UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended September 30, 2016

 

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: 000-55500

 

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.)

 

Flat/RM 03-04 20/F Hutchison House 10 Harcourt Road, Central, Hong Kong
(Address of principal executive offices) (Zip Code)

 

+852 3158 0977

(Registrant’s telephone number, including area code)

 

 

 

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

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). x Yes ¨ No

 

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

 

Large accelerated filer   ¨ Accelerated filer ¨
Non-accelerated filer (Do not check if a smaller reporting company) ¨ Smaller reporting company x

 

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 9, 2016 is 11,119,276.

 

 

 

 

FORM 10-Q

TAKUNG ART CO, LTD

INDEX

 

    Page
     
PART I. Financial Information 3
     
  Item 1.  Financial Statements (Unaudited). 3
     
  Item 2.  Management’s Discussion and Analysis of Financial Condition and results of Operation. 22
     
  Item 3.  Quantitative and Qualitative Disclosures About Market Risk. 30
     
  Item 4.  Controls and Procedures. 30
     
PART II. Other Information 31
     
  Item 1.  Legal Proceedings. 31
     
  Item 1A. Risk Factors. 31
     
  Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds. 31
     
  Item 3.  Defaults Upon Senior Securities. 31
     
  Item 4.  Mine Safety Disclosures. 31
     
  Item 5.  Other Information. 31
     
  Item 6.  Exhibits. 31
     
  Signatures 33

2 

 

 

 

PART 1 - FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

TAKUNG ART CO., LTD AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Stated in US Dollars except Number of Shares)

 

    September 30,
2016
    December 31,
2015
 
    (Unaudited)        
ASSETS                
CURRENT ASSETS                
Cash and cash equivalents   $ 16,831,035     $ 10,769,456  
Restricted cash     25,448,772       16,195,289  
Short-term investments, available-for-sale     299,918       -  
Deposits     7,776       70,194  
Accounts receivables, net     2,080,139       184,537  
Prepayment and other current assets     892,136       1,172,405  
Loan receivables     3,513,534       -  
Amount due from director     -       502  
Total current assets     49,073,310       28,392,383  
                 
NON-CURRENT ASSETS                
Property and equipment, net   $ 1,808,738     $ 1,213,255  
Intangible assets, net     20,540       22,194  
Deferred tax assets     191,374       -  
Other non-current assets     359,256       121,381  
Total non-current assets     2,379,908       1,356,830  
TOTAL ASSETS   $ 51,453,218     $ 29,749,213  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY                
CURRENT LIABILITIES                
Accrued expenses and other payables   $ 528,220     $ 667,622  
Customer deposits     25,448,772       16,195,289  
Advance from customers     287,698       -  
Short-term borrowings from third parties     3,519,580       -  
Amount due to related party     2,340,895       -  
Tax payables     2,467,139       1,564,370  
Total current liabilities     34,592,304       18,427,281  
                 
NON-CURRENT LIABILITIES                
Deferred tax liabilities   $ 54,361     $ 45,037  
Total non-current liabilities     54,361       45,037  
                 
TOTAL LIABILITIES     34,646,665       18,472,318  
                 
COMMITMENTS AND CONTINGENCIES                
                 
STOCKHOLDERS'  EQUITY                
Common stock, 1,000,000,000 shares authorized; $0.001 par value; 11,119,276 shares issued and outstanding as of September 30, 2016 and December 31, 2015     11,119       11,119  
Additional paid-in capital     5,311,920       4,465,217  
Retained earnings     11,466,610       6,801,977  
Accumulated other comprehensive income (loss)     16,904       (1,418 )
Total stockholders' equity     16,806,553       11,276,895  
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY   $ 51,453,218     $ 29,749,213  

 

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

 

3 

 

 

TAKUNG ART CO., LTD AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Stated in US Dollars except Number of Shares)

 

   For the Three Months Ended
September 30,
   For the Nine Months Ended
September 30,
 
   2016   2015   2016   2015 
   (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited) 
Revenue                
Listing fee revenue  $2,968,534   $439,811   $8,166,072   $1,549,587 
Commission revenue   1,669,698    2,239,526    3,739,958    3,267,516 
Gross management fee revenue   781,219    26,889    1,341,294    98,674 
Authorized agent subscription revenue   322,318    -    966,059    - 
Annual fee revenue   440    162    869    1,591 
Total revenue   5,742,209    2,706,388    14,214,252    4,917,368 
                     
Cost of revenue   (285,252)   (214,530)   (822,735)   (592,342)
                     
Gross profit   5,456,957    2,491,858    13,391,517    4,325,026 
                     
Operating expenses:                    
General and administrative expenses   (1,744,965)   (882,982)   (5,076,689)   (1,950,662)
Selling expenses   (652,207)   (116,090)   (1,993,782)   (173,888)
                     
Income from operations   3,059,785    1,492,786    6,321,046    2,200,476 
                     
Other income and expenses:                    
Other income (loss)   163,738    (659)   314,268    (205)
Loan interest expense   (62,670)   -    (62,670)   - 
Exchange loss   (112,384)   (4,542)   (530,934)   (4,513)
Total other income (loss)   (11,316)   (5,201)   (279,336)   (4,718)
                     
Income before provision for income taxes   3,048,469    1,487,585    6,041,710    2,195,758 
                     
Provision for income taxes   (596,732)   (343,512)   (1,377,078)   (480,414)
                     
Net income  $2,451,737   $1,144,073   $4,664,632   $1,715,344 
                     
Foreign currency translation adjustment   10,172    (22,523)   18,322    (21,903)
                     
Comprehensive income  $2,461,909   $1,121,550   $4,682,954   $1,693,441 
                     
Earnings per common share– basic  $0.23   $0.12   $0.44   $0.18 
Earnings per common share– diluted   0.22    0.12    0.41    0.18 
Weighted average number of common shares outstanding-basic   10,632,276    9,612,496    10,632,276    9,426,026 
Weighted average number of common shares outstanding-diluted   11,365,597    9,612,496    11,277,845    9,426,026 

  

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

 

4 

 

 

TAKUNG ART CO., LTD AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOW

(STATED IN U.S. DOLLARS)

(UNAUDITED)

 

   For the Nine Months Ended
September 30,
 
   2016   2015 
Cash flows from operating activities:          
           
Net income  $4,664,632   $1,715,344 
Adjustments to reconcile net income to net cash provided by operating activities          
Depreciation   373,308    240,921 
Changes in exchange rate   672,021    - 
Stock-based compensation   846,703    186,000 
Changes in operating assets and liabilities:          
Deposits   62,418    (117,678)
Prepayment and other current assets   280,269    (348,566)
Other non-current assets   (237,875)   - 
Account receivables   (1,895,602)   - 
Due from director   502    (3,231)
Customer deposits   9,253,483    7,949,252 
Deferred tax assets   (191,374)   - 
Deferred tax liabilities   9,324    (15,303)
Restricted cash   (9,253,483)   (7,949,252)
Tax payables   902,769    495,775 
Advance from customers   287,698    - 
Accrued expenses and other payables   (670,336)   (1,341,632)
Net cash provided by operating activities   5,104,457    811,630 
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Purchase of property and equipment   (976,460)   (507,032)
Purchase of available-for-sale investments   (299,918)   - 
Purchase of held-to-maturity investments   (14,995,876)   - 
Maturity and redemption of held-to-maturity investments   14,995,876    - 
Net cash used in investing activities   (1,276,378)   (507,032)
           
Cash flows from financing activities:          
Proceeds from subscription receivables   -    1,928,191 
Proceeds from short-term borrowings   3,519,580    - 
Proceeds from related party loans   2,340,895    - 
Loan to third parties   (3,513,534)   - 
Net cash provided by financing activities   2,346,941    1,928,191 
           
Effect of exchange rate change on cash and cash equivalents   (113,441)   3,053 
           
NET INCREASE IN CASH AND CASH EQUIVALENTS   6,061,579    2,235,842 
           
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD   10,769,456    2,355,839 
           
CASH AND CASH EQUIVALENTS - END OF PERIOD  $16,831,035   $4,591,681 
           
SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITY          
Cash paid during the period for income taxes  $562,994   $- 
Cash paid during the period for interest expense  $-   $- 

  

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

5 

 

 

TAKUNG ART CO., LTD AND SUBSIDIARIES

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS

(Stated in US Dollars except Number of Shares)

(UNAUDITED)

 

1. ORGANIZATION AND DESCRIPTION OF BUSINESS

 

Takung Art Co., Ltd.(the “Company” or “Takung”), a Delaware corporation (formerly Cardigant Medical Inc.) through Hong Kong Takung Assets and Equity of Artworks Exchange Co., Ltd. (“Hong Kong Takung”), a Hong Kong company and our wholly owned subsidiary, operates an electronic online platform located at www.takungae.com for artists, art dealers and art investors to offer and trade in valuable artwork.

 

Hong Kong Takung Assets & Equity of Artworks Exchange Co., Ltd. was incorporated in Hong Kong on September 17, 2012 and operates an electronic online platform for offering and trading artwork. For the period from September 17, 2012 (inception) to December 31, 2012, there were no operations except the issuance of shares for subscription receivable. 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, and management fees. We conduct our 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 Assets and Equity of Artworks Exchange Co. Ltd. by receiving deposits from and making payments to online artwork traders of Takung for and on behalf of Takung. It also provides provides research and development services to Takung.

 

Takung Cultural Development (Tianjin) Co., Ltd (“Tianjin Takung”) is a limited liability company, with a registered capital of $1 million located in Pilot Free Trade Zone. Tianjin Takung was incorporated on January 27, 2016.

 

Tianjin Takung provides technology development services to Hong Kong Takung and Shanghai Takung, and also carries out marketing and promotion activities in mainland China.

 

REVERSE MERGER

 

On October 20, 2014, Cardigant Medical Inc. (or “Cardigant”) acquired all the issued and outstanding shares of Hong Kong Takung, a privately held Hong Kong corporation, pursuant to the Share Exchange Agreement and Hong Kong Takung became the wholly owned subsidiary of Cardigant in a reverse merger, or the Merger. Pursuant to the Merger, all of the issued and outstanding shares of Hong Kong Takung common stock were converted, at an exchange ratio of 10.4988-for-1, into an aggregate of 8,399,040 (209,976,000 pre-reverse split) shares of Cardigant common stock and Hong Kong Takung became a wholly owned subsidiary of Cardigant. The holders of Cardigant’s common stock as of immediately prior to the Merger held an aggregate of 933,227 (23,330,662 pre-reverse split) shares of Cardigant’s common stock, The accompanying financial statements share and per share information has been retroactively adjusted to reflect the exchange ratio in the Merger. Subsequent to the Merger, Cardigant’s name was changed from “Cardigant Medical Inc.” to “Takung Art Co., Ltd.”

 

Under accounting principles generally accepted in the United States, (“U.S. GAAP”) because Hong Kong Takung’s former stockholders received the greater portion of the voting rights in the combined entity and Hong Kong Takung’s senior management represents all of the senior management of the combined entity, the Merger was accounted for as a recapitalization effected by a share exchange, wherein Hong Kong Takung is considered the acquirer for accounting and financial reporting purposes. The assets and liabilities of Hong Kong Takung have been brought forward at their book value and no goodwill has been recognized. Accordingly, the assets and liabilities and the historical operations that are reflected in Hong Kong Takung's consolidated financial statements are those of Hong Kong Takung and are recorded at the historical cost basis of Hong Kong Takung.

 

6 

 

 

Unless otherwise indicated or the context otherwise requires, references to “the Company” refer to Takung Art Co., Ltd. Disclosures relating to the pre-merger business of Takung, unless noted as being the business of Cardigant prior to the Merger, pertain to the business of Takung prior to the Merger. The Company is currently trading on the OTC market with the ticker “TKAT”.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying consolidated balance sheet as of December 31, 2015, which has been derived from audited financial statements, and the unaudited interim consolidated financial statements as of September 30, 2016, 2015 and for the three and nine months ended September 30, 2016 and 2015 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 U.S. GAAP, have been condensed or omitted pursuant to such rules and regulations, although we believe that the disclosures made are adequate to provide for 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/A for the fiscal year ended December 31, 2015, previously filed with the SEC.

 

This basis of accounting involves the application of accrual accounting and consequently, revenues and gains are recognized when earned, and expenses and losses are recognized when incurred. The Company’s financial statements are expressed in U.S. dollars.

 

In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the Company’s consolidated financial position as of September 30, 2016, its consolidated results of operations and cash flows for the nine-month periods ended September 30, 2016 and 2015, 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.

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the amount of revenues and expenses during the reporting periods. Actual results could differ materially from those results.

 

Principles of consolidation

 

The consolidated financial statements include the accounts of Takung Art, Co., and its subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation.

 

Reverse stock split

 

On August 10, 2015, the Company’s board of directors and a majority of the Company’s shareholders approved a reverse stock split of its issued and outstanding shares of common stock at a ratio of 1-for-25.

 

Upon filing of the Certificate of Amendment, every twenty-five shares of the Company’s issued and outstanding common stock were automatically converted into one issued and outstanding share of common stock, without any change in par value per share. All references made to share or per share amounts in the accompanying consolidated financial statements and applicable disclosures have been retroactively adjusted to reflect the 1-for-25 reverse stock split.

 

7 

 

 

Fair Value Measurements

 

The Company applies the provisions of ASC Subtopic 820-10, “Fair Value Measurements”, for fair value measurements of financial assets and financial liabilities and for fair value measurements of non-financial items that are recognized or disclosed at fair value in the financial statements.  ASC 820 also establishes a framework for measuring fair value and expands disclosures about fair value measurements.

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.

 

ASC 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 establishes three levels of inputs that may be used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:

 

·Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

·Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.

 

·Level 3 inputs to the valuation methodology are unobservable and significant to the fair value.

 

There were no assets or liabilities measured at fair value on a recurring basis subject to the disclosure requirements of ASC 820 as of September 30, 2016 and December 31, 2015, respectively.

 

Comprehensive Income

 

Recognized revenue, expenses, gains and losses are included in net income or loss. Although certain changes in assets and liabilities are reported as separate components of the equity section of the consolidated balance sheet, such items, along with net income or loss, are components of comprehensive income or loss. The components of other comprehensive income or loss are consisted solely of foreign currency translation adjustments, net of the income tax effect.

 

Foreign Currency Translation and Transaction

 

The functional currency of the Hong Kong Takung and Shanghai Takung are the Hong Kong Dollar (“HKD”).

 

The functional currency of Tianjin Takung is the Renminbi (“RMB”).

 

The reporting currency of the Company is the United States Dollar (“USD”).

 

8 

 

 

Transactions in currencies other than the entity’s functional currency are recorded at the rates of exchange prevailing on the date of the transaction. At the end of each reporting period, monetary items denominated in foreign currencies are translated at the rates prevailing at the end of the reporting periods. Exchange differences arising on the settlement of monetary items and on re-translation of monetary items at period-end are included in income statement of the period.

 

For the purpose of presenting these financial statements, the Company’s assets and liabilities with functional currency of HKD are expressed in USD at the exchange rates on the balance sheet dates, which are 7.7555 and 7.7507 as of September 30, 2016 and December 31, 2015 respectively; stockholder’s equity accounts are translated at historical rates, and income and expense items are translated at the weighted average exchange rates during the years, which are 7.7635 and 7.7530 for the period ended September 30, 2016 and 2015 respectively. For Renminbi currency, the Company’s assets and liabilities are expressed in USD at the exchange rate on the balance sheet dates, which are 6.6685 and 6.4778 as of September 30, 2016 and December 31, 2015; stockholder’s equity accounts are translated at historical rates, and income and expense items are translated at the weighted average exchange rates during the years, which are 6.5785 and 6.2477 for the period ended September 30, 2016 and 2015.

 

The resulting translation adjustments are reported under accumulated other comprehensive income in the stockholders’ equity section of the balance sheets.

 

Cash and Cash Equivalents

 

The Company considers highly liquid investments with maturities of three months or less, when purchased, to be cash equivalents. As of September 30, 2016 and December 31, 2015, the Company’s cash and cash equivalents amounted to $16,831,035 and $10,769,456, respectively. All of the Company’s cash deposits are held in the financial institutions located in Hong Kong and China where there are currently regulations mandated on obligatory insurance of bank accounts.

 

Restricted Cash

 

Restricted cash represents the cash deposited by the traders (“buyers and sellers”) into a specific bank account under Takung (“the broker’s account”) in order to facilitate the trading ownership units of the artwork. The buyers are required to have their funds transferred to the broker’s account before the trading take place. Upon the delivery of the ownership units, the seller can send instructions to the bank, requesting the amount to be transferred to their personal accounts. After deducting the commission and the management fee as per Takung’s instruction, the bank will transfer the remainder to the seller’s personal account. Except for instructing the bank to deduct the commission and management fee, Takung has no right to manipulate any funds in the broker’s account except the Company statements of intention with regard to particular deposits. The whole process was monitored and approved by a third party accounting firm. Restricted cash amounted to $25,448,772 which includes $10,497,113 deposits with a 7-day maturity date with principal guaranteed by Bank of China, and $16,195,289 as of September 30, 2016 and December 31, 2015, respectively.

 

 

Short-term investments

 

Short term investments consist of held-to-maturity investments and available-for-sale investments.

 

The Company’s held-to-maturity investments consist of financial products purchased from banks, which are not allowed for the early withdrawal. The Company’s short term held-to-maturity investments are classified as short-term investments on the consolidated balance sheets based on their contractual maturity dates which are less than one year and are stated at their amortized costs.

 

Investments classified as available-for-sale investments are carried at their fair values and the unrealized gains or losses from the changes in fair values are reported net of tax in accumulated other comprehensive income until realized.

 

The Company reviews its investments for other-than-temporary impairment (“OTTI”) based on the specific identification method. The Company considers available quantitative and qualitative evidence in evaluating potential impairment of its investments. If the cost of an investment exceeds the investment’s fair value, the Company considers, among other factors, general market conditions, expected future performance of the investees, the duration and the extent to which the fair value of the investment is less than the cost, and the Company’s intent and ability to hold the investment. OTTI is recognized as a loss in the income statement.

 

Accounts Receivables and Allowance for Doubtful Accounts

 

Accounts receivables are recorded and carried at the original invoiced amount less an allowance for any potential uncollectible amounts. The Company makes estimates for the allowance for doubtful accounts based upon our assessment of various factors, including historical, experience, the age of the accounts receivable balances, credit quality of our customers, current economic conditions, and other factors that may affect customers' ability to pay.

 

Loan receivables

 

Loan to third party is presented under current asset of the balance sheets based on the nature and loan period of time.

 

Other Non-current Assets

 

A portion of the other assets, such as prepayments and deposits, are presented under the non-current section of the balance sheets based on the nature of the amounts.

 

Property and Equipment

 

Property and equipment are stated at cost less accumulated depreciation and impairment losses. Gains or losses on dispositions of property and equipment are included in other income. Major additions, renewals and betterments are capitalized, while maintenance and repairs are expensed as incurred.

 

Depreciation and amortization are provided over the estimated useful lives of the assets using the straight-line method from the time the assets are placed in service. Estimated useful lives are as follows, taking into account the assets' estimated residual value:

 

9 

 

 

Classification   Estimated
useful life
     
Furniture, fixtures and equipment   5 years
     
Leasehold improvements   Shorter of the remaining lease terms or the estimated 3 years
     
Computer trading and clearing system   5 years

 

Long-lived Assets

 

The Company evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. When these events occur, the Company assesses the recoverability of these long-lived assets by comparing the carrying amount of the assets to the future undiscounted cash flows expected to result from the use of the assets and their eventual disposition. If the future undiscounted cash flow is less than the carrying amount of the assets, the Company recognizes an impairment equal to the difference between the carrying amount and fair value of these assets.

 

No impairments were recorded during the periods ended September 30, 2016 and December 31, 2015, respectively.

 

Intangible Assets

 

Intangible assets represent the licensing cost for our trademark registration. For intangible assets with indefinite lives, the Company evaluates intangible assets for impairment at least annually and more often whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Whenever any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value. The Company has not recorded impairment of intangible assets as of September 30, 2016 and December 31, 2015.

 

Customer deposits

 

Customer deposits represents the cash deposited by the traders (“buyers and sellers”) into a specific bank account under Takung (“the broker’s account”) in order to facilitate the trading ownership units of the artwork. The buyers are required to have their funds transferred to the broker’s account before the trading takes place. Customer deposits were $25,448,772 and $16,195,289 as of September 30, 2016 and December 31, 2015, respectively.

 

Advance from customers

 

Advance from customers represent trading commissions one month in advance charge to the VIP traders. Starting from April 1, 2016, the Company charges a monthly commission to VIP traders, instead of charging per transaction.

 

Short-term borrowings from third parties

 

The Company made two short-term borrowings from third parties, both with 8% annual interest rate and due on December 31, 2016.

 

Revenue Recognition

 

The Company generates revenue from its services in connection with the offering and trading of artwork on our system, primarily consisting of listing fees, trading commissions, and management fees.

 

We recognize revenue once all of the following criteria have been met:

 

·persuasive evidence of an arrangement exists;

 

·delivery of our obligations to our customer has occurred;

 

10 

 

 

·the price is fixed or determinable; and

 

·collectability of the related receivable is reasonably assured

 

Listing fee – The Company collects a listing fee once the ownership shares of the artwork are listed and successfully traded on the Company’s system, based on the agreed percentage of the total offering price. The listing fee revenue is collected from either the money raised from the issuance of such shares, or separately at a pre-determined amount. When the ownership shares of the artwork is listed and starts trading on the Company’s system, the Original Owner and/or the Offering Agent shall pay the Company a one-time offering fee and a listing deposit. The offering fee is determined based on many factors, such as the type of artwork and the offering size. The Company generally charges approximately 22.5-48.5% of the total offering price for calligraphies, paintings and jewelry, which are the major types of artwork listed and traded on the Company’s system as of September 30, 2016. Listing fee revenue was $2,968,534 and $439,811 for the three months ended September 30, 2016 and 2015, respectively, and $8,166,072 and $1,549,587 for the nine months ended September 30, 2016 and 2015, respectively.

 

Commission – The Company charges trading commissions for the purchase and sale of the ownership shares of the artworks. The commission is typically 0.3% of the total amount of each transaction, but as an initial promotion, we currently charge a reduced fee of 0.2% (resulting in an aggregate of 0.4%) of the total transaction amount with the minimum charge of $0.13 (HK$1). The commission is accounted for as revenue and immediately deducted from the proceeds from the sales of artwork units when a transaction is completed.

 

Commission rebate programs are offered to the traders and service agents. As part of the referral incentive program, the Company would rebate 15% of the commission earned from the transactions of new traders referred by the existing traders. In addition, the Company rebates 40% to 60% to the service agents when they bring in the agreed number of traders to the trading platform. Such commission rebate is recognized as reduction of the commission revenue. Commission rebated program is also offered to VIP traders , when their trading volumes of certain artworks reach an agreed level each month, a contractually determined flat rate of trading commission was applied to the transactions of these certain artworks. Any trading commission charges incurred by the VIP traders over the flat rate would be waived and deducted from the commission revenue. Starting from April 1, 2016, the Company charges a fixed monthly commission based on class of certain artwork to VIP traders, instead of charging per transaction.

 

Commission revenue (net of applicable rebates and discounts) was $1,669,698 and $2,239,526 for the three months ended September 30, 2016 and 2015, respectively, and $3,739,958 and $3,267,516 for the nine months ended September 30, 2016 and 2015, respectively.

 

Management fee – The Company charges management fees for covering the 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 ownership units per day. The management fee is accounted for as revenue, and immediately deducted from the proceeds from the sales of artwork ownership units when a transaction is completed. Management fee revenue was $781,219 and $26,889 for the three months ended September 30, 2016 and 2015, respectively, and $1,341,294 and $98,674 for the nine months ended September 30, 2016 and 2015, respectively.

 

Annual fee income – The Company charges an annual fee for providing traders with premium services, including more in-depth information and tools, on the trading platform. This revenue is recognized ratably over the service agreement period. Annual fee income was $440 and $162 for the three months ended September 30, 2016 and 2015, respectively, and $869 and $1,591 for the nine months ended September 30, 2016 and

 

Authorized agent subscription revenue – The Company charges an authorized agent subscription fee which is an annual service fee paid by authorized agents to grant them the right to bring their network of artwork owners to list their artwork on our trading platform. This revenue is recognized ratably over the annual agreement period.

 

11 

 

 

Cost of Revenue

 

Cost of revenue consists primarily of expenses associated with the delivery the Company’s service. These include expenses related to the operation of data centers, such as facility and lease of the server equipment, development and maintenance of the Company’s platform system, as well as the cost of insurance, storage and transportation of the artworks. Cost of revenue was $285,252 and $214,530 for the three months ended September 30, 2016 and 2015, respectively, and $822,735 and $592,342 for the nine months ended September 30, 2016 and 2015, respectively.

 

Income Taxes

 

The Company accounts for income taxes using an asset and liability approach which allows for the recognition and measurement of deferred tax assets based upon the likelihood of realization of tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not that these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain.

 

Under ASC 740, a tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The evaluation of a tax position is a two-step process. The first step is to determine whether it is more-likely-than-not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigations based on the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the year incurred. GAAP also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosures and transition.

 

There are uncertain tax positions regarding whether the income of Hong Kong Takung should be deemed as the taxable income of Shanghai Takung under the law of the People's Republic of China on Enterprise Income Tax ("EIT") as of September 30, 2016 and December 31, 2015. Such income will be subject to EIT with 25% tax rate once it is deemed as the taxable income of Shanghai Takung and Tianjin Takung; otherwise it is subject to Hong Kong's Profits Tax with 16.5% tax rate.

 

The Company currently recognizes such income as taxable income under Hong Kong's Profits Tax rather than taxable income under EIT, and the Company holds that it is more-likely-than-not that this tax position will be sustained upon examination, including the resolution of any related appeals or litigations based on the technical merits of that position.

 

The Company did not have any interest and penalties related to uncertain tax positions in our provision for income taxes line of the Company’s consolidated statements of operations for the period ended September 30, 2016 and 2015. The Company does not expect that its assessment regarding unrecognized tax positions will materially change over the next 12 months.

 

Earnings per share

 

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

 

As of September 30, 2016 and December 31, 2015, respectively, there were options, which would have a dilutive effect on earnings per share.

 

12 

 

 

Concentration of Risks

 

Concentration of credit risk

 

Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash, short-term investments, deposits, accounts receivables, prepayment and other current assets. The Company places its cash and cash equivalents, restricted cash and short-term investments with financial institutions with high-credit ratings and quality. Accounts receivables primarily comprise of amounts receivables from the trader customers. With respect to the prepayment to service suppliers, the Company performs on-going credit evaluations of the financial condition of these suppliers. The Company establishes an allowance for doubtful accounts based upon estimates, factors surrounding the credit risk of specific service providers and other information.

 

Concentration of customers

 

There are no revenues from customers that individually represent greater than 10% of the total revenues during the three-month period ended September 30, 2016 and 2015, and also during the nine-month period ended September 30, 2016 and 2015.

 

Reclassifications

 

Certain amounts in the 2015 financial statements may have been reclassified to conform to the 2016 presentation. These reclassifications had no effect on previously reported results of operations or retained earnings.

 

Recent Accounting Pronouncements

 

Revenue recognition

 

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASU 2014-09), to supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 is effective for us in our first quarter of fiscal 2018 using either of two methods: (i) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-09; or (ii) retrospective with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures as defined per ASU 2014-09. We are continuing to evaluate the impacts of our pending adoption of Topic 606.

 

13 

 

 

Disclosure of Going Concern Uncertainties

 

In August 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (ASU 2014-15), to provide guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective for us in our fourth quarter of fiscal 2017 with early adoption permitted. We do not believe the impact of our pending adoption of ASU 2014-15 on the Company’s financial statements will be material.

 

Financial Instrument

 

In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”). The standard addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. ASU 2016-01 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is not permitted. Accordingly, the standard is effective for us on September 1, 2018. The Company is currently evaluating the impact that the standard will have on the Company’s consolidated financial statements.

 

Leases

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-2”), which provides guidance on lease amendments to the FASB Accounting Standard Codification. This ASU will be effective for us beginning in May 1, 2019. The Company is currently in the process of evaluating the impact of the adoption of ASU 2016-2 on the Company consolidated financial statements.

 

Stock-based Compensation

 

In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). ASU 2016-09 changes how companies account for certain aspects of stock-based awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 is effective for us in the first quarter of 2018, and earlier adoption is permitted. We are still evaluating the effect that this guidance will have on our consolidated financial statements and related disclosures.

 

Financial Instruments - Credit Losses

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): The amendments in this Update require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The amendments broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The use of forecasted information incorporates more timely information in the estimate of expected credit loss, which will be more decision useful to users of the financial statements. ASU 2016-13 is effective for the Company for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is allowed as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is still evaluating the effect that this guidance will have on the Company’s consolidated financial statements and related disclosures.

 

Statement of Cash Flows

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): The amendments in this Update apply to all entities, including both business entities and not-for-profit entities that are required to present a statement of cash flows under Topic 230. The amendments in this Update provide guidance on the following eight specific cash flow issues. The amendments are an improvement to GAAP because they provide guidance for each of the eight issues, thereby reducing the current and potential future diversity in practice described above. ASU 2016-15 is effective for the Company for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company is still evaluating the effect that this guidance will have on the Company’s consolidated financial statements and related disclosures.

 

Except for the ASU above, in the period from January 1, 2016 to November 6, 2016, the FASB has issued ASU No. 2016-01 through ASU 2016-17, which are not expected to have a material impact on the consolidated financial statements upon adoption.

 

3. PREPAYMENT AND OTHER CURRENT ASSETS

 

   September 30,
2016
   December 31,
2015
 
   (Unaudited)     
Prepayment  $804,161   $1,172,405 
Prepaid expense and other receivables   87,975    - 
Prepayment and other current assets  $892,136   $1,172,405 

 

Prepayment mainly consists of the prepaid service fee for the development and maintenance of online trading system, as well as the advertising and promotional services.

 

14 

 

 

4. LOAN RECEIVABLES

 

In order to meet the Company’s working capital needs in US Dollars, the Company entered into the following transactions:

  

  On July 15, 2016, Shanghai Takung entered into an interest-free loan toan individual, Xiaohui Wang (“Ms. Wang”), a national of the People’s Republic of China, of RMB10.08 million (equivalent to US$1.5 million) with a maturity of December 31, 2016. On August 24, 2016, an additional loan to Ms. Wang of RMB13.35 million (equivalent to US$2 million) was made with the same maturity date and on the same terms. Both loans are guaranteed by Chongqing Wintus (New Star) Enterprises Group (“Chongqing”) and Ms. Wang is a shareholder and the legal representative of Chongqing. Both Chongqing and Ms, Wang are the non-related parties to the Company.

 

  Also, on July 15, 2016, Hong Kong Takung entered into a loan agreement with Merit Crown Limited,a Hong Kong company (“Merit Crown) , to borrow US$1.5 million with interest accruing at a rate of 8% per annum pro-rated through the maturity date of December 31, 2016. On August 24, 2016, Hong Kong Takung borrowed another US$2 million from Merit Crown on similar terms. Merit Crown is a non-related party to the Company.

 

The US$1.5 million and US$2 million are collectively the US Dollar Loan (the “US Dollar Loans”). The RMB10.08 million and RMB13.35 million are collectively the RMB Loan (the “RMB Loans”).

 

Through an understanding between Ms. Wang and Merit Crown, the US Dollar Loans are “secured” by the RMB Loans. Further details on the RMB Loans are disclosed in Note 10. It is the understanding between the parties that when the US Dollar Loans are repaid, the RMB Loans will similarly be repaid.

 

As of September 30, 2016 and December 31, 2015, the Company has $3,513,534 and nil of loan receivable from Xiaohui Wang.

 

5. SHORT TERM INVESTMENTS

  

Short term investments consist of held-to-maturity investments and available-for-sale investments.

 

Held-to-maturity investments

 

Held-to-maturity investments consist of various financial products purchased from Bank of China, which are classified as held-to-maturity investments as the Company has the positive intent and ability to hold the investments to maturity. The maturities of these financial products range from thirty to seventy days, with contractual maturity dates from July 14, 2016, to September 26, 2016 and estimated annual interest rates ranging from 1.90% to 3.45%. They are classified as short term investments on the consolidated balance sheets as its contractual maturity dates are less than one year. The repayments of principal of the financial products are not guaranteed by the Bank of China from which the financial products were purchased. Historically, the Company has received the principal and the interest in full upon maturity of these investments. As of September 30, 2016, there were no outstanding held-to-maturity investments.

 

While these financial products are not publicly traded, the Company estimated that their fair value approximate their amortized costs considering their short term maturities and high credit quality. No OTTI loss was recognized for the periods ended September 30, 2016 and 2015.

 

Available-for-sale investments

 

Investments other than held-to-maturity are classified as available-for-sale investments, which consist of various adjustable-income financial products purchased from Bank of China. All the available for sale investments did not have maturity date. They are classified as short-term investments on the consolidated balance sheets as management intend to hold them for a period less than one year.

 

Available-for-sale securities are carried at their fair values and the unrealized gains or losses from the changes in fair values are included in accumulated other comprehensive income. The aging of all the available-for-sale investments were less than 12 months as of September 30, 2016. No OTTI loss was recognized for the periods ended September 30, 2016 and 2015.

 

6. PROPERTY AND EQUIPMENT, NET

 

Property and equipment consisted of the following:

 

   September 30,
2016
   December 31,
2015
 
   (Unaudited)     
         
Furniture, fixtures and equipment  $64,591   $61,787 
Leasehold improvements   153,576    140,955 
Computer trading and clearing system   2,581,113    1,628,542 
Sub-total   2,799,280    1,831,284 
Less: accumulated depreciation   (990,542)   (618,029)
Property and equipment, net  $1,808,738   $1,213,255 

 

Depreciation expense was $133,608 and $83,981 for the three months ended September 30, 2016 and 2015, respectively, and $373,308 and $240,921 for the nine months ended September 30, 2016 and 2015, respectively.

 

15 

 

 

7. INTANGIBLE ASSETS

 

Intangible assets consist of the Company’s trademarks with indefinite useful life. The intangible asset was $20,540 and $22,194 as of September 30, 2016 and December 31, 2015, respectively.

 

8. OTHER NON-CURRENT ASSETS

 

Other non-current assets as of September 30, 2016 and December 31, 2015 consisted of:

 

   September 30,
2016
   December 31,
2015
 
   (Unaudited)     
Deposit – non-current  $293,649   $121,381 
Prepayment – non-current   65,607    - 
Total other non-current assets  $359,256   $121,381 

 

9. ACCRUED EXPENSES AND OTHER PAYABLES

 

Accrued expenses and other payables as of September 30, 2016 and December 31, 2015 consisted of:

  

    September 30,
2016
    December 31,
2015
 
    (Unaudited)        
Accruals for consulting fees   $ 291,322     $ 259,244  
Accruals for payroll     58,269       46,167  
Accruals for professional fees     37,219       75,116  
Accruals for rental     -       15,855  
Other payables     76,796       19,261  
Trading and clearing system     64,614       76,763  
Temporary customer deposits     -       175,216  
Total accrued expenses and other payables   $ 528,220     $ 667,622  

 

10. SHORT-TERM BORROWINGS FROM THIRD PARTIES

 

On July 15, 2016, Hong Kong Takung entered into a loan agreement with Merit Crown Limited, a Hong Kong company, to borrow US$1.5 million to meet its working capital needs. Interest shall accrue at a rate of 8% per annum pro-rated to the actual loan period, which shall be from the date the loan amount is made through December 31, 2016. Merit Crown is a non-related party to the Company.

 

On August 24, 2016, an additional US$2 million was borrowed by Hong Kong Takung from Merit Crown to meet its working capital needs. Interest shall accrue at a rate of 8% per annum pro-rated to the actual loan period, which shall be from the date the loan amount is made through December 31, 2016.

 

The US Dollar Loans are to provide Hong Kong Takung with sufficient US Dollar-denominated currency to meet its working capital requirements. It is “secured” by the aforementioned RMB Loans (See Note 4) of equivalent amount by its subsidiary to an individual and guarantor affiliated with the lender of the US Dollar Loans. It is the understanding between the parties that when the US Dollar Loans are repaid, the RMB Loans will similarly be repaid.

 

As of September 30, 2016 and December 31, 2015, the Company has $3,519,580 of and nil short-term borrowings from Merit Crown Limited, respectively.

 

The weighted average interest rate of short-term borrowings outstanding was 8% and nil per annum as of September 30, 2016 and December 31, 2015. The fair values of the short-term borrowings approximate their carrying amounts. The weighted average short-term borrowings was $742,251 and nil for the nine months ended September 30, 2016 and 2015 respectively, $2,226,753 and nil for the three months ended September 30, 2016 and 2015. 

 

11. RELATED PARTY BALANCES AND TRANSACTIONS

 

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

 

(a) Di Xiao, the director of the Company;

 

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

 

Amount due from director

 

Amount due from director consisted of the following for the periods indicated:

 

   September 30,
2016
   December 31,
2015
 
   (Unaudited)     
Di Xiao (a)  $-   $520 
Total   -    520 

 

Amount due to related party

 

Amount due to related party consisted of the following as of the periods indicated:

 

   September 30,
2016
   December 31,
2015
 
   (Unaudited)     
Jianpian Mao (b)  $2,340,895   $- 
Total   2,340,895    - 

 

Related party transactions

 

Unsecured borrowings from related parties consisted of the following for the periods indicated:

 

   Three months end
September 30, 2016
   Three months ended
September 30, 2015
   Nine months end
September 30, 2016
   Nine months ended
September 30, 2015
 
   (Unaudited)   (Unaudited)   (Unaudited)    (Unaudited) 
Jianpian Mao (b)  $2,320,934   $-   $2,320,934   $- 
Total   2,320,934    -    2,320,934    - 

 

Interest expenses from related parties consisted of the following for the periods indicated:

 

   Three months end
September 30, 2016
   Three months ended
September 30, 2015
   Nine months end
September 30, 2016
   Nine months ended
September 30, 2015
 
   (Unaudited)    (Unaudited)   (Unaudited)    (Unaudited) 
Jianpian Mao (b)  $19,941   $-   $19,941   $- 
Total   19,941    -    19,941    - 

 

On August 25, 2016, Hong Kong Takung entered into a loan agreement with Mao for the loan of HK$18,000,000 (US$2,320,934) to Hong Kong Takung. Interest shall accrue at a rate of 8% per annum pro-rated to the actual loan period, which shall be from the date the loan amount is made through December 31, 2016. The loan is to provide Hong Kong Takung with sufficient Hong Kong Dollar-denominated currency to meet its working capital requirements.

 

12. INCOME TAXES

 

United States of America

 

As of September 30, 2016 and December 31, 2015, the Company in the United States had $2,676,324 and $900,301 in net operating loss carry forwards available to offset future taxable income. Federal net operating losses can generally be carried forward twenty years.

 

The Company believes that it is more likely than not that these net accumulated operating losses will not be utilized in the future. Therefore, the Company has provided full valuation allowance for the deferred tax assets arising from the losses at US. Accordingly, the Company has no net deferred tax assets under the US entity.

 

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Hong Kong

 

The provision for current income taxes of the subsidiary operating in Hong Kong has been calculated by applying the current rate of taxation of 16.5%, if applicable.

 

PRC

 

In accordance with the relevant tax laws and regulations of the PRC, a company registered in the PRC is subject to income taxes within the PRC at the applicable tax rate on taxable income.  All the PRC subsidiaries that are not entitled to any tax holiday were subject to income taxes at a rate of 25%.

 

The income tax expenses were $596,732 and $343,512 for the three months ended September 30, 2016 and 2015, respectively, and $1,377,078 and $480,414 for the nine months ended September 30, 2016 and 2015, respectively.

 

The income tax provision consists of the following components:

 

   For the Three Months Ended
September 30,
   For the Nine Months Ended
September 30,
 
   2016   2015   2016   2015 
   (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited) 
Current  $684,801   $349,513   $1,561,728   $495,730 
Deferred   (88,069)   (6,001)   (184,650)   (15,316)
                     
TOTAL PROVISION FOR INCOME TAXES  $596,732   $343,512   $1,377,078   $480,414 

 

A reconciliation between the Company’s effective tax rate and the expected statutory rate is as follow:

 

   For the Three Months Ended
September 30,
   For the Nine Months Ended
September 30,
 
   2016   2015   2016   2015 
   (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited) 
Income before income tax expense  $3,048,470   $1,487,585   $6,041,711   $2,195,758 
                     
Provision for taxes at respective statutory tax rate   478,492    190,106    740,488    299,344 
Tax effect of non-deductible expenses   11,117    38,260    32,742    51,138 
Changes in valuation allowance   107,123    115,146    603,848    129,932 
                     
TOTAL PROVISION FOR INCOME TAXES  $596,732   $343,512   $1,377,078   $480,414 

 

The Company's effective tax rate was 19.6% and 23.1% for the three months ended September 30, 2016 and 2015, respectively, and 22.8% and 21.9% for the nine months ended September 30, 2016 and 2015, respectively.

 

17 

 

 

The approximate tax effects of temporary differences, which give rise to the deferred tax assets and liabilities, are as follows:

 

   September 30,
2016
   December 31,
2015
 
   (Unaudited)     
Deferred tax assets:          
Net operating losses  $975,244   $306,102 
Excess advertising expense   126,080    - 
Total deferred tax assets   1,101,324    306,102 
Valuation allowance   (909,950)   (306,102)
Deferred tax asset, net of valuation allowance   191,374    - 
           
Deferred tax liabilities          
Property, plant and equipment, principally due to differences in depreciation   54,361    45,037 
Deferred tax liability  $54,361   $45,037 

 

13. COMMITMENTS AND CONTINGENCIES

 

Capital Commitments

 

The Company purchased property and equipment which the payment was due within one year. As of September 30, 2016 and December 31, 2015, the Company has capital commitments of $31,280 and $60,571, respectively.

 

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Operation Commitments

 

The total future minimum lease payments under the non-cancellable operating lease with respect to the office and the dormitory, as well as hardware trading platform as of September 30, 2016 are payable as follows:

 

Remaining 2016  $139,507 
      
Year ending December 31, 2017   856,829 
      
Year ending December 31, 2018   500,849 
      
Year ending December 31, 2019   85,403 
      
Year ending December 31, 2020   14,996 
      
Year ending December 31, 2021   14,996 
      
Year ending December 31, 2022 and thereafter   52,486 
      
Total  $1,665,066 

 

Rental expense of the Company was $199,514 and $181,214 for the three months ended September 30, 2016 and 2015, respectively, and $428,440 and $308,400 for the nine months ended September 30, 2016 and 2015, respectively.

 

14. EARNINGS PER SHARE

 

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

 

   For the Three Months Ended
September 30,
   For the Nine Months Ended
September 30,
 
   2016   2015   2016   2015 
   (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited) 
Numerator:                    
Net income  $2,451,737    1,144,073   $4,664,632    1,715,344 
                     
Denominator:                    
Weighted-average shares outstanding                    
Weighted-average shares outstanding - Basic   10,632,276    9,612,496    10,632,276    9,426,026 
Stock options   733,321    -    645,569    - 
Weighted-average shares outstanding - Diluted   11,365,597    9,612,496    11,277,845    9,426,026 
                     
Earnings per share                    
-Basic   0.23    0.12    0.44    0.18 
-Diluted   0.22    0.12    0.41    0.18 

 

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.

 

487,000 restricted shares of Common Stock (the “Compensation Shares”) related to the Consulting Agreement with Regeneration Capital Group, LLC (“Regeneration”) entered on November 20, 2015. These shares were placed in an escrow account and were subject to Regeneration’s performance condition. There was a dilutive effect of 487,000  shares for the three and nine months ended September 30, 2016. (See Note 15)

 

During the nine months ended September 30, 2016, the Company granted an aggregate of 431,525 stock options under the 2015 Incentive Stock Plan (the “2015 Plan”). In addition, on December 1, 2015 and March 1, 2016, 12,143 and 7,463 of restricted stock-based awards were granted. There was a dilutive effect of 246,321 and 158,569 shares for the three and nine months ended September 30, 2016. (See Note 15)

 

19 

 

 

15. STOCKHOLDERS’ EQUITY

 

On July 7, 2015, the Board granted 300,000 shares of fully vested common stock to a third party for consulting services. The shares were subsequently issued on August 26, 2015 and the Company fair valued the shares at grant date and recorded $186,000 as stock-based compensation expense during the year ended December 31, 2015.

 

On August 10, 2015, the Company filed a Certificate of Amendment to our Certificate of Incorporation with the Secretary of State of the State of Delaware to effect a reverse stock split of our issued and outstanding shares of Common Stock at a ratio of 1-for-25 (the “Reverse Stock Split”). Upon filing of the Certificate of Amendment, every twenty-five shares of the Company’s issued and outstanding Common Stock were automatically converted into one issued and outstanding share of Common Stock, without any change in par value per share. No fractional shares will be issued as a result of the Reverse Stock Split. Stockholders who would otherwise be entitled to receive a fractional share will be entitled to rounding up their fractional shares to the nearest whole number. Prior period consolidated financial statement is adjusted to reflect the impact of the one-for-twenty five reverse stock split.

 

On August 26, 2015, the 2015 Incentive Stock Plan (“2015 Plan”) was approved by the Board of Directors for rewarding the Company’s directors, executives and selected employees and consultants for making major contributions to the success of the Company. 1,037,000 shares were registered on August 27, 2015.

 

On November 16, 2015, we entered into various subscription agreements with and sold to the selling stockholders a total of 1,000,000 shares of Common Stock at a price of $1.58 per share for aggregate gross proceeds of $1,580,000 (the “Private Placements”). The shares were offered and sold without registration under the Securities Act, in reliance upon the exemption from registration under Section 4(a)(2) of the Securities Act and/or Rule 506 of Regulation D and/or Rule 903 of Regulation S promulgated there under. No commissions were paid by the Company in connection with the Private Placements.

 

On November 20, 2015, we entered into a Consulting Agreement with Regeneration for the provision of certain consulting and advisory services, including without limitation, assisting in the preparation of Company financial projections, business plans, executive summaries and website, and recruiting qualified directors and officers. In consideration for providing such services, the Company issued to Regeneration the Compensation Shares which are placed in an escrow account maintained with the Company’s attorneys until either (i) the Company has successfully listed its securities on the NASDAQ or other U.S. securities exchange on or before December 31, 2016, whereupon the Compensation Shares shall be forthwith delivered to Regeneration or (ii) if the Company is unsuccessful in listing its securities on the NASDAQ or other U.S. securities exchange on or before December 31, 2016, the Compensation Shares shall be returned to the Company for cancellation. Regeneration shall be entitled to “piggy-back” registration rights with respect to the Compensation Shares. The Compensation Shares were issued in reliance on an exemption from registration under Section 4(a)(2) of the Securities Act. The stock-based compensation related to this consulting agreement was $76,613 and $571,266 during the three and nine months ended September 30, 2016. Pursuant to ASC 505-50-30, this transaction was measured based on the fair value of the equity instruments issued as the Company determined that the fair value of the equity instruments issued in a share-based payment transaction with nonemployees was more reliably measurable than the fair value of the consideration received. The Company would measure the fair value of the equity instruments in these transactions using the stock price and other measurement assumptions on the date at which the Regeneration’s performance is complete. The Company recognized (as appropriate relative to the periods and manner that Company would recognize cash payments under the same arrangement) the cost of the appropriate number of the 487,000 shares at the current fair value as of November 20, 2015, and subsequently each financial reporting date until Regeneration has completed its performance.

 

Stock-based Compensation Plans

 

During the nine months ended September 30, 2016, the Company granted an aggregate of 431,525 stock options under the 2015 Plan. 268,600 were granted effective on February 2, 2016, 50,000 were granted effective on February 29, 2016 and 112,925 of the options were granted effective on March 30, 2016. In addition, on December 1, 2015 and March 1, 2016, 12,143 and 7,463 of restricted stock-based awards were granted. Each of the awards is subject to service-based vesting restrictions. The February 2, 2016 grant included a grant of 50,000 shares to a non-employee who became an employee on March 2, 2016.

 

The exercise price of stock options was ranged from $2.91 to $3.65 and the requisite service period was ranged from two to five years. 46,172 stock options have been vested during nine months ended September 30, 2016, and no stock options were exercised or cancelled during the nine months ended September 30, 2015.

 

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The following table sets forth changes in compensation-related restricted stock awards during nine months ended September 30, 2016, and 12,838 shares are exercisable as of September 30, 2016.

 

   Number of   Weighted
Average
Grant Date
   Weighted
Average
Remaining
Contractual
   Shares   Fair Value   Term
Unvested at December 31, 2015   11,131   $3.50   3.91 years
Granted   7,463    3.35    
Forfeited   -    -    
Vested   (12,838)   3.50    
Unvested at September 30, 2016   5,756   $3.31   3.25 years

 

The stock-based compensation recognized is $186,928 and $186,000 during the three months ended September 30, 2016 and 2015, respectively, while it is $846,703 and $186,000 during the nine months ended September 30, 2016 and 2015, respectively.

 

16. SUBSEQUENT EVENT

 

The Company evaluated and concluded that no subsequent events have occurred that would require recognition or disclosure in the consolidated financial statements.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q or Form 10-Q and other reports filed by us from time to time with the Securities and Exchange Commission (collectively the “Filings”) contain 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 filings 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. The following discussion should be read in conjunction with our pro forma financial statements and the related notes that will be filed herein.

 

OVERVIEW

 

We were incorporated in Delaware under the name Cardigant Medical Inc. on April 17, 2009. Our initial business plan was to focus on the development of novel biologic and peptide based compounds and enhanced methods for local delivery for the treatment of vascular disease including peripheral artery disease and ischemic stroke.

 

Pursuant to the Stock Purchase Agreement dated as of July 31, 2014, Yong Li, an individual purchased a total of 887,409 restricted shares of common stock of the Company from a group of three former shareholders of the Company. In consideration for the shares, Mr. Li paid the sellers $399,344 in cash which came from his own capital. The sellers were Jerett A. Creed, the Company’s former Chief Executive Officer, Chief Financial Officer, director and formerly a controlling shareholder of the Company, the Creed Family Limited Partnership and Ralph Sinibaldi. The shares represented approximately 95% of the Company’s then issued and outstanding common stock. The sale was consummated on August 28, 2014. As a result of the transaction, there was a change in control of the Company.

 

On August 27, 2014, we entered into a Contribution Agreement with Cardigant Neurovascular. Pursuant to the Contribution Agreement, we assigned all our assets, properties, rights, title and interest used or held for use by our business, (except for certain excluded assets set forth therein) which was the treatment of atherosclerosis and plaque stabilization in both the coronary and peripheral vasculature using systemic and local delivery of large molecule therapeutics and peptide mimetics based on high density lipoprotein targets (“Business”). In consideration for such contribution of capital, Cardigant Neurovascular agreed to assume all our liabilities raising from the Business prior to the date of the Contribution Agreement and thereafter with regard to certain contributed contacts. We granted Cardigant Neurovascular an exclusive option for a period of 6 months to purchase the excluded assets for $1. Cardigant Neurovascular exercised this option October 20, 2014 and the excluded assets were assigned to Cardigant Neurovascular on October 20, 2014.

 

Also on October 20, 2014, we acquired the business of Hong Kong Takung Assets and Equity of Artworks Exchange Co., Ltd (“Hong Kong Takung”) through the acquisition of all the share capital of Hong Kong Takung under a Share Exchange Agreement dated September 23, 2014 in exchange for 8,339,040 newly-issued restricted shares of our common stock to the shareholders of Hong Kong Takung.

 

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Hong Kong Takung is a limited liability company incorporated on September 17, 2012 under the laws of Hong Kong, Special Administrative Region, China. Although Hong Kong Takung was incorporated in late 2012, it did not commence business operations until late 2013.

 

As a result of the transfer of the excluded assets pursuant to the Contribution Agreement and the acquisition of all the issued and outstanding shares of Hong Kong Takung, we are no longer conducting the Business and have now assumed Hong Kong Takung’s business operations as it is now our only operating wholly-owned subsidiary.

 

Hong Kong Takung operates an electronic online platform located at www.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.

 

We conduct our business primarily in Hong Kong, Special Administrative Region, People’s Republic of China. Our principal executive offices are located at Flat/RM 03-04, 20/F, Hutchison House, 10 Harcourt Road, Central Hong Kong.

 

On July 28, 2015, Hong Kong Takung incorporated a wholly owned subsidiary, Takung (Shanghai) Co., Ltd. (“Shanghai Takung”), in Shanghai Free-Trade Zone (SFTZ) in Shanghai, China, with a registered capital of $1 million. Shanghai Takung is engaged in providing services to its parent company Hong Kong Takung by receiving deposits from and making payments to online artwork traders for and on behalf of Hong Kong Takung.

 

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

 

Since July 28, 2016, we have expanded access to our trading platform to residents of Russia, Mongolia, Australia and New Zealand – our first major expansion of operations outside of China. To further stimulate trading interest, we have added selected portfolios from these countries to our platform, which now numbers 157 artworks including three Russian painting portfolios and fourteen Mongolian paintings.

 

RESULTS OF OPERATIONS

 

The following discussion should be read in conjunction with the unaudited consolidated Financial Statements of the Company for the three and nine month period ended September 30, 2016 and 2015 and related notes thereto.

 

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THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2016 COMPARED TO THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2015.

 

Revenue

 

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

 

   Three Months Ended
September 30,
 
   2016   2015 
         
Revenue  $5,742,209   $2,706,388 
Cost of revenue   (285,252)   (214,530)
Selling expense   (652,207)   (116,090)
General and administrative expense   (1,744,965)   (882,982)
Total costs and expenses   (2,682,424)   (1,213,602)
Income from operations   3,059,785    1,492,786 
Interest and other income, net   (11,316)   (5,201)
Income before provision for income taxes   3,048,469    1,487,585 
Provision for income taxes   (596,732)   (343,512)
Net income  $2,451,737   $1,144,073 

 

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

 

   Three Months Ended
September 30,
 
   2016   2015 
         
Revenue   100%   100%
Cost of revenue   (5)%   (8)%
Selling expense   (11)%   (4)%
General and administrative expense   (30)%   (33)%
Total costs and expenses   (46)%   (45)%
Income from operations   54%   55%
Interest and other income, net   -    - 
Income before provision for income taxes   54%   55%
Provision for income taxes   (10)%   (13)%
Net income   44%   42%

 

Listing fee revenue was $2,968,534 and $439,811; commission revenue was $1,669,698 and $2,239,526; gross management fee revenue was $781,219 and $26,889; annual fee revenue was $440 and $162; authorized agent subscription revenue was $322,318 and nil for the three months ended September 30, 2016 and 2015, respectively. Since the fourth quarter of 2015, the Company has received one more revenue stream in the form of authorized agent subscriptions, with the contribution of $322,318 for the three months ended September 30, 2016.

 

During the three months ended September 30, 2016, there were seven pieces of painting, seven pieces of amber, fourteen pieces of precious stone, and five pieces of jewelry successfully listed on our system. The total listing values were $1,803,310 (HK$14,000,000) for the paintings, $2,975,462 (HK$23,100,000) for the amber, $1,043,344 (HK$8,100,000) for the precious stones, $747,086 (HK$5,800,000) for the jewelry, of which 47.75%-48% (for the seven pieces of painting), 46% (for the seven pieces of amber), 32%-48.5% (for the fourteen pieces of precious stones), 29%-48% (for the five pieces of jewelry) of the listed values were charged as listing fees, respectively.

 

Compared to the corresponding period ended September 30, 2015, there were seven pieces of precious stones and three pieces of amber listed on our system. The total listing values were $180,620 (HK$1,400,000) for all the precious stones and $812,792 (HK$6,300,000) for the ambers, of which 32% and 47% were charged as listing fee revenue, respectively.

 

The increase in number of pieces listed, listing values and corresponding listing fees charged during the three months ended September 30, 2016 compared to three months ended September 30, 2015 resulted in an increase in listing fee revenue in the current period.

 

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During the three months period ended September 30, 2016, commission revenue decreased due to the increase of percentage of commission rebate to traders.

 

Our trading volume and transaction amounts increased significantly during three months ended September 30, 2016. Trading amount and trading volume increased by 266% and 476% respectively during the three months ended September 30, 2016 compared to the corresponding period in 2015. Shanghai Takung contributed 57% of the total trading volume, and 32% of the total trading amount and the significant decrease of our commission revenue by $569,828 was caused by the change of percentage of commission rebate.

 

During the three-month period ended September 30, 2016, management fee revenue increased by $754,330, from $26,889, for the three months ended September 30, 2015 to $781,219 for the three months ended September 30, 2016, due to the aforementioned increase in trading amount and volume.

 

During the three-month period ended September 30, 2016, annual fee revenue increased insignificantly from $162 for the three months ended September 30, 2015 to $440, as the premium service was not as popular as the Company expected. However, no decision is being made as to whether the service will be terminated in the near future.

 

During the three-month period ended September 30, 2016, authorized agent subscription was $322,318 for the three months ended September 30, 2016. We did not start earning this form of revenue until October 2015 .

 

Cost of Revenue

 

Cost of revenue for the three months ended September 30, 2016 and 2015 were $285,252 and $214,530, respectively. Our cost of revenue primarily includes the leasing of equipment, depreciation and amortization of hardware and software for our trading platform, storage and insurance fee for artwork and others

 

In the third quarter of 2014, we entered into an agreement with Shenzhen Qianrong Culture Investment Development Co., Ltd. (“Qianrong”) to provide software development services with a total contract amount of $901,522 (HK$6,995,000). The services contracted for are divided into different modules, according to different upgrades and new functionalities. As of September 30, 2016, nine out of the ten modules have been completed and are operational, while as of September 30, 2015, only six out of ten modules were completed and operational. We started to capitalize (with a total cost of $837,470 (HK$6,495,000)) and amortized these costs once the modules were completed. All of these additional costs from gradual completion of our platform system modules and addition of equipment contributed to an increase in our cost of revenue through 2016.

 

Gross Profit

 

Gross profit was $5,456,957 for the three months ended September 30, 2016, compared to $2,491,858 for the three months ended September 30, 2015. The increase was due to the higher transaction volume with more artworks trading on our platform.

 

Listing fees contributed 51.7% of the total revenue for the three months ended September 30, 2016 compared to 16.3% in the corresponding period in 2015, while commission revenue contributed 29.1% for the three months ended 2016 compared to 82.7% in the corresponding period in 2015. The increase in listing fee in the current period during the same period was due to more artworks listed, and more trading volume and amount. Gross profit margins were 95% and 92% for the three months ended September 30, 2016 and 2015 respectively.

 

Operating Expenses

 

Selling expense was $652,207, or 11 % of net sales, for the three months ended September 30, 2016 compared to $116,090, or 4% of net sales, for the comparable period in 2015, an increase of 462%. Selling expense consists primarily of marketing expenses.

 

25 

 

 

General and administrative expenses for the three months ended September 30, 2016 were $1,744,965 compared to $882,982 for the three months ended September 30, 2015. Despite the decrease in consultancy fee by $39,883, the substantial increase was primarily due to an increase in legal and professional fees by $6,689 because of more filing and compliance activities; an increase in salaries by $596,039 because of an increase in employee headcount; an increase in office and rental expenses by $158,788 because of the new rented office space for Hong Kong Takung in Hong Kong, Shanghai and Tianjin; an increase in travelling expenses by $67,325 because of more travelling needed to set up Shanghai Takung and Tianjin Takung, and an increase in stock-based compensation amounting to $928 because of expenses being paid to employees and non-employees, and an increase in other expenses by $72,097.

 

The following table sets forth the main components of the Company’s operating expenses for the three months ended September 30, 2016 and 2015.

 

   Three months ended
September 30, 2016
   Three months ended
September 30, 2015
 
   Amount($)   % of Total   Amount($)   % of Total 
General and administrative expense:                    
Consultancy fee   92,809    5%   132,692    15%
Legal and professional fees   247,278    14%   240,589    27%
Salary and welfare   750,267    43%   154,228    17%
Office expenses and rental   288,766    17%   129,978    15%
Traveling and accommodation fees   71,560    4%   4,235    1%
Others   107,357    6%   35,260    4%
Stock based compensation   186,928    11%   186,000    21%
Total general and administrative expense  $1,744,965    100%  $882,982    100%
                     
Selling expense:                    
Marketing expenses   652,207    100%   116,090    100%
Total selling expense  $652,207    100%  $116,090    100%
                     
Total operating expense  $2,397,172    100%  $999,072    100%

 

Net Income

 

We had a net income for the three months ended September 30, 2016 of $2,451,737 compared to net income of $1,144,073 for the three months ended September 30, 2015.

 

The increase in net income during this current period was primarily due to an increase of revenue by $3,035,821, as discussed in previous paragraphs.

 

NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2016 COMPARED TO NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2015.

 

Revenue

 

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

 

   Nine Months Ended
September 30,
 
   2016   2015 
         
Revenue  $14,214,252   $4,917,368 
Cost of revenue   (822,735)   (592,342)
Selling expense   (1,993,782)   (173,888)
General and administrative expense   (5,076,689)   (1,950,662)
Total costs and expenses   (7,893,206)   (2,716,892)
Income from operations   6,321,046    2,200,476 
Interest and other income, net   (279,336)   (4,718)
Income before provision for income taxes   6,041,710    2,195,758 
Provision for income taxes   (1,377,078)   (480,414)
Net income  $4,664,632   $1,715,344 

 

26 

 

 

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

 

   Nine Months Ended
September 30,
 
   2016   2015 
         
Revenue   100%   100%
Cost of revenue – Direct revenue   (6)%   (12)%
Selling expense   (14)%   (4)%
General and administrative expense   (36)%   (40)%
Total costs and expenses   (56)%   (56)%
Income from operations   44%   44%
Interest and other income, net   (2)%   - 
Income before provision for income taxes   42%   44%
Provision for income taxes   (10)%   (10)%
Net income   32%   34%

 

Listing fee revenue was $8,166,072 and $1,549,587; commission revenue was $3,739,958 and $3,267,516; gross management fee revenue was $1,341,294 and $98,674; annual fee revenue was $869 and $1,591; authorized agent subscription revenue was $966,059 and nil for the nine months ended September 30, 2016 and 2015, respectively. Since the fourth quarter of 2015, the Company has received one more revenue stream in the form of authorized agent subscriptions, with the contribution of $966,059 for the nine months ended September 30, 2016.

 

During the nine months ended September 30, 2016, there were fifteen pieces of painting, fifty-nine pieces of precious stones, eleven pieces of jewelry, three pieces of ivory, eighteen pieces of amber and two pieces of porcelain pastel paintings successfully listed on our system. The total listing values were $3,349,005 (HK$26,000,000) for the painting, $5,744,832 (HK$44,600,000) for the precious stones, $1,816,191 (HK$14,100,000) for the jewelry, $515,232 (HK$4,000,000) for the ivory, $7,239,003 (HK$56,200,000) for the ambers, and $334,900 (HK$2,600,000) for the porcelain pastel paintings, of which 47.75%-48% (for the fifteen pieces of painting), 29%-48.5% (for the fifty-nine pieces of precious stones), 29%-48% (for the eleven pieces of jewelry), 47% (for the three pieces of ivory), 45%-48% (for the eighteen pieces of amber), and 45%-46% (for two pieces of porcelain pastel paintings ) of the relevant listed values were charged as listing fees.

 

Compared to the corresponding period ended September 30, 2015, only four pieces of jewelry, twelve pieces of precious stones, and three pieces of amber with a total listing value of $1,625,177 (HK$12,600,000), $1,470,399 (HK$11,400,000) and $812,589 (HK$6,300,000) were listed, of which 31% (for the four pieces of jewelry), 47% (for the five piece of precious stones listed in the first half year) and 32% (for the other seven pieces of precious stones listed in the third quarter of 2015),and 47% (for the three pieces of amber) of the listed values were charged as listing fee revenue.

 

The increase in number of pieces listed, listing values and corresponding listing fees charged during the nine months ended September 30, 2016 compared to nine months ended September 30, 2015 resulted in an increase in listing fee revenue in the current period.

 

During the nine months period ended September 30, 2016, commission revenue increased mainly due to more artworks being listed and commencement of operations of Shanghai Takung in July 2015 that allowed transactions to be settled in Renminbi. This increased the number of traders from mainland China, as well as the trading volume and transaction amounts. The increase was however offset by increased rebates during this period.

 

Our trading volume and transaction amounts increased significantly during nine months ended September 30, 2016. Trading amount and trading volume increased by 283% and 170% respectively during the nine months ended September 30, 2016 compared to the corresponding period in 2015. Shanghai Takung contributed 54% of the total trading volume, and 37% of the total trading amount.

 

27 

 

 

During the nine-month period ended September 30, 2016, management fee revenue increased by $1,242,620, from $98,674 for the nine months ended September 30, 2015 to $1,341,294, due to the aforementioned increase in trading amount and volume.

 

During the nine-month period ended September 30, 2016, annual fee revenue decreased from $1,591 to $869, as the premium service was not as popular as the Company expected. However, no decision has been made to terminate the service in the near future.

 

During the nine-month period ended September 30, 2016, authorized agent subscription was $966,059 for the nine months ended September 30, 2016. We did not start earning this form of revenue until October 2015.

 

Cost of Revenue

 

Cost of revenue for the nine months ended September 30, 2016 and 2015 was $822,735 and $592,342, respectively. Our cost of revenue primarily includes the leasing of equipment, depreciation and amortization of hardware and software for our trading platform storage and insurance fee for artwork and others

 

In the third quarter of 2014, we entered into an agreement with Qianrong to provide software development services with a total contract amount of $901,522 (HK$6,995,000). The services contracted for are divided into different modules, according to different upgrades and new functionalities. As of September 30, 2016, nine out of the ten modules have been completed and are operational. We started to capitalize (with a total cost of $837,470 (HK$6,495,000)) and amortized these costs once the modules were completed. All of these additional costs from gradual completion of our platform system modules and addition of equipment contributed to an increase in our cost of revenue through 2016.

 

Gross Profit

 

Gross profit was $13,391,517 for the nine months ended September 30, 2016, compared to $4,325,026 for the nine months ended September 30, 2015. The increase was due to the higher transaction volume with more artworks trading on our platform.

 

Listing fees contributed 57.4% of the total revenue for the nine months ended September 30, 2016 compared to 31.5% in the corresponding period in 2015, while commission revenue contributed 26.3% for the nine months ended September 30, 2016 compared to 66.4% in the corresponding period in 2015. The increase mainly contributed from listing fee income was due to the significant increase in both trading amount and trading volume. Depreciation under the cost of revenue was increased by 32% in the current period compared to the same period in 2015. Gross profit margin was 94% and 88% for the nine months ended September 30, 2016 and 2015 respectively.

 

Operating Expenses

 

Selling expense was $1,993,782, or 14% of net sales, for the nine months ended September 30, 2016 compared to $173,888, or 4% of net sales, for the comparable period in 2015. Selling expense consists primarily of marketing expenses.

 

General and administrative expenses for the nine months ended September 30, 2016 were $5,076,689 compared to $1,950,662 for the nine months ended September 30, 2015. The substantial increase was primarily due to an increase in consultancy fees by $9,284 because of more consultants being engaged; an increase in legal and professional fees by $222,348 because of more filing and compliance activities; an increase in salaries by $1,438,025 because of an increase in employee headcount; an increase in office and rental expenses by $595,627 because of the new rented office space for Hong Kong Takung in Hong Kong, Shanghai and Tianjin; an increase in travelling expenses by $83,438 because of more promotional activities to expand our operations; an increase in stock-based compensation amounting to $660,703 because of expenses being paid to employees and non-employees and an increase of other expenses by $116,602.

 

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The following table sets forth the main components of the Company’s operating expenses for the nine months ended September 30, 2016 and 2015.

 

    Nine months ended
September 30, 2016
    Nine months ended
September 30, 2015
 
    Amount($)     % of Total     Amount($)     % of Total  
General and administrative expense:                                
Consultancy fee     361,610       7 %     352,326       18 %
Legal and professional fees     728,856       14 %     506,508       26 %
Salary and welfare     1,852,355       36 %     414,330       21 %
Office expenses and rental     852,494       17 %     256,867       13 %
Traveling and accommodation fees     184,235       4 %     100,797       5 %
Others     250,436       5 %     133,834       7 %
Stock based compensation     846,703       17 %     186,000       10 %
Total general and administrative expense   $ 5,076,689       100 %   $ 1,950,662       100 %
                                 
Selling expense:                                
Marketing expenses     1,993,782       100 %     173,888       100 %
Total selling expense   $ 1,993,782       100 %   $ 173,888       100 %
                                 
Total operating expense   $ 7,070,471       100 %   $ 2,124,550       100 %

 

Net Income

 

We had a net income for the nine months ended September 30, 2016 of $4,664,632 compared to net income of $1,715,344 for the nine months ended September 30, 2015.

 

The increase in net income during this current period was mainly due to an increase of revenue by $9,296,884, as discussed in previous paragraphs.

 

Liquidity and Capital Resources

 

Sources of Liquidity

 

During the nine months ended September 30, 2016, net cash provided by operating activities totaled $5,104,457. Net cash used in investing activities totaled $1,276,378. Net cash provided by financing activities totaled $2,346,941. The resulting change in cash for the period was an increase of $6,061,579. The cash balance at the beginning of the period was $10,769,456. The cash balance on September 30, 2016 was $16,831,035.

 

During the nine months ended September 30, 2015, net cash provided by operating activities totaled $811,630. Net cash used in investing activities totaled $507,032. Net cash provided by financing activities totaled $1,928,191 during the period. The resulting change in cash for the period was an increase of $2,235,842. The cash balance at the beginning of the period was $2,355,839. The cash balance on September 30, 2015 was $4,591,681.

 

As of September 30, 2016, the Company had $34,592,304 in total current liabilities, which comprised of $528,220 in accrued expenses and other payables, $287,698 in advance from customers, $25,448,772 in customer deposits, $3,519,580 in short-term borrowings from third parties, $2,340,895 in amount due to related party, and $2,467,139 in tax payables. As of December 31, 2015, the Company had $18,427,281 in total current liabilities, which comprised of $667,622 in accrued expenses and other payables, $16,195,289 in customer deposits, and $1,564,370 in tax payables.

 

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The Company had deferred tax liabilities of $54,361 as of September 30, 2016, and $45,037 as of December 31, 2015, respectively. The Company’s total liabilities as of September 30, 2016 and December 31, 2015 amounted to $34,646,665 and $18,472,318, respectively.

 

In Note 4, 10 and 11, it is disclosed that the Company had secured three loans for a total of US$ 5.8 million. The purpose of these loans is to strengthen the Company’s HKD currency reserves and ensure that all of its Hong Kong-based online traders can make HKD withdrawals on demand. The three loans and the decision to increase the company’s HKD reserves were deemed necessary as a result of the Chinese government’s capital controls associated with cross border fund transfers, which have made it difficult for companies to convert RMB into HKD and other currencies. 

 

The first two loans, of US$1.5 million and US$2.0 million, were secured from Hong Kong-based Merit Crown Limited on July 15 and August 24, 2016, respectively. Both loans carry annual interest of eight percent and expire on December 31, 2016, with an option to renew based on negotiation.

 

The third loan, of HKD18 million, or approximately US$2.3 million, was secured from Ms. Jianping Mao, on August 25, 2016. Of the HKD18 million, HKD10 million is due three months after the effective date, and HKD8 million is due by December 31, 2016. This loan also carries annual interest of eight percent with an option to renew based on negotiation.

 

The Company is in the process of negotiating with Merit Crown and Ms. Wang to extend the due dates of the three loans for a further 6 months.

 

The Company is not aware of any known trends, events or uncertainties which may affect its future liquidity. Our business is subject to risks inherent in the establishment of a new business enterprise, including limited capital resources and possible cost overruns.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to stockholders.

 

Future Financings

 

Our business is sufficiently funded by cash generated from our operating activities. In order to further expand our business operations at a higher growth rate, we may need to obtain financing through equity sales of our common shares. Issuances of additional shares will result in dilution to existing stockholders. There is no assurance that we will achieve any additional sales of the equity securities or arrange for debt or other financing to expand our operations and other activities or if we are able, there is no guarantee that existing shareholders will not be substantially diluted.

 

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.

 

Recent Accounting Pronouncements

 

See Note 2 to the financial statements included herewith.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

Not applicable.

 

Item 4. Controls and Procedures.

 

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

 

We conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (Exchange Act), under the supervision of and with the participation of our management, which presently comprises our Chief Executive Officer, Mr. Di Xiao and our Chief Financial Officer, Mr. Chun Hin Leslie Chow. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of the nine months ended September 30, 2016 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.

 

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Changes in Internal Controls over Financial Reporting

 

Subject to the foregoing disclosure, there were no changes in our internal control over financial reporting that occurred during our fiscal quarter ended September 30, 2016, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

None.

 

Item 1A. Risk Factors

 

Not applicable.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

Not applicable.

 

Item 6. Exhibits.

 

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

 

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Exhibit    
No.   Description
     
3.1   Certificate of Incorporation (1)
3.2   By-laws of the Company (2)
3.3   Certificate of Amendment of the Certificate of Incorporation (1)
3.4   Certificate of Amendment of the Certificate of Incorporation (1)
3.5   Certificate of Amendment (2)
3.6   Certificate of Amendment of the Certificate of Incorporation (4)
3.7   Certificate of Incorporation of Hong Kong Takung Assets and Equity Artworks Exchange Co., Ltd.(3)
3.8   Articles of Association of Hong Kong Takung Assets and Equity Artworks Exchange Co., Ltd.(3)
31.1   Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2   Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1   Certification of the Principal Executive Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
32.2   Certification of 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 10, 2016 By: /s/ Di Xiao
    Di Xiao
    Chief Executive Officer
    (Principal Executive Officer) and Director
     
Date: November 10, 2016 By: /s/ Chun Hin Leslie Chow
    Chun Hin Leslie Chow
    Chief Financial Officer
    (Principal Financial Officer)

 

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