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 March 31, 2017

 

or

 

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

 

For the transition period from _________________________ to_________________________

 

Commission File Number: 001-38036

 

TAKUNG ART CO., LTD

(Exact name of registrant as specified in its charter)

 

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

 

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 nteractive 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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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

 

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

 

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

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

 

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

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

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

 

The number of shares of common stock issued and outstanding as of May 12, 2017 is 11,188,882.

 

 

 

 

 

 

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. 26
     
  Item 3.  Quantitative and Qualitative Disclosures About Market Risk. 33
     
  Item 4.  Controls and Procedures. 33
     
PART II. Other Information 34
     
  Item 1.  Legal Proceedings. 34
     
  Item 1A. Risk Factors. 34
     
  Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds. 34
     
  Item 3.  Defaults Upon Senior Securities. 34
     
  Item 4.  Mine Safety Disclosures. 34
     
  Item 5.  Other Information. 34
     
  Item 6.  Exhibits. 34
     
  Signatures 35

 

 

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PART I –FINANCIAL INFORMATION

Item 1. Financial Statements   

 

TAKUNG ART CO., LTD AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

 

   March 31,   December 31, 
   2017   2016 
   (Unaudited)     
ASSETS          
Current assets          
Cash and cash equivalents  $15,461,396   $13,395,337 
Restricted cash   18,989,960    21,743,360 
Account receivables, net   3,173,691    3,058,568 
Prepayment and other current assets   932,045    968,446 
Loan receivables   6,579,281    6,374,046 
Total current assets   45,136,373    45,539,757 
           
Non-current assets          
Property and equipment, net   1,960,930    2,065,182 
Intangible assets   20,498    20,546 
Deferred tax assets   280,041    243,772 
Other non-current assets   419,882    428,764 
Total non-current assets   2,681,351    2,758,264 
Total assets  $47,817,724   $48,298,021 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
LIABILITIES          
Current liabilities          
Accrued expenses and other payables  $873,771   $608,883 
Customer deposits   18,989,960    21,743,360 
Advance from customers   737,533    360,248 
Short-term borrowings from third parties   6,354,147    6,308,513 
Amount due to related party   1,029,416    1,031,805 
Tax payables   893,892    549,897 
Total current liabilities   28,878,719    30,602,706 
Deferred tax liabilities   56,771    62,618 
Total non-current liabilities   56,771    62,618 
Total liabilities   28,935,490    30,665,324 
           
COMMITMENTS AND CONTINGENCIES          
           
STOCKHOLDERS’ EQUITY          
Common stock (1,000,000,000 shares authorized; $0.001 par value; 11,188,882 shares issued and outstanding as of March 31, 2017;
11,169,276 shares issued and outstanding as of December 31, 2016)
   11,189    11,169 
Additional paid-in capital   5,773,877    5,532,426 
Retained earnings   14,046,210    13,172,671 
Accumulated other comprehensive loss   (949,042)   (1,083,569)
Total stockholders’ equity   18,882,234    17,632,697 
Total liabilities and stockholders’ equity  $47,817,724   $48,298,021 

 

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

 

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TAKUNG ART CO., LTD AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

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

(UNAUDITED)

 

   For the Three Months
Ended March 31,
   For the Three Months
Ended March 31,
 
   2017   2016 
         
Revenue          
Listing fee  $2,307,946   $2,195,064 
Commission   1,670,613    1,143,471 
Authorized agent subscription revenue   -    321,583 
Management fee   292,551    128,491 
Annual fee   483    161 
Total revenue   4,271,593    3,788,770 
           
Cost of  revenue   (262,659)   (262,067)
Gross profit   4,008,934    3,526,703 
           
Operating expenses          
General and administrative expenses   (2,573,391)   (1,561,373)
Selling expenses   (337,527)   (638,209)
Total operating expenses   (2,910,918)   (2,199,582)
           
Income from operations   1,098,016    1,327,121 
           
Other income and expenses:          
Other income   112,358    50,643 
Loan interest expense   (149,891)   - 
Exchange gain   120,937    119,456 
Total other income   83,404    170,099 
           
Income before income tax expense     1,181,420    1,497,220 
           
Provision for income taxes   (307,881)   (401,168)
           
Net income   873,539    1,096,052 
           
Foreign currency translation adjustment   134,527    12,084 
           
Comprehensive income  $1,008,066   $1,108,136 
           
Earnings per common share – basic  $0.08   $0.10 
Earnings per common share – diluted  $0.08   $0.10 
Weighted average number of common shares outstanding –basic   10,733,506    10,632,276 
Weighted average number of common shares outstanding –diluted,   11,509,938    11,147,577 

  

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

 

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TAKUNG ART CO., LTD AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Stated in U.S. Dollars)

(UNAUDITED)

 

   For the Three Months   For the Three Months 
   Ended   Ended 
   March 31,   March 31, 
   2017   2016 
         
Cash flows from operating activities:          
Net income  $873,539   $1,096,052 
Adjustments to reconcile net income to net cash provided by operating activities          
Depreciation   168,142    102,973 
Changes in exchange rate   (81,418)   (157,518)
Stock-based compensation   241,471    440,736 
Amortization of prepaid interest expense   60,739    - 
Changes in operating assets and liabilities:          
Account receivables   (115,123)   (274,234)
Deposit   -    (8,985)
Other receivables   -    (16,653)
Prepayment   45,283    (195,698)
Restricted cash   2,753,400    (1,499,123)
Deferred revenue   -    147,337 
Due from director   -    502 
Customer deposits   (2,753,400)   1,499,123 
Advance from customer   377,285    - 
Deferred tax assets   (36,269)   - 
Deferred tax liabilities   (5,847)   (2,465)
Tax payable   343,995    (149,497)
Accrued expenses and other payables   264,887    278,985 
Net cash provided by operating activities   2,136,684    1,261,535 
           
Cash flows from investing activities:          
Purchase of property and equipment   (59,900)   (409,664)
Purchase of available-for-sales investment   (13,656,439)   - 
Maturity and redemption of available-for-sales investment   13,656,439    - 
Loan to third parties   (3,553,799)   - 
Repayment from loan to third parties   3,403,940    - 
Net cash used in investing activities   (209,759)   (409,664)
           
Effect of exchange rate change on cash and cash equivalents   139,134    47,312 
           
Net increase in cash and cash equivalents   2,066,059    899,183 
           
Cash and cash equivalents, beginning balance   13,395,337    10,769,456 
           
Cash and cash equivalents, ending balance  $15,461,396   $11,668,639 
           
Supplemental cash flows information:          
Cash paid for interest  $69,229   $521,714 
Cash paid for income tax  $-   $- 

 

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

 

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TAKUNG ART CO., LTD AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(UNAUDITED)

 

1. ORGANIZATION AND DESCRIPTION OF BUSINESS

 

Takung Art Co., Ltd and Subsidiaries ( “Takung”), a Delaware corporation (formerly Cardigant Medical Inc.) through Hong Kong Takung 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 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 was no operation 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 by receiving deposits from and making payments to online artwork traders of Takung for and on behalf of Takung.

 

Shanghai Takung set up a new office in Hangzhou, PRC on November 20, 2016 for technology development.  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 support 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 Takung common stock were converted, at an exchange ratio of 10.4988-for-1, into an aggregate of 8,399,040 shares of Cardigant common stock and 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 933,236 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 and Subsidiaries”.

 

Under generally accepted accounting principles 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. 

 

Unless otherwise indicated or the context otherwise requires, references to “the Company” refer to Takung Art Co., Ltd and Subsidiaries 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”.

 

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying consolidated balance sheet as of December 31, 2016, which has been derived from audited financial statements, and the unaudited interim consolidated financial statements as of March 31, 2017 and for the three months ended March 31, 2017 and 2016 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 for the fiscal year ended December 31, 2016, 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 March 31, 2017, its consolidated results of operations and cash flows for the three-month periods ended March 31, 2017 and 2016, 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.

  

Basis of Consolidation

 

The consolidated financial statements include the financial statements of the Company, and its subsidiaries, Hong Kong Takung, Shanghai Takung and Tianjin Takung. All intercompany transactions, balances and unrealized profit and losses have been eliminated on consolidation.

 

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.

 

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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 March 31, 2017 and December 31, 2016.

   

Comprehensive Income

 

The Company follows the provisions of the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) 220 “Reporting Comprehensive Income”, and establishes standards for the reporting and display of comprehensive income, its components and accumulated balances in a full set of general purpose financial statements. For the period ended March 31, 2017 and the year ended December 31, 2016, the Company’s comprehensive income includes net income and foreign currency translation adjustment.

 

Foreign Currency Translation and Transaction

 

The functional currency of 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”).

  

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 7.7714 and 7.7534 as of March 31, 2017 and December 31, 2016 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 periods, which are 7.7608 and 7.7740 for the period ended March 31, 2017 and 2016 respectively. For Renminbi currency, the Company’s assets and liabilities are expressed in USD at the exchange rate on the balance sheet dates, which is 6.8832 and 6.9430 as of March 31, 2017 and December 31, 2016 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 periods, which is 6.8853 and 6.5394 for the period ended March 31, 2017 and 2016 respectively. 

 

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The resulting translation adjustments are reported under accumulated other comprehensive loss in the stockholder’s 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. 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 shares 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 shares, the seller will send instructions to the bank, requesting the amount to be transferred to their personal account. After deducting the commission and the management fee as per Takung, 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.

 

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.

  

As of March 31, 2017, all short-term investments under held-to-maturity and available-for-sale investments were redeemed with a nil balance.

 

Account Receivables and Allowance for Doubtful Accounts

 

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

 

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Loan Receivables

 

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

 

Prepayment and Other Current Assets

 

Prepayment and other current assets mainly consist of the prepayment for development, maintenance of online trading system, the advertising and promotional services, prepaid financial advisory and banking services, as well as other current assets.

 

Other Non-current Assets

 

A portion of the 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 operating income or expense. 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:

 

Classification   Estimated
useful life
Furniture, fixtures and equipment   5 years
Leasehold improvements   Shorter of the remaining lease terms and 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 March 31, 2017 and 2016, 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. For intangible assets with definite lives, they are amortized over estimated useful lives, and are reviewed annually for impairment. The Company has not recorded impairment of intangible assets as of March 31, 2017 and December 31, 2016.

 

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Customer deposits

 

Customer deposit 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. 

 

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 four short-term borrowings from third parties, both with 8% annual interest rate and due on December 31, 2016. Two borrowings were extended with to a maturity date on March 31, 2017 and then further extended on April 4, 2017 to a maturity date of December 31, 2017.

 

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;

 

  the price is fixed or determinable; and

 

  collectability of the related receivable is reasonably assured

 

Listing fee -The Company recognizes the listing fee revenue once the ownership shares of the artwork are listed and successfully traded on our system, based on the agreed percentage of the total offering price. When the ownership shares of the artwork is listed and starts trading on our system, the Original Owner and/or the Offering Agent shall pay us 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. We generally charge 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 our system as of March 31, 2017.

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Commission - For non-VIP Traders, the commission revenue was calculated based on a percentage of transaction value of artworks, which we charge trading commissions for the purchase and sale of the ownership shares of the artworks. The commission is typically 0.3% of the total amount of each transaction, but as an initial promotion, we currently charge a reduced fee of 0.2% (resulting in an aggregate of 0.4% for both buy and sell transactions) of the total transaction amount with the minimum charge of $0.13 (HK$1). The commission is accounted for as revenue and immediately deducted from the proceeds from the sales of artwork units when a transaction is completed.

 

For selected VIP Traders, we ran a discount program for them starting from April 1, 2015, when their trading volumes of the certain artworks reached an agreed level in 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. The discounted rate varied between selected artworks. This discount program ended on March 31, 2016.

 

For selected Traders, starting from April 1, 2016, we charged a predetermined monthly fee (unlimited trade for specific artworks) for specific artworks. These Traders are selected by authorized agents and reviewed by us. After review, we negotiate individually with each one of them to determine a fixed monthly fee. Different Traders may have different rates but once negotiated and agreed to, the monthly fee is fixed.

 

Commission rebate programs are offered to Traders and service agents. We would rebate 5% of the commission earned from the transactions of new Traders referred by the existing Traders. The rebate rate was adjusted from 15% to 5%, starting from January 1, 2017. For service agents, we rebate a total of 40% to 60% of the commission earned from transactions with new Traders to the service agents when they bring in an agreed number of Traders to the trading platform. For service agents who have individual referrers referring Traders to us, we will, after rebating such individual referrers 15% of the commission earned from the transactions of new Traders they referred, deduct such 15% of the commission from the rebates payable to the service agents to which such individual referrers belong. The commission rebate is recognized as reduction of the commission revenue.

 

The rebates and discounts are recognized as a reduction of revenue in the same period the related revenue is recognized.

 

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 shares per day. The management fee is accounted for as revenue, and immediately deducted from the proceeds from the sales of artwork ownership shares when a transaction is completed. A discount program is offered to waive the management fee during certain promotion periods. Such discount is recognized as a reduction of the revenue upon the completion of the transactions.

 

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.

 

12 

 

  

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.

 

Cost of Revenue

 

Our cost of revenue consists primarily of expenses associated with the delivery of our service. These include expenses related to the operation of our data centers, such as facility and lease of the server equipment, development and maintenance of our platform system, as well as the cost of insurance, storage and transportation of the artworks.

 

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 March 31, 2017 and December 31, 2016. Such income will be subject to EIT with 25% tax rate once it is deemed as the taxable income of Shanghai 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 our consolidated statements of operations for the period ended March 31, 2017 and 2016. The Company does not expect that its assessment regarding unrecognized tax positions will materially change over the next 12 months.  

 

13 

 

  

Earnings per share

 

Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the periods. 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 periods.

  

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, account receivables, prepayment and other current assets. The Company places its cash and cash equivalents and restricted cash with financial institutions with high-credit ratings and quality. Account receivables primarily comprise of amounts receivable 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 three-month period ended March 31, 2017 and 2016.

 

Reclassification

 

Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation.

 

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 (full retrospective method); 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 (modified retrospective method). We are currently assessing the impact to our consolidated financial statements, and have not yet selected a transition approach.

 

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.

 

14 

 

  

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. We are currently evaluating the impact that the standard will have on our 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. We are currently in the process of evaluating the impact of the adoption of ASU 2016-2 on our 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.

 

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): “Restricted Cash”(“ASU 2016-18”). ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This update is effective in fiscal years, including interim periods, beginning after December 15, 2017 and early adoption is permitted. The adoption of this guidance will result in the inclusion of the restricted cash balances within the overall cash balance and removal of the changes in restricted cash activity, which are currently recognized in Other financing activities, on the Statements of Consolidated Cash Flows. Furthermore, an additional reconciliation will be required to reconcile Cash and cash equivalents and restricted cash reported within the Consolidated Balance Sheets to sum to the total shown in the Statements of Consolidated Cash Flows. The Company anticipates adopting this new guidance effective January 1, 2018. The Company is currently evaluating this guidance and the impact it will have on the Consolidated Financial Statements and disclosures. 

 

In January 2017, the FASB issued Accounting Standards Update No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (ASU 2017-01), which revises the definition of a business and provides new guidance in evaluating when a set of transferred assets and activities is a business. This guidance will be effective for us in the first quarter of 2018 on a prospective basis, and early adoption is permitted. We do not expect the standard to have a material impact on our consolidated financial statements.

 

Except for the ASU above, in the period from January 1, 2017 to May 12, 2017, the FASB has issued ASU No. 2017-01 through ASU 2017-08, which are not expected to have a material impact on the consolidated financial statements upon adoption.

 

15 

 

 

3. PREPAYMENT AND OTHER CURRENT ASSETS

 

Prepayment and other current assets mainly consist of the prepaid services for development, maintenance of online trading system,   the advertising and promotional services, prepaid financial advisory and banking services, as well as other current assets. The prepayment was $932,045 and $968,446 as of March 31, 2017 and December 31, 2016, respectively.

   

   March 31,
2017
   December 31, 
2016
 
   (Unaudited)     
Prepaid services for development  $-   $17,514 
Prepaid maintenance of trading system   60,644    4,706 
Advertising and promotional services   264,859    296,163 
Prepaid insurance   138,470    31,082 
Staff advance   7,145    28,806 
Prepaid financial advisory and banking services   156,615    201,808 
Short-term borrowings to third party   -    259,254 
Prepaid bonus   214,804    - 
Other current assets   89,508    129,113 
Prepayment and other current assets  $932,045   $968,446 

 

4. ACCOUNT RECEIVABLES, NET

 

Account receivables consisted of the following:

 

   March 31,
2017
   December 31, 
2016
 
   (Unaudited)     
Listing fee  $1,355,881   $1,403,255 
Authorized agent subscription revenue   993,147    995,453 
Monthly commission fee   767,888    605,677 
Others   56,775    54,183 
Less: allowance for doubtful accounts   -    - 
Account receivables, net  $3,173,691   $3,058,568 

 

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5. LOAN RECEIVABLES

 

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

 

Date   Borrower   Lender  

Original 

Amount
(RMB)

   

March 31,
2017

(USD)

   

December 31,
2016

(USD)

   

Annual 
Interest 

Rate

    Repayment 
Due Date
                  (Unaudited)                  
7/15/2016   Xiaohui Wang   Shanghai Takung     10,080,000     $ -     $ 1,451,822       0 %   3/31/2017
8/24/2016   Xiaohui Wang   Shanghai Takung     13,350,000     $ -     $ 1,922,800       0 %   3/31/2017
11/14/2016   Xiaohui Wang   Shanghai Takung     10,275,000     $ 1,492,765     $ 1,479,908       0 %   10/31/2017
12/9/2016   Xiaohui Wang   Tianjin Takung     10,550,000     $ 1,532,717     $ 1,519,516       0 %   11/30/2017
1/4/2017   Xiaohui Wang   Tianjin Takung     24,461,505     $ 3,553,799     $ -       0 %   12/31/2017
              Total     $ 6,579,281     $ 6,374,046              

 

All the transactions were aimed to meet the Company’s working capital needs in US Dollars.

  

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

 

  In the meantime, Hong Kong Takung entered into loan agreements (the “US Dollar Loans”) with Merit Crown Limited, a Hong Kong company (“Merit Crown) with interest accruing at a rate of 8% per annum (See Note 9). Merit Crown is a non-related party to the Company.

 

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

  

17 

 

 

6. PROPERTY AND EQUIPMENT, NET

 

Property and equipment consisted of the following:

 

   March 31, 
2017
   December 31, 
2016
 
   (Unaudited)     
Furniture, fixtures and equipment  $140,897   $100,386 
Leasehold improvements   300,012    298,965 
Computer trading and clearing system   2,823,287    2,802,430 
Sub-total   3,264,196    3,201,781 
Less: accumulated depreciation   (1,303,266)   (1,136,599)
Property and equipment, net  $1,960,930   $2,065,182 

 

Depreciation expense was $168,142 and $102,973 for the three months ended March 31, 2017 and 2016, respectively.

 

7. OTHER NON-CURRENT ASSETS

 

Other non-current assets as of March 31, 2017 and December 31, 2016 consisted of:

 

   March 31, 
2017
   December 31,
2016
 
   (Unaudited)     
Deposit – non-current  $302,153   $301,263 
Prepayment – non-current   117,729    127,501 
Total other non-current assets  $419,882   $428,764 

 

8. ACCRUED EXPENSES AND OTHER PAYABLES

 

Accrued expenses and other payables as of March 31, 2017 and December 31, 2016 consisted of:

 

   March 31,   December 31, 
   2017   2016 
   (Unaudited)     
Trading and clearing system  $72,585   $61,735 
Accruals for professional fees   96,017    49,952 
Accruals for consulting fees   299,693    290,773 
Accruals for rental   68,722    7,613 
Payroll payables   143,962    141,022 
Accruals for business trip expense   141,499    - 
Other payables   51,293    57,788 
Total accrued expenses, account & other payables  $873,771   $608,883 

   

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9. SHORT-TERM BORROWINGS FROM THIRD PARTIES

 

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

 

Date  Borrower  Lender  Original Amount
(HKD)
   March 31, 
2017
(USD)
  

December 31,
2016
(USD)

   Annual 
Interest Rate
   Repayment 
Due Date
             (Unaudited)            
7/15/2016  Hong Kong
Takung
  Merit Crown
Limited
   11,700,000   $1,505,520   $1,509,015    8%  12/31/2017
8/24/2016  Hong Kong Takung  Merit Crown
Limited
   15,596,100   $2,006,858   $2,011,518    8%  12/31/2017
11/18/2016  Hong Kong Takung  Merit Crown
Limited
   11,479,102   $1,477,096   $1,480,525    8%  10/31/2017
12/9/2016  Hong Kong Takung  Merit Crown
Limited
   11,787,600   $1,516,792   $1,520,314    8%  11/30/2017
                              
   Less: Discount loan payable          $152,119   $212,859         
                              
          Total   $6,354,147   $6,308,513         

 

 

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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 5) 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.

 

The weighted average interest rate of outstanding short-term borrowings was 8% per annum as of March 31, 2017 and December 31, 2016. The fair values of the short-term borrowings approximate their carrying amounts. The weighted average short-term borrowing was $6,354,147 and $1,678,803 for the three months period ended March 31, 2017 and year ended December 31, 2016, respectively. The interest expenses for the loan agreements were $129,557 and $0 for the three months ended March 31, 2017 and 2016.

   

10. RELATED PARTY BALANCES AND TRANSACTIONS

 

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

  

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

  

Amount due to related party

 

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

 

   March 31,
2017
   December 31,
2016
 
   (Unaudited)     
Mao (a)  $1,029,416   $1,031,805 
Total   1,029,416    1,031,805 

 

Related party transactions

 

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

 

   March 31,
2017
   March 31,
2016
 
   (Unaudited)   (Unaudited) 
Mao (a)  $20,334   $- 
Total   20,334    - 

 

On August 25, 2016, Hong Kong Takung entered into a loan agreement with Mao for the loan of $2,318,990 (HK$18,000,000) 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. $1,287,185 (HK$10,000,000) was repaid on December 31, 2016. The remaining $1,029,416 (HK $ 8,000,000) was extended with a due date on September 30, 2017. The interest expenses during the periods ended March 31, 2017 and 2016 were $20,334 and $0.

 

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11. INCOME TAXES

 

The Company was incorporated in the State of Delaware under the name of Cardigant Medical Inc. on April 17, 2009. After the Company had acquired the business of Hong Kong Takung through the acquisition of all the share capital of Hong Kong Takung under a Share Exchange Agreement dated September 23, 2014 on October 20, 2014, it became a holding company and do not conduct any substantial operations or business of its own in the State of Delaware and in the U.S.

 

The Company also does not provide for U.S. taxes or foreign withholding taxes on undistributed earnings from its non-U.S. subsidiaries, either owned directly or indirectly, because it was elected to indefinitely reinvest such earnings outside the U.S to support non-U.S. liquidity needs to fund operations and growth of its foreign subsidiaries and acquisitions.

  

United States of America

 

As of March 31, 2017 and 2016, the Company in the United States had $3,454,521 and $1,612,604 in net operating loss carryforwards available to offset future taxable income, respectively. Federal net operating losses can generally be carried forward twenty years. The federal corporate net operating loss carryover is expired in 20 taxable years following the taxable year of the loss.

  

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 a full valuation allowance for the deferred tax assets arising from the losses at the U.S. during the three months ended March 31, 2017 and year ended December 31, 2016 amounting to $1,207,533 and $962,012, respectively. Accordingly, the Company has no net deferred tax assets under the US entity.

 

Hong Kong

 

The provision for current income taxes of the subsidiary operating in Hong Kong has been calculated by applying the current rate of taxation of 16.5% for the three months ended March 31, 2017 and 2016, if applicable.

 

PRC

 

In accordance with the relevant tax laws and regulations of the PRC, a company registered in the PRC is subject to income taxes within the PRC at the applicable tax rate on taxable income. All the PRC subsidiaries were subject to income tax at a rate of 25% for the three months ended March 31, 2017 and 2016.

 

The income tax provision consists of the following components: 

 

   March 31,
2017
   March 31,
2016
 
   (Unaudited)   (Unaudited) 
Current  $349,997   $403,633 
Deferred   (42,116)   (2,465)
Total Provision for Income Taxes   307,881    401,168 
           

  

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A reconciliation between the Company’s actual provision for income taxes and the provision at the statutory rate is as follow:

 

   March 31,
2017
   March 31,
2016
 
   (Unaudited)   (Unaudited) 
Income before income tax expense    $1,181,420   $1,497,220 
           
Provision for taxes at respective statutory tax rate   41,840    104,878 
Tax effect of non-deductible expenses   20,520    47,942 
Changes in valuation allowance   245,521    248,348 
           
Total Provision for Income Taxes   307,881    401,168 

 

The Company's effective tax rate was 26.1% and 26.8% for the three months ended March 31, 2017 and 2016, respectively.  

 

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

 

   As of
March 31,
   As of 
December 31,
 
   2017   2016 
   (Unaudited)     
Deferred tax assets          
Tax loss carried forward  $1,329,612   $873,071 
           
Unvested restricted stock carry forward   32,997    209,629 
Deferred advertising expenses   124,805    122,496 
Others   160    588 
 Total deferred tax assets   1,487,574    1,205,784 
Valuation allowance   (1,207,533)   (962,012)
Deferred tax asset, net   280,041    243,772 
           
Deferred tax liabilities          
Property, plant and equipment, principally due to differences in depreciation   (56,771)   (62,618)
Deferred tax liability  $(56,771)  $(62,618)

 

12. COMMITMENTS AND CONTINGENCIES 

 

Capital Commitments

 

The Company purchased property, plant and equipment which the payment was due within one year. As of March 31, 2017 and December 31, 2016, the Company has capital commitments of $69,929 and $90,315, 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 of March 31, 2017 are payable as follows: 

 

Year ending December 31, 2017  $705,763 
      
Year ending December 31, 2018   655,094 
      
Year ending December 31, 2019   160,595 
      
Year ending December 31, 2020   14,528 
      
Year ending December 31, 2021   14,528 
      
Year ending December 31, 2022 and thereafter   51,454 
      
Total  $1,601,962 

 

Rental expense of the Company was $224,547 and $116,593 for the three months ended March 31, 2017 and 2016, respectively. 

 

13. 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.

 

    Three months ended
March 31, 2017
    Three months ended
March 31, 2016
 
    (Unaudited)     (Unaudited)  
Numerator:                
Net income   $ 873,539     $ 1,096,052  
Denominator:                
Weighted-average shares outstanding-Basic     10,733,506       10,632,276  
Stock options and restricted shares    

776,432

      515,301  
Weighted-average shares outstanding-Diluted     11,509,938       11,147,577  
                 
Earnings per share                
-Basic   $ 0.08     $ 0.10  
-Diluted   $ 0.08     $ 0.10  

 

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 were dilutive effects of 487,000 shares for the three months period ended March 31, 2017 and 2016. The 487,000 shares were released from escrow account and transferred to Regeneration since the Company successfully listed on NYSE on March 22, 2017.

 

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14. STOCKHOLDERS’ EQUITY

  

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 March 31, 2017, 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 March 31, 2017, 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. 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 measured the fair value of the equity instruments in these transactions using the stock price and other measurement assumptions on the date at which Regeneration’s commitment for performance is reached. 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. The performance was completed during the quarter ended March 31, 2017 and the remaining stock-based compensation was fully recognized as of March 31, 2017.

 

On October 27, 2016, the Company entered into a Financial Advisory Agreement with Maxim Group, LLC (“Maxim”) to provide general financial advisory and banking services, including, assisting and advising the Company with respect to its strategic planning process, business plans and capitalization, helping the Company broaden its shareholder base, increasing shareholder awareness through non-deal roadshows and other value-added services such as making strategic introductions, advising the Company on potential financing alternatives and merger and acquisition criteria and activity. As consideration of the provision of such services, the Company agreed to issue to Maxim or its designees 50,000 restricted shares of the Company’s common stock (“Compensation Shares”) with unlimited piggyback registration rights. Maxim shall also be entitled to additional fees in connection with any financings and transactions arranged by Maxim and reimbursement of reasonable expenses. As additional consideration, the Company shall, during the term of the Financial Advisory Agreement and for twelve (12) months thereafter, offer to retain Maxim as lead book running manager if it were to propose to effect a public offering of its securities on a US exchange, private placement of its securities or other financing. The Company fair valued the shares at grant date and recorded $45,193 as share-based compensation expense during the period of three months ended March 31, 2017.

 

Stock-based Compensation Plans

 

As of March 31, 2017, 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, March 1, 2016 and March 1, 2017, 12,143, 7,463 and 15,000 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 ranged from $2.91 to $3.65 and the requisite service period ranged from two to five years. 131,619 stock options have been vested and 9,765 stock options were cancelled during the three months ended March 31, 2017, and 33,333 stock options have been vested during the three months ended March 31, 2016.

  

Stock Option Valuation Assumptions:

 

The fair value of stock option grants is estimated on the date of grant using the Black-Scholes option pricing model. The following weighted average assumptions were used to value grants made in 2016.

 

   Period ended
March 31, 2017
 
     
Exercise Price  $3.15 
Expected Terms (years)   6.79 
Volatility   92.78%
Dividend Yield   0.00%
Risk-Free Interest Rate   1.53%

 

The Company estimated the risk free rates based on the yield to maturity of U.S. Treasury Bill as at the option respective valuation dates. The expected terms of the stock options is based on the contract life of the option. The expected volatility at the date of grant date and each option valuation date was estimated based on historical volatility of comparable companies for the period before the grant date with length commensurate with the expected term of the options. The Company has no history or expectation of paying dividends on its common shares.

 

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Stock Options:

 

The number of stock options as of March 31, 2017 is as follows:

 

   Options   Weighted
Average Exercise
Price
   Weighted Average
Remaining
Contractual Terms
   Aggregate
Intrinsic
Value
 
                 
Outstanding, beginning of year   428,525    3.15    3.45      
Granted   -                
Exercised   -                
Forfeited   (9,765)   3.20    3.90      
Outstanding, end of period   418,760    3.17    3.21      
Exercisable, end of period   131,619    3.13    2.37      
Expected to vest   287,141    3.19    3.60    1,333,158 

    

The following table sets forth changes in compensation-related restricted stock awards during period ended March 31, 2017.

 

   Number of   Weighted
Average
Grant Date
   Weighted
Average
Remaining
Contractual
 
   Shares   Fair Value   Term 
Unvested at December 31, 2016   1,244   $3.35    0.17 years 
Granted   15,000    7.26    1 year 
Forfeited   -           
Vested   (4,994)          
Unvested at March 31, 2017   11,250    7.26    0.71 years 

 

The stock-based compensation recognized were $286,670 and $440,736 during the periods ended March 31, 2017 and 2016, respectively.

 

15. SUBSEQUENT EVENT

 

 On April 4, 2017, Hong Kong Takung and Merit Crown entered into an extension of loan agreements to amongst other things, extended the term of the US$1.5 million and US$2 million loans through December 31, 2017 (the "Extension of Loan Agreement"). US$213,081 should be paid (being the interest at a rate of 8% per annum for the period from April 1, 2017 to December 31, 2017) in a lump sum to Merit Crown by April 10, 2017, which has been paid on April 27, 2017. The principal loan amounts shall be payable on December 31, 2017.

 

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

 

The following discussion and analysis should be read in conjunction with our financial statements and related notes thereto.

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q 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.

 

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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 Takung was incorporated in 2012, it did not commence business operations until late 2013.

 

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

 

Hong Kong Takung operates an electronic online platform located at http://eng.takungae.com for artists, art dealers and art investors to offer and trade in valuable artwork.

 

Through Hong Kong Takung, we offer on-line listing and trading services that allow artists/art dealers/owners to access a much bigger art trading market where they can engage with a wide range of investors that they might not encounter without our platform. Our platform also makes investment in high-end and expensive artwork more accessible to ordinary people without substantial financial resources.

  

We generate revenue from our services in connection with the offering and trading of artwork on our system, primarily consisting of listing fees, trading commissions, management fees and authorized agent subscription.

 

On July 28, 2015, Hong Kong Takung incorporated a wholly owned subsidiary, Takung (Shanghai) Co., Ltd. (“Shanghai Takung”), in Shanghai Free-Trade Zone (SFTZ) in Shanghai, China, with a registered capital of $1 million. Shanghai Takung 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.

 

Recently Shanghai Takung set up an office in Hangzhou to carry out technology development.

 

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

 

Our headquarters are located in Hong Kong, Special Administrative Region, People’s Republic of China and we conduct our business primarily in Hong, Shanghai and Tianjin. Recently, we set up a new office in Hangzhou to conduct technology development. Our principal executive offices are located at Flat/RM 03-04, 20/F, Hutchison House, 10 Harcourt Road, Central Hong Kong.

 

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

 

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Results of Operation of Takung

 

The following discussion should be read in conjunction with the unaudited consolidated Financial Statements of the Company for the three-month period ended March 31, 2017 and 2016 and related notes thereto.

 

THREE-MONTH PERIOD ENDED MARCH 31, 2017 COMPARED TO THREE-MONTH PERIOD ENDED MARCH 31, 2016

 

Revenue

 

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

 

   Three Months Ended
March 31,
 
   2017   2016 
   (Unaudited)   (Unaudited) 
Revenue   4,271,593    3,788,770 
Cost of revenue   262,659    262,067 
Selling expense   337,527    638,209 
General and administrative expense   2,573,391    1,561,373 
Total costs and expenses   3,173,577    2,461,649 
Income from operations   1,098,016    1,327,121 
Interest and other income, net   83,404    170,099 
Income before provision for income taxes   1,181,420    1,497,220 
Provision for income taxes   307,881    401,168 
Net income  $873,539   $1,096,052 

 

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

 

   Three Months Ended
March 31,
 
   2017   2016 
   (Unaudited)   (Unaudited) 
Revenue   100%   100%
   Cost of revenue – Direct revenue   6    7 
   Selling expense   8    17 
   General and administrative expense   61    41 
Total costs and expenses   75    65 
Income from operations   25    35 
Interest and other income, net   2    5 
Income before provision for income taxes   27    40 
Provision for income taxes   7    11 
Net income   20%   29%

 

Listing fee revenue was $2,307,946 and $2,195,064; commission revenue was $1,670,613 and $1,143,471; gross management fee revenue was $292,551 and $128,491; annual fee revenue was $483 and $161; authorized agent subscription revenue was $0 and $321,583 for the three months ended March 31, 2017 and 2016, respectively.

 

  (i) Listing fee revenue

 

Listing fee revenue is calculated based on a percentage of the listing value and transaction value of artworks. 

 

Listing value is the total offering price of an artwork when the ownership units are initially listed on our trading platform. We utilize an appraised value as a basis to determine the appropriate listing value for each artwork, or portfolio of artworks.

 

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As of the three months ended March 31, 2017, a total of 199 sets of artwork were listed for trade on our platform —comprising 31 sets of paintings and calligraphies from famous Chinese, Russian and Mongolian artists, with a total listing value of $15,668,494 (HK$121,600,000), 28 pieces of jewelry with a total listing value of $8,890,840 (HK$69,000,000), 103 pieces of precious stones with a total listing value of $12,369,864 (HK$96,000,000), 29 pieces of amber with a total listing value of $12,820,849 (HK$99,500,000), 4 pieces of antique mammoth ivory carvings with a total listing value of $670,034 (HK$5,200,000), 2 pieces of porcelain pastel paintings ranging with a total listing value of $335,017 (HK$2,600,000), and 2 pieces of porcelains with a total listing value of $103,082 (HK$800,000), of which 22.5%-48% (for 31 piece of paintings), 29%-48.5% (for the 103 pieces of precious stones), 29%-48% (for the 28 pieces of jewelry), 47%-48.5% (for 4 piece of ivory), 32%-48% (for the 29 pieces of amber), 45%-46% (for the 2 pieces of porcelain pastel paintings) and 46%-47.5% (for the 2 pieces of porcelains) of the listed values were charged as listing fees, respectively.

 

During the three months ended March 31, 2017, there were 7 pieces of precious stones, 10 pieces of jewelry, and 1 piece of porcelain listed on our platform. Their total listing values were $1,056,593 (HK$8,200,000) for the precious stones, $5,244,307 (HK$40,700,000) for jewelry, and $38,656 (HK$300,000) for the porcelain, of which 31.5%-47% (for the precious stones), 33.5%-47.2% (for the jewelry), and 46%(for the porcelain) of the listed values were charged as listing fees, respectively.

 

The increase in number of pieces listed, listing values and corresponding listing fees charged during the three months ended March 31, 2017 compared to the same period ended March 31, 2016 resulted in an increase in listing fee revenue in the current period.

   

  (ii) Commission fee revenue

 

For non-VIP Traders, the commission revenue was calculated based on a percentage of transaction value of artworks, which we charge trading commissions for the purchase and sale of the ownership shares of the artworks. The commission is typically 0.3% of the total amount of each transaction, but as an initial promotion, we currently charge a reduced fee of 0.2% (resulting in an aggregate of 0.4% for both buy and sell transactions) of the total transaction amount with the minimum charge of $0.13 (HK$1). The commission is accounted for as revenue and immediately deducted from the proceeds from the sales of artwork units when a transaction is completed.

 

For selected VIP Traders, we ran a discount program for them starting from April 1, 2015, when their trading volumes of the certain artworks reached an agreed level in 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. The discounted rate varied between selected artworks. This discount program ended on March 31, 2016.

 

For selected Traders, starting from April 1, 2016, we charged a predetermined monthly fee (unlimited trades for specific artworks) for specific artworks. These Traders are selected by authorized agents and reviewed by us. After review, we negotiate individually with each one of them to determine a fixed monthly fee. Different Traders may have different rates but once negotiated and agreed to, the monthly fee is fixed.

   

Commission rebate programs are offered to Traders and service agents. We would rebate 5% of the commission earned from the transactions of new Traders referred by the existing Traders. The rebate rate was adjusted from 15% to 5%, starting from January 1, 2017. For service agents, we rebate a total of 40% to 60% of the commission earned from transactions with new Traders to the service agents when they bring in an agreed number of Traders to the trading platform. For service agents who have individual referrers referring Traders to us, we will, after rebating such individual referrers 15% of the commission earned from the transactions of new Traders they referred, deduct such 15% of the commission from the rebates payable to the service agents to which such individual referrers belong. The commission rebate is recognized as reduction of the commission revenue.

 

The rebates and discounts are recognized as a reduction of revenue in the same period the related revenue is recognized.

 

Our trading volume and transaction value amounts increased significantly from 2015 when we commenced operations in Shanghai and consequently added a significant number of Traders from mainland China as they could now settle their trades in Renminbi. This trend continued into 2017. Trading volume increased by 501% and trading amount by 483% for the three months ended March 31, 2017 compared to corresponding period in 2016.

 

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In spite of this, total commission revenue increased by only $527,142 or 46% for the three months ended March 31, 2017 to $1,670,613 compared to $1,143,471 for the three months ended March 31, 2016 primarily because of the change in our commission fee policy. From April 1, 2016 onwards, selected Traders pay a predetermined monthly fixed fee for their trades in specific artworks while our other non-VIP Traders continue to pay a commission calculated based on a percentage of transaction value of artworks.

  

  (iii) Management fee revenue

 

We charge Traders a management fee to cover the costs of insurance, storage, and transportation for an artwork and trading management of artwork units, which are calculated at $0.0013 (HK$0.01) per 100 artwork units per day. The management fee is deducted from proceeds from the sale of artwork units.

 

During the three-month period ended March 31, 2017, management fee revenue increased by $164,060, from $128,491 for the three months ended March 31, 2016 to $292,551, due to the aforementioned increase in artwork units listed on the platform. This was in spite of the promotions we ran that period. From September 1, 2016 to December 31, 2016, we waived management fees for certain VIP Traders. We recognized these promotions as a reduction of revenue, which was recognized upon the completion of the transactions.

 

  (iv) Other revenue

 

During the three-month period ended March 31, 2017, annual fee revenue increased by $322, from $161 for the three-month period ended March 31, 2016 to $483.

 

During the three-month period ended March 31, 2017, authorized agent subscription was $0 comparing to $321,583 for the three months ended March 31, 2016.

 

Cost of Revenue

 

Cost of revenue for the three months ended March 31, 2017 and 2016 was $262,659 and $262,067, respectively. Our cost of revenue primarily includes the leasing of equipment, depreciation and amortization of hardware and software for our trading platform.

  

In the third quarter of 2014, we entered into an agreement with a third party service provider, Shenzhen Qianrong Cultural Investment Development Co., Ltd (“Qianrong”), to provide software development services with a total contract amount of $902,592 (HK$6,995,000). The services contracted for are divided into different modules, according to different upgrades and new functionalities. As of March 31, 2017, nine out of the ten modules have been completed and are operational. This is in comparison to March 31, 2016 when only eight of the ten modules were completed.

 

We started to capitalize (with a total cost of $1,069,853 (HK$8,295,000)) 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 2017.

 

Gross Profit

 

Gross profit was $4,008,934 for the three months ended March 31, 2017, compared to $3,526,703 for the three months ended March 31, 2016. The increase was due to the higher transaction volume with more artworks trading on our platform.

 

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Listing fees contributed 54.0% of the total revenue for the quarter ended March 31, 2017 compared to 57.9% in the corresponding period in 2016, while commission revenue contributed 39.1% for the quarter ended March 31, 2017 compared to 30.2% in the corresponding period in 2016. Although there was an increase in listing fee and commission revenue in the current period, the positive factors were offset by an increase in our costs and expenses during the same period due to a larger depreciation expense from the addition of platform system modules and equipment. Depreciation increased 30% in the current quarter ended March 31, 2017 compared to the same period in 2016. Consequently, we posted a comparable gross profit margin of 94% for the three months ended March 31, 2017 compared to 93% for the same period in 2016. 

 

Operating Expenses

 

Selling expenses were $337,527, or 7.9% of net sales, for the three months ended March 31, 2017 compared to $638,209, or 16.8% of net sales, for the comparable period in 2016, a decrease of 8.9%. Selling expenses consist primarily of marketing expenses.

 

General and administrative expenses for the three months ended March 31, 2017 were $2,573,391 compared to $1,561,373 for the three months ended March 31, 2016. The substantial increase was primarily due to an increase in salaries by $613,828 because of an increase in employee headcount; an increase in office and rental expenses by $253,516 because of the new rented office space for Takung in Hong Kong, Shanghai, Hangzhou and Tianjin; and an increase in travelling expenses by $253,140 which were incurred to attend to the listing of our common stock on the NYSE.

 

The following table sets forth the main components of the Company’s general and administrative expenses for the three months ended March 31, 2017 and 2016.

 

   Three months ended
March 31, 2017
   Three months ended
March 31, 2016
 
   (Unaudited)   (Unaudited) 
   Amount($)   % of Total   Amount($)   % of Total 
Consultancy fee   78,218    3.0%   138,906    8.9%
Legal and professional fees   299,764    11.6%   247,448    15.9%
Salary and welfare   1,054,344    41.0%   440,516    28.2%
Office, insurance and rental expenses   434,899    16.9%   181,383    11.6%
Non-deductible input VAT expense   2,542    0.1%   -    -%
Traveling and accommodation fees   315,515    12.3%   62,375    4.0%
Share based compensation   286,670    11.1%   440,736    28.2%
Others   101,439    4.0%   50,009    3.2%
Total general and administrative expense  $2,573,391    100.0%  $1,561,373    100.0%

  

Net Income

 

We had a net income for the three months ended March 31, 2017 of $873,539 compared to net income of $1,096,052 for the three months ended March 31, 2016.

 

The decrease in net income during this current period was due to an increase of general and administrative expense by $1,012,018, as discussed in the previous paragraphs.  

 

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Liquidity and Capital Resources

 

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

 

   Three months ended March 31 
   2017   2016 
   (Unaudited)   (Unaudited) 
Net cash provided by operating activities  $2,136,684   $1,261,535 
Net cash used in investing activities   (209,759)   (409,664)
Effect of exchange rate change on cash and cash equivalents   139,134    47,312 
Net increase in cash and cash equivalents   2,066,059    899,183 
Cash and cash equivalents, beginning balance   13,395,337    10,769,456 
Cash and cash equivalents, ending balance  $15,461,396   $11,668,639 

 

Sources of Liquidity

 

During the three months ended March 31, 2017, net cash generated from operating activities totaled $2,136,684. Net cash used in investing activities totaled $209,759. No cash was generated from financing activities during the period. The resulting change in cash for the period was an increase of $2,066,059. The cash balance at the beginning of the period was $13,395,337. The cash balance on March 31, 2017 was $15,461,396.

 

During the three months ended March 31, 2016, net cash provided by operating activities totaled $1,261,535. Net cash used by investing activities totaled $409,664. No cash was generated from financing activities during the period. The resulting change in cash for the period was an increase of $899,183. The cash balance at the beginning of the period was $10,769,456. The cash balance on March 31, 2016 was $11,668,639.

 

As of March 31, 2017, the Company had $28,878,719 in total current liabilities, which comprised of $873,771 in accrued expense and other payables, $18,989,960 in customers’ deposits, $737,533 in advance from customer, $6,354,147 in loan payable, $1,029,416 in amount due to related party and $893,892 in tax payables. As of December 31, 2016, the Company had $30,602,706 in total current liabilities, which included $608,883 in accrued expense and other accruals, $21,743,360 in customers’ deposits, $360,248 in advance from customers, $6,308,513 in short-term borrowings from third parties, $1,031,805 in amount due to related party and $549,897 in tax payables.

 

The Company had deferred tax liabilities as long-term liability of $56,771 as of March 31, 2017, and $62,618 as of December 31, 2016, respectively. The Company’s total liabilities as of March 31, 2017 and December 31, 2016 amounted to $28,935,490 and $30,665,324, respectively. 

 

The Company is aware of events or uncertainties which may affect its future liquidity because of capital controls in the PRC. The Renminbi is only currently convertible under the "current account," which includes dividends, trade and service-related foreign exchange transactions, but not under the "capital account," which includes foreign direct investment and loans, including loans we may secure from our onshore subsidiaries or variable interest entities. Currently, our PRC subsidiaries, which are wholly-foreign owned enterprises, may purchase foreign currency for settlement of "current account transactions," including payment of dividends to us, without the approval of the State Administration of Foreign Exchange (“SAFE”) by complying with certain procedural requirements. However, the relevant PRC governmental authorities may limit or eliminate our ability to purchase foreign currencies in the future for current account transactions. The existing and future restrictions on currency exchange may limit our ability to utilize revenue generated in Renminbi to fund our business activities outside of the PRC or pay dividends in foreign currencies to our stockholders, including holders of our shares of common stock. Foreign exchange transactions under the capital account remain subject to limitations and require approvals from, or registration with, SAFE and other relevant PRC governmental authorities. This could affect our ability to obtain foreign currency through debt or equity financing for our PRC subsidiaries.

 

Applicable PRC law permits payment of dividends to us by our operating subsidiaries in China only out of their net income, if any, determined in accordance with PRC accounting standards and regulations. Our operating subsidiaries in China are also required to set aside a portion of their net income, if any, each year to fund general reserves for appropriations until such reserves have reached 50% of the subsidiary's registered capital. These reserves are not distributable as cash dividends. In addition, registered share capital and capital reserve accounts are also restricted from withdrawal in the PRC, up to the amount of net assets held in each operating subsidiary. In contrast, there is no foreign exchange control or restrictions on capital flows into and out of Hong Kong. Hence, our Hong Kong operating subsidiary is able to transfer cash without any limitation to the U.S. under normal circumstances.

 

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If our operating subsidiaries were to incur additional debt on their own behalf in the future, the instruments governing the debt may restrict the ability of our operating subsidiaries to transfer cash to our U.S. investors.

 

Off-Balance Sheet Arrangements 

 

We have no off-balance sheet arrangements, including arrangements that would affect our liquidity, capital resources, market risk support, and credit risk support or other benefits.

 

Future Financings

 

We will continue to rely on equity sales of our common shares in order to continue to fund our business operations. 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 fund 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.ChunHin 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 three months ended March 31, 2017 were effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Changes in Internal Controls over Financial Reporting

 

Subject to the foregoing disclosure, there were no changes in our internal control over financial reporting that occurred during our fiscal quarter ended March 31, 2017 that materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

 

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PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

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.

 

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: May 15, 2017 By: /s/ Di Xiao
    Di Xiao
    Chief Executive Officer
    (Principal Executive Officer) and Director
     
Date: May 15, 2017 By: /s/ Chun Hin Leslie Chow
    Chun Hin Leslie Chow
    Chief Financial Officer
     (Principal Financial Officer)

 

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