UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended September 30, 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 interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     x Yes ¨ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 November 14, 2017 is 11,188,882.

 

 

 

 

 

FORM 10-Q

TAKUNG ART CO, LTD

INDEX

 

    Page
     
PART I. Financial Information 3
     
  Item 1.  Interim Condensed Consolidated Financial Statements (Unaudited). 3
     
  Item 2.  Management’s Discussion and Analysis of Financial Condition and results of Operation. 17
     
  Item 3.  Quantitative and Qualitative Disclosures About Market Risk. 26
     
  Item 4.  Controls and Procedures. 27
     
PART II. Other Information 28
     
  Item 1.  Legal Proceedings. 28
     
  Item 1A. Risk Factors. 28
     
  Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds. 28
     
  Item 3.  Defaults Upon Senior Securities. 28
     
  Item 4.  Mine Safety Disclosures. 28
     
  Item 5.  Other Information. 28
     
  Item 6.  Exhibits. 28
     
  Signatures 29

 

2 

 

 

PART I –FINANCIAL INFORMATION

 

Item 1. Interim Condensed Consolidated Financial Statements (Unaudited)

 

TAKUNG ART CO., LTD AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS

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

 

   September 30,   December 31, 
   2017   2016 
   (Unaudited)     
ASSETS          
Current assets          
Cash and cash equivalents  $14,887,890   $13,395,337 
Restricted cash   19,057,733    21,743,360 
Account receivables, net   3,732,569    3,058,568 
Prepayment and other current assets   870,231    968,446 
Loan receivables   6,806,623    6,374,046 
Total current assets   45,355,046    45,539,757 
           
Non-current assets          
Property and equipment, net   2,104,107    2,065,182 
Intangible assets   20,394    20,546 
Deferred tax assets   294,676    243,772 
Other non-current assets   535,420    428,764 
Total non-current assets   2,954,597    2,758,264 
Total assets  $48,309,643   $48,298,021 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
LIABILITIES          
Current liabilities          
Accrued expenses and other payables  $780,800   $608,883 
Customer deposits   19,057,733    21,743,360 
Advance from customers   -    360,248 
Short-term borrowings from third parties   6,371,900    6,308,513 
Amount due to related party   1,085,480    1,031,805 
Taxes payable   1,094,885    549,897 
Total current liabilities   28,390,798    30,602,706 
Deferred tax liabilities   45,301    62,618 
Total non-current liabilities   45,301    62,618 
Total liabilities   28,436,099    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 September 30, 2017;
11,169,276 shares issued and outstanding as of December 31, 2016)
   11,189    11,169 
Additional paid-in capital   5,928,455    5,532,426 
Retained earnings    14, 229,809    13,172,671 
Accumulated other comprehensive loss   (295,909)   (1,083,569)
Total stockholders’ equity   19,873,544    17,632,697 
Total liabilities and stockholders’ equity  $48,309,643   $48,298,021 

 

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

 

3 

 

 

TAKUNG ART CO., LTD AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME

AND COMPREHENSIVE INCOME

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

(UNAUDITED)

 

   For the Three Months Ended
September 30,
   For the Nine Months Ended
September 30,
 
   2017   2016   2017   2016 
   (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited) 
Revenue                    
Listing fee revenue  $1,455,498   $2,968,534   $4,606,649   $8,166,072 
Commission revenue   1,496,826    1,669,698    4,970,651    3,739,958 
Gross management fee revenue   402,547    781,219    967,518    1,341,294 
Annual fee revenue   140    440    859    869 
Authorized agent subscription revenue   -    322,318    -    966,059 
Total revenue   3,355,011    5,742,209    10,545,677    14,214,252 
                     
Cost of revenue   (292,168)   (285,252)   (822,335)   (822,735)
                     
Gross profit   3,062,843    5,456,957    9,723,342    13,391,517 
                     
Operating expenses:                    
General and administrative expenses   (2,498,848)   (1,744,965)   (7,311,128)   (5,076,689)
Selling expenses   (624,151)   (652,207)   (1,272,010)   (1,993,782)
                     
Income (loss) from operations   (60,156)   3,059,785    1, 140,204    6,321,046 
                     
Other income and expenses:                    
Other income   186,259    163,738    440,470    314,268 
Loan interest expense   (152,059)   (62,670)   (455,762)   (62,670)
Exchange gain (loss)   177,652    (112,384)   526,603    (530,934)
Total other income (loss)   211,852    (11,316)   511,311    (279,336)
                     
Income before income taxes   151,696    3,048,469    1,651,515    6,041,710 
                     
Income tax (expense) benefit   (124,662)   (596,732)   (594,377)   (1,377,078)
                     
Net income  $27,034   $2,451,737   $1,057,138   $4,664,632 
                     
Foreign currency translation adjustment   311,485    10,172    787,660    18,322 
                     
Comprehensive income  $338,519   $2,461,909   $1,844,798   $4,682,954 
                     
Earnings per common share– basic  $0.00   $0.23   $0.10   $0.44 
Earnings per common share– diluted   0.00    0.22    0.09    0.41 
Weighted average number of common shares outstanding-basic   11,188,882    10,632,276    11,039,880    10,632,276 
Weighted average number of common shares outstanding-diluted   11,248,688    11,365,597    11,398,082    11,277,845 

 

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

  

4 

 

 

TAKUNG ART CO., LTD AND SUBSIDIARIES 

 

INTERIM CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Stated in U.S. Dollars)

(UNAUDITED)

 

   For the Nine Months   For the Nine Months 
   Ended   Ended 
   September 30,   September 30, 
   2017   2016 
Cash flows from operating activities:          
Net cash provided by operating activities   1,028,524    5,635,391 
           
Cash flows from investing activities:          
Purchase of property and equipment   (455,255)   (976,460)
Purchase of held-to-maturity investments   -    (14,995,876)
Purchase of available-for-sales investment   (53,501,874)   (299,918)
Maturity and redemption of available-for-sales investment   53,501,874    - 
Maturity and redemption of held-to-maturity investments   -    14,995,876 
Loan to third parties   (3,518,325)   - 
Repayment from loan to third parties   3,412,070    - 
Net cash used in investing activities   (561,510)   (1,276,378)
           
Cash Flows from financing activities:          
Proceeds from short-term borrowings   -    3,519,580 
Proceeds from related party loans   -    2,340,895 
Loan to third parties   -    (3,513,534)
Net cash provided by financing activities   -    2,346,941 
           
Effect of exchange rate change on cash and cash equivalents   1,025,539    (644,375)
           
Net increase in cash and cash equivalents   1,492,553    6,061,579 
           
Cash and cash equivalents, beginning balance   13,395,337    10,769,456 
           
Cash and cash equivalents, ending balance  $14,887,890   $16,831,035 
           
Supplemental cash flows information:          
Cash paid for interest  $212,954   $- 
Cash paid for income tax  $136,453   $562,994 

  

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

 

5 

 

 

TAKUNG ART CO., LTD AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED 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”, the “Company”, “we”, “us” and “our”), a Delaware corporation (formerly Cardigant Medical Inc.) through Hong Kong Takung Art Company Limited (formerly Hong Kong Takung Assets and Equity of Artworks Exchange Co., Ltd.) (“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.

  

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  

 

Basis of Presentation

 

The accompanying condensed consolidated balance sheet as of December 31, 2016, which has been derived from audited financial statements, and the unaudited interim condensed consolidated financial statements as of September 30, 2017 and for the three months ended and nine months ended September 30, 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 omitted pursuant to such rules and regulations, although the management believes 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 unaudited interim condensed consolidated financial position as of September 30, 2017, its consolidated results of operations and cash flows for the nine-month periods ended September 30, 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. 

 

6 

 

 

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.

 

   September 30,
2017
   December 31, 
2016
 
   (Unaudited)     
Advertising and promotional services   438,741    296,163 
Prepaid professional fee   144,706    - 
Prepaid rental expense   82,793    60,822 
Prepaid insurance   54,875    31,082 
Prepaid maintenance of trading system   78,784    17,514 
Staff advance   11,263    28,806 
Prepaid financial advisory and banking services   39,153    201,808 
Short-term borrowings to third party   -    259,254 
Other current assets   19,916    72,997 
Prepayment and other current assets  $870,231   $968,446 

  

4. ACCOUNT RECEIVABLES, NET

 

Account receivables consisted of the following:

 

   September 30,
2017
   December 31, 
2016
 
   (Unaudited)     
Listing fee  $1,562,924   $1,403,255 
Authorized agent subscription revenue   924,100    995,453 
Monthly commission fee   1,422,750    605,677 
Others   63,323    54,183 
Less: allowance for doubtful accounts   (240,528)   - 
Account receivables, net  $3,732,569   $3,058,568 

 

Management reviewed the collectability of the receivables periodically, and identified certain inactive traders during this quarter. Management considered the receivables due from these traders are uncertain and provided bad debt provision of $240,528 for the three and nine months ended September 30, 2017.

  

10 

 

  

5. LOAN RECEIVABLES

 

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

 

Date   Borrower   Lender   Original
Amount
(RMB)
   

September 30,
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     $ 1,544,346     $ 1,479,908       0 %   10/31/2017
12/9/2016   Xiaohui Wang   Tianjin Takung     10,550,000     $ 1,585,680     $ 1,519,516       0 %   11/30/2017
1/4/2017   Xiaohui Wang   Tianjin Takung     24,461,505     $ 3,676,597     $ -       0 %   12/31/2017
              Total     $ 6,806,623     $ 6,374,046              

 

All the transactions were aimed to meet the Company’s working capital needs in US Dollar, which is freely convertible to Hong Kong Dollar.

  

The interest-free loans (the “RMB Loans”) that Shanghai Takung and Tianjin Takung entered were 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 8). 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 be repaid at the same time.

 

11 

 

 

6. PROPERTY AND EQUIPMENT, NET   

 

Property and equipment consisted of the following:

 

   September 30, 
2017
   December 31, 
2016
 
   (Unaudited)     
Furniture, fixtures and equipment  $157,736   $100,386 
Leasehold improvements   402,597    298,965 
Computer trading and clearing system   3,220,318    2,802,430 
Sub-total   3,780,651    3,201,781 
Less: accumulated depreciation   (1,676,544)   (1,136,599)
Property and equipment, net  $2,104,107   $2,065,182 

 

Depreciation expense amounted to  $190,626 and $133,608 for the three months ended September 30, 2017 and 2016, respectively, and $538,532 and $373,308 for the nine months ended September 30, 2017 and 2016, respectively.

  

7. ACCRUED EXPENSES AND OTHER PAYABLES

 

Accrued expenses and other payables as of September 30, 2017 and December 31, 2016 consisted of:

 

    September 30,     December 31,  
    2017     2016  
    (Unaudited)        
Trading and clearing system   $ 54,688     $ 61,735  
Accruals for professional fees     19,972       49,952  
Accruals for consulting fees     297,461       290,773  
Payroll payables     295,722       141,022  
Accruals for business trip expense     23,722       -  
Other payables        89,235       65,401  
Total accrued expenses and other payables   $ 780,800     $ 608,883  

 

12 

 

 

8. 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)
   September 30, 
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   $1,497,888   $1,509,015    8%  12/31/2017
8/24/2016  Hong Kong Takung  Merit Crown Limited   15,596,100   $1,996,684   $2,011,518    8%  12/31/2017
11/18/2016  Hong Kong Takung  Merit Crown Limited   11,479,102   $1,469,607   $1,480,525    8%  10/31/2017
12/9/2016  Hong Kong Takung  Merit Crown Limited   11,787,600   $1,509,103   $1,520,314    8%  11/30/2017
                              
   Less: Discount loan payable          $101,382   $212,859         
                              
          Total   $6,371,900   $6,308,513         

  

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 September 30, 2017 and December 31, 2016. The fair values of the short-term borrowings approximate their carrying amounts. The weighted average short-term borrowing was $6,419,099 and $1,678,803 for the nine months period ended September 30, 2017 and year ended December 31, 2016, respectively. The interest expenses for the short-term borrowings were $133,174 and $62,670 for the three months ended September 30, 2017 and 2016, respectively and $394,295 and $62,670 for the nine months ended September 30, 2017 and 2016, respectively.

   

On October 30, 2017, Hong Kong Takung entered into agreements with both Merit Crown Limited and Ms. Wang to extend the US Dollar Loan and RMB Loan (see Note 5) with the original maturity date on October 31, 2017, to October 31, 2018.

 

9. RELATED PARTY BALANCES AND TRANSACTIONS   

 

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

  

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

  

Amount due to related party

 

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

 

   September 30,
2017
   December 31,
2016
 
   (Unaudited)     
Mao (a)  $1,085,480   $1,031,805 
Total   1,085,480    1,031,805 

 

The interest rate of the outstanding short-term loan from Mao was 8% per annum as of September 30, 2017 and December 31, 2016. The interest expense was $61,283 and $19,941 for the nine months ended September 30, 2017 and 2016, respectively, and $20,652 and $19,941 for the three months ended September 30, 2017 and 2016, respectively.

 

On October 26, 2017, Hong Kong Takung entered into a supplementary agreement with Mao that, as of 30 September 2017, the outstanding principal amount of the Loan (as defined in the Loan Agreement) to be repaid by Hong Kong Takung to Mao is HK$8,000,000 (Hong Kong Dollars Eight Million) (“Outstanding Principal Loan Amount”), and the accrued interest of the Outstanding Principal Loan Amount is HK$478,685 (“Accrued Interest”). Mao hereby agreed to extend the maturity date of the Outstanding Principal Loan Amount and the interest thereof by Hong Kong Takung as below: (i) HK$4,500,000 and the interest thereof, together with the Accrued Interest to be due and payable by November 30, 2017; and (ii) HK$3,500,000 together with the interest thereof to be due and payable by December 31, 2017.

 

13 

 

 

10. INCOME TAXES

   

United States of America 

 

As of September 30, 2017 and December 31, 2016, the Company in the United States had $4,008,459 and $2,212,890 in net operating loss carried forward 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 nine months ended September 30, 2017 and year ended December 31, 2016 amounting to $1,414,445 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 nine months ended September 30, 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%.

 

The income tax provision consists of the following components:

 

   For the Three Months Ended
September 30,
   For the Nine Months Ended
September 30,
 
   2017   2016   2017   2016 
   (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited) 
Current  $159,281   $684,801   $662,598   $1,561,728 
Deferred   (34,619)   (88,069)   (68,221)   (184,650)
                     
Total provision for income taxes  $124,662   $596,732   $594,377   $1,377,078 

  

14 

 

 

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

 

   For the Three Months Ended
September 30,
   For the Nine Months Ended
September 30,
 
   2017   2016   2017   2016 
   (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited) 
Income before income tax expense  $151,697   $3,048,469   $1,651,515   $6,041,710 
                     
Computed tax expense with statutory tax rate   25,030    502,998    271,806    994,688 
Impact of different tax rates in other jurisdictions   (73,258)   (24,505)   (230,651)   (254,199)
                     
Non-deductible items:                    
Tax effect of non-deductible expenses   25,896    11,117    100,789    32,742 
Changes in valuation allowance   146,994    107,122    452,433    603,847 
                     
Actual income tax expense  $124,662   $596,732   $594,377   $1,377,078 

 

The Company's effective tax rate was 82.2% and 19.6% for the three months ended September 30, 2017 and 2016, respectively, and 36.0% and 22.8% for the nine months ended September 30, 2017 and 2016, respectively.

 

11. COMMITMENTS AND CONTINGENCIES 

 

Operation Commitments

 

The total future minimum lease payments under the non-cancellable operating lease with respect to the office and the dormitory as of September 30, 2017 are payable as follows: 

 

Three months ending December 31, 2017  $244,960 
      
Year ending December 31, 2018   761,175 
      
Year ending December 31, 2019   223,026 
      
Year ending December 31, 2020   39,999 
      
Year ending December 31, 2021   15,030 
      
Year ending December 31, 2022 and thereafter   53,232 
      
Total  $1,337,422 

 

Rental expense of the Company was $293,338 and $199,514 for the three months ended September 30, 2017 and 2016, respectively, and $721,492 and $428,440 for the nine months ended September 30, 2017 and 2016, respectively.

 

15 

 

  

12. EARNINGS PER SHARE

 

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

 

   For the Three Months Ended
September 30,
   For the Nine Months Ended
September 30,
 
   2017   2016   2017   2016 
   (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited) 
Numerator:                    
Net income  $27,034    2,451,737   $1,057,138    4,664,632 
                     
Denominator:                    
Weighted-average shares outstanding                    
Weighted-average shares outstanding - Basic   11,188,882    10,632,276    11,039,880    10,632,276 
Stock options and restricted shares   59,806    733,321    358,202    645,569 
Weighted-average shares outstanding - Diluted   11,248,688    11,365,597    11,398,082    11,277,845 
                     
Earnings per share                    
-Basic   0.00    0.23    0.10    0.44 
-Diluted   0.00    0.22    0.09    0.41 

 

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.

 

For the three months ended September 30, 2017, the diluted earnings per share calculation did not include options to purchase up to 109,160 shares of the Company's common stock, because they were out of money. It has no such impact for three months ended September 30, 2016, nine months ended September 30, 2017 and 2016 respectively.

 

There were dilutive effects of 487,000 shares for the nine months period ended September 30, 2017 and 2016. The 487,000 restricted shares of Common Stock (the “Compensation Shares”) related to the Consulting Agreement with Regeneration Capital Group, LLC (“Regeneration”) were placed in an escrow account and were subject to Regeneration’s performance condition. The shares were released from escrow account and transferred to Regeneration since the Company successfully listed on NYSE on March 22, 2017. 

  

13. SUBSEQUENT EVENT    

 

Other than the newly signed extension agreements as disclosed in Note 8, and the supplementary agreement with related party as disclosed in Note 9 above, the Company does not identify any other subsequent events with material financial impact on the unaudited condensed consolidated financial statements.

 

16 

 

 

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 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.

 

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.

 

17 

 

 

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 Kong, 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 American under the symbol “TKAT” on March 22, 2017.

  

Results of Operation of Takung

 

The following discussion should be read in conjunction with the unaudited condensed consolidated Financial Statements of the Company for the three-month and nine-month period ended September 30, 2017 and 2016 and related notes thereto.

 

THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2017 COMPARED TO THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2016

 

Revenue

 

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

 

   Three Months Ended
September 30,
 
   2017   2016 
   (Unaudited)   (Unaudited) 
Revenue  $3,355,011   $5,742,209 
Cost of revenue   (292,168)   (285,252)
Selling expense   (624,151)   (652,207)
General and administrative expenses   (2,498,848)   (1,744,965)
Total costs and expenses   (3,415,167)   (2,682,424)
Income from operations   (60,156)   3,059,785 
Interest and other income (loss), net   211,852    (11,316)
Income before income taxes   151,696    3,048,469 
Income tax benefit (expense)   (124,662)   (596,732)
Net income  $27,034   $2,451,737 

 

18 

 

 

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

 

   Three Months Ended
September 30,
 
   2017   2016 
   (Unaudited)   (Unaudited) 
Revenue   100%   100%
   Cost of revenue – Direct revenue   (9)   (5)
   Selling expense   (18)   (11)
   General and administrative expenses   (74)   (30)
Total costs and expenses   (101)   (46)
Income from operations   (1)   54 
Interest and other income (loss), net   6    - 
Income before income taxes   5    54 
Income tax expense   (4)   (10)
Net income   1%   44%

 

Listing fee revenue was $1,455,498 and $2,968,534; commission revenue was $1,496,826 and $1,669,698, gross management fee revenue was $402,547 and $781,219, annual fee revenue was $140 and $440 , authorized agent subscription revenue was $nil and $322,318 for the three months ended September 30, 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.

 

Takung Unit+ is a new unit trading platform for collectibles. It allows investors to buy and trade shared ownership units of portfolios of collectibles, however, unlike the Company's standard Unit trading platform, each Takung Unit+ portfolio will contain multiple numbers of the same item, and traders will have the option of direct ownership with physical delivery by trading the units they own for one or more of the items in the portfolio. Takung will collect listing fees on the initial listing values of new portfolios, commissions on trades made by investors using the platform, and management fees for the storage, transportation, and insurance of the items in the portfolio.

 

During the three months ended September 30, 2017, there were 6 sets of paintings and calligraphies, 9 pieces of precious stones, 1 pieces of jewelry and 1 set of Unit+ product listed on our platform. Their total listing values were $2,118,726 (HK$16,500,000) for the 6 sets of paintings and calligraphies, $1,132,555 (HK$ 8,820,000) for the 9 pieces of precious stones, $46,227 (HK$360,000) for the 1 pieces of jewelry and $152,578 (HK$1,188,000) for the 1 set of Unit+ product, of which 41.5%-47% (for the 6 sets of paintings and calligraphies), 26%-46% (for the 9 pieces of precious stones), 43% (for the 1 pieces of jewelry) and 30.3% (for the 1 set of Unit+ product) of the listed values were charged as listing fees, respectively.

 

Compared to the corresponding period ended September 30, 2016, there were 7 sets of paintings and calligraphies, 7 pieces of amber, 14 pieces of precious stones, 5 pieces of jewelry successfully listed on our system. The total listing values were $1,802,475 (HK$14,000,000) for the 7 sets of paintings and calligraphies, $2,974,083 (HK$23,100,000) for the 7 pieces of amber, $1,042,860 (HK$8,100,000) for the 14 pieces of precious stones, $746,739 (HK$5,800,000) for 5 pieces of jewelry, of which 47.75%-48% (for the 7 sets of paintings and calligraphies) ,46% (for the 7 pieces of amber), 32%-48.5% (for the 14 pieces of precious stones), 29%-48% (for the 5 pieces of jewelry) of the listed values were charged as listing fees, respectively.

 

The decrease in number of pieces listed, listing values and corresponding listing fees charged during the three months ended September 30, 2017 compared to the same period ended September 30, 2016 resulted in a decrease in listing fee revenue in the current period. The decrease in number of pieces listed was due to a new listing category (“A-tier”) implemented on July 3, 2017. A-tier is aim to meet an elevated set of standards including higher levels of liquidity, market value, number of owners and number of VIP traders. Therefore, the listing schedule of some artworks were deferred to a later time.

  

  (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.

 

19 

 

 

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.

 

In spite of this, total commission revenue decreased by $172,872 or 10% for the three months ended September 30, 2017 to $1,496,826 compared to $1,669,698 for the three months ended September 30, 2016 primarily because of the change in our commission fee policy and the decrease of transaction volume of non VIP traders and non-selected traders. 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 September 30, 2017, management fee revenue decreased by $378,672, from $781,219 for the three months ended September 30, 2016 to $402,547. From September 1, 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. Although the listed artworks increased, the management fee decreased by the promotions.

 

  (iv) Other revenue

 

During the three-month period ended September 30, 2017, annual fee revenue decreased by $300, from $440 for the three-month period ended September 30, 2016 to $140.

 

(v) Authorized agent subscription revenue

 

Authorized agent subscription revenue was nil for the three-month period ended September 30, 2017 compared to $322,318 for the three-month period ended September 30, 2016. We have ceased charging new authorized agent with subscription revenue in order to encourage high quality authorized agent to sign up with our platform.

 

Cost of Revenue

 

Cost of revenue for the three months ended September 30, 2017 and 2016 was $292,168 and $285,252, respectively. Our cost of revenue primarily includes internet service fee, depreciation and amortization of hardware and software for our trading platform.

  

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Gross Profit

 

Gross profit was $3,062,843 for the three months ended September 30, 2017, compared to $5,456,957 for the three months ended September 30, 2016. The decrease was due to the less artworks listed on our platform, the change in our commission fee policy and the decrease of transaction volume of non VIP traders and non-selected traders.

 

Listing fees contributed 43.4% of the total revenue for the three months ended September 30, 2017 compared to 51.7% in the corresponding period in 2016, while commission revenue contributed 44.6% for the three months ended September 30, 2017 compared to 29% in the corresponding period in 2016. While there was a decrease in commission revenue in the current period, the negative factors were catalyzed by a decrease in listing fees due to less artworks listing on the platform during the current period. Consequently, we posted a comparable gross profit margin of 91% for the three months ended September 30, 2017 compared to 95% for the same period in 2016.

 

Operating Expenses

 

Selling expenses were $624,151, or 20% of net sales, for the three months ended September 30, 2017 compared to $652,207, or 12% of net sales, for the comparable period in 2016, a decrease by $28,056. Selling expenses consist primarily of marketing expenses.

 

General and administrative expenses for the three months ended September 30, 2017 were $2,498,848 compared to $1,744,965 for the three months ended September 30, 2016. The substantial increase was primarily due to an increase in salaries by $258,469 because of an increase in employee headcount, accrual of doubtful account by $241,248, office, insurance and rental expense by $141,281 and an increase in travelling expenses by $116,220 which were incurred to attend to the listing of our common stock on the NYSE American.

 

The following table sets forth the main components of the Company’s general and administrative expenses for the three months ended September 30, 2017 and 2016.

 

   Three months ended
September 30, 2017
   Three months ended
September 30, 2016
 
   (Unaudited)   (Unaudited) 
   Amount($)   % of Total   Amount($)   % of Total 
Consultancy fee  $46,059    2%  $92,809    5%
Legal and professional fees   218,066    9%   247,278    14%
Salary and welfare   1,008,736    40%   750,267    43%
Office, insurance and rental expenses   430,047    17%   288,766    17%
Non-deductible input VAT expenses   6,924    0%   -    -%
Traveling and accommodation fees   187,780    8%   71,560    4%
Share-based compensation   138,161    6%   186,928    11%
Bad debt expenses   241,248    10%   -    -%
Others   221,827    8%   107,357    6%
Total general and administrative expenses  $2,498,848    100.0%  $1,744,965    100.0%

  

Net Income

 

We had a net income for the three months ended September 30, 2017 of $27,034 compared to net income of $2,451,737 for the three months ended September 30, 2016.

 

The decrease in net income by $2,424,703 during this current period was primarily due to a decrease of revenue by $2,387,198 as discussed in the previous paragraphs.

 

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NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2017 COMPARED TO NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2016

 

Revenue

 

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

 

   Nine Months Ended
September 30,
 
   2017   2016 
   (Unaudited)   (Unaudited) 
Revenue  $10,545,677   $14,214,252 
Cost of revenue   (822,335)   (822,735)
Selling expense   (1,272,010)   (1,993,782)
General and administrative expenses   (7,311,128)   (5,076,689)
Total costs and expenses   (9,405,473)   (7,893,206)
Income from operations   1,140,204    6,321,046 
Interest and other income (loss), net   511,311    (279,336)
Income before income taxes   1,651,515    6,041,710 
Income tax expense   (594,377)   (1,377,078)
Net income  $1,057,138   $4,664,632 

 

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

 

   Nine Months Ended
September 30,
 
   2017   2016 
   (Unaudited)   (Unaudited) 
Revenue   100%   100%
   Cost of revenue – Direct revenue   (8)   (6)
   Selling expense   (12)   (14)
   General and administrative expenses   (69)   (36)
Total costs and expenses   (89)   (56)
Income from operations   11    44 
Interest and other income (loss), net   5    (2)
Income before income taxes   16    42 
Income tax expense   (6)   (10)
Net income   10%   32%

 

Listing fee revenue was $4,606,649 and $8,166,072; commission revenue was $4,970,651 and $3,739,958, gross management fee revenue was $967,518 and $1,341,294, annual fee revenue was $859 and $869, authorized agent subscription revenue was $nil and $966,059, for the nine months ended September 30, 2017 and 2016, respectively.

 

(i)Listing fee revenue

 

During the nine months ended September 30, 2017, there were 49 sets of artwork listed for trade on our platform —comprising 8 sets of paintings and calligraphies, with a total listing value of $2,632,356 (HK$20,500,000), 16 pieces of jewelry with a total listing value of $5,567,754 (HK$43,360,000), 23 pieces of precious stones with a total listing value of $3,212,759 (HK$25,020,000), 1 piece of porcelains with a total listing value of $38,522 (HK$300,000) and 1 set of Unit+ product which was listed in Unit+ trading platform, with a total listing value of $152,548 (HK$1,188,000), of which 41.5%-47% (for 8 sets of paintings and calligraphies), 33.5%-48% (for the 16 pieces of jewelry), 26%-47% (for the 23 pieces of precious stones), 46% (for the 1 pieces of porcelains) and 43% (for the 1 set of Unit+ product) of the listed values were charged as listing fees, respectively.

 

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Compared to the corresponding period ended September 30, 2016, there were 15 pieces of painting, 59 pieces of precious stones, 11 pieces of jewelry, 3 pieces of ivory, 18 pieces of amber and 2 pieces of porcelain pastel paintings successfully listed on our system. The total listing values were $3,349,005 (HK$26,000,000) for the 15 pieces of painting, $5,744,832 (HK$44,600,000) for the 59 pieces of precious stones, $1,816,191 (HK$14,100,000) for the 11 pieces of jewelry, $515,232 (HK$4,000,000) for the 3 pieces of ivory, $7,239,003 (HK$56,200,000) for the 18 pieces of amber, and $334,900 (HK$2,600,000) for the 2 pieces of porcelain pastel paintings, of which 47.75%-48% (for the 15 pieces of painting), 29%-48.5% (for the 59 pieces of precious stones), 29%-48% (for the 11 pieces of jewelry), 47% (for the 3 pieces of ivory), 45%-48% (for the 18 pieces of amber), and 45%-46% (for 2 pieces of porcelain pastel paintings ) of the relevant listed values were charged as listing fees, respectively.

 

The decrease in number of pieces listed, listing values and corresponding listing fees charged during the nine months ended September 30, 2017 compared to the same period ended September 30, 2016 resulted in a decrease in listing fee revenue in the current period. The decrease in number of pieces listed was due to a new listing category (A-tier) implemented on July 3, 2017. A-tier is aim to meet an elevated set of standards including higher levels of liquidity, market value, number of owners and number of VIP traders. Therefore, the rigorous listing requirements of A-tier led some artworks listing deferred.

 

  (ii) Commission fee revenue

 

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 193% and trading amount increased by 178% for the nine months ended September 30, 2017 compared to corresponding period in 2016.

    

In spite of this, total commission revenue increased by $1,230,693 or 33% for the nine months ended September 30, 2017 to $4,970,651 compared to $3,739,958 for the nine months ended September 30, 2016 primarily because of the change in our commission fee policy and the decrease of transaction volume of non VIP traders and non-selected traders . 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

 

During the nine month period ended September 30, 2017, management fee revenue decreased by $373,776, from $1,341,294 for the nine months ended September 30, 2016 to $967,518. From September 1, 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 nine-month period ended September 30, 2017, annual fee revenue increased by $10, from $869 for the nine-month period ended September 30, 2016 to $859.

 

(v) Authorized agent subscription revenue

 

Authorized agent subscription revenue for the nine-month period ended September 30, 2017 was nil compared to $966,059 for the nine-month period ended September 30, 2016. We have ceased charging new authorized agent with subscription revenue in order to encourage high quality authorized agent to sign up with our platform.

 

Cost of Revenue

 

Cost of revenue for the nine months ended September 30, 2017 and 2016 was $822,335 and $822,735, respectively. Our cost of revenue primarily includes internet service fee, depreciation and amortization of hardware and software for our trading platform.

 

23 

 

 

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 September 30, 2017 and 2016, nine out of the ten modules have been completed and are operational. We capitalized (with a total cost of $1,069,853 (HK$8,295,000)) and amortized these costs once the modules were completed.

 

Gross Profit

 

Gross profit was $9,723,342 for the nine months ended September 30, 2017, compared to $13,391,517 for the nine months ended September 30, 2016. The decrease was due to the less artworks listed on our platform, the change in our commission fee policy and the decrease of transaction volume of non VIP traders and non-selected traders.

 

Operating Expenses

 

Selling expenses were $1,272,010, or 13% of net sales, for the nine months ended September 30, 2017 compared to $1,993,782 or 15% of net sales, for the comparable period in 2016, a decrease by 36%. Selling expenses consist primarily of marketing expenses.

 

General and administrative expenses for the nine months ended September 30, 2017 were $7,311,128 compared to $5,076,689 for the nine months ended September 30, 2016. The substantial increase by $2,234,439 or 44% was chiefly due to an increase in salaries by $1,314,324 because of an increase in employee headcount, accrual of doubtful accounts, by $241,248, office, insurance and rental expenses by $400,067 and an increase in travelling expenses by $495,715 which were incurred to attend to the listing of our common stock on the NYSE American.

 

The following table sets forth the main components of the Company’s general and administrative expenses for the nine months ended September 30, 2017 and 2016.

 

   Nine months ended
September 30, 2017
   Nine months ended
September 30, 2016
 
   (Unaudited)   (Unaudited) 
   Amount($)   % of Total   Amount($)   % of Total 
Consultancy fee  $187,230    3%  $361,610    7%
Legal and professional fees   733,466    10%   728,856    14%
Salary and welfare   3,166,679    43%   1,852,355    36%
Office, insurance and rental expenses   1,252,561    17%   852,494    17%
Non-deductible input VAT expense   16,369    -%   -    -%
Traveling and accommodation fees   679,950    9%   184,235    4%
Share-based compensation   562,184    8%   846,703    17%
Bad debt expenses   241,248    4%   -    -%
Others   471,441    6%   250,436    5%
Total general and administrative expenses  $7,311,128    100.0%  $5,076,689    100.0%

 

Net Income

 

We had a net income for the nine months ended September 30, 2017 of $1,057,138 compared to net income of $4,664,632 for the nine months ended September 30, 2016.

 

The decrease in net income by $3,607,494 during this current period was due to a fall of revenue by $3,668,575, and the increase of general and administrative expenses by $2,234,439 as discussed in the previous paragraphs.

 

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Liquidity and Capital Resources

 

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

 

   Nine months ended September 30 
   2017   2016 
   (Unaudited)   (Unaudited) 
Net cash provided by operating activities  $1, 028,524   $5,635,391 
Net cash used in investing activities   (561,510)   (1,276,378)
Net cash provided by financing activities   -    2,346,941 
Effect of exchange rate change on cash and cash equivalents   1,025,539    (644,375)
Net increase in cash and cash equivalents   1,492,553    6,061,579 
Cash and cash equivalents, beginning balance   13,395,337    10,769,456 
Cash and cash equivalents, ending balance  $14,887,890   $16,831,035 

 

Sources of Liquidity

 

During the nine months ended September 30, 2017, net cash generated from operating activities totaled $1,028,524. Net cash used in investing activities totaled $561,510. No cash was generated from financing activities during the period. The resulting change in cash for the period was an increase of $1,492,553. The cash balance at the beginning of the period was $13,395,337. The cash balance on September 30, 2017 was $14,887,890.

 

During the nine months ended September 30, 2016, net cash provided by operating activities totaled $5,635,391. Net cash used in investing activities totaled $1,276,378. Net cash provided by financing activities totaled $2,346,941. The resulting change in cash for the period was an increase of $6,061,579. The cash balance at the beginning of the period was $10,769,456. The cash balance on September 30, 2016 was $16,831,035.

 

As of September 30, 2017, the Company had $28,390,798 in total current liabilities, which comprised of $780,800 in accrued expense and other payables, $19,057,733 in customers’ deposits, $6,371,900 in short-term borrowings from third parties, $1,085,480 in amount due to related party and $1,094,885 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 $45,301 as of September 30, 2017, and $62,618 as of December 31, 2016, respectively. The Company’s total liabilities as of September 30, 2017 and December 31, 2016 amounted to $28,436,099 and $30,665,324, respectively.

 

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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.

 

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 have always been generating sufficient cash from our operation to fund our business organically. However, we may conduct equity sales of our common shares in order to fund further expansion and growth of our business. Issuances of additional shares will result in dilution to existing stockholders. There is no assurance that we will achieve any sales of the equity securities to fund expansion and other activities, or if we are able, there is no guarantee that existing shareholders will not be substantially diluted. In essence, we do not need to rely on equity sales to fund our business operations.

 

Critical Accounting Policies

 

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

 

See Note 2 to the financial statements included herewith and Note 2 to the financial statements on Form 10-K for the fiscal year ended December 31, 2016, previously filed with the SEC.

 

Recent Accounting Pronouncements

 

See Note 2 to the financial statements included herewith and Note 2 to the financial statements on Form 10-K for the fiscal year ended December 31, 2016, previously filed with the SEC.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

  

Not applicable.

  

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Item 4. Controls and Procedures.

 

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

 

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

 

There were no changes in our internal control over financial reporting that occurred during our fiscal quarter ended September 30, 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 (1)
3.3   Certificate of Amendment of the Certificate of Incorporation (1)
3.4   Certificate of Amendment of the Certificate of Incorporation (1)
3.5   Certificate of Amendment (2)
3.6   Certificate of Amendment of the Certificate of Incorporation (4)
3.7   Certificate of Incorporation of Hong Kong Takung Assets and Equity Artworks Exchange Co., Ltd.(3)
3.8   Articles of Association of Hong Kong Takung Assets and Equity Artworks Exchange Co., Ltd.(3)

3.9   Certificate of Change of Name of Hong Kong Takung Assets and Equity Artworks Exchange Co., Ltd.*

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.**
101.INS   XBRL Instance Document*
101.SCH   XBRL Taxonomy Extension Schema Document*
101.CAL   XBRL Taxonomy Calculation Linkbase Document*
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB   XBRL Taxonomy Label Linkbase Document*
101.PRE   XBRL Taxonomy Presentation Linkbase Document*

 

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

 

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

 

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

 

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

 

*Filed herewith.

**Furnished herewith.

 

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SIGNATURES

 

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

 

  TAKUNG ART CO., LTD
     
Date: November 14, 2017 By:   /s/ Di Xiao
    Di Xiao
    Chief Executive Officer
    (Principal Executive Officer) and Director
     
Date: November 14, 2017 By: /s/ Chun Hin Leslie Chow
    Chun Hin Leslie Chow
    Chief Financial Officer
    (Principal Financial Officer and Principal Accounting Officer)

 

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