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 March 31, 2016

 

or

 

¨

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

 

For the transition period from _________________________ to_________________________

 

Commission File Number:333-176329

 

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. xYes ¨ 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).                                                                                                          xYes ¨No

 

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

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

¨Yes xNo

 

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 16, 2016 is 11,119,276.

 

 

FORM 10-Q

TAKUNG ART CO, LTD

INDEX

 

		Page
PART I.	Financial Information	3
	Item 1.  Financial Statements (Unaudited).	3
	Item 2.  Management’s Discussion and Analysis of Financial Condition and results of Operation.	21
	Item 3.  Quantitative and Qualitative Disclosures About Market Risk.	27
	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	30

 

 

PART I –FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

TAKUNG ART CO., LTD AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Stated in US Dollars except Number of Shares)

 

		March 31, 2016				December 31, 2015
		(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	11,668,639			$	10,769,456
Restricted cash			17,791,375				16,195,289
Deposits			200,560				191,575
Accounts receivables, net			458,771				184,537
Other receivables			16,653				-
Prepayment			1,363,556				1,172,405
Due from director			-				502
Total current assets			31,499,554				28,513,764
NON-CURRENT ASSETS
Property and equipment, net			1,524,436				1,213,255
Intangibles, net			20,538				22,194
Prepayment – Non-current			4,547				-
Total non-current assets			1,549,521				1,235,449
TOTAL ASSETS		$	33,049,075			$	29,749,213
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accrued expenses and other payables		$	827,151			$	667,622
Customer deposits			17,791,375				16,195,289
Deferred revenue			147,337				-
Tax payables			1,414,873				1,564,370
Total current liabilities			20,180,736				18,427,281
NON-CURRENT LIABILITIES
Deferred tax liabilities		$	42,572			$	45,037
Total non-current liabilities			42,572				45,037
TOTAL LIABILITIES			20,223,308				18,472,318
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS'  EQUITY
Common stock, 1,000,000,000 shares authorized; $0.001 par value; 11,119,276 shares issued and outstanding at March 31, 2016 and December 31, 2015			11,119				11,119
Additional paid-in capital			4,905,953				4,465,217
Retained earnings			7,898,029				6,801,977
Accumulated other comprehensive income (loss)			10,666				(1,418	)
Total stockholders' equity			12,825,767				11,276,895
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	33,049,075			$	29,749,213

   

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

 

 

TAKUNG ART CO., LTD AND SUBSIDIARIES

\CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Stated in US Dollars except Number of Shares)

(UNAUDITED)

 

		For the Three Months Ended March 31,
		2016				2015
Revenue		$	3,788,770			$	1,274,879
Cost of revenue			(262,067	)			(177,692	)
Gross profit			3,526,703				1,097,187
Operating expenses:
General and administrative expenses			(1,561,373	)			(466,493	)
Selling expenses			(638,209	)			(9,456	)
Income from operations			1,327,121				621,238
Other income and expense:
Other income			50,643				29
Exchange gain or loss			119,456				-
Total other income			170,099				29
Income before provision for income taxes			1,497,220				621,267
Provision for income taxes			(401,168	)			(127,172	)
Net income		$	1,096,052			$	494,095
Foreign currency translation adjustment			12,084				(364	)
Comprehensive income		$	1,108,136			$	493,731
Earnings per common share– basic		$	0.10			$	0.05
Earnings per common share– diluted			0.10			$	0.05
Weighted average number of common shares outstanding– basic			11,119,276				9,332,267
Weighted average number of common shares outstanding– diluted			11,147,577				9,332,267

   

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

 

 

TAKUNG ART CO., LTD AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOW

(Stated in US Dollars)

(UNAUDITED)

 

		For the Three Months Ended March 31,
		2016				2015
Cash flows from operating activities:
Net income		$	1,096,052			$	494,095
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation			102,973				74,128
Changes in exchange rate			(157,518	)			-
Stock-based compensation			440,736				-
Changes in operating assets and liabilities:
Accounts receivables			(274,234	)			-
Deposit			(8,985	)			(115,992	)
Other receivables			(16,653	)			(281	)
Prepayment			(195,698	)			56,810
Restricted cash			(1,499,123	)			3,093,533
Deferred revenue			147,337				-
Due from director			502				(18,688	)
Customer deposits			1,499,123				(3,093,533	)
Deferred tax liabilities			(2,465	)			12,431
Tax payable			(149,497	)			114,694
Accrued expenses and other payables			278,985				(661,425	)
Net cash provided by (used in) operating activities			1,261,535				(44,228	)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment			(409,664	)			(218,167	)
Net cash used in investing activities			(409,664	)			(218,167	)
Effect of exchange rate change on cash and cash equivalents			47,312				(402	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			899,183				(262,797	)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD			10,769,456				2,355,839
CASH AND CASH EQUIVALENTS - END OF PERIOD		$	11,668,639			$	2,093,042
SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITY
Cash paid during the year for income taxes		$	521,714			$	-
Cash paid during the year for interest expense		$	-			$	-

   

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

 

 

TAKUNG ART CO., LTD AND SUBSIDIARIES

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS

(Stated in US Dollars except Number of Shares)

(UNAUDITED)

 

1. ORGANIZATION AND DESCRIPTION OF BUSINESS

 

Takung Art Co., Ltd.(the “Company” or “Takung Art”), a Delaware corporation (formerly Cardigant Medical Inc.) through Hong Kong Takung Assets and Equity of Artworks Exchange Co., Ltd. (“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.

 

HongKong Takung Assets & Equity of Artworks Exchange Co., Ltd. (“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 operations except the issuance of shares for subscription receivable. We generate revenue from our services in connection with the offering and trading of artwork on our system, primarily consisting of listing fees, trading commissions, and management fees. We conduct our business primarily in Hong Kong, People’s Republic of China.

 

Takung (Shanghai) Co., Ltd (“Takung Shanghai”) is a limited liability company, with a registered capital of $1 million, located in the Shanghai Pilot Free Trade Zone. Takung Shanghai was incorporated on July 28, 2015. It is engaged in providing services to its parent company Hong Kong Takung Assets and Equity of Artworks Exchange Co. Ltd. ("Takung") by receiving deposits from and making payments to online artwork traders of Takung for and on behalf of Takung.

 

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

 

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

 

REVERSE MERGER

 

On October 20, 2014, Cardigant Medical Inc. (or “Cardigant”) acquired all the issued and outstanding shares of Takung, a privately held Hong Kong corporation, pursuant to the Share Exchange Agreement and 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 (209,976,000 pre-reverse split) 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 933,227 (23,330,662 pre-reverse split) shares of Cardigant’s common stock, The accompanying financial statements share and per share information has been retroactively adjusted to reflect the exchange ratio in the Merger. Subsequent to the Merger, Cardigant’s name was changed from “Cardigant Medical Inc.” to “Takung Art Co., Ltd.”

 

Under generally accepted accounting principles in the United States, (“U.S. GAAP”) because Takung’s former stockholders received the greater portion of the voting rights in the combined entity and 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 Takung is considered the acquirer for accounting and financial reporting purposes. The assets and liabilities of 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 Takung's consolidated financial statements are those of Takung and are recorded at the historical cost basis of Takung. 

 

 

Unless otherwise indicated or the context otherwise requires, references to “the Company” refer to Takung Art Co., Ltd. Disclosures relating to the pre-merger business of Takung, unless noted as being the business of Cardigant prior to the Merger, pertain to the business of Takung prior to the Merger.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying consolidated balance sheet as of December 31, 2015, which has been derived from audited financial statements, and the unaudited interim consolidated financial statements as of March 31, 2016 and for the three months ended March 31, 2016 and 2015 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and disclosures, which are normally included in financial statements prepared in accordance with United States generally accepted accounting principles (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, 2015, previously filed with the SEC.

 

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

 

In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the Company’s consolidated financial position as of March 31, 2016, its consolidated results of operations and cash flows for the three-month periods ended March 31, 2016 and 2015, as applicable, have been made. The interim results of operations are not necessarily indicative of the operating results for the full fiscal year or any future periods.

 

Use of Estimates

 

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

 

Reverse stock split

 

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

 

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

 

 

Fair Value Measurements

 

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

  

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

 

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

 

	·	Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
	·	Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.
	·	Level 3 inputs to the valuation methodology are unobservable and significant to the fair value.

 

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

 

Comprehensive Income

 

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

  

Foreign Currency Translation

 

The functional currency of the Company is the Hong Kong Dollar (“HKD”).

 

The functional currency of Takung Shanghai& Tianjin 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 7.7563 and 7.7507 as of March 31, 2016 and December 31, 2015 respectively; stockholder’s equity accounts are translated at historical rates, and income and expense items are translated at the weighted average exchange rates during the years, which are 7.7740 and 7.7556 for the period ended March 31, 2016 and 2015 respectively. For Renminbi currency, the Company’s assets and liabilities are expressed in USD at the exchange rate on the balance sheet dates, which is 6.4480 as of March 31, 2016; stockholder’s equity accounts are translated at historical rates, and income and expense items are translated at the weighted average exchange rates during the years, which is 6.5394 for the period ended March 31, 2016.

 

The resulting translation adjustments are reported under accumulated other comprehensive income 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. As of March 31, 2016 and December 31, 2015, the Company’s cash and cash equivalents amounted $11,668,639 and $10,769,456, respectively. All of the Company’s cash deposits are held in the financial institutions located in Hong Kong and China where there are currently regulation mandated on obligatory insurance of bank accounts.

 

Restricted Cash

 

Restricted cash represents the cash deposited by the traders (“buyers and sellers”) into a specific bank account under Takung (“the broker’s account”) in order to facilitate the trading ownership units of the artwork. The buyers are required to have their funds transferred to the broker’s account before the trading take place. Upon the delivery of the ownership units, the seller can send instructions to the bank, requesting the amount to be transferred to their personal accounts. After deducting the commission and the management fee as per Takung’s instruction, the bank will transfer the remainder to the seller’s personal account. Except for instructing the bank to deduct the commission and management fee, Takung has no right to manipulate any funds in the broker’s account. Restricted cash was $17,791,375 and $16,195,289 as of March 31, 2016 and December 31, 2015, respectively.

 

Accounts Receivable and Allowance for Doubtful Accounts

 

Accounts receivable 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 accounts receivable balances, credit quality of our customers, current economic conditions, and other factors that may affect customers' ability to pay.

 

Property and Equipment

 

Property and equipment are stated at cost less accumulated depreciation and impairment losses. Gains or losses on dispositions of property and equipment are included in other income (loss). 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		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 period ended March 31, 2016 and December 31, 2015, respectively.

 

Intangible Assets

 

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

 

Customer deposit

 

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. Customer deposit was $17,791,375 and $16,195,289 as of March 31, 2016 and December 31, 2015, respectively.

 

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 collects a listing fee 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. This amount is collected from the money raised from the issuance of such shares accounted as the listing fee revenue accordingly. 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% 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, 2016. Listing fee revenue was $2,195,064 and $503,633 for the three months ended March 31, 2016 and 2015, respectively.

 

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

 

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

 

Commission revenue was $1,143,471 and $726,608 for the three months ended March 31, 2016 and 2015, respectively.

 

Management fee – The Company charges management fees for covering the insurance, storage, and transportation for an artwork and trading management of artwork units, which are calculated at $0.0013 (HK$0.01) per 100 artwork ownership units per day. The management fee is accounted for as revenue, and immediately deducted from the proceeds from the sales of artwork ownership units when a transaction is completed. Management fee revenue was $128,491 and $43,349 for the three months ended March 31, 2016 and 2015, respectively.

 

Annual fee income – The Company charges an annual fee for providing traders with premium services, including more in-depth information and tools, on the trading platform. This revenue is recognized ratably over the service agreement period.

 

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 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, salaries, benefits, and share-based compensation for employees on our operations teams.

  

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 Takung should be deemed as the taxable income of Takung Shanghai under the law of the People's Republic of China on Enterprise Income Tax ("EIT") as of March 31, 2016 and December 31, 2015. Such income will be subject to EIT with 25% tax rate once it is deemed as the taxable income of Takung Shanghai; 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 quarter ended March 31, 2016 and 2015. The Company does not expect that its assessment regarding unrecognized tax positions will materially change over the next 12 months.  

  

Earnings per share

 

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

 

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

 

 

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, accounts receivable, other receivables and prepayments. The Company places its cash and cash equivalents and restricted cash with financial institutions with high-credit ratings and quality. Accounts receivable 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, 2016 and 2015.

 

Reclassifications

 

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

 

Recent Accounting Pronouncements

  

Revenue recognition

 

In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers, or ASU 2014-09. This new standard will replace all current U.S. GAAP guidance on this topic and eliminate all industry-specific guidance. The new revenue recognition standard provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to correlate with the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. In July 2015, the FASB voted to defer the effective date of ASU 2014-09 by one year, while allowing a company to adopt the new revenue standard early but not before the original effective date. This guidance will be effective as to us on January 1, 2018 and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. We are evaluating the impact of adopting ASU 2014-09 on our consolidated financial statements.

 

 

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 2016-2on our consolidated financial statements.

 

Liabilities

 

In February 2015, FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. The new consolidation standard changes the way reporting enterprises evaluate whether (a) they should consolidate limited partnerships and similar entities, (b) fees paid to a decision maker or service provider are variable interests in a VIE, and (c) variable interests in a VIE held by related parties of the reporting enterprise require the reporting enterprise to consolidate the VIE. The guidance is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2015. Early adoption is allowed, including early adoption in an interim period. A reporting entity may apply a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption or may apply the amendments retrospectively. The Company is currently assessing the impact of the adoption of this guidance on the consolidated financial statements.

 

3. PROPERTY AND EQUIPMENT, NET

 

		March 31, 2016				December 31, 2015
Cost
Furniture, fixtures and equipment		$	61,746			$	61,787
Leasehold improvements			141,972				140,955
Computer trading and clearing system			2,041,595				1,628,542
Sub-total			2,245,313				1,831,284
Less: accumulated depreciation			(720,877	)			(618,029	)
Property and equipment, net		$	1,524,436			$	1,213,255

 

Depreciation expense was $102,973 and $74,128 for the three months ended March 31, 2016 and 2015, respectively.

 

 

4. INTANGIBLE ASSETS

 

Intangible assets consist of the Company’s trademarks with indefinite useful life. The intangible asset was $20,538 and $22,194 as of March 31, 2016 and December 31, 2015, respectively.

 

5. PREPAYMENT

 

Prepayments mainly consist of the prepaid service fee for the maintenance of online trading system, as well as the advertising and promotional services. The prepayment was $1,363,556 and $1,172,405 as of March 31, 2016 and December 31, 2015, respectively.

 

6. ACCRUED EXPENSES AND OTHER PAYABLES

 

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

 

		March 31, 2016				December 31, 2015
Trading and clearing system		$	39,885			$	76,763
Accruals for promotional services related to trading platform			96,696				-
Accruals for professional fees			145,796				75,116
Accruals for consulting fees			255,708				259,244
Accruals for rental			33,668				15,855
Accruals for foreign currency gain/loss of restricted cash			60,552				175,216
Payroll payables			116,565				46,167
Other payables			78,281				19,261
Total accrued expenses, account & other payables		$	827,151			$	667,622

   

7. INCOME TAXES

 

United States of America

 

As of March 31, 2016, the Company in the United States had $1,612,604 in net operating loss carry forwards available to offset future taxable income. Federal net operating losses can generally be carried forward twenty years.

 

The Company believes that it is more-likely-than-not that these net accumulated operating losses will not be utilized in the future. Therefore, the Company has provided full valuation allowance for the deferred tax assets arising from the losses at US during the three months ended March 31, 2016 and 2015. 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 quarter ended March 31, 2016 and 2015, if applicable.

 

PRC

 

In accordance with the relevant tax laws and regulations of the PRC, a company registered in the PRC is subject to income taxes within the PRC at the applicable tax rate on taxable income.  All the PRC subsidiaries that are not entitled to any tax holiday were subject to income tax at a rate of 25% for the three months ended March 31, 2016 and 2015.

 

The income tax expenses were $401,168 and $127,172 for the three months ended March 31, 2016 and 2015, respectively.

 

The income tax provision consists of the following components: 

 

		March 31, 2016				March 31, 2015
Current			403,633				114,732
Deferred			(2,465	)			12,440
TOTAL PROVISION FOR INCOME TAXES		$	401,168			$	127,172

  

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

 

		March 31, 2016				March 31, 2015
Income before income tax expense		$	1,497,220			$	621,267
Provision for taxes at respective statutory tax rate			104,878				103,817
Tax effect of non-deductible expenses			47,942				23,355
Changes in valuation allowance			248,348				-
TOTAL PROVISION FOR INCOME TAXES			401,168				127,172

 

The Company's effective tax rate was 26.8% and 20.5% for the three months ended March 31, 2016 and 2015, 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, 2016				As of December 31, 2015
		(Unaudited)
Deferred tax assets
Tax loss carried forward		$	548,285			$	268,987
			548,285				268,987
Valuation allowance			(548,285	)			(268,987	)
Deferred tax asset, net			-				-
Deferred tax liabilities
Property, plant and equipment, principally due to differences in depreciation			42,572				45,037
Deferred tax liability		$	42,572			$	45,037

   

8. COMMITMENTS AND CONTINGENCIES

 

Capital Commitments

 

The Company purchased property, plant and equipment which the payment was due within one year. As of March 31, 2016 and December 31, 2015, the Company has capital commitments of $282,677 and $348,329, respectively.

 

Operation Commitments  

 

The total future minimum lease payments under the non-cancellable operating lease with respect to the office and the dormitory, as well as hardware trading platform as of March 31, 2016 are payable as follows: 

 

 

Remaining 2016		$	407,739
Year ending December 31, 2017			528,552
Year ending December 31, 2018			270,582
Year ending December 31, 2019			85,908
Year ending December 31, 2020 and thereafter			85,298
Total		$	1,378,079

  

Rental expense of the Company was $116,593 and $65,899 for the three months ended March 31, 2016 and 2015, respectively.

 

9. 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, 2016				Three months ended March 31, 2015
		(Unaudited) $				(Unaudited) $
Numerator:
Net income			1,096,052			$	494,095
Denominator
Weighted-average shares outstanding
-Basic			11,119,276				9,332,267
-Diluted			11,147,577				9,332,267
Earnings per share
-Basic			0.10				0.05
-Diluted			0.10				0.05

 

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.

 

431,525 options outstanding with a total dilutive effect of 268,600 shares were included in the computation of diluted EPS for the three months ended March 31, 2016. No options outstanding with no dilutive effect for three months ended March 31, 2016.

 

 

10. STOCKHOLDERS’ EQUITY

 

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

 

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

 

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

 

On November 20, 2015, we entered into a Consulting Agreement with Regeneration Capital Group, LLC (“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 487,000 restricted shares of Common Stock (the “Compensation Shares”) which are placed in an escrow account maintained with the Company’s attorneys until either (i) the Company has successfully listed its securities on the NASDAQ or other U.S. securities exchange on or before December 31, 2016, whereupon the Compensation Shares shall be forthwith delivered to Regeneration or (ii) if the Company is unsuccessful in listing its securities on the NASDAQ or other U.S. securities exchange on or before December 31, 2016, the Compensation Shares shall be returned to the Company for cancellation. Regeneration shall be entitled to “piggy-back” registration rights with respect to the Compensation Shares. The Compensation Shares were issued in reliance on an exemption from registration under Section 4(a)(2) of the Securities Act. The stock based compensation related to this consulting agreement was $384,730 during the three months ended March 31, 2016.

 

Stock-based Compensation Plans

 

During the three months ended March 31, 2016, the Company granted an aggregate of 431,525 stock options under the 2015 Incentive Stock Plan (the “2015 Plan”). 112,925 of the options were granted effective March 30, 2016, 50,000 were granted effective February 29, 2016 and 268,600 were granted effective February 2, 2016. In addition, on March 1, 2016, 7,463 of restricted stock-based awards were granted. Each of the awards is subject to service-based vesting restrictions. The February 2, 2016 grant included a grant of 50,000 shares to a non-employee who became an employee on March 2, 2016.

 

The exercise price of stock options was ranged from $2.91 to $3.65 and the requisite service period was ranged from two to five years. 27,425 stock options have been vested and no stock options were exercised or cancelled during the three months ended March 31, 2016 and 2015.

  

 

The following table sets forth changes in compensation-related restricted stock awards during three months ended March 31, 2016:

 

		Number of				Weighted Average Grant Date				Weighted Average Remaining
		Shares				Fair Value				Contractual Term
Unvested at December 31, 2015			11,131			$	3.50				3.91 years
Granted			7,463				3.35
Forfeited			-				-
Vested			(3,658	)			3.50
Unvested at March 31, 2016			14,936			$	3.43				3.78 years

  

The stock-based compensation recognized during the three months ended March 31, 2016 and 2015 was $440,736 and $0, respectively.

 

11. SUBSEQUENT EVENT

 

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

 

 

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

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q or Form 10-Q and other reports filed by us from time to time with the Securities and Exchange Commission (collectively the “Filings”) contain or may contain forward-looking statements and information that are based upon beliefs of, and information currently available to, our management as well as estimates and assumptions made by our management. When used in the filings the words “anticipate”, “believe”, “estimate”, “expect”, “future”, “intend”, “plan” or the negative of these terms and similar expressions as they relate to us or our management identify forward-looking statements. Such statements reflect the current view of our management with respect to future events and are subject to risks, uncertainties, assumptions and other factors as they relate to our industry, our operations and results of operations, and any businesses that we may acquire. Should one or more of the events described in these risk factors materialize, or should our underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended or planned.

 

Although we believe that the expectations reflected in the forward looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the U.S. federal securities laws, we do not intend to update any of the forward-looking statements to conform them to actual results. The following discussion should be read in conjunction with our pro forma financial statements and the related notes that will be filed herein.

 

OVERVIEW

 

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

 

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

 

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

 

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

 

 

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 late 2012, it did not commence business operations until late 2013.

 

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

 

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

 

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

 

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

 

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

 

On July 28, 2015, our 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.

 

RESULTS OF OPERATIONS

 

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, 2016 and 2015 and related notes thereto.

 

  

THREE-MONTH PERIOD ENDED MARCH 31, 2016 COMPARED TO THREE-MONTH PERIOD ENDED MARCH 31, 2015

 

Revenue

  

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

 

		Three Months Ended March 31,
		2016				2015
Revenue		$	3,788,770			$	1,274,879
Cost of revenue			262,067				177,692
Selling expense			638,209				9,456
General and administrative expense			1,561,373				466,493
Total costs and expenses			2,461,649				653,641
Income from operations			1,327,121				621,238
Interest and other income, net			170,099				29
Income before provision for income taxes			1,497,220				621,267
Provision for income taxes			401,168				127,172
Net income		$	1,096,052			$	494,095

 

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

 

		Three Months Ended March 31,
		2016				2015
Revenue			100	%			100	%
Cost of revenue – Direct revenue			7				14
Selling expense			17				1
General and administrative expense			41				36
Total costs and expenses			65				51
Income from operations			35				49
Interest and other income, net			5				-
Income before provision for income taxes			40				49
Provision for income taxes			11				10
Net income			29	%			39	%

 

Listing fee revenue was $2,195,064 and $503,633; commission revenue was $1,143,471 and $726,608; gross management fee revenue was $128,491 and $43,349; annual fee revenue was $161 and $1,289; authorized agent subscription revenue was $321,583 and $0 for the three months ended March 31, 2016 and 2015, respectively. Since the fourth quarter of 2015, the Company has received one more revenue stream in the form of authorized agent subscriptions, with the contribution of $321,583 for the three months ended March 31, 2016.

 

During the three months ended March 31, 2016, there were one piece of painting, thirteen pieces of precious stone, three pieces of jewelry, one piece of ivory, and five pieces of amber successfully listed on our system. The total listing values were $128,634 (HK$1,000,000) for one piece of painting, $1,569,334 (HK$12,200,000) for the thirteen pieces of precious stone, $565,989 (HK$4,400,000) for the three pieces of jewelry, $128,634 (HK$1,000,000) for one piece of ivory, and $2,585,542 (HK$20,100,000) for five pieces of amber, of which 48% (for a piece of painting),29%-47% (for the thirteen pieces of precious stones), 45% (for the three pieces of jewelry), 47% (for a piece of ivory),and 45%-48% (for the five pieces of amber) of the listed values were charged as listing fees, respectively.

 

 

Compared to the corresponding period ended March 31, 2015, only four pieces of jewelry with a total listing value of $1,624,968 (HK$12,600,000) were listed, of which 31% of the listed values was charged as listing fee revenue.

 

The increase in number of pieces listed, listing values and corresponding listing fees charged during the three months ended March 31, 2016 compared to three months ended March 31, 2015 resulted in an increase in listing fee revenue in the current period.

 

During the three months period ended March 31, 2016, commission revenue increased significantly mainly due to more artworks being listed and commencement of operations of Takung Shanghai in July 2015 that allowed transactions to be settled in Renminbi. This increased the number of traders from mainland China.

 

Our trading volume and transaction amounts increased significantly during the first quarter of 2016. Trading amount and trading volume increased by 311% and 74% respectively during the three months ended March 31, 2016 compared to the corresponding period in 2015. Takung Shanghai contributed 56% of the total trading volume, and 48% of the total trading amount and this resulted in the significant increase of our commission revenue by $416,863.

 

During the three-month period ended March 31, 2016, management fee revenue increased by $85,142, from $43,349 for the three months ended March 31, 2015 to $128,491, due to the aforementioned increase in trading amount and volume.

 

During the three-month period ended March 31, 2016, annual fee revenue decreased from $1,289 to $161, as the premium service was not as popular as the Company expected. However, no decision is being made as if the service shall be terminated in the near future.

 

During the three-month period ended March 31, 2016, authorized agent subscription was $321,583 for the three months ended March 31, 2016. We only started earning this form of revenue in 2016.

 

Cost of Revenue

 

Cost of revenue for the three months ended March 31, 2016 and 2015 was $262,067 and $177,692, 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 Qianrong to provide software development services with a total contract amount of $901,848 (HK$6,995,000). The services contracted for are divided into different modules, according to different upgrades and new functionalities. As of March 31, 2016, eight out of the ten modules have been completed and are operational. We have started to capitalize (with a total cost of $553,743 (HK$4,295,000)) 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 2016.

  

 

Gross Profit

 

Gross profit was $3,526,703 for the three months ended March 31, 2016, compared to $1,097,187 for the three months ended March 31, 2015. The increase was due to the higher transaction volume with more artworks trading on our platform.

 

The gross profit margin during the three months ended March 31, 2016 was comparable to the corresponding period in 2015.

 

Listing fees contributed 57.9% of the total revenue compared to 39.5% in the corresponding period in 2015, while commission revenue contributed 30.2% compared to 57% in the corresponding period in 2015. Although there was an increase in listing fee and commission revenue in the current period, the positive factors were offset by the increase in our costs during the same period due to larger depreciation expense from the addition of platform system modules and equipment. Depreciation under the cost of revenue was increased by 35% in the current period compared to the same period in 2015. Consequently, we posted a comparable gross profit margin of 93% and 86% for the three months ended March 31, 2016 and 2015 respectively.

 

Operating Expenses

 

Selling expense was $638,209, or 16.8% of net sales, for the three months ended March 31, 2016 compared to $9,456, or 0.7% of net sales, for the comparable period in 2015, an increase of 66.5%. Selling expense is consisted of primarily the marketing activities.

 

General and administrative expenses for the three months ended March 31, 2016 were $1,561,373 compared to $466,493 for the three months ended March 31, 2015. The substantial increase was primarily due to an increase in consultancy fees by $54,953 because of more consultants being engaged; an increase in legal and professional fees by $125,907 because of more filing and compliance activities; an increase in salaries by $315,081 because of an increase in employee headcount; an increase in office and rental expenses by $135,598 because of the new rented office space for Takung in Hong Kong, Shanghai and Tianjin; an increase in travelling expenses by $18,965 because of more promotional activities to expand our operations; an increase in share-based compensation amounting to $440,736 because of expenses being paid to employees and non-employees and an increase of other expenses to $3,640.

 

The following table sets forth the main components of the Company’s operating expenses for the three months ended March 31, 2016 and 2015.

 

		Three months ended March 31, 2016								Three months ended March 31, 2015
		Amount($)				% of Total				Amount($)				% of Total
General and administrative expense:
Consultancy fee			138,906				8.9	%			83,953				18.0	%
Legal and professional fees			247,448				15.9	%			121,541				26.1	%
Salary and welfare			440,516				28.2	%			125,435				26.9	%
Office expenses and rental			181,383				11.6	%			45,785				9.8	%
Traveling and accommodation fees			62,375				4.0	%			43,410				9.3	%
Others			50,009				3.2	%			46,369				9.9	%
Share based compensation			440,736				28.2	%			-				0	%
Total general and administrative expense		$	1,561,373				100.0	%		$	466,493				100.0	%
Selling expense:
Marketing expenses			638,209				100	%			9,456				100	%
Total selling expense			638,209				100	%		$	9,456				100	%
Total operating expense		$	2,199,582				100.0	%		$	475,949				100.0	%

  

Net Income

 

We had a net income for the three months ended March 31, 2016 of $1,096,052 compared to net income of $494,095 for the three months ended March 31, 2015.

 

The increase in net income during this current period was due to an increase of revenue by $2,513,891, as discussed in previous paragraphs.

  

 

Liquidity and Capital Resources

 

Sources of Liquidity

 

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.

 

During the three months ended March 31, 2015, net cash used in operating activities totaled $44,228. Net cash used by investing activities totaled $218,167. No cash was generated from financing activities during the period. The resulting change in cash for the period was a decrease of $262,797. The cash balance at the beginning of the period was $2,355,839. The cash balance on March 31, 2015 was $2,093,042.

 

As of March 31, 2016, the Company had $20,180,736 in total current liabilities, which comprised of $759,277 in accrued expense, $67,874 in accounts payables and other payables, $147,337 in deferred revenue, $17,791,375 in customer deposits, and $1,414,873 in tax payables. As of December 31, 2015, the Company had $18,427,281 in total current liabilities, which comprised of $667,622 in accounts payables and other payables, $16,195,289 in customer deposits, and $1,564,370 in tax payables.  

 

The Company had deferred tax liabilities as long-term liability of $42,572 as of March 31, 2016, and $45,037 as of December 31, 2015, respectively. The Company’s total liabilities as of March 31, 2016 and December 31, 2015 amounted to $20,223,308 and $18,472,318, respectively.

 

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

 

Off-Balance Sheet Arrangements

 

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

 

Future Financings

 

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

 

Critical Accounting Policies

 

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

 

See Note 2 to the financial statements included herewith.

 

 

Recent Accounting Pronouncements

 

See Note 2 to the financial statements included herewith.  

  

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

Not applicable.

 

Item 4. Controls and Procedures.

 

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

 

We conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (Exchange Act), under the supervision of and with the participation of our management, which presently comprises our Chief Executive Officer, Mr. Di Xiao and our Chief Financial Officer, Mr.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, 2016 were effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Changes in Internal Controls over Financial Reporting

 

During the fiscal quarter ended March 31, 2016, we have improved our structure and internal control with the following:

 

·

We set up a key monitoring mechanism such as independent directors and audit committee to oversee and monitor Company’s risk management, business strategies and financial reporting procedure.

 

·

We have appointed a suitability qualified Chief Financial Officer, an AICPA with US GAAP and SEC expertise.

 

·

We have strengthened our financial team by employing more qualified accountant(s) to enhance the quality of our financial reporting function.

 

 

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.

 

 

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 16, 2016	By:	/s/ Di Xiao
		Di Xiao
		Chief Executive Officer
		(Principal Executive Officer) and Director
Date: May 16, 2016	By:	/s/ Chun Hin Leslie Chow
		Chun Hin Leslie Chow
		Chief Financial Officer
		(Principal Financial Officer)