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Takung Art Co., Ltd - Quarter Report: 2015 June (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended June 30, 2015

 

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 66142555

(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).

x Yes ¨ No

 

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

 

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

 

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

¨Yes x No

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d)of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

¨ Yes ¨ No

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

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

 

The number of shares of common stock issued and outstanding as of August 13, 2015 is 9,332,267.

 

 

 

 

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. 14
     
  Item 3.  Quantitative and Qualitative Disclosures About Market Risk. 25
     
  Item 4.  Controls and Procedures. 25
     
PART II. Other Information 25
     
  Item 1.  Legal Proceedings. 25
     
  Item 1A. Risk Factors. 25
     
  Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds. 25
     
  Item 3.  Defaults Upon Senior Securities. 26
     
  Item 4.  Mine Safety Disclosures. 26
     
  Item 5.  Other Information. 26
     
  Item 6.  Exhibits. 26
     
  Signatures 27

 

 2 

 

 

PART I –FINANCIAL INFORMATION

 

Item 1. Financial Statements

TAKUNG ART CO., LTD

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

   June 30, 2015   December 31, 2014 
         
ASSETS          
CURRENT ASSETS          
Cash & equivalents  $2,221,878   $2,355,839 
Restricted cash   6,882,400    6,865,821 
Deposits   190,400    73,852 
Accounts receivables   291,564    291,496 
Other receivables   83,246    295,870 
Prepayment   411,518    183,083 
Due from director   4,305    - 
Total current assets   10,085,311    10,065,961 
           
PROPERTY AND EQUIPMENT, net   1,117,091    1,037,758 
INTANGIBLES, net   20,551    20,547 
           
TOTAL ASSETS  $11,222,953   $11,124,266 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
CURRENT LIABILITIES          
Accrued expenses and other payables  $751,583   $1,891,525 
Customer deposits   6,882,400    6,865,821 
Due to director   -    2,730 
Tax payables   395,415    249,092 
Total current liabilities   8,029,398    9,009,168 
           
NON-CURRENT LIABILITIES          
Deferred tax liabilities  $57,253   $66,555 
Total non-current liabilities   57,253    66,555 
           
TOTAL LIABILITIES   8,086,651    9,075,723 
           
STOCKHOLDERS'  EQUITY          
Common stock, 1,000,000,000 shares authorized; $0.001 par value; 9,332,267 shares issued and outstanding as of June 30, 2015 and December 31, 2014   9,332    9,332 
Additional paid-in capital   2,570,098    2,570,098 
Subscription receivables   (1,380,703)   (1,896,548)
Retained earnings   1,937,139    1,365,868 
Accumulated other comprehensive loss   436    (207)
Total stockholders' equity   3,136,302    2,048,543 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY  $11,222,953   $11,124,266 

  

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

 

 3 

 

 

TAKUNG ART CO., LTD

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(UNAUDITED)

  

   For the Three Months Ended
June 30,
   For the Six Months Ended
June 30,
 
   2015   2014   2015   2014 
Revenue  $936,101   $468,264   $2,210,980   $1,513,648 
                     
Cost of revenue   (200,120)   (99,824)   (377,812)   (176,884)
                     
Gross profit   735,981    368,440    1,833,168    1,336,764 
                     
Operating expenses:                    
General and administrative expenses   (649,529)   (313,828)   (1,125,478)   (547,241)
                     
Income from operations   86,452    54,612    707,690    789,523 
                     
Other income   454    44    483    63 
                     
Income before provision for income taxes   86,906    54,656    708,173    789,586 
                     
Provision for income taxes   9,730    13,044    136,902    138,105 
                     
Net income  $77,176   $41,612   $571,271   $651,481 
                     
Foreign currency translation adjustment   984    (692)   620    1,704 
                     
Comprehensive income  $78,160   $40,920   $571,891   $653,185 
                     
Earnings per common share– basic and diluted  $0.01   $0.00   $0.06   $0.08 
Weighted average number of common shares outstanding   9,332,267    8,339,040    9,332,267    8,339,040 

 

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

 

 4 

 

 

TAKUNG ART CO., LTD

CONSOLIDATED STATEMENTS OF CASH FLOW

(STATED IN U.S. DOLLARS)

(UNAUDITED)

 

   For the Six Months Ended
June 30,
 
   2015   2014 
Cash flows from operating activities:          
           
Net income  $571,271   $651,481 
Adjustments to reconcile net income to net cash provided by operating activities          
Depreciation   156,940    86,561 
Changes in operating assets and liabilities:          
Deposit   (116,498)   (287)
Other receivables   212,571    (27,537)
Prepayment   (228,333)   (6,856)
Account receivables   -    (31,016)
Restricted cash   (17,789)   (626,343)
Due from director   (7,033)   3,416 
Customer deposits   17,789    626,343 
Deferred tax assets   -    27,507 
Deferred tax liabilities   (9,310)   (1,402)
Tax payable   146,238    - 
Accrued expenses and other payables   (1,139,853)   101,277 
Net cash (used in) provided by operating activities   (414,007)   803,144 
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Purchase of property, plant and equipment   (236,448)   (24,435)
Net cash used in investing  activities   (236,448)   (24,435)
           
Cash flows from financing activities:          
Proceeds from subscription receivables   515,876    - 
Net cash provided by financing activities   515,876    - 
           
Effect of exchange rate change on cash and cash equivalents   618    1,721 
           
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS   (133,961)   780,430 
           
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD   2,355,839    260,187 
           
CASH AND CASH EQUIVALENTS - END OF PERIOD  $2,221,878   $1,040,617 
           
SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITY          
Cash paid during the year for income taxes  $-   $- 
Cash paid during the year for interest expense  $-   $- 

  

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

 

 5 

 

 

TAKUNG ART CO., LTD

 

NOTES TO CONDENSED CONSOLIDATION FINANCIAL STATEMENTS

 

(UNAUDITED)

 

1. ORGANIZATION AND DESCRIPTION OF BUSINESS

 

Takung Art Co., Ltd.(the “Company” or “Takung Art”), a Delaware corporation (formerly Cardigant Medical Inc.) through HongKong 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 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.

 

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 209,976,000 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 23,330,662 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. 

 

The results of operations of the acquired Cardigant business have been included in the consolidated statement of operations since the date of Merger.

 

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.

 

 6 

 

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  

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. See Notes 8 for additional information about the reverse stock split.

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information article 10 of Regulation S-X.

 

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.

 

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.

 

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 June 30, 2015 and December 31, 2014, respectively.

 

Comprehensive Income

 

The Company follows the provisions of the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) 220 “Reporting Comprehensive Income”, and establishes standards for the reporting and display of comprehensive income, its components and accumulated balances in a full set of general purpose financial statements. For the period ended June 30, 2015 and 2014, the Company’s comprehensive income includes net income and foreign currency translation adjustments.

 

 7 

 

 

Foreign Currency Translation

 

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

 

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 are expressed in USD at the exchange rates on the balance sheet dates, which are 7.7513 and 7.7531 as of June 30, 2015 and December 31, 2014 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 7.7538 and 7.7592 for the period ended June 30, 2015 and 2014 respectively. 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 June 30, 2015 and December 31, 2014, the Company’s cash and cash equivalents amounted $2,221,878 and $2,355,839, respectively. All of the Company’s cash deposit is held in a financial institution located in Hong Kong where there is 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 $6,882,400 and $6,865,821 as of June 30, 2015 and December 31, 2014, respectively.

 

Property and Equipment

 

Property and equipment are stated at cost less accumulated depreciation and impairment losses. Gains or losses on dispositions of property and equipment are included in operating income (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:

 

 8 

 

 

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 June 30, 2015 and December 31, 2014, 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 22.5-47% 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 June 30, 2015. Listing fee revenue was $606,143 and $1,109,776 for the three and six months ended June 30, 2015, respectively, and $0 and $605,995 for the three and six months ended June 30, 2014. 

 

 9 

 

 

Commission-The Company charges trading commissions for the purchase and sale of the ownership units 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 ownership units when a transaction of the sales of artwork units is completed.

 

As part of the referral incentive program, the Company would rebate 5% of the commission earned from the transaction to the related referrer. A discount program is offered to the VIP traders that when their trading volumes of the certain artworks reach an agreed level of each month, a contractually determined flat rate of trading commission is applied to the transactions of these certain artworks. Any trading commission charges incurred by the VIP traders over the flat rate will be waived. The discounted rate varies between the selected artworks. Besides, a separate discount program is offered to the buyers by waiving their trading commissions during certain promotion periods. The rebates and discounts are recognized as a reduction of revenue in the same period the related revenue is recognized.

 

Commission revenue was $301,382 and $1,027,990 for the three and six months ended June 30, 2015, respectively, and $445,978 and $873,011 for the three and six months ended June 30, 2014, 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.

 

A discount program is offered to waive the management fee during certain promotion periods. Such discount is recognized as a reduction of the revenue in the same period the related revenue is recognized.

 

Management fee revenue was $28,436 and $71,785 for the three and six months ended June 30, 2015, respectively, and $22,286 and $34,642 for the three and six months ended June 30, 2014, 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.

  

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. 

 

 10 

 

 

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 June 30, 2015 and December 31, 2014, respectively, there were no outstanding securities or other contracts to issue common stock, such as options, warrants or conversion rights, which would have a dilutive effect on earnings per share.

 

 

Intangible Assets

 

Intangible assets represent the Company’s trademark. 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 June 30, 2015 and December 31, 2014.

 

Recent Accounting Pronouncements

  

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

 

In July 2015, the FASB decided to delay the effective date of ASU 2014-09 by one year. The FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. As such, the updated standard will be effective for us in the first quarter of 2018, with the option to adopt it in the first quarter of 2017. We are still evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures. The adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.

 

 11 

 

 

3. PROPERTY AND EQUIPMENT, NET

 

   June 30, 2015   December 31, 2014 
         
Cost          
Furniture, fixtures and equipment  $61,403   $54,429 
Leasehold improvements   140,944    139,686 
Computer trading and clearing system   1,353,474    1,125,316 
Sub-total   1,555,821    1,319,431 
Less: accumulated depreciation   (438,730)   (281,673)
Property and equipment, net  $1,117,091   $1,037,758 

 

Depreciation expense was $ $82,812 and $156,940 for the three and six months ended June 30, 2015, respectively, and $55,122 and $86,561 for the three and six months ended June 30, 2014, respectively.

 

4. INTANGIBLE ASSETS

 

Intangible assets consist of the Company’s trademarks with indefinite useful life. The intangible asset was $20,551 and $20,547 as of June 30, 2015 and December 31, 2014, respectively.

 

5. ACCRUED EXPENSES AND OTHER PAYABLES

 

Accrued expenses and other payables as of June 30, 2015 and December 31, 2014 consisted of:

 

   June 30,   December 31, 
   2015   2014 
         
Trading and clearing system  $92,888   $399,195 
Accruals for promotional services related to trading platform   -    894,481 
Accruals for professional fees   97,867    73,420 
Accruals for consulting fees   210,767    413,900 
Accruals for office rental   19,428    11,437 
Payroll payables   -    297 
           
Other payables   330,633    98,795 
Total accrued expenses and other payables  $751,583   $1,891,525 

   

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6. INCOME TAXES

 

The income tax expense was $9,730 and $136,902 for the three and six months ended June 30, 2015, and $13,044 and $138,105 for the three and six months ended June 30, 2014, respectively.

 

Our effective tax rate was 11.2% and 19.3% for the three and six months ended June 30, 2015 respectively, and 23.9% and 17.5% for the three and six months ended June 30, 2014 respectively.

 

7. COMMITMENTS 

 

Capital Commitments

 

The Company purchased property, plant and equipment which the payment was due within one year. As of June 30, 2015 and December 31, 2014, the Company has capital commitments of $348,329 and $499,929, 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 June 30, 2015 are payable as follows: 

 

Remaining 2015  $217,419 
      
Year ending December 31, 2016   315,106 
      
Year ending December 31, 2017   225,494 
      
Year ending December 31, 2018   65,769 
Total  $823,788 

  

Rental expense of the Company was $61,287 and $127,186 for the three and six months ended June 30, 2015. Rental expense of the Company was $48,318 and $96,665 for the three and six months ended June 30, 2014.

  

8. SUBSEQUENT EVENT

 

On July 28, 2015, the Company incorporated a wholly owned subsidiary, Takung (Shanghai) Co., Ltd., in Shanghai Free-Trade Zone (SFTZ) in Shanghai, China, with a registered capital of $1 million. Through this subsidiary, the Company intends to provide a facility for one-to-one art transaction sales that will allow a seller to use the platform to list artwork for sale at a fixed price.

 

During July 2015, the Company has received the remaining balance of subscription receivables, $1,380,703, from the shareholders.

 

On August 10, 2015 (the “Effective Time”), the Company filed a Certificate of Amendment to its Certificate of Incorporation with the Secretary of State of the State of Delaware to effect a reverse stock split of its issued and outstanding shares of common stock at a ratio of 1-for-25 (the “Reverse Stock Split”). The Reverse Stock Split was approved by the Company’s board of directors and by written consent of the holders of a majority of the Company’s issued and outstanding common stock.

 

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. The Reverse Stock Split will be applied to all shares of the Company’s common stock outstanding immediately prior to the Effective Time. In addition, the Reverse Stock Split will effect a reduction in the number of shares of common stock issuable upon the conversion of shares of preferred stock or upon the exercise of stock options or warrants outstanding immediately prior to the effectiveness of the Reverse Stock Split. 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.

 

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

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

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

 

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

 

OVERVIEW

 

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

 

Pursuant to the Stock Purchase Agreement dated as of July 31, 2014, Yong Li, an individual purchased a total of 22,185,230 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 (“Takung”) through the acquisition of all the share capital of Takung under a Share Exchange Agreement dated September 23, 2014 in exchange for 209,976,000 newly-issued restricted shares of our common stock to the shareholders of Takung.

 

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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 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.

 

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 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, and management fees.

 

On November 5, 2014, we filed a Certificate of Amendment to our Certificate of Incorporation with the Secretary of the State of Delaware to change our name from “Cardigant Medical Inc.” to “Takung Art Co., Ltd.”

 

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 subsidiary, Takung incorporated a wholly owned subsidiary, Takung (Shanghai) Co., Ltd., in Shanghai Free-Trade Zone (SFTZ) in Shanghai, China, with a registered capital of $1 million. Through this newly-formed subsidiary, the Company intends to provide a facility for one-to-one art transaction sales that will allow a seller to use the platform to list artwork for sale at a fixed price. The value of each art work listed is expected to be below US$ 20,000 with Takung handling the complete sale and settlement on the platform using the current settlement method.

 

RESULTS OF OPERATIONS

 

The following discussion should be read in conjunction with the unaudited condensed consolidated Financial Statements of the Company for the three-month period ended June 30, 2015 and 2014 and related notes thereto.

 

THREE-MONTH PERIOD ENDED JUNE 30, 2015 COMPARED TO THREE-MONTH PERIOD ENDED JUNE 30, 2014

 

Revenue

 

Listing fee revenue was $606,143 and $0; commission revenue was $301,382 and $445,978; gross management fee revenue was $28,436 and $22,286 for the three months ended June 30, 2015 and 2014 respectively.

 

 During the three months period ended June 30, 2015, we successfully listed five pieces precious stones on our system. The total listing values were $1,290,106 (HK$10,000,000) for all the stones, of which 47% was charged as listing fee revenue. Compared to the corresponding period ended June 30, 2014 when there was no artwork listed, this is a significant increase of listing fee revenue in the current period from the comparable period in 2014. 

 

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During the three months period ended June 30, 2015, there were two promotional events, which offered discounts to our traders. The first discount program, which began on April 1, 2015, was offered to the VIP traders. When their trading volumes of the certain artworks reached a threshold level each month, a contractually determined flat rate of trading commission is applied to the transactions of these certain artworks. Any trading commission charges incurred by the VIP traders over the flat rate will be waived. The discount amount offered to those VIP traders during the three months ended Jun 30, 2015 amounted to $474,043. The second promotion event, which was held from April 9, 2015 to June 8, 2015, waived the trading commissions from all buyers, as well as the management fee for all artworks. The discount amount on commission and management fee offered from this program amounted to $413,786 and $61,583, respectively. This resulted in a decrease in commission revenue, even though there was higher trading volume with more artworks listed during the three months ended June 30, 2015 compared to the three months ended June 30, 2014.

 

Cost of Revenue

 

Cost of revenue for the three months ended June 30, 2015 and 2014 was $200,120 and $99,824, respectively. Our cost of revenue primarily includes the leasing of equipment, depreciation and amortization of hardware and software for our trading platform. Since the second half of 2014, we have acquired additional hardware and equipment, developed new and upgraded the existing functionality of our trading, banking integration and social media platforms. 

 

In the third quarter of 2014, we entered into an agreement with Qianrong to provide software development services with a total contract amount of $644,173 (HK$4,995,000). The services contracted for are divided into eight modules, according to different upgrades and new functionalities. As of June 30, 2015, six out of the eight modules have been completed and are operational. We have started to capitalize (with a total cost of $296,011 (HK$2,295,000)) and amortize these costs. All of these additional costs would contribute to an increase in our cost of revenue through 2015.

 

Gross Profit

 

Gross profit was $735,891 for the three months ended June 30, 2015, compared to $368,440 for the three months ended June 30, 2014. 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 June 30, 2015 is comparable to the corresponding period in 2014. Although the revenue from commission decreased due to the discount programs offered in the current period, and the cost of revenue increased due to purchase and lease of more equipment to enhance the trading platform, there were more artworks listed in the current period with a total listing value of $1,290,206. This generated more listing fee revenue with higher profit margins compared to the rest of our revenue streams. Listing fees contributed 64.8% of the total revenue compared zero in the prior period. Consequently, we posted a comparable gross profit margin of 78.6% and 78.7% for the three months ended June 30, 2015 and 2014 respectively.

 

Operating Expenses

 

Operating expenses for the three months ended June 30, 2015 were $649,529 compared to $313,828 for the three months ended June 30, 2014. The substantial increase was primarily due to an increase in consultancy fees by $59,833 due to more consultants being engaged, an increase in legal and professional fees amounting to $35,783 because of more filing and compliance activities; an increase in salaries amounting to $86,896 because of an increase of employee headcount; an increase in market expenses by $42,948, and an increase in travelling expenses amounting to $40,118 because of more promotional activities to expand our operations .

 

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The following table sets forth the main components of the Company’s operating expenses for the three months ended June 30, 2015 and 2014.

 

   Three months ended
June 30, 2015
   Three months ended
June 30, 2014
 
   Amount($)   % of Total   Amount($)   % of Total 
Consultancy fee   135,681    20.9%   75,848    24.2%
Legal and professional fees   146,378    22.5%   110,595    35.2%
Salary and welfare   134,667    20.7%   47,771    15.2%
Office expenses and rental   79,104    12.2%   44,312    14.2%
Marketing expenses   48,343    7.4%   5,394    1.7%
Traveling and accommodation fees   53,152    8.2%   13,034    4.1%
Others   52,204    8.1%   16,874    5.4%
Total G&A  $649,529    100.0%  $313,828    100.0%

  

Net Income

 

We had a net income for the three months ended June 30, 2015 of $77,176 compared to net income of $41,612 for the three months ended June 30, 2014.

 

The increase in net income during this current period was due to an increase in artworks listed and higher trading volume due to more artworks being listed on our platform, as discussed in previous paragraphs.

 

The following discussion should be read in conjunction with the unaudited condensed consolidated Financial Statements of the Company for the six-month period ended June 30, 2015 and 2014 and related notes thereto.

 

SIX-MONTH PERIOD ENDED JUNE 30, 2015 COMPARED TO SIX-MONTH PERIOD ENDED JUNE 30, 2014

 

Revenue

 

Listing fee revenue was $1,109,776 and $605,995; commission revenue was $1,027,990 and $873,011; gross management fee revenue was $71,785 and $34,642; for the six months ended June 30, 2015 and 2014, respectively.

 

 During the six months ended June 30, 2015, there were four pieces of jewelry and five pieces of precious stones successfully listed on our system. The total listing values were $1,624,968 (HK$12,600,000) for the four pieces of jewelry and $1,290,106 (HK$10,000,000) for five pieces of precious stones, of which 31% and 47% were charged as listing fee revenue, respectively. Compared to the corresponding period ended June 30, 2014, two pieces of paintings were listed. The total listing values were $2,580,645 (HK$20,000,000), of which 23.5% was charged as listing fee. The increase in total listing value of the jewelry and precious stones with higher listing fees charged during the six month ended June 30, 2015 compared to six months ended June 30, 2014 resulted in an increase of listing fee revenue in the current period. 

 

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During the six months ended June 30, 2015, there were two promotional events which offered discounts to our traders. The first discount program, which began on April 1, 2015, was offered to the VIP traders. When their trading volumes of the certain artworks reach a threshold level each month, a contractually determined flat rate of trading commission is applied to the transactions of these certain artworks. Any trading commission charges incurred by the VIP traders over the flat rate will be waived. The discount amount offered to those VIP traders during the six months ended June 30, 2015 was $474,043. The second promotional event, which was held from April 9, 2015 to June 8, 2015, waived the trading commissions from all buyers, as well as the management fee for all artworks. The discount amount on commission and management fees offered from this program were $413,786 and $61,583, respectively. This limited the increase in commission revenue and management fee even though there were significantly higher trading volumes with more artworks listed during the six months ended June 30, 2015 compared to the six months June 30, 2014.

 

Cost of Revenue

 

Cost of revenue for the six months ended June 30, 2015 and 2014 was $377,812 and $176,884, respectively. Our cost of revenue primarily includes the leasing of equipment, depreciation and amortization of hardware and software for our trading platform. Since the second half of 2014, we have acquired additional hardware and equipment, developed new and upgraded the existing functionality of our trading, banking integration and social media platforms. 

 

In the third quarter of 2014, we entered into an agreement with Qianrong to provide software development services with a total contract amount of $644,173 (HK$4,995,000). The services contracted for are divided into eight modules, according to different upgrades and new functionalities. As of June 30, 2015, six out of the eight modules have been completed and are operational. We have started to capitalize (with a total cost of $296,011 (HK$2,295,000)) and amortize these costs. All of these additional costs would contribute to an increase in our cost of revenue through 2015.

 

Gross Profit

 

Gross profit was $1,833,168 for the six months ended June 30, 2015, compared to $1,336,764 for the six months ended June 30, 2014. The increase was due to the higher transaction volume with more artworks trading on our platform.

 

Despite the increase in gross profit, there was a decrease in gross profit margin during the six months ended June 30, 2015 compared to the corresponding period in 2014. Although there was an increase in listing revenue which generates higher profit margin than the rest of our revenue streams, it was offset by the discounts offered during the two promotional events in current period. The total discount on commission revenue and management fee revenue for the six months ended June 30, 2014 were $887,829 and $61,583 respectively, whereas there was no discount offered in the prior corresponding period. Consequently, this resulted in a decrease in gross profit margin from 88.3% to 82.9% during the current period compared to the same period in 2014.

 

Operating Expenses

 

Operating expenses for the six months ended June 30, 2015 were $1,125,478 compared to $547,241 for the six months ended June 30, 2014. The substantial increase was primarily due to an increase in consultancy fees amounting to $70,438 because of more consultants being engaged; an increase in legal and professional fees amounting to $134,559 because of more filing and compliance activities; an increase in salaries amounting to $161,610 because of an increase in employee headcount; an increase of market expenses by $44,254, and an increase in travelling expenses amounting to $92,047 because of more promotional activities to expand our operations .

 

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The following table sets forth the main components of the Company’s operating expenses for the six months ended June 30, 2015 and 2014.

 

   Six months ended
June 30, 2015
   Six months ended
June 30, 2014
 
   Amount($)   % of Total   Amount($)   % of Total 
Consultancy fee   219,634    19.5%   149,196    27.3%
Legal and professional fees   265,919    23.6%   131,360    24.0%
Salary and welfare   260,102    23.1%   98,492    18.0%
Office expenses and rental   126,889    11.3%   102,905    18.8%
Marketing expenses   57,798    5.1%   13,544    2.5%
Traveling and accommodation fees   96,562    8.6%   4,515    0.8%
Others   98,574    8.8%   47,229    8.6%
Total G&A  $1,125,478    100.0%  $547,241    100.0%

  

Net Income

 

We had a net income for the six months ended June 30, 2015 of $571,271 compared to net income of $651,481 for the six months ended June 30, 2014.

 

The decrease in net income during this current period was due to an increase in operating expenses by $578,237, although there was an increase of gross profit of $496,404, as discussed in previous paragraphs.

 

Liquidity and Capital Resources

 

Sources of Liquidity

 

During the six months ended June 30, 2015, net cash used in operating activities totaled $414,007. Net cash used by investing activities totaled $236,448. Net cash provided by financing activities was $515,876. The resulting change in cash for the period was a decrease of $133,961. The cash balance at the beginning of the period was $2,355,839. The cash balance on June 30, 2015 was $2,221,878.

 

During the six months ended June 30, 2014, net cash generated from operating activities totaled $803,144. Net cash used by investing activities totaled $24,435. No cash was generated from financing activities during the period. The resulting change in cash for the period was an increase of $780,430. The cash balance at the beginning of the period was $260,187. The cash balance on June 30, 2014 was $1,040,617.

 

As of June 30, 2015, the Company had $8,029,398 in total current liabilities, which comprised $751,583 in accrued expense and other payables, $6,882,400 in customer deposits, and $395,415 in tax payables. As of December 31, 2014, the Company had $9,009,168 in total current liabilities, which comprised $1,891,525 in accrued expenses and other payables, $6,865,821 in customer deposits, $2,730 due to our director, and $249,092 in tax payables.  

 

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The Company had deferred tax liabilities as long-term liability of $57,253 as of June 30, 2015, and $66,555 as of December 31, 2014, respectively. The Company’s total liabilities as of June 30, 2015 and December 31, 2014 amounted to $8,086,651 and $9,075,723, 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.

 

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. See Notes 8 for additional information about the reverse stock split.

 

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.

 

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:

 

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  · 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 June 30, 2015 and December 31, 2014, respectively.

 

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 June 30, 2015 and December 31, 2014, the Company’s cash and cash equivalents amounted $2,221,878 and $2,355,839, respectively. All of the Company’s cash deposit is held in a financial institution located in Hong Kong where there is 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 $6,882,400 and $6,865,821 as of June 30, 2015 and December 31, 2014, respectively.

 

Property and Equipment

 

Property and equipment are stated at cost less accumulated depreciation and impairment losses. Gains or losses on dispositions of property and equipment are included in operating income (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

 

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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 June 30, 2015 and December 31, 2014, 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 22.5-47% 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 June 30, 2015. Listing fee revenue was $606,143 and $1,109,776 for the three and six months ended June 30, 2015, respectively, and $0 and $605,995 for the three and six months ended June 30, 2014. 

 

Commission-The Company charges trading commissions for the purchase and sale of the ownership units 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 ownership units when a transaction of the sales of artwork units is completed.

 

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As part of the referral incentive program, the Company would rebate 5% of the commission earned from the transaction to the related referrer. A discount program is offered to the VIP traders that when their trading volumes of the certain artworks reach an agreed level of each month, a contractually determined flat rate of trading commission is applied to the transactions of these certain artworks. Any trading commission charges incurred by the VIP traders over the flat rate will be waived. The discounted rate varies between the selected artworks. Besides, a separate discount program is offered to the buyers by waiving their trading commissions during certain promotion periods. The rebates and discounts are recognized as a reduction of revenue in the same period the related revenue is recognized.

 

Commission revenue was $301,382 and $1,027,990 for the three and six months ended June 30, 2015, respectively, and $445,978 and $873,011for the three and six months ended June 30, 2014, 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.

 

A discount program is offered to waive the management fee during certain promotion periods. Such discount is recognized as a reduction of the revenue in the same period the related revenue is recognized.

 

Management fee revenue was $28,436 and $71,785 for the three and six months ended June 30, 2015, respectively, and $22,286 and $34,642 for the three and six months ended June 30, 2014, 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.

  

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. 

 

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.

 

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As of June 30, 2015 and December 31, 2014, respectively, there were no outstanding securities or other contracts to issue common stock, such as options, warrants or conversion rights, which would have a dilutive effect on earnings per share.

 

Intangible Assets

 

Intangible assets represent the Company’s trademark. 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 June 30, 2015 and December 31, 2014.

 

Recent Accounting Pronouncements

  

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

 

In July 2015, the FASB decided to delay the effective date of ASU 2014-09 by one year. The FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. As such, the updated standard will be effective for us in the first quarter of 2018, with the option to adopt it in the first quarter of 2017. We are still evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures. The adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.

 

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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, who is also our Chief Financial Officer, Chief Accounting Officer and sole director. Because of these multiple roles, it is impossible to fully segregate duties to ensure that all information required to be disclosed by us in the reports that we file or submit is: (i) recorded, processed, summarized and reported, within the time periods specified in the Commission’s rule and forms; and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Our Chief Executive Officer and Chief Financial Officer concluded that (i) there continue to be material weaknesses in the Company’s internal controls over financial reporting, that the weaknesses constitute a “deficiency” which could result in misstatements of the foregoing accounts and disclosures that could result in a material misstatement to the financial statements for the period covered by this report that would not be detected, and (ii) accordingly, our disclosure controls and procedures were not effective as of June 30, 2015.

 

Inherent Limitations

 

Because of its inherent limitations, our disclosure controls and procedures may not prevent or detect misstatements. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

 

Changes in Internal Controls over Financial Reporting

 

Subject to the foregoing disclosure, there were no changes in our internal control over financial reporting that occurred during our fiscal quarter ended June 30, 2015, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

None.

 

Item 1A. Risk Factors

 

Not applicable.

 

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

 

None.

 

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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 Amendment filed with the State of Delaware on August 10, 2015 (5)
3.8   Certificate of Incorporation of Hong Kong Takung Assets and Equity Artworks Exchange Co., Ltd. (3)
3.9   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.

 

(5)        Incorporated by reference to the exhibit to our current report on Form 8-K filed with the SEC on August 12, 2015.

 

*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: August 14, 2015 By: /s/ Di Xiao
    Di Xiao
    Chief Executive Officer
    (Principal Executive Officer)/ Chief Financial Officer (Principal Financial Officer) and Director

 

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