Attached files
| file | filename |
|---|---|
| EX-32.2 - EXHIBIT 32.2 - Takung Art Co., Ltd | v461595_ex32-2.htm |
| EX-32.1 - EXHIBIT 32.1 - Takung Art Co., Ltd | v461595_ex32-1.htm |
| EX-31.2 - EXHIBIT 31.2 - Takung Art Co., Ltd | v461595_ex31-2.htm |
| EX-31.1 - EXHIBIT 31.1 - Takung Art Co., Ltd | v461595_ex31-1.htm |
| EX-21.1 - EXHIBIT 21.1 - Takung Art Co., Ltd | v461595_ex21-1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2016
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _____________________ to _________________________
Commission file number 001-38036
TAKUNG ART CO., LTD
(Exact name of registrant as specified in its charter)
| Delaware | 26-4731758 |
| State or other jurisdiction of incorporation or organization |
(I.R.S. Employer Identification No.) |
| Flat/RM 03-04 20/F Hutchison House 10 Harcourt Road, Central, Hong Kong | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code +852 3158-0977
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Name of each exchange on which registered | |
Securities registered pursuant to section 12(g) of the Act:
Common Stock par value $0.001 per share
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes x No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes x No
Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨ Yes x 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 Act). ¨ Yes x No
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the bid and asked price of such common equity, as of the last business day of the registrant’s 2016 second fiscal quarter was $48,470,261.40 (7,343,979 shares of common stock held by non-affiliates, at $6.60 per share, the price at which the common equity was last sold on June 30, 2016).
Note .—If a determination as to whether a particular person or entity is an affiliate cannot be made without involving unreasonable effort and expense, the aggregate market value of the common stock held by non-affiliates may be calculated on the basis of assumptions reasonable under the circumstances, provided that the assumptions are set forth in this Form.
APPLICABLE ONLY TO REGISTRANTS 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 Section 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 REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
The number of shares of common stock, par value $0.001 (the “Common Stock”), outstanding as of March 31, 2017 is 11,188,882.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933. The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980).
Table of Contents
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Cautionary Statement Regarding Forward Looking Statements
The discussion contained in this Annual Report on Form 10-K (“Annual Report”) contains “forward-looking statements” within the meaning of Section 27A of the United States Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the United States Securities Exchange Act of 1934, as amended, or the Exchange Act. Any statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. These statements are often, but not always, made through the use of words or phrases like “anticipate,” “estimate,” “plans,” “projects,” “continuing,” “ongoing,” “target,” “expects,” “management believes,” “we believe,” “we intend,” “we may,” “we will,” “we should,” “we seek,” “we plan,” the negative of those terms, and similar words or phrases. We base these forward-looking statements on our expectations, assumptions, estimates and projections about our business and the industry in which we operate as of the date of this Annual Report. These forward-looking statements are subject to a number of risks and uncertainties that cannot be predicted, quantified or controlled and that could cause actual results to differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. Statements in this Annual Report describe factors, among others, that could contribute to or cause these differences. Actual results may vary materially from those anticipated, estimated, projected or expected should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect. Because the factors discussed in this Annual Report could cause actual results or outcomes to differ materially from those expressed in any forward-looking statement made by us or on our behalf, you should not place undue reliance on any such forward-looking statement. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement. Except as required by law, we undertake no obligation to publicly revise our forward-looking statements to reflect events or circumstances that arise after the date of this Annual Report or the date of documents incorporated by reference herein that include forward-looking statements.
Currency, exchange rate, and “China” and other references
Unless otherwise noted, all currency figures in this filing are in U.S. dollars.
References to “US$,” “dollars” and “U.S. dollars” are to the legal currency of the United States.
References to "yuan" or "RMB" are to the Chinese yuan, the lawful currency of China, which is also known as the “Renminbi”.
References to “HK$” are to the Hong Kong dollars, the legal currency of Hong Kong.
Our reporting currency is US dollars. This Annual Report also contains translations of certain foreign currency amounts into U.S. dollars for the convenience of the reader. Unless otherwise stated, all translations of HK$ into U.S. dollars were made at HK$7.7534 and HK$7.7507 to US$1.00 and translations of Renminbi into U.S. dollars were made at RMB 6.9430 and RMB6.4778 to US$1.00, the exchange rates set forth in the H.10 statistical release of the Federal Reserve Board on December 30, 2016 and December 31, 2015, respectively. We make no representation that the HK$, Renminbi or U.S. dollar amounts referred to in this Annual Report could have been or could be converted into U.S. dollars, HK$ or Renminbi, as the case may be, at any particular rate or at all. As of March 27, 2017, the translations of HK$ and Renminbi into U.S. dollars were made at HK$7.7669 and RMB 6.8803 to US$1.00, respectively.
References to “Common Stock” are to the common stock of Takung Art Co., Ltd, par value $0.001.
References to “PRC” or “China” are to the People’s Republic of China, excluding, for the purposes of this Annual Report only, Taiwan and the special administrative regions of Hong Kong and Macau.
References to “Hong Kong” are to “Hong Kong, Special Administrative Region of the People’s Republic of China”.
Unless otherwise specified or required by context, references to “we,” “the Company”, “Takung”, “our” and “us” refer collectively to (i) Takung Art Co., Ltd, (ii) the subsidiaries of Takung Art Co., Ltd, HongKong Takung Assets and Equity of Artworks Exchange Co., Ltd (“Hong Kong Takung”), a Hong Kong limited liability company, Takung (Shanghai) Co., Ltd. (“Shanghai Takung”) and Takung Cultural Development (Tianjin) Co., Ltd (“Tianjin Takung”), wholly-owned subsidiaries of Hong Kong Takung incorporated in the Shanghai Free-Trade Zone (SFTZ) in Shanghai, China and Tianjin Pilot Free-Trade Zone (TJFTZ) in Tianjin, China respectively.
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References to the “OTCQB” are to one of the three marketplaces for OTC-traded securities under the banner of the OTC Markets, a securities quotation service, which is accessible at the website www.otcmarkets.com.
References to Shanghai Takung’s “registered capital” and Tianjin Takung’s “registered capital” are to the equity of Shanghai Takung and Tianjin Takung respectively, which under PRC law is measured not in terms of shares owned but in terms of the amount of capital that has been contributed to a company by a particular stockholder or all stockholders. The portion of a limited liability company’s total capital contributed by a particular stockholder represents that stockholder’s ownership of the company, and the total amount of capital contributed by all stockholders is the company’s total equity. Capital contributions are made to a company by deposits into a dedicated account in the company’s name, which the company may access in order to meet its financial needs. When a company’s accountant certifies to PRC authorities that a capital contribution has been made and the company has received the necessary government permission to increase its contributed capital, the capital contribution is registered with regulatory authorities and becomes a part of the company’s “registered capital.”
Overview
Takung Art Co., Ltd is a holding company that, through HongKong Takung Assets and Equity of Artworks Exchange Co., Ltd., a Hong Kong company (“HongKong Takung”), our wholly owned subsidiary, and Takung (Shanghai) Co., Ltd and Takung Cultural Development (Tianjin) Co. Ltd,, Hong Kong Takung’s wholly-owned subsidiaries in China (“Shanghai Takung” and “Tianjin Takung” respectively), operate an electronic online platform located at http://eng.takungae.com/ for artists, art dealers and art investors to offer and trade in ownership units over valuable artwork.
Through Hong Kong Takung, Shanghai Takung and Tianjin 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.
We are headquartered in Hong Kong, Special Administrative Region, People’s Republic of China and conduct business in Hong Kong, Shanghai and Tianjin. Recently we set up another office in Hangzhou to carry out technology development. Our principal executive offices are located at Flat/RM 03-04, 20/F, Hutchison House, 10 Harcourt Road, Central, Hong Kong.
Corporate History and Structure
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 (pre- Reverse Stock Split) restricted shares of Common Stock of the Company from a group of three former stockholders 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 stockholder 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.
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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 (“Cardigant Business”). In consideration for such contribution of capital, Cardigant Neurovascular agreed to assume all our liabilities raising from the Cardigant 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 through the acquisition of all the share capital of Hong Kong Takung under a Share Exchange Agreement dated September 23, 2014 in exchange for 209,976,000 (pre-Reverse Stock Split) newly-issued restricted shares of our Common Stock to the stockholders of Hong Kong 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 Hong Kong Takung was incorporated in late 2012, it did not commence business operations until late 2013.
As a result of the transfer of the excluded assets pursuant to the Contribution Agreement and the acquisition of all the issued and outstanding shares of Hong Kong Takung, we are no longer conducting the Cardigant Business and have now assumed Hong Kong Takung’s business operations as it is now our only operating wholly-owned subsidiary.
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.”
On July 28, 2015, Hong Kong Takung incorporated a wholly owned subsidiary, Takung (Shanghai) Co., Ltd. (“Shanghai Takung”), in Shanghai Free-Trade Zone (SFTZ) in Shanghai, China, with a registered capital of $1 million. Shanghai Takung assists in Hong Kong Takung’s operations by receiving deposits from and making payments to online artwork Traders in mainland China on behalf of Hong Kong Takung. On January 27, 2016, Hong Kong Takung incorporated a wholly owned subsidiary, Takung Cultural Development (Tianjin) Co., Ltd (“Tianjin Takung”) in the Tianjin Free Trade Zone (TJFTZ) in Tianjin, China with a registered capital of $1 million. Tianjin Takung provides technology development services to Hong Kong Takung and Shanghai Takung, and also carries out marketing and promotion activities in mainland China.
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.
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Business History of Hong Kong Takung
Hong Kong Takung is a limited liability company incorporated on September 17, 2012 under the laws of Hong Kong, Special Administrative Region, China. Its authorized capital is 20,000,000 shares. Prior to the Reverse Merger, all its 20,000,000 issued and outstanding shares, par value $0.13 (HK$1) per share, were owned by Kirin Linkage Limited (4,000,000 shares) and Loyal Heaven Limited (16,000,000 shares), both Cayman Islands companies.
Although Hong Kong Takung was incorporated in late 2012, it did not commence business operations until late 2013.
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Corporate Structure
The diagram below illustrates our current corporate structure:
Our Trading Platform
Our proprietary platform is an all-electronic trading system, consisting of host computers, client-side terminals and related communication system. Our trading system supports the trading and payment/settlement of artwork ownership units. It is an electronic platform developed by a third party software development company and customized for us, primarily consisting of a matching system, a transaction monitoring system, an account managing system and a settlement system.
Matching is a core function of our trading platform. Our system concludes transactions by matching all the transactions submitted by the Traders. Transaction monitoring system is responsible for monitoring the daily transactions in real-time to ensure fairness and accuracy in our trading platform. The settlement system verifies and reconciles daily statistical data with the banks’ transaction system, and completes the registration and settlement (or payment) of artwork units once the transaction data is verified.
Our website http://eng.takungae.com/ is an essential part of our trading platform.
The website is important as it is the gateway to our trading platform. It publishes our membership and trading rules, trading information disclosure, and artwork introduction, and provides services to Traders, such as account management. Traders may open, close and manage their accounts with us on our website. Client-end terminal may be downloaded from our website. Through the terminal, Traders may access their account with us and conduct transactions in artwork units, such as purchasing and selling and submitting inquiries. Data transmission between the Traders and our trading system is encrypted to prevent data leaks.
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Our trading platform is currently linked to China Merchants Bank, Hong Kong Branch (“CMB”). Traders are required to open an account with CMB and their accounts are linked to our trading and settlement system to ensure the timely settlement of their trades. For RMB settlements in China, the Traders transfer money into our designated client-money bank account at Bank of China and Ping An Bank. The Traders will then upload the deposit slip or money transfer evidence to our back-end Trading platform. Upon review of the money transfer evidence and confirmation of the receipt of money, the Traders’ accounts on our trading system will be updated accordingly. If they would like to withdraw money from their trading account, the Traders will put in a request on our trading platform. After confirming the Traders’ accounts have sufficient money for withdrawal, we will transfer the money from the client-money bank account to the Traders’ individual bank account.
In order to execute a trade, a Trader logs into his online bank account and must first transfer funds from his bank account to his trading account with us. This ensures that he has sufficient funds to consummate a trade.
Offering and trading of artwork on our platform involves a number of parties, namely, Original Owner, Offering Agent, and Traders.
| · | An Original Owner is the original owner of the artwork to be offered and traded on our platform. Customarily, the Original Owner is also the artist or creator of the artwork although this is not always the case. The Original Owner must have good and marketable title to the artwork and have the right to dispose of the artwork. |
| · | An Offering Agent is an entity that is experienced with artwork or artwork investment and has a good reputation. The Offering Agent is engaged by the Original Owner to assist him or her with the offering and trading of artwork, such as preparation of listing application and assigning an investment value, research, organizing promotions and marketing activities, communicating with potential investors, etc. |
| · | A Trader is anyone who is 18 years or older or any entity that maintains a trading account with us through our electronic trading platform and participates in the trading of artwork units. Once a Trader acquires one or more units of an artwork, the Trader becomes a Co-Owner of that artwork. Presently, only residents of the People’s Republic of China, Australia, Malaysia, Mongolia, New Zealand, Russia, Singapore and Taiwan are eligible to become a Trader. |
Additional parties such as insurer, appraisal firm, trader service organizations and custodian for artworks will be retained in connection with the offering and trading of artwork on our system. A trader service organization is an independent legal entity pre-approved by us to provide business consulting services to our Traders.
Our trading system hardware platform is hosted in Macau, our clearing system hardware platform is hosted in Hong Kong and our disaster recovery system is set up in the CITIC Telecom IDC room, located in Hong Kong. The real-time data synchronization ensures the safety of transaction data.
Through our subsidiary, Shanghai Takung, we are able to receive deposits from and make payments to online artwork Traders in mainland China on behalf of Hong Kong Takung. Tianjin Takung provides technology development services to Hong Kong Takung and Shanghai Takung, and also carries out marketing and promotion activities in mainland China.
Revenue
We generate revenue from our services in connection with the offering and trading of artwork on our system. Our revenue mainly falls into three broad categories: (i) listing fees, (ii) trading commissions, and (iii) management fees. To a much smaller extent, we have two additional sources of revenue, which we began earning only in 2015. We charge an annual fee for providing Traders and Offering Agents with premium services, including more in-depth information and tools, on the trading platform. This revenue is recognized ratably over the service agreement period. We also began earning authorized agent subscription revenue 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.
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Offering
Artwork that is eligible for offering and trading on our platform includes calligraphy, paintings, sculptures, crafts, jade, jewelry, metal ware, ceramics, and antique furniture. The common denominator of our listed paintings is that they are from renowned living artists and are valuable.
For example, the 181 sets of artwork listed for trade on our platform through December 31, 2016 have been thirty-one sets of paintings and calligraphies from famous Chinese, Malaysian, Russian and Mongolian artists ranging in listing value from $128,833 (HK$1,000,000) to $1,545,993 (HK$12,000,000), eighteen pieces of jewelry ranging in listing value from $38,650 (HK$300,000) to $515,331 (HK$4,000,000), ninety-six pieces of precious stones ranging in listing value from $12,883 (HK$100,000) to $772,997 (HK$6,000,000),twenty-nine pieces of amber ranging in listing value from $128,833 (HK$1,000,000) to $1,030,662 (HK$8,000,000), four pieces of antique mammoth ivory carving ranging in listing value from $128,833 (HK$1,000,000) to $257,666 (HK$2,000,000), two pieces of porcelain pastel paintings ranging in listing value from $103,066 (HK$800,000) to $231,890(HK$1,800,000) and one piece of porcelain ranging in listing value of $64,416(HK$500,000). Four precious stones ranging in listing value from $64,416 (HK$500,000) to $244,782 (HK$1,900,000) and one piece of porcelain with a listing value of $38,650 (HK$300,000) were listed in January 2017.
Traditionally, artwork is sold and transacted by the creator/owner of it through galleries, stores and agents.
Similarly, an artwork is presented to us for listing by the owner/artist (Original Owner) together with an agent (Offering Agent). Both the Original Owner and the Offering Agent would have discussed and proposed a price for the artwork in their listing application to us. An Offering Agent assists the Original Owner with the listing process, such as getting the artwork appraised by a third party professional, assigning an initial value for each trading unit at listing, performing research and preparing the marketing material and promotional activities to attract Traders’ interest. There may be circumstances in the future that the Original Owner will approach us for the listing, in which case, we will recommend an Offering Agent to assist the Original Owner with the listing process. However, we consider this to be a rare case. For the181 pieces of artwork that we have listed through December 31, 2016, the listing processes were all initiated by Offering Agents.
On receipt of the application, we will assess and consider the merits of listing the artwork on our platform. Some of the factors we will consider are the appeal of the proposed artwork, the artist, the marketability of the artwork and the likelihood of its appreciation in the future.
Assuming that an artwork is accepted for listing, it will be divided into equal ownership units based on its appraised value. For example, a painting with a listing value of $1,545,993 (HK$12,000,000) may be divided into 12,000,000 units with each unit sold at $0.13 (HK$1). Traders would then be able to bid for and trade these units on our platform.
Qualification for Offering
We do not have quantified standards for artwork that is eligible for offering and trading on our platform. However, we will generally require the artwork to meet the following qualifications:
| · | Clearly-established ownership |
| · | Having certain economic and artistic value |
| · | Having an appraisal report from professional appraisers |
We do not evaluate or appraise artwork but we rely on expert opinions from third parties on the value of the artwork.
Offering Process
To list an eligible artwork on our platform, the Original Owner and/or his/her Offering Agent must submit a listing application to us together with an investment value research report on the artwork and an offering statement. The investment value research report analyses all the factors that would affect the investment value of the artwork. The artwork should be appraised by a qualified appraisal firm appointed by the Original Owner and/or the Offering Agent.
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Generally, an offering statement includes the following information:
| · | Introduction of the artwork, including name, author, date of creation |
| · | Material facts on the offering, including type of artwork, total offering price, offering method, identity of Offering Agent, the number of artwork units offered, offering number, unit offering price, term of the offering, subscription period, minimum subscription amount, etc. |
| · | Offering details including subscription procedure, registration, etc. |
| · | Parties involved in the offering, including Offering Agent, appraisal firm, insurer, custodian |
| · | Appendices generally include related material documents such as appraisal report |
Prior to the sale to the public, the Original Owner may reserve a certain percentage of the artwork units and the Offering Agent may subscribe for a certain percentage of artwork units, generally up to 20%. These artwork units held by the Original Owner and the Offering Agent may not be traded until 180 days after the date when the artwork is listed.
The offering of ownership units in artwork will be considered successful if the units subscribed reach a prescribed percentage (“Offering Percentage”) of the total units offered. The Offering Percentage is determined by the Original Owner, the Offering Agent, if one is engaged, and us and is set forth in our Offering Agreement with them. The Offering Percentage for our existing listed artwork is 80%. If an Offering Agent is engaged, the total number of subscribed units by Traders and reserved units by the Original Owner should equal or exceed the Offering Percentage; otherwise, the offering is unsuccessful. If no Offering Agent is involved, the total subscribed units should exceed the Offering Percentage; otherwise, the offering is unsuccessful. In the event of an unsuccessful offering, the offer for subscriptions of the artwork units by Traders is voided.
If the total subscribed units exceed the Offering Percentage but are less than the total offered amount, then the Offering Agent is obliged to purchase the remaining units on the same offering terms or if no Offering Agent is engaged, the Original Owner shall retain the remaining units. In the former, the Offering Agent is required to link its bank account at CMB with its trading account with us to ensure that it has sufficient funds to purchase any remaining unsold units. The Original Owner and/or the Offering Agent shall pay us a one-time offering fee and a listing deposit. The offering fee is determined based on many factors, such as the type of artwork and the offering size. We generally charge approximately 22.5-48.5% of the total offering price for calligraphies, paintings, jewelry, ambers, precious stones, antique mammoth ivory carving, porcelain pastel paintings and porcelain, which are the major types of artwork listed and traded on our system as of December 31, 2016. The listing fee is earned when the units for the artwork are successfully subscribed for and trades on our platform.
The offering deposit is generally 20% of the total offering price and may vary based on the type of artwork, offering price and other factors. The offering deposit is paid by the Offering Agent through the linked accounts as described above and will be refunded if all offered artwork units are sold. In the event that the total number of units sold exceeds the Offering Percentage but does not reach all of the units offered, the offering deposit will be used to purchase the remaining artwork units that have not been subscribed by Traders.
Upon receipt of all required offering documents, we will review the offering application and decide on a case by case basis, if the artwork should be listed and traded on our platform. Our management team, with the assistance of art consultants (who are appointed by the Offering Agent), conducts a procedural review of the offering application and related documents. We will approve the artwork for offering and trading as long as all listing requirements are met.
As of February 10, 2017 there were 186 pieces of artworks, including 31 sets of paintings and calligraphies, 18 pieces of jewelry, 100 pieces of precious stones, 29 pieces of amber, 4 pieces of antique mammoth ivory carving, 2 pieces of porcelain pastel paintings and 2 piece of porcelain successfully listed and trading on our system. The first set of paintings and calligraphies was listed in 2013, two sets were listed during the six months ended June 30, 2014, the fourth set was listed during the third quarter of 2014, two sets were listed during the fourth quarter of 2014, three sets were listed during the fourth quarter of 2015, one set was listed during the first quarter of 2016, five sets were listed during the second quarter of 2016, nine sets were listed during the third quarter of 2016 and seven sets were listed during the fourth quarter of 2016. Besides paintings and calligraphies, four pieces of jewelry were listed on the platform on January 16, 2015,five precious stones during the second quarter of 2015 and seven precious stones and three pieces of amber during the third quarter of 2015. Thirteen precious stones and eight pieces of amber were listed during the fourth quarter of 2015. Three pieces of jewelry, four pieces of amber, eleven precious stones and one piece of antique mammoth ivory carving were listed during the first quarter of 2016. One piece of porcelain pastel painting, two pieces of jewelry, six pieces of amber, thirty-two precious stones and two pieces of antique mammoth ivory carving were listed during the second quarter of 2016. One piece of porcelain pastel painting, six pieces of jewelry, eight pieces of amber and sixteen precious stones were listed during the third quarter of 2016.Three pieces of jewelry, twelve precious stones, one piece of porcelain and one piece of antique mammoth ivory carving were listed during the fourth quarter of 2016. Four precious stones and one piece of porcelain were listed in January 2017.
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The Original Owner and the Offering Agent are required to disclose timely all material information regarding the artwork. The disclosure must be true, accurate, complete and not misleading. The Original Owner and the Offering Agent are responsible for their conduct in connection with the offering of the artwork. We also monitor and regulate their conduct. For more information, please refer to our disclosure under “Regulation of Market Participants.”
Subscription Process
Once the offering is approved, the Offering Agent will fund its trading account with the listing deposit and we then register the artwork units in our system. The Traders may log into their trading account to bid for the artwork units. If the artwork units are over-subscribed, we will conduct a lottery to determine which subscriptions will be accepted.
A Trader may receive a lower allocation than the number of units that he or she has applied for. Traders may also be allotted with more or fewer units than others who have applied for the same number of units. It is also possible that Traders are not allotted any units at all. The more units that a Trader applies for, the more likely a Trader is allotted with units. In order to subscribe for units, Traders need to set aside money in their brokerage accounts with us, which is “frozen” during the subscription period. After the announcement of the allotment, the money “frozen” will be released to us in a successful Offering or back to the Traders’ accounts in an unsuccessful one. The funds from successful subscriptions will be disbursed to the Original Owner in accordance with the payment schedule provided in our Offering Agreement with him or her.
Pre-Listing Premium Pricing
In addition to charging a percentage of the total listing amount as listing fee, additional listing revenue may be generated by the Pre-Listing Premium processed by the Offering Agent.
In certain circumstances, if the Offering Agent believes that there are Traders who are willing to pay a premium to be able to purchase the units without entering the balloting process so they can be certain about purchasing the units, the Offering Agent can negotiate with the Original Owner and us to “lock-in” and purchase the units outright on the listing date at a premium. These units will not be entered into the balloting process. The Listing Agreement (between the Owner, Agent and us) would specify the maximum number of units that can be locked in by the Offering Agent. The premium, which is in addition to the total listing amount, is recognized as listing income.
Insurance and Storage of Artwork
We require insurance coverage for artwork offered and traded on our platform. The insurance policy has an insured value equal to the total offering price of the artwork and covers the entire trading period.
The listed artwork is also required to be stored at qualified facilities. The storage companies we select are experienced with artwork storage and transportation. Specifically, the storage facility should meet the following requirements:
| · | Has warehouses with constant temperature and humidity in different locations; |
| · | Has 24 hour video surveillance and infrared burglar alarm system; |
| · | Has professional artwork transportation equipment; and |
| · | Has security personnel. |
Once a Trader purchases certain artwork units, he will become a Co-Owner of this artwork and must abide by a Co-Owner Agreement, which, among other things, authorizes us to select and change, on behalf of the Co-Owners, the Storage Company and insurer for the artwork.
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We pay the fees for the insurance and the storage out of the management fees paid to us by the Traders. Our management fee is calculated at $0.0013 (HK$0.01) per 100 artwork units per day. The management fee is accounted for as revenue, and immediately deducted from the proceeds from the sales of artwork units when a transaction is completed.
In the event of a loss, we will receive the insurance monies from the insurer as beneficiary under the relevant insurance policy and then disburse them to all Co-Owners in accordance with the Co-Owner Agreement.
Trading
Our market is open for trading from Monday through Friday. Traders may only purchase or sell artwork units during business hours. They may nevertheless log into their account and view the account information, such as the balance of funds, type and number of artwork units held during non-business hours.
Traders purchase and sell artwork units listed on our system through a client-end terminal – trading software. The software is available for download from our website http://eng.takungae.com/ and every Trader may commence trading in artwork units once he opens a trading account with us and has funded this account as described above. Each Trader is required to sign a Trading Agreement and abide by a Co-Owner Agreement. The aggregate number of units allowed to be traded per day by a Trader shall not exceed 5% of the total offered artwork units.
We charge trading commissions for purchase and sale of artwork units. The commission is typically 0.3% of the total amount of each transaction but as a promotion, we currently charge a reduced fee of 0.2% of the transaction value on both the purchase and sale sides resulting in an aggregate commission rate of 0.4%.
We also charge Traders management fees 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 units per day. The management fee is deducted from proceeds from the sale of artwork units.
Currently, most of our Traders are from Mainland China and some portion from other countries such as Australia, Malaysia, Mongolia, New Zealand, Russia, Singapore and Taiwan are also eligible to register as Traders.
Trading Halt
We may halt the trading of a listed artwork upon occurrence of the following conditions:
| · | Occurrence of irregular trading activities; |
| · | 10% or more of a listed artwork is involved in legal proceeding and has been frozen by relevant authorities; |
| · | Release of information in public media that may materially affect or have affected the trading price of the artwork; |
| · | The artwork is the subject of a legal proceeding regarding ownership; |
| · | Upon application by all the Co-Owners to change the terms of Co-Owner Agreement or arrangements regarding transportation, storage, insurance or exhibition of the artwork; |
| · | The artwork is involved in illegal transactions; and |
| · | Other circumstances that would make the listing unfit in our discretion. |
Delisting
Each offering statement will stipulate the term in which an artwork trades on our platform. An artwork may be delisted from our platform through voluntary withdrawal or successful sale of the artwork via auction at the end of the term.
Upon application of all the Co-Owners, an artwork may also be delisted from our system. The Co-Owners should submit a delisting application, upon receipt of which we will suspend the trading of the artwork units. If the application is approved, the artwork will be delisted from our platform; otherwise, it will resume trading. Once delisted, the artwork will be returned to the designee of all Co-Owners or the sole owner.
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Upon expiration of the trading term as set forth in the offering statement, the trading of the artwork units will be suspended and the artwork will enter into an auction process. The offering price shall be the reserve price for the artwork. Once it is successfully sold through auction, the artwork will be delisted from our system. If the auction is not successful, the artwork units will resume trading for a term to be determined at the time its trading is resumed.
An artwork may also be delisted due to the following reasons:
| · | The artwork was lost in a theft or robbery; |
| · | The artwork was irreparably damaged; |
| · | The artwork was adjudicated to be owned by a person other than the Original Owner; and |
| · | Other circumstances which we deem would render the listing unfit. |
A delisting report will be issued by us upon delisting of an artwork, which report will state the name of the delisted artwork, the delisting date, the delisting decision, related matters following the delisting, etc.
Registration and Settlement
Our trading platform’s settlement system reconciles all trades and payments on a daily basis.
The registration and settlement of the trading of artwork units is currently supervised and managed by our registration and settlement department. This department is responsible for trading account setup and management, registration of artwork units, including initial registration, transfer registration and delisting registration and providing information, consultation or training relating to the registration and settlement of artwork units.
Regulation of Market Participants
The Original Owner and the Offering Agent are required to comply with our rules in connection with the offering of artwork. If we discover any violation, we will request them to take corrective actions. If the Offering Agent engages in fraudulent activities, such as putting out false or misleading advertisement or disclosure on the artwork, it may be barred from participating in any offering for up to two years, in addition to any legal liabilities.
We monitor and regulate the conducts of Traders on a daily basis through our real time monitoring system. If there are irregular trading activities that may affect the trading price and volume of artwork units, we will seek clarification from the Trader(s) by sending inquiries and notices, and conducting interviews, etc. If there is any violation of our trading rules, we may take the following actions:
| · | issue oral or written warnings; |
| · | request the Trader to submit written commitment; |
| · | issue a reprimand; |
| · | impose a fine; |
| · | suspend or limit trading activities; and |
| · | revoke the qualifications of the Trader. |
Sales and Marketing
We are currently marketing our electronic trading platform through participation in culture and art exhibitions and internet advertising. Additionally, we encourage existing Traders to introduce new Traders. For fiscal year 2016, we paid commissions to existing Traders who have successfully introduced new Traders at the following rates:
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| Number of Referees |
Accumulated Total Gross Trade Amount (in HKD) |
Rebate Ratio | ||
| ≥ 1 person | > $0 | 5% of Referee’s commission | ||
| ≥ 3 person | ≥ $3 million | 20% of Referee’s commission | ||
| ≥ 6 person | ≥ $6 million | 40% of Referee’s commission | ||
| ≥ 10 person | ≥ $10 million | 50% of Referee’s commission |
Effective January 1, 2016 through December 31, 2016, commissions to existing Traders are as follows:
| Number of Referees |
Accumulated Total Gross Trade Amount (in HKD) |
Rebate Ratio | ||
| ≥ 10 persons | > $0 | 15% of Referee’s commission |
We have also instituted a trader service organization service program. Trader service organizations are separate, independent entities that provide business consultation services to some of our Traders such as providing training on the trading rules of our platform. Under the trader service organization service program, we will pay the relevant trader service organization up to 60% of all trading commissions generated from new Traders referred to us from Traders serviced by such trader service organization (“Service Fee”). The exact terms with each trader service organization which participates in this program vary on a case by case basis although in every case, the Service Fee is contingent on the ongoing business consultation relationship between the trader service organization and the Trader. In other words, if the business consultation relationship is terminated between a Trader and its trader service organization, that trader service organization will no longer earn a Service Fee from trading commissions generated from new Traders introduced by that Trader.
Additionally, a trader service organization may refer other trader service organizations to us. The referring trader service organization will be paid 10% of the Service Fee payable to the new trader service organization.
We entered into three other sales and marketing related agreements with Shenzhen Qianrong Cultural Investment Development Co., Ltd (“Qianrong”) in 2015, namely (1) Trader Promotion Services Agreement; (2) Internet and SMS Marketing Services Agreement; (3) Online Marketing Service Agreement.
During 2016, we entered into ten sales and marketing related agreements with Qianrong, with the same three types of agreements as previous year.
We also entered into three Advertising and Promotional Services Agreements with Shenzhen Qianxiang Investment Consulting Co., Ltd. (“Qianxiang”) in 2016.
We utilize Baidu Listing Search and Key Word Search services for search engine optimization in order to promote our website and platform.
Recently, we introduced a discount program to our VIP Traders. 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 this, we also instituted separate discount programs to buyers by waiving their trading commissions and management fees during certain promotion periods. The rebates and discounts are recognized as a reduction of revenue in the same period the related revenue is recognized.
Customers
Our customers are the Traders, Original Owners and Offering Agents. We are constantly marketing and increasing our customer base, it is difficult to ascertain if the loss of a single customer, or a few customers would have a material adverse effect on us. Suffice it to say, no one customer constitutes in the aggregate 10% or more of our consolidated revenue.
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Seasonality
Because we have only been in operation for approximately two years, it is difficult to ascertain if there is a seasonality to our business, although we are inclined to believe, given the nature of our business that it is not cyclical.
Employees
As of February 10, 2017, we had 94 full-time employees, comprising 73 employees who are based in the People’s Republic of China, and 21 employees who are based in Hong Kong. Di Xiao is Hong Kong Takung’s General Manager (apart from being our Chief Executive Officer) as well as its director. Zishen Li is Shanghai and Tianjin Takung’s General Manager and the director of the Company. Chun Hin Leslie Chow is our Chief Financial Officer. As for the other 91 employees, 12 are from the Marketing department, 8 are from the IT department, 7 are from the Transaction Management department, 15 are from the Administrative and Customer Service department, 3 are from the Clearing and Settlement department, 2 are from the Uplisting department, 30 are from the Software Development department, 3 are from the Legal department, 5 are from the Information System department, one from the Internal Control department and 5 are from the Accounting department.
There are no collective bargaining contracts covering any of our employees. We believe our relationship with our employees is satisfactory.
Regulation
As a business operating in Hong Kong, we are subject to various regulations and rules promulgated by the Hong Kong government. The following is a brief summary of the Hong Kong laws and regulations that currently materially affect our business. This section does not purport to be a comprehensive summary of all present and proposed regulations and legislation relating to the industries in which we operate.
Securities & Futures
The securities and futures markets in Hong Kong are currently governed by the Securities & Futures Ordinance (“SFO”). The SFO consolidates and authorized the 10 previous ordinances regulating the securities and futures markets. The primary legislation and the subsidiary legislation commenced operation on April 1, 2003. By law, any person carrying on, among others, a business of dealing in securities in Hong Kong, has to be licensed by the Securities and Futures Commission (“SFC”) unless falling within one of the licensing exemptions.
The term “securities” under the SFO is defined as:
| (a) | shares, stocks, debentures, loan stocks, funds, bonds or notes of, or issued by, or which it is reasonably foreseeable will be issued by, a body, whether incorporated or unincorporated, or a government or municipal government authority; |
| (b) | rights, options or interests (whether described as units or otherwise) in, or in respect of, such shares, stocks, debentures, loan stocks, funds, bonds or notes; |
| (c) | certificates of interest or participation in, temporary or interim certificates for, receipts for, or warrants to subscribe for or purchase, such shares, stocks, debentures, loan stocks, funds, bonds or notes; |
| (d) | interests, rights or property, whether in the form of an instrument or otherwise, commonly known as securities; |
| (e) | interests, rights or property, whether in the form of an instrument or otherwise, prescribed by notice under section 392 as being regarded as securities in accordance with the terms of the notice. |
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Our business model does not qualify as dealing in securities, as such term is defined in the SFO and as such, we are not required to obtain the requisite license from the SFC.
Sale of Goods
In the event an artwork is “delisted” from our platform, we would arrange to sell the artwork on behalf of all owners of the artwork and then distribute the proceeds of sale to them. We will be considered a “Commercial Agent” under the Hong Kong Factors Ordinance and a “Seller” under the Hong Kong Sales of Goods Ordinance.
The Sale of Goods Ordinance (“SGO”) provides that goods for sale must be:
| · | Of merchantable (satisfactory) quality. Goods must meet the standard that a reasonable person would regard as satisfactory, taking account of any description of the goods, the price and all other relevant circumstances. The quality of goods includes their appearance and finish, their safety and their durability. Goods must be free from defects, even minor ones, except where these defects have been brought to your attention by the seller (section 16 of SGO); |
| · | Fit for their purposes (section 16 of SGO); |
| · | As described on the package or a display sign, or by the seller (section 15 of SGO); and |
| · | Correspond with the sample (section 17 of SGO). |
If sellers fail to meet any one of the above conditions, they are in breach of contract. Under these circumstances, consumers are entitled to reject the goods and demand a full refund. We are accordingly bound by these implied warranties of sale in the event that we sell any artwork previously listed on our platform.
Supply of Services
We provide a platform to trade in artwork units for which we are compensated by receiving listing fees, management fees and trading commissions. The Hong Kong Supply of Services (Implied Terms) Ordinance (“SSO”), provides that in the absence of provisions in the contract for services, services should be carried out with reasonable care and skill (which generally means the services must meet the standard that a reasonable person would regard as satisfactory) ( section 5 of the SSO), the services should be performed within a reasonable time if the time of performance has not been fixed by the contract (section 6 of the SSO); and a reasonable charge should be paid if the charge has not been fixed by the contract (section 7 of the SSO).
If service suppliers fail to meet any one of the above conditions, they would be “in breach of contract”. Under these circumstances, consumers are entitled to sue defaulting suppliers for compensation.
Section 8(1) of the SSO provides that as against a party to a contract for the supply of a service who deals as a consumer, the other party (the service supplier) cannot, by reference to any contract term, exclude or restrict any liability of his arising under the contract by virtue of this Ordinance. In other words, we cannot impose a contract term that excludes or restricts our liability on breach of contract.
In addition, the Hong Kong Control of Exemption Clauses Ordinance subject any attempt by us to exclude our liability for financial loss or damage to property during the course of the provision of our services to the test of “reasonableness”. Our exemption clauses are also controlled by the rules of common law. For example, an exemption clause must be incorporated into the contract, and the person who is seeking to rely on the exemption clause must show that reasonable steps have been taken to bring the clause to the attention of the other party.
The Hong Kong Unconscionable Contracts Ordinance only applies to a contract for the sale of goods or supply of services in which one of the contracting parties is dealing as a consumer. If the Court finds out that the contract or any part thereof was unconscionable (unfair/not sensible) in circumstances relating to the contract at the time when it was made, the Court would have the jurisdiction under section 5 of the Unconscionable Contracts Ordinance to refuse to enforce the contract, or to enforce the remainder of the contract without the unconscionable part, or to limit the application of, or to revise or alter, any unconscionable part so as to avoid any unconscionable result.
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Fair Trading
The Trade Descriptions (Unfair Trade Practices) (Amendment) Ordinance 2012 (“Amendment Ordinance”) came into effect on July 19, 2013 and amended the Trade Descriptions Ordinance by prohibiting specified unfair trade practices that may be deployed against customers and strengthen the enforcement mechanism. The Customs and Excise Department is the principal enforcement agency under the Trade Descriptions Ordinance. Concurrent jurisdiction is conferred on the Office of the Communications Authority (“HKCA”) to enforce the new fair trading sections. The key amendments include:
| · | the expansion of the definition of trade descriptions in relation to goods, as well as the extension of the scope to cover services; |
| · | the creation of new criminal offences on unfair trade practices, namely misleading omissions, aggressive commercial practices, bait advertising, bait-and-switch and wrongly accepting payment; |
| · | the introduction of a compliance-based mechanism under which civil enforcement options, namely the acceptance of undertaking from Traders and the seeking of injunction from the court where necessary, can be drawn on to promote compliance with the new fair trading sections introduced by the Amendment Ordinance; and |
| · | the creation of a new private right of action for damages to facilitate consumer redress. |
On July 15, 2013, the Customs and Excise Department and the HKCA published the Enforcement Guidelines for the Amendment Ordinance to state the manner in which they will exercise their enforcement powers and provide guidance on the operation of the new legislative provisions.
Intellectual Property
Our business is dependent on a combination of trademarks, trademark application, trade secrets and industry know-how, and copyright, in order to protect our intellectual property rights. We have submitted trademark applications for “Takung” in Hong Kong, Mainland China, Macau and the United States.
In China, the Trademark Law and the Unfair Competition Law governs our marks. The Hong Kong SAR’s trade mark registration system is separate from the system operating in other parts of China. Trade mark registrations obtained in Chinese Trade Marks Office, or elsewhere in the world, do not automatically get protection in the Hong Kong SAR. Trade marks must be registered in the Hong Kong SAR before they can be protected in the Hong Kong SAR under the Trade Marks Ordinance.
Protection of Personal Data
We have access to certain of our Traders’, Original Owners’ and Offering Agents’ personal information as well as information of Qianrong’s network of art traders. The Hong Kong Personal Data (Privacy) (Amendment) Ordinance 2012 (“Amendment Ordinance”) which changes the Personal Data (Privacy) Ordinance (“PDPO”) governs our use of such personal information in direct marketing activities and in acquiring and transferring such personal data to third parties for direct marketing purposes.
The Amendment Ordinance creates a new direct marketing regime (Part VI A of the PDPO) to establish the rights and obligations of parties using personal information for direct marketing purposes or transferring personal information to a third party for marketing purposes. Under the new regime, an organization can only use or transfer personal information for direct marketing purposes if that organization has provided the required information and consent mechanism to the individual concerned, and obtained his or her consent. Under the Amendment Ordinance it is a criminal offense, punishable by fines and imprisonment, for an organization to fail to comply with any of these new requirements.
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We are also now required to have in place procedures to ensure that any personal information transferred to any service provider is not retained for longer than necessary, and is protected against any unauthorized or accidental access, processing, erasure, loss, or use.
Employment
Some of our employees are employed in Hong Kong and we are subject to the Hong Kong Employment Ordinance (“EO”). The EO is the main employment legislation in Hong Kong. It guarantees certain minimum benefits, including:
| · | Paid annual leave. |
| · | Paid sick leave. |
| · | Paid maternity leave. |
Subject to limited exceptions, the EO applies to all employees working in Hong Kong, regardless of their nationality. Observing the terms of the EO is generally considered to be mandatory, although it is not specifically expressed to be an overriding statute.
Other mandatory laws that are likely to apply to the employment relationship with our employees include:
| · | Personal Data (Privacy) Ordinance (PDPO). This ordinance regulates an employer's collection or surveillance, use and disclosure of an employee's personal data (including personal data contained in e-mails and phone calls). | |
| · | Mandatory Provident Fund Schemes Ordinance (MPFSO). Subject to very limited exceptions, this ordinance requires employers in Hong Kong to enroll employees in a Mandatory Provident Fund (MPF) Scheme (that is, a retirement scheme), to which the employer and employee must make certain contributions. Foreign nationals are exempt if they are posted in Hong Kong to work for a period not exceeding 13 months or belong to a retirement scheme outside of Hong Kong. In certain cases, a Hong Kong national working outside of Hong Kong may still be subject to this ordinance if the employment has sufficient connection with Hong Kong. | |
| · | Occupational Safety and Health Ordinance (OSHO). This ordinance imposes a duty on all employers, as far as is reasonably practical, to ensure the safety and health in the workplace of its employees. The OSHO covers most industrial and non-industrial workplaces in Hong Kong. | |
| · | Employees' Compensation Ordinance (ECO). If an employee suffers injury arising out of and in the course of employment in Hong Kong (or overseas, if the travel is authorized by the employer), the employer is usually liable to compensate the employee under the ECO. Eligible family members of an employee killed in an accident at work can also be entitled to compensation. If an employer carries on business in Hong Kong, its employees are protected under the ordinance. (An employee can work outside Hong Kong but his employment contract must have been entered into in Hong Kong.) All employers must maintain valid employees’' compensation insurance policies to cover their liabilities under the ordinance and at common law. | |
| · | Companies Ordinance. Protects employees of a Hong Kong company (including a Hong Kong subsidiary of a foreign company) in relation to wages and other entitlements if the company is wound up. The employees become preferential creditors in the winding-up. | |
| · | Sex Discrimination Ordinance (SDO), Disability Discrimination Ordinance (DDO), Family Status Discrimination Ordinance (FSDO) and Race Discrimination Ordinance (RDO). All legislate against various forms of discrimination. | |
| · | Basic Law and the Hong Kong Bill of Rights Ordinance. These safeguard certain rights of individuals, although they have limited application in the context of employment law. | |
| · | Labour Tribunal Ordinance. This ordinance empowers the Labour Tribunal to hear and resolve disputes relating to employment contracts as well as alleged breaches of the EO. It potentially covers disputes involving foreign nationals or Hong Kong residents working abroad. | |
| · | Prevention of Bribery Ordinance (POBO). The POBO applies to employees, particularly to those who receive or solicit bribes from third parties (for example, an employee who receives bribes from a supplier of goods in return for placing orders with that supplier). In some cases, employees may also be subject to anti-corruption legislation in other jurisdictions. | |
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PRC Regulations
Regulations on Foreign Investment
Investment activities in the PRC by foreign investors are principally governed by the Guidance Catalog of Industries for Foreign Investment, or the Catalog, which was promulgated and is amended from time to time by the Ministry of Commerce and the National Development and Reform Commission. Industries listed in the Catalogue are divided into three categories: encouraged, restricted and prohibited. Industries not listed in the Catalogue are generally deemed as constituting a fourth "permitted" category. Establishment of wholly foreign-owned enterprises is generally allowed in the encouraged and permitted industries. Some restricted industries are limited to equity or contractual joint ventures, while in some cases Chinese partners are required to hold the majority interests in such joint ventures. In addition, restricted category projects are subject to higher-level government approvals. Foreign investors are not allowed to invest in industries in the prohibited category. Industries not listed in the Catalogue are generally open to foreign investment unless specifically restricted by other PRC regulations. We conduct business operations that are restricted to foreign investment through our PRC consolidated affiliated entities.
Currently, the business scope of our wholly-owned subsidiary in the PRC, Shanghai Takung, mainly includes the business of wholesale, import and export of arts and crafts and related services, which are in the encouraged category. Under the PRC laws, the establishment of a wholly foreign owned enterprise is subject to the approval of the Ministry of Commerce or its local counterparts and the wholly foreign owned enterprise must register with the competent industry and commerce authority. We have duly obtained the approvals from the competent commerce authority for our interest in Shanghai Takung and completed the registration of Shanghai Takung with the competent industry and commerce authority.
Regulations Relating to Taxation
In January 2008, the PRC Enterprise Income Tax Law took effect. The PRC Enterprise Income Tax Law applies a uniform 25% enterprise income tax rate to both foreign-invested enterprises and domestic enterprises, unless where tax incentives are granted to special industries and projects. Under the PRC Enterprise Income Tax Law and its implementation regulations, dividends generated from the business of a PRC subsidiary after January 1, 2008 and payable to its foreign investor may be subject to a withholding tax rate of 10% if the PRC tax authorities determine that the foreign investor is a non-resident enterprise, unless there is a tax treaty with China that provides for a preferential withholding tax rate. Distributions of earnings generated before January 1, 2008 are exempt from PRC withholding tax. Our PRC subsidiary is subject to PRC enterprise income tax at the statutory rate of 25% on its PRC taxable income.
Under the PRC Enterprise Income Tax Law, an enterprise established outside China with “de facto management bodies” within China is considered a “resident enterprise” for PRC enterprise income tax purposes and is generally subject to a uniform 25% enterprise income tax rate on its worldwide income. A circular issued by the State Administration of Taxation in April 2009 regarding the standards used to classify certain Chinese-invested enterprises controlled by Chinese enterprises or Chinese enterprise groups and established outside of China as “resident enterprises” clarified that dividends and other income paid by such PRC “resident enterprises” will be considered PRC-source income and subject to PRC withholding tax, currently at a rate of 10%, when paid to non-PRC enterprise shareholders. This circular also subjects such PRC “resident enterprises” to various reporting requirements with the PRC tax authorities.
Under the implementation regulations to the PRC Enterprise Income Tax Law, a “de facto management body” is defined as a body that has material and overall management and control over the manufacturing and business operations, personnel and human resources, finances and properties of an enterprise. In addition, the tax circular mentioned above specifies that certain PRC-invested overseas enterprises controlled by a Chinese enterprise or a Chinese enterprise group in the PRC will be classified as PRC resident enterprises if the following are located or resident in the PRC: senior management personnel and departments that are responsible for daily production, operation and management; financial and personnel decision making bodies; key properties, accounting books, the company seal, and minutes of board meetings and shareholders’ meetings; and half or more of the senior management or directors having voting rights.
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Please see “Risk Factors—We may be treated as a resident enterprise for PRC tax purposes under the PRC Enterprise Income Tax Law, and we may therefore be subject to PRC income tax on our global income.”
Regulations Relating to Labor
We are subject to laws and regulations governing our relationship with our PRC employees, including wage and hour requirements, working and safety conditions, and social insurance, housing funds and other welfare. The compliance with these laws and regulations may require substantial resources.
Pursuant to the PRC Labor Law effective in 1995 and the PRC Labor Contract Law effective in 2008 and amended in 2012, a written labor contract is required when an employment relationship is established between an employer and an employee. Other labor-related regulations and rules of China stipulate the maximum number of working hours per day and per week as well as the minimum wages. An employer is required to set up occupational safety and sanitation systems, implement the national occupational safety and sanitation rules and standards, educate employees on occupational safety and sanitation, prevent accidents at work and reduce occupational hazards.
An employer is obligated to sign an indefinite term labor contract with an employee if the employer continues to employ the employee after two consecutive fixed-term labor contracts, with certain exceptions. The employer also has to pay compensation to the employee if the employer terminates an indefinite term labor contract, with certain exceptions. Except where the employer proposes to renew a labor contract by maintaining or raising the conditions of the labor contract and the employee is not agreeable to the renewal, an employer is required to compensate the employee when a definite term labor contract expires. Furthermore, under the Regulations on Paid Annual Leave for Employees issued by the State Council in December 2007 and effective as of January 2008, an employee who has served an employer for more than one year and less than ten years is entitled to a 5-day paid vacation, those whose service period ranges from 10 to 20 years are entitled to a 10-day paid vacation, and those who have served for more than 20 years are entitled to a 15-day paid vacation. An employee who does not use such vacation time at the request of the employer must be compensated at three times their normal salaries for each waived vacation day.
Pursuant to the Regulations on Occupational Injury Insurance effective in 2004, as amended in 2010, and the Interim Measures concerning the Maternity Insurance for Enterprise Employees effective in 1995, PRC companies must pay occupational injury insurance premiums and maternity insurance premiums for their employees. Pursuant to the Interim Regulations on the Collection and Payment of Social Insurance Premiums effective in 1999 and the Interim Measures concerning the Administration of the Registration of Social Insurance effective in 1999, basic pension insurance, medical insurance and unemployment insurance are collectively referred to as social insurance. Both PRC companies and their employees are required to contribute to the social insurance plans. The aforesaid measures are reiterated in the Social Insurance Law of China effective in July 2011, which stipulates the system of social insurance of China, including basic pension insurance, medical insurance, unemployment insurance, occupational injury insurance and maternity insurance. Pursuant to the Regulations on the Administration of Housing Fund effective in 1999, as amended in 2002, PRC companies must register with applicable housing fund management centers and establish a special housing fund account in an entrusted bank. Both PRC companies and their employees are required to contribute to the housing funds.
Regulation on PRC Business Tax and Value-Added Tax
Prior to January 1, 2012, pursuant to Provisional Regulation of China on Business Tax and its implementing rules, any entity or individual rendering services in the territory of PRC is generally subject to a business tax at the rate of 5% on the revenues generated from provision of such services.
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On January 1, 2012, the Chinese State Council officially launched a pilot value-added tax (“VAT”) reform program, or Pilot Program, applicable to businesses in selected industries. Businesses in the Pilot Program would pay VAT instead of business tax. The Pilot Industries in Shanghai included industries involving the leasing of tangible movable property, transportation services, research and development and technical services, information technology services, cultural and creative services, logistics and ancillary services, certification and consulting services. Revenues generated by advertising services, a type of “cultural and creative services,” are subject to the VAT tax rate of 6%. According to official announcements made by competent authorities in Beijing and Guangdong province, Beijing launched the same Pilot Program on September 1, 2012, and Guangdong province launched it on November 1, 2012. On May 24, 2013, the Ministry of Finance and the State Administration of Taxation issued the Circular on Tax Policies in the Nationwide Pilot Collection of Value Added Tax in Lieu of Business Tax in the Transportation Industry and Certain Modern Services Industries, or the Pilot Collection Circular. The scope of certain modern services industries under the Pilot Collection Circular extends to the inclusion of radio and television services. On August 1, 2013, the Pilot Program was implemented throughout China. Shanghai and Tianjin Takung are currently subject to a VAT of 6% on its gross revenue.
Regulations on Dividend Distribution
The principal regulations governing dividend distributions of wholly foreign-owned enterprises include the Company Law (2013 Amendment); the Wholly Foreign-Owned Enterprise Law (2000 Amendment) and the Wholly Foreign-Owned Enterprise Law Implementing Rules (2001 Amendment).
Under these regulations, wholly foreign-owned enterprises in the PRC may pay dividends only out of their accumulated profits as determined in accordance with PRC accounting standards and regulations. In addition, these wholly foreign-owned enterprises are required to set aside at least 10% of their respective accumulated after-tax profits each year, if any, to fund certain reserve funds, until the aggregate amount of such fund reaches 50% of its registered capital.
Approvals, Licenses and Certificates
We require a number of approvals, licenses and certificates in order to operate our business. Our principal approvals, licenses and certificates are set forth below.
Hong Kong Takung
| · | Certificate of Incorporation (No. 18013848) issued by Hong Kong Special Administrative Region, Registrar of Companies on September 17, 2012. |
| · | Business Registration Certificate for the year commencing September 17, 2015 to September 16, 2016. |
Shanghai Takung
| · | Business License (Registration No. 310141400028740) issued by Shanghai State Administration of Industry and Commerce, Free Trading Zone Branch, valid from July 28, 2015 through July 27, 2045. |
| · | Organization Code Certificate issued by Shanghai Quality Supervision and Inspection Bureau (Registration No. 35105674-3), valid from July 29 through July 29, 2019. |
| · | Taxation Registration Certificate (No. 310115351056743) issued by the Shanghai Pudong New Development Area Branch of the State and Local Administration of Taxation on July 29, 2015. |
Tianjin Takung
| · | Business License (Registration No. 91120118MA07H4322R) issued by Tianjin Pilot Free Trade Zone Market and Quality Supervisory Administration valid from January 27, 2016 through January 26, 2046. |
Competition
Traditionally art galleries and auction houses provide a platform for owners of artworks to sell their collections. However, their trading model is substantially different from ours. We believe we do not have any direct competition due to our unique business model of trading artwork ownership units instead of the artworks. We are not aware of any other companies engaging in a similar business.
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Research and Development
We purchased the trading platform from a third party for approximately $232,261 (HK$1,800,000). The cost of this software is amortized over its useful life and recorded as cost of revenue on the income statement. We have IT consultants who help maintain and operate the trading platform software, and whose cost is charged as consultancy fee under general and administrative expenses. We outsourced research and development activities to Qianrong. We entered into a software development agreement with Qianrong in 2014 and 2015 to develop ten trading modules. As of December 31, 2016, nine out of the ten modules have been completed and are operational. We have started to capitalize (with a total cost of $1,069,853 (HK$8,295,000)) and amortized these costs once the modules were completed. All of these additional costs from gradual completion of our platform system modules and addition of equipment contributed to an increase in our cost of revenue through 2016.
Intellectual Property
Our business is dependent on a combination of trademarks, trademark application, trade secrets and industry know-how, and copyright, in order to protect our intellectual property rights. We have submitted trademark applications for “Takung” in Hong Kong, Mainland China, Macau and the United States.
Set forth below is a detailed description of our trademarks under application or registered by our subsidiary HongKong Takung Assets and Equity of Artworks Exchange Co., Ltd as of March 28, 2017:
| Application/ | ||||||||
| Trademark | ||||||||
| Country | Trademark | number | Classes | Status | ||||
| 303101679 | 14, 16, | Registered on August 14, 2014. | ||||||
| Hong Kong |  |
35, 36, 42 | Effective until August 13, 2024. | |||||
| Macau | |
N/090131 | 14 | |||||
| N/090132 | 16 | Registered on February 26, 2015. | ||||||
| N/090133 | 35 | Effective until February 26, 2022. | ||||||
| N/090134 | 36 | |||||||
| N/090135 | 42 | |||||||
| United States | |
86372887 | 14 | In process | ||||
| 4983954 | 16 | |||||||
| 4983955 | 35 | Registered on June 21, 2016 | ||||||
| 4983956 | 36 | Effective until June 20, 2026 | ||||||
| 4983957 | 41 | |||||||
| China | |
|||||||
| 15247645 | 36 | Registered on December 14, 2015. | ||||||
| 15247714 | 42 | Effective until December 13, 2025. |
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Set forth below is a detailed description of our registered domain names.
| Domain name | Registrant | Registration date | Expiry date | |||
| takungae.com.hk | HongKong Takung Assets and Equity of Artworks Exchange Co., Ltd | June 28, 2013 | June 28, 2021 | |||
| takungae.com | HongKong Takung Assets and Equity of Artworks Exchange Co., Ltd | June 19, 2013 | June 19, 2021 | |||
| takungae.net | HongKong Takung Assets and Equity of Artworks Exchange Co., Ltd | June 19, 2013 | June 19, 2021 | |||
| takungonline.com.hk | HongKong Takung Assets and Equity of Artworks Exchange Co., Ltd | August 4, 2015 | August 4, 2020 | |||
| takungunit.com.hk | HongKong Takung Assets and Equity of Artworks Exchange Co., Ltd | August 4, 2015 | August 4, 2020 | |||
| takungonline.com | Takung (Shanghai) Co., Ltd. | August 4, 2015 | August 4, 2020 | |||
| takungunit.com | Takung (Shanghai) Co., Ltd. | August 4, 2015 | August 4, 2020 |
We own our trading system and related software.
Emerging Growth Company Status
We are an “emerging growth company”, as defined in the Jumpstart Our Business Startups Act enacted on April 5, 2012 (the “JOBS Act”). For as long as we are an emerging growth company, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding advisory “say-on-pay” and “say-when-on-pay” votes on executive compensation and stockholder advisory votes on golden parachute compensation. Under the JOBS Act, we will remain an emerging growth company until the earliest of:
| · | the last day of the fiscal year during which we have total annual gross revenues of $1 billion or more; |
| · | the last day of the fiscal year following the fifth anniversary of the date of the first sale of our Common Stock; |
| · | the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt; or |
| · | the date on which we are deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934 (the “Exchange Act”) (we will qualify as a large accelerated filer as of the first day of the first fiscal year after we have (i) more than $700 million in outstanding common equity held by our non-affiliates and (ii) been public for at least 12 months; the value of our outstanding common equity will be measured each year on the last day of our second fiscal quarter). |
The JOBS Act also provides that an emerging growth company may utilize the extended transition period provided in Section 7(a)(2)(B) of the Securities Act, for complying with new or revised accounting standards. However, we are choosing to “opt out” of such extended transition period, and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for companies that are not emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.
An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below and the other information contained in this report before deciding to invest in our common stock.
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RISKS RELATED TO OUR BUSINESS AND FINANCIAL CONDITION
The global economy and the financial markets may negatively affect our business and clients, as well as the supply of and demand for works of art.
Our business is affected by global, national and local economic conditions since the services we provide are discretionary and we depend, to a significant extent, upon a number of factors relating to discretionary consumer spending in Hong Kong and Mainland China. These factors include economic conditions and perceptions of such conditions by Traders, employment rates, the level of Traders’ disposable income, business conditions, interest rates, availability of credit and levels of taxation in regional and local markets. There can be no assurance that our services will not be adversely affected by changes in general economic conditions in Hong Kong and globally.
The art market is influenced over time by the overall strength and stability of the global economy and the financial markets, although this correlation may not be immediately evident. In addition, political conditions and world events may affect our business through their effect on the economies, as well as on the willingness of potential buyers and sellers to invest and sell art in the wake of economic uncertainty.
A decline in trading volumes will decrease our trading revenues.
Trading volumes are directly affected by economic, political and market conditions, broad trends in business and finance, unforeseen market closures or other disruptions in trading, the level and volatility of interest rates, inflation, changes in price levels of artworks and the overall level of investor confidence. In recent years, trading volumes across our markets have fluctuated depending on market conditions and other factors beyond our control. Because a significant percentage of our revenues are tied directly to the trading volumes on our markets, it is likely that a general decline in trading volumes would lower revenues and may adversely affect our operating results. Declines in trading volumes may also impact our market share or pricing structures and adversely affect our business and financial condition.
System limitations or failures could harm our business.
Our businesses depend on the integrity and performance of the technology, computer and communications systems supporting them. If our systems cannot expand to cope with increased demand or otherwise fail to perform, we could experience unanticipated disruptions in service, slower response times and delays in the introduction of new services. These consequences could result financial losses and decreased customer service and satisfaction. If trading volumes increase unexpectedly or other unanticipated events occur, we may need to expand and upgrade our technology, transaction processing systems and network infrastructure. We do not know whether we will be able to accurately project the rate, timing or cost of any increases, or expand and upgrade our systems and infrastructure to accommodate any increases in a timely manner.
A variety of uncontrollable events may reduce our ability to provide our trading services, impair our ability to provide our services or increase the cost of providing our services.
Our headquarters are in Hong Kong SAR and our servers are in Hong Kong SAR, Macau and mainland China, which are historically susceptible to adverse weather conditions such as typhoons, excessive heat or rain, earthquakes and floods. Those natural disasters may result in significant and extensive damage to our network equipment. Moreover, certain countries and regions, including China, have encountered incidents of the H5N1 strain of bird flu, or avian flu, as well as severe acute respiratory syndrome, or SARS, over the past several years and, in 2009, the outbreak of influenza A (H1N1). In 2010, an earthquake registering 7.1 on the Richter scale struck Qinghai Province. In April 2013, another major earthquake registering 7.0 on the Richter scale struck Ya’an region of Sichuan Province. In 2013, certain areas of China suffered from severe floods. We are unable to predict the effect, if any, that any other future natural disasters and health hazards may have on our business. Any future natural disasters and health hazards may, among other things, significantly disrupt our ability to adequately staff our business, and may generally disrupt our operations. Furthermore, natural disasters and health hazards may severely restrict the level of economic activities in affected areas, which may in turn materially adversely affect our business and prospects. As a result, any natural disasters or health hazards in China may have a material adverse effect on our financial condition and results of operations. These events and others, such as fluctuations in energy costs and computer virus attacks, intrusions or other widespread computing or telecommunications failures, may also damage our ability to provide our services or to obtain insurance coverage with respect to these events.
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We have insufficient insurance coverage
We presently do not have any insurance to cover certain events such as physical damage to our office premises and resulting business interruption, certain injuries occurring on our property and liability for breach of legal responsibilities as we believe, based on our organization, business model and the remote possibility of the incurrence of substantial damages from such events, that the costs of such insurance greatly exceeds the benefits of having it. However, in the possible event of a significant loss from such an event, this may severely impact our performance or continue as a going concern.
The success of our business depends on our ability to market and advertise the services we provide effectively.
Our ability to establish effective marketing campaigns is the key to our success. Our advertisements promote our corporate image and our services. If we are unable to increase awareness of our brand, the benefits of using our trading platform to invest in artwork and that such investment is secure, we may not be able to attract new Traders. Our marketing activities may not be successful in promoting our services or in retaining and increasing our Trader base. We cannot assure you that our marketing programs will be adequate to support our future growth, which may result in a material adverse effect on our results of operations.
Our success is dependent on the receptiveness of Traders of artwork to our platform.
We believe the demand for artwork listings will be generated by our Traders. We hope to educate our Traders on the merits of using our platform to invest in artwork. Not only in the subject artwork secure and insured, it requires less capital for our Traders to invest as they need only invest in artwork units and not purchase the entire piece of artwork. We hope that they will see their investment as less risky as they are presented with the opportunity to diversify their investments through various pieces of artwork. Our success would accordingly depend on the receptiveness of Traders to the merits of investments on our platform.
If we are unable to renew the lease of our property, our operations may be adversely affected.
We do not directly own the land over the property we lease. We may lose our leases or may not be able to renew it when it is due on terms that are reasonable or favorable to us. This may have adverse impact on our operations, including disrupting our operations or increasing our cost of operations.
The failure to manage growth effectively could have an adverse effect on our employee efficiency, product quality, working capital levels, and results of operations.
Any significant growth in the market for our services or our entry into new markets may require an expansion of our employee base for managerial, operational, financial, and other purposes. As of the date of this Annual Report, we had approximately 94 full time employees and 7 consultants. During any growth, we may face problems related to our operational and financial systems and controls, including quality control and delivery and service capacities. We would also need to continue to expand, train and manage our employee base. Continued future growth will impose significant added responsibilities upon the members of management to identify, recruit, maintain, integrate, and motivate new employees.
Aside from increased difficulties in the management of human resources, we may also encounter working capital issues, as we will need increased liquidity to finance the purchase of supplies, development of new products and services, and the hiring of additional employees. For effective growth management, we will be required to continue improving our operations, management, and financial systems and controls. Our failure to manage growth effectively may lead to operational and financial inefficiencies that will have a negative effect on our profitability. We cannot assure investors that we will be able to timely and effectively meet that demand and maintain the quality standards required by our existing and potential customers.
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If we need additional capital to fund our growing operations, we may not be able to obtain sufficient capital and may be forced to limit the scope of our operations.
If adequate additional financing is not available on reasonable terms, we may not be able to undertake our expansion plan and we would have to modify our business plans accordingly. There is no assurance that additional financing will be available to us.
In connection with our growth strategies, we may experience increased capital needs and accordingly, we may not have sufficient capital to fund our future operations without additional capital investments. Our capital needs will depend on numerous factors, including (i) our profitability; (ii) the release of competitive products by our competitors; (iii) the level of our investment in research and development; and (iv) the amount of our capital expenditures, including acquisitions. We cannot assure you that we will be able to obtain capital in the future to meet our needs.
If we cannot obtain additional funding, we may be required to: (i) limit our investments in research and development; (ii) limit our marketing efforts; and (iii) decrease or eliminate capital expenditures. Such reductions could materially adversely affect our business and our ability to compete.
Even if we do find a source of additional capital, we may not be able to negotiate terms and conditions for receiving the additional capital that are acceptable to us. Any future capital investments could dilute or otherwise materially and adversely affect the holdings or rights of our existing stockholders. In addition, new equity or convertible debt securities issued by us to obtain financing could have rights, preferences and privileges senior to our Common Stock. We cannot give you any assurance that any additional financing will be available to us, or if available, will be on terms favorable to us.
We are dependent on certain key personnel and loss of these key personnel could have a material adverse effect on our business, financial condition and results of operations.
Our success is, to a certain extent, attributable to the management and operational and technical expertise of certain key personnel. In addition, we will require an increasing number of experienced and competent executives and other members of senior management to implement our growth plans. If we lose the services of any member of our senior management, we may not be able to locate suitable or qualified replacements, and may incur additional expenses to recruit and train new personnel, which could severely disrupt our business and prospects.
We are dependent on a trained workforce and any inability to retain or effectively recruit such employees, particularly distribution personnel and regional retail managers for our business, could have a material adverse effect on our business, financial condition and results of operations.
We must attract, recruit and retain a sizeable workforce of qualified and trained staff to operate our business. Our ability to implement effectively our business strategy and expand our operations will depend upon, among other factors, the successful recruitment and retention of highly skilled and experienced distribution personnel, regional retail managers and other technical and marketing personnel. There is significant competition for qualified personnel in our business and we may not be successful in recruiting or retaining sufficient qualified personnel consistent with our current and future operational needs.
Our financial results may fluctuate because of many factors and, as a result, investors should not rely on our historical financial data as indicative of future results.
Fluctuations in operating results or the failure of operating results to meet the expectations of public market analysts and investors may negatively impact the market price of our securities. Operating results may fluctuate in the future due to a variety of factors that could affect revenues or expenses in any particular quarter. Fluctuations in operating results could cause the value of our securities to decline. Investors should not rely on comparisons of results of operations as an indication of future performance. As result of the factors listed below, it is possible that in future periods results of operations may be below the expectations of public market analysts and investors. This could cause the market price of our securities to decline. Factors that may affect our quarterly results include:
| · | vulnerability of our business to a general economic downturn in Hong Kong and mainland China; |
| · | fluctuation and unpredictability of the prices of the products we sell; |
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| · | changes in the laws of Hong Kong that affect our operations; and |
| · | our ability to obtain necessary government certifications and/or licenses to conduct our business. |
If we fail to establish and maintain effective internal control over financial reporting, our ability to accurately and timely report our financial results in accordance with U.S. GAAP could be materially and adversely affected. In addition, investor confidence in us and the market price of our equities could decline significantly if we conclude that our internal control over financial reporting is not effective.
For the year ended December 31, 2016, we enhanced our internal controls over financial reporting by making the following changes: (i) we established a desired level of corporate governance with regard to identifying and measuring the risk of material misstatement, (ii) we set up a key monitoring mechanism including independent directors and audit committee to oversee and monitor our risk management, business strategies and financial reporting procedure, (iii) we qualified Chief Financial Officer with SEC and US GAAP expertise and (iv) we have strengthened our financial team by employing more qualified accountant(s) to enhance the quality of our financial reporting function. We conducted out an evaluation using the framework set forth in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission with the participation of our management, including Di Xiao, the Company’s Chief Executive Officer and Chun Hin Leslie Chow, the Company’s Chief Financial Officer of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of December 31, 2016. Based upon that evaluation, we concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit 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 CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. However, we do not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. Accordingly, if in spite of such changes and improvements, our internal controls are still ineffective in our ability to accurately and timely report our financial results in accordance with U.S. GAAP, this could result in inaccuracies in our financial statements and could also impair our ability to comply with applicable financial reporting requirements and make related regulatory filings on a timely basis. This, in turn, could result in a material adverse impact on us and undermine investor confidence in us and the market price of our equities could decline significantly.
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Security breaches and attacks against our systems and network, and any potentially resulting breach or failure to otherwise protect confidential and proprietary information, could damage our reputation and negatively impact our business, as well as materially and adversely affect our financial condition and results of operations.
Although we have employed significant resources to develop our security measures against breaches, our cybersecurity measures may not detect or prevent all attempts to compromise our systems, including distributed denial-of-service attacks, viruses, malicious software, break-ins, phishing attacks, social engineering, security breaches or other attacks and similar disruptions that may jeopardize the security of information stored in and transmitted by our systems or that we otherwise maintain. Breaches of our cybersecurity measures could result in unauthorized access to our systems, misappropriation of information or data, deletion or modification of client information, or a denial-of-service or other interruption to our business operations. As techniques used to obtain unauthorized access to or sabotage systems change frequently and may not be known until launched against us or our third-party service providers, we may be unable to anticipate, or implement adequate measures to protect against, these attacks.
If we are unable to avert these attacks and security breaches, we could be subject to significant legal and financial liability, our reputation would be harmed and we could sustain substantial revenue loss from lost sales and customer dissatisfaction. We may not have the resources or technical sophistication to anticipate or prevent rapidly evolving types of cyber-attacks. Cyber-attacks may target us, our Traders or other participants, the communication infrastructure, or the e-platform on which we depend. Actual or anticipated attacks and risks may cause us to incur significantly higher costs, including costs to deploy additional personnel and network protection technologies, train employees, and engage third-party experts and consultants. Cybersecurity breaches would not only harm our reputation and business, but also could materially decrease our revenue and net income.
Future inflation may inhibit our ability to conduct business profitably.
In recent years, the economy in China including Hong Kong has experienced periods of rapid expansion and high rates of inflation. High inflation may in the future cause the Chinese and Hong Kong governments to impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in China and Hong Kong, and thereby harm the market for our services.
Currency fluctuations and restrictions on currency exchange may adversely affect our business, including limiting our ability to convert RMB into foreign currencies and, if RMB were to decline in value, reducing our revenues and profits in U.S. dollar terms.
Our reporting currency is the U.S. dollar and our operations in China and Hong Kong use their respective local currencies as their functional currencies. We are subject to the effects of exchange rate fluctuations with respect to any of these currencies. For example, the value of the RMB depends to a large extent on Chinese government policies and China’s domestic and international economic and political developments, as well as supply and demand in the local market. Starting July 2005, the Chinese government changed its policy of pegging the value of the RMB to the U.S. dollar. Under the new policy, the RMB has fluctuated within a narrow and managed band against a basket of certain foreign currencies. It is possible that the Chinese government will adopt a more flexible currency policy, which could result in more significant fluctuations of the RMB against the U.S. dollar.
The income statements of our China and Hong Kong operations are translated into U.S. dollars at the average exchange rates in each applicable period. To the extent the U.S. dollar strengthens against foreign currencies, the translation of these foreign currency-denominated transactions results in reduced revenues, operating expenses and net income for our non-U.S. operations. Similarly, to the extent the U.S. dollar weakens against foreign currencies, the translation of RMB and Hong Kong dollar -denominated transactions results in increased revenues, operating expenses and net income for our non-U.S. operations. We are also exposed to foreign exchange rate fluctuations as we convert the financial statements of our non-U.S. subsidiaries into U.S. dollars in consolidation. If there is a change in foreign currency exchange rates, the conversion of the non-U.S. subsidiaries’ financial statements into U.S. dollars will lead to a translation gain or loss which is recorded as a component of other comprehensive income. We have not entered into agreements or purchased instruments to hedge our exchange rate risks, although we may do so in the future. The availability and effectiveness of any hedging transaction may be limited and we may not be able to successfully hedge our exchange rate risks.
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Although Chinese governmental policies were introduced in 1996 to allow the convertibility of RMB into foreign currency for current account items, conversion of RMB into foreign exchange for most of the capital items, such as foreign direct investment, loans or securities, requires the approval of the State Administration of Foreign Exchange, or SAFE. These approvals, however, do not guarantee the availability of foreign currency. We cannot be sure that we will be able to obtain all required conversion approvals for our operations or that Chinese regulatory authorities will not impose greater restrictions on the convertibility of RMB in the future. Because a significant amount of our future revenues may be in the form of RMB, our inability to obtain the requisite approvals or any future restrictions on currency exchanges could limit our ability to utilize revenue generated in RMB to fund our business activities outside China, or to repay non-RMB-denominated obligations, including our debt obligations, which would have a material adverse effect on our financial condition and results of operations.
The Company’s requirements could exceed the amount of time or level of experience that our officer and directors may have.
Our success largely depends on the continuing services of our chief executive officer and director, Di Xiao, our chief financial officer, Chun Hin Leslie Chow and our other directors, Joseph Levinson, Zishen Li, John Levy and William Kwok Keung Tsui. Our continued success, also, depends on our ability to attract and retain qualified personnel. We believe that Messrs. Xiao, Chow, Levinson, Li, Levy and Tsui possess valuable business development and marketing knowledge, experience and leadership abilities that would be difficult in the short term to replicate. The loss of their services could have an adverse effect on our business, results of operations and financial condition as our potential future revenues.
Our management may not be able to operate our business effectively. There can be no assurance that we will be able to attract and hire officers or directors with similar experience to operate our business, in the event that any one of them is otherwise unsuccessful in doing so.
Because our funds are held in banks which do not provide insurance, the failure of any bank in which we deposit our funds could affect our ability to continue in business.
Banks and other financial institutions in Hong Kong and China do not provide insurance for funds held on deposit. The Hong Kong Deposit Protection Board manages and supervises the operation of the Deposit Protection Scheme, which protects deposit amounts up to only $64,517 (HK$500,000).
On May 1, 2015, the State Council of People’s Republic of China, released the Regulations on Deposit Insurance, with scheme that would insure up to $78,671 (RMB500,000) in deposits made by businesses and individuals per bank. The scheme is backed by a fund run by the People’s Bank of China.
As a result, in the event of a bank failure, we may not have access to funds on deposit. Depending upon the amount of money we maintain in a bank that fails, our inability to have access to our cash could impair our operations, and, if we are not able to access funds to pay our employees and other creditors, we may be unable to continue in business.
RISKS RELATED TO DOING BUSINESS IN HONG KONG
The Hong Kong legal system embodies uncertainties which could limit the legal protections available to you and us.
As one of the conditions for the handover of the sovereignty of Hong Kong to China, China had to accept some conditions such as Hong Kong's Basic Law before its return. The Basic Law ensured Hong Kong will retain its own currency (the Hong Kong Dollar), legal system, parliamentary system and people's rights and freedom for fifty years from 1997. This agreement had given Hong Kong the freedom to function in a high degree of autonomy. The Special Administrative Region (“SAR”) of Hong Kong is responsible for its own domestic affairs including, but not limited to, the judiciary and courts of last resort, immigration and customs, public finance, currencies and extradition. Hong Kong continues using the English common law system.
Some international observers and human rights organizations have expressed doubts about the future of the relative political freedoms enjoyed in Hong Kong, and about the PRC's pledge to allow a high degree of autonomy in Hong Kong. They considered, for example, that the proposals in Article 23 of the Basic Law in 2003 (which was withdrawn due to mass opposition) might have undermined autonomy. On June 10, 2014, Beijing released a new report asserting its authority over the territory. This ignited criticism from many people in Hong Kong, who said that the Communist leadership was reneging on its pledges to abide by the "one country, two systems" policy that allows for a democratic, autonomous Hong Kong under Beijing's rule.
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If the PRC were to, in fact, renege on its agreement to allow Hong Kong to function autonomously, this could potentially impact Hong Kong’s common law legal system and may in turn bring about uncertainty in, for example, the enforcement of our contractual rights. This could, in turn, materially and adversely affect our business and operation. Additionally, intellectual property rights and confidentiality protections in Hong Kong may not be as effective as in the United States or other countries. Accordingly, we cannot predict the effect of future developments in the Hong Kong legal system, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, or the preemption of local regulations by national laws. These uncertainties could limit the legal protections available to us, including our ability to enforce our agreements with our customers.
It will be difficult to acquire jurisdiction and enforce liabilities against our officers, directors and assets based in Hong Kong.
Substantially all of our assets will be located in Hong Kong and our officers and our present directors reside outside of the United States. As a result, it may not be possible for United States investors to enforce their legal rights, to effect service of process upon our directors or officers or to enforce judgments of United States courts predicated upon civil liabilities and criminal penalties of our directors and officers under Federal securities laws.
We may have difficulty establishing adequate management, legal and financial controls in Hong Kong, which could impair our planning processes and make it difficult to provide accurate reports of our operating results.
Although we will be required to implement internal controls, we may have difficulty in hiring and retaining a sufficient number of qualified employees to work in Hong Kong in these areas. As a result of these factors, we may experience difficulty in establishing the required controls, making it difficult for management to forecast its needs and to present the results of our operations accurately at all times. If we are unable to establish the required controls, market makers may be reluctant to make a market in our stock and investors may be reluctant to purchase our stock, which would make it difficult for you to sell any shares of Common Stock that you may own or acquire.
Because our funds are held in banks which do not provide insurance, the failure of any bank in which we deposit our funds could affect our ability to continue in business.
Banks and other financial institutions in Hong Kong do not provide insurance for funds held on deposit. The Hong Kong Deposit Protection Board manages and supervises the operation of the Deposit Protection Scheme, which protects deposit amounts up to only $64,517 (HK$500,000) As a result, in the event of a bank failure, we may not have access to funds on deposit. Depending upon the amount of money we maintain in a bank that fails, our inability to have access to our cash could impair our operations, and, if we are not able to access funds to pay our employees and other creditors, we may be unable to continue in business.
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RISKS RELATED TO DOING BUSINESS IN THE PEOPLE’S REPUBLIC OF CHINA
Changes in the political and economic policies of the PRC government may materially and adversely affect our business, financial condition and results of operations and may result in our inability to sustain our growth and expansion strategies.
Some of our operations are conducted in the People’s Republic of China (“PRC”) and part of our revenue is sourced from the PRC. Accordingly, our financial condition and results of operations are affected to a significant extent by economic, political and legal developments in the PRC.
The PRC economy differs from the economies of most developed countries in many respects, including the extent of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. Although the PRC government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets, and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the government. In addition, the PRC government continues to play a significant role in regulating industry development by imposing industrial policies. The PRC government also exercises significant control over China's economic growth by allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, regulating financial services and institutions and providing preferential treatment to particular industries or companies.
While the PRC economy has experienced significant growth in the past three decades, growth has been uneven, both geographically and among various sectors of the economy. The PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures may benefit the overall PRC economy, but may also have a negative effect on us. Our financial condition and results of operation could be materially and adversely affected by government control over capital investments or changes in tax regulations that are applicable to us. In addition, the PRC government has implemented in the past certain measures, including interest rate increases, to control the pace of economic growth. These measures may cause decreased economic activity, which in turn could lead to a reduction in demand for our services and consequently have a material adverse effect on our businesses, financial condition and results of operations.
There are uncertainties regarding the interpretation and enforcement of PRC laws, rules and regulations.
As some of our operations are conducted in the PRC, and are governed by PRC laws, rules and regulations. Our PRC Subsidiaries, Shanghai Takung and Tianjin Takung are subject to laws, rules and regulations applicable to foreign investment in China. The PRC legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions may be cited for reference but have limited precedential value.
In 1979, the PRC government began to promulgate a comprehensive system of laws, rules and regulations governing economic matters in general. The overall effect of legislation over the past three decades has significantly enhanced the protections afforded to various forms of foreign investment in China. However, China has not developed a fully integrated legal system, and recently enacted laws, rules and regulations may not sufficiently cover all aspects of economic activities in China or may be subject to significant degree of interpretation by PRC regulatory agencies and courts. In particular, because these laws, rules and regulations are relatively new, and because of the limited number of published decisions and the non-precedential nature of such decisions, and because the laws, rules and regulations often give the relevant regulator significant discretion in how to enforce them, the interpretation and enforcement of these laws, rules and regulations involve uncertainties and can be inconsistent and unpredictable. In addition, the PRC legal system is based in part on government policies and internal rules, some of which are not published on a timely basis or at all, and which may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until after the occurrence of the violation.
Any administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources and management attention. Since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. These uncertainties may impede our ability to enforce the contracts we have entered into and could materially and adversely affect our business, financial condition and results of operations.
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PRC regulations regarding acquisitions impose significant regulatory approval and review requirements, which could make it more difficult for us to pursue growth through acquisitions.
Under the PRC Anti-Monopoly Law, companies undertaking acquisitions relating to businesses in China must notify MOFCOM, in advance of any transaction where the parties' revenues in the China market exceed certain thresholds and the buyer would obtain control of, or decisive influence over, the target. In addition, on August 8, 2006, six PRC regulatory agencies, including the MOFCOM, the State-Owned Assets Supervision and Administration Commission, the State Administration of Taxation, the SAIC, the China Securities Regulatory Commission, or the CSRC, and the State Administration of Foreign Exchange, or SAFE, jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, which came into effect on September 8, 2006 and was amended on June 22, 2009. Under the M&A Rules, the approval of MOFCOM must be obtained in circumstances where overseas companies established or controlled by PRC enterprises or residents acquire domestic companies affiliated with such PRC enterprises or residents. Applicable PRC laws, rules and regulations also require certain merger and acquisition transactions to be subject to security review.
If we grow to a certain threshold level, any proposed acquisition of control of, or decisive influence over, any company with revenues within China of more than RMB400 million in the year prior to any proposed acquisition would be subject to MOFCOM merger control review. As a result of, many of the transactions we may undertake could be subject to MOFCOM merger review. Complying with the requirements of the relevant regulations to complete such transactions could be time-consuming, and any required approval processes, including approval from MOFCOM, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share. In addition, MOFCOM has not accepted antitrust filings for any transaction involving parties that adopt a variable interest entity structure. If MOFCOM's practice remains unchanged, our ability to carry out our investment and acquisition strategy may be materially and adversely affected and there may be significant uncertainty as to whether transactions that we may undertake would subject us to fines or other administrative penalties and negative publicity and whether we will be able to complete large acquisitions in the future in a timely manner or at all.
We rely to a significant extent on dividends and other distributions on equity paid by our principal operating subsidiary in China to fund offshore cash and financing requirements.
We are a holding company and rely to a significant extent on dividends and other distributions on equity paid by our operating subsidiary in the PRC, for our offshore cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to our stockholders, fund inter-company loans, service any debt we may incur outside of China and pay our expenses. When our operating Subsidiary incur additional debt, the instruments governing the debt may restrict its ability to pay dividends or make other distributions or remittances to us. Furthermore, the laws, rules and regulations applicable to our PRC Subsidiary permit payments of dividends only out of their retained earnings, if any, determined in accordance with applicable accounting standards and regulations.
Under PRC laws, rules and regulations, our Subsidiary incorporated in China is required to set aside a portion of its net income each year to fund certain statutory reserves. These reserves, together with the registered equity, are not distributable as cash dividends. As a result of these laws, rules and regulations, our Subsidiary incorporated in China are restricted in their ability to transfer a portion of their respective net assets to their stockholders as dividends. In addition, registered share capital and capital reserve accounts are also restricted from withdrawal in the PRC, up to the amount of net assets held in each operating subsidiary.
Limitations on the ability to pay dividends to us could limit our ability to access cash generated by the operations of those entities, including making investments or acquisitions that could be beneficial to our businesses, pay dividends to our stockholders or otherwise fund and conduct our business.
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The services conducted by our wholly-foreign owned enterprises might be regarded as a form of online advertising or as part of services requiring an Internet content provider license or other licenses and subjecting us to other laws, rules and regulations as well as increased taxes.
Our online platform to list artwork for sale at fixed prices and other related services are currently not classified as a form of online advertising in China or as part of services requiring an ICP license or other licenses. We conduct our fixed price sale of artwork and other related business through our wholly-foreign owned enterprises in the PRC, which are not qualified to operate an online advertising business and do not hold an ICP license. However, we cannot assure you that the PRC government will not classify our business and other related services as a form of online advertising or as part of services requiring an ICP license or other licenses in the future. If new regulations characterize our business and other related services as a form of online advertising or as part of ICP services requiring an ICP license or other licenses, we may have to conduct our business through other entities, which are qualified to operate online advertising business and hold ICP or other licenses.
If we conducted our business through other entities, we may face increased scrutiny from the tax authorities and may incur additional taxes on any services fees paid by such entities to our wholly-foreign owned enterprise. In addition, advertising services are subject to a cultural construction fee under PRC law, which is a 3% surcharge in addition to the applicable value-added tax. If our business and other related services were to be considered a form of online advertising, our revenue from those services would be subject to the 3% surcharge. If that were to occur, our margins would decline and our net income could be reduced. In addition, the substantial revenue streams attributable to our business would then be collected from such other entities and subject to the risks associated with these entities. If the change in classification of our business and other related services were to be retroactively applied, we might be subject to sanctions, including payment of delinquent taxes and late payment interest.
Moreover, PRC advertising laws, rules and regulations require advertisers, advertising operators and advertising distributors to ensure that the content of the advertisements they prepare or distribute is fair and accurate and is in full compliance with applicable law. Violation of these laws, rules or regulations may result in penalties, including fines, confiscation of advertising fees, orders to cease dissemination of the advertisements and orders to publish an advertisement correcting the misleading information. In circumstances involving serious violations, the PRC government may revoke a violator's license for operating an advertising business.
In addition, for advertising content related to specific types of products and services, advertisers, advertising operators and advertising distributors must confirm that the advertisers have obtained requisite government approvals, including the advertiser's operating qualifications, proof of quality inspection of the advertised products, government pre-approval of the contents of the advertisement and filing with the local authorities. If we become subject to PRC advertising laws, we would need to take steps to monitor, and to ensure that our third-party marketing affiliates monitor, the content of any advertisements displayed on our platforms. This could require considerable resources and time, and could significantly affect the operation of our business, while also subjecting us to increased liability under the relevant laws, rules and regulations. The costs associated with complying with such laws, rules and regulations, including any penalties or fines for our failure to so comply if required, could have a material adverse effect on our business, financial condition and results of operations. Any change in the classification of our business and other related services by the PRC government may also significantly disrupt our operations and materially and adversely affect our business and prospects.
We may be treated as a resident enterprise for PRC tax purposes under the PRC Enterprise Income Tax Law, and we may therefore be subject to PRC income tax on our global income.
Under the PRC Enterprise Income Tax Law and its implementing rules, both of which came into effect on January 1, 2008, enterprises established under the laws of jurisdictions outside of China with "de facto management bodies" located in China may be considered PRC tax resident enterprises for tax purposes and may be subject to the PRC enterprise income tax at the rate of 25% on their global income. "De facto management body" refers to a managing body that exercises substantive and overall management and control over the production and business, personnel, accounting books and assets of an enterprise. The State Administration of Taxation issued the Notice Regarding the Determination of Chinese-Controlled Offshore-Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, or Circular 82, on April 22, 2009. Circular 82 provides certain specific criteria for determining whether the "de facto management body" of a Chinese-controlled offshore-incorporated enterprise is located in China. Although Circular 82 only applies to offshore enterprises controlled by PRC enterprises, not those controlled by foreign enterprises or individuals, the determining criteria set forth in Circular 82 may reflect the State Administration of Taxation's general position on how the "de facto management body" test should be applied in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises. Currently, we generate only a small portion of our revenues offshore. However, if this proportion were to increase and if we were to be considered a PRC resident enterprise, we would be subject to PRC enterprise income tax at the rate of 25% on our global income. In such case, our profitability and cash flow may be materially reduced as a result of our global income being taxed under the Enterprise Income Tax Law. We believe that none of our entities outside of China is a PRC resident enterprise for PRC tax purposes. However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term "de facto management body."
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Dividends payable to our foreign investors and gains on the sale of our Common Stock by our foreign investors may become subject to PRC taxation.
Under the Enterprise Income Tax Law and its implementation regulations issued by the State Council, a 10% PRC withholding tax is applicable to dividends payable by a resident enterprise to investors that are non-resident enterprises, which do not have an establishment or place of business in the PRC or which have such establishment or place of business but the dividends are not effectively connected with such establishment or place of business, to the extent such dividends are derived from sources within the PRC. Similarly, any gain realized on the transfer of Common Stock by such investors is also subject to PRC tax at a current rate of 10%, subject to any reduction or exemption set forth in relevant tax treaties, if such gain is regarded as income derived from sources within the PRC. If we are deemed a PRC resident enterprise, dividends paid on our Common Stock, and any gain realized by the investors from the transfer of our Common Stock, would be treated as income derived from sources within the PRC and would as a result be subject to PRC taxation. Furthermore, if we are deemed a PRC resident enterprise, dividends payable to individual investors who are non-PRC residents and any gain realized on the transfer of our common stock by such investors may be subject to PRC tax at a current rate of 20%, subject to any reduction or exemption set forth in applicable tax treaties. It is unclear whether if we or any of our subsidiaries established outside China are considered a PRC resident enterprise, holders of our common stock would be able to claim the benefit of income tax treaties or agreements entered into between China and other countries or areas and to claim foreign tax credit if applicable. If dividends payable to our non-PRC investors, or gains from the transfer of our common stock by such investors are subject to PRC tax, the value of your investment in our common stock may decline significantly.
We and our stockholders face uncertainties with respect to indirect transfers of equity interests in PRC resident enterprises or other assets attributed to a PRC establishment of a non-PRC company, or other assets attributable to a PRC establishment of a non-PRC company.
On February 3, 2015, the State Administration of Taxation issued the Bulletin on Issues of Enterprise Income Tax and Indirect Transfers of Assets by Non-PRC Resident Enterprises, or Bulletin 7, which replaced or supplemented certain previous rules under the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises, or Circular 698, issued by the State Administration of Taxation, on December 10, 2009. Pursuant to this Bulletin, an "indirect transfer" of assets, including equity interests in a PRC resident enterprise, by non-PRC resident enterprises may be recharacterized and treated as a direct transfer of PRC taxable assets, if such arrangement does not have a reasonable commercial purpose and was established for the purpose of avoiding payment of PRC enterprise income tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax.
According to Bulletin 7, "PRC taxable assets" include assets attributed to an establishment in China, immoveable properties located in China, and equity investments in PRC resident enterprises, in respect of which gains from their transfer by a direct holder, being a non-PRC resident enterprise, would be subject to PRC enterprise income taxes. When determining whether there is a "reasonable commercial purpose" of the transaction arrangement, factors to be taken into consideration include: whether the main value of the equity interest of the relevant offshore enterprise derives from PRC taxable assets; whether the assets of the relevant offshore enterprise mainly consists of direct or indirect investment in China or if its income mainly derives from China; whether the offshore enterprise and its subsidiaries directly or indirectly holding PRC taxable assets have real commercial nature which is evidenced by their actual function and risk exposure; the duration of existence of the business model and organizational structure; the replicability of the transaction by direct transfer of PRC taxable assets; and the tax situation of such indirect transfer and applicable tax treaties or similar arrangements. In respect of an indirect offshore transfer of assets of a PRC establishment, the resulting gain is to be included with the enterprise income tax filing of the PRC establishment or place of business being transferred, and would consequently be subject to PRC enterprise income tax at a rate of 25%. Where the underlying transfer relates to the immoveable properties located in China or to equity investments in a PRC resident enterprise, which is not related to a PRC establishment or place of business of a non-resident enterprise, a PRC enterprise income tax at 10% would apply, subject to available preferential tax treatment under applicable tax treaties or similar arrangements, and the party who is obligated to make the transfer payments has the withholding obligation. Where the pay or fails to withhold any or sufficient tax, the transferor shall declare and pay such tax to the tax authority by itself within the statutory time limit. Late payment of applicable tax will subject the transferor to default interest. Bulletin 7 does not apply to transactions of sale of shares by investors through a public stock exchange where such shares were acquired from a transaction through a public stock exchange.
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There are uncertainties as to the application of Bulletin 7. As Bulletin 7 was promulgated recently, it is not clear how it will be implemented. Bulletin 7 may be determined by the tax authorities to be applicable to some of our offshore restructuring transactions or sale of the shares of our offshore subsidiaries or investments where PRC taxable assets are involved. The transferors and transferees may be subject to the tax filing and withholding or tax payment obligation, while our PRC Subsidiary may be requested to assist in the filing. Furthermore, we, our non-resident enterprises and PRC Subsidiary may be required to spend valuable resources to comply with Bulletin 7 or to establish that we and our non-resident enterprises should not be taxed under Bulletin 7, for our previous and future restructuring or disposal of shares of our offshore subsidiaries, which may have a material adverse effect on our financial condition and results of operations.
The PRC tax authorities have the discretion under Bulletin 7 to make adjustments to the taxable capital gains based on the difference between the fair value of the taxable assets transferred and the cost of investment. If the PRC tax authorities make adjustments to the taxable income of the transactions under Bulletin 7, our income tax costs associated with such potential acquisitions or disposals will increase, which may have an adverse effect on our financial condition and results of operations.
Restrictions on currency exchange may limit our ability to utilize our revenue effectively.
A significant portion of our revenue is denominated in Renminbi. The Renminbi is currently convertible under the "current account," which includes dividends, trade and service-related foreign exchange transactions, but not under the "capital account," which includes foreign direct investment and loans, including loans we may secure from our onshore subsidiaries or variable interest entities. Currently, our PRC subsidiaries, which are wholly-foreign owned enterprises, may purchase foreign currency for settlement of "current account transactions," including payment of dividends to us, without the approval of SAFE by complying with certain procedural requirements. However, the relevant PRC governmental authorities may limit or eliminate our ability to purchase foreign currencies in the future for current account transactions. Since a significant amount of our future revenue is denominated in Renminbi, any existing and future restrictions on currency exchange may limit our ability to utilize revenue generated in Renminbi to fund our business activities outside of the PRC or pay dividends in foreign currencies to our stockholders, including holders of our shares of common stock. Foreign exchange transactions under the capital account remain subject to limitations and require approvals from, or registration with, SAFE and other relevant PRC governmental authorities. This could affect our ability to obtain foreign currency through debt or equity financing for our subsidiaries and the variable interest entities.
Our significant amount of deposits in certain banks in China may be at risk if these banks go bankrupt or otherwise do not have the liquidity to pay us during our deposit period.
On May 1, 2015, China’s new Deposit Insurance Regulation came into effect, pursuant to which banking financial institutions, such as commercial banks, established in China are required to purchase deposit insurance for deposits in RMB and in foreign currency. Under this regulation, depositors will be fully indemnified for their deposits and interests in an aggregate amount up to a limit of RMB500,000. Deposits or interests over such limit will only be covered by the bank’s liquidation assets. Therefore, although this requirement to purchase deposit insurance may help, to a certain extent, prevent Chinese banks from going bankrupt, it would not be effective in providing effective protection for our accounts, as our aggregate deposits are much higher than the compensation limit.
RISKS RELATING TO INVESTMENT IN OUR SECURITIES
An active public market for our Common Stock may not develop or be sustained, which would adversely affect the ability of our investors to sell their securities in the public market.
We cannot predict the extent to which an active public market for our Common Stock will develop or be sustained.
Shares eligible for future sale may adversely affect the market price of our Common Stock, as the future sale of a substantial amount of outstanding stock in the public marketplace could reduce the price of our Common Stock.
Holders of a significant number of our shares and/or their designees may be eligible to sell our shares of Common Stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144, promulgated under the Securities Act (“Rule 144”), subject to certain limitations. In general, pursuant to Rule 144, a non-affiliate stockholder (or stockholders whose shares are aggregated) who has satisfied a six-month holding period, and provided that there is current public information available, may sell all of its securities. Rule 144 also permits the sale of securities, without any limitations, by a non-affiliate that has satisfied a one-year holding period. Any substantial sale of Common Stock pursuant to any resale prospectus or Rule 144 may have an adverse effect on the market price of our Common Stock by creating an excessive supply.
If we fail to maintain effective internal controls, we may not be able to accurately report our financial results or prevent fraud, and our business, financial condition, results of operations and reputation could be materially and adversely affected.
We are a public company and our internal controls are essential to the integrity of our business and financial results. Our public reporting obligations place a strain on our management, operational and financial resources and systems. Although we have implemented measures to enhance our internal controls, and plan to take steps to further improve our internal controls, if we encounter difficulties in improving our internal controls and management information systems, we may incur additional costs and management time in meeting our improvement goals. We cannot assure you that the measures taken to improve our internal controls will be effective. If we fail to maintain effective internal controls in the future, our business, financial condition, results of operations and reputation may be materially and adversely affected.
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Compliance with changing regulation of corporate governance and public disclosure will result in additional expenses.
Changing laws, regulations and standards relating to corporate governance and public disclosure, including SOX and related SEC regulations, have created uncertainty for public companies and significantly increased the costs and risks associated with accessing the public markets and public reporting. Our management team will need to invest significant management time and financial resources to comply with both existing and evolving standards for public companies, which will lead to increased general and administrative expenses and a diversion of management time and attention from revenue generating activities to compliance activities.
We do not foresee paying cash dividends in the near future.
We do not plan to declare or pay any cash dividends on our shares of Common Stock in the foreseeable future and currently intend to retain any future earnings for funding growth. As a result, investors should not rely on an investment in our securities if they require the investment to produce dividend income.
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Item 1B. Unresolved Staff Comments.
Not applicable.
We lease approximately 1,119.45 square feet of office space at Rooms 2003 and 2004 on the 20th Floor of Hutchison House, Hong Kong. The lease expires on May 15, 2019 and provides for a monthly rent of $12,705 (HK$98,464) and a monthly service fee of $1,084 (HK$8,398).
We also lease approximately 1,904 square feet of office space at Room 2018 on the 20th Floor of Hutchison House, Hong Kong. The lease expires on April 15, 2018 and provides for a monthly rent of $17,689 (HK$137,088) and a monthly service fee of $1,597 (HK$12,376).
We lease approximately 146.33 square feet of storage space at Private Storage Area 13 on the 18th Floor of Cheung HingShing Center, Hong Kong. The lease expires on November 20, 2017 and provides for a monthly rent of $1,391 (HK$10,780). We leased an additional 194 square feet of storage space on the same floor, which expires on April 30, 2018 and provides for a monthly rent of $1,842 (HK$14,300)
We lease approximately 538.2 square feet of storage space at the Linji Building A, No. 8 Street 8, Shunyi District, Beijing, China 101300. The lease expires on August 14, 2017 and provides for a monthly rent of $1,467 (RMB 9,500) and a monthly service fee of $88 (RMB 570).
We also lease approximately 2,152.8 square feet of storage space at LingtongGongyuan, Southeast of Hebin Park, Tanggu, Binhai New Area, Tianjin City, China. The lease expires on July 14, 2025 and provides for a monthly rent and monthly service fee of $1,286 (RMB 8,333).
On January 11, 2016, Shanghai Takung leased approximately 906.5 square feet of office space at Units 04, 16th floor, Shanghai Times Square Office Building, No. 93 HuaiHai Middle Road, Huang Pu, Shanghai, China. The lease expires on January 10, 2018 and provides for a monthly rent of $4,350 (RMB 28,178) and monthly service fee of $520 (RMB 3,369).
On November 20, 2016, Shanghai Takung leased approximately 4,438.5 square feet of office space at No.1701, 17/F, Block A, Huaxing Times Plaza, 478 Wensan Road, Xihu District, Hangzhou, China. The lease expires on November 19, 2019 and provides for a monthly rent and monthly service fee of $7,390 (RMB 49,070).
On December 16, 2016, Tianjin Takung leased approximately 13,371 square feet of office space at 2805-10, Financial Street Center, No. 2 Dagu North Road, Heping District, Tianjin, China. The lease expires on December 15, 2018 and provides for a monthly rent of $21,630 (RMB 143,622) and monthly service fee of $4,776 (RMB 31,712)
We know of no material, active, pending or threatened proceeding against us or our subsidiaries, nor are we, or any subsidiary, involved as a plaintiff or defendant in any material proceeding or pending litigation.
Item 4. Mine Safety Disclosures.
Not applicable.
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Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market for Common Equity and Related Stockholder Matters
Our Common Stock was originally quoted on the OTCBB from October 2013 under the designation “CARD”. On November 5, 2014, we amended our name from “Cardigant Medical Inc.” to “Takung Art Co., Ltd and on November 12, 2014, our symbol was changed to “TKAT”. Our Common Stock start to trade on the NYSE from March 22, 2017. Until November 25, 2015, there had been no trading in our Common Stock. The table below presents the high and low bid for our Common Stock for the quarter from October 1, 2015 through December 31, 2016. These prices reflect inter-dealer prices, without retail markup, markdown, or commission, and may not represent actual transactions.
| Year ended December 31, 2015 | High | Low | ||||||
| 4th Quarter | $ | 3.60 | $ | 1.95 | ||||
| Year ended December 31, 2016 | High | Low | ||||||
| 1st Quarter | $ | 3.60 | $ | 2.80 | ||||
| 2nd Quarter | $ | 6.41 | $ | 4.00 | ||||
| 3rd Quarter | $ | 6.83 | $ | 6.40 | ||||
| 4th Quarter | $ | 7.70 | $ | 5.75 | ||||
Holders of Our Common Stock
As of December 31, 2016, we had 140 stockholders of our Common Stock, including the shares held in street name by brokerage firms. The holders of Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. Holders of the Common Stock have no preemptive rights and no right to convert their Common Stock into any other securities. There are no redemption or sinking fund provisions applicable to the Common Stock.
Dividends
We have not paid dividends on our Common Stock and do not anticipate paying such dividends in the foreseeable future. We will rely on dividends from our Hong Kong and China operation entities for our funds and Hong Kong and Chinese regulations may limit the amount of funds distributed to us from our Hong Kong and Chinese operation entities, which will affect our ability to declare any dividends.
Stock Option and Warrant Grants
On August 26, 2015, we approved our 2015 Incentive Stock Plan, allowing for the issuance of up to 1,037,000 shares of our Common Stock. On August 27, 2015, we registered the shares of Common Stock reserved for issuance under our 2015 Incentive Stock Plan with the SEC on a registration statement on Form S-8 under the Securities Act. On August 28, 2015, we issued 300,000 shares of our Common Stock under the 2015 Incentive Stock Plan as partial compensation to third party consultants.
During 2016, the Company granted 431,525 and forfeited 3,000 stock options. The outstanding stock option as of December 31, 2016 is 428,525.
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Registration Rights
On October 27, 2016, we entered into a Financial Advisory Agreement with Maxim Group, LLC (“Maxim”) to provide general financial advisory and banking services, including, assisting and advising us with respect to our strategic planning process, business plans and capitalization, helping us broaden our shareholder base, increasing shareholder awareness through non-deal roadshows and other value-added services such as making strategic introductions, advising us on potential financing alternatives and merger and acquisition criteria and activity. As consideration of the provision of such services, we agreed to issue to Maxim or its designees 50,000 restricted shares of our Common Stock with unlimited piggyback registration rights.
Other than the aforementioned registration rights, we have no other obligation to register under the Securities Act any of our shares of Common Stock.
Equity Compensation Plans
On August 26, 2015, we approved our 2015 Incentive Stock Plan, allowing for the issuance of up to 1,037,000 shares of our Common Stock. On August 27, 2015, we registered the shares of Common Stock reserved for issuance under our 2015 Incentive Stock Plan with the SEC on a registration statement on Form S-8 under the Securities Act. On August 28, 2015, we issued 300,000 shares of our Common Stock under the 2015 Incentive Stock Plan as partial compensation to third party consultants.
During 2016, the Company granted 431,525 and forfeited 3,000 stock options. The outstanding stock option as of December 31, 2016 is 428,525.
Stock Transfer Agent
Our stock transfer agent is VStock Transfer, LLC, 18 Lafayette Place, Woodmere, New York 11598.
Dividends
We have not declared or paid any dividends on our Common Stock and presently do not expect to declare or pay any such dividends in the foreseeable future. We have not yet formulated a future dividend policy in the event restrictions on our ability to pay dividends are created.
Repurchase of Equity Securities by Takung Art Co., Ltd and Affiliated Purchasers
None.
Recent Sales of Unregistered Securities
On November 16, 2015, we entered into various subscription agreements with and sold to certain investors a total of 1,000,000 shares of Common Stock at a price of $1.58 per share (the “Shares”) 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.
Each of the subscribers in the Private Placements has represented to the Company that it is an “accredited investor” as that term is defined in Rule 501(a) of Regulation D promulgated under the Securities Act. Additionally, we completed the Private Placements of the shares pursuant to Rule 903 of Regulation S of the Securities Act on the basis that the sale of the Shares was completed in "offshore transactions", as defined in Rule 902(h) of Regulation S. We did not engage in any "directed selling efforts", as defined in Regulation S, in the United States in connection with the sale of the Shares. The subscribers represented to us that they were not U.S. persons, as defined in Regulation S, and were not acquiring the Shares for the account or benefit of a U.S. person. The subscription agreements executed between us and the subscribers included statements that the Shares had not been registered pursuant to the Securities Act and that the Shares may not be offered or sold in the United States unless the Shares are registered under the Securities Act or pursuant to an exemption from the Securities Act. The subscribers agreed by execution of the subscription agreement for the Shares: (i) to resell the securities purchased only in accordance with the provisions of Regulation S or Regulation D, pursuant to registration under the Securities Act or pursuant to an exemption from registration under the Securities Act; (ii) that we are required to refuse to register any sale of the securities purchased unless the transfer is in accordance with the provisions of Regulation S or Regulation D, pursuant to registration under the Securities Act or pursuant to an exemption from registration under the Securities Act; and (iii) not to engage in hedging transactions with regards to the securities purchased unless in compliance with the Securities Act. All Shares issued were endorsed with a restrictive legend confirming that the securities had been issued pursuant to Regulation S and/or Regulation D of the Securities Act and could not be resold without registration under the Securities Act or an applicable exemption from the registration requirements of the Securities Act.
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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 Compensation Shares which are placed in an escrow account maintained with the Company’s attorneys until either (i) the Company has successfully listed its securities on the NASDAQ or other U.S. securities exchange on or before March 31, 2017, whereupon the Compensation Shares shall be forthwith delivered to Regeneration or (ii) if the Company is unsuccessful in listing its securities on the NASDAQ or other U.S. securities exchange on or before March 31, 2017, the Compensation Shares shall be returned to the Company for cancellation. Regeneration shall be entitled to “piggy-back” registration rights with respect to the Compensation Shares. The Compensation Shares were issued in reliance on an exemption from registration under Section 4(a)(2) of the Securities Act.
Both the Shares and Compensation Shares were registered under a Registration Statement on Form S-1 which went effective on February 12, 2016.
On October 27, 2016, we entered into a Financial Advisory Agreement with Maxim Group, LLC (“Maxim”) to provide general financial advisory and banking s services, including, assisting and advising us with respect to our strategic planning process, business plans and capitalization, helping us broaden our shareholder base, increasing shareholder awareness through non-deal roadshows and other value-added services such as making strategic introductions, advising us on potential financing alternatives and merger and acquisition criteria and activity. As consideration of the provision of such services, we agreed to issue to Maxim or its designees 50,000 restricted shares of the Company’s Common Stock (“Maxim Shares”) with unlimited piggyback registration rights. Maxim shall also be entitled to additional fees in connection with any financings and transactions arranged by Maxim and reimbursement of reasonable expenses. As additional consideration, we shall, during the term of the Financial Advisory Agreement and for twelve (12) months thereafter, offer to retain Maxim as lead book running manager if we were to propose to affect a public offering of our securities on a US exchange, private placement of our securities or other financing.
On November 30, 2016, we issued 50,000 restricted shares of our Common Stock to Maxim pursuant to the Financial Advisory Agreement. The Maxim Shares were issued in reliance on an exemption from registration under Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”).
On March 22, 2017, we issued an aggregate of 19,606 restricted shares of our Common Stock to three of our non-executive directors, namely, Messrs. Joseph Levinson, John Levy and Kwok Keung William Tsui under our 2015 Incentive Stock Plan (which was registered on a registration statement on Form S-8 under the Securities Act and filed with the SEC on August 27, 2015) as partial consideration for their services as directors pursuant to their respective director appointment letters.
Item 6. Selected Financial Data.
Not applicable.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with our financial statements and related notes thereto.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain statements that may be deemed “forward-looking statements” within the meaning of United States of America securities laws. All statements, other than statements of historical fact, that address activities, events or developments that we intend, expect, project, believe or anticipate and similar expressions or future conditional verbs such as will, should, would, could or may occur in the future are forward-looking statements. Such statements are based upon certain assumptions and assessments made by our management in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe to be appropriate.
These statements include, without limitation, statements about our anticipated expenditures, including those related to general and administrative expenses; the potential size of the market for our services, future development and/or expansion of our services in our markets, our ability to generate revenues, our ability to obtain regulatory clearance and expectations as to our future financial performance. Our actual results will likely differ, perhaps materially, from those anticipated in these forward-looking statements as a result of various factors, including: our need and ability to raise additional cash.. The forward-looking statements included in this report are subject to a number of additional material risks and uncertainties, including but not limited to the risks described in our filings with the Securities and Exchange Commission.
The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and the related notes to those statements included in this filing. In addition to historical financial information, this discussion may contain forward-looking statements reflecting our current plans, estimates, beliefs and expectations that involve risks and uncertainties. As a result of many important factors, particularly those set forth under "Special Note Regarding Forward-Looking Statements", our actual results and the timing of events may differ materially from those anticipated in these forward-looking statements.
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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 887,410 restricted shares (before Reverse Stock Split was 22,185,230 restricted shares) of Common Stock of the Company from a group of three former stockholders 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 stockholder 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 (“Cardigant 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 all the issued and outstanding shares of Hong Kong Takung, a privately held Hong Kong corporation, pursuant to the Share Exchange Agreement and Hong Kong Takung became the wholly owned subsidiary of us in a reverse merger, or the Merger. Pursuant to the Merger, all of the issued and outstanding shares of Hong Kong Takung common stock were converted, at an exchange ratio of 10.4988-for-1, into an aggregate of 8,399,040 shares (before Reverse Stock Split was 209,976,000 shares) of our common stock and Hong Kong Takung became a wholly owned subsidiary of us. The holders of our common stock as of immediately prior to the Merger held an aggregate of 933,236 shares (before Reverse Stock Split was 23,330,662 shares) of our 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, our name was changed from “Cardigant Medical Inc.” to “Takung Art Co., Ltd.”.
Hong Kong Takung is a limited liability company incorporated on September 17, 2012 under the laws of Hong Kong, Special Administrative Region, China. Although Takung was incorporated in 2012, it did not commence business operations until late 2013.
As a result of the transfer of the excluded assets pursuant to the Contribution Agreement and the acquisition of all the issued and outstanding shares of Hong Kong Takung, we are no longer conducting the Cardigant Business and have now assumed Hong Kong Takung’s business operations as it now our only operating wholly-owned subsidiary.
Hong Kong Takung operates an electronic online platform located at http://eng.takungae.com for artists, art dealers and art investors to offer and trade in valuable artwork.
Through Hong Kong Takung, we offer on-line listing and trading services that allow artists/art dealers/owners to access a much bigger art trading market where they can engage with a wide range of investors that they might not encounter without our platform. Our platform also makes investment in high-end and expensive artwork more accessible to ordinary people without substantial financial resources.
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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.
Our headquarters are located in Hong Kong, Special Administrative Region, People’s Republic of China and we conduct our business primarily in Hong, Shanghai and Tianjin. Recently, we set up a new office in Hangzhou to conduct technology development. Our principal executive offices are located at Flat/RM 03-04, 20/F, Hutchison House, 10 Harcourt Road, Central Hong Kong.
On July 28, 2015, Hong Kong Takung incorporated a wholly owned subsidiary, Takung (Shanghai) Co., Ltd. (“Shanghai Takung”), in Shanghai Free-Trade Zone (SFTZ) in Shanghai, China, with a registered capital of $1 million. Shanghai Takung is engaged in providing services to its parent company Hong Kong Takung by receiving deposits from and making payments to online artwork traders for and on behalf of Hong Kong Takung.
On January 27, 2016, Hong Kong Takung incorporated another subsidiary, Takung Cultural Development (Tianjin) Co., Ltd (“Tianjin Takung”), a limited liability company, with a registered capital of $1 million in Tianjin Pilot Free Trade Zone in Tianjin, People’s Republic of China. Tianjin Takung provides technology development services to Hong Kong Takung and Shanghai Takung, and also carries out marketing and promotion activities in mainland China.
Since July 28, 2016, we have expanded access to our trading platform to residents of Russia, Mongolia, Australia and New Zealand – our first major expansion of operations outside of China. To further stimulate trading interest, we have added selected portfolios from these countries to our platform, which now numbers 181 artworks including three Russian painting portfolios and fifteen Mongolian paintings.
Results of Operation of Takung
Hong Kong Takung operates a platform for offering and trading artwork. We generate revenue from our services in connection with the offering and trading of artwork ownership units on our system, primarily consisting of listing fees, trading commissions, and management fees.
For the years ended December 31, 2016 and 2015
Revenue
The following tables set forth our consolidated statements of income data:
| For the Year Ended December 31 | ||||||||
| 2016 | 2015 | |||||||
| Revenue | ||||||||
| Listing fee | $ | 10,914 ,300 | $ | 4,834,126 | ||||
| Commission | 5,416,436 | 6,145,261 | ||||||
| Authorized agent subscription revenue | 1,049,364 | 239,260 | ||||||
| Management fee | 1,761,977 | 115,542 | ||||||
| Annual fee | 1,352 | 1,752 | ||||||
| Total revenue | 19,143,429 | 11,335,941 | ||||||
| Cost of revenue | 1,129,031 | 805,684 | ||||||
| Gross profit | 18,014,398 | 10,530,257 | ||||||
| Selling expense | 2,272,339 | 584,179 | ||||||
| General and administrative expense | 7,299,543 | 3,078,217 | ||||||
| Total expenses | 9,571,882 | 3,662,396 | ||||||
| Income from operations | 8,442,516 | 6,867,861 | ||||||
| Total other loss | (302,373 | ) | (149,421) | |||||
| Income before provision for income taxes | 8,140,143 | 6,718,440 | ||||||
| Provision for income taxes | 1,769,449 | 1,282,331 | ||||||
| Net income | $ | 6,370,694 | $ | 5,436,109 | ||||
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The following tables set forth our consolidated statements of income data (as a percentage of revenue):
| For the Year Ended December 31 | ||||||||
| 2016 | 2015 | |||||||
| Revenue | 100 | % | 100 | % | ||||
| Listing fee | 57 | 43 | ||||||
| Commission | 28 | 54 | ||||||
| Authorized agent subscription revenue | 6 | 2 | ||||||
| Management fee | 9 | 1 | ||||||
| Annual fee | - | - | ||||||
| Total revenue | 100 | 100 | ||||||
| Cost of revenue – Direct revenue | 6 | 7 | ||||||
| Gross profit | 94 | 93 | ||||||
| Selling expense | 12 | 5 | ||||||
| General and administrative expense | 38 | 27 | ||||||
| Total expenses | 50 | 32 | ||||||
| Income from operations | 44 | 61 | ||||||
| Total other (loss) income | (2 | ) | (2) | |||||
| Income before provision for income taxes | 42 | 59 | ||||||
| Provision for income taxes | 9 | 11 | ||||||
| Net income | 33 | % | 48 | % | ||||
Listing fee revenues were $10,914,300 and $4,834,126; commission revenues were $5,416,436 and $6,145,261 (net of applicable rebates and discounts); gross management fee revenues were $1,761,977 and $115,542; annual fee income were $1,352 and $1,752; authorized agent subscription revenue were $1,049,364 and $239,260 for the years ended December 31, 2016 and 2015, respectively.
| (i) | Listing fee revenue |
Listing fee revenue is calculated based on a percentage of the listing value and transaction value of artworks.
Listing value is the total offering price of an artwork when the ownership units are initially listed on our trading platform. We utilize an appraised value as a basis to determine the appropriate listing value for each artwork, or portfolio of artworks.
As of the year ended December 31, 2016, a total of 181 sets of artwork were listed for trade on our platform —comprising 31 sets of paintings and calligraphies from famous Chinese, Russian and Mongolian artists ranging in listing value from $128,833 (HK$1,000,000) to $1,545,993 (HK$12,000,000), 18 pieces of jewelry ranging in listing value from $38,650 (HK$300,000) to $515,331 (HK$4,000,000), 96 pieces of precious stones ranging in listing value from $12,883 (HK$100,000) to $772,997 (HK$6,000,000), 29 pieces of amber ranging in listing value from $128,833 (HK$1,000,000) to $1,030,662 (HK$8,000,000), 4 pieces of antique mammoth ivory carving ranging in listing value from $128,833 (HK$1,000,000) to $257,666 (HK$2,000,000), 2 pieces of porcelain pastel paintings ranging in listing value from $103,066 (HK$800,000) to $2,318,990 (HK$18,000,000) and 1 piece of porcelain with listing value of $64,416 (HK$500,000).
Compared to 2015, we listed a total of 132 pieces of artworks in 2016. The listing fees ranged from 46% to 48% of listing value for paintings and calligraphies, 29% to 48% of listing value for jewelry, 29% to 48.5% of listing value for precious stones, 45% to 48% of listing value for ambers, 47% to 48.5% of listing value for antique mammoth ivory carving, 45% to 46% of listing value for porcelain pastel paintings and 47.5% of listing value for porcelain. The total listing value of artwork during 2016 was $24,942,025 (HK$193,600,000).
By the year ended December 31, 2015, 49 sets of artwork were listed for trade on our platform —9 sets of paintings and calligraphies from famous Chinese and Russian artists ranging in listing value from $387,062 (HK$3,000,000) to $1,548,247 (HK$12,000,000), 4 pieces of jewelry ranging in listing value from $335,454 (HK$2,600,000) to $516,082 (HK$4,000,000), 25 pieces of precious stones ranging in listing value from $12,902 (HK$100,000) to $645,103 (HK$5,000,000), and 11 pieces of amber ranging in listing value from $154,825 (HK$1,200,000) to $903,144 (HK$7,000,000).
The listing fees ranged from 22.5% to 47% of listing value for paintings and calligraphies, 31% of listing value for jewelry, 32% to 47% of listing value for precious stones, and 32% to 47% of listing value for ambers. The total listing value of artwork during 2015 was $11,596,409 (HK$89,900,000).
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The increase in number of pieces listed, listing values and corresponding listing fees charged during the year ended December 31, 2016 compared to the year ended December 31, 2015 resulted in an increase in listing fee revenue in the current period.
| (ii) | Commission fee revenue |
For non-VIP Traders, the commission revenue was calculated based on a percentage of transaction value of artworks, which we charge trading commissions for the purchase and sale of the ownership shares of the artworks. The commission is typically 0.3% of the total amount of each transaction, but as an initial promotion, we currently charge a reduced fee of 0.2% (resulting in an aggregate of 0.4% for both buy and sell transactions) of the total transaction amount with the minimum charge of $0.13 (HK$1). The commission is accounted for as revenue and immediately deducted from the proceeds from the sales of artwork units when a transaction is completed.
For selected VIP Traders, we ran a discount program for them starting from April 1, 2015, when their trading volumes of the certain artworks reached an agreed level in each month, a contractually determined flat rate of trading commission was applied to the transactions of these certain artworks. Any trading commission charges incurred by the VIP Traders over the flat rate would be waived. The discounted rate varied between selected artworks. This discount program ended on March 31, 2016.
For selected Traders, starting from April 1, 2016, we charged a predetermined monthly fee (unlimited trades for specific artworks) for specific artworks. These Traders are selected by authorized agents and reviewed by us. After review, we negotiate individually with each one of them to determine a fixed monthly fee. Different Traders may have different rates but once negotiated and agreed to, the monthly fee is fixed.
A separate discount program was offered to buying Traders (“Buyers”) by waiving their trading commissions during certain promotion periods. For example, from April 9, 2015 to June 8, 2015, we waived all Buyers’ trading commissions. The program ended on December 31, 2015.
Commission rebate programs are offered to Traders and service agents. We would rebate 15% of the commission earned from the transactions of new Traders referred by the existing Traders. The rebate rate was adjusted from 5% to 15%, starting from January 1, 2016. For service agents, we rebate a total of 40% to 60% of the commission earned from transactions with new Traders to the service agents when they bring in an agreed number of Traders to the trading platform. For service agents who have individual referrers referring Traders to us, we will, after rebating such individual referrers 15% of the commission earned from the transactions of new Traders they referred, deduct such 15% of the commission from the rebates payable to the service agents to which such individual referrers belong. The commission rebate is recognized as reduction of the commission revenue.
The rebates and discounts are recognized as a reduction of revenue in the same period the related revenue is recognized.
Our trading volume and transaction value amounts increased significantly from 2015 when we commenced operations in Shanghai and consequently added a significant number of Traders from mainland China as they could now settle their trades in Renminbi. This trend continued into 2016. Trading volume increased by 251% and trading amount by 303% for the year ended December 31, 2016 compared to corresponding year in 2015.
In spite of this, total commission revenue decreased by $728,825 or 12% for the year ended December 31, 2016 to $5,416,436 compared to $6,145,261 for the year ended December 31, 2015 primarily because of the change in our commission fee policy. From April 1, 2016 onwards, our selected Traders pay a predetermined monthly fixed fee for their trades in specific artworks while our other non-VIP Traders continue to pay a commission calculated based on a percentage of transaction value of artworks.
| (iii) | Management fee revenue |
We charge Traders a management fee to cover the costs of insurance, storage, and transportation for an artwork and trading management of artwork units, which are calculated at $0.0013 (HK$0.01) per 100 artwork units per day. The management fee is deducted from proceeds from the sale of artwork units.
During the year ended December 31, 2016, management fee revenue increased by $1,646,435, from $115,542 for the year ended December 31, 2015 to $1,761,977 for the year ended December 31, 2016, due to the aforementioned increase in artwork units listed on the platform. This was in spite of the promotions we ran that year. From April 9, 2015 to June 8, 2015, we waived all buying Traders’ management fees and from September 1, 2016 to December 31, 2016, we waived management fees for certain VIP Traders. We recognized these promotions as a reduction of revenue, which was recognized upon the completion of the transactions.
| (iv) | Other revenue |
During the year ended December 31, 2016, authorized agent subscription revenue increased by $810,104, from $239,260 for the year ended December 31, 2015 to $1,049,364 for the year ended December 31, 2016.
During the year ended December 31, 2016, annual fee revenue decreased by $400, from $1,752 for the year ended December 31, 2015 to $1,352 for the year ended December 31, 2016.
Cost of Revenue
Cost of revenue for the years ended December 31, 2016 and 2015 were $1,129,031 and $805,684, respectively. Our cost of revenue primarily includes the leasing of equipment, depreciation and amortization of hardware and software for our trading platform.
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In the third quarter of 2014, we entered into an agreement with Qianrong to provide software development services with a total contract amount of $902,592 (HK$6,995,000). The services contracted for are divided into different modules, according to different upgrades and new functionalities. As of December 31, 2016, nine out of the ten modules have been completed and are operational. We have started to capitalize (with a total cost of $1,069,853 (HK$8,295,000)) and amortized these costs once the modules were completed. As of December 31, 2015, eight out of the ten modules were completed and operational. We started to capitalize (with a total cost of $554,143 (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 $18,014,398 for the year ended December 31, 2016, compared to $10,530,257 for the year ended December 31, 2015. The increase was primarily due to increased revenue resulting from higher transaction volume with more artworks trading on our platform.
The gross profit margin during the year ended December 31, 2016 was comparable to the corresponding period in 2015.
Listing fees contributed 57.0% of the total revenue compared to 42.6% in the year ended December 31, 2015, while commission revenue contributed 28.3% compared to 54.2% in the year ended in December 31, 2015. Cost of revenue increased in line with the revenue. Consequently, we posted a comparable gross profit margin of 94.1% and 92.9% for the years ended December 31, 2016 and 2015 respectively.
Operating Expenses
General and administrative expenses for the year ended December 31, 2016 were $7,299,543, compared to $3,078,217 for the year ended December 31, 2015. Despite the decrease in consultancy fee by $56,801, the substantial increase was primarily due to an increase in legal and professional fees by $265,561 because of more filing and compliance activities, an increase in salaries by $2,190,331 as a result of an increase in employee headcount, an increase in office, insurance and rental expenses by $727,789 because of newly rented offices in Hong Kong and the PRC, an increase in travelling expenses by $264,402 because of more travelling needed to set up Shanghai Takung and Tianjin Takung, an increase in stock-based compensation amounting to $551,207 due to amortization of expenses related to compensation for consulting services and employee stock options in 2016; an increase of $163,690 in non-deductible input VAT expense; as well as an increase of $115,147 in other expenses.
The following table sets forth main the components of the Company’s general and administrative expenses for the years ended December 31, 2016 and 2015.
| Year ended December 31, 2016 |
Year ended December 31, 2015 |
|||||||||||||||
| Amount($) | % of Total | Amount($) | % of Total | |||||||||||||
| Consultancy fee | 477,551 | 6.5 | % | 534,352 | 17.4 | % | ||||||||||
| Legal and professional fees | 1,066,384 | 14.6 | % | 800,823 | 26.0 | % | ||||||||||
| Salary and welfare | 2,916,173 | 40.0 | % | 725,842 | 23.6 | % | ||||||||||
| Office, insurance and rental expenses | 1,080,941 | 14.8 | % | 353,152 | 11.5 | % | ||||||||||
| Traveling and accommodation expenses | 467,245 | 6.4 | % | 202,843 | 6.6 | % | ||||||||||
| Stock-based compensation | 865,450 | 11.9 | % | 314,243 | 10.2 | % | ||||||||||
| Non-deductible input VAT expense | 163,690 | 2.2 | % | - | - | % | ||||||||||
| Others | 262,109 | 3.6 | % | 146,962 | 4.7 | % | ||||||||||
| Total G&A | $ | 7,299,543 | 100 | % | $ | 3,078,217 | 100 | % | ||||||||
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The Company also incurred a total of $2,272,339 and $584,179 in selling expenses for the year ended December 31, 2016 and 2015, respectively. The increase of selling expense was due to more promotion and advertising events launched during the year 2016.
Foreign currency loss
We had a foreign currency loss for the year ended December 31, 2016 of $516,350, versus a loss of 163,469 for the year ended December 31, 2015.
We incurred a foreign currency loss because we have a RMB capital pool that should have been converted to HKD that we could not achieve because of the capital control in the PRC. The increase during 2016 was due to the fact that RMB devalued at a quicker rate and the Company’s RMB capital pool was larger compared to the previous year.
Net Income
We had a net income for the year ended December 31, 2016 of $6,370,694, versus $5,436,109 for the year ended December 31, 2015.
The increase in net income during 2016 was mainly due to an increase in listing fee revenue and partially offset by increase in general and administrative expenses, selling expenses and exchange loss.
Liquidity and Capital Resources
The following tables set forth our consolidated statements of cash flow
| For the Year Ended December 31 | ||||||||
| 2016 | 2015 | |||||||
| Net cash provided by operating activities | $ | 4,624,343 | $ | 5,419,693 | ||||
| Net cash used in investing activities | (7,786,348 | ) | (512,144 | ) | ||||
| Net cash provided by financing activities | 7,340,318 | 3,510,853 | ||||||
| Effect of exchange rate change on cash and cash equivalents | (1,552,432 | ) | (4,785 | ) | ||||
| Net increase in cash and cash equivalents | 2,625,881 | 8,413,617 | ||||||
| Cash and cash equivalents, beginning balance | 10,769,456 | 2,355,839 | ||||||
| Cash and cash equivalents, ending balance | $ | 13,395,337 | $ | 10,769,456 | ||||
Sources of Liquidity
The cash balance at December 31, 2016 was $13,395,337. Of the $13,395,337, we had $1,729,608 denominated in Hong Kong dollars in Hong Kong banks, $148,594 and $761,691 denominated in US dollars deposited in banks in Hong Kong and China respectively, and $10,755,444 denominated in Renminbi and deposited in a bank in China. During the year ended December 31, 2016, net cash provided by operating activities totaled $4,624,343 Net cash used in investing activities totaled $7,786,348. Net cash provided by financing activities totaled $7,340,318. The resulting change in cash for the period was an increase of $2,625,881, which was primarily due to a net income of $6,370,694 and the collection from subscription proceeds from the issuance of shares.
The cash balance at December 31, 2015 was $10,769,456. Of the $10,769,456, we had $1,849,010 denominated in Hong Kong dollars in Hong Kong banks, $1,457,247 and $953,186 denominated in US dollars deposited in banks in Hong Kong and China respectively, and $6,510,013 denominated in Renminbi and deposited in a bank in China. During the year ended December 31, 2015, net cash provided by operating activities totaled $5,419,693. Net cash used in investing activities totaled $512,144. Net cash provided by financing activities totaled $3,510,853. The resulting change in cash for the period was an increase of $8,413,617, which was primarily due to a net income of $5,436,109 and the collection from subscription proceeds from the issuance of shares.
As of December 31, 2016, the Company had $30,602,706 in total current liabilities, which included $608,883 in account payables and other accruals, $21,743,360 in customers’ deposits, $360,248 in advance from customers, $6,308,513 in short-term borrowings from third parties, $1,031,805 in amount due to related party and $549,897 in tax payables. As of December 31, 2015, the Company had $18,427,281 in total current liabilities, which included $667,622 in accrued expenses and other payables, $16,195,289 in customers’ deposits, and $1,564,370 tax payables.
As of December 31, 2016 and 2015, the Company had $62,618 and $45,037 in total non-current liabilities, which included deferred tax liabilities.
The Company’s total liabilities as of December 31, 2016 and 2015 amounted to $30,665,324 and $18,472,318, respectively.
The Company’s net assets amounted to $17,632,697 and $11,276,895 as of December 31, 2016 and 2015, respectively.
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The Company is aware of events or uncertainties which may affect its future liquidity because of capital controls in the PRC. The Renminbi is only currently convertible under the "current account," which includes dividends, trade and service-related foreign exchange transactions, but not under the "capital account," which includes foreign direct investment and loans, including loans we may secure from our onshore subsidiaries or variable interest entities. Currently, our PRC subsidiaries, which are wholly-foreign owned enterprises, may purchase foreign currency for settlement of "current account transactions," including payment of dividends to us, without the approval of the State Administration of Foreign Exchange (“SAFE”) by complying with certain procedural requirements. However, the relevant PRC governmental authorities may limit or eliminate our ability to purchase foreign currencies in the future for current account transactions. The existing and future restrictions on currency exchange may limit our ability to utilize revenue generated in Renminbi to fund our business activities outside of the PRC or pay dividends in foreign currencies to our stockholders, including holders of our shares of common stock. Foreign exchange transactions under the capital account remain subject to limitations and require approvals from, or registration with, SAFE and other relevant PRC governmental authorities. This could affect our ability to obtain foreign currency through debt or equity financing for our PRC subsidiaries.
Applicable PRC law permits payment of dividends to us by our operating subsidiaries in China only out of their net income, if any, determined in accordance with PRC accounting standards and regulations. Our operating subsidiaries in China are also required to set aside a portion of their net income, if any, each year to fund general reserves for appropriations until such reserves have reached 50% of the subsidiary's registered capital. These reserves are not distributable as cash dividends. In addition, registered share capital and capital reserve accounts are also restricted from withdrawal in the PRC, up to the amount of net assets held in each operating subsidiary. In contrast, there is no foreign exchange control or restrictions on capital flows into and out of Hong Kong. Hence, our Hong Kong operating subsidiary is able to transfer cash without any limitation to the U.S. under normal circumstances.
If our operating subsidiaries were to incur additional debt on their own behalf in the future, the instruments governing the debt may restrict the ability of our operating subsidiaries to transfer cash to our U.S. investors.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements, including arrangements that would affect our liquidity, capital resources, market risk support, and credit risk support or other benefits.
Future Financings
We will continue to rely on equity sales of our common shares in order to continue to fund our business operations. Issuances of additional shares will result in dilution to existing stockholders. There is no assurance that we will achieve any additional sales of the equity securities or arrange for debt or other financing to fund our operations and other activities, or if we are able, there is no guarantee that existing shareholders will not be substantially diluted.
Critical Accounting Policies
We regularly evaluate the accounting policies and estimates that we use to make budgetary and financial statement assumptions. A complete summary of these policies is included in the notes to our financial statements. In general, management's estimates are based on historical experience, on information from third party professionals, and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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 reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
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Basis of consolidation
The consolidated financial statements include the financial statements of the Company, and its subsidiaries, Hong Kong Takung, Shanghai Takung and Tianjin Takung. All intercompany transactions, balances and unrealized profit and losses have been eliminated on consolidation.
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 1 for additional information about the 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 December 31, 2016 and 2015, 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 year ended December 31, 2016 and 2015, the Company’s comprehensive income includes net income and foreign currency translation adjustment.
Foreign Currency Translation and Transaction
The functional currency of the Hong Kong Takung and Shanghai Takung are 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.
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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 rate on the balance sheets dates, which is 7.7534 and 7.7507 as of December 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 year, which is 7.7620 and 7.7524 for the year ended December 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 date, which is 6.9430 and 6.4778 as of December 31, 2016 and December 31, 2015; stockholder’s equity accounts are translated at historical rates, and income and expense items are translated at the weighted average exchange rates during the year, which is 6.6400 and 6.2827 for the year ended December 31, 2016 and December 31, 2015.
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 December 31, 2016 and 2015, the Company’s cash and cash equivalents amounted to $13,395,337 and $10,769,456. The Company’s cash deposit is held in the financial institutions located in Hong Kong and mainland China where there are currently regulations mandated on obligatory insurance of bank accounts.
Restricted Cash
Restricted cash represents the cash deposited by the traders (“buyers and sellers”) into a specific bank account under Takung (“the broker’s account”) in order to facilitate the trading shares of the artwork. The buyers are required to have their funds transferred to the broker’s account before the trading take place. Upon the delivery of the shares, the seller will send instructions to the bank, requesting the amount to be transferred to their personal account. After deducting the commission and the management fee as per Takung, the bank will transfer the remainder to the seller’s personal account. Except for instructing the bank to deduct the commission and management fee, Takung has no right to manipulate any funds in the broker’s account except the Company statements of intention with regard to particular deposits. The whole process was monitored and approved by a third party accounting firm. Restricted cash amounted to $21,743,360 and $16,195,289 as of December 31, 2016 and 2015, respectively.
Accounts Receivables 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.
Prepayment and Other Current Assets
Prepayment and other current assets mainly consist of the prepayment for development of fixed assets, maintenance of online trading system, the advertising and promotional services, prepaid financial advisory and banking services, as well as other current assets.
Other Non-current Assets
A portion of the deposits, are presented under the non-current section of the balance sheets based on the nature of the amounts.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and impairment losses. Gains or losses on dispositions of property and equipment are included in operating income or expense. Major additions, renewals and betterments are capitalized, while maintenance and repairs are expensed as incurred.
Depreciation and amortization are provided over the estimated useful lives of the assets using the straight-line method from the time the assets are placed in service. Estimated useful lives are as follows, taking into account the assets' estimated residual value:
| Classification | Estimated useful life | |
| Furniture, fixtures and equipment | 5 years | |
| Leasehold improvements | Shorter of the remaining lease terms and the estimated 3 years | |
| Computer trading and clearing system | 5 years |
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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 impairment was recorded during the years ended December 31, 2016 and 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. For intangible assets with definite lives, they are amortized over estimated useful lives, and are reviewed annually for impairment. The Company has not recorded impairment of intangible assets as of December 31, 2016 and 2015.
Customer deposits
Customer deposits represent 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 deposits were $21,743,360 and $16,195,289 as of December 31, 2016 and 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; |
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| • | the price is fixed or determinable; and | |
| • | collectability of the related receivable is reasonably assured |
Listing fee -The Company recognizes the listing fee revenue once the ownership units 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 units accounted as the listing fee revenue accordingly. When the ownership units of the artwork is listed and starts trading on our system, the Original Owner and/or the Offering Agent shall pay us a one-time offering fee and a listing deposit. The offering fee is determined based on many factors, such as the type of artwork and the offering size. We generally charge approximately 22.5-48.5% of the total offering price for calligraphies, paintings and jewelry, which are currently the major types of artwork listed and traded on our system. Listing fee revenues were $10,914,300 and $4,834,126 for the years ended December 31, 2016 and 2015, respectively.
Commission- For non-VIP Traders, the commission revenue was calculated based on a percentage of transaction value of artworks, which we charge trading commissions for the purchase and sale of the ownership shares of the artworks. The commission is typically 0.3% of the total amount of each transaction, but as an initial promotion, we currently charge a reduced fee of 0.2% (resulting in an aggregate of 0.4% for both buy and sell transactions) of the total transaction amount with the minimum charge of $0.13 (HK$1). The commission is accounted for as revenue and immediately deducted from the proceeds from the sales of artwork units when a transaction is completed.
For selected VIP Traders, we ran a discount program for them starting from April 1, 2015, when their trading volumes of the certain artworks reached an agreed level in each month, a contractually determined flat rate of trading commission was applied to the transactions of these certain artworks. Any trading commission charges incurred by the VIP Traders over the flat rate would be waived. The discounted rate varied between selected artworks. This discount program ended on March 31, 2016.
For selected Traders, starting from April 1, 2016, we charged a predetermined monthly fee (unlimited trades for specific artworks) for specific artworks. These Traders are selected by authorized agents and reviewed by us. After review, we negotiate individually with each one of them to determine a fixed monthly fee. Different Traders may have different rates but once negotiated and agreed to, the monthly fee is fixed.
A separate discount program was offered to buying Traders (“Buyers”) by waiving their trading commissions during certain promotion periods. For example, from April 9, 2015 to June 8, 2015, we waived all Buyers’ trading commissions. The program ended on December 31, 2015.
Commission rebate programs are offered to Traders and service agents. We would rebate 15% of the commission earned from the transactions of new Traders referred by the existing Traders. The rebate rate was adjusted from 5% to 15%, starting from January 1, 2016. For service agents, we rebate a total of 40% to 60% of the commission earned from transactions with new Traders to the service agents when they bring in an agreed number of Traders to the trading platform. For service agents who have individual referrers referring Traders to us, we will, after rebating such individual referrers 15% of the commission earned from the transactions of new Traders they referred, deduct such 15% of the commission from the rebates payable to the service agents to which such individual referrers belong. The commission rebate is recognized as reduction of the commission revenue.
The rebates and discounts are recognized as a reduction of revenue in the same period the related revenue is recognized.
Our trading volume and transaction value amounts increased significantly from 2015 when we commenced operations in Shanghai and consequently added a significant number of Traders from mainland China as they could now settle their trades in Renminbi. This trend continued into 2016. Trading volume increased by 251% and trading amount by 303% for the year ended December 31, 2016 compared to corresponding year in 2015.
In spite of this, total commission revenue decreased by $728,825 or 12% for the year ended December 31, 2016 to $5,360,411 compared to $6,145,261 for the year ended December 31, 2015 primarily because of the change in our commission fee policy. From April 1, 2016 onwards, our selected Traders pay a predetermined monthly fixed fee for their trades in specific artworks while our other non-VIP Traders continue to pay a commission calculated based on a percentage of transaction value of artworks.
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. From April 9, 2015 to June 8, 2015, from September 9, 2015 to December 31, 2015 and from September 1, 2016 to December 31, 2016, we waived management fee for certain VIP traders as a promotion and this discount was recognized as a reduction of the revenue, which was recognized upon the completion of the transactions. Management fee revenues were $1,761,977 and $115,542 for the years ended December 31, 2016 and 2015, respectively.
Annual fee income -The Company charges an annual fee for providing traders and Offering Agents with premium services, including more in-depth information and tools, on the trading platform. This revenue is recognized ratably over the service agreement period. Annual fee revenues were $1,352 and $1,752 for the years ended December 31, 2016 and 2015, respectively.
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. Authorized agent subscription revenues were $1,049,364 and $239,260 for the years ended December 31, 2016 and 2015, respectively.
Cost of Revenue
Our cost of revenue consists primarily of expenses associated with the delivery of our service. These include expenses related to the operation of our data centers, such as facility and lease of the server equipment, development and maintenance of our platform system, as well as the cost of insurance, storage and transportation of the artworks.
Income Taxes
The Company accounts for income taxes using an asset and liability approach which allows for the recognition and measurement of deferred tax assets based upon the likelihood of realization of tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not that these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain.
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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 of Common Stock
The Company reports earnings (loss) per share in accordance with ASC Topic 260-10 "Earnings per Share." Basic earnings (loss) per share are computed by dividing income (loss) available to common shareholders by the weighted average number of common shares available.
Concentration of Risks
Concentration of credit risk
Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash, account receivables. The carrying values of the financial instruments approximate their fair values due to their short-term maturities. 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 the year ended December 31, 2016 and 2015.
Stock-Based Compensation
The Company accounts for stock-based compensation under ASC Topic 505-50. This standard defines a fair value-based method of accounting for stock-based compensation. The cost of stock-based compensation is measured at the grant date based on the value of the award, and is recognized over the period in which the Company expects to receive the benefit, which is generally the vesting period. As of December 31, 2016, there were 431,525 employee stock options outstanding.
Recent Accounting Pronouncements
Revenue Recognition: In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASU 2014-09), to supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 is effective for us in our first quarter of fiscal 2018 using either of two methods: (i) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-09 (full retrospective method); or (ii) retrospective with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures as defined per ASU 2014-09(modified retrospective method). We are currently assessing the materiality of the impact to our consolidated financial statements, and have not yet selected a transition approach.
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Disclosure of Going Concern Uncertainties: In August 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern(ASU 2014-15), to provide guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective for us in our fourth quarter of fiscal 2017 with early adoption permitted. We do not believe the impact of our pending adoption of ASU 2014-15 on the Company’s financial statements will be material.
Financial instrument: In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”). The standard addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. ASU 2016-01 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is not permitted. Accordingly, the standard is effective for us on September 1, 2018. 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.
Stock-based Compensation: In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). ASU 2016-09 changes how companies account for certain aspects of stock-based awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 is effective for us in the first quarter of 2018, and earlier adoption is permitted. We are still evaluating the effect that this guidance will have on our consolidated financial statements and related disclosures.
Financial Instruments - Credit Losses: In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): The amendments in this Update require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The amendments broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The use of forecasted information incorporates more timely information in the estimate of expected credit loss, which will be more decision useful to users of the financial statements. ASU 2016-13 is effective for the Company for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is allowed as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is still evaluating the effect that this guidance will have on the Company’s consolidated financial statements and related disclosures.
Statement of Cash Flows: In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): The amendments in this Update apply to all entities, including both business entities and not-for-profit entities that are required to present a statement of cash flows under Topic 230. The amendments in this Update provide guidance on the following eight specific cash flow issues. The amendments are an improvement to GAAP because they provide guidance for each of the eight issues, thereby reducing the current and potential future diversity in practice described above. ASU 2016-15 is effective for the Company for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company is still evaluating the effect that this guidance will have on the Company’s consolidated financial statements and related disclosures.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): “Restricted Cash”(“ASU 2016-18”). ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. ASU 2016-18 will become effective for us beginning April 1, 2018, or fiscal 2019. ASU 2016-18 is required to be applied retrospectively. Upon the adoption, amounts described as restricted cash will be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts shown on the statements of cash flows.
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| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk. |
Not applicable.
| Item 8. | Financial Statements and Supplementary Data. |
INDEX TO FINANCIAL STATEMENTS
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Report of Independent Registered Public Accounting Firm
To the Audit Committee of the
Board of Directors and Shareholders
of Takung Art Co., Ltd.
We have audited the accompanying consolidated balance sheets of Takung Art Co., Ltd. and Subsidiaries (the “Company”) as of December 31, 2016 and 2015, and the related consolidated statements of income and comprehensive income, changes in stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2016 and 2015, and the consolidated results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ Marcum Bernstein & Pinchuk LLP
Marcum Bernstein & Pinchuk LLP
Guangzhou, China
March 31, 2017
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TAKUNG ART CO., LTD AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Stated in U.S. Dollars except Number of Shares)
| December 31, | December 31, | |||||||
| 2016 | 2015 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 13,395,337 | $ | 10,769,456 | ||||
| Restricted cash | 21,743,360 | 16,195,289 | ||||||
| Deposits | - | 70,194 | ||||||
| Account receivables, net | 3,058,568 | 184,537 | ||||||
| Prepayment and other current assets | 968,446 | 1,172,405 | ||||||
| Loan receivables | 6,374,046 | - | ||||||
| Due from director | - | 502 | ||||||
| Total current assets | 45,539,757 | 28,392,383 | ||||||
| Non-current assets | ||||||||
| Property and equipment, net | 2,065,182 | 1,213,255 | ||||||
| Intangible assets | 20,546 | 22,194 | ||||||
| Deferred tax assets | 243,772 | - | ||||||
| Other non-current assets | 428,764 | 121,381 | ||||||
| Total non-current assets | 2,758,264 | 1,356,830 | ||||||
| Total assets | $ | 48,298,021 | $ | 29,749,213 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| LIABILITIES | ||||||||
| Current liabilities | ||||||||
| Accrued expenses and other payables | $ | 608,883 | $ | 667,622 | ||||
| Customer deposits | 21,743,360 | 16,195,289 | ||||||
| Advance from customers | 360,248 | - | ||||||
| Short-term borrowings from third parties | 6,308,513 | - | ||||||
| Amount due to related party | 1,031,805 | - | ||||||
| Tax payables | 549,897 | 1,564,370 | ||||||
| Total current liabilities | 30,602,706 | 18,427,281 | ||||||
| Deferred tax liabilities | 62,618 | 45,037 | ||||||
| Total non-current liabilities | 62,618 | 45,037 | ||||||
| Total liabilities | 30,665,324 | 18,472,318 | ||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Common stock (1,000,000,000 shares authorized; $0.001 par value; 11,169,276 shares issued and outstanding as of December 31, 2016; 11,119,276 shares issued and outstanding as of December 31, 2015) | 11,169 | 11,119 | ||||||
| Additional paid-in capital | 5,532,426 | 4,465,217 | ||||||
| Retained earnings | 13,172,671 | 6,801,977 | ||||||
| Accumulated other comprehensive loss | (1,083,569 | ) | (1,418 | ) | ||||
| Total stockholders’ equity | 17,632,697 | 11,276,895 | ||||||
| Total liabilities and stockholders’ equity | $ | 48,298,021 | $ | 29,749,213 | ||||
* All shares outstanding for all periods have been retroactively restated to reflect Takung’s 1-for-25 reverse stock split, which was effective on August 10, 2015.
The accompanying notes are an integral part of these consolidated financial statements.
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TAKUNG ART CO., LTD AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Stated in U.S. Dollars except Number of Shares)
| For the Year Ended December 31, | For the Year Ended December 31, | |||||||
| 2016 | 2015 | |||||||
| Revenue | ||||||||
| Listing fee | $ | 10,914,300 | $ | 4,834,126 | ||||
| Commission | 5,416,436 | 6,145,261 | ||||||
| Authorized agent subscription revenue | 1,049,364 | 239,260 | ||||||
| Management fee | 1,761,977 | 115,542 | ||||||
| Annual fee | 1,352 | 1,752 | ||||||
| Total revenue | 19,143,429 | 11,335,941 | ||||||
| Cost of revenue | (1,129,031 | ) | (805,684 | ) | ||||
| Gross profit | 18,014,398 | 10,530,257 | ||||||
| Operating expenses | ||||||||
| General and administrative expenses | (7,299,543 | ) | (3,078,217 | ) | ||||
| Selling expenses | (2,272,339 | ) | (584,179 | ) | ||||
| Total operating expenses | (9,571,882 | ) | (3,662,396 | ) | ||||
| Income from operations | 8,442,516 | 6,867,861 | ||||||
| Other income and expenses: | ||||||||
| Other income | 416,353 | 14,038 | ||||||
| Loan interest expense | (202,376 | ) | - | |||||
| Exchange loss | (516,350 | ) | (163,459 | ) | ||||
| Total other loss | (302,373 | ) | (149,421 | ) | ||||
| Income before income tax expense | 8,140,143 | 6,718,440 | ||||||
| Provision for income taxes | (1,769,449 | ) | (1,282,331 | ) | ||||
| Net income | 6,370,694 | 5,436,109 | ||||||
| Foreign currency translation adjustment | (1,082,151 | ) | (1,211 | ) | ||||
| Comprehensive income | $ | 5,288,543 | $ | 5,434,898 | ||||
| Earnings per common share – basic | $ | 0.60 | $ | 0.57 | ||||
| Earnings per common share – diluted | $ | 0.56 | $ | 0.56 | ||||
| Weighted average number of common shares outstanding –basic | 10,641,180 | 9,601,034 | ||||||
| Weighted average number of common shares outstanding –diluted, | 11,309,190 | 9,656,736 | ||||||
* All shares outstanding for all periods have been retroactively restated to reflect Takung’s 1-for-25 reverse stock split, which was effective on August 10, 2015.
The accompanying notes are an integral part of these consolidated financial statements.
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TAKUNG ART CO., LTD AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Stated in U.S. Dollars except Number of Shares)
| Number | Common | Additional paid-in | Subscription | Retained | Accumulated Other Comprehensive | Stockholders' | ||||||||||||||||||||||
| of shares | stock | capital | receivable | earnings | (loss) | equity | ||||||||||||||||||||||
| Balance, December 31, 2014 | 9,332,276 | 9,332 | 2,570,098 | (1,896,548 | ) | 1,365,868 | (207 | ) | 2,048,543 | |||||||||||||||||||
| Shares for compensation | 787,000 | 787 | 313,456 | - | - | - | 314,243 | |||||||||||||||||||||
| Issuance of shares | 1,000,000 | 1,000 | 1,579,000 | - | - | - | 1,580,000 | |||||||||||||||||||||
| Net income for the Year | - | - | - | - | 5,436,109 | - | 5,436,109 | |||||||||||||||||||||
| Receipt of subscription receivable | - | - | 2,663 | 1,896,548 | - | - | 1,899,211 | |||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | (1,211 | ) | (1,211 | ) | |||||||||||||||||||
| Balance, December 31, 2015 | 11,119,276 | 11,119 | 4,465,217 | - | 6,801,977 | (1,418 | ) | 11,276,895 | ||||||||||||||||||||
| Issuance of shares | 50,000 | 50 | 254,450 | - | - | - | 254,500 | |||||||||||||||||||||
| Shares for compensation | 812,759 | - | - | - | 812,759 | |||||||||||||||||||||||
| Net income for the Year | - | - | - | - | 6,370,694 | - | 6,370,694 | |||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | (1,082,151 | ) | (1,082,151 | ) | |||||||||||||||||||
| Balance, December 31, 2016 | 11,169,276 | 11,169 | 5,532,426 | - | 13,172,671 | (1,083,569 | ) | 17,632,697 | ||||||||||||||||||||
* All shares outstanding for all periods have been retroactively restated to reflect Takung’s 1-for-25 reverse stock split, which was effective on August 10, 2015.
The accompanying notes are an integral part of these consolidated financial statements.
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TAKUNG ART CO., LTD AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Stated in U.S. Dollars)
| For the Year | For the Year | |||||||
| Ended | Ended | |||||||
| December 31, | December 31, | |||||||
| 2016 | 2015 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | 6,370,694 | $ | 5,436,109 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation | 523,698 | 336,222 | ||||||
| Changes in exchange rate | 508,606 | - | ||||||
| Stock-based compensation | 812,759 | 314,243 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Account receivables | (2,874,031 | ) | 106,948 | |||||
| Deposits | 70,194 | (70,194 | ) | |||||
| Prepayment and other current assets | 458,459 | (772,694 | ) | |||||
| Other non-current assets | (307,383 | ) | - | |||||
| Restricted cash | (5,548,071 | ) | (9,327,160 | ) | ||||
| Due to director | 502 | (3,230 | ) | |||||
| Customer deposits | 5,548,071 | 9,327,160 | ||||||
| Deferred tax liabilities | 17,581 | (21,517 | ) | |||||
| Deferred tax assets | (243,772 | ) | - | |||||
| Tax payables | (1,014,473 | ) | 1,316,656 | |||||
| Advance from customer | 360,248 | - | ||||||
| Accrued expenses and other payables | (58,739 | ) | (1,222,850 | ) | ||||
| Net cash provided by operating activities | 4,624,343 | 5,419,693 | ||||||
| Cash flows from investing activities: | ||||||||
| Purchase of property and equipment | (1,412,302 | ) | (512,144 | ) | ||||
| Purchase of available-for-sale investments | (8,929,857 | ) | - | |||||
Maturity and redemption of available-for-sale investments | 8,929,857 | - | ||||||
| Purchase of held-to-maturity investments | (14,402,996 | ) | - | |||||
| Maturity and redemption of held-to-maturity investments | 14,402,996 | - | ||||||
| Loan receivables | (6,374,046 | ) | - | |||||
| Net cash used in investing activities | (7,786,348 | ) | (512,144 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from share issuance | - | 1,580,000 | ||||||
| Proceeds from subscription receivable | - | 1,930,853 | ||||||
| Proceeds from short-term borrowings | 6,308,513 | - | ||||||
| Proceeds from related party loans | 1,031,805 | - | ||||||
| Net cash provided by financing activities | 7,340,318 | 3,510,853 | ||||||
| Effect of exchange rate change on cash and cash equivalents | (1,552,432 | ) | (4,785 | ) | ||||
| Net increase in cash and cash equivalents | 2,625,881 | 8,413,617 | ||||||
| Cash and cash equivalents, beginning balance | 10,769,456 | 2,355,839 | ||||||
| Cash and cash equivalents, ending balance | $ | 13,395,337 | $ | 10,769,456 | ||||
| Supplemental cash flows information: | ||||||||
| Cash paid for interest | $ | 434,968 | $ | - | ||||
| Cash paid for income tax | $ | 3,024,665 | $ | - | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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TAKUNG ART CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in U.S. Dollars except Number of Shares)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Takung Art Co., Ltd and Subsidiaries ( “Takung”), a Delaware corporation (formerly Cardigant Medical Inc.) through Hong Kong Takung Assets and Equity of Artworks Exchange Co., Ltd. (“Hong Kong Takung”), a Hong Kong company and our wholly owned subsidiary, operates an electronic online platform located at www.takungae.com for artists, art dealers and art investors to offer and trade in valuable artwork.
HongKong Takung Assets & Equity of Artworks Exchange Co., Ltd. (“Hong Kong Takung”) was incorporated in Hong Kong on September 17, 2012 and operates an electronic online platform for offering and trading artwork. For the period from September 17, 2012 (inception) to December 31, 2012, there was no operation except the issuance of shares for subscription receivable. We generate revenue from our services in connection with the offering and trading of artwork on our system, primarily consisting of listing fees, trading commissions, and management fees. We conduct our business primarily in Hong Kong, People’s Republic of China.
Takung (Shanghai) Co., Ltd (“Shanghai Takung”) is a limited liability company, with a registered capital of $1 million, located in the Shanghai Pilot Free Trade Zone. Shanghai Takung was incorporated on July 28, 2015. It is engaged in providing services to its parent company HongKong Takung Assets and Equity of Artworks Exchange Co. Ltd. ("Hong Kong Takung") by receiving deposits from and making payments to online artwork traders of Takung for and on behalf of Takung.
Shanghai Takung set up a new office in Hangzhou, PRC on November 20, 2016 for technology development. Takung Cultural Development (Tianjin) Co., Ltd (“Tianjin Takung”) is a limited liability company, with a registered capital of $1 million located in Pilot Free Trade Zone. Tianjin Takung was incorporated on January 27, 2016.
Tianjin Takung provides technology development services to Hong Kong Takung and Shanghai Takung and also carries out marketing and promotion activities in mainland China.
REVERSE MERGER
On October 20, 2014, Cardigant Medical Inc. (or “Cardigant”) acquired all the issued and outstanding shares of Hong Kong Takung, a privately held Hong Kong corporation, pursuant to the Share Exchange Agreement and Hong Kong Takung became the wholly owned subsidiary of Cardigant in a reverse merger, or the Merger. Pursuant to the Merger, all of the issued and outstanding shares of 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 933,236 (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 and Subsidiaries”.
Under generally accepted accounting principles in the United States, (“U.S. GAAP”) because Hong Kong Takung’s former stockholders received the greater portion of the voting rights in the combined entity and Hong Kong Takung’s senior management represents all of the senior management of the combined entity, the Merger was accounted for as a recapitalization effected by a share exchange, wherein Hong Kong Takung is considered the acquirer for accounting and financial reporting purposes. The assets and liabilities of Hong Kong Takung have been brought forward at their book value and no goodwill has been recognized. Accordingly, the assets and liabilities and the historical operations that are reflected in Hong Kong Takung's consolidated financial statements are those of Hong Kong Takung and are recorded at the historical cost basis of Hong Kong Takung.
Unless otherwise indicated or the context otherwise requires, references to “the Company” refer to Takung Art Co., Ltd and Subsidiaries Disclosures relating to the pre-merger business of Takung, unless noted as being the business of Cardigant prior to the Merger, pertain to the business of Takung prior to the Merger. The Company is currently trading on the OTC market with the ticker “TKAT”.
On August 10, 2015, Takung effected a 1-for-25 reverse stock split (the “Reverse Spilt”). The principal effect of the Reverse Split was to decrease the number of outstanding shares of Takung’s common shares. All shares outstanding for all the periods have been retroactively restated to reflect the Reverse Split.
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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements have been prepared in accordance with the generally accepted accounting principles in the United States ("U.S. GAAP").
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.
Basis of Consolidation
The consolidated financial statements include the financial statements of the Company, and its subsidiaries, Hong Kong Takung, Shanghai Takung and Tianjin Takung. All intercompany transactions, balances and unrealized profit and losses have been eliminated on consolidation.
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 December 31, 2016 and 2015.
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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 year ended December 31, 2016 and 2015, the Company’s comprehensive income includes net income and foreign currency translation adjustment.
Foreign Currency Translation and Transaction
The functional currency of Hong Kong Takung and Shanghai Takung are the Hong Kong Dollar (“HKD”).
The functional currency of Tianjin Takung is the Renminbi (“RMB”).
The reporting currency of the Company is the United States Dollar (“USD”).
Transactions in currencies other than the entity’s functional currency are recorded at the rates of exchange prevailing on the date of the transaction. At the end of each reporting period, monetary items denominated in foreign currencies are translated at the rates prevailing at the end of the reporting periods. Exchange differences arising on the settlement of monetary items and on re-translation of monetary items at period-end are included in income statement of the period.
For the purpose of presenting these financial statements, the Company’s assets and liabilities with functional currency of HKD are expressed in USD at the exchange rate on the balance sheets dates, which is 7.7534 and 7.7507 as of December 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 year, which is 7.7620 and 7.7524 for the years ended December 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 date, which is 6.9430 and 6.4778 as of December 31, 2016 and December 31, 2015; stockholder’s equity accounts are translated at historical rates, and income and expense items are translated at the weighted average exchange rates during the year, which is 6.6400 and 6.2827 for the years ended December 31, 2016 and December 31, 2015.
The resulting translation adjustments are reported under accumulated other comprehensive loss in the stockholder’s equity section of the balance sheets.
Cash and Cash Equivalents
The Company considers highly liquid investments with maturities of three months or less, when purchased, to be cash equivalents. As of December 31, 2016 and 2015, the Company’s cash and cash equivalents amounted to $13,395,337 and $10,769,456, respectively. The Company’s cash deposit is held in the financial institutions located in Hong Kong and mainland China where there are currently regulations mandated on obligatory insurance of bank accounts.
Restricted Cash
Restricted cash represents the cash deposited by the traders (“buyers and sellers”) into a specific bank account under Takung (“the broker’s account”) in order to facilitate the trading shares of the artwork. The buyers are required to have their funds transferred to the broker’s account before the trading take place. Upon the delivery of the shares, the seller will send instructions to the bank, requesting the amount to be transferred to their personal account. After deducting the commission and the management fee as per Takung, the bank will transfer the remainder to the seller’s personal account. Except for instructing the bank to deduct the commission and management fee, Takung has no right to manipulate any funds in the broker’s account except the Company statements of intention with regard to particular deposits. The whole process was monitored and approved by a third party accounting firm. Restricted cash amounted to $21,743,360 and $16,195,289 as of December 31, 2016 and 2015, respectively.
Short-term investments
Short term investments consist of held-to-maturity investments and available-for-sale investments.
The Company’s held-to-maturity investments consist of financial products purchased from banks, which are not allowed for the early withdrawal. The Company’s short term held-to-maturity investments are classified as short-term investments on the consolidated balance sheets based on their contractual maturity dates which are less than one year and are stated at their amortized costs.
Investments classified as available-for-sale investments are carried at their fair values and the unrealized gains or losses from the changes in fair values are reported net of tax in accumulated other comprehensive income until realized.
The Company reviews its investments for other-than-temporary impairment (“OTTI”) based on the specific identification method. The Company considers available quantitative and qualitative evidence in evaluating potential impairment of its investments. If the cost of an investment exceeds the investment’s fair value, the Company considers, among other factors, general market conditions, expected future performance of the investees, the duration and the extent to which the fair value of the investment is less than the cost, and the Company’s intent and ability to hold the investment. OTTI is recognized as a loss in the income statement.
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As of December 31, 2016, all short-term investments under held-to-maturity and available-for-sale investments were redeemed with a nil balance.
Accounts Receivables 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.
Loan Receivables
Loan to third parties is presented under current asset of the balance sheets based on the nature and loan period of time.
Prepayment and Other Current Assets
Prepayment and other current assets mainly consist of the prepayment for, maintenance of online trading system, the advertising and promotional services, prepaid financial advisory and banking services, as well as other current assets.
Other Non-current Assets
A portion of the deposits, are presented under the non-current section of the balance sheets based on the nature of the amounts.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and impairment losses. Gains or losses on dispositions of property and equipment are included in operating income or expense. Major additions, renewals and betterments are capitalized, while maintenance and repairs are expensed as incurred.
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Depreciation and amortization are provided over the estimated useful lives of the assets using the straight-line method from the time the assets are placed in service. Estimated useful lives are as follows, taking into account the assets' estimated residual value:
| Classification | Estimated useful life | |
| Furniture, fixtures and equipment | 5 years | |
| Leasehold improvements | Shorter of the remaining lease terms and the estimated 3 years | |
| Computer trading and clearing system | 5 years |
Long-lived Assets
The Company evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. When these events occur, the Company assesses the recoverability of these long-lived assets by comparing the carrying amount of the assets to the future undiscounted cash flows expected to result from the use of the assets and their eventual disposition. If the future undiscounted cash flow is less than the carrying amount of the assets, the Company recognizes an impairment equal to the difference between the carrying amount and fair value of these assets.
No impairments were recorded during the years ended December 31, 2016 and 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. For intangible assets with definite lives, they are amortized over estimated useful lives, and are reviewed annually for impairment. The Company has not recorded impairment of intangible assets as of December 31, 2016 and 2015.
Customer deposits
Customer deposits represent 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 deposits were $21,743,360 and $16,195,289 as of December 31, 2016 and 2015, respectively.
Advance from customers
Advance from customers represent trading commissions one month in advance charge to the VIP traders. Starting from April 1, 2016, the Company charges a monthly commission to VIP traders, instead of charging per transaction.
Short-term borrowings from third parties
The Company made four short-term borrowings from third parties, both with 8% annual interest rate and due on December 31, 2016. Two borrowings were extended with a maturity date on March 31, 2017.
Revenue Recognition
The Company generates revenue from its services in connection with the offering and trading of artwork on our system, primarily consisting of listing fees, trading commissions, and management fees.
We recognize revenue once all of the following criteria have been met:
| • | persuasive evidence of an arrangement exists; |
| • | delivery of our obligations to our customer has occurred; |
| • | the price is fixed or determinable; and |
| • | collectability of the related receivable is reasonably assured |
Listing fee -The Company recognizes the listing fee revenue once the ownership shares of the artwork are listed and successfully traded on our system, based on the agreed percentage of the total offering price. When the ownership shares of the artwork is listed and starts trading on our system, the Original Owner and/or the Offering Agent shall pay us a one-time offering fee and a listing deposit. The offering fee is determined based on many factors, such as the type of artwork and the offering size. We generally charge approximately 22.5-48.5% of the total offering price for calligraphies, paintings and jewelry, which are currently the major types of artwork listed and traded on our system. Listing fee revenues was $10,914,300 and $4,834,126 for the year ended December 31, 2016 and 2015, respectively.
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Commission - For non-VIP Traders, the commission revenue was calculated based on a percentage of transaction value of artworks, which we charge trading commissions for the purchase and sale of the ownership shares of the artworks. The commission is typically 0.3% of the total amount of each transaction, but as an initial promotion, we currently charge a reduced fee of 0.2% (resulting in an aggregate of 0.4% for both buy and sell transactions) of the total transaction amount with the minimum charge of $0.13 (HK$1). The commission is accounted for as revenue and immediately deducted from the proceeds from the sales of artwork units when a transaction is completed.
For selected VIP Traders, we ran a discount program for them starting from April 1, 2015, when their trading volumes of the certain artworks reached an agreed level in each month, a contractually determined flat rate of trading commission was applied to the transactions of these certain artworks. Any trading commission charges incurred by the VIP Traders over the flat rate would be waived. The discounted rate varied between selected artworks. This discount program ended on March 31, 2016.
For selected Traders, starting from April 1, 2016, we charged a predetermined monthly fee (unlimited trade for specific artworks) for specific artworks. These Traders are selected by authorized agents and reviewed by us. After review, we negotiate individually with each one of them to determine a fixed monthly fee. Different Traders may have different rates but once negotiated and agreed to, the monthly fee is fixed.
A separate discount program was offered to buying Traders (“Buyers”) by waiving their trading commissions during certain promotion periods. For example, from April 9, 2015 to June 8, 2015, we waived all Buyers’ trading commissions. The program ended on December 31, 2015.
Commission rebate programs are offered to Traders and service agents. We would rebate 15% of the commission earned from the transactions of new Traders referred by the existing Traders. The rebate rate was adjusted from 5% to 15%, starting from January 1, 2016. For service agents, we rebate a total of 40% to 60% of the commission earned from transactions with new Traders to the service agents when they bring in an agreed number of Traders to the trading platform. For service agents who have individual referrers referring Traders to us, we will, after rebating such individual referrers 15% of the commission earned from the transactions of new Traders they referred, deduct such 15% of the commission from the rebates payable to the service agents to which such individual referrers belong. The commission rebate is recognized as reduction of the commission revenue.
The rebates and discounts are recognized as a reduction of revenue in the same period the related revenue is recognized.
Our trading volume and transaction value amounts increased significantly from 2015 when we commenced operations in Shanghai and consequently added a significant number of Traders from mainland China as they could now settle their trades in Renminbi. This trend continued into 2016. Trading volume increased by 251% and trading amount by 303% for the year ended December 31, 2016 compared to corresponding year in 2015.
In spite of this, total commission revenue decreased by $728,825 or 12% for the year ended December 31, 2016 to $5,360,411 compared to $6,145,261 for the year ended December 31, 2015 primarily because of the change in our commission fee policy. From April 1, 2016 onwards, our selected Traders pay a predetermined monthly fixed fee for their trades in specific artworks while our other non-VIP Traders continue to pay a commission calculated based on a percentage of transaction value of artworks.
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Management fee -The Company charges management fees for covering the insurance, storage, and transportation for an artwork and trading management of artwork units, which are calculated at $0.0013 (HK$0.01) per 100 artwork ownership shares per day. The management fee is accounted for as revenue, and immediately deducted from the proceeds from the sales of artwork ownership shares when a transaction is completed. A discount program is offered to waive the management fee during certain promotion periods. Such discount is recognized as a reduction of the revenue upon the completion of the transactions. Management fee revenue was $1,761,977 and $115,542 for the year ended December 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. Annual fee revenues were $1,352 and $1,752 for the years ended December 31, 2016 and 2015, respectively.
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. Authorized agent subscription revenues were $1,049,364 and $239,260 for the years ended December 31, 2016 and 2015, respectively.
Cost of Revenue
Our cost of revenue consists primarily of expenses associated with the delivery of our service. These include expenses related to the operation of our data centers, such as facility and lease of the server equipment, development and maintenance of our platform system, as well as the cost of insurance, storage and transportation of the artworks. Cost of revenue was $1,129,031 and $805,684 for the years ended December 31, 2016 and 2015, respectively
Payroll bonus
Payroll bonus consists of the bonus being paid for the current year. No accrual is being prepared.
Income Taxes
The Company accounts for income taxes using an asset and liability approach which allows for the recognition and measurement of deferred tax assets based upon the likelihood of realization of tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not that these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain.
Under ASC 740, a tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The evaluation of a tax position is a two-step process. The first step is to determine whether it is more-likely-than-not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigations based on the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the year incurred. GAAP also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosures and transition.
There are uncertain tax positions regarding whether the income of Hong Kong Takung should be deemed as the taxable income of Shanghai Takung under the law of the People's Republic of China on Enterprise Income Tax ("EIT") as of December 31, 2016 and 2015. Such income will be subject to EIT with 25% tax rate once it is deemed as the taxable income of Shanghai Takung; otherwise it is subject to Hong Kong's Profits Tax with 16.5% tax rate.
The Company currently recognizes such income as taxable income under Hong Kong's Profits Tax rather than taxable income under EIT, and the Company holds that it is more-likely-than-not that this tax position will be sustained upon examination, including the resolution of any related appeals or litigations based on the technical merits of that position.
The Company did not have any interest and penalties related to uncertain tax positions in our provision for income taxes line of our consolidated statements of operations for the year ended December 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 year. 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 year.
The weighted average of 668,010 and 55,702 share options and restricted shares were included in computing diluted earnings per share as of December 31, 2016 and December 31, 2015 respectively.
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On August 10, 2015, the Company affected a 1-for-25 reverse stock split (the “Reverse Spilt”). The principal effect of the Reverse Split was to decrease the number of outstanding shares of each of the Company’s common shares. All shares outstanding for all the periods have been retroactively restated to reflect the Reverse Split.
Concentration of Risks
Concentration of credit risk
Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash, account receivables. The carrying values of the financial instruments approximate their fair values due to their short-term maturities. The Company places its cash and cash equivalents and restricted cash with financial institutions with high-credit ratings and quality. Account receivables primarily comprise of amounts receivable from the trader customers. With respect to the prepayment to service suppliers, the Company performs on-going credit evaluations of the financial condition of these suppliers. The Company establishes an allowance for doubtful accounts based upon estimates, factors surrounding the credit risk of specific service providers and other information.
Concentration of customers
There are no revenues from customers that individually represent greater than 10% of the total revenues during the year ended December 31, 2016 and 2015.
Reclassification
Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation.
Recent Accounting Pronouncements
Revenue Recognition: In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASU 2014-09), to supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 is effective for us in our first quarter of fiscal 2018 using either of two methods: (i) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-09 (full retrospective method); or (ii) retrospective with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures as defined per ASU 2014-09 (modified retrospective method). We are currently assessing the materiality of the impact to our consolidated financial statements, and have not yet selected a transition approach.
Disclosure of Going Concern Uncertainties: In August 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (ASU 2014-15), to provide guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective for us in our fourth quarter of fiscal 2017 with early adoption permitted. We do not believe the impact of our pending adoption of ASU 2014-15 on the Company’s financial statements will be material.
Financial instrument: In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”). The standard addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. ASU 2016-01 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is not permitted. Accordingly, the standard is effective for us on September 1, 2018. We are currently evaluating the impact that the standard will have on our consolidated financial statements.
Leases: In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-2”), which provides guidance on lease amendments to the FASB Accounting Standard Codification. This ASU will be effective for us beginning in May 1, 2019. We are currently in the process of evaluating the impact of the adoption of ASU 2016-2 on our consolidated financial statements.
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Stock-based Compensation: In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). ASU 2016-09 changes how companies account for certain aspects of stock-based awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 is effective for us in the first quarter of 2018, and earlier adoption is permitted. We are still evaluating the effect that this guidance will have on our consolidated financial statements and related disclosures.
Financial Instruments - Credit Losses: In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): The amendments in this Update require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The amendments broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The use of forecasted information incorporates more timely information in the estimate of expected credit loss, which will be more decision useful to users of the financial statements. ASU 2016-13 is effective for the Company for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is allowed as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is still evaluating the effect that this guidance will have on the Company’s consolidated financial statements and related disclosures.
Statement of Cash Flows: In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): The amendments in this Update apply to all entities, including both business entities and not-for-profit entities that are required to present a statement of cash flows under Topic 230. The amendments in this Update provide guidance on the following eight specific cash flow issues. The amendments are an improvement to GAAP because they provide guidance for each of the eight issues, thereby reducing the current and potential future diversity in practice described above. ASU 2016-15 is effective for the Company for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company is still evaluating the effect that this guidance will have on the Company’s consolidated financial statements and related disclosures.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): “Restricted Cash”(“ASU 2016-18”). ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This update is effective in fiscal years, including interim periods, beginning after December 15, 2017 and early adoption is permitted. The adoption of this guidance will result in the inclusion of the restricted cash balances within the overall cash balance and removal of the changes in restricted cash activity, which are currently recognized in Other financing activities , on the Statements of Consolidated Cash Flows. Furthermore, an additional reconciliation will be required to reconcile Cash and cash equivalents and restricted cash reported within the Consolidated Balance Sheets to sum to the total shown in the Statements of Consolidated Cash Flows. The Company anticipates adopting this new guidance effective January 1, 2018. The Company is currently evaluating this guidance and the impact it will have on the Consolidated Financial Statements and disclosures.
Except for the ASU above, in the period from January 1, 2016 to March 6, 2017, the FASB has issued ASU No. 2016-01 through ASU 2017-06, which are not expected to have a material impact on the consolidated financial statements upon adoption.
3. PREPAYMENT AND OTHER CURRENT ASSETS
Prepayment and other current assets mainly consist of the prepaid services for development, maintenance of online trading system, the advertising and promotional services, prepaid financial advisory and banking services, as well as other current assets. The prepayment was $968,446 and $1,172,405 as of December 31, 2016 and 2015, respectively.
| December 31, 2016 | December 31, 2015 | |||||||
Prepaid services for development | $ | 17,514 | $ | 201,461 | ||||
| Prepaid maintenance of trading system | 4,706 | 439,917 | ||||||
| Advertising and promotional services | 296,163 | 451,572 | ||||||
| Prepaid insurance | 31,082 | - | ||||||
| Staff advance | 28,806 | - | ||||||
| Prepaid financial advisory and banking services | 201,808 | - | ||||||
| Short-term borrowings to third party | 259,254 | - | ||||||
| Other current assets | 129,113 | 79,455 | ||||||
| Prepayment and other current assets | $ | 968,446 | $ | 1,172,405 | ||||
Short-term borrowings to third party refer to the borrowing of $259,254 (RMB 1,800,000) to Shuang Ye (“Mr. Ye”) for his operational needs. The loan was made on December 22, 2016, interest free, with a maturity date on January 13, 2017. It was repaid on January 13, 2017.
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4. ACCOUNT RECEIVABLES, NET
Account receivables consisted of the following:
| December 31, 2016 | December 31, 2015 | |||||||
| Listing fee | $ | 1,403,255 | $ | 85,154 | ||||
| Authorized agent subscription revenue | 995,453 | 82,718 | ||||||
| Monthly commission fee | 605,677 | - | ||||||
| Others | 54,183 | 16,665 | ||||||
| Less: allowance for doubtful accounts | - | - | ||||||
| Account receivables, net | $ | 3,058,568 | $ | 184,537 | ||||
5. LOAN RECEIVABLES
The following table sets forth a summary of the loan agreements in loan receivables balance:
| Date | Borrower | Lender | Original Amount (RMB) | Amount in Reporting Currency (USD) | Annual Interest Rate | Repayment Due Date | ||||||||||||
| 7/15/2016 | Xiaohui Wang | Shanghai Takung | $ | 10,080,000 | $ | 1,451,822 | 0 | % | 3/31/2017 | |||||||||
| 8/24/2016 | Xiaohui Wang | Shanghai Takung | $ | 13,350,000 | $ | 1,922,800 | 0 | % | 3/31/2017 | |||||||||
| 11/14/2016 | Xiaohui Wang | Shanghai Takung | $ | 10,275,000 | $ | 1,479,908 | 0 | % | 10/31/2017 | |||||||||
| 12/9/2016 | Xiaohui Wang | Tianjin Takung | $ | 10,550,000 | $ | 1,519,516 | 0 | % | 11/30/2017 | |||||||||
| Total | $ | 6,374,046 | ||||||||||||||||
In order to meet the Company’s working capital needs in US Dollars, the Company entered into the following transactions:
| • | On July 15, 2016, Shanghai Takung entered into an interest-free loan to an individual, Xiaohui Wang (“Ms. Wang”), a national of the People’s Republic of China, of RMB10.08 million (equivalent to US$1.45 million) with a maturity of December 31, 2016. The loan was renewed with a maturity of March 31, 2017. On August 24, 2016, an additional loan to Ms. Wang of RMB13.35 million (equivalent to US$1.92 million) was made with the same maturity date and on the same terms. On November 14, 2016, a third loan to Ms. Wang of RMB10.28 million (equivalent to US$1.48 million) was made with a maturity of October 31, 2017 and on the same terms. On December 9, 2016, Tianjin Takung entered into an interest–free loan to Ms. Wang of RMB10.55 million (equivalent to US$1.52 million) was made with maturity of November 30, 2017 and on the same terms. Both loans are guaranteed by Chongqing Wintus (New Star) Enterprises Group (“Chongqing”) and Ms. Wang is a shareholder and the legal representative of Chongqing. Both Chongqing and Ms. Wang are the non-related parties to the Company. |
| • | Also, on July 15, 2016, Hong Kong Takung entered into a loan agreement with Merit Crown Limited, a Hong Kong company (“Merit Crown) , to borrow US$1.5 million with interest accruing at a rate of 8% per annum pro-rated through the maturity date of December 31, 2016. The loan was renewed with a maturity of March 31, 2017. On August 24, 2016, Hong Kong Takung borrowed another US$2 million from Merit Crown on similar terms. Merit Crown is a non-related party to the Company. On November 18, 2016, Hong Kong Takung borrowed another US$1.48 million from Merit Crown on similar terms. Merit Crown is a non-related party to the Company. On December 9, 2016, Hong Kong Takung borrowed another US$1.52 million from Merit Crown on similar terms. Merit Crown is a non-related party to the Company. |
The US$1.51 million, US$2.01 million, US1.48 million and US1.52 million are collectively the US Dollar Loan (the “US Dollar Loans”). The RMB10.08 million, RMB13.35 million, RMB10.28 million and RMB10.55 million are collectively the RMB Loan (the “RMB Loans”).
Through an understanding between Ms. Wang and Merit Crown, the US Dollar Loans are “secured” by the RMB Loans. Further details on the US Dollar Loans are disclosed in Note 10. It is the understanding between the parties that when the US Dollar Loans are repaid, the RMB Loans will similarly be repaid.
As of December 31, 2016 and December 31, 2015, the Company has $6,374,046 and nil of loan receivables from Xiaohui Wang.
6. PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following:
| December 31, 2016 | December 31, 2015 | |||||||
| Furniture, fixtures and equipment | $ | 100,386 | $ | 61,787 | ||||
| Leasehold improvements | 298,965 | 140,955 | ||||||
| Computer trading and clearing system | 2,802,430 | 1,628,542 | ||||||
| Sub-total | 3,201,781 | 1,831,284 | ||||||
| Less: accumulated depreciation | (1,136,599 | ) | (618,029 | ) | ||||
| Property and equipment, net | $ | 2,065,182 | $ | 1,213,255 | ||||
Depreciation expense was $523,698 and $343,526 for the year ended December 31, 2016 and 2015, respectively.
7. INTANGIBLE ASSETS
Intangible assets consist of the Company’s trademarks with indefinite useful life. The intangible asset was $20,546 and $22,194 as of December 31, 2016 and 2015, respectively.
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8. OTHER NON-CURRENT ASSETS
Other non-current assets as of December 31, 2016 and December 31, 2015 consisted of:
| December 31, 2016 | December 31, 2015 | |||||||
| Deposit – non-current | $ | 301,263 | $ | 121,381 | ||||
| Prepayment – non-current | 127,501 | - | ||||||
| Total other non-current assets | $ | 428,764 | $ | 121,381 | ||||
9. ACCRUED EXPENSES AND OTHER PAYABLES
Accrued expenses and other payables as of December 31, 2016 and 2015 consisted of:
| December 31, | December 31, | |||||||
| 2016 | 2015 | |||||||
| Trading and clearing system | $ | 61,735 | $ | 76,763 | ||||
| Accruals for professional fees | 49,952 | 75,116 | ||||||
| Accruals for consulting fees | 290,773 | 259,244 | ||||||
| Accruals for office rental | 7,613 | 15,855 | ||||||
| Payroll payables | 141,022 | 46,167 | ||||||
| Temporary customer deposits | - | 175,216 | ||||||
| Other payables | 57,788 | 19,261 | ||||||
| Total Accrued expenses and other payables | $ | 608,883 | $ | 667,622 | ||||
10. SHORT-TERM BORROWINGS FROM THIRD PARTIES
The following table sets forth a summary of the loan agreements in loan receivables balance:
| Date | Borrower | Lender | Original Amount (HKD) | Amount in Reporting Currency (USD) | Annual Interest Rate | Repayment Due Date | ||||||||||||||
| 7/15/2016 | Hong Kong Takung | Merit Crown Limited | $ | 11,700,000 | $ | 1,509,015 | 8 | % | 3/31/2017 | |||||||||||
| 8/24/2016 | Hong Kong Takung | Merit Crown Limited | $ | 15,596,100 | $ | 2,011,518 | 8 | % | 3/31/2017 | |||||||||||
| 11/18/2016 | Hong Kong Takung | Merit Crown Limited | $ | 11,479,102 | $ | 1,480,525 | 8 | % | 10/31/2017 | |||||||||||
| 12/9/2016 | Hong Kong Takung | Merit Crown Limited | $ | 11,787,600 | $ | 1,520,314 | 8 | % | 11/30/2017 | |||||||||||
| Less: Discount loan payable | $ | 212,859 | ||||||||||||||||||
| Total | $ | 6,308,513 | ||||||||||||||||||
On July 15, 2016, Hong Kong Takung entered into a loan agreement with Merit Crown Limited, a Hong Kong company, to borrow US$1.51 million to meet its working capital needs. Interest shall accrue at a rate of 8% per annum pro-rated to the actual loan period, which shall be from the date the loan amount is made through December 31, 2016. The loan was extended with a due date on March 31, 2017. Merit Crown is a non-related party to the Company.
On August 24, 2016, an additional US$2.01 million was borrowed by Hong Kong Takung from Merit Crown to meet its working capital needs. Interest shall accrue at a rate of 8% per annum pro-rated to the actual loan period, which shall be from the date the loan amount is made through December 31, 2016. The loan was extended with a due date on March 31, 2017.
On November 18, 2016, an additional US$1.48 million was borrowed by Hong Kong Takung from Merit Crown to meet its working capital needs. Interest shall accrue at a rate of 8% per annum pro-rated to the actual loan period, which shall be from the date the loan amount is made through October 31, 2017.
On December 9, 2016, 2016, an additional US$1.52 million was borrowed by Hong Kong Takung from Merit Crown to meet its working capital needs. Interest shall accrue at a rate of 8% per annum pro-rated to the actual loan period, which shall be from the date the loan amount is made through November 30, 2017.
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The US Dollar Loans are to provide Hong Kong Takung with sufficient US Dollar-denominated currency to meet its working capital requirements. It is “secured” by the aforementioned RMB Loans (See Note 5) of equivalent amount by its subsidiary to an individual and guarantor affiliated with the lender of the US Dollar Loans. It is the understanding between the parties that when the US Dollar Loans are repaid, the RMB Loans will similarly be repaid.
As of December 31, 2016 and December 31, 2015, the Company has $6,308,513 of and nil short-term borrowings from Merit Crown Limited, respectively.
The weighted average interest rate of outstanding short-term borrowings was 8% and nil per annum as of December 31, 2016 and December 31, 2015, respectively. The fair values of the short-term borrowings approximate their carrying amounts. The weighted average short-term borrowing was $1,678,803 and nil for the year ended December 31, 2016 and 2015, respectively. The interest expense for the loan agreements are $135,792.
11. RELATED PARTY BALANCES AND TRANSACTIONS
The following is a list of director and related parties to which the Company has transactions with:
(a) Di Xiao, the director of the Company;
(b) Jianping Mao (“Mao”), the wife of the Vice General Manager of Hong Kong Takung.
Amount due from director
Amount due from director consisted of the following for the years indicated:
| December 31, 2016 | December 31, 2015 | |||||||
| Di Xiao (a) | $ | - | $ | 502 | ||||
| Total | - | 502 | ||||||
Amount due to related party
Amount due to related party consisted of the following as of the years indicated:
| December 31, 2016 | December 31, 2015 | |||||||
| Jianpian Mao (b) | $ | 1,031,805 | $ | - | ||||
| Total | 1,031,805 | - | ||||||
Related party transactions
Unsecured borrowings from related parties consisted of the following for the years indicated:
| December 31, 2016 | December 31, 2015 | |||||||
| Jianpian Mao (b) | $ | 2,318,990 | $ | - | ||||
| Total | 2,318,990 | - | ||||||
Interest expenses to related parties consisted of the following for the years indicated:
| December 31, 2016 | December 31, 2015 | |||||||
| Jianpian Mao (b) | $ | 66,584 | $ | - | ||||
| Total | 66,584 | - | ||||||
On August 25, 2016, Hong Kong Takung entered into a loan agreement with Mao for the loan of $2,318,990 (HK$18,000,000) to Hong Kong Takung. Interest shall accrue at a rate of 8% per annum pro-rated to the actual loan period, which shall be from the date the loan amount is made through December 31, 2016. The loan was extended with a due date on March 31, 2017. The loan is to provide Hong Kong Takung with sufficient Hong Kong Dollar-denominated currency to meet its working capital requirements. $1,287,185 (HK$10,000,000) was repaid on December 31, 2016. The interest expense during the year ended December 31, 2016 was $66,584.
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12. INCOME TAXES
The Company was incorporated in the State of Delaware under the name of Cardigant Medical Inc. on April 17, 2009. After the Company had acquired the business of Hong Kong Takung through the acquisition of all the share capital of Hong Kong Takung under a Share Exchange Agreement dated September 23, 2014 on October 20, 2014, it became a holding company and do not conduct any substantial operations or business of its own in the State of Delaware and in the U.S.
The Company also does not provide for U.S. taxes or foreign withholding taxes on undistributed earnings from its non-U.S. subsidiaries, either owned directly or indirectly, because it was elected to indefinitely reinvest such earnings outside the U.S to support non-U.S. liquidity needs to fund operations and growth of its foreign subsidiaries and acquisitions.
United States of America
As of December 31, 2016 and 2015, the Company in the United States had $2,212,890 and $900,301 in net operating loss carry forwards available to offset future taxable income, respectively. Federal net operating losses can generally be carried forward twenty years. The federal corporate net operating loss carryover is expired in 20 taxable years following the taxable year of the loss. If not utilized, the federal net operating loss for the fiscal years 2014, 2015 and 2016 in an amount of $109,162, $791,139 and $1,312,589, respectively, will begin to expire in the years 2035, 2036 and 2037, respectively.
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 year ended December 31, 2016 and 2015, amounting to $962,012 and $306,102, respectively. Accordingly, the Company has no net deferred tax assets under the US entity.
Hong Kong
The provision for current income taxes of the subsidiary operating in Hong Kong has been calculated by applying the current rate of taxation of 16.5% for the year ended December 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 year ended December 31, 2016 and 2015. As of December 31, 2016 and 2015, the Company in PRC had $504,782 and nil in net operating loss carryforwards available to offset future taxable income, respectively. According to PRC tax regulations, the PRC net operating loss can generally carried forward for no longer than five years starting from the year subsequent to the year in which the loss was incurred. Carryback of losses is not permitted. If not utilized, the PRC net operating loss for the fiscal year 2016, $504,782, will expire in 2022.
The income tax expense was $1,769,449 and $1,282,331 for the year ended December 31, 2016 and 2015, respectively.
The income tax provision consists of the following components:
| December 31, 2016 | December 31, 2015 | |||||||
| Current | $ | 2,006,768 | $ | 1,303,865 | ||||
| Deferred | (237,319 | ) | (21,534 | ) | ||||
| Total Provision for Income Taxes | 1,769,449 | 1,282,331 | ||||||
A reconciliation between the Company’s actual provision for income taxes and the provision at the statutory rate is as follow:
| December 31, 2016 | December 31, 2015 | |||||||
| Income before income tax expense | $ | 8,140,143 | $ | 6,718,440 | ||||
| Provision for taxes at respective statutory tax rate | 983,604 | 984,497 | ||||||
| Tax effect of non-deductible expenses | 132,509 | 50,383 | ||||||
| Return true-up | (2,574 | ) | - | |||||
| Changes in valuation allowance | 655,910 | 247,451 | ||||||
| Total Provision for Income Taxes | 1,769,449 | 1,282,331 | ||||||
The Company's effective tax rate was 21.7%and 19.1% for the year ended December 31, 2016 and 2015, respectively.
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The approximate tax effects of temporary differences, which give rise to the deferred tax assets and liabilities, are as follows:
| As of December 31, | As of December 31, | |||||||
| 2016 | 2015 | |||||||
| Deferred tax assets | ||||||||
| Tax loss carried forward | $ | 873,071 | $ | 306,102 | ||||
| Unvested restricted stock carried forward | 209,629 | - | ||||||
| Deferred advertising expenses | 122,496 | - | ||||||
| Others | 588 | - | ||||||
| 1,205,784 | 306,102 | |||||||
| Valuation allowance | (962,012 | ) | (306,102 | ) | ||||
| Deferred tax asset, net | 243,772 | - | ||||||
| Deferred tax liabilities | ||||||||
| Property, plant and equipment, principally due to differences in depreciation | (62,618 | ) | (45,037 | ) | ||||
| Deferred tax liability | $ | (62,618 | ) | $ | (45,037 | ) | ||
As of December 31, 2016 and 2015, deferred tax asset, net are derived from tax loss carried forward and deferred advertising expenses arising from the tax jurisdictions in China.
As of December 31, 2016 and 2015, deferred tax liability is derived from Property, plant and equipment depreciation differences arising from the tax jurisdiction in Hong Kong.
13. COMMITMENTS AND CONTINGENCIES
Capital Commitments
The Company purchased property, plant and equipment which the payment was due within one year. As of December 31, 2016 and 2015, the Company has capital commitments of $90,315 and $60,571, respectively.
Operation Commitments
The total future minimum lease payments under the non-cancellable operating lease with respect to the office and the dormitory as of December 31, 2016 are payable as follows:
| Year ending December 31, 2017 | $ | 944,350 | ||
| Year ending December 31, 2018 | 652,302 | |||
| Year ending December 31, 2019 | 159,980 | |||
| Year ending December 31, 2020 | 14,403 | |||
| Year ending December 31, 2021 | 14,403 | |||
| Year ending December 31, 2022 and thereafter | 51,011 | |||
| Total | $ | 1,836,449 |
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Rental expense of the Company was $564,585 and $459,050 for the year ended December 31, 2016 and 2015, respectively.
14. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted-average number of common shares and dilutive potential common shares outstanding during the period.
| Year ended December 31, 2016 | Year ended December 31, 2015 | |||||||
| $ | $ | |||||||
| Numerator: | ||||||||
| Net income | 6,370,694 | 5,436,109 | ||||||
| Denominator: | ||||||||
| Weighted-average shares outstanding-Basic | 10,641,180 | 9,601,034 | ||||||
| Stock options and restricted shares | 668,010 | 55,702 | ||||||
| Weighted-average shares outstanding-Diluted | 11,309,190 | 9,656,736 | ||||||
| Earnings per share | ||||||||
| -Basic | 0.60 | 0.57 | ||||||
| -Diluted | 0.56 | 0.56 | ||||||
Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock.
487,000 restricted shares of Common Stock (the “Compensation Shares”) related to the Consulting Agreement with Regeneration Capital Group, LLC (“Regeneration”) entered on November 20, 2015. These shares were placed in an escrow account and were subject to Regeneration’s performance condition. There were dilutive effects of 487,000 shares for the year ended December 31, 2015 and 2016.
15. STOCKHOLDERS’ EQUITY
On July 7, 2015, the Board granted 300,000 shares of fully vested common stock to a third party for consulting services. The shares were subsequently issued on August 28, 2015 and the Company expensed the total amount during 2015. The Company adopted the Chaffe European Put Option Model to measure the fair value by applying the discount due to the lack of marketability when this transaction took place.
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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 August 26, 2015, the 2015 Incentive Stock Plan (“2015 Plan”) was approved by the Board of Directors for rewarding the Company’s directors, executives and selected employees and consultants for making major contributions to the success of the Company. 1,037,000 shares were registered on August 27, 2015.
On November 16, 2015, we entered into various subscription agreements with and sold to the selling stockholders a total of 1,000,000 shares of Common Stock at a price of $1.58 per share for aggregate gross proceeds of $1,580,000 (the “Private Placements”). The shares were offered and sold without registration under the Securities Act, in reliance upon the exemption from registration under Section 4(a)(2) of the Securities Act and/or Rule 506 of Regulation D and/or Rule 903 of Regulation S promulgated there under. No commissions were paid by the Company in connection with the Private Placements.
On November 20, 2015, we entered into a Consulting Agreement with Regeneration for the provision of certain consulting and advisory services, including without limitation, assisting in the preparation of Company financial projections, business plans, executive summaries and website, and recruiting qualified directors and officers. In consideration for providing such services, the Company issued to Regeneration the Compensation Shares which are placed in an escrow account maintained with the Company’s attorneys until either (i) the Company has successfully listed its securities on the NASDAQ or other U.S. securities exchange on or before March 31, 2017, whereupon the Compensation Shares shall be forthwith delivered to Regeneration or (ii) if the Company is unsuccessful in listing its securities on the NASDAQ or other U.S. securities exchange on or before March 31, 2017, the Compensation Shares shall be returned to the Company for cancellation. Regeneration shall be entitled to “piggy-back” registration rights with respect to the Compensation Shares. The Compensation Shares were issued in reliance on an exemption from registration under Section 4(a)(2) of the Securities Act. Pursuant to ASC 505-50-30, this transaction was measured based on the fair value of the equity instruments issued as the Company determined that the fair value of the equity instruments issued in a share-based payment transaction with nonemployees was more reliably measurable than the fair value of the consideration received. The Company measured the fair value of the equity instruments in these transactions using the stock price and other measurement assumptions on the date at which Regeneration’s commitment for performance is reached. The Company recognized (as appropriate relative to the periods and manner that Company would recognize cash payments under the same arrangement) the cost of the appropriate number of the 487,000 shares at the current fair value as of November 20, 2015, and subsequently each financial reporting date until Regeneration has completed its performance. The stock-based compensation related to this consulting agreement was $496,943 for the year ended December 31, 2016.
On October 27, 2016, Takung Art Co., Ltd ("we" or the "Company") entered into a Financial Advisory Agreement with Maxim Group, LLC (“Maxim”) to provide general financial advisory and banking services, including, assisting and advising the Company with respect to its strategic planning process, business plans and capitalization, helping the Company broaden its shareholder base, increasing shareholder awareness through non-deal roadshows and other value-added services such as making strategic introductions, advising the Company on potential financing alternatives and merger and acquisition criteria and activity. As consideration of the provision of such services, the Company agreed to issue to Maxim or its designees 50,000 restricted shares of the Company’s common stock (“Compensation Shares”) with unlimited piggyback registration rights. Maxim shall also be entitled to additional fees in connection with any financings and transactions arranged by Maxim and reimbursement of reasonable expenses. As additional consideration, the Company shall, during the term of the Financial Advisory Agreement and for twelve (12) months thereafter, offer to retain Maxim as lead book running manager if it were to propose to effect a public offering of its securities on a US exchange, private placement of its securities or other financing. The Company fair valued the shares at grant date and recorded $52,692 as share-based compensation expense during the year ended December 31, 2016.
Stock-based Compensation Plans
During the year ended December 31, 2016, the Company granted an aggregate of 431,525 stock options under the 2015 Plan. 268,600 were granted effective on February 2, 2016, 50,000 were granted effective on February 29, 2016 and 112,925 of the options were granted effective on March 30, 2016. In addition, on December 1, 2015 and March 1, 2016, 12,143 and 7,463 of restricted stock-based awards were granted. Each of the awards is subject to service-based vesting restrictions. The February 2, 2016 grant included a grant of 50,000 shares to a non-employee who became an employee on March 2, 2016.
The exercise price of stock options ranged from $2.91 to $3.65 and the requisite service period ranged from two to five years. 33,333 stock options have been vested and 3,000 stock options were cancelled during year ended December 31, 2016, and no stock options were exercised or cancelled ended December 31, 2015.
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Stock Option Valuation Assumptions:
The fair value of stock option grants is estimated on the date of grant using the Black-Scholes option pricing model. The following weighted average assumptions were used to value grants made in 2016.
| Year ended December 31, 2016 | ||||
| Exercise Price | $ | 3.15 | ||
| Expected Terms (years) | 6.79 | |||
| Volatility | 92.78 | % | ||
| Dividend Yield | 0.00 | % | ||
| Risk-Free Interest Rate | 1.53 | % | ||
The Company estimated the risk free rates based on the yield to maturity of U.S. Treasury Bill as at the option respective valuation dates. The expected terms of the stock options is based on the contract life of the option. The expected volatility at the date of grant date and each option valuation date was estimated based on historical volatility of comparable companies for the period before the grant date with length commensurate with the expected term of the options. The Company has no history or expectation of paying dividends on its common shares.
Stock Options:
The number of stock options as of December 31, 2016 is as follows:
| Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Terms | Aggregate Intrinsic Value | |||||||||||||
| Outstanding, beginning of year | - | - | - | - | ||||||||||||
| Granted | 431,525 | 3.15 | 3.45 | - | ||||||||||||
| Exercised | - | - | - | - | ||||||||||||
| Forfeited | 3,000 | 2.91 | 4.09 | - | ||||||||||||
| Outstanding, end of year | 428,525 | 3.15 | 3.45 | - | ||||||||||||
| Exercisable, end of year | 33,333 | 3.11 | 1.14 | 149,833 | ||||||||||||
| Expected to vest | 395,192 | 3.15 | 3.45 | 1,756,885 | ||||||||||||
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The following table sets forth changes in compensation-related restricted stock awards during year ended December 31, 2016, and 17,350 shares are exercisable as of December 31, 2016.
| Number of | Weighted Average Grant Date | Weighted Average Remaining Contractual | ||||||||
| Shares | Fair Value | Term | ||||||||
| Unvested at December 31, 2015 | 11,131 | $ | 3.50 | 0.92 years | ||||||
| Granted | 7,463 | 3.35 | 1 year | |||||||
| Forfeited | - | |||||||||
| Vested | (17,350 | ) | ||||||||
| Unvested at December 31, 2016 | 1,244 | $ | 3.35 | 0.17 years | ||||||
The stock-based compensation recognized were $812,759 and $314,243 during the years ended December 31, 2016 and 2015, respectively.
16. SUBSEQUENT EVENT
On January 4, 2017, Hong Kong Takung and Merit Crown entered into an extension of loan agreement to amongst other things, extend the term of the US$ loans through March 31, 2017 (the "Extension of Loan Agreement"). HongKong Takung shall pay a total of US$69,212 (being the interest on the US$ loans based on an annual interest rate of 8% and 360-day year for the period from January 1, 2017 to March 31, 2017) in a lump sum to Merit Crown by January 13, 2017. The principal loan amounts shall be payable on March 31, 2017.
On January 4, 2017, our PRC subsidiary, Takung Cultural Development (Tianjin) Co., Ltd. entered into an interest-free loan agreement to lend Wang RMB24,461,505 (equivalent to US$3.50 million) with the principal loan amount payable on March 31, 2017 (the "RMB Loan"). The RMB Loan is to "secure" the loan amounts under the Extension of Loan Agreement and is guaranteed again by Chongqing Wintus (New Star) Enterprises Group. It is the understanding between the parties that when the loan amounts under the Extension of Loan Agreement are repaid, the RMB Loan will similarly be repaid.
On March 22, 2017, the Company’s common stock was listed and began trading on the New York Stock Exchange MKT.
On March 27, 2017, the Company released the compensation shares of 487,000 to Regeneration as per the Consulting Agreement with Regeneration entered on November 20, 2015. The shares were registered through Company’s Form S-1 filed on January 27, 2016.
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| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
None.
| Item 9A. | Controls and Procedures. |
Evaluation of Disclosure Controls and Procedures and Internal Control over Financial Reporting
The Company maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in the reports filed under the Securities Exchange Act, is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms. Disclosure controls are also designed with the objective of ensuring that this 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.
Pursuant to Rule 13a-15(b) under the Exchange Act, the Company carried out an evaluation with the participation of the Company’s management, including Di Xiao, the Company’s Chief Executive Officer (“CEO”), and Chun Hin Leslie Chow, the Company’s Chief Financial Officer (“CFO”), of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of December 31, 2016. Based upon that evaluation, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures 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 CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2016. In making this assessment, management used the framework set forth in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management has determined that, as of December 31, 2016, the Company’s internal control over financial reporting was effective.
This annual report does not include an attestation report of its registered independent public accounting firm regarding the Company's internal control over financial reporting because the Company is not required to include such attestation report in this annual report.
Changes in Internal Controls over Financial Reporting
We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities, and migrating processes.
During the year ended December 31, 2016, the Company enhanced its internal controls over financial reporting by making the following changes in internal controls over financial reporting:
| · | We have established a desired level of corporate governance with regard to identifying and measuring the risk of material misstatement. We have also set up a key monitoring mechanism including independent directors and audit committee to oversee and monitor Company’s risk management, business strategies and financial reporting procedure. |
| · | We have appointed a qualified Chief Financial Officer with SEC and US GAAP expertise. |
| · | We have strengthened our financial team by employing more qualified accountant(s) to enhance the quality of our financial reporting function. |
These additional controls allowed the Company to remediate the previously identified material weakness in internal controls over financial reporting.
Limitations on Controls
Management does not expect that the Company's disclosure controls and procedures or the Company's internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. The Company's disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives and the Company's chief executive officer and chief financial officer have concluded that the Company's disclosure controls and procedures are effective at that reasonable assurance level.
| Item 9B. | Other Information. |
None.
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| Item 10. | Directors, Executive Officers and Corporate Governance. |
The following are our officers and directors as of March 28, 2017. Other than Messrs. Levinson and Levy, our officers and other directors reside in either the PRC and Hong Kong and, therefore, it may be difficult for investors to effect service of process within the U.S. upon the latter or to enforce judgments against them obtained from the United States courts.
The following table sets forth certain information concerning our directors and executive officer:
| Name | Age | Position | ||
| Di Xiao | 41 | Chief Executive Officer, and Chairman | ||
| Chun Hin Leslie Chow | 33 | Chief Financial Officer | ||
| Joseph Levinson | 40 | Director | ||
| William Kwok Keung Tsui | 60 | Director | ||
| John Levy | 61 | Director | ||
| Zishen Li | 33 | Director |
The following is a summary of the biographical information of our directors and officers:
DI XIAO, the founder and executive director of the Company, has been in the art investment and consulting industry since 2008. He is familiar with all forms of art dealings, as well as the trading models and risks in the Chinese art market. He has extensively researched the evaluation, storage and insurance of artworks. Prior to founding Hong Kong Takung in 2012, he served as the general manager of Hangzhou LuxTimes Culture and Art Co., Ltd. from March 2009 to January 2013, where he oversaw the general operation. Prior to that, Mr. Xiao served as a director at FAI electronics Co., Ltd. from August 2003 to December 2008, focusing on marketing. Mr. Xiao has a bachelor degree from Tianjin University.
CHUN HIN LESLIE CHOW, is a qualified Certified Public Accountant in the United States. Mr. Chow has extensive experience in financial advising and has been engaging in the profession for more than ten (10) years. Mr. Chow graduated with Highest Honors from the University of California, Santa Barbara, with a Bachelor of Arts degree in Business Economics. From October 2005 to March 2009, Mr. Chow worked at Deloitte &Touche LLP in the United States with his last position as audit senior. From April 2009 to April 2011, Mr. Chow worked as a manager in Albeck Financial Services, a financial consulting firm in the United States. In May 2011, Mr. Chow became a managing director in Albeck Financial Services and was promoted to partner in March 2014. Mr. Chow was mainly responsible for financial reporting review, GAAP technical consultation, financial statement audit preparation, valuation of financial instruments and assisting companies with their management assessment of internal controls under Section 404 of Sarbanes Oxley Act and other corporate governance requirements. Mr. Chow has been an independent non-executive Director of Golden Power Group Holdings Limited, a company listed on the Hong Kong Stock Exchange, since June 2015. Mr. Chow has also been an independent non-executive Director of PPS International (Holdings) Limited, a company listed on the Hong Kong Stock Exchange, since September 2015. Since August 17, 2015, Mr. Chow has been a consultant to the Company. He was appointed our Chief Financial Officer as well as Chief Financial Officer of our Hong Kong subsidiary, HongKong Takung Assets and Equity of Artworks Exchange Co., Ltd, effective February 22, 2016.
JOSEPH LEVINSON, joined the Company’s Board of Directors on December 1, 2015. Mr. Levinson has 19 years’ experience in managing cross-border issues pertaining to U.S.-listed foreign companies. He speaks and reads Chinese fluently and has provided due diligence and forensic accounting services to many U.S.-based funds on their China-based investments, as well as extensive accounting and auditing consulting for numerous U.S.-listed Chinese companies. Since January 2012, he has been a director of China Xingbang Industry Group Inc., a company providing e-commerce related services and marketing consultancy services. Mr. Levinson was a director for China Growth Corp, a water purification system manufacturer, from March 2011 to March 2014 and formerly a director for China AgriCorp, Inc., a soybean producer in China, from April 2011 to September 2011. Mr. Levinson was a director for Energroup Holdings Corp., a pork producer, from April 2010 to January 2011, a director for China 3C Group, an electronics company in China, from May 2007 to January 2009 and a director for Sino Clean Energy, Inc., a clean coal manufacturer, from April 2011 to May 2011. Mr. Levinson was previously a Manager in the banking practice of the New York office of Deloitte and Touche and was involved in numerous transactions involving complex financial structures. Mr. Levinson also previously worked at KPMG in New York and Hong Kong. In the 1990s, Mr. Levinson served as an executive of Hong Kong Stock Exchange-listed China Strategic Holdings, where his major responsibilities included its subsidiary, China Tire, one of the first Mainland Chinese companies, to list on the NYSE. He is also the editor of “Wall Street Guanxi: How Chinese Companies Can Maximize Their Value in the U.S. Capital Markets”, a trade paperback published in Chinese by Beijing University Press in 2007. Mr. Levinson graduated summa cum laude from the University at Buffalo in 1994 with a double major in accounting and finance. Mr. Levinson’s track record as a U.S. Certified Public Accountant for 19 years, and his long experience in China were factors viewed favorably by the Board in selecting Mr. Levinson for a directorship. Specifically, Mr. Levinson’s experience as a manager at the “Big 4” firms of Deloitte and Touche, his work as a U.S. Certified Public Accountant, and his academic achievements were factors in leading to this recommendation.
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WILLIAM KWOK KEUNG TSUI, joined the Company’s Board of Directors on December 1, 2015. Mr. Tsui has extensive experience in trading, manufacturing, property management and development and corporate finance and management. In 2002, he founded Smith Naturals (China) Ltd., a subsidiary of Smith Naturals (USA) LLC, a manufacturer of herbal natural supplements and cosmetic products and has been serving as its Executive Director in charge of marketing since its inception. In 2004, he founded Jewels4Teens (China) Ltd., a jewelry and fashion accessories company and has been serving as its Executive Director for marketing since its incorporation. In 1988, he founded Adeble Enterprises Ltd., which introduces high tech food processing machinery to China, and has been the company’s managing director. In 1985, he founded Hua Xing Industrial Ltd. and served as director. He also managed the China Trade department of Kemklen Industrial Co. Ltd. from 1984 to 1985. Mr. Tsui holds a bachelor’s degree in civil engineering from McGill University in Canada. Mr. Tsui’s extensive executive experience in the China-related manufacturing, corporate finance and management spheres led to our conclusion that he is well qualified to serve as a director of the Board.
JOHN F. LEVY, became a director of the Company on March 1, 2016. Mr. Levy currently serves as the Chief Executive Officer and principal consultant for Board Advisory (the “Levy Company”), a consulting firm established to assist public companies, or companies aspiring to be public with corporate governance, corporate compliance, ethics, financial reporting and financial strategies. He has held this role since May 2005. Mr. Levy is a recognized corporate governance and financial reporting expert with over 30 years of progressive financial, accounting and business experience; including nine years in public accounting with three national accounting firms and having served as Chief Financial Officer of both public and private companies for over 13 years. Mr. Levy currently serves on the board of directors of two other public companies: Applied Minerals, Inc. (since January 2008), a mine owner that extracts, processes, markets halloysite clay and iron oxide for sale to a range of end markets; and Washington Prime Group, Inc. (since June 2016), a retail REIT that owns, develops and manages 114 shopping centers in the United States. Mr. Levy also served on the board of directors of Applied Energetics, Inc., a company specializing in the development and application of high power lasers, high voltage electronics, advanced optical systems and energy management systems technologies, until February 2016; Gilman Ciocia, Inc., a former financial planning and tax preparation firm, until October 2013; BrightPoint, Inc., a former NASDAQ listed device lifecycle services provider to the wireless industry, until October 2012; and China Commercial Credit, Inc., a financial services firm operating in China, until December 2016. Mr. Levy also served as a board member and program chair for the New Jersey Chapter of the National Association of Corporate Directors (“NACD”) from October 2007 to June 2012. Mr. Levy is a frequent speaker on the roles and responsibilities of board members and audit committee members. He has authored and presented numerous courses on finance, management and governance to state accounting societies including THE 21ST CENTURY DIRECTOR: Ethical and Legal Responsibilities of Board Members. Mr. Levy is a Certified Public Accountant with several years of experience. Mr. Levy is a graduate of the Wharton School of Business at the University of Pennsylvania, and received his MBA from St. Joseph's University in Philadelphia, Pennsylvania. Mr. Levy is a National Association of Corporate Director’s Board Leadership Fellow.
ZISHEN LI, joined the Company as a director on March 11, 2016. Mr. Li has been a Vice President of Hong Kong Takung since March 1, 2015. He was subsequently appointed as the General Manager of Shanghai Takung and Tianjin Takung with effect from July 28, 2015 and January 27, 2016, respectively. The employment with Mr. Li can be terminated by either party by giving at least one month notice. Mr. Li reports to Mr. Di Xiao, the CEO of Takung Art Co., Ltd. Mr. Li has extensive experience in working in the Chinese art industry since 2009. He is familiar with storage, appraisal and other procedures related to the trading of artworks. He also has expertise in internet application and online artwork trading. He served as the assistant general manager of Tianjin Culture and Artwork Exchange Co., Ltd. from 2009 to 2014. Mr. Li was engaged in customer service related work at WuXiAppTec (NYSE: WX) from 2006 to 2008. He graduated from Zhejiang University of Technology with a Bachelor of Science degree in 2006, and completed the postgraduate studies in industrial economics at Nankai University in 2013.
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Directors and Officers of Hong Kong Takung
Mr. Di Xiao, our present Chief Executive Officer and Chairman, is also the founder and sole director and officer (General Manager) of Hong Kong Takung. Under Hong Kong Takung’s Articles of Association and Hong Kong law, Hong Kong Takung is managed by the General Manager who is appointed and supervised by the Board of Directors. A director is appointed by the stockholders for a term of one year or until the next Annual General Meeting and can be re-elected for consecutive terms.
Mr. Chow has been appointed as Chief Financial Officer of the Company’s wholly-owned Hong Kong subsidiary, HongKong Takung Assets and Equity of Artworks Exchange Co., Ltd, effective February 22, 2016.
Directors and Officers of Shanghai Takung and Tianjin Takung
Mr. Zishen has been appointed as director of the Company on March 11, 2016.
Mr. Li has extensive experience in working in the Chinese art industry since 2009. He is familiar with storage, appraisal and other procedures related to the trading of artworks. He also has expertise in internet application and online artwork trading. He served as the assistant general manager of Tianjin Culture and Artwork Exchange Co., Ltd. from 2009 to 2014. Mr. Li was engaged in customer service related work at WuXiAppTec (NYSE: WX) from 2006 to 2008. He graduated from Zhejiang University of Technology with a Bachelor of Science degree in 2006, and completed the postgraduate studies in industrial economics at Nankai University in 2013.
Mr. Li has been a Vice President of Hong Kong Takung since March 1, 2015. He was subsequently appointed as the General Manager of Shanghai Takung and Tianjin Takung with effect from July 28, 2015 and January 27, 2016, respectively. The employment with Mr. Li can be terminated by either party by giving at least one month notice. Mr. Li reports to Mr. Di Xiao, the CEO of Takung Art Co., Ltd.
Term of Office
Our directors hold their positions until the next annual meeting of stockholders and until their successor is elected and qualified by our stockholders, or until their earlier death, retirement, resignation or removal.
Director Qualifications
Directors are responsible for overseeing the Company’s business consistent with their fiduciary duty to the stockholders. This significant responsibility requires highly-skilled individuals with various qualities, attributes and professional experience. Our Board believes that there are general requirements for service on the Board that are applicable to directors and that there are other skills and experience that should be represented on the Board as a whole but not necessarily by each director. The Board considers the qualifications of director and director candidates individually and in the broader context of the Board’s overall composition and the Company’s current and future needs.
Qualifications for All Directors
In its assessment of each potential candidate, including those recommended by the stockholders, the Board will consider the nominee’s judgment, integrity, experience, independence, understanding of the Company’s business or other related industries and such other factors it determines are pertinent in light of the current needs of the Board. The Board also takes into account the ability of a director to devote the time and effort necessary to fulfill his or her responsibilities to the Company.
The Board requires that each director be a recognized person of high integrity with a proven record of success in his or her field. Each director must demonstrate innovative thinking, familiarity with and respect for corporate governance requirements and practices, an appreciation of multiple cultures and a commitment to sustainability and to dealing responsibly with social issues. In addition to the qualifications required of all directors, the Board conducts interviews of potential director candidates to assess intangible qualities including the individual’s ability to ask difficult questions and, simultaneously, to work collegially.
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Qualifications, Attributes, Skills and Experience to be Represented on the Board as a Whole
The Board has identified particular qualifications, attributes, skills and experience that are important to be represented on the board as a whole, in light of the Company’s current needs and its business priorities. The Board believes that it should include some directors with a high level of financial literacy and some directors who possess relevant business experience as a Chief Executive Officer or a President or like position. Marketing is the core focus of our business and the Company seeks to develop and deploy the world’s most innovative and effective marketing and technology. Therefore, the Board believes that marketing and technology experience should be represented on the Board. The Company is involved in the on-line trading business in Hong Kong and the PRC. Therefore the Company’s business also requires compliance with a variety of regulatory requirements and relationships with various governmental entities. Therefore, the board believes that governmental, political or diplomatic expertise should be represented on the Board.
Set forth below are a chart and a narrative disclosure that summarize the specific qualifications, attributes, skills and experiences described above. An “X” in the chart below indicates that the item is a specific reason that the director has been nominated to serve on the Company’s Board. The lack of an “X” for a particular qualification does not mean that the director does not possess that qualification or skill. Rather, an “X” indicates a specific area of focus or expertise of a director on which the board currently relies.
| Di Xiao | William Tsui | Joseph Levinson | John Levy | Zishen Li | ||||||
| High level of financial literacy | X | X | X | |||||||
| Extensive knowledge of the Company’s business | X | X | ||||||||
| Marketing/Marketing related technology experience | X | X | X | |||||||
| Relevant Chief Executive/President or like experience | X | X | X | X | X | |||||
| Corporate Governance expertise | X | X |
Di Xiao
Extensive knowledge of the Company’s business/Marketing/Marketing related technology – Mr. Xiao is the founder and executive director of the Company and has been in the art investment and consulting industry since 2008. He is familiar with all forms of art dealings, as well as the trading models and risks in the Chinese art market. He has extensively researched the evaluation, storage and insurance of artworks. Prior to founding Takung in 2012, he served as the general manager of Hangzhou LuxTimes Culture and Art Co., Ltd. from March 2009 to January 2013, where he oversaw the general operation.
Relevant Chief Executive/President or like experience -Prior to founding Hong Kong Takung in 2012, he served as the general manager of Hangzhou LuxTimes Culture and Art Co., Ltd. from March 2009 to January 2013, where he oversaw the general operation.
William Kwok Keung Tsui
High level of financial literacy/ Relevant Chief Executive/President or like experience – Mr. Tsui has, amongst many things, extensive experience in corporate finance. He has founded numerous companies and continues to assume an executive role in many of them.
Marketing/Marketing related technology experience - In 2002, Mr. Tsui founded Smith Naturals (China) Ltd., a subsidiary of Smith Naturals (USA) LLC, a manufacturer of herbal natural supplements and cosmetic products and has been serving as its Executive Director in charge of marketing since its inception. In 2004, he founded Jewels4Teens (China) Ltd., a jewelry and fashion accessories company and has been serving as its Executive Director for marketing since its incorporation.
Joseph Levinson
High level of financial literacy – Mr. Levinson has provided due diligence and forensic accounting services to many U.S.-based funds on their China-based investments, as well as extensive accounting and auditing consulting for numerous U.S.-listed Chinese companies. Mr. Levinson was previously a Manager in the banking practice of the New York office of Deloitte and Touche and was involved in numerous transactions involving complex financial structures. Mr. Levinson also previously worked at KPMG in New York and Hong Kong. Mr. Levinson graduated summa cum laude from the University at Buffalo in 1994 with a double major in accounting and finance. Mr. Levinson’s track record as a U.S. Certified Public Accountant for 19 years, and his long experience in China were factors viewed favorably by the Board in selecting Mr. Levinson for a directorship. Specifically, Mr. Levinson’s experience as a manager at the “Big 4” firms of Deloitte and Touche, his work as a U.S. Certified Public Accountant, and his academic achievements were factors in leading to this recommendation.
John Levy
High level of financial literacy/Relevant Chief Executive/President or like experience – Mr. Levy is a recognized corporate governance and financial reporting expert with over 30 years of progressive financial, accounting and business experience, including nine years in public accounting with three national accounting firms and having served as Chief Financial Officer of both public and private companies for over 13 years.
Zishen Li
Extensive knowledge of the Company’s business/Marketing/Marketing related technology – Mr. Li has been a Vice President of Hong Kong Takung since March 1, 2015. He was subsequently appointed as the General Manager of Shanghai Takung and Tianjin Takung with effect from July 28, 2015 and January 27, 2016, respectively. The employment with Mr. Li can be terminated by either party by giving at least one month notice. Mr. Li reports to Mr. Di Xiao, the CEO of Takung Art Co., Ltd.
Save as otherwise reported above, none of our directors hold directorships in other reporting companies.
There are no family relationships among our directors or officers.
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Directors or Executive Officers involved in Bankruptcy or Criminal Proceedings
To our knowledge, during the last ten years, none of our directors and executive officers (including those of our subsidiaries), other than Mr. John Levy, has:
| · | Had a bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time. |
| · | Been convicted in a criminal proceeding or been subject to a pending criminal proceeding, excluding traffic violations and other minor offenses. |
| · | Been subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities. |
| · | Been found by a court of competent jurisdiction (in a civil action), the SEC, or the Commodities Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated. |
| · | Been the subject to, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization, any registered entity, or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member. |
Mr. Levy served as Interim Chief Financial Officer of Universal Food & Beverage Company from November 2005 to March 2006. Universal Food & Beverage Company filed a voluntary petition under the provisions of Chapter 11 of the United States Bankruptcy Act on August 31, 2007.
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Board Committees
Our business, property and affairs are managed by or under the direction of the Board of Directors. Members of the Board of Directors are kept informed of our business through discussion with the chief executive and financial officers and other officers, by reviewing materials provided to them and by participating at meetings of the board and its committees.
Our Board of Directors has three committees - the Audit Committee, the Compensation Committee and the Governance and Nominating Committee. The Audit Committee is comprised of Joseph Levinson, Kwok Keung William Tsui and John Levy, with Mr. Levinson serving as chairman. The Compensation Committee is comprised of Joseph Levinson, Kwok Keung William Tsui and John Levy, with Mr. Tsui serving as chairman. The Governance and Nominating Committee is comprised of Joseph Levinson, Kwok Keung William Tsui and John Levy, with Mr. Levy serving as chairman.
Our Audit Committee is involved in discussions with our independent auditor with respect to the scope and results of our year-end audit, our quarterly results of operations, our internal accounting controls and the professional services furnished by the independent auditor. Our Board of Directors has determined that both Mr. Levinson and Mr. Levy qualify as audit committee financial experts and have the accounting or financial management expertise as required under NYSE Rule 303A.07(a). Our Board of Directors has also adopted a written charter for the audit committee which the audit committee reviews and reassesses for adequacy on an annual basis. A copy of the audit committee’s current charter is available at our corporate website at http://content.stockpr.com/takungae/db/225/642/file/Audit+Committee+Charter+-+v443235_TAKUNG_ART_CO.%2C_LTD._8K_20160623+-+99.1.pdf.
The Compensation Committee oversees the compensation of our chief executive officer and our other executive officers and reviews our overall compensation policies for employees generally. If so authorized by the Board of Directors, the committee may also serve as the granting and administrative committee under any option or other equity-based compensation plans which we may adopt. The Compensation Committee does not delegate its authority to fix compensation; however, as to officers who report to the chief executive officer, the compensation committee consults with the chief executive officer, who may make recommendations to the Compensation Committee. Any recommendations by the chief executive officer are accompanied by an analysis of the basis for the recommendations. The committee will also discuss compensation policies for employees who are not officers with the chief executive officer and other responsible officers. A copy of the compensation committee’s current charter is available at our corporate website at http://content.stockpr.com/takungae/db/225/643/file/Compensation+Committee+Charter+-+v443235_TAKUNG_ART_CO.%2C_LTD._8K_20160623+-+99.2.pdf.
The Nominating Committee is involved in evaluating the desirability of and recommending to the Board any changes in the size and composition of the board, evaluation of and successor planning for the chief executive officer and other executive officers. The qualifications of any candidate for director will be subject to the same extensive general and specific criteria applicable to director candidates generally. A copy of the nominating committee’s current charter is available at our corporate website at http://content.stockpr.com/takungae/db/225/644/file/Governance+and+Nominating+Committee+Charter+-+v443235_TAKUNG_ART_CO.%2C_LTD._8K_20160623+-+99.3.pdf
Board Meetings
The Board of Directors and its committees held the following number of meetings during 2016:
| Board of Directors | 2 |
| Audit Committee | 4 |
| Compensation Committee | 2 |
| Nominating Committee | 1 |
The above table includes meetings held by means of a conference telephone call, but not actions taken by unanimous written consent.
Each director attended at least 75% of the total number of meetings of the Board of Directors and those committees on which he served during the year.
Material Changes to the Procedures by which Security Holders May Recommend Nominees to the Board of Directors
There have been no material changes to the procedures by which security holders may recommend nominees to the Board of Directors.
Code of Ethics
We have adopted a Code of Business Conduct and Ethics that applies to our principal executive officers and principal financial officer, principal accounting officer or controller, or persons performing similar functions and also to other employees. The Code is current available on our website at http://content.stockpr.com/takungae/db/225/645/file/Code+of+Business+Conduct+and+Ethics+-+v443235_TAKUNG_ART_CO.%2C_LTD._8K_20160623+-+99.4.pdf.
Board Leadership Structure and Role in Risk Oversight
Mr. Di Xiao is the Company’s Chairman and Chief Executive Officer and Mr. Chun Hin Leslie Chow is our Chief Financial Officer. We have three independent directors. The Board believes that the Company’s chief executive officer is best situated to serve as Chairman of the Board because he is the director most familiar with our business and industry and the director most capable of identifying strategic priorities and executing our business strategy. In addition, having a single leader eliminates the potential for confusion and provides clear leadership for the Company. We believe that this leadership structure has served the Company well. The Board’s role in the risk oversight of the Company includes, among other things:
| · | appointing, retaining and overseeing the work of the independent auditors, including resolving disagreements between the management and the independent auditors relating to financial reporting; |
| · | approving all auditing and non-auditing services permitted to be performed by the independent auditors; |
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| · | reviewing annually the independence and quality control procedures of the independent auditors; |
| · | reviewing and approving all proposed related party transactions; |
| · | discussing the annual audited financial statements with the management; and |
| · | meeting separately with the independent auditors to discuss critical accounting policies, management letters, recommendations on internal controls, the auditor’s engagement letter and independence letter and other material written communications between the independent auditors and the management. |
Our Board of Directors is responsible to approve all related party transactions. We have not adopted written policies and procedures specifically for related person transactions.
Limitations on Liability
Article VI of our Bylaws limits the liability of our directors, officers and employees to the fullest extent permitted by Delaware law. Consequently, our directors and officers may not be personally liable for monetary damages regarding their duties as directors.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our executive officers and directors and persons who own more than 10% of a registered class of our equity securities to file with the SEC initial statements of beneficial ownership, reports of changes in ownership and annual reports concerning their ownership of our common stock and other equity securities, on Form 3, 4 and 5 respectively. Executive officers, directors and greater than 10% shareholders are required by the SEC regulations to furnish our Company with copies of all Section 16(a) reports they file.
Based solely on our review of the copies of such reports received by us and on written representations by our officers and directors regarding their compliance with the applicable reporting requirements under Section 16(a) of the Exchange Act, we believe that, with respect to the fiscal year ended December 31, 2016, our officers and directors, and all of the persons known to us to own more than 10% of our Common Stock, filed all required reports on a timely basis.
| Item 11. | Executive Compensation. |
The following table sets forth information with respect to the compensation of each of the named executive officers for services provided in all capacities to Takung Art Co., Ltd and its subsidiaries, HongKong Takung Assets and Equity of Artworks Exchange Co., Ltd, Takung (Shanghai) Co., Ltd and Takung Cultural Development (Tianjin) Co., Ltd. in the fiscal years ended December 31, 2016 and 2015 in their capacity as such officers. Mr. Chun Hin Leslie Chow, our chief financial officer received no additional compensation for his services as chief financial officer of HongKong Takung Assets and Equity of Artworks Exchange Co., Ltd. Mr. Li receives no additional consideration for his services as director of the Company. No other executive officer or former executive officer received more than $100,000 in compensation in the fiscal years reported.
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Summary Compensation Table
| Name & Principal Position | Fiscal Year | Base Compensation (annual, unless otherwise noted) | Bonus | Stock Options * | Total Annual | |||||||||||||
| Di Xiao | 2016 | $ | 193,533 | $ | 60,551 | $ | 51,346 | $ | 305,430 | |||||||||
| Chief Executive Officer and Director (1) | 2015 | 37,162 | 4,645 | - | 41,807 | |||||||||||||
| Chun Hin Leslie Chow (2) | 2016 | 172,064 | 45,100 | 61,310 | 278,474 | |||||||||||||
| Chief Financial Officer | 2015 | - | - | - | - | |||||||||||||
| Zishen Li (3) Vice President, Hong Kong Takung General Manager, Shanghai Takung and Tianjin Takung | 2016 | 75,944 | 13,785 | - | 89,729 | |||||||||||||
| 2015 | - | - | - | - | ||||||||||||||
(1) For the year ended December 31, 2015, Mr. Xiao received an apportioned salary of $37,161.72 and an apportioned bonus of $4,645.22. His compensation is apportioned between Takung Art Co., Ltd and its subsidiary, HongKong Takung Assets and Equity of Artworks Exchange Co., Ltd to reflect the time he spends on the affairs of both entities. For the year ended December 31, 2016, Mr. Xiao received salary of $193,533, bonus of $60,551 and stock options worth $51,346. On March 1, 2016, Mr. Xiao was granted stock options to purchase 50,000 shares of common stock of the Company at an exercise price of $3.30 per share pursuant to the Company’s 2015 Incentive Stock Plan. The options are exercisable during the term of his employment in three equal installments of 16,666 shares of common stock, the first installment being exercisable on the date of issue and thereafter on each successive anniversary thereof.
(2) Mr. Chow was appointed our Chief Financial Officer and Chief Financial Officer of our Hong Kong subsidiary, HongKong Takung Assets and Equity of Artworks Exchange Co., Ltd on February 22, 2016. He received an apportioned salary of $172,064, bonus of $45,100 and stock options worth $61,310. On February 22, 2016, Mr. Chow was granted stock options to purchase 50,000 shares of common stock of the Company at an exercise price of $2.91 per share pursuant to the Company’s 2015 Incentive Stock Plan. The options are exercisable during the term of his employment in three equal installments of 16,666 shares of common stock, the first installment being exercisable on the date of issue and thereafter on each successive anniversary thereof.
(3) Mr. Li has been a Vice President of Hong Kong Takung since March 1, 2015. He was subsequently appointed as the General Manager of Shanghai Takung with effect from July 28, 2015 and General Manager of Tianjin Takung with effect from January 27, 2016. He was appointed as director of the Company on March 11, 2016. For the year ended December 31, 2016, Mr. Li received an apportioned salary of $75,944 and an apportioned bonus of $13,785. His compensation is apportioned between the subsidiaries, HongKong Takung Assets and Equity of Artworks Exchange Co., Ltd, Shanghai Takung and Tianjin Takung to reflect the time he spends on the affairs of these entities. He receives no additional compensation as director of the Company.
*The value reported for each executive is the cost recognized in our financial statements during fiscal year 2016, calculated in accordance with Accounting Standards Codification Topic 718 "Share-based Compensation”.
Operating Subsidiary Executive Compensation Summary
The table below sets forth the positions and compensations for the officers and sole director of Hong Kong Takung for the years ended December 31, 2016 and 2015.
| Name | Year | Annual Salary ($) | Bonus ($) | Total ($) | ||||||||||
| Di Xiao | 2016 | 193,533 | (2) | 60,551 | 254,084 | |||||||||
| Managing Director | 2015 | 86,711 | (1) | 10,839 | 97,550 | (1) | ||||||||
| Leslie Chow | 2016 | 172,064 | (3) | 45,100 | 217,164 | (3) | ||||||||
| Chief Financial Officer | 2015 | - | - | - | ||||||||||
| (1) | Mr. Xiao received a monthly compensation of $10,333 (HK$80,000). |
| (2) | Mr. Xiao’s monthly compensation was adjusted to $12,883 (HK$100,000) on October 2015 and further adjusted to $15,460 (HK$120,000) on April 2016. His compensation is apportioned between Takung Art Co., Ltd and its subsidiary, HongKong Takung Assets and Equity of Artworks Exchange Co., Ltd to reflect the time he spends on the affairs of both entities. |
| (3) | Mr. Chow’s monthly compensation was $14,953 (HK$116,064 ). His compensation is apportioned between Takung Art Co., Ltd and its subsidiary, HongKong Takung Assets and Equity of Artworks Exchange Co., Ltd to reflect the time he spends on the affairs of both entities. |
The table below sets forth the positions and compensations for the General Manager of Shanghai Takung and Tianjin for the years ended December 31, 2016 and 2015.
| Name | Year | Annual Salary ($) | Bonus ($) | Total ($) | ||||||||||
| Zishen Li | 2016 | $ | 75,944 | (1) | $ | 13,785 | $ | 89,729 | (1) | |||||
| Managing Director | 2015 | - | - | - | ||||||||||
| (1) |
Mr. Li’s monthly compensation paid by Hong Kong Takung and Shanghai Takung Takung were $4,662 (HKD$36,183) and $1,667 (RMB11,069), respectively, to reflect the time he spends on the affairs of the entities |
Operating Subsidiary Employment Agreements
Mr. Xiao entered into an employment agreement with Hong Kong Takung on June 1, 2014 whereby he agreed to serve as Hong Kong Takung’s General Manager and Managing Director. Pursuant to such employment agreement, Mr. Xiao is entitled to a monthly salary of $7,741 (HK$60.000), which will be reviewed annually in January. On March 2015, Mr. Xiao’s salary was adjusted to $10,323 (HK$80,000), and was adjusted to $12,883 (HK$100,000) on October 2015, and further adjusted to $15,460 (HK$120,000) on April 2016. The employment agreement may be terminated by either party upon one month’s advance notice.
Mr. Li has been a Vice President of Hong Kong Takung since March 1, 2015. He was subsequently appointed as the General Manager of Shanghai Takung and Tianjin Takung with effect from July 28, 2015 and January 27, 2016, respectively. The employment with Mr. Li can be terminated by either party by giving at least one month notice.
On February 22, 2016, the board of directors of the Company approved the appointment of Mr. Chow as the new Chief Financial Officer of the Company and the Company’s wholly-owned Hong Kong subsidiary, HongKong Takung Assets and Equity of Artworks Exchange Co., Ltd, effective February 22, 2016. The employment agreement may be terminated by either party upon three months’ advance notice.
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Compensation Discussion and Analysis
We strive to provide our named executive officers (as defined in Item 402 of Regulation S-K) with a competitive base salary that is in line with their roles and responsibilities when compared to peer companies of comparable size in similar locations.
It is not uncommon for Hong Kong private companies to have base salaries as the sole form of compensation. The base salary level is established and reviewed based on the level of responsibilities, the experience and tenure of the individual and the current and potential contributions of the individual. The base salary is compared to the list of similar positions within comparable peer companies and consideration is given to the executive’s relative experience in his or her position. Base salaries are reviewed periodically and at the time of promotion or other changes in responsibilities.
We have formed a compensation committee to oversee the compensation of our named executive officers. All the members of the compensation committee are independent directors. The compensation committee reviews and plans to adopt in 2017 a more formal bonus plan. The committee has the discretion to review and approve each employee’s bonus.
Compensation of Directors
The following table sets forth the compensation received by our directors in fiscal year of 2016 and 2015 in their capacity as directors.
| Name and Principal Position | Year | Fee earned or paid in Cash ($) | Stock Awards ($) | Option Awards ($) | Non-equity Incentive Plan Compensation ($) | Change
in Pension Value and Nonqualified Deferred Compensation Earnings ($) | All
Other Compensation ($) | Total ($) | ||||||||||||||||||||||||
| Di Xiao | 2016 | $ | - | $ | - | $ | 51,346 | $ | - | $ | - | $ | - | $ | 51,346 | |||||||||||||||||
| Chief Executive Officer and director (1) | 2015 | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Joseph Levinson | 2016 | 47,769 | 22,945 | 70,714 | ||||||||||||||||||||||||||||
| Director (2) | 2015 | 3,333 | - | - | - | - | 3,333 | |||||||||||||||||||||||||
| William Kwok Keung Tsui | 2016 | 47,769 | 16,062 | 63,831 | ||||||||||||||||||||||||||||
| Director (2) | 2015 | 3,333 | - | - | - | - | - | 3,333 | ||||||||||||||||||||||||
| John Levy | ||||||||||||||||||||||||||||||||
| Director (3) | 2016 | 41,102 | 20,890 | - | - | - | - | 61,992 | ||||||||||||||||||||||||
| Zishen Li | ||||||||||||||||||||||||||||||||
| Director (4) | 2016 | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| (1) | On March 1, 2016, Mr. Di Xiao was granted stock options to purchase 50,000 shares of common stock of the Company at an exercise price of $3.30 per share pursuant to the Company’s 2015 Incentive Stock Plan. The options are exercisable during the term of his employment in three equal installments of 16,666 shares of common stock, the first installment being exercisable on the date of issue and thereafter on each successive anniversary thereof. Mr. Xiao received these stock options for his services as director for the year ended December 31, 2016. |
| (2) | Messrs. Joseph Levinson and William Kwok Keung Tsui joined the Company as its directors on December 1, 2015. They each received an apportioned salary of $3,333 for the year ended December 31, 2015 and cash compensation of $47,769 for their services for the year ended December 31, 2016. Mr. Levinson also received stock awards worth $22,945 and Mr. Tsui received stock awards worth $16,062, respectively. |
| (3) | Mr. John Levy joined the Company as a director on March 1, 2016. He received an apportioned cash compensation of $41,102 and stock awards worth $20,890 for his services for the year ended December 31, 2016. |
| (4) | Mr. Zishen Li was appointed to serve as a director of the Company on March 11, 2016. He receives no additional compensation for his services as director. |
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Option Grants Table
During the year ended December 31, 2016, the Company granted an aggregate of 431,525 stock options under the 2015 Plan. 268,600, including a grant of 50,000 shares to a non-employee who became an employee on March 2, 2016, were granted effective on February 2, 2016, 50,000 were granted effective on February 29, 2016 and 112,925 of the options were granted effective on March 30, 2016.
Outstanding Equity Awards at Fiscal Year-End
During year ended December 31, 2016, 7,463 of restricted stock-based awards were granted. Each of the awards is subject to service-based vesting restrictions. The total unvested restricted stock was 1,244 shares as of December 31, 2016.
Aggregated Option Exercises and Fiscal Year-End Option Value Table
33,333 stock options have been vested and 3,000 stock options were cancelled during year ended December 31, 2016. As of December 31, 2016, the number of options outstanding and exercisable were 428,525 and 33,333 respectively.
Long-Term Incentive Plan (“LTIP”) Awards Table
There were no awards made in the last completed fiscal year under any LTIP.
Pension and Retirement Plans
Currently, except for contributions to the PRC government-mandated social security retirement endowment fund for those employees who have not waived their coverage, we do not offer any annuity, pension or retirement benefits to be paid to any of our officers, directors or employees. There are also no compensatory plans or arrangements with respect to any individual named above which results or will result from the resignation, retirement or any other termination of employment with our company, or from a change in our control.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table sets forth certain information with respect to the beneficial ownership of our voting securities by (i) any person or group owning more than 5% of any class of voting securities, (ii) each director, (iii) our chief executive officer and (iv) all executive officers and directors as a group as of March 28, 2017.
Unless otherwise indicated in the footnotes to the following table, each person named in the table has sole voting and investment power and that person‘s address is c/o Takung Art Co., Ltd, Flat/RM 03-04 20/F Hutchison House 10 Harcourt Road, Central, Hong Kong.
| Name and Address | Title of Class | Number of Shares Beneficially Owned (1) | Percentage Ownership of Shares of Common Stock | |||||||
| Owner of more than 5% of Class | ||||||||||
| Yan Sun (3) 1-4-901, Tianyang Place, Beicang Town, Beichen District, Tianjin, PRC | Common Stock | 3,732,907 | 33.4 | % | ||||||
| Directors and Officers | ||||||||||
| Di Xiao (2)(3)(4) | Common Stock | 125,722 | * | |||||||
| Chun Hin Leslie Chow (5) | Common Stock | 33,332 | * | |||||||
| Joseph Levinson (6) | Common Stock | 7,143 | * | |||||||
| William Kwok Keung Tsui (6) | Common Stock | 5,000 | * | |||||||
| John Levy (7) | Common Stock | 7,463 | * | |||||||
| Zishen Li | Common Stock | - | - | |||||||
| All Officers and Directors (six persons) | 178,660 | 1.5 | % | |||||||
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* Less than one percent (1%) of the issued and outstanding shares of Common Stock as of March 28, 2017.
| (1) | In determining beneficial ownership of our Common Stock as of a given date, the number of shares shown includes shares of Common Stock which may be acquired on exercise of warrants or options or conversion of convertible securities within 60 days of that date. In determining the percent of Common Stock owned by a person or entity on March 28, 2017, (a) the numerator is the number of shares of the class beneficially owned by such person or entity, including shares which may be acquired within 60 days on exercise of warrants or options and conversion of convertible securities, and (b) the denominator is the sum of (i) the total shares of Common Stock outstanding on March 28, 2017 (11,188,882), and (ii) the total number of shares that the beneficial owner may acquire upon conversion of the preferred stock and on exercise of the warrants and options, subject to limitations on conversion and exercise. Unless otherwise stated, each beneficial owner has sole power to vote and dispose of its shares. |
| (2) | In connection with the Reverse Merger, Di Xiao was appointed as our new Chief Executive Officer, Chief Financial Officer and director effective from October 20, 2014. |
| (3) | On October 20, 2014, we acquired Hong Kong Takung in a Reverse Merger transaction involving Kirin Linkage Limited and Loyal Heaven Limited, shareholders of Hong Kong Takung. In consideration of receiving all 20,000,000 issued and outstanding shares of Hong Kong Takung, we issued to Kirin Linkage Limited and Loyal Heaven Limited 41,995,200 and 167,980,800 pre Reverse Stock Split shares of restricted Common Stock respectively. Kirin Linkage Limited, a Cayman Islands company had four stockholders, namely AihuaTian, Caijing Zhao, Yue Zhang and Di Xiao, each holding equal shares of Kirin Linkage Limited. Accordingly, each shareholder of Kirin Linkage Limited had sole investment and voting power over shares owned by Kirin Linkage Limited in the proportion to their respective shareholdings in Kirin Linkage Limited. On or about August 12, 2015, Kirin Linkage Limited transferred its shareholdings in the Company to five (5) individuals who were its shareholders. Di Xiao, one of the recipients of these shares, received 92, 390 post Reverse Stock Split shares. None of the other transferees hold more than five per cent (5%) of the Company’s issued and outstanding shares. Similarly, on or about August 12, 2015, Loyal Heaven Limited transferred all its shares in the Company to eight (8) individuals who were its shareholders, of whom only Yan Sun holds more than five per cent (5%) of the Company’s issued and outstanding shares of Common Stock. Each of the aforementioned stockholders has sole investment and voting power over their respective shares of Common Stock in the Company. |
| (4) | On March 1, 2016, Mr. Xiao was granted an option pursuant to the Company's 2015 Incentive Stock Plan to purchase a total of 50,000 shares of Common Stock of the Company at $3.30 per share. The option shall become exercisable during the term of his employment in three (3) equal annual installments of 16,666 shares of Common Stock each, the first installment to be exercisable on the date of issue of the option with additional installments becoming exercisable on each of the successive anniversaries following the option grant date. As of March 28, 2017, Mr. Xiao may exercise his option to purchase 33,332 shares of the Company’s Common Stock. |
| (5) | On February 22, 2016, Mr. Chow was granted an option pursuant to the Company's 2015 Incentive Stock Plan to purchase a total of 50,000 shares of Common Stock of the Company at $2.91 per share. The option shall become exercisable during the term of his employment in three (3) equal annual installments of 16,666 shares of Common Stock each, the first installment to be exercisable on the date of issue of the option with additional installments becoming exercisable on each of the successive anniversaries following the option grant date. As of March 28, 2017, Mr. Chow may exercise his option to purchase 33,332 shares of the Company’s Common Stock. |
| (6) | Both Messrs. Joseph Levinson and William Kwok Keung Tsui were appointed directors of the Company on December 1, 2015. Pursuant to Mr. Tsui’s appointment letter, he shall, apart from cash compensation be entitled to receive 5,000 restricted shares of Common Stock per year, which shall vest in 4 equal quarterly installments. Pursuant to Mr. Levinson’s appointment letter, he shall, apart from cash compensation, be entitled to receive 5,000 restricted shares of Common Stock, or the equivalent of $25,000 worth of shares, whichever is greater per year, which shall vest in 4 equal quarterly installments. Both Mr. Levinson’s and Mr. Tsui’s shares were issued on March 22, 2017. |
| (7) | Mr. Levy was appointed as director of the Company on March 1, 2016. Pursuant to Mr. Levinson’s appointment letter, he shall, apart from cash compensation, be entitled to receive 5,000 restricted shares of Common Stock, or the equivalent of $25,000 worth of shares, whichever is greater per year, which shall vest in 4 equal quarterly installments. Mr. Levy’s shares were issued on March 22, 2017. |
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Except for the ownership of our securities, and except as set forth below, none of the directors, executive officers, holders of more than five percent of our outstanding Common Stock, or any member of the immediate family of any such person have, to our knowledge, had a material interest, direct or indirect, in any transaction or proposed transaction which may materially affect our company.
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On November 20, 2015, we entered into a Consulting Agreement with Regeneration Capital Group, LLC 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 Capital Group, LLC 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 March 31, 2017, whereupon the Compensation Shares shall be forthwith delivered to Regeneration or (ii) if the Company is unsuccessful in listing its securities on the NASDAQ or other U.S. securities exchange on or before March 31, 2017, the Compensation Shares shall be returned to the Company for cancellation. Regeneration Capital Group, LLC shall be entitled to “piggy-back” registration rights with respect to the Compensation Shares.
Other Related Transactions of Hong Kong Operating Entity and Shanghai Operating Entity
Related Transactions Prior to Reverse-Merger
Except as disclosed above, no executive officer, director or any member of these individuals’ immediate families, any corporation or organization with whom any of these individuals is an affiliate or any trust or estate in which any of these individuals serve as a trustee or in a similar capacity or has a substantial beneficial interest in is or has been indebted to us at any time since the beginning of our fiscal year 2015.
Procedures for Approval of Related Party Transactions
Our Board of Directors is charged with reviewing and approving all potential related party transactions. All such related party transactions must then be reported under applicable SEC rules. We have not adopted other procedures for review, or standards for approval, of such transactions, but instead review them on a case-by-case basis.
Director Independence
Except as reported above, our chief executive officer and director, Mr. Di Xiao and our director, Mr. Zishen Li do not hold any directorships in other reporting companies and do not qualify as an “independent director” under the NYSE Listing Rule. Mr. Joseph Levinson, Mr. John Levy and Mr. William Kwok Keung Tsui however qualify as independent directors under the NYSE Listing Rule.
Secured Loan Agreements
On July 15, 2016, Shanghai Takung entered into an interest-free loan to an individual, Xiaohui Wang (“Ms. Wang”), a national of the People’s Republic of China, of RMB10.08 million (equivalent to US$1.45 million) with a maturity of December 31, 2016. The loan was renewed with a maturity of March 31, 2017. On August 24, 2016, an additional loan to Ms. Wang of RMB13.35 million (equivalent to US$1.92 million) was made with the same maturity date and on the same terms. On November 14, 2016, a third loan to Ms. Wang of RMB10.28 million (equivalent to US$1.48 million) was made with a maturity of October 31, 2017 and on the same terms. On December 9, 2016, Tianjin Takung entered into an interest–free loan to Ms. Wang of RMB10.55 million (equivalent to US$1.52 million) was made with a maturity of November 30, 2017 and on the same terms. Both loans are guaranteed by Chongqing Wintus (New Star) Enterprises Group (“Chongqing”) and Ms. Wang is a shareholder and the legal representative of Chongqing. Both Chongqing and Ms., Wang are the non-related parties to the Company.
On January 4, 2017, our PRC subsidiary, Takung Cultural Development (Tianjin) Co., Ltd. entered into an interest-free loan agreement to lend Wang RMB24,461,505 (equivalent to US$3.50 million) with the principal loan amount payable on March 31, 2017 (the "RMB Loan"). The RMB Loan is to "secure" the loan amounts under the Extension of Loan Agreement and is guaranteed again by Chongqing Wintus (New Star) Enterprises Group. It is the understanding between the parties that when the loan amounts under the Extension of Loan Agreement are repaid, the RMB Loan will similarly be repaid.
Also, on July 15, 2016, Hong Kong Takung entered into a loan agreement with Merit Crown Limited, a Hong Kong company (“Merit Crown) , to borrow US$1.51 million with interest accruing at a rate of 8% per annum pro-rated through the maturity date of December 31, 2016. The loan was renewed with a maturity of March 31, 2017. On August 24, 2016, Hong Kong Takung borrowed another US$2.01 million from Merit Crown on similar terms. Merit Crown is a non-related party to the Company. On November 18, 2016, Hong Kong Takung borrowed another US$1.48 million from Merit Crown on similar terms. Merit Crown is a non-related party to the Company. On December 9, 2016, Hong Kong Takung borrowed another US$1.52 million from Merit Crown on similar terms. Merit Crown is a non-related party to the Company.
The US$1.51 million, US$2.01 million, US1.48 million and US1.52 million are collectively the US Dollar Loan (the “US Dollar Loans”). The RMB10.08 million, RMB13.35 million, RMB10.28 million, RMB10.55 million and RMB 24.46 million are collectively the RMB Loan (the “RMB Loans”).
Through an understanding between Ms. Wang and Merit Crown, the US Dollar Loans are “secured” by the RMB Loans. Further details on the RMB Loans are disclosed in Note 5. It is the understanding between the parties that when the US Dollar Loans are repaid, the RMB Loans will similarly be repaid.
Item 14. Principal Accounting Fees and Services.
On April 26, 2016, Marcum Bernstein & Pinchuk LLP (“Marcum”) was appointed as the new independent registered public accounting firm for Takung Art Co., Ltd (the “Company”). The decision to appoint Marcum was approved by the Audit Committee of the Company’s Board of Directors. Prior to engaging Marcum on April 26, 2016, the Company has not consulted Marcum regarding the application of accounting principles to a specified transaction, completed or proposed, the type of audit opinion that might be rendered on our financial statements or a reportable event, nor did the Company consult with Marcum regarding any disagreements with the Company’s prior auditor on any matter of accounting principles or practices, financial statement disclosure, or auditing scope of procedure, which disagreements, if not resolved to the satisfaction of the prior auditor, would have caused it to make a reference to the subject matter of the disagreements in connection with its reports.
Simultaneously with the appointment of Marcum, on April 26, 2016, AWC (CPA) Limited (“AWC”) was terminated as the independent registered public accounting firm for the Company. The decision to change audit firms from AWC to Marcum was approved by the Audit Committee of the Company’s Board of Directors.
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Audit Fees
We incurred approximately $85,000 for professional services rendered by our former registered independent public accounting firm, AWC (CPA) Limited for the integrated audit of the Company for 2015.
We incurred approximately $2,834 for professional services rendered by our former registered independent public accounting firm, AWC Albert Wong & Company for the audit of HongKong Takung for 2016.
We incurred approximately $266,490 for professional services rendered by our current registered independent public accounting firm, Marcum Bernstein & Pinchuk LLP for the audit and review of the Company in the fiscal year 2016, including a $200,000 fee for the re-audit of the Company for the years ended 2014 and 2015.
Audit-Related Fees
We did not incur any audit-related fees in the fiscal years ended December 31, 2016 and 2015.
Tax Fees
We did not incur any tax fees in the fiscal years ended December 31, 2016 and 2015.
All Other Fees
We did not incur any fees from our registered independent public accounting firm for services other than the services covered in “Audit Fees” in the fiscal years ended December 31, 2016 and 2015.
Pre-Approval Policies and Procedures
The Board of Directors pre-approves all audit and non-audit services performed by the Company’s auditor and the fees to be paid in connection with such services in order to assure that the provision of such services does not impair the auditor’s independence.
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Item 15. Exhibits, Financial Statement Schedules.
| Exhibit Number |
Description | |
| 3.1 | Certificate of Incorporation (1) | |
| 3.2 | Bylaws (1) | |
| 3.3 | Certificate of Amendment of the Certificate of Incorporation (1) | |
| 3.4 | Certificate of Amendment of the Certificate of Incorporation (1) | |
| 3.5 | Certificate of Amendment (2) | |
| 3.6 | Certificate of Amendment (3) | |
| 3.7 | Certificate of Amendment (5) | |
| 3.8 | Certificate of Incorporation of HongKong Takung Assets and Equity Artworks Exchange Co., Ltd.(4) | |
| 3.9 | Articles of Association of HongKong Takung Assets and Equity Artworks Exchange Co., Ltd.(4) | |
| 4.1 | Takung Art Co., Ltd 2015 Incentive Stock Plan (6) | |
| 10.1 | Share Exchange Agreement dated September 23, 2014, by and among Cardigant Medical Inc., HongKong Takung Assets and Equity Artworks Exchange Co., Ltd., and the shareholders of HongKong Takung Assets and Equity Artworks Exchange Co., Ltd.(4) | |
| 10.2 | Tenancy Agreement with Hongville Limited (4) | |
| 10.3 | Co-Owner Agreement (4) | |
| 10.4 | Provisional Rules Governing the Trading in Artwork Units (4) | |
| 10.5 | Provisional Rules Governing the Offering and Listing of Artwork Units(4) | |
| 10.6 | Market Entry Agreement of Traders (4) | |
| 10.7 | Provisional Administrative Measures Governing the Registration and Clearing of Artwork Units(4) | |
| 10.8 | Order Form with China Telecom Global Limited(4) | |
| 10.9 | Employment Letter, dated June 1, 2014, by and between HongKong Takung Assets and Equity of Artworks Exchange Co., Ltd. and Di Xiao(4) | |
| 10.10 | Cooperation Agreement for Bank-Dealer Payment Services, dated August 20, 2013, by and between Wing Lung Bank Ltd. and HongKong Takung Assets and Equity Artworks Exchange Co., Ltd (4) | |
| 10.11 | Agreement of Funds Transfer Services, dated June 25, 2014, by and between China Merchants Bank Co., Ltd., Hong Kong Branch and HongKong Takung Assets and Equity Artworks Exchange Co., Ltd (4) | |
| 10.12 | Internet and SMS Marketing Services Agreement between HongKong Takung Assets and Equity of Artworks Exchange Co., Ltd and Shenzhen Qianrong Cultural Investment Development Co., Ltd (7) | |
| 10.13 | Print Media Promotion Services Agreement between HongKong Takung Assets and Equity of Artworks Exchange Co., Ltd and Shenzhen Qianrong Cultural Investment Development Co., Ltd (7) | |
| 10.14 | Trader Promotion Services Agreement between HongKong Takung Assets and Equity of Artworks Exchange Co., Ltd and Shenzhen Qianrong Cultural Investment Development Co., Ltd (7) | |
| 10.15 | Software Development Agreement between HongKong Takung Assets and Equity of Artworks Exchange Co., Ltd and Shenzhen Qianrong Cultural Investment Development Co., Ltd (7) | |
| 10.16 | Subscription Agreement (8) | |
| 10.17 | Consulting Agreement between the Company and Regeneration Capital Group, LLC dated November 20, 2015 (9) | |
| 10.18 | Software Development Agreement dated August 1, 2015, between HongKong Takung Assets and Equity of Artworks Exchange Co., Ltd. and Shenzhen Qianrong Cultural Investment Development Co., Ltd.(10) | |
| 10.19 | Loan Agreement between Hongkong Takung Assets and Equity of Artworks Exchange Co., Ltd. and Merit Crown Limited dated July 15, 2016 (11) | |
| 10.20 | Loan Agreement between Takung (Shanghai) Co., Ltd, Xiaohui Wang and Chongqing Wintus (New Star) Enterprises Group dated July 15, 2016 (11) | |
| 10.21 | Loan Agreement between Hongkong Takung Assets and Equity of Artworks Exchange Co., Ltd. and Merit Crown Limited dated August 24. 2016. (12) | |
| 10.22 | Loan Agreement between Takung (Shanghai) Co., Ltd, Xiaohui Wang and Chongqing Wintus (New Star) Enterprises Group dated August 24, 2016.(12) | |
| 10.23 | Loan Agreement between Hongkong Takung Assets and Equity of Artworks Exchange Co., Ltd. and Jianping Mao dated August 25. 2016. (12) | |
| 10.24 | Loan Agreement between Hongkong Takung Assets and Equity of Artworks Exchange Co., Ltd. and Merit Crown Limited dated November 14. 2016. (13) | |
| 10.25 | Loan Agreement between Takung (Shanghai) Co., Ltd, Xiaohui Wang and Chongqing Wintus (New Star) Enterprises Group dated November 14. 2016. (13) | |
| 10.26 | English Translation of the Loan Agreement between Hongkong Takung Assets and Equity of Artworks Exchange Co., Ltd. and Merit Crown Limited dated December 2, 2016. (14) | |
| 10.27 | English Translation of the Loan Agreement between Takung Cultural Development (Tianjin) Co., Ltd., Xiaohui Wang and Chongqing Wintus (New Star) Enterprises Group dated December 2, 2016. (14) | |
| 10.28 | Financial Advisory Agreement between the Company and Maxim Group, LLC dated October 27, 2016.(15) | |
| 10.29 | Extension of Loan Agreement between Hongkong Takung Assets and Equity of Artworks Exchange Co., Ltd. and Merit Crown Limited dated January 4, 2017. (16) | |
| 10.30 | Loan Agreement between Takung Cultural Development (Tianjin) Co., Ltd., Xiaohui Wang and Chongqing Wintus (New Star) Enterprises Group dated January 4, 2017. (16) | |
| 16.1 | Letter from Farber Hass Hurley LLP (4) |
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| 21.1 | List of Subsidiaries * | |
| 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 herein by reference to the exhibits to our registration statement on Form S-1 filed with the SEC on August 16, 2011. |
| (2) | Incorporated herein by reference to the exhibit to our current report on Form 8-K filed with the SEC on March 7, 2013. |
| (3) | Incorporated herein by reference to the exhibit to our current report on Form 8-K filed with the SEC on November 6, 2014. |
| (4) | Incorporated herein by reference to the exhibit to our current report on Form 8-K filed with the SEC on October 22, 2014. |
| (5) | Incorporated herein by reference to Exhibit 3.1 to our current report on Form 8-K filed with the SEC on August 12, 2015. |
| (6) | Incorporated herein by reference to Exhibit 4.1 to our registration statement on Form S-8 filed with the SEC on August 27, 2015. |
| (7) | Incorporated herein by reference to the exhibits to our annual report on Form 10-K filed with the SEC on March 31, 2015. |
| (8) | Incorporated herein by reference to the exhibits to our current report on Form 8-K filed with the SEC on November 17, 2015. |
| (9) | Incorporated herein by reference to the exhibits to our current report on Form 8-K filed with the SEC on November 23, 2015. |
| (10) | Incorporated herein by reference to the exhibits to our registration statement on Form S-1 filed with the SEC on November 25, 2015. |
| (11) | Incorporated herein by reference to the exhibits to our current report on Form 8-K filed with the SEC on July 20, 2016. |
| (12) | Incorporated herein by reference to the exhibits to our current report on Form 8-K filed with the SEC on August 30, 2016. |
| (13) | Incorporated herein by reference to the exhibits to our current report on Form 8-K filed with the SEC on November 23, 2016. |
| (14) | Incorporated herein by reference to the exhibits to our current report on Form 8-K filed with the SEC on December 7, 2016. |
| (15) | Incorporated herein by reference to the exhibits to our current report on Form 8-K filed with the SEC on December 9, 2016. |
| (16) | Incorporated herein by reference to the exhibits to our current report on Form 8-K filed with the SEC on January 10, 2017. |
| * | Filed herewith |
| ** | Furnish herewith |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| TAKUNG ART CO., LTD | ||
| March 31, 2017 | By: | /s/ Di Xiao |
| Di Xiao | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) | ||
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||
| /s/ Di Xiao | Chief Executive Officer | March 31, 2017 | ||
| Di Xiao | Chairman of the Board of Directors | |||
| (Principal Executive Officer) | ||||
| /s/ Leslie Chow | Chief Financial Officer | March 31, 2017 | ||
| Leslie Chow | (Principal Financial and Accounting Officer) | |||
| /s/Joseph Levinson | Director | March 31, 2017 | ||
| Joseph Levinson | ||||
| /s/ William Kwok Keung Tsui | Director | March 31, 2017 | ||
| William Kwok Keung Tsui | ||||
| /s/ John Levy | Director | March 31, 2017 | ||
| John Levy | ||||
| /s/ Zishen Li | Director | March 31, 2017 | ||
| Zishen Li |
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