UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 8-K

 

CURRENT REPORT

 

Pursuant to Section 13 OR 15(d) of the

Securities Exchange Act of 1934

 

Date of Report (Date of earliest event reported): October 20, 2014

 

 

Cardigant Medical, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   333-176329   26-4731758

(State or other jurisdiction

of incorporation)

 

(Commission

File Number)

 

(IRS Employer

Identification No.)

 

Flat/RM 03-04 20/F Hutchison House

10 Harcourt Road, Central Hong Kong

(Address of Principal Executive Offices)

 

Registrant’s telephone number: +852 66142555

 

1500 Rosecrans Avenue, St 500, Manhattan Beach, California 90266

(Former name or former address, if changed since last report)

 

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions ( see  General Instruction A.2. below):

 

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 

 

 
 

 

TABLE OF CONTENTS

 

Item No.   Description of Item   Page
No.
         
Item 1.01   Entry Into a Material Definitive Agreement   4
Item 2.01   Completion of Acquisition or Disposition of Assets   5
Item 3.02   Unregistered Sales of Equity Securities   49
Item 4.01   Changes in Registrant’s Certifying Accountant   49
Item 5.01   Change in Control of Registrant   50
Item 5.02   Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers   50
Item 9.01   Financial Statements and Exhibits   51

 

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CONVENTIONS THAT APPLY TO THIS CURRENT REPORT ON FORM 8-K

 

Except where the context otherwise requires and for purposes of this Current Report on Form 8-K only:

 

    “we,” “us,” “our company,” “our,” “the Company” and “Cardigant Medical, Inc.” refer to Cardigant Medical, Inc., and its operating entity, namely Hong Kong Takung Assets and Equity of Artworks Exchange Co., Ltd., a Hong Kong company.

 

   

    all references to “Hong Kong dollars” or “HKD” are to the legal currency of Hong Kong; and
       

 

    all references to “U.S. dollars,” “dollars,” or “$” are to the legal currency of the United States.

 

Amounts may not always add to the totals due to rounding.

 

Unless otherwise noted, all translations from Hong Kong dollars to U.S. dollars using the exchange rate refers to the exchange rate quoted on http://www.xe.com on October 21, 2014, which was HKD 7.7563 to $1.00. We make no representation that the Hong Kong dollars amounts referred to in this Current Report on Form 8-K could have been or could be converted into U.S. dollars at any particular rate or at all.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Current Report on Form 8-K or Form 8-K and other reports filed by us from time to time with the Securities and Exchange Commission (collectively the “ Filings ”) contain or may contain forward-looking statements and information that are based upon beliefs of, and information currently available to, our management as well as estimates and assumptions made by our management. When used in the filings the words “anticipate”, “believe”, “estimate”, “expect”, “future”, “intend”, “plan” or the negative of these terms and similar expressions as they relate to us or our management identify forward looking statements. Such statements reflect the current view of our management with respect to future events and are subject to risks, uncertainties, assumptions and other factors (including the risks contained in the section of this report entitled “Risk Factors”) as they relate to our industry, our operations and results of operations, and any businesses that we may acquire. Should one or more of the events described in these risk factors materialize, or should our underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended or planned.

 

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

 

Item 1.01. Entry into a Material Definitive Agreement

 

On September 23, 2014, we entered into a share exchange agreement (“Share Exchange Agreement”) with (i) Hong Kong Takung Assets and Equity of Artworks Exchange Co., Ltd., a limited liability company formed under the laws of Hong Kong, Special Administrative Region, China (“Takung”), and (ii) Kirin Linkage Limited and Loyal Heaven Limited, which are the members of Takung to acquire all the issued and outstanding capital stock of Takung in exchange for the issuance to Kirin Linkage Limited and Loyal Heaven Limited an aggregate of 209,976,000 restricted shares of our common stock (the “Reverse Merger”).The Reverse Merger closed on October 20, 2014.

 

Immediately after the closing of the Reverse Merger, we had a total of 233,306,662 issued and outstanding shares of common stock substantially all of which was held by Kirin Linkage Limited and Loyal Heaven Limited. As a result of the Reverse Merger, Takung is now our wholly-owned subsidiary.

 

Upon closing of the Reverse Merger, Mr. Jerett Creed, Mr. Lei Wang and Mr. Yong Li resigned from all officers and directors positions they held with the Company due to personal reasons and Mr. Xiao Di was appointed as the Chief Executive Officer, Chief Financial Officer and the sole director of the Company. There were no disagreements between Mr. Jerett, Mr. Wang or Mr. Li and the Company.

 

Both Kirin Linkage Limited and Loyal Heaven Limited and their respective natural person shareholders are not U.S. Persons (as that term is defined in Regulation S of the Securities Act of 1933) and they acquired our shares in the Reverse Merger outside of the United States.

 

In issuing these securities to Kirin Linkage Limited and Loyal Heaven Limited, we claim an exemption from the registration requirements of the Securities Act of 1933, as amended (the “Act”) for the private placement of the shares of our common stock to them pursuant to Regulation S promulgated thereunder since, among other things, the offer or sale was made in an offshore transaction and no directed selling efforts were made in the United States by the issuer, a distributor, any of their respective affiliates, or any person acting on behalf of any of the foregoing. In addition, the recipient of the shares certified that it is not a U.S. person and is not acquiring the securities for the account or benefit of any U.S. person and agreed to resell such securities only in accordance with the provisions of Regulation S, pursuant to registration under the Act, or pursuant to an available exemption from registration; and agreed not to engage in hedging transactions with regard to such securities unless in compliance with the Act.

 

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Item 2.01 Completion of Acquisition or Disposition of Assets

 

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

 

As described in Item 1.01 above, on October 20, 2014, we acquired all the issued and outstanding shares of Takung pursuant to the Share Exchange Agreement and Takung became our wholly owned subsidiary. The acquisition was accounted for as a recapitalization effected by a share exchange, wherein Takung is considered the acquirer for accounting and financial reporting purposes. The assets and liabilities of Takung have been brought forward at their book value and no goodwill has been recognized.

 

As a result of the transfer of the excluded assets pursuant to the Contribution Agreement and the acquisition of all the issued and outstanding shares of Takung, we are no longer conducting the Business and have now assumed Takung’s business operations as our own.

 

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FORM 10 DISCLOSURE

 

As disclosed elsewhere in this report, on October 20, 2014, we acquired Takung in a Reverse Merger acquisition transaction. Item 2.01(f) of Form 8-K states that if the registrant were a shell company before a Reverse Merger transaction disclosed under Item 2.01, then the registrant must disclose the information that would be required if the registrant were filing a general form for registration of securities under the Exchange Act on Form 10.

 

We are not and have never been a shell. However, because of the exercise by Cardigant Neurovascular Inc. of its option to purchase the excluded assets under the Contribution Agreement and the Reverse Merger, we are now not in the business of treating atherosclerosis and plaque stabilization but have assumed the business of Takung, namely the business of on-line trading in artwork, we have decided to voluntarily provide below the information that would be included in a Form 10 registration statement.

 

Please note that the information provided below relates to the combined enterprises after the acquisition of Takung, except that information relating to periods prior to the date of the Reverse Merger only relate to Takung unless otherwise specifically indicated.

 

DESCRIPTION OF BUSINESS

Overview

 

We are a holding company that, through Takung, 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.

 

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

 

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

 

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

 

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 restricted shares of common stock of the Company from a group of three former shareholders of the Company. In consideration for the shares, Mr. Li paid the sellers $399,344 in cash which came from his own capital. The sellers were Jerett A. Creed, the Company’s former Chief Executive Officer, Chief Financial Officer, director and formerly a controlling shareholder of the Company, the Creed Family Limited Partnership and Ralph Sinibaldi. The shares represented approximately 95% of the Company’s then issued and outstanding common stock. The sale was consummated on August 28, 2014. As a result of the transaction, a change in control of the Company occurred and in connection therewith, Mr, Yong Li and Mr. Lei Wang were appointed as new directors to the Board.

 

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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 (“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.

 

On October 20, 2014, we acquired the business of Takung through the acquisition of all the share capital of Takung under the Share Exchange Agreement dated September 23, 2014.

 

Takung is a limited liability company incorporated on September 17, 2012 under the laws of Hong Kong, Special Administrative Region, China. It authorized capital is 20,000,000. Prior to the Reverse Merger, all its 20,000,000 issued and outstanding shares, par value HK$1 per share, were owned by Kirin Linkage Limited (4,000,000) and Loyal Heaven Limited (16,000,000), both Cayman Islands companies.

 

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

 

As a result of the transfer of the excluded assets pursuant to the Contribution Agreement and the acquisition of all the issued and outstanding shares of Takung, we are no longer conducting the Business and have now assumed Takung’s business operations as our own.

 

As a result of the above, Takung became our wholly owned subsidiary. The diagram below illustrates our current corporate structure:

 

 

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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 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 accuracyin 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 www.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.

 

Our trading platform is linked to two banks, namely Wing Lung Bank Ltd and the China Merchants Bank, Hong Kong Branch. Traders are required to open an account with either of these two banks and their accounts are linked to our trading and settlement system to ensure the timely settlement of their trades.

 

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 are eligible to become a Trader.

 

Additional parties such as insurer, appraisal firm and custodian for artworks will be retained in connection with the offering and trading of artwork on our system.

 

Our trading system hardware platform is hosted in a China Telecom IDC room, and disaster recovery is also set up in the CITIC Telecom IDC room, both located in Hong Kong. The real-time data synchronization ensures the safety of transaction data.

 

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Revenue

 

We generate revenue from our services in connection with the offering and trading of artwork on our system. Our revenue falls into three broad categories: (i) listing fees, (ii) trading commissions, and (iii) management fees.

 

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 artwork is that it is from renowned artists and is valuable.

 

For example, the four pieces of artwork listed so far for trade on our platform have been oil paintings from famous Chinese artists and range in value from RMB 12,000,000 to RMB 13,000,000. For the time being, we are limiting ourselves to artwork from living artists although this may change in the future.

 

Traditionally, art is sold and transacted by the creator/owner of it through galleries and art 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 the four pieces of artwork that we have listed thus far, the listing processes were all initiated by the Offering Agent.

 

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 an appraised value of $12,000,000 may be divided into 12,000,000 units with each unit sold at $1.00. 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 either Wing Lung Bank Ltd or the China Merchant Bank, Hong Kong Branch 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 20% of the total offering price for calligraphies and paintings, which are currently the major types of artworks listed and traded on our system. 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), conduct 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 the date of this report, four pieces of artwork have been successfully listed and being traded on our system. The first piece was listed during 2013, two pieces were listed during the six months ended June 30, 2014 and the fourth piece was listed during the third quarter of 2014.

 

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.”

 

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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 Trader 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/her.

 

Pre-Listing Premium Pricing

 

In addition to charging a percentage of the total listing amount as listing fee, an additional listing revenue may be generated by the Pre-Listing Premium process 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.

 

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 (“HKD $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.

 

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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 www.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 an initial promotion, we currently charge a reduced fee of 0.2% of the total amount.

 

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 (0.01 Hong Kong Dollar) per 100 artwork units per day. The management fee is deducted from proceeds from the sale of artwork units.

 

Currently, our Traders are all from mainland China. We plan to market our platform to other Chinese speaking countries and regions, such as Singapore.

 

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.

 

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.

 

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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. We pay commissions to existing Traders who have successfully introduced new Traders at the following rates:

 

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

 

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We also entered into a cooperation arrangement with Shenzhen Qianrong Cultural Investment Development Co., Ltd. (“Qianrong”). Qianrong specializes in promoting trading in the arts and has a broad network of both amateur and professional artworks traders. Cooperating with Qianrong enables us to access their traders in order to expand our own base of registered members/Traders in the PRC. At the same time, our trading platform provides Qianrong’s art traders an alternative and untraditional way of trading artwork. Qianrong also assists us in market development, maintaining relationships, technical support and education related to artwork and generating interest in the art dealer community.

 

We utilize Baidu Listing Search and Key Word Search services for search engine optimization in order to promote our website and platform.

 

Customers

 

Our customers are the Traders, Original Owners and Offering Agents. Because we have listed only four pieces of artwork so far and 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.

 

Seasonality

 

Because we have only been in operation for less than a year, 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 the date of this report, we have ten full-time employees, all of whom are based in Hong Kong. Di Xiao is Takung’s General Manager (apart from being our Chief Executive Officer and Chief Financial Officer) as well as the sole director. As for the other nine employees, two are from the IT department, two are from the Transaction Management department, three are from the Administrative and Customer Service department, and two 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 a business of dealing in securities, or carrying on a business of dealing in futures contracts in Hong Kong, has to be licensed by the Securities and Futures Commission (“SFC”) or fall 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, 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;

 

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(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 in any collective investment schemI(e) interests, rights or property, whether in the form of an instrument or otherwise, commonly known as securities;
(f) interests, rights or property which is interests, rights or property, or is of a class or description of interests, rights or property, prescribed by notice under section 392 of this Ordinance as being regarded as securities in accordance with the terms of the notice; (Amended 8 of 2011 s. 14)
(g) a structured product that does not come within any of paragraphs (a) to (f) but in respect of which the issue of any advertisement, invitation or document that is or contains an invitation to the public to do any act referred to in section 103(1)(a) of this Ordinance is authorized, or required to be authorized, under section 105(1) of this Ordinance, (Added 8 of 2011 s. 14)

 

but does not include

 

(i) shares or debentures of a company that is a private company within the meaning of section 11 of the Companies Ordinance (Cap 622); (Amended 28 of 2012 ss. 912 & 920)
(ii) any interest in any collective investment scheme that is-

 

(A) a registered scheme as defined in section 2(1) of the Mandatory Provident Fund Schemes Ordinance (Cap 485), or its constituent fund as defined in section 2 of the Mandatory Provident Fund Schemes (General) Regulation (Cap 485 sub. leg. A);
(B) an occupational retirement scheme as defined in section 2(1) of the Occupational Retirement Schemes Ordinance (Cap 426); or
(C) a contract of insurance in relation to any class of insurance business specified in the First Schedule to the Insurance Companies Ordinance (Cap 41);
(iii) any interest arising under a general partnership agreement or proposed general partnership agreement unless the agreement or proposed agreement relates to an undertaking, scheme, enterprise or investment contract promoted by or on behalf of a person whose ordinary business is or includes the promotion of similar undertakings, schemes, enterprises or investment contracts (whether or not that person is, or is to become, a party to the agreement or proposed agreement);
(iv) any negotiable receipt or other negotiable certificate or document evidencing the deposit of a sum of money, or any rights or interest arising under the receipt, certificate or document;
(v) any bill of exchange within the meaning of section 3 of the Bills of Exchange Ordinance (Cap 19) and any promissory note within the meaning of section 89 of that Ordinance;
(vi) any debenture that specifically provides that it is not negotiable or transferable (excluding a debenture that is a structured product in respect of which the issue of any advertisement, invitation or document that is or contains an invitation to the public to do any act referred to in section 103(1)(a) of this Ordinance is authorized, or required to be authorized, under section 105(1) of this Ordinance); (Amended 8 of 2011 s. 14)
(vii) interests, rights or property which is interests, rights or property, or is of a class or description of interests, rights or property, prescribed by notice under section 392 of this Ordinance as not being regarded as securities in accordance with the terms of the notice.

 

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.

 

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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.

 

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;

 

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· 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.

 

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

 

All 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.

 

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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 (see Question 25).
· 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.

 

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. We are not aware of any other companies engaging in a similar business.

 

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Research and Development

 

We currently do not conduct any research and development activities. We purchased the trading platform from a third party for approximately $232,141 (HKD $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 an IT consultant who helps maintain and operate the trading platform software, and whose cost is charged as consultancy fee under General & Administrative expenses. We do not expect to have any upcoming research and development projects, nor do we plan on upgrading the trading platform software any time soon.

 

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.

 

Country   Trademark   Application number   Classes   Our Ref   Status
Hong Kong     303101679   14, 16, 35, 36, 42   TM HK–1104 - BS000152144   In process
Hong Kong            
Hong Kong            
Macau     N/090131   14   TM MO 01–6(1) - BS000152144   In process
Macau     N/090132   16   TM MO 01–6(2) - BS000152144   In process
Macau     N/090133   35   TM MO 01–6(3) - BS000152144   In process
Macau     N/090134   36   TM MO 01–6(4) - BS000152144   In process
Macau     N/090135   42   TM MO 01–6(5) - BS000152144   In process
United States     86372887   14   TM US 0203 – BS000152144   In process
United States     86372895   16   TM US 0204 – BS000152144   In process
United States     86372899   35   TM US 0205 – BS000152144   In process
United States     86372901   36   TM US 0206 – BS000152144   In process
United States     86372903   42   TM US 0207 – BS000152144   In process

 

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Class 14: Jewelry Products

 

Precious metals and their alloys and goods in precious metals or coated therewith, not included in other classes; jewelry, precious stones; horological and chronometric instruments.

 

Class 16: Paper and Printed Material Products

 

Paper, cardboard and goods made from these materials, not included in other classes; printed matter; bookbinding material; photographs; stationery; adhesives for stationery or household purposes; artists materials; paint brushes; typewriters and office requisites (except furniture); instructional and teaching material (except apparatus); plastic materials for packaging (not included in other classes); printers type; printing blocks.

 

Class 35: Advertising, Business and Retail Services

 

Advertising; business management; business administration; office functions.

 

Class 36: Insurance and Financial Services

 

Insurance; financial affairs; monetary affairs; real estate affairs.

 

Class 42: Computer & Software Services and Scientific Services

 

Scientific and technological services and research and design relating thereto; industrial analysis and research services; design and development of computer hardware and software.

 

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 shareholder 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.

 

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RISK FACTORS

 

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.

 

Risks Related To Our Business

 

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 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 is 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.

 

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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 and location of our servers are in Hong Kong SAR, which is historically susceptible to adverse weather conditions such as typhoons,excessive heat or rain 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, more recently 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.

 

We have insufficient insurance coverage

 

We presently do not have any insurance to cover certain events such as physical damage to our property 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 and advertising 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 us 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 dependent 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 Report, we had approximately 9 full time employees. 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.

 

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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 raw materials and supplies, development of new products, 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.

 

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 shareholders. 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.

 

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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;

 

    fluctuation and unpredictability of the prices of the products we sell;

 

    changes in the laws of Hong Kong that affect our operations;

 

    competition from other healthcare products manufacturers and distributors; and

 

    our ability to obtain necessary government certifications and/or licenses to conduct our 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. 

 

The Hong Kong legal system is a civil law system based on written statutes. The overall effect of legislation over the past approximately 25 years has significantly enhanced the protections afforded to various forms of foreign investment in Hong Kong. However, these laws, regulations and legal requirements change frequently, and their interpretation and enforcement involve uncertainties. For example, we may have to resort to administrative and court proceedings to enforce the legal protection that we enjoy either by law or contract. However, since Hong Kong 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. For example, these uncertainties may impede our ability to enforce the contracts we have entered into. In addition, such uncertainties, including the inability to enforce our contracts, could materially and adversely affect our business and operation. In addition, 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.

 

Foreign Exchange Risk.  

 

While our reporting currency is USD, our revenues, costs and expenses are denominated in HKD. All of our assets are denominated in HKD. As a result, we are exposed to foreign exchange risk as our revenues and results of operations may be affected by fluctuations in the exchange rate between USD and HKD. If the HKD depreciates against USD, the value of our HKD revenues, earnings and assets as expressed in our USD financial statements will decline.   To date, we have not entered into any foreign exchange forward contracts or similar instruments to attempt to mitigate our exposure to change in foreign currency rates.

 

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Future inflation in Hong Kong may inhibit our ability to conduct business profitably. 

 

In recent years, the Hong Kong economy has experienced periods of rapid expansion and high rates of inflation. High inflation may in the future cause the Hong Kong government to impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in Hong Kong, and thereby harm the market for our services.

 

It will be extremely 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 HK$500,000 (USD 64,433) 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.

 

Since we are a Hong Kong company, you will not have certain investor rights as our shareholder, such as the right to bring legal action against other shareholders on behalf of the company.

 

Takung, our operational subsidiary, is incorporated in Hong Kong. The Hong Kong Companies Ordinance (Chapter 662 of the Laws of Hong Kong), or the Companies Ordinance, does not provide for any right for our shareholders, including our significant shareholders, to bring legal action against any other shareholder on our behalf to enforce any claim against such party or parties if we fail to enforce such claim ourselves.

 

Our investors do not have the benefit to rely on the Public Company Accounting Oversight Board inspection of our independent registered public accounting firm.

 

As a company registered with the U.S. Securities and Exchange Commission, or the SEC, and traded publicly in the United States, our independent registered public accounting firm is required by the laws of the United States to be registered with the Public Company Accounting Oversight Board, or the PCAOB, and undergo regular inspections by the PCAOB to assess its compliance with the laws of the United States and professional standards. The PCAOB, however, is currently unable to inspect a registered public accounting firm’s audit work relating to a company’s operations in Hong Kong where the documentation of such audit work is located in Hong Kong. Accordingly, our independent registered public accounting firm’s audit of our operations in Hong Kong is not subject to the PCAOB inspection. As a result, our investors do not have the benefit of the PCAOB inspection of our independent registered public accounting firm’s audit works and quality control procedures.

 

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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 will become a public company upon completion of the private placement and our internal control will be essential to the integrity of our business and financial results. Our public reporting obligations are expected to place a strain on our management, operational and financial resources and systems in the foreseeable future. In preparation for this offering, 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.

 

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.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

 

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

 

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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.  

 

Overview

 

General

 

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.

 

However in a series of transactions involving (i) a purchase of a majority share in our Company, (ii) the execution and consummation of a Contribution Agreement with Cardigant Neurovascular Inc., a newly formed Delaware corporation (“Cardigant Neurovascular”) whereby we transferred to Cardigant Neurovascular as a contribution to capital, all the assets, properties, rights, titles and interests that were used or held for use by us for the development of biologic and peptide based compounds and enhanced methods for local delivery for treatment of vascular disease including peripheral artery disease and certain cancers (except for certain explicitly excluded assets) in exchange for Cardigant Neurovascular assuming all our liabilities prior to the date of the Contribution Agreement (except for certain excluded liabilities), (iii) the exercise by Cardigant Neurovascular of its option to purchase the aforementioned excluded assets and (iv) the execution and consummation of a Share Exchange Agreement (“Share Exchange”) with Hong Kong Takung Assets and Equity of Artworks Exchange Co., Limited, a Hong Kong limited liability company, (“Takung”), and the shareholders of Takung whereby Takung has become our wholly-owned subsidiary, we have now assumed the business of Takung, which is the operation of an electronic online platform for the offering and trading in of ownership units in valuable artwork. For example, a piece of art is divided into equal units of ownership and the units are listed on our platform so that registered members/traders can bid and offer, or trade in these units.

 

Subsequent to the Share Exchange, all our operations are conducted through Takung in Hong Kong, Special Administrative Region (“SAR”), China. Takung was incorporated under the Companies Ordinance (Chapter 32 of the Laws of Hong Kong) as a limited liability company on September 17,2012. Although it was incorporated in 2012, it did not commence operations until the fourth quarter of the fiscal year ended December 31, 2013. Since inception, we have listed four pieces of artwork. Our volume of trades has increased with each listing and presently averages 3,152,800 units traded per day.

 

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 Our revenue is from three categories: (i) listing fees, (ii) management fees and (iii) trade commissions. We collect a listing fee when a piece of artwork is listed and successfully traded on our system. We generally charge 22.5-23.5% of the total offering price for calligraphies and paintings, which are currently the major types of artwork listed and traded on our system. We charge a trading commission for each purchase and sale of artwork units. The commission is typically 0.3% of the total amount of each transaction, but as an initial promotion, we currently charge a reduced fee of 0.2% of the total amount. Finally, we charge a management fee of 0.01 Hong Kong Dollar (HKD) per 100 artwork units per day, which is accounted for as revenue, and immediately deducted from the proceeds of the sale of units when a transaction is completed. This fee is offset by payments for insurance, storage and transportation of the relevant piece.

 

Listing fee

 

A listing procedure can either be initiated by an Offering Agent (“Agent”) or an Original Owner (“Owner”) of the piece. An Agent is a reputable entity who is an experienced art dealer. They attempt to offer pieces which will result in a realization of value. They negotiate with the Owner and list the piece on our platform. An Agent assists the Owner with the listing process, such as getting the piece appraised by a third party, assigning an initial value for each trading unit at listing, performing research and preparing the marketing material and promotional activities to attract Traders’ interests.

 

In the future an Owner may approach us directly for a listing. In such case, we will recommend an Agent to assist the Owner with the listing process. However, we consider this to be a rare case. For the four pieces that we have listed thus far(the first piece was listed during 2013; two pieces were listed during the six months ended June 30, 2014; and the fourth piece was listed during the third quarter of 2014), the listings were all initiated by an Agent.

 

The listing of artwork is driven by market demand. We gauge the market interest by discussing with art dealers and collectors. We anticipate having two to four additional listings (with listing fee of approximately $2.58 million to $5.16 million) within the next six months. While current listings are paintings and calligraphy, our listings are not limited to these types of work. We will potentially introduce others,such as sculptures, crafts, jade, jewelry, ceramics, furniture,and antiques, to list.

 

Once the artwork is listed and successfully traded on our system, we charge the listing fee based on the agreed percentage of the total offering price.

 

At this moment, we only accept PRC nationals to be our traders. Therefore, we are only marketing our platform in PRC. One of our biggest marketing efforts is to cooperate with Shenzhen Qianrong Cultural Investment Development Co., Ltd. (“Qianrong”), an agency specializing in promoting trading in the arts and has a broad network of both amateur and professional art traders and dealers. Cooperating with Qianrong enables us to access their traders in order to expand our own base of registered members/traders in the PRC. At the same time, our trading platform provides Qianrong’s art traders an alternative and untraditional way of trading art. Qianrong also assists us in market development, maintaining relationships, technical support and education related to art and generating interests in the art dealer community. Going forward, we are looking to co-operate with other agencies similar to Qianrong to expand our business.

 

The listing fee we charge include two components, 1) basic listing fee, 2) pre-listing premium.

 

We generally charge the basic listing fee of 20% of the total offering price for the artwork. Besides, additional listing revenue may be generated by the Pre-Listing Premium process by the Agent.

 

Pre-Listing Premium Pricing

 

When a listing is oversubscribed, the allotment is generally made by way of balloting based on a predetermined basis. It means 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 his/her account with us, which is frozen during the subscription period. After the announcement of the allotment, the money frozen will be released.

 

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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 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, Offering 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. As of June 30, 2014, the pre-listing premium of the three artworks listed thus far was from 2.5% to 3.5% of the total offering price.

 

Commissions

 

Revenue is generated from commissions charged at the time of trading of units.

 

In order to increase trade volumes with more traders on our trading platform, we encourage our Traders (“referrer”) to refer new Traders (“referee”) to our platform by a referral program. As discussed in our revenue recognition policy, for every trade that the referee makes, we make 0.2% of the gross trade amount as commission income. Before August 6, 2014, we would rebate 5% of our commission earned to the referrer. From inception to December 31, 2013, there were 8 referees added to our platform and we rebated approximately $13.50 for the period. For the six months ended June 30, 2014, there were 5 referees added to our platform and we rebated approximately $403 for the period. Starting from August 6, 2014, and effective till December 31, 2015, we have revised our referral policy according to the table below:

 

Number of
Referees
  Accumulated Total Gross
Trading Amount
  Rebate Ratio
≥ 1 person   > $0   5% of Referee's commission
≥ 3 persons   ≥ $3 million   20% of Referee's commission
≥ 6 persons   ≥ $6 million   40% of Referee's commission
≥ 10 persons   ≥ $10 million   50% of Referee's commission

 

While the amount of referral rebate was historically low, with the new referral policy in place, we expect to rebate a greater amount in the future.

 

We also participate in art and culture events, such as exhibitions and cocktail parties, to market our trading platform and promote our brand name.

 

For internet advertising, we utilize Baidu Listing Search and Key Word Search services for search engine optimization in order to promote our website and platform.

 

Management fee

 

Apart from the revenue generated from the listing of units of artwork and commission via the trading of the units, we also charge management fees for covering the insurance, storage, and transportation for a piece and trading management of units, which are calculated at $0.0013 (HKD $0.01) per 100 units per day. The management fee is accounted for as revenue, and immediately deducted from the proceeds from the sale of units when a transaction is completed. Management fee revenue was $2,293 and $0 for the year ended December 31, 2013 and for the period from September 17 (inception) to December 31, 2012, respectively.

 

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Plan of upcoming revenue stream

 

We are working on a project which offers an enhanced trading platform to the Traders. With a monthly fee, the enhanced trading platform provides Traders with more in-depth information and tools, such as streaming real-time data, advanced charting tools, etc. The enhanced trading platform is expected to be released in the fourth quarter of 2014.

 

Important Factors Affecting our Results of Operations and Existing Trends

 

Dependency on Original Owners and/or Offering Agents

We do not independently source artwork for listing on our platform. Instead we are reliant on Owners and Agents to submit their artwork for listing. Accordingly our success is dependent on their willingness to accept our alternative to traditional trading and dealing in art.

 

Dependency on Traders

The demand for listings will be generated by our Traders. We hope to educate our Traders on the merits of using our platform to invest in art. The subject artwork is secure and insured, and requires less capital to participate as units can be a very small fraction of the cost of an entire piece. The investment provides a possible risk mitigation through the liquidity of our trading platform; and an opportunity to diversify through units in multiple pieces. Our success would accordingly dependent the receptiveness of Traders to utilizing our platform.

 

Growth of the Chinese Economy

Because our Traders are from mainland China, our success is dependent in part on the growth of the Chinese economy. As the economy grows and improves, our Traders will presumably have more capital to invest in our units. Throughout 2013 and 2014, the economic data from China have pointed to stabilization and improvement. However, it is important to recognize that China’s recent economic stabilization has been led by property market activity and state-led infrastructure investment (Source: https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/ConsumerDiscretionary2014.pdf ). Should such activities cease or slow down, the Chinese economy could similarly slow and thus affect our business.

 

Costs of being a public company

Prior to the Reverse Merger, we have not operated as a public company. We expect that compliance with our obligations as a public company will require significant management time and increase our general and administrative expenses, including insurance, legal and financial compliance costs.

 

Foreign currency translation

Our financial statements are expressed in U.S. dollars but the functional currency of our operating subsidiaries is in Hong Kong dollars. Our results of operations are translated at average exchange rates during the relevant financial reporting periods, assets and liabilities are translated at the unified exchange rate at the end of these periods and equity is translated at historical exchange rates. Adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining comprehensive income.

 

Description of Selected Income Statement Items

 

Revenue . Revenue consists of net revenue generated from listing of artwork, trading commissions and management fees.

 

Costs of Revenue. Cost of revenue primarily consists of the depreciation of our trading system, as well as the leasing fee of related equipment of clearing and banking system, and the IT support fee.

 

Operating Expenses. Our operating expenses consist of sales and marketing expenses, and general and administrative expenses.. Sales and marketing expenses consist primarily of sales and marketing employee compensation and travel expenses, transportation expenses and advertising expenses. General and administrative expenses consist primarily of administrative employee compensation, payroll taxes and benefits, general office expenses and depreciation. We expect general and administrative expenses to continue to increase as we incur expenses related to costs of compliance with securities laws and other regulations, including increased audit and legal fees and investor relations expenses.

 

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Other (expenses) income. Our other income (expenses) consisted primarily of interest income, subsidy income and other revenue from sales of obsolete equipment.

 

Income taxes . Takung is governed by the Income Tax Law of Hong Kong, which is generally subject to tax at a statutory rate of 16.5% on income reported in the statutory financial statements after appropriate tax adjustments. . As all of our operations are conducted solely by Takung in Hong Kong SAR, no income is earned in the United States and we do not repatriate any earnings outside Hong Kong, SAR. As a result, we do not generate any U.S. taxable income.

 

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Results of Operation of Takung

 

Takung operates a platform for offering and trading artwork. 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.

 

For the three months ended June 30, 2014 and June 30, 2013

 

Revenue

 

Listing fee revenue was both $0 for the three months ended June 30, 2014 and June 30, 2013; commission revenue was $445,978 and $0 for the three months ended June 30, 2014 and June 30, 2013, respectively; gross management fee revenue was $22,286 and $0 for the three months ended June 30, 2014 and June 30, 2013, respectively. Since we did not commence any operations until the fourth quarter of fiscal year ended December 31, 2013, there was no revenue generated during the three months ended June 30, 2013.

 

Cost of Revenue

 

Cost of revenue for the three months ended June 30, 2014 and 2013 was $99,824 and $0 respectively. The increase was in line with the Company’s revenue generating activities.

 

Gross Profit

 

Gross profit was $368,440 for the three months ended June 30, 2014, compared to $0 during the same period in 2013. The increase was because operations had not commenced until the fourth quarter of 2013.

 

Operating Expenses

 

Operating expenses for the three months ended June 30, 2014 were $313,828, compared to $24,284 for the three months ended June 30, 2013. There was significant increase in the period ended June 30, 2014 since the Company did not commence operations until the fourth quarter of 2013, The operating expenses incurred during the three months ended June 30, 2013 were primarily in connection with the incorporation of the Company.

 

The following table sets forth main the components of the Company’s operating expenses for the three months ended June 30, 2014 and 2013. 

 

    Three months ended
June 30, 2014
    Three months ended
June 30, 2013
 
    Amount($)     % of Total     Amount($)     % of Total  
Consultancy fee     75,848       24.2 %     -          - %
Legal and professional fees     110,595       35.2 %     18,165       74.8 %
Salary and welfare     47,771       15.2 %     -         - %
Office expenses and rental     44,312       14.1 %     -         - %
Marketing expenses     5,394       1.7 %                 %
Others     29,908       9.6 %     6,119       25.2 %
Total G&A   $ 313,828       100.0 %   $ 24,284       100.0 %

 

Net Income/(loss)

 

We had a net income for the three months ended June 30, 2014 of $41,612, versus a net loss of $23,885 for the three months ended June 30, 2013. The Company was already operating during the three months ended June 30, 2014, whereas it was still in its incorporation phrase during the three months ended June 30, 2013.

 

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For the six months ended June 30, 2014 and June 30, 2013

 

Revenue

 

Listing fee revenue was $605,995 and $0 for the six months ended June 30, 2014 and June 30, 2013, respectively. The listing fee revenue for the six months ended June 30, 2014 was generated through the listing of the shares of two artworks in the same period(of which our listing fee was 23% and 23.5% of the total offering price respectively);commission revenue was $873,011 and $0 for the six months ended June 30, 2014 and June 30, 2013, respectively; gross management fee revenue was $34,642 and $0 for the six months ended June 30, 2014 and June 30, 2013, respectively. Since we did not commence any operations until fourth quarter of the fiscal year ended December 31, 2013, there was no any revenue generated during the six months ended June 30, 2013.

 

Cost of Revenue

 

Cost of revenue for the six months ended June 30, 2014 and 2013 was $176,884 and $0 respectively. The increase was in line with the Company’s revenue generating activities.

 

Gross Profit

 

Gross profit was $1,336,764 for the six months ended June 30, 2014, compared to $0 during the same period in 2013. The increase was because operations had not commenced until the fourth quarter of 2013.

 

Operating Expenses

 

Operating expenses for the six months ended June 30, 2014 were $547,241,when compared to $24,572 for the six months ended June 30, 2013.There was significant increase in the period ended June 30, 2014 since the Company did not commence operations until fourth quarter of 2013, The operating expenses incurred during the six months ended June 30, 2013 were primarily in connection with the incorporation of the Company.

 

The following table sets forth main components of the Company’s operating expenses for the six months ended June 30, 2014 and 2013. 

 

    Six months ended  
June 30, 2014
    Six months ended
June 30, 2013
 
    Amount($)     % of Total     Amount($)     % of Total  
Consultancy fee     149,196       27.3 %     -       - %
Legal and professional fees     131,360       24.0 %     18,165       73.9 %
Salary and welfare     98,492       18.0 %     -       - %
Office expenses and rental     102,905       18.8 %     -       - %
Marketing expenses     13,544       2.5 %               %  
Others     51,744       9.4 %     6,407       26.1 %
Total G&A   $ 547,241       100.0 %   $ 24,572       100.0 %

 

Net Income/(loss)

 

We had a net income for the six months ended June 30, 2014 of $789,586, versus a net loss of $24,571 for the six months ended June 30, 2013. Since the Company was already operations during the six months ended June 30, 2014, whereas it was still in incorporation phrase during the six months ended June 30, 2013.

 

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For the year ended December 31, 2013 and for the period from September 17 (inception) to December 31, 2012

 

Revenue

 

Listing fee revenue was $290,078 and $0 for the year ended December 31, 2013 and for the period from September 17 (inception) to December 31, 2012, respectively. The listing fee revenue for the year ended December 31, 2013 was generated through the listing of the shares of one artwork in the same period (of which our listing fee was 22.5% of the total offering price); commission revenue was $66,477 and $0 for the year ended December 31,2013 and for the period from September 17 (inception) to December 31, 2012, respectively; management fee revenue was $2,293 and $0 for the year ended December 31, 2013 and for the period from September 17 (inception) to December 31, 2012, respectively.

 

The increase in both periods was due to the Company generating revenues during 2013. Operations had not commenced as of the year ended December 31, 2012.

 

Cost of Revenue

 

Cost of revenue for the year ended December 31,2013 and for the period from September 17, 2012 (inception) to December 31, 2012 was $153,161 and $0 respectively. The increase was in line with the Company’s revenue generating activities.

 

Gross Profit

 

Gross profit was $205,687 for the year ended December 31, 2013, compared to $0 during the period from September 17, 2012 (inception) to December 31, 2012. The increase was because operations had not commenced until fourth quarter of 2013.

 

Operating Expenses

 

Operating expenses for the year ended December 31, 2013 were $205,821, when compared to $0 for the period from September 17, 2012 (inception) to December 31, 2012. The increase was due to the Company generating the related revenues during 2013. Operations had not commenced as of the year ended December 31, 2012.

 

The following table sets forth main components of the Company’s operating expenses for the year ended December 31, 2013 and for the period from September 17, 2012 (inception) to December 31, 2012. 

 

    Year ended
December 31, 2013
    Period from September 17,
2012 (inception) to
December 31, 2012
 
    Amount($)     % of Total     Amount($)     % of Total  
Consultancy fee     3,384       1.6 %     -       - %
Legal and professional fees     23,214       11.3 %     -       - %
Salary and welfare     27,627       13.4 %     -       - %
Office expenses and rental     89,969       43.7 %     -       - %
Marketing expenses     8,537       4.2 %               %  
Others     53,090       25.8 %     -       - %
Total G&A   $ 205,821       100.0 %   $ -       - %

 

Net loss

 

We had a net loss for the year ended December 31, 2013 of $3,669, versus $0 for the period from September 17 (inception) to December 31, 2012.

 

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The increase was due to the Company generating the related revenues during 2013. Operations had not commenced as of the year ended December 31, 2012.

 

Liquidity and Capital Resources

 

Sources of Liquidity

 

The cash balance at June 30, 2014 was $1,040,617. During the six months ended June 30, 2014, net cash provided by operating activities totaled $803,144. Net cash used in investing activities totaled $24,435. No cash was provided by financing activities during the period. The resulting change in cash for the period was an increase of $780,430, which was primarily due to the increase in customers deposits, as well as the decrease in account payables and other accruals, increase in restricted cash, and payment for the purchase of property and equipment.

 

The cash balance at December 31, 2013 was $260,187. During the year ended December 31,2013, net cash provided by operating activities totaled $185,982. Net cash used in investing activities totaled $608,450. Net cash provided by financing activities totaled $683,531, which represents the proceeds from shares issued. The resulting change in cash for the period was an increase of $260,187, which was primarily due to the increase in account payables and other accruals, the capital injection from our shareholders, as well as the increase in restricted cash, and payment for the purchase of property and equipment.  

 

As of June 30, 2014, the Company had $4,850,970 in total current liabilities, which included $557,202 in account payables and other accruals, $4,290,350 in customers deposits, and $3,418 due to director.  As of December 31, 2013, the Company had $4,228,597 in total current liabilities, which included$3,660,885 in account payables and other accruals, and $567,712 in customers deposits.  

 

As of June 30, 2014 and December 31, 2013, the Company had $31,075 and $31,060 in total non-current liabilities, which included deferred tax liabilities.

 

The Company’s total liabilities as of June 30, 2014 and December 31, 2013 amounted to $4,882,045 and $4,259,657, respectively.

 

The Company’s net assets amounted $709,611 as of June 30, 2014, compared with the net liabilities amounted $137,964 as of December 31,2013.

 

The Company is not aware of any known trends, events or uncertainties which may affect its future liquidity. We currently do not have grant applications outstanding, and we can make no guarantees that any grant money will be awarded from any future applications. Our business is subject to risks inherent in the establishment of a new business enterprise, including limited capital resources and possible cost overruns.

 

Going Concern Consideration

 

Our operations and financial results are subject to numerous various risks and uncertainties that could adversely affect our business, financial condition, and results of operations. 

 

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.

 

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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.

 

Fair Value of Financial Instruments

 

The Company’s financial instruments for 2014 and 2013 consist of account payables and other accruals, customers deposits and amount due to director. The Company considers the carrying value of such amounts in the financial statements to approximate their fair value due to their respective short maturity dates.

 

Revenue Recognition

 

The Company generates revenue from its services in connection with the offering and trading of artwork on our system, primarily consisting of listing fees, trading commissions, and management fees.

 

We recognize revenue once all of the following criteria have been met:  

persuasive evidence of an arrangement exists;
delivery of our obligations to our customer has occurred;
the price is fixed or determinable; and
collectability of the related receivable is reasonably assured

 

Listing fee -The Company collects a listing fee once the ownership shares of the artwork are listed and successfully traded on our system, based on the agreed percentage of the total offering price. This amount is collected from the money raised from the issuance of such shares accounted as the listing fee revenue accordingly. When the ownership shares of the artwork is listed and starts trading on our system, the Original Owner and/or the Offering Agent shall pay us a one-time offering fee and a listing deposit. The offering fee is determined based on many factors, such as the type of artwork and the offering size. We generally charge approximately 22.5-23.5% of the total offering price for calligraphies and paintings, which are currently the major types of artwork listed and traded on our system. Listing fee revenue was $290,078 and $0 for the year ended December 31,2013 and for the period from September 17 (inception) to December 31, 2012, respectively.

 

Commission -The Company charges trading commissions for the purchase and sale of the ownership shares of the artworks. The commission is typically 0.3% of the total amount of each transaction, but as an initial promotion, we currently charge a reduced fee of 0.2% of the total transaction amount with the minimum charge of $0.13 (HKD $1),. As part of the referral incentive program, the Company would rebate 5% of the commission earned from the transaction to the related referrer. The commission is accounted for as revenue and immediately deducted from the proceeds from the sales of artwork units when a transaction is completed. Commission revenue was $66,477 and $0 for the year ended December 31,2013 and for the period from September 17 (inception) to December 31, 2012, respectively.

 

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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 (HKD $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. Management fee revenue was $2,293 and $0 for the year ended December 31, 2013 and for the period from September 17 (inception) to December 31, 2012, respectively.

 

Property and Equipment

 

Property and equipment are stated at cost less accumulated depreciation and impairment losses. Gains or losses on dispositions of property and equipment are included in operating income (loss). Major additions, renewals and betterments are capitalized, while maintenance and repairs are expensed as incurred.

 

Depreciation and amortization are provided over the estimated useful lives of the assets, using the straight-line method from the time the assets are placed in service. Estimated useful lives are as follows, taking into account the assets' estimated residual value:

 

       
  Classification   Estimated useful life
  Furniture, fixtures and equipment   5 years
  Leasehold improvements   3 years
  Computer trading and clearing system   5 years

 

Earnings/(Loss) 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.  

 

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.  

 

Recent Accounting Pronouncements

 

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.

 

Revenue Recognition:     In May 2014, the FASB issued Accounting Standards Update No. 2014-09,  Revenue from Contracts with Customers: Topic  606 (ASU 2014-09), to supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 is effective for us in our first quarter of fiscal 2018 using either of two methods: (i) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-09; or (ii) retrospective with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures as defined per ASU 2014-09. The adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements

 

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PROPERTIES

 

We lease approximately 1,119.45 square feet of office space at Rooms 2003 and 2004 on the 20 th Floor of Hutchison House, Hong Kong. The lease expires on May 16, 2016 and provides for a monthly rent of HKD $98,464.00 (approximately US$12,703) and a monthly service fee of HKD 8,398.40 (approximately US$1,083).

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL

OWNERS AND MANAGEMENT

 

The following table sets forth certain information with respect to the beneficial ownership of our voting securities following the completion of the Reverse Merger described in Items 1.01 and 3.02 of this report 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 October 21, 2014.

 

Name and Address     Number of Shares of
Common Stock
Beneficially Owned(1)
      Percentage
Ownership of
Shares of
Common
Stock
 
                 
Owner of More than 5% of Class                
                 
Kirin Linkage Limited (6)(7)     41,995,200       18 %
Loyal Heaven Limited (6)(8)     167,980,800       72 %
                 
Directors and Executive Officers                
                 
Jerett A. Creed (2)            
Yong Li (3)     22,185,230       *  
Lei Wang (4)            
Di Xiao (5)(7)     10,498,800       *  
                 
All directors and executive officers (1 person)     10,498,800       *  

 

*Less than one per cent (1%) of the issued and outstanding shares as of October 21, 2014.

 

(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 October 21, 2014, (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 October 21, 2014 (233,306,662), and (ii) the total number of shares that the beneficial owner may acquire upon conversion of the preferred 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) Jerett A. Creed, was our former Chief Executive Officer and director until his resignation on October 20, 2014 in connection with the Reverse Merger.

 

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(3) Yong Li was one of our directors and was appointed on August 28, 2014 in connection with his purchase of 22,185,230 shares of common stock from a group of three former shareholders. He resigned as our director on October 20, 2014 in connection with the Reverse Merger.

 

(4) Lei Wang was one of our directors and was appointed on August 28, 2014 in connection with Yong Li’s purchase of 22,185,230 shares of common stock from a group of three former shareholders. He resigned as our director on October 20, 2014 in connection with the Reverse Merger.

 

(5) In connection with the Reverse Merger, Di Xiao was appointed as our new Chief Executive Officer, Chief Financial Officer and sole director effective from October 20, 2014.

 

(6) On October 20, 2014, we acquired Hong Kong Takung Assets and Equity of Artworks Exchange Co., Ltd (“Takung”) in a Reverse Merger transaction involving Kirin Linkage Limited and Loyal Heaven Limited,. shareholders of Takung. In consideration of receiving all 20,000,000 issued and outstanding shares of Takung, we issued to Kirin Linkage Limited and Loyal Heaven Limited 41,995,200 and 167,980,800 shares of restricted common stock respectively.

 

(7) Kirin Linkage Limited, a Cayman Islands company has four shareholders, namely Aihua Tian, Caijing Zhao, Yue Zhang and Di Xiao, each holding equal shares of Kirin Linkage Limited. Accordingly, each shareholder of Kirin Linkage Limited has sole investment and voting power over shares owned by Kirin Linkage Limited in the proportion to their respective shareholdings in Kirin Linkage Limited.

 

(8) Loyal Heaven Limited, a Cayman Islands company has eight shareholders, namely Yue Zhang (37.5%), Jun Yang (25%), Weiwei Wang (6.25%), Xiuli Li (6.25%), Guolin Xing (6.25%), Yuhua Cao (6.25%), Yao Shi (6.25%) and Shukui Lu (6.25%). Each shareholder has sole investment and voting power over shares owned by Loyal Heaven Limited in the proportion to their respective shareholdings in Loyal Heaven Limited.

 

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DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS

AND CONTROL PERSONS

 

Our Directors and Executive Officers

 

In connection with the change in control of the Company on October 20, 2014, Jerett A. Creed, Yong Li, and Lei Wang resigned from all officers and directors position they held with the Company. We appointed Di Xiao as our new Chief Executive Officer, Chief Financial Officer and sole director on October 20, 2014.

 

As such, as of October 22, 2014, the date this Report was originally filed, our sole officer and director is a resident of the PRC. As a result, it may be difficult for investors to effect service of process within the United States upon him to enforce court judgments obtained against them in the United States courts.

 

The following table sets forth certain information concerning our directors and executive officers:

 

Name   Age   Position   Date
             
Di Xiao   38   Chief Executive Officer, Chief Financial Officer and sole director   October 20 , 2014

 

The following is a summary of the biographical information of our directors and officers:

 

DI XIAO , the founder and executive director of Takung, 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 Takungin 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.

 

Directors and Officers of Takung

 

Di Xiao, our present Chief Executive Officer, Chief Financial Officer and sole director is also the founder and sole director and officer (General Manager) of Takung. Under Takung’s Articles of Association and Hong Kong law, Takung is managed by the General Manager who is appointed and supervised by the Board of Directors. A director is appointed by the shareholders for a term of one year or until the next Annual General Meeting and can be re-elected for consecutive terms.

 

Term of Office

 

Our sole director holds his position until the next annual meeting of shareholders and until his successor is elected and qualified by our shareholders, or until earlier death, retirement, resignation or removal.

 

Director Independence

 

Except as reported above, our sole officer and director, Mr. Di Xiao, does not hold any directorships in other reporting companies and does not qualify as an “independent director” under the Rules of NASDAQ, Marketplace Rule 4200(a)(15). There are no family relationships among our director or officer.

 

Family Relationships

 

There are no family relationships between any of our directors, executive officers or directors.

 

Involvement in Certain Legal Proceedings

 

To our knowledge, during the last ten years, our sole officer and director (including those of our subsidiaries) has not:

 

40
 

 

    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 reverse, 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.

  

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 sole director 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.

 

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 should 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, president or similar position at a company.

 

Presently, Mr. Di Xiao is the sole director of the Company. Mr. Di Xiao possesses many of the skills and experience needed for our business. He has years of experience in the art investment and consulting industry. His knowledge of the industry and familiarity with business management makes him valuable to the Board.

 

The Board plans to eventually increase its membership to include directors with skills and experience complementary to Mr. Di Xiao’s background.

 

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Board Leadership Structure and Role in Risk Oversight

 

Mr. Di Xiao is the Company’s Chairman,Chief Executive Officer and Chief Financial Officer. 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;

 

  - 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.

 

Board Committees

 

Audit Committee . We intend to establish an audit committee of the Board which will consist of soon-to-be-nominated independent directors. The audit committee’s duties will be to recommend to the Board the engagement of independent auditors to audit our financial statements and to review our accounting and auditing principles. The audit committee will review the scope, timing and fees for the annual audit and the results of audit examinations performed by the internal auditors and independent public accountants, including their recommendations to improve the system of accounting and internal controls. The audit committee will at all times be composed exclusively of directors who are, in the opinion of the Board, free from any relationship which would interfere with the exercise of independent judgment as a committee member and who possess an understanding of financial statements and generally accepted accounting principles.

 

Audit Committee Financial Expert . The Board currently acts as our audit committee. The Board is still in the process of finding an “audit committee financial expert” as defined in Regulation S-K and directors that are “independent” as that term is used in Section 10A of the Exchange Act.

 

Compensation Committee . We intend to establish a compensation committee of the Board. The compensation committee will review and approve our salary and benefits policies, including compensation of executive officers.

 

Nominating Committee . We do not presently have a nominating committee. Our board of directors currently acts as our nominating committee.

 

Code of Ethics

 

We have recently 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.

 

EXECUTIVE COMPENSATION

 

Our executive compensation program is designed to help us attract talented individuals to manage and operate all aspects of our business, to reward those individuals fairly over time and to retain those individuals who continue to meet our high expectations.

 

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The following is a summary of the compensation we paid to our former Chief Executive Officer and current Chief Executive Officer and Chief Financial Officer for the two years ended December 31, 2013 and 2012. This includes all compensation, including any compensation paid to the officer by any of our subsidiaries. Other than otherwise disclosed, no executive officer received compensation in excess of $100,000 in 2013 or 2012.

 

Summary Compensation Table

 

Name & Principal Position   Fiscal Year   Base
Compensation
(annual, unless
otherwise noted)
  Bonus   Stock Options   Total Annual

Di Xiao;

CEO, CFO and Director (1)

  2013   -   -   -   -
    2012   -   -   -   -
Jerett A. Creed; Former CEO and Director (2)   2013   $120,000   $0   $0   $120,000
    2012   $120,000   $0   $0   $120,000
Ralph M. Sinibaldi, PhD; Former CSO (3)   2013   $200/hr   $0   $0   $7,500
    2012   $12,000   $0   100,000 options valued at $13,613   $25,613

Emerson C. Perin, MD, PhD;

Former CMO (3)

  2013   $0          

$0

 

    2012  

$3,000

(30,000 shares (valued at $0.10 /share)

         

$3,000

 

Jack Mott CFO, Former CAO (3)   2013   $1,500 in cash per month, 1,500 shares per month   $0   $0   $22,748 (January 2013 through October 2013)

 

 

  2012   $5,000 month   $0   100,000 options valued at $13,613   $33,613 (September 2012 through December 2012)

 

(1) In connection with the Reverse Merger, Di Xiao was appointed as our new Chief Executive Officer, Chief Financial Officer and sole director effective from October 20, 2014.
(2) Jerett A. Creed was our former Chief Executive Officer and director until his resignation on October 20, 2014 in connection with the Reverse Merger.
(3) Messrs Sinibaldi, Perin and Mott all resigned from their respective positions prior to Reverse Merger.

 

Employment Agreements

 

Our former CEO, Mr. Creed's employment agreement provides an annual compensation of $120,000 per year. Additionally the agreement provides for 5% accrued annual interest on the outstanding principle balance for any funds advanced to us or unreimbursed by us from the employee for recognized business expenses. The employment agreement with Mr. Creed is terminated upon his resignation from all positions he held with us.

 

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Operating Subsidiary Executive Compensation Summary

 

The table below sets forth the positions and compensations for the sole officer and director of Takung for the year ended December 31, 2013 and 2012.

 

Name   Year     Annual Salary 
($)
    Total
($)
 
Di Xiao                        
Managing Director     2013       92,887.05 (1)      92,887.05  
      2012       92,887.05 (1)      92,887.05  

 

(1) Mr. Xiao received a monthly compensation of HKD 60,000 (approximately US$ 7,732).

 

Operating Subsidiary Employment Agreements

 

Mr. Xiao entered into an employment agreement with Takung on June 1, 2014 whereby he agreed to serve as Takung’s General Manager and Managing Director. Pursuant to such employment agreement, Mr. Xiao is entitled to a monthly salary of HKD 60,000, which will be reviewed annually in January. The employment agreement may be terminated by either party upon one month’s advance notice.

 

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 in 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 will consider forming a compensation committee to oversee the compensation of our named executive officers. The majority of the members of the compensation committee would be independent directors.

 

Compensation of Directors

 

Directors are permitted to receive fixed fees and other compensation for their services as directors. The board of directors has the authority to fix the compensation of directors. No amounts have been paid to, or accrued to, directors in such capacity.

 

As of the date of this report, our directors have received no compensation for their service on the board of directors. We plan to implement a compensation program for our independent directors, as and when they are appointed, which we anticipate will include such elements as an annual retainer, meeting attendance fees and stock options. The details of that compensation program will be negotiated with each independent director.

 

Option Grants Table

 

All prior grants of options had been cancelled as a condition of the purchase of shares from three former shareholders to Yong Li. Accordingly, there were no individual grants or stock options to purchase our common stock made to the executive officers named in the Executive Compensation Table through October 21, 2014.

 

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Aggregated Option Exercises and Fiscal Year-End Option Value Table

 

There were no stock options exercised during the fiscal year ended December 31, 2013, by the executive officers named in the Executive Compensation Table.

 

Long-Term Incentive Plan (“LTIP”) Awards Table

 

There were no awards made to a named executive officer in the last completed fiscal year under any LTIP.

 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

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.

 

Our former CEO, Mr. Jerett Creed has entered into a loan arrangement with the Company whereby advances to the Company may be made by Mr. Creed from time to time for general working capital purposes. Interest is accrued at 5% annual. The note can be called by Mr. Creed at any time as well it can be converted to equity at the current fair market value at Mr. Creed’s sole option.

 

Other Related Transactions of Hong Kong 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 last fiscal year.

 

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.

 

LEGAL PROCEEDINGS

 

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.

 

MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANTS

COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

 

Market Information

 

Our common stock has been quoted on the OTCBB since October 2013 under the designation “CARD,” however, there has been no trading in our common stock historically.

 

If a market develops, the trading of our common stock is likely to be thin and volatile. The market price of our common stock will be subject to significant fluctuations in response to variations in our quarterly operating results, general trends in the market, and other factors, over many of which we have little or no control. In addition, broad market fluctuations, as well as general economic, business and political conditions, may adversely affect the market for our common stock, regardless of our actual or projected performance.

 

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Holders of Our Common Stock

 

As of October 21, 2014, we had 119 shareholders 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 operation entity for our funds and Hong Kong regulations may limit the amount of funds distributed to us from our Hong Kong operation entity, which will affect our ability to declare any dividends.

 

Stock Option and Warrant Grants

 

All prior grants of options and warrants had been cancelled as a condition of the purchase of shares from three former shareholders to Yong Li.

 

Registration Rights

 

We have not granted registration rights to the selling shareholders or to any other persons.

 

Equity Compensation Plans

 

We approved our Stock Option Plan in May 2010, allowing for the issuance of up to 5,000,000 shares of common stock. As of October 21, 2014, there are no options outstanding.

 

Penny Stock Regulations

 

Our shares of common stock are subject to the “penny stock” rules of the Securities Exchange Act of 1934 and various rules under this Act. In general terms, “penny stock” is defined as any equity security that has a market price less than $5.00 per share, subject to certain exceptions. The rules provide that any equity security is considered to be a penny stock unless that security is registered and traded on a national securities exchange meeting specified criteria set by the SEC, issued by a registered investment company, and excluded from the definition on the basis of price (at least $5.00 per share), or based on the issuer’s net tangible assets or revenues. In the last case, the issuer’s net tangible assets must exceed $3,000,000 if in continuous operation for at least three years or $5,000,000 if in operation for less than three years, or the issuer’s average revenues for each of the past three years must exceed $6,000,000.

 

Trading in shares of penny stock is subject to additional sales practice requirements for broker-dealers who sell penny stocks to persons other than established customers and accredited investors. Accredited investors, in general, include individuals with assets in excess of $1,000,000 or annual income exceeding $200,000 (or $300,000 together with their spouse), and certain institutional investors. For transactions covered by these rules, broker-dealers must make a special suitability determination for the purchase of the security and must have received the purchaser’s written consent to the transaction prior to the purchase. Additionally, for any transaction involving a penny stock, the rules require the delivery, prior to the first transaction, of a risk disclosure document relating to the penny stock. A broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative, and current quotations for the security. Finally, monthly statements must be sent disclosing recent price information for the penny stocks. These rules may restrict the ability of broker-dealers to trade or maintain a market in our common stock, to the extent it is penny stock, and may affect the ability of shareholders to sell their shares.

 

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RECENT SALES OF UNREGISTERED SECURITIES

 

On October 20 , 2014, we consummated a Share Exchange Agreement with Takung, the members of Takung to acquire all the issued and outstanding capital stock of Takung, a Hong Kong company, in exchange for the issuance to 209,976,000 restricted shares of our common stock.

 

We claim an exemption from the registration requirements of the Act for the private placement of the shares of our common stock to Kirin Linkage Limited and Loyal Heaven Limited, shareholders of Takung, pursuant to Regulation S promulgated thereunder since, among other things, the offer or sale was made in an offshore transaction and no directed selling efforts were made in the United States by the issuer, a distributor, any of their respective affiliates, or any person acting on behalf of any of the foregoing. In addition, the recipient of the shares certified that it is not a U.S. person and is not acquiring the securities for the account or benefit of any U.S. person and agreed to resell such securities only in accordance with the provisions of Regulation S, pursuant to registration under the Act, or pursuant to an available exemption from registration; and agreed not to engage in hedging transactions with regard to such securities unless in compliance with the Act.

 

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DESCRIPTION OF SECURITIES

 

The following is a summary description of our capital stock and certain provisions under the laws of the State of Delaware where the Company was incorporated. The following discussion is qualified in its entirety by reference to such exhibits.

 

General

 

We are authorized to issue 1,000,000,000 shares of common stock, par value $0.001 per share, and 1,000,000 shares of preferred stock, par value $0.001 per share.

 

Common Stock

 

The holders of our common stock are entitled to one vote for each share held of record on all matters to be voted on by stockholders. There is no cumulative voting with respect to the election of directors, with the result that the holders of more than 50% of the shares voting for the election of directors can elect all of the directors then up for election. The holders of our common stock are entitled to receive dividends when, as and if declared by the board of directors out of funds legally available therefor. In the event of liquidation, dissolution or winding up of our company, the holders of common stock are entitled to share ratably in all assets remaining which are available for distribution to them after payment of liabilities and after provision has been made for each class of stock, if any, having preference over the common stock. Holders of shares of our common stock, as such, have no conversion, preemptive or other subscription rights, and there are no redemption provisions applicable to the common stock.

 

Indemnification of Directors and Officers

 

Under Delaware law, a corporation may indemnify its officers, directors, employees and agents under certain circumstances, including indemnification of such persons against liability under the Securities Act. Those circumstances include that an officer, director, employee or agent may be indemnified if the person acted in good faith and in a manner that he or she reasonably believed to be in, or not opposed to, the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe that his or her conduct was unlawful.

 

Article Sixth of our Articles of Incorporation provides that no director shall be personally liable to the Company or the stockholders for monetary damages for any breach of fiduciary duty unless the breach involves a: a) a director’s duty of loyalty to the Company or the stockholders; b) intentional misconduct or violation of law; c) a transaction from which the director derived an improper personal benefit; or d) liability for unlawful payments of dividends or unlawful stock purchases or redemption by the Company. Notwithstanding the foregoing sentence, a director shall be liable to the extent provided by applicable law, (i) for breach of his or her duty of loyalty to the Company or the stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) pursuant to Section 174 of the Delaware General Corporation law, or (iv) for any transaction from which he or she derived an improper personal benefit. No amendment to or repeal of this provision shall apply to or have any effect on the liability or alleged liability of any director of the Company for or with respect to any acts or omissions of such director occurring prior to such amendment.

 

We are also permitted to apply for insurance on behalf of any director, officer, employee or other agent for liability arising out of his or her actions, whether or not the Delaware General Corporation Law would permit indemnification.

 

Indemnification against Public Policy

 

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling an issuer pursuant to the foregoing provisions, the opinion of the SEC is that such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. In the event that a claim for indemnification against such liabilities (other than by a director, officer or controlling person in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by us is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

 

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The effect of indemnification may be to limit the rights of the Company and the stockholders (through stockholders’ derivative suits on behalf of the Company) to recover monetary damages and expenses against a director for breach of fiduciary duty.

 

Item 3.02 Unregistered Sales of Equity Securities.

 

Reference is made to the disclosure made under Item 1.01 which is incorporated herein by reference.

 

Item 4.01 Changes in Registrant’s Certifying Accountant.

 

(a) Dismissal of Farber Hass Hurley LLP

 

On October 20, 2014,we dismissed Farber Hass Hurley LLP (“Farber”) as its independent registered public accounting firm.

 

The report of Farber on the Company’s financial statements for the fiscal years ended July 31, 2013 and 2012 did not contain any adverse opinion or disclaimer of opinion, nor was it qualified or modified as to audit scope or accounting principles. The report did include an explanatory paragraph about the uncertainty as to the Registrant's ability to continue as a going concern. During the period of Farber’s engagement as the Company’s independent registered public accounting firm through October 20, 2014 (the “Engagement Period”), there were no disagreements as defined in Item 304 of Regulation S-K with Farber on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Farber, would have caused it to make reference in connection with any opinion to the subject matter of the disagreement. Further, during the Engagement Period, there were no reportable events (as defined in Item 304(a)(1)(v) of Regulation S-K).

 

(b) Engagement of Albert Wong & Co

 

On October 20, 2014, the Board of Directors appointed Albert Wong & Co (“Albert Wong”), an independent registered public accounting firm which is registered with, and governed by the rules of, the Public Company Accounting Oversight Board, as our independent registered public accounting firm. During our two most recent fiscal years through October 20, 2014, neither us nor anyone on our behalf consulted Albert Wong regarding either (1) the application of accounting principles to a specified transaction regarding us, either completed or proposed, or the type of audit opinion that might be rendered on our financial statements; or (2) any matter regarding us that was either the subject of a disagreement (as defined in Item 304(a)(1)(iv) of Regulation S-K and related instructions to Item 304 of Regulation S-K) or a reportable event (as defined in Item 304(a)(1)(v) of Regulation S-K).

 

The Company provided Farber a copy of this report prior to its filing with the SEC and has requested that Farber furnish a letter addressed to the SEC stating whether it agrees with the statements above. A copy of this letter dated October 21, 2014 is filed as an exhibit to this report.

 

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Item 5.01 Change in Control of Registrant.

 

As more fully described in Items 1.01 and 2.02 above, on September 23, 2014, we entered into a share exchange agreement (“Share Exchange Agreement”) with (i) Takung, and (ii) Kirin Linkage Limited and Loyal Heaven Limited, who which are the members of Takung to acquire all the issued and outstanding capital stock of Takung in exchange for the issuance to Kirin Linkage Limited and Loyal Heaven Limited an aggregate of 209,976,000 restricted shares of our common stock (the “Reverse Merger”). The Reverse Merger closed on October 20, 2014.

 

Immediately after the closing of the Reverse Merger, we have a total of 233,306,662 issued and outstanding shares of common stock, approximately 90% (209,976,000 shares of common stock) of which is held by Kirin Linkage Limited and Loyal Heaven Limited in the aggregate. As a result of the Reverse Merger, a change in control has occurred.

 

In connection with this change in control, and as more fully described in Item 2.01 above under the section titled “DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS” and in Item 5.02 below, effective October 20, 2014, Mr. Jerett Creed, Mr. Lei Wang and Mr. Yong Li resigned from all officers and directors positions they held with the Company due to personal reasons and Mr. Xiao Di was appointed as the Chief Executive Officer, Chief Financial Officer and the sole director of the Company. There were no disagreements between Mr. Jerett, Mr. Wang or Mr. Li and the Company.

 

Item 5.02 Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers.

 

Reference is made to the disclosure made under Item 1.01 and Item 2.01 which is incorporated herein by reference. For certain biographical and other information regarding the newly appointed officers and directors, see the disclosure under the heading “DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS” under Item 2.01 which disclosure is incorporated herein by reference.

 

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Item 9.01 Financial Statements and Exhibits.

 

 

 

 

Report of Independent Registered Public Accounting Firm

 

 

We have audited the accompanying balance sheets of Hong Kong Takung Assets & Equity of Artworks Exchange Co., Ltd. ("the Company") as of December 31, 2013 and 2012 and the related statements of operations, 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 audit.

 

We conducted our audit in accordance with 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes 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 financial position of Hong Kong Takung Assets & Equity of Artworks Exchange Co., Ltd as of December 31, 2013 and 2012 and the 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.

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered losses from operations and has a capital deficiency that may raise doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

 

 

 

 

Hong Kong, China /s/ Albert Wong & Co.
October 22, 2014 Certified Public Accountants

 

 

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Hong Kong Takung Assets & Equity of Artworks Exchange Co., Ltd.

Balance Sheets

(Stated in U.S. Dollars)

  

    December 31,     December 31,  
    2013     2012  
ASSETS                
Current assets                
Cash   $ 260,187     $ -  
Restricted cash     3,660,885       -  
Deposit     73,565       -  
Account receivables     59,325       -  
Prepayment     36,671       -  
Total current assets   $ 4,090,633     $ -  
                 
Non-current assets                
Property, plant and equipment, net     776,920       -  
Deferred tax assets     27,513       -  
Prepayment – non-current     43,720       -  
  Total non-current assets   $ 848,153     $ -  
                 
Total assets   $ 4,938,786     $ -  
LIABILITIES AND STOCKHOLDERS’ EQUITY                
                 
LIABILITIES                
Current liabilities                
Accounts payables and other accruals   $ 567,712       -  
Customers deposits     3,660,885       -  
Total current liabilities     4,228,597       -  
                 
Deferred tax liabilities     31,060       -  
Total non-current liabilities     31,060       -  
                 
Total liabilities     4,259,657       -  
                 
COMMITMENTS AND CONTINGENCIES                
STOCKHOLDERS’ EQUITY                
Registered capital     2,580,079       2,580,079  
Subscription receivables     (1,896,548 )     (2,580,079 )
Accumulated deficit     (3,669 )     -  
Accumulated other comprehensive income     (733 )     -  
Total stockholders’ equity     679,129       -  
Total liabilities and stockholders’ equity   $ 4,938,786     $ -  

 

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

 

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Hong Kong Takung Assets & Equity of Artworks Exchange Co., Ltd.

Statement of Operations and Comprehensive Income (Loss)

(Stated in U.S. Dollars)

 

    For the year ended
December 31,
2013
    For the period from
September 17,2012
(inception)
to December 31,
2012
 
             
Revenue     358,848       -  
Cost of  revenue     (153,161 )     -  
Gross profit     205,687       -  
                 
Operating expenses                
General and administrative expenses     (205,821 )     -  
                 
Loss from operations     (134 )     -  
                 
Other income     10       -  
                 
Loss before income taxes     (124 )     -  
Income taxes     3,545       -  
                 
Net loss     (3,669 )     -  
                 
Foreign currency translation adjustment     (733 )     -  
                 
Comprehensive income (loss)   $ (4,402 )     -  

 

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

 

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Hong Kong Takung Assets & Equity of Artworks Exchange Co., Ltd.

Statement of Stockholders’ Equity

(Audited)

(Stated in U.S. Dollars)

 

    Number
of shares
    Amount     Subscription
Receivables
    Accumulated
Deficit
    Comprehensive
Income
    Total
Stockholders'
Equity
 
Balance, September 17, 2012 (Inception)     -     $ -     $ -     $ -     $ -     $ -  
Issuance of common shares     20,000,000       2,580,079       -       -       -       2,580,079  
Unpaid subscriptions due from shareholders     -       -       (2,580,079 )     -       -       (2,580,079 )
Balance, December 31, 2012     20,000,000     $ 2,580,079     $ (2,580,079 )   $ -     $ -     $ -  
                                                 
Receipt of subscriptions due from shareholders     -       -       683,531       -       -       683,531  
Net loss for the period     -       -       -       (3,669 )     -       (3,669 )
Foreign currency translation adjustment     -       -       -       -       (733 )     (733 )
Balance, December 31, 2013     20,000,000     $ 2,580,079     $ (1,896,548 )   $ (3,669 )   $ (733 )   $ 679,129  

 

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Hong Kong Takung Assets & Equity of Artworks Exchange Co., Ltd.

Statement of Cash Flows

(Audited)

(Stated in U.S. Dollars)

 

    For the year ended
December 31, 
2013
    For the period from
September 17,2012
(inception)
to December 31,
2012
 
Cash flows from operating activities:                
Net loss     (3,669 )     -  
Adjustments to reconcile net loss to net cash provided by operating activities:                
Depreciation     63,857       -  
Changes in operating assets and liabilities:                
Deposit     (73,539 )     -  
Account receivables     (59,305 )     -  
Restricted cash     (3,660,885 )     -  
Prepayment     (80,364 )     -  
Deferred tax assets     (27,504 )     -  
Customer deposits     3,660,885       -  
Deferred tax liabilities     31,049       -  
Account payable and other accruals     335,457       -  
Net cash provided by operating activities     185,982       -  
                 
Cash flows from investing activities:                
Purchase of property, plant and equipment     (608,450 )     -  
Net cash used in investing activities     (608,450 )     -  
                 
Cash flows from financing activities:                
Proceeds from issuance of shares     683,531       -  
Net cash provided by financing activities     683,531       -  
                 
Effect of exchange rate change on cash and cash equivalents     (876 )     -  
                 
Net increase in cash and cash equivalents                
      260,187       -  
Cash and cash equivalents, beginning balance     -       -  
                 
Cash and cash equivalents, ending balance   $ 260,187       -  
                 
Supplemental cash flows information:                
Cash paid for interest   $ -       -  
Cash paid for income tax   $ -       -  

 

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

 

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Hong Kong Takung Assets & Equity of Artworks Exchange Co., Ltd.

Notes to Financial Statements

(Stated in U.S. Dollars)

 

1. ORGANIZATION AND DESCRIPTION OF BUSINESS

 

Hong Kong Takung Assets & Equity of Artworks Exchange Co., Ltd. (“Takung”, “We” or “the Company”) 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. Our principal executive offices are located at Flat/RM 03-04, 20/F, Hutchison House, 10 Harcourt Road, Central, Hong Kong.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying audited financial statements and related notes have been prepared in accordance with generally accepted accounting principles in the United States of America (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.

 

As of December 31, 2013, the Company has an accumulate deficits of $4,402, and its current liabilities exceed its current assets by $137,964. In view of the future, recoverability of major portion of the recorded asset amounts and realization of the portion of current liabilities into revenue shown in the accompanying balance sheets are dependent upon continued operations of the Company, which in turn are dependent upon the Company's ability to raise additional financing and to succeed in its future merger or operations.  These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

Management has taken continuous steps to revise its operating and financial requirements, which it believes are sufficient to provide the Company with the ability to continue as a going concern. The Company is actively pursuing additional funding which would enhance capital employed and strategic partners which would increase revenue bases or reduce production costs. Management believes that the above actions will allow the Company to continue its operations throughout the next fiscal year.

 

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Use of Estimates

 

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

 

Fair Value Measurements

 

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

 

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

 

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

 

¨          Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

¨          Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.

¨          Level 3 inputs to the valuation methodology are unobservable and significant to the fair value.

 

There were no assets or liabilities measured at fair value on a recurring basis subject to the disclosure requirements of ASC 820 as of December 31, 2013.

 

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 2013, the Company’s comprehensive income includes net income and foreign currency translation adjustments.

 

Foreign Currency Translation

 

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

 

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The reporting currency of the Company is the US$.

 

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 the income statement for the period.

 

For the purpose of presenting these financial statements, the Company’s assets and liabilities are expressed in US$ at the exchange rate on the balance sheet date, which is 7.7507 and 7.7539 as of December 31, 2012 and 2013 respectively; stockholder’s equity accounts are translated at historical rates, and income and expense items are translated at the weighted average exchange rate during the period, which is 7.7539 and 7.7560 for the period from inception to December 31, 2012 and period ended December 31, 2013 respectively. The resulting translation adjustments are reported under accumulated other comprehensive income in the stockholder’s equity section of the balance sheets.

 

Cash and Cash Equivalents

 

The Company considers highly liquid investments with maturities of three months or less, when purchased, to be cash equivalents. As at December 31, 2013 and 2012, the Company’s cash and cash equivalents amounted $260,187 and $0, respectively. All of the Company’s cash deposits are held in a financial institution located in Hong Kong, where there is currently regulation mandated on obligatory insurance of bank accounts.

 

Restricted cash

 

Restricted cash represents the cash deposited by the investors (“buyers and sellers”) into a specific bank account under Takung (“the broker’s account”) as the secured amount, 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. The seller can also choose to keep the fund in this account for future transactions. After deducting the commission and the management fee as per Takung, the bank can 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. All these can only be operated in the specific system in the bank. Restricted cash amounted $3,660,885 and $0 as of December 31, 2013 and 2012, respectively.

 

Property and Equipment

 

Property and equipment are stated at cost less accumulated depreciation and impairment losses. Gains or losses on dispositions of property and equipment are included in operating income (loss). Major additions, renewals and betterments are capitalized, while maintenance and repairs are expensed as incurred.

 

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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   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 impairment was recorded during year ended December 31, 2013, and the period from September 17, 2012 to December 31, 2012.

 

Revenue Recognition

 

The Company generates revenue from its services in connection with the offering and trading of artwork on our system, primarily consisting of listing fees, trading commissions, and management fees.

 

We recognize revenue once all of the following criteria have been met:  

 

persuasive evidence of an arrangement exists;

 

delivery of our obligations to our customer has occurred;

 

the price is fixed or determinable; and

 

collectability of the related receivable is reasonably assured

 

Listing fee -The Company collects a listing fee once the ownership shares of the artwork are listed and successfully traded on our system, based on the agreed percentage of the total offering price. This amount is collected from the money raised from the issuance of such shares accounted as the listing fee revenue accordingly. When the ownership shares of the artwork is listed and starts trading on our system, the Original Owner and/or the Offering Agent shall pay us a one-time offering fee and a listing deposit. The offering fee is determined based on many factors, such as the type of artwork and the offering size. We generally charge approximately 22.5-23.5% of the total offering price for calligraphies and paintings, which are currently the major types of artwork listed and traded on our system. Listing fee revenue was $290,078 and $0 for the year ended December 31, 2013 and for the period from September 17 (inception) to December 31, 2012, respectively.

 

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Commission -The Company charges trading commissions for the purchase and sale of the ownership shares of the artworks. The commission is typically 0.4% of the total amount of each transaction, but as an initial promotion, we currently charge a reduced fee of 0.2% of the total transaction amount with the minimum charge of $0.13 (HKD $1),. As part of the referral incentive program, the Company would rebate 5% of the commission earned from the transaction to the related referrer. The commission is accounted for as revenue and immediately deducted from the proceeds from the sales of artwork units when a transaction is completed. Commission revenue was $66,477 and $0 for the year ended December 31,2013 and for the period from September 17 (inception) to December 31, 2012, respectively.

 

Management fee -The Company charges management fees for covering the insurance, storage, and transportation for an artwork and trading management of artwork units, which are calculated at $0.0013 (“HKD $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. Management fee revenue was $2,293 and $0 for the year ended December 31, 2013 and for the period from September 17 (inception) to December 31, 2012, respectively.

 

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 these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain.

 

Under ASC 740, Income Taxes ,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.

 

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Recent Accounting Pronouncements

 

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.

 

Revenue Recognition:     In May 2014, the FASB issued Accounting Standards Update No. 2014-09,  Revenue from Contracts with Customers: Topic  606 (ASU 2014-09), to supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 is effective for us in our first quarter of fiscal 2018 using either of two methods: (i) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-09; or (ii) retrospective with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures as defined per ASU 2014-09. The adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements

 

3. PROPERTY AND EQUIPMENT, NET

 

    December 31,
2013
    December 31,
2012
 
             
Cost            
Furniture, fixtures and equipment   $ 71,691       -  
Leasehold improvements     139,672       -  
Computer trading and clearing system     629,435       -  
Sub-total     840,798       -  
Less: accumulated depreciation     (63,878 )     -  
Property and equipment, net     776,920       -  

 

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Depreciation expense for the year ended December 31, 2013, and the period from September 17 (inception) to December 31, 2012 amounted $63,878 and $0, respectively.

 

4. ACCOUNT PAYABLES AND OTHER ACCRUALS

 

Account payables and other accruals as of December 31, 2013 and 2012 are consisted of:

 

    December 31,     December 31,  
    2013     2012  
             
Trading and clearing system     535,877          
Accruals for professional fees     7,590          
Accruals for office rental     19,901          
Payroll payables     1,705       -  
Other payables     2,639       -  
Total   $ 567,712     $ -  

 

5. INCOME TAXES

 

Takung is incorporated in Hong Kong and subject to profit tax rate at 16.5%.

 

The components of provision for income taxes were:

 

    For the year ended
December 31,2013
    For the period from
September 17, 2012
(inception) to
December 31,2012
 
             
Current   $ -     $ -  
Deferred     3,545       -  
Total   $ 3,545     $ -  

 

The provision of income taxes was $3,545 for the year ended December 31, 2013, which represented the deferred tax provision for the year of 2013. The provision of income taxes was $0 for the period from September 17, 2013 (inception) to December 31, 2012.

 

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The following table provides an analysis of the Company’s deferred tax assets and liabilities:

 

    For the year ended
December 31,2013
    For the period from
September 17, 2012
(inception) to
December 31,2012
 
             
Deferred tax assets                
Net operating loss carryforwards   $ 27,513     $ -  
Total deferred tax assets   $ 27,513     $ -  
                 
Deferred tax liabilities                
Property and equipment   $ 31,060     $ -  
Total deferred tax liabilities   $ 31,060     $ -  

 

Tax losses may be carried forward indefinitely to be offset against future profits of the Company.

 

6. STOCKHOLDERS’ EQUITY

 

On September 17, 2013, Takung was incorporated with the issuance of 20,000,000 shares, par value $0.13 per share, to the two shareholders, Kirin Linkage Limited and Loyal Heaven Limited. The subscription receivable due from the shareholders was $1,896,548 and $2,580,079 as of December 31, 2013 and 2012 respectively.

 

7. OPERATING LEASE COMMITMENTS  

 

The total future minimum lease payments under a non-cancellable operating lease with respect to the office and the dormitory as of December 31,2013 are payable as follows: 

 

Year ending December 31, 2014   $ 193,238  
         
Year ending December 31, 2015     184,726  
         
Year ending December 31, 2016     89,581  
         
Total   $ 467,545  

 

Rental expense of the Company for the year ended December 31, 2013 and period from September 17 (inception) to December 31, 2012 was $79,116 and $0, respectively.

 

8. SUBSEQUENT EVENT

 

On September 23, 2014, we entered into a share exchange agreement (“Share Exchange Agreement”) with Cardigant Medical, Inc., a Delaware corporation (“Cardigant”) in which Cardigant acquired all the issued and outstanding capital stock of Takung in exchange for the issuance to Takung’s shareholders, Kirin Linkage Limited and Loyal Heaven Limited, an aggregate of 209,976,000 restricted shares of its common stock (the “Reverse Merger”).The Reverse Merger closed on October 20, 2014.  

 

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Hong Kong Takung Assets & Equity of Artworks Exchange Co., Ltd. 

Condensed Balance Sheets
(Stated in U.S. Dollars)

 

    June 30,     December 31,  
   

2014

   

 2013

 
    (Unaudited)        
ASSETS                
Current assets                
Cash   $ 1,040,617     $ 260,187  
Restricted cash     4,290,350       3,660,885  
Deposit     73,880       73,565  
Account receivables     90,320       59,325  
Prepayment     65,414       36,671  
Total current assets     5,560,581       4,090,633  
                 
Non-current assets                
Property and equipment, net     715,049       776,920  
Deferred tax assets     -       27,513  
Prepayment – non-current     21,870       43,720  
Total non-current assets     736,919       848,153  
Total assets   $ 6,297,500     $ 4,938,786  
LIABILITIES AND STOCKHOLDERS’ EQUITY                
                 
LIABILITIES                
Current liabilities                
Accounts payables and other accruals   $ 669,284     $ 567,712  
Customer deposits     4,290,350       3,660,885  
Amount due to director     3,418       -  
Total current liabilities     4,963,052       4,228,597  
                 
Deferred tax liabilities     29,672       31,060  
Total non-current liabilities     29,672       31,060  
                 
Total liabilities     4,992,724       4,259,657  
                 
COMMITMENTS AND CONTINGENCIES                
STOCKHOLDERS’ EQUITY                
Paid-in capital     2,580,079       2,580,079  
Subscription receivables     (1,924,086 )     (1,896,548 )
Accumulated deficit     647,812       (3,669 )
Accumulated other comprehensive income     971       (733 )
Total stockholders’ equity     1,304,776       679,129  
Total liabilities and stockholders’ equity   $ 6,297,500     $ 4,938,786  

 

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

 

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Hong Kong Takung Assets & Equity of Artworks Exchange Co., Ltd.

Condensed Statement of Operations and Comprehensive Loss

(Unaudited)

(Stated in U.S. Dollars)

 

    For the Three Months
Ended June 30,
    For the Six Months
Ended June 30,
 
    2014     2013     2014     2013  
                         
Revenue     468,264       -       1,513,648       -  
Cost of  revenue     (99,824 )     -       (176,884 )     -  
Gross profit     368,440       -       1,336,764       -  
                                 
Operating expenses                                
General and administrative expenses     (313,828 )     (24,284 )     (547,241 )     (24,572 )
                                 
Income (loss) from operations     54,612       (24,284 )     789,523       (24,572 )
                                 
Other income     44       1       63       1  
                                 
Income (loss) before income tax expense (benefit)       54,656       (24,283 )     789,586       (24,571 )
Income tax expense (benefit)     13,044       (398 )     138,105       (398 )
                                 
Net income (loss)     41,612       (23,885 )     651,481       (24,173 )
                                 
Foreign currency translation adjustment     (692 )     (9 )     1,704       (9 )
                               
Comprehensive Income/(Loss)   $ 40,920       (23,894 )   $ 653,185       (24,182 )

 

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

 

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  Hong Kong Takung Assets & Equity of Artworks Exchange Co., Ltd.  
    Condensed Statement of Cash Flows
    (Unaudited)
(Stated in U.S. Dollars)

 

          For the Six  
    For the Six Months     Months  
    Ended June 30,     Ended June 30,  
    2014     2013  
Cash flows from operating activities:                
Net income (loss)   $ 651,481     $ (24,173 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:                
Depreciation     86,561       3,607  
Changes in operating assets and liabilities:                
Deposit     (287 )     (70,799 )
Due from shareholders     (27,537 )     -  
Prepayment     (6,856 )     -  
Account receivables     (31,016 )     -  
Restricted cash     (626,343 )     -  
Due to directors     3,416       -  
Customer deposits     626,343       -  
Deferred tax assets     27,507       (17,820 )
Deferred tax liabilities     (1,402 )     17,422  
Account payables and other accruals     101,277       631,957  
Net cash provided by operating activities     803,144       540,194  
                 
Cash flows from investing activities:                
Deposit for property, plant and equipment     (24,435 )     (329,184 )
Net cash used in investing activities     (24,435 )     (329,184 )
                 
Cash flows from financing activities:                
Capital contribution from shareholders     -       -  
Net cash provided by financing activities                
                 
Effect of exchange rate change on cash and cash equivalents     1,721       75  
                 
Net increase in cash and cash equivalents     780,430       211,085  
             
Cash and cash equivalents, beginning balance     260,187       -  
             
Cash and cash equivalents, ending balance   $ 1,040,617     $ 211,085  
                 
Supplemental cash flows information:                
Cash paid for interest   $ -     $ -  
Cash paid for income tax   $ -     $ -  

 

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

 

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Hong Kong Takung Assets& Equity of Artworks Exchange Co., Ltd.

Notes to Financial Statements

(Unaudited)

(Stated in U.S. Dollars)

 

1. ORGANIZATION AND DESCRIPTION OF BUSINESS

 

Hong Kong Takung Assets & Equity of Artworks Exchange Co., Ltd. (“Takung”, “We” or “the Company”) 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. Our principal executive offices are located at Flat/RM 03-04, 20/F, Hutchison House, 10 Harcourt Road, Central, Hong Kong.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

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

 

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

 

Use of Estimates

 

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

 

Fair Value Measurements

 

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

 

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

 

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

 

         Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

         Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.

         Level 3 inputs to the valuation methodology are unobservable and significant to the fair value.

 

There were no assets or liabilities measured at fair value on a recurring basis subject to the disclosure requirements of ASC 820 as of June 30, 2014.

 

Comprehensive Income

 

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

 

Foreign Currency Translation

 

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

 

The reporting currency of the Company is the US$.

 

Transactions in currencies other than the entity’s functional currency are recorded at the rates of exchange prevailing on the date of the transaction. At the end of each reporting period, monetary items denominated in foreign currencies are translated at the rates prevailing at the end of the reporting periods. Exchange differences arising on the settlement of monetary items and on re-translation of monetary items at period-end are included in income statement of the period.

 

For the purpose of presenting these financial statements, the Company’s assets and liabilities are expressed in US$ at the exchange rate on the balance sheet date, which is 7.7502 and 7. 7507 as of June 30, 2014 and December 31, 2013 respectively; stockholder’s equity accounts are translated at historical rates, and income and expense items are translated at the weighted average exchange rate during the period, which is 7.7558 and 7.7588 for the period ended June 30, 2014 and 2013 respectively. The resulting translation adjustments are reported under accumulated other comprehensive income in the stockholder’s equity section of the balance sheets.

 

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Cash and Cash Equivalents

 

The Company considers highly liquid investments with maturities of three months or less, when purchased, to be cash equivalents. As of June 30, 2014 and December 31, 2013, the Company’s cash and cash equivalents amounted $1,040,617 and $260,187, respectively. All of the Company’s cash deposit is held in a financial institution located in Hong Kong where there is currently regulation mandated on obligatory insurance of bank accounts.

 

Restricted Cash

 

Restricted cash represents the cash deposited by the investors (“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. Restricted cash amounted $4,290,350 and $3,660,885 as of June 30, 2014 and December 31, 2013 respectively.

 

Property and Equipment

 

Property and equipment are stated at cost less accumulated depreciation and impairment losses. Gains or losses on dispositions of property and equipment are included in operating income (loss). Major additions, renewals and betterments are capitalized, while maintenance and repairs are expensed as incurred.

 

Depreciation and amortization are provided over the estimated useful lives of the assets using the straight-line method from the time the assets are placed in service. Estimated useful lives are as follows, taking into account the assets' estimated residual value:

 

Classification   Estimated useful life
Furniture, fixtures and equipment   5 years
Leasehold improvements   3 years
Computer trading and clearing system   5 years

 

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.

 

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No impairment was recorded during the period ended June 30, 2014 and 2013, respectively.

 

Revenue Recognition

 

The Company generates revenue from its services in connection with the offering and trading of artwork on our system, primarily consisting of listing fees, trading commissions, and management fees.

 

We recognize revenue once all of the following criteria have been met:  

 

persuasive evidence of an arrangement exists;
   
delivery of our obligations to our customer has occurred;
   
the price is fixed or determinable; and
   
collectability of the related receivable is reasonably assured

 

Listing fee -The Company collects a listing fee once the ownership shares of the artwork are listed and successfully traded on our system, based on the agreed percentage of the total offering price. This amount is collected from the money raised from the issuance of such shares accounted as the listing fee revenue accordingly. When the ownership shares of the artwork is listed and starts trading on our system, the Original Owner and/or the Offering Agent shall pay us a one-time offering fee and a listing deposit. The offering fee is determined based on many factors, such as the type of artwork and the offering size. We generally charge approximately 22.5-23.5% of the total offering price for calligraphies and paintings, which are currently the major types of artwork listed and traded on our system. Listing fee revenue was $605,995 and $0 for the period ended June 30, 2014 and 2013, respectively.

 

Commission -The Company charges trading commissions for the purchase and sale of the ownership shares of the artworks. The commission is typically 0.3% of the total amount of each transaction, but as an initial promotion, we currently charge a reduced fee of 0.2% of the total transaction amount with the minimum charge of $0.13 (HKD $1),. As part of the referral incentive program, the Company would rebate 5% of the commission earned from the transaction to the related referrer. The commission is accounted for as revenue and immediately deducted from the proceeds from the sales of artwork units when a transaction is completed. Commission revenue was $873,011 and $0 for the period ended June 30, 2014 and 2013, respectively.

 

Management fee -The Company charges management fees for covering the insurance, storage, and transportation for an artwork and trading management of artwork units, which are calculated at $0.0013 (“HKD $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. Management fee revenue was $34,642 and $0 for the period ended June 30, 2014 and 2013, respectively.

 

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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.

 

Recent Accounting Pronouncements

 

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.

 

Revenue Recognition:     In May 2014, the FASB issued Accounting Standards Update No. 2014-09,  Revenue from Contracts with Customers: Topic  606 (ASU 2014-09), to supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 is effective for us in our first quarter of fiscal 2018 using either of two methods: (i) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-09; or (ii) retrospective with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures as defined per ASU 2014-09. The adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements

 

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3. PROPERTY AND EQUIPMENT, NET

 

    June 30,
2014
    December 31,
2013
 
             
Cost                
Furniture, fixtures and equipment   $ 96,012     $ 71,691  
Leasehold improvements     139,738       139,672  
Computer trading and clearing system     629,833       629,435  
Sub-total     865,583       840,798  
Less: accumulated depreciation     (150,534 )     (63,878 )
Property and equipment, net   $ 715,049     $ 776,920  

 

Depreciation expense was $55,122 and $86,561 for the three and six months ended June 30, 2014. Depreciation expense was $3,607 for both three and six months ended June 30, 2013.

 

4. ACCOUNT PAYABLES AND OTHER ACCRUALS

 

Account payables and other accruals as of June 30, 2014 and December 31, 2013 consisted of:

 

    June 30,     December 31,  
    2014     2013  
             
Trading and clearing system   $ 232,271     $ 535,877  
Accruals for professional fees     8,019       7,590  
Accruals for office rental     15,676       19,901  
Payroll payables     2,425       1,705  
Other payables     410,893       2,639  
Accruals for office rental   $ 669,284     $ 567,712  

 

72
 

 

5. INCOME TAXES

 

The income tax expense was $13,044 and $138,105 for the three and six months ended June 30, 2014. The tax benefit was $398 and $398 for the three and six months ended June 30, 2013.

 

6. OPERATING LEASE COMMITMENTS  

 

The total future minimum lease payments under the non-cancellable operating lease with respect to the office and the dormitory , as well as hardware trading platform as of June 30, 2014 are payable as follows: 

  

Remaining  2014   $ 122,600  
         
Year ending December 31, 2015     236,684  
         
Year ending December 31, 2016     89,624  
         
Total   $ 448,908  

 

Rental expense of the Company was $48,318 and $96,665 for the three and six months ended June 30, 2014. Rental expense of the Company was $0 for both three and six months ended June 30, 2013.

  

7. SUBSEQUENT EVENT

 

To disclose the reverse merger transaction (outstanding) On September 23, 2014, we entered into a share exchange agreement (“Share Exchange Agreement”) with Cardigant Medical, Inc., a Delaware corporation (“Cardigant”) in which Cardigant acquired all the issued and outstanding capital stock of Takung in exchange for the issuance to Takung’s shareholders, Kirin Linkage Limited and Loyal Heaven Limited, an aggregate of 209,976,000 restricted shares of its common stock (the “Reverse Merger”).The Reverse Merger closed on October 20, 2014.

 

73
 

 

(d) The following exhibits are filed with this report:

 

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 Incorporation of Hong Kong Takung Assets and Equity Artworks Exchange Co., Ltd.*
     
3.7   Articles of Association of Hong Kong Takung Assets and Equity Artworks Exchange Co., Ltd.*
     
4.1   2010 Stock Option Plan (3)
     
10.1   Share Exchange Agreement dated September 23, 2014, by and among Cardigant Medical Inc., Hong Kong Takung Assets and Equity Artworks Exchange Co., Ltd., and the shareholders of Hong Kong Takung Assets and Equity Artworks Exchange Co., Ltd.*

 

74
 

 

10.2   Tenancy Agreement with Hongville Limited *
     
10.3   Co-Owner Agreement*
     
10.4   Provisional Rules Governing the Trading in Artwork Units*
     
10.5   Provisional Rules Governing the Offering and Listing of Artwork Units*
     
10.6   Market Entry Agreement of Traders*
     
10.7   Provisional Administrative Measures Governing the Registration and Clearing of Artwork Units*
     
10.8   Order Form with China Telecom Global Limited*
     
10.9   Employment Letter, dated June 1, 2014, by and between Hong Kong Takung Assets and Equity of Artworks Exchange Co., Ltd. and Di Xiao*
     
10.10   Cooperation Agreement for Bank-Dealer Payment Services, dated August 20 , 2013, by and between Wing Lung Bank Ltd. and Hong Kong Takung Assets and Equity Artworks Exchange Co., Ltd.*
     
10.11   Agreement of Funds Transfer Services, dated June 25, 2014, by and between China Merchants Bank Co., Ltd., Hong Kong Branch and Hong Kong Takung Assets and Equity Artworks Exchange Co., Ltd.*
     
16.1   Letter from Farber Hass Hurley LLP*
     
101.INS   XBRL Instance Document*
     
101.SCH   XBRL Taxonomy Extension Schema Document*
     
101.CAL   XBRL Taxonomy Calculation Linkbase Document*
     
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document*
     
101.LAB   XBRL Taxonomy Label Linkbase Document*
     
101.PRE   XBRL Taxonomy Presentation Linkbase Document*
     

 

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

 

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

 

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

 

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SIGNATURES

 

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

 

    Cardigant Medical, Inc.
     
Date: October 22 , 2014    
    /s/ Di Xiao
    Name: Di Xiao
    Title: Chief Executive Officer, Chief Financial Officer and Director

 

76

 

 

 

 

Exhibit 3.6

 

 

 

Exhibit 3-7

 

MEMORANDUM

 AND

ARTICLES OF ASSOCIATION

 OF

 

HONGKONG TAKUNG ASSETS AND EQUITY OF
ARTWORKS EXCHANGE CO., LIMITED

 

Incorporated the 17th day of September, 2012.

 

HONG KONG

 

No. 1801348

'COPY'

 

COMPANIES ORDINANCE
(CHAPTER32)
CERTIFICATE OF INCORPORATION

 

I hereby certify that

 

HONGKONG TAKUNG ASSETS AND EQUITY OF
ARTWORKS EXCHANGE CO., LIMITED

 

is this day incorporated in Hong Kong under the Companies Ordinance, and that this company is limited. Issued by the undersigned on 17 September, 2012.

 

  (Sd.) Ms. Ada L L CHUNG
   
  Registrar of Companies
  Hong Kong Special Administrative Region

 

Note:

 

Registration of a company name with the Companies Registry does not confer any trade mark rights or any other intellectual property rights in respect of the company name or any part thereof.

 

 
 

 

THE COMPANIES ORDINANCE (CHAPTER32)

 

Private Company Limited by Shares

 

MEMORANDUM OF ASSOCIATION
OF

 

HONGKONG TAKUNG ASSETS AND EQUITY OF
ARTWORKS EXCHANGE CO., LIMITED

 

First: - The name of the Company is "HONGKONG TAKUNG ASSETS AND EQUITY OF ARTWORKS EXCHANGE CO., LIMITED

 

Second: - The registered office of the Company will be situated in the Hong Kong.

 

Third: - The liability of the members is limited.

 

Fourth:- The Share Capital of the Company is HK$10,000.00 divided into 10,000 shares of HK$1.00 each with the power for the company to increase or reduce the said capital and to issue any part of its capital, original or increased, with or without preference, priority or special privileges, or subject to any postponement of rights or to any conditions or restrictions and so that, unless the conditions of issue shall otherwise expressly declare, every issue of shares, whether declared to be preference or otherwise, shall be subject to the power hereinbefore contained.

 

***************************************

 

 
 

 

I/We, the undersigned, whose name(s),address(es) and description(s) is hereto given below, wish to form a Company in pursuance of this Memorandum of Association, and I/We respectively agree to take the number of share(s) in the capital of the Company set opposite to my/our respective name(s):-

 

 

Dated the: 10 September - 2012.

WITNESS to the above signature(s):

 

  WANG XIA
  Merchant
  No.6 Row.19 Area 1,
  Tuancheng Worker Village,
Fuxing District, Handan City,
Hebei Province, China

 

 
 

 

THE COMPANIES ORDINANCE (CHAPTER32)

 

Private Company Limited by Shares

 

ARTICLES OF ASSOCIATION

 

OF

 

HONGKONG TAKUNG ASSETS AND EQUITY OF
ARTWORKS EXCHANGE CO., LIMITED

 

Preliminary

 

The regulations contained in Table "A" in the First Schedule to the Companies Ordinance (Chapter 32) shall apply to the Company save in so far as they are hereby expressly excluded or modified. In case of conflict between the provisions of Table "A" and these presents, the provisions herein contained shall prevail.

 

2. The Company is a private Company and accordingly: -

 

(a) the right to transfer shares is restricted in manner hereinafter prescribed;

 

(b)          the number of members of the company (exclusive of persons who are in the employment of the company and of persons who having been formerly in the employment of the company were while in such employment and have continued after the determination of such employment to be members of the company) is limited to fifty. Provided that where two or more persons hold one or more shares in the company jointly they shall for the purpose of this regulation be treated as a single member;

 

(c) any invitation to the public to subscribe for any shares or debentures of the company is prohibited.

 

Transfer of Shares

 

3. The Directors may decline to register any transfer of shares to any person without giving any reason therefor. The Directors may suspend the registration of transfers during the twenty-one days immediately preceding the Annual General Meeting in each year. The Directors may decline to register any instrument of transfer, unless (a) a fee not exceeding five dollars is paid to the Company in respect thereof, and (b) the instrument of transfer is accompanied by the Certificate of the shares to which it relates, and such other evidence as the Directors may reasonably require to show the right of the transferor to make the transfer.

 

Chairman of Directors

 

4. The Directors may elect a chairman of their meetings, and determine the period for which he is to hold office, and unless otherwise determined the chairman shall be elected annually.If no chairman is elected, or if at any meeting the chairman is not present within half an hour of the time appointed for holding the same, the Directors present shall choose someone of their member to be the chairman of such meeting.

 

 
 

 

5. Unless and until the Company in General Meeting shall otherwise determine, the number of Directors shall not be less than one. The first Directors of the Company shall be nominated in writing by the signatories to the Memorandum of Association.

 

6. A Director who is about to go away from or is absent from Hong Kong may with the approval of the majority of the other Directors nominate any person to be his substitute and such substitute whilst he holds office as such shall be entitled to notice of meetings of the Directors and to attend and vote thereat accordingly and he shall ipso facto vacate office if and when the appointer returns to Hong Kong or vacate office as a Director or removes the substitue from office and any appointment and removal under this Article shall be effected by notice in writing under the hand of or by cable from the Director making the same. A Director may appoint (subject as above provided) one of the other Directors to be his substitute who shall thereupon be entitled to exercise (in addition to his own right of voting as a Director) such appointer’s rights at meetings of the Directors.

 

7. At the Annual General Meeting to be held next after the adoption of these Articles and at every succeeding Annual General Meeting all Directors, except Permanent Directors if any are appointed, shall retire from office and shall be eligible for re-election.

 

8. A Director shall not require any qualification shares.

 

9. The office of a Director shall be vacated if the Director:-

 

(a) resigns his office by notice in writing to the Company; or
(b) becomes bankrupt or makes any arrangement or composition with his creditors generally; or
(c) becomes of unsound mind.

 

10. (a) No Director shall be disqualified from his office by contracting with the Company, nor shall any such contract or any contract entered into by or on behalf of the Company in which any Director shall be in any way interested be avoided, nor shall any Director so contracting or being so interested be liable to account to the Company for any profit realized by any such contract by reason only of such Director holding that office, or of the fiduciary relations thereby established but it is: declared that the nature of his interest must be disclosed by him at the meeting of the Directors at which the contract is determined on if his interest then exists, or, in any other case, at the first meeting of the Directors after the acquisition of his interest. A Director may vote in respect of any contract or arrangement in which he is interested.

 

(b) A Director of the Company may be or become a Director of any company promoted by this Company or in which it may be interested as a vendor, shareholder or otherwise and no such Director shall be accountable for any benefits received as a Director or shareholder of such Company.

 

11. The Directors may meet together for the dispatch of business, adjourn and otherwise regulate their meetings as they think fit and determine the quorum necessary for the transaction of business. Until otherwise determined, two Directors shall constitute a quorum. If the Company shall have only one director, a director may at any time summon a meeting of the directors, the provisions hereinafter contained for meetings of the directors shall not apply but such sole director shall have full power to represent and act for the Company in all matters and in lieu of minutes of a meeting shall record in writing and sign a note or memorandum of all matters requiring a resolution of the directors. Such note or memorandum shall constitute sufficient evidence of such resolution for all purposes.

 

12. Any casual vacancy occurring in the Board of Directors may be filled up by the Directors, but the person so chosen shall be subject to retirement at the same time as if he had become a Director on the day on which the Director in whose place he is appointed was last elected a Director.

 

 
 

 

13. Subject to the provisions of Article 6 hereof, the Directors shall have power at any time, and from time to time, to appoint a person as an additional Director who shall retire from office at the next following Annual General Meeting, but shall be eligible for election by the Company at that meeting as an additional Director.

 

14. The Company may by an ordinary resolution remove any Director and may by an ordinary resolution appoint another person in his stead. The person so appointed shall be subject to retirement at the same time as if he had become a Director on the day on which the Director in whose place he is appointed was last elected a Director.

 

15. Any Resolution of the Board of Directors in writing signed by the majority of the Directors, in whatever part of the world they may be, shall be valid binding as a resolution of the Directors provided that notice shall have been given to all the Directors of the Company capable of being communicated with conveniently according to the last notification of address by each such Director given to the Registered Office of the Company.

 

16. Where any notice is required either by these Articles, by Table "A", by the Ordinance or otherewise, to be given to any Director or to any Member of the Company and where any consent, agreement, signature, notice by or authority from any Director or Member of the Company shall be valid if given by cable or by mail. This clause shall not apply to special Resolutions.

 

Powers of Directors

 

17. The Directors , in addition to the powers and authorities by these Articles or otherwise expressly conferred upon them, may exercise all such powers and do all such acts and things as may be exercised or done by the Company in General Meeting subject nevertheless to the provisions of the Companies Ordinance (Chapter 32), to these Articles, and to any regulations from time to time made by the Company in General Meetings, provided that no such regulation so made shall invalidate any prior act of the Directors which would have been valid if such regulations had not been made.

 

18. Without prejudice to the general powers conferred by the preceding Article and the other powers conferred by these Articles, it is hereby expressly declared that the Directors shall have the following powers, that is to say, power:-

 

(1) To pay the costs, charges and expenses preliminary and incidental to the promotion, formation, establishment and registration of the Company.

 

(2) To purchase or otherwise acquire for the Company or sell or otherwise dispose of any property, rights or privileges which the Company is authorized to acquire at such price and generally on such terms and conditions as they shall think fit.

 

(3) To engage, suspend or dismiss the employees of the Company, and to fix and vary their salaries or emoluments.

 

(4) To institute, conduct, defend, compromise or abandon any legal proceedings by or against the Company or its officers, or otherwise concerning the affairs of the Company, and also to compound and allow time for payment or satisfaction of any debts due and of any claims or demands by or against the Company.

 

(5) To refer any claims or demands by or against the Company to arbitration and observe and perform the awards.

 

(6) To make and give receipts, release and other discharges for moneys payable to the Company, and for claims and demands of the Company.

 

 
 

 

(7) To invest, lend or otherwise deal with any of the moneys or property of the Company in such manner as they think fit having regard to the Company's Memorandum of Association and from time to time to vary or realize any such investment.

 

(8) To borrow money on behalf of the Company, and to pledge, mortgage or hypothecate any of the property of the Company.

 

(9) To open a current account with themselves for the Company and to advance any money to the Company with or without interest and upon such terms and conditions as they shall think fit.

 

(10) To enter into all such negotiations and contracts and rescind and vary all such contracts and execute and do all such acts, deeds and things in the name and on behalf of the Company as they may consider expedient for, or in relation to, any of the matters aforesaid, or otherwise for the purpose of the Company.

 

(11) To give to any Director, officer or other person employed by the Company a commission on the profits of any particular business or transaction, and such commission shall be treated as part of the working expenses of the Company, and to pay commissions and make allowances (either by way of a share in the general profits of the Company or otherwise) to any person introducing business to the Company or otherwise promoting or serving the interest thereof.

 

(12) To sell, improve, manage, exchange, lease, let, mortgage or turn to account all or any part of the land, property, rights and privileges of the Company.

 

(13) To employ, invest or otherwise deal with any Reserve Fund or Reserve Funds in such manner and for such purposes as the Directors may think fit.

 

(14) To execute, in the name and on behalf of the Company, in favor of any Director or other person who may incur or be about to incur any person liability for the benefit of the Company, such mortgages of the Company's property (present or future) as they think fit, and any such mortgage may contain a power of sale and such other powers, covenants and provisions as shall be agreed upon.

 

(15) From time to time to provide for the management of the affairs of the Company abroad in such manner as they think fit, and in particular to appoint any person to be the attorney or agent of the Company with such powers (including power to sub-delegate) and upon such terms as they think fit.

 

(16) From time to time to make, vary or repeal rules and by-laws for the regulation of the business of the Company, its officers and servants.

 

(17) To delegate any or all of the powers herein to any Directors or other person or persons as the Directors may at any time think fit.

 

19. Clause 81 of Table "A" shall not apply.

 

Seal and Checks

 

20. The Seal of the Company shall be kept by the Board of Directors and shall not be used except with their authority.

 

21. Every document required to be sealed with the Seal of the Company shall be deemed to be properly executed if sealed with the Seal of the Company and signed by the Chairman of the Board of Directors, or such person or persons as the Board may from time to time authorized for such purpose.

 

6
 

 

22. All checks, promissory notes, drafts, bills of exchange, and other negotiable instruments, shall be made, signed, drawn, accepted and endorsed, or otherwise executed by the person or persons from time to time authorized by a resolution of the Board of Directors.

 

General Meetings

 

23. For all purposes, the quorum for all general meetings shall be two members personally present and holding either in his own right or by proxy at least one-tenth of the paid-up capital of the Company. Notwithstanding any provision herein, one member shall constitute a quorum for a meeting of a company having only one member. No business shall be transacted at any General Meeting unless the requisite quorum be present at the commencement of the business.

 

24. A resolution in writing signed by all the members or the sole member shall be as valid and effectual as a resolution passed at a general meeting duly convened and held.

 

Votes of Members

 

25. All voting of members in respect of any matter or matters shall be by poll and every member present in person or by proxy shall have one vote for each share of which he is the holder.

 

Divisions of Profits

 

26. The net profits of the Company in each year shall be applied in or towards the formation of such reserve fund or funds and in or towards the payment of such dividends and bonuses as the Directors subject to the approval of the Company in General Meeting may direct.

 

27. No dividend shall be payable except out of the profits of the Company, and no dividend shall carry interest as against the Company.

 

28. A transfer of shares shall not pass the right to any dividend declared thereon before the registration of the transfer.

 

29. If two or more persons are registered as joint holders of any share, any one of such persons may give effectual receipts for any dividend or for other moneys payable in respect of such share.

 

30. The Directors may retain any dividend payable on shares on which the Company has a lien, and may apply the same in or towards satisfaction of the debts, liabilities or engagements in respect of which the lien exists.

 

31. All dividends unclaimed for one year after having been declared may be invested or otherwise made use of by the Directors for benefit of the Company until claimed.

 

Secretary

 

32. The First Secretary of the Company shall be LIAN BANG INT'L BUSINESS (HK) LIMITED who may resign from this office upon giving notice to Company of such intention and such resignation shall take effect upon the expiration of such notice or its earlier acceptance.

 

Notice

 

33. Any notice required to be given to the shareholders under these Articles may be in Chinese or English or both.

 

7
 

 

 

Dated the: 10 - September - 2012.

WITNESS to the above signature(s):

 

  WANG XIA (E)
  Merchant
  No.6 Row. 19 Area 1,
  Tuancheng Worker Village,
Fuxing District, Handan City,
Hebei Province, China

 

8

 

 

Exhibit 10.1

 

SHARE EXCHANGE AGREEMENT

 

This Share Exchange Agreement (the “ Agreement ”), is made and entered into as of September 23, 2014, by and among Cardigant Medical, Inc., a Delaware corporation (“ Parent ”), Hong Kong Takung Assets and Equity of Artworks Exchange Co., Limited, a Hong Kong limited liability company, the “ Company ”), and the shareholders of the Company (each a “ Shareholder ” and collectively the “ Shareholders ”). Certain other capitalized terms used in this Agreement are defined in Exhibit A attached hereto.

 

RECITALS

 

WHEREAS, the Company has approximately 20,000,000 ordinary shares, par value HK$1 (the “Shares”) outstanding, all of which are held by the Shareholders. The Shareholders have agreed to transfer the Shares to Parent in exchange for 209,976,000 newly issued restricted shares of common stock, par value $0.001 per share, of Parent (the “Parent Common Stock”).;

 

WHEREAS, the exchange of shares for Parent Common Stock is intended to constitute a reorganization within the meaning of Section 351 of the Internal Revenue Code of 1986, as amended (the “Code”), or such other tax free reorganization or restructuring provisions as may be available under the Code and to qualify as a transaction in securities exempt from registration or qualification under the Securities Act of 1933, as amended and in effect on the date of this Agreement (the “Securities Act”).;

 

WHEREAS, the Board of Directors of each of the Parent and the Company has determined that it is desirable and in the best interests of the shareholders of their respective companies to effect this plan of reorganization and share exchange.

 

AGREEMENT

 

NOW, THEREFORE, in consideration of the foregoing and the mutual promises, representations, warranties, covenants and agreements herein contained, the parties hereto, intending to be legally bound, hereby agree as follows:

 

ARTICLE 1

 

EXCHANGE OF SHARES

 

1.1.         Exchange by the Shareholders . At the Closing, the Shareholders shall sell, transfer, convey, assign and deliver to the Parent their Shares free and clear of all Liens in exchange for an aggregate of 209,976,000 (Two Hundred and Nine Million Nine Hundred and Seventy-Six Thousand) restricted shares of Parent Common Stock, in the amounts for each Shareholder set forth in Exhibit B (the “ Exchange Consideration ”).

 

1.2.         Closing . The closing (the “ Closing ”) of the transactions contemplated by this Agreement (the “ Transactions ”) shall take place at the offices of Sichenzia Ross Friedman Ference LLP in New York, New York, commencing upon the satisfaction or waiver of all conditions and obligations of the parties to consummate the transactions contemplated hereby (other than conditions and obligations with respect to the actions that the respective parties will take at Closing) or such other date and time as the parties may mutually determine (the “ Closing Date ”).

 

1
 

 

ARTICLE 2

 

REPRESENTATIONS OF THE SHAREHOLDERS

 

Each Shareholder, severally and not jointly and only as to itself, represents and warrants to the Parent, as follows:

 

2.1         Good Title. The Shareholder is the record and beneficial owner, and has good and marketable title to its Shares (as set forth on Exhibit B ), with the right and authority to sell and deliver such Shares to Parent as provided herein. Upon registering of the Parent as the new owner of such Shares in the share register of the Company, the Parent will receive good title to such Shares, free and clear of all Liens.

 

2.2         Power and Authority. All acts required to be taken by the Shareholder to enter into this Agreement and to carry out the Transactions have been properly taken. The obligations of the Shareholder under this Agreement constitute legal, valid and binding obligations of the Shareholder, enforceable against such Shareholder in accordance with the terms hereof.

 

2.3         No Conflicts. The execution and delivery of this Agreement by the Shareholder and the performance by the Shareholder of its obligations hereunder in accordance with the terms hereof: (i) will not require the consent of any Governmental Entity under any Laws; (ii) will not violate any Law applicable to such Shareholder; and (iii) will not violate or breach any contractual obligation to which such Shareholder is a party.

 

2.4         No Finder’s Fee. The Shareholder has not created any obligation for any finder’s, investment banker’s or broker’s fee in connection with the transactions contemplated under this Agreement that the Company or the Parent will be responsible for.

 

2.5         Purchase Entirely for Own Account. The Parent Common Stock proposed to be acquired by the Shareholder hereunder will be acquired for investment for its own account, and not with a view to the resale or distribution of any part thereof, and the Shareholder has no present intention of selling or otherwise distributing the Parent Common Stock, except in compliance with applicable securities laws.

 

2.6         Available Information. The Shareholder has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of an investment in the Parent.

 

2.7         Non-Registration. The Shareholder understands that the Parent Common Stock has not been registered under the Securities Act of 1933, as amended and, if issued in accordance with the provisions of this Agreement, will be issued by reason of a specific exemption from the registration provisions of the Securities Act which depends upon, among other things, the bona fide nature of the investment intent and the accuracy of the Shareholder’s representations as expressed herein. The non-registration shall have no prejudice with respect to any rights, interests, benefits and entitlements attached to the Parent Common Stock in accordance with the Parent charter documents or the laws of its jurisdiction of incorporation.

 

2.8         Restricted Securities. The Shareholder understands that the Parent Common Stock is characterized as “restricted securities” under the Securities Act inasmuch as this Agreement contemplates that, if acquired by the Shareholder pursuant hereto, the Parent Common Stock would be acquired in a transaction not involving a public offering. The Shareholder further acknowledges that if the Parent Common Stock is issued to the Shareholder in accordance with the provisions of this Agreement, such Parent Common Stock may not be resold without registration under the Securities Act or the existence of an exemption therefrom.

 

2
 

 

2.9         Legends. The Shareholder understands that the Parent Common Stock will bear the following legend or another legend that is similar to the following:

 

THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THESE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT SECURED BY SUCH SECURITIES.

 

and any legend required by the “blue sky” laws of any state to the extent such laws are applicable to the securities represented by the certificate so legended.

 

2.10       Regulation S. The Shareholder is an non-“U.S. Person” within the meaning of Regulation S under the Securities Act.

 

ARTICLE 3

 

REPRESENTATIONS AND WARRANTIES OF THE COMPANY

 

The Company represents and warrants to Parent that, except as set forth in the disclosure schedules delivered by the Company to Parent (the “ Company Disclosure Schedule ”) which have been provided to Parent prior to the date hereof.

 

3.1.        Organization, Standing and Corporate Power . The Company is duly organized, validly existing and in good standing under the Laws of Hong Kong SAR and has the requisite corporate power and authority and all government licenses, authorizations, Permits, consents and approvals required to own, lease and operate its properties and carry on its business as now being conducted. The Company is duly qualified or licensed to do business and is in good standing in each jurisdiction in which the nature of its business or the ownership or leasing of its properties makes such qualification or licensing necessary, other than in such jurisdictions where the failure to be so qualified or licensed (individually or in the aggregate) would not have a Material Adverse Effect.

 

3.2.        Subsidiaries . The Company does not own directly or indirectly, any equity or other ownership interest in any company, corporation, partnership, joint venture or otherwise.

 

3
 

 

3.3.        Capital Structure of the Company . As of the date of this Agreement, the number of shares and type of all authorized, issued and outstanding capital stock of the Company, and all shares of capital stock reserved for issuance under the Company’s various option and incentive plans is specified on Schedule 3.3. Except as set forth in Schedule 3.3, no shares of capital stock or other equity securities of the Company are issued, reserved for issuance or outstanding. All outstanding shares of capital stock of the Company are duly authorized, validly issued, fully paid and nonassessable and not subject to preemptive rights. Except as set forth on Schedule 3.3, there are no outstanding bonds, debentures, notes or other indebtedness or other securities of the Company having the right to vote (or convertible into, or exchangeable for, securities having the right to vote) on any matters. Except as set forth in Schedule 3.3, there are no outstanding securities, options, warrants, calls, rights, commitments, agreements, arrangements or undertakings of any kind to which the Company is a party or by which it is bound obligating the Company to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of capital stock or other equity or voting securities of the Company or obligating the Company to issue, grant, extend or enter into any such security, option, warrant, call, right, commitment, agreement, arrangement or undertaking. Except on Schedule 3.3, there are no outstanding contractual obligations, commitments, understandings or arrangements of the Company to repurchase, redeem or otherwise acquire or make any payment in respect of any shares of capital stock of the Company. Except as set forth on Schedule 3.3, there are no agreements or arrangements pursuant to which the Company is or could be required to register shares of Company Common Stock or other securities under the Securities Act or other agreements or arrangements with or among any security holders of the Company with respect to securities of the Company.

 

3.4.        Corporate Authority; Noncontravention . The Company has all requisite corporate and other power and authority to enter into this Agreement and to consummate the Transactions, the execution and delivery of this Agreement by the Company and the consummation by the Company of the Transactions have been (or at Closing will have been) duly authorized by all necessary corporate action on the part of the Company. This Agreement has been duly executed and when delivered by the Company shall constitute a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as such enforcement may be limited by bankruptcy, insolvency or other similar Laws affecting the enforcement of creditors’ rights generally or by general principles of equity. The execution and delivery of this Agreement do not, and the consummation of the Transactions and compliance with the provisions hereof will not, conflict with, or result in any breach or violation of, or Default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of or “put” right with respect to any obligation or to a loss of a material benefit under, or result in the creation of any Lien upon any of the properties or Assets of the Company under, (i) the Certificate of Incorporation, Bylaws or other organizational or charter documents of the Company (the " Company Charter Documents "), (ii) any loan or credit agreement, note, bond, mortgage, indenture, lease or other agreement, instrument, Permit, concession, franchise or license applicable to the Company, its properties or Assets, or (iii) subject to the governmental filings and other matters referred to in the following sentence, any judgment, Order, decree, statute, Law, ordinance, rule, regulation or arbitration award applicable to the Company, its properties or Assets, other than, in the case of clauses (ii) and (iii), any such conflicts, breaches, violations, Defaults, rights, losses or Liens that individually or in the aggregate could not have a Material Adverse Effect with respect to the Company or could not prevent, hinder or materially delay the ability of the Company to consummate the Transactions.

 

3.5.        Governmental Authorization . No consent, approval, Order or authorization of, or registration, declaration or filing with, or notice to, any Governmental Entity, is required by or with respect to the Company in connection with the execution and delivery of this Agreement by the Company or the consummation by the Company of the transactions contemplated hereby, except, with respect to this Agreement, any filings under the Securities Act or Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder (the “ Exchange Act ”).

 

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3.6.        Financial Statements .

 

(a)  The Company has provided Parent a copy of the audited consolidated financial statements of the Company for the period ended December 31, 2013 and the unaudited consolidated financial statements of the Company for the period ended June 30, 2014 (the “ Company Financial Statements ”). The Company Financial Statements fairly present the financial condition of the Company at the dates indicated and its results of operations and cash flows for the periods then ended and, except as indicated therein, reflect all claims against, debts and liabilities of the Company, fixed or contingent, and of whatever nature, as of the dates indicated.

 

(b)  Since June 30, 2014 (the “ Company Balance Sheet Date ”), there has been no Material Adverse Effect with respect to the Company.

 

(c)  Since the Company Balance Sheet Date, the Company has not suffered any damage, destruction or loss of physical property (whether or not covered by insurance) affecting its condition (financial or otherwise) or operations (present or prospective), nor has the Company issued, sold or otherwise disposed of, or agreed to issue, sell or otherwise dispose of, any capital stock or any other security of the Company and has not granted or agreed to grant any option, warrant or other right to subscribe for or to purchase any capital stock or any other security of the Company or has incurred or agreed to incur any indebtedness for borrowed money.

 

3.7.       Absence of Certain Changes or Events . Since the Company Balance Sheet Date, the Company has conducted its business only in the ordinary course consistent with past practice, and there is not and has not been any:

 

(a)  Material Adverse Effect with respect to the Company;

 

(b)  event which, if it had taken place following the execution of this Agreement, would not have been permitted by Section 5.1 without prior consent of Parent;

 

(c)  condition, event or occurrence which could reasonably be expected to prevent, hinder or materially delay the ability of the Company to consummate the Transactions;

 

(d)  incurrence, assumption or guarantee by the Company of any indebtedness for borrowed money other than in the ordinary course and in amounts and on terms consistent with past practices;

 

(e)  creation or other incurrence by the Company of any Lien on any asset other than in the ordinary course consistent with past practices;

 

(f)  labor dispute, other than routine, individual grievances, or, to the Knowledge of the Company, any activity or proceeding by a labor union or representative thereof to organize any employees of the Company or any lockouts, strikes, slowdowns, work stoppages or threats by or with respect to such employees;

 

(g)  payment, prepayment or discharge of liability other than in the ordinary course of business or any failure to pay any liability when due;

 

(h)  material write-offs or write-downs of any Assets of the Company;

 

(i)  damage, destruction or loss having, or reasonably expected to have, a Material Adverse Effect on the Company;

 

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(j)  other condition, event or occurrence which individually or in the aggregate could reasonably be expected to have a Material Adverse Effect or give rise to a Material Adverse Effect with respect to the Company;

 

(k)  transaction or commitment made, or any Contract or agreement entered into, by the Company relating to its Assets or business (including the acquisition or disposition of any Assets) or any relinquishment by the Company or any Contract or other right, in either case, material to the Company, other than transactions and commitments in the ordinary course consistent with past practices and those contemplated in this Agreement; or

 

(l)  agreement or commitment to do any of the foregoing.

 

3.8.        Certain Fees . No brokerage or finder’s fees or commissions are or will be payable by the Company to any broker, financial advisor or consultant, finder, placement agent, investment banker, bank or other person with respect to the Transactions.

 

3.9.        Litigation; Labor Matters; Compliance with Laws .

 

(a)  There is no suit, action or proceeding or investigation pending or, to the Knowledge of the Company, threatened against or affecting the Company or any basis for any such suit, action, proceeding or investigation that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect with respect to the Company or prevent, hinder or materially delay the ability of the Company to consummate the Transactions, nor is there any judgment, decree, injunction, rule or Order of any Governmental Entity or arbitrator outstanding against the Company having, or which, insofar as reasonably could be foreseen by the Company, in the future could have, any such effect.

 

(b)  The Company is not a party to, or bound by, any collective bargaining agreement, Contract or other agreement or understanding with a labor union or labor organization, nor is it the subject of any proceeding asserting that it has committed an unfair labor practice or seeking to compel it to bargain with any labor organization as to wages or conditions of employment nor is there any strike, work stoppage or other labor dispute involving it pending or, to its Knowledge, threatened, any of which could have a Material Adverse Effect with respect to Company.

 

(c)  The conduct of the business of the Company complies with all statutes, Laws, regulations, ordinances, rules, judgments, Orders, decrees or arbitration awards applicable thereto, except as would not have a Material Adverse Effect with respect to the Company.

 

3.10.       Benefit Plans. The Company is not a party to any Benefit Plan under which the Company currently has an obligation to provide benefits to any current or former employee, officer or director of the Company, other than as required by Hong Kong law. As used herein, “ Benefit Plan ” shall mean any employee benefit plan, program, or arrangement of any kind, including any defined benefit or defined contribution plan, stock ownership plan, executive compensation program or arrangement, bonus plan, incentive compensation plan or arrangement, profit sharing plan or arrangement, deferred compensation plan, agreement or arrangement, supplemental retirement plan or arrangement, vacation pay, sickness, disability, or death benefit plan (whether provided through insurance, on a funded or unfunded basis, or otherwise), medical or life insurance plan providing benefits to employees, retirees, or former employees or any of their dependents, survivors, or beneficiaries, employee stock option or stock purchase plan, severance pay, termination, salary continuation, or employee assistance plan.

 

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3.11.       Tax Returns and Tax Payments .

 

(a)  The Company has timely filed with the appropriate taxing authorities all Tax Returns required to be filed by it (taking into account all applicable extensions). All such Tax Returns are true, correct and complete in all respects. All Taxes due and owing by the Company have been paid (whether or not shown on any Tax Return and whether or not any Tax Return was required). Except as set forth on Schedule 3.11, the Company is not currently the beneficiary of any extension of time within which to file any Tax Return or pay any Tax. No claim has ever been made in writing or otherwise addressed to the Company by a taxing authority in a jurisdiction where the Company does not file Tax Returns that it is or may be subject to taxation by that jurisdiction. The unpaid Taxes of the Company did not, as of the Company Balance Sheet Date, exceed the reserve for Tax liability (excluding any reserve for deferred Taxes established to reflect timing differences between book and Tax income) set forth on the face of the financial statements (rather than in any notes thereto). Since the Company Balance Sheet Date, neither the Company nor any of its subsidiaries has incurred any liability for Taxes outside the ordinary course of business consistent with past custom and practice. As of the Closing Date, the unpaid Taxes of the Company and its subsidiaries will not exceed the reserve for Tax liability (excluding any reserve for deferred Taxes established to reflect timing differences between book and Tax income) set forth on the books and records of the Company.

 

(b)  No material claim for unpaid Taxes has been made or become a Lien against the property of the Company or is being asserted against the Company, no audit of any Tax Return of the Company is being conducted by a tax authority, and no extension of the statute of limitations on the assessment of any Taxes has been granted by the Company and is currently in effect. The Company has withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, shareholder or other third party.

 

(c)  As used herein, “ Taxes ” shall mean all taxes of any kind, including, without limitation, those on or measured by or referred to as income, gross receipts, sales, use, ad valorem, franchise, profits, license, withholding, payroll, employment, excise, severance, stamp, occupation, premium, value added, property or windfall profits taxes, customs, duties or similar fees, assessments or charges of any kind whatsoever, together with any interest and any penalties, additions to tax or additional amounts imposed by any governmental authority, domestic or foreign. As used herein, “ Tax Return ” shall mean any return, report or statement required to be filed with any governmental authority with respect to Taxes.

 

3.12.       Environmental Matters. The Company is in compliance with all Environmental Laws in all material respects. The Company has not received any written notice regarding any violation of any Environmental Laws, including any investigatory, remedial or corrective obligations which, if determined adversely to the Company, would reasonably be expected to have, either individually or in the aggregate, a Material Adverse Effect. The Company holds all Permits and authorizations required under applicable Environmental Laws, unless the failure to hold such Permits and authorizations would not have a Material Adverse Effect on the Company, and is in compliance with all terms, conditions and provisions of all such Permits and authorizations in all material respects. No releases of Hazardous Materials have occurred at, from, in, to, on or under any real property currently or formerly owned, operated or leased by the Company or any predecessor thereof and no Hazardous Materials are present in, on, about or migrating to or from any such property which could result in any liability to the Company. The Company has not transported or arranged for the treatment, storage, handling, disposal, or transportation of any Hazardous Material to any off-site location which could result in any liability to the Company. The Company has no liability, absolute or contingent, under any Environmental Laws that if enforced or collected would have a Material Adverse Effect on the Company. There are no past, pending or threatened claims under Environmental Laws against the Company and Company is not aware of any facts or circumstances that could reasonably be expected to result in a liability or claim against the Company pursuant to Environmental Laws.

 

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3.13.       Material Agreements.

 

(a)   Schedule 3.13 lists the following contracts and other agreements (“ Material Agreements ”) to which the Company is a party: (i) any agreement (or group of related agreements) for the lease of real or personal property, including capital leases, to or from any person providing for annual lease payments in excess of $25,000; (ii) any licensing agreement, or any agreement forming a partnership, strategic alliances, profit sharing or joint venture; (iii) any agreement (or group of related agreements) under which it has created, incurred, assumed, or guaranteed any indebtedness for borrowed money in excess of $25,000, or under which a security interest has been imposed on any of its Assets, tangible or intangible; (iv) any profit sharing, deferred compensation, severance, or other material plan or arrangement for the benefit of its current or former officers, directors and managers or any of the Company’s employees; (v) any employment or independent contractor agreement providing annual compensation in excess of $25,000 or providing post-termination or severance payments or benefits or that cannot be cancelled without more than thirty (30) days’ notice; (vi) any agreement with any current or former officer, director, shareholder, members, manager or affiliate of the Company; (vii) any agreements relating to the acquisition (by merger, purchase of units or assets or otherwise) by the Company of any operating business or material assets or the capital stock of any other person; (viii) any agreements for the sale of any of the Assets of the Company, other than in the ordinary course of business; (ix) any outstanding agreements of guaranty, surety or indemnification, direct or indirect, by the Company; (x) any royalty agreements, licenses or other agreements relating to Intellectual Property (excluding licenses pertaining to “off-the-shelf” commercially available software used pursuant to shrink-wrap or click-through license agreements on reasonable terms for a license fee of no more than $10,000); and (xi) any other agreement under which the consequences of a default or termination could reasonably be expected to have a Material Adverse Effect on the Company.

 

(b)  The Company has made available to Parent either an original or a correct and complete copy of each written Material Agreement. Except as set forth on Schedule 3.13 , with respect to each Material Agreement to which the Company is a party thereto: (i) the agreement is the legal, valid, binding, enforceable obligation of the Company and is in full force and effect in all material respects, subject to bankruptcy and equitable remedies exceptions; (ii) (A) the Company is not in material breach or default thereof and (B) no event has occurred which, with notice or lapse of time, would constitute a material breach or default of, or permit termination, modification, or acceleration under, the Material Agreement; and (iii) the Company has not repudiated any material provision of the agreement.

 

3.14.       Material Contract Defaults. The Company is not, or has not received any notice or has any Knowledge that any other party is, in Material Contract Default under any Company Material Contract; and there has not occurred any event that with the lapse of time or the giving of notice or both would constitute such a Material Contract Default. For purposes of this Agreement, a “ Company Material Contract ” means any Contract that is effective as of the Closing Date to which the Company is a party (i) with expected receipts or expenditures in excess of $25,000, (ii) requiring the Company to indemnify any person, (iii) granting exclusive rights to any party, or (iv) evidencing indebtedness for borrowed or loaned money in excess of $25,000, including guarantees of such indebtedness.

 

3.15.       Accounts Receivable . All of the accounts receivable of the Company that are reflected on the Company Financial Statements or the accounting records of the Company as of the Closing (collectively, the “ Accounts Receivable ”) represent or will represent valid obligations arising from sales actually made or services actually performed in the ordinary course of business and are not subject to any defenses, counterclaims, or rights of set off other than those arising in the ordinary course of business and for which adequate reserves have been established. The Accounts Receivable are fully collectible to the extent not reserved for on the balance sheet on which they are shown.

 

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3.16.       Reserved.

 

3.17.       Intellectual Property .

 

(i)          As used in this Agreement, “ Intellectual Property ” means all right, title and interest in or relating to all intellectual property, whether protected, created or arising under the laws of the United States or any other jurisdiction or under any international convention, including, but not limited to the following: (a) service marks, trademarks, trade names, trade dress, logos and corporate names (and any derivations, modifications or adaptations thereof), Internet domain names and Internet websites (and content thereof), together with the goodwill associated with any of the foregoing, and all applications, registrations, renewals and extensions thereof (collectively, “ Marks ”); (b) patents and patent applications, including all continuations, divisionals, continuations-in-part and provisionals and patents issuing thereon, and all reissues, reexaminations, substitutions, renewals and extensions thereof (collectively, “ Patents ”); (c) copyrights, works of authorship and moral rights, and all registrations, applications, renewals, extensions and reversions thereof (collectively, “ Copyrights ”); (d) confidential and proprietary information, trade secrets and non-public discoveries, concepts, ideas, research and development, technology, know-how, formulae, inventions (whether or not patentable and whether or not reduced to practice), compositions, processes, techniques, technical data and information, procedures, designs, drawings, specifications, databases, customer lists, supplier lists, pricing and cost information, and business and marketing plans and proposals, in each case excluding any rights in respect of any of the foregoing that comprise or are protected by Patents (collectively, “ Trade Secrets ”); and (e) Technology. For purposes of this Agreement, “ Technology ” means all Software, information, designs, formulae, algorithms, procedures, methods, techniques, ideas, know-how, research and development, technical data, programs, subroutines, tools, materials, specifications, processes, inventions (whether or not patentable and whether or not reduced to practice), apparatus, creations, improvements and other similar materials, and all recordings, graphs, drawings, reports, analyses, and other writings, and other embodiments of any of the foregoing, in any form or media whether or not specifically listed herein. Further, for purposes of this Agreement, “ Software ” means any and all computer programs, whether in source code or object code; databases and compilations, whether machine readable or otherwise; descriptions, flow-charts and other work product used to design, plan, organize and develop any of the foregoing; and all documentation, including user manuals and other training documentation, related to any of the foregoing.

 

(ii)          Schedule 3.17 sets forth a list and description of the Intellectual Property required for the Company to operate, or used or held for use by the Company, in the operation of its business, including, but not limited to (a) all issued Patents and pending Patent applications, registered Marks, pending applications for registration of Marks, unregistered Marks, registered Copyrights of the Company and the record owner, registration or application date, serial or registration number, and jurisdiction of such registration or application of each such item of Intellectual Property, (b) all Software developed by or for the Company and (c) any Software not exclusively owned by the Company and incorporated, embedded or bundled with any Software listed in clause (b) above (except for commercially available software and so-called “shrink wrap” software licensed to the Company on reasonable terms through commercial distributors or in consumer retail stores for a license fee of no more than $10,000).

 

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(iii)        The Company is the exclusive owner of or has a valid and enforceable right to use all Intellectual Property listed for the Company in Schedule 3.17 (and any other Intellectual Property required to be listed in Schedule 3.17 ) as the same are used, sold, licensed and otherwise commercially exploited by the Company, free and clear of all Liens, security interests, encumbrances or any other obligations to others (other than obligations under the license agreements pursuant to which such Intellectual Property is licensed to the Company), and no such Intellectual Property has been abandoned. The Intellectual Property owned by the Company and the Intellectual Property licensed to it pursuant to valid and enforceable written license agreements include all of the Intellectual Property necessary and sufficient to enable the Company to conduct its business in the manner in which such business is currently being conducted. The Intellectual Property owned by the Company and its rights in and to such Intellectual Property are valid and enforceable.

 

(iv)         The Company has not received, and is not aware of, any written or oral notice of any reasonable basis for an allegation against the Company of any infringement, misappropriation, or violation by the Company of any rights of any third party with respect to any Intellectual Property, and the Company is not aware of any reasonable basis for any claim challenging the ownership, use, validity or enforceability of any Intellectual Property owned, used or held for use by the Company. The Company does not have any knowledge (a) of any third-party use of any Intellectual Property owned by or exclusively licensed to the Company, (b) that any third-party has a right to use any such Intellectual Property, or (c) that any third party is infringing, misappropriating, or otherwise violating (or has infringed, misappropriated or violated) any such Intellectual Property.

 

(v)          To the Company's Knowledge, the Company has not infringed, misappropriated or otherwise violated any Intellectual Property rights of any third parties, and the Company is not aware of any infringement, misappropriation or violation of any third party rights which will occur as a result of the continued operation of the Company as presently operated and/or the consummation of the Transactions.

 

(vi)         The Company has taken adequate security measures to protect the confidentiality and value of its Trade Secrets (and any confidential information owned by a third party to whom the Company has a confidentiality obligation).

 

(vii)        The consummation of the Transactions will not adversely affect the right of the Company to own or use any Intellectual Property owned, used or held for use by it.

 

3.18.       Board Recommendation . The Board of Directors of the Company has determined that the terms of the Transactions are fair to and in the best interests of the shareholders of the Company.

 

3.19.       Undisclosed Liabilities . The Company has no liabilities or monetary obligations of any nature (whether fixed or unfixed, secured or unsecured, known or unknown and whether absolute, accrued, contingent, or otherwise) except for such liabilities or obligations reflected or reserved against in the Company Financial Statements, incurred in the ordinary course of business after the Company Balance Sheet Date.

 

3.20.       No Registration of Securities . The Company understands and acknowledges that except as set forth in this Agreement, the offering, exchange and issuance of Exchange Consideration pursuant to this Agreement will not be registered under the Securities Act on the grounds that the offering, sale, exchange and issuance of securities contemplated by this Agreement are exempt from registration pursuant to Section 4(a)(2) of the Securities Act, and that Parent’s reliance upon such exemption is predicated in part upon the Company’s and the Shareholders’ representations herein and upon the representations contained in the Stockholder Representation Letters, the form of which is attached as Exhibit C to this Agreement.

 

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3.21.       Parent Information . The Company acknowledges that it has had access to the documents filed by Parent under the Exchange Act, since the end of its most recently completed fiscal year to the date hereof, and has carefully reviewed the same (“ Exchange Act Documents ”). The Company further acknowledges that Parent has made available to it the opportunity to ask questions of and receive answers from Parent’s officers and directors concerning the terms and conditions of this Agreement and the business and financial condition of Parent, and the Company has received to its satisfaction, such information about the business and financial condition of Parent and the terms and conditions of the Agreement as it has requested. The Company has carefully considered the potential risks relating to Parent and investing in the Exchange Consideration, and fully understands that such securities are speculative investments, which involve a high degree of risk of loss of the Company and its stockholders’ entire investment. Among others, the Company has carefully considered each of the risks identified under the caption “Risk Factors” in the Exchange Act Documents, which are incorporated herein by reference.

 

3.22.       Full Disclosure. All of the representations and warranties made by the Company in this Agreement, including the Company Disclosure Schedules attached hereto, and all statements set forth in the certificates delivered by the Company at the Closing pursuant to this Agreement, are true, correct and complete in all material respects and do not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make such representations, warranties or statements, in light of the circumstances under which they were made, misleading. The copies of all documents furnished by the Company pursuant to the terms of this Agreement are complete and accurate copies of the original documents. The schedules, certificates, and any and all other statements and information, whether furnished in written or electronic form, to Parent or its representatives by or on behalf of any of the Company or its Affiliates in connection with the negotiation of this Agreement and the transactions contemplated hereby do not contain any material misstatement of fact or omit to state a material fact or any fact necessary to make the statements contained therein not misleading.

 

ARTICLE 4

 

REPRESENTATIONS AND WARRANTIES OF PARENT

 

Parent represents and warrants to the Company, the Shareholders that, except as set forth in Parent Disclosure Schedule:

 

4.1.        Organization, Standing, Corporate Power and Quotation of Common Stock . Each of Parent and its Subsidiaries is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, and has the requisite corporate power and authority and all government licenses, authorizations, Permits, consents and approvals required to own, lease and operate its properties and carry on its business as now being conducted. Each of Parent and its Subsidiaries is duly qualified or licensed to do business and is in good standing in each jurisdiction in which the nature of its business or the ownership or leasing of its properties makes such qualification or licensing necessary, other than in such jurisdictions where the failure to be so qualified or licensed (individually or in the aggregate) would not have a Material Adverse Effect with respect to Parent. Parent has taken all steps required to qualify shares of common stock of Parent, par value $0.001 (“ Parent Common Stock ”), to become quoted on the OTCBB under the corporate name and symbol described in Section 8.3(i), including filing of Form 211, and submission of all materials required by the OTC Bulletin Board for such quotation. If the Parent has no Subsidiaries, all other references to the Subsidiaries or any of them in this Agreement, shall be disregarded.

 

4.2.        Subsidiaries . The Subsidiaries of the Parent, and the authorized and outstanding capital stock of each are set forth on Schedule 4.2 . All of the outstanding capital stock of the Parent’s Subsidiaries are owned by Parent free and clear of all Liens. Other than as set forth on Schedule 4.2 , Parent does not own directly or indirectly, any equity or other ownership interest in any company, corporation, partnership, joint venture or otherwise.

 

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4.3.        Capital Structure of Parent

 

Immediately prior to the issuance of the Exchange Consideration at Closing, the authorized capital stock of Parent will consist of 1,000,000,000 shares of Parent Common Stock, $0.001 par value, of which no more than 23,330,662 shares of Parent Common Stock will be issued and outstanding, and no shares of Parent Common Stock will be issuable upon the exercise of outstanding warrants, convertible notes, options or otherwise (except as described below). All outstanding shares of capital stock of Parent and its Subsidiaries are, and all shares which may be issued pursuant to this Agreement will be, when issued, duly authorized, validly issued, fully paid and nonassessable, not subject to preemptive rights, and issued in compliance with all applicable state and federal Laws concerning the issuance of securities. Except for the Parent Common Stock, there are no outstanding bonds, debentures, notes or other indebtedness or other securities of Parent having the right to vote (or convertible into, or exchangeable for, securities having the right to vote). There are no outstanding securities, options, warrants, calls, rights, commitments, agreements, arrangements or undertakings of any kind to which Parent or any of its Subsidiaries is a party or by which Parent or any of its Subsidiaries is bound obligating Parent or any of its Subsidiaries to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of capital stock or other equity securities of Parent or any of its Subsidiaries or obligating Parent or any of its Subsidiaries to issue, grant, extend or enter into any such security, option, warrant, call, right, commitment, agreement, arrangement or undertaking. There are no outstanding contractual obligations, commitments, understandings or arrangements of Parent or any of its Subsidiaries to repurchase, redeem or otherwise acquire or make any payment in respect of any shares of capital stock of Parent or any of its Subsidiaries. There are no agreements or arrangements pursuant to which the Parent is or could be required to register shares of Parent Common Stock or other securities under the Securities Act or other agreements or arrangements with or among any security holders of the Parent with respect to securities of the Parent.

 

4.4.        Corporate Authority; Noncontravention . Parent has all requisite corporate and other power and authority to enter into this Agreement and to consummate the Transactions. The execution and delivery of this Agreement by Parent and the consummation by Parent of the transactions contemplated hereby have been (or at Closing will have been) duly authorized by all necessary corporate action on the part of Parent. This Agreement has been duly executed and when delivered by Parent, shall constitute a valid and binding obligation of Parent, enforceable against Parent in accordance with its terms, except as such enforcement may be limited by bankruptcy, insolvency or other similar Laws affecting the enforcement of creditors’ rights generally or by general principles of equity. The execution and delivery of this Agreement does not, and the consummation of the Transactions and compliance with the provisions hereof will not, conflict with, or result in any breach or violation of, or Default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of or “put” right with respect to any obligation or to loss of a material benefit under, or result in the creation of any Lien upon any of the properties or Assets of Parent under, (i) the Certificate of Incorporation, Bylaws, or other charter documents of Parent, (ii) any loan or credit agreement, note, bond, mortgage, indenture, lease or other agreement, instrument, Permit, concession, franchise or license applicable to Parent, its properties or Assets, or (iii) subject to the governmental filings and other matters referred to in the following sentence, any judgment, Order, decree, statute, Law, ordinance, rule, regulation or arbitration award applicable to Parent, its properties or Assets, other than, in the case of clauses (ii) and (iii), any such conflicts, breaches, violations, Defaults, rights, losses or Liens that individually or in the aggregate could not have a Material Adverse Effect with respect to Parent or could not prevent, hinder or materially delay the ability of Parent to consummate the Transactions.

 

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4.5.        Government Authorization . No consent, approval, Order or authorization of, or registration, declaration or filing with, or notice to, any Governmental Entity, is required by or with respect to Parent in connection with the execution and delivery of this Agreement by Parent, or the consummation by Parent of the transactions contemplated hereby, except, with respect to this Agreement, any filings under the Securities Act or the Exchange Act.

 

4.6.        SEC Documents; Undisclosed Liabilities; Financial Statements .

 

(a)  Parent has filed with the Securities and Exchange Commission (the “ SEC ”) all reports, schedules, forms, statements and other documents as required under the Exchange Act and Parent has delivered or made available to the Company all reports, schedules, forms, statements and other documents filed with the SEC (collectively, and in each case including all exhibits and schedules thereto and documents incorporated by reference therein, the “ Parent SEC Documents ”). As of their respective dates, the Parent SEC Documents complied in all material respects with the requirements of the Securities Act or the Exchange Act, as the case may be, and the rules and regulations of the SEC promulgated thereunder applicable to such Parent SEC Documents. Except to the extent revised or superseded by a subsequent filing with the SEC (a copy of which has been provided to the Company prior to the date of this Agreement), none of the Parent SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The consolidated financial statements of Parent included in such Parent SEC Documents comply as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto, have been prepared in accordance with GAAP (except, in the case of unaudited consolidated quarterly statements, as permitted by Form 10-Q of the SEC) applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto) and fairly present the financial position of Parent as of the dates thereof and the results of operations and changes in cash flows for the periods then ended (subject, in the case of unaudited quarterly statements, to normal year-end audit adjustments as determined by Parent’s independent accountants). Except as set forth in the Parent SEC Documents, at the date of the most recent financial statements of Parent included in the Parent SEC Documents, Parent has not incurred any liabilities or monetary obligations of any nature (whether accrued, absolute, contingent or otherwise), which, individually, or in the aggregate, could reasonably be expected to have a Material Adverse Effect on Parent.

 

(b)  Except as disclosed in the Parent SEC Documents filed prior to the date hereof or as set forth in this Agreement, since June 30, 2014 (the “ Parent Balance Sheet Date ”), there has been no Material Adverse Effect with respect to Parent.

 

(c)  Except as disclosed in the Parent SEC Documents filed prior to the date hereof or as provided in this Agreement, since the Parent Balance Sheet Date, Parent has not issued, sold or otherwise disposed of, or agreed to issue, sell or otherwise dispose of, any capital stock or any other security of Parent and, has not granted or agreed to grant any option, warrant or other right to subscribe for or to purchase any capital stock or any other security of Parent or has incurred or agreed to incur any indebtedness for borrowed money.

 

4.7.        Absence of Certain Changes . Except as disclosed in the Parent SEC Documents filed prior to the date hereof or as set forth on Schedule 4.7 , since the Parent Balance Sheet Date, Parent has conducted its business only in the ordinary course consistent with past practice in light of its current business circumstances, and there is not and has not been any:

 

(a)   Material Adverse Effect with respect to Parent;

 

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(b)  event which, if it had taken place following the execution of this Agreement, would not have been permitted by Section 6.1 without prior consent of the Company;

 

(c)  condition, event or occurrence which could reasonably be expected to prevent, hinder or materially delay the ability of Parent to consummate the Transactions;

 

(d)  incurrence, assumption or guarantee by Parent of any indebtedness for borrowed money other than in the ordinary course and in amounts and on terms consistent with past practices;

 

(e)  creation or other incurrence by Parent of any Lien on any asset other than in the ordinary course consistent with past practices;

 

(f)  labor dispute, other than routine, individual grievances, or, to the Knowledge of Parent, any activity or proceeding by a labor union or representative thereof to organize any employees of Parent or any lockouts, strikes, slowdowns, work stoppages or threats by or with respect to such employees;

 

(g)  payment, prepayment or discharge of liability other than in the ordinary course of business or any failure to pay any liability when due;

 

(h)  material write-offs or write-downs of any Assets of Parent;

 

(i)  damage, destruction or loss having, or reasonably expected to have, a Material Adverse Effect on Parent;

 

(j)  other condition, event or occurrence which individually or in the aggregate could reasonably be expected to have a Material Adverse Effect or give rise to a Material Adverse Effect with respect to Parent;

 

(k)  transaction or commitment made, or any Contract or agreement entered into, by the Parent relating to its Assets or business (including the acquisition or disposition of any Assets) or any relinquishment by the Parent or any Contract or other right, in either case, material to the Parent, other than transactions and commitments in the ordinary course consistent with past practices and those contemplated in this Agreement; or

 

(l)  agreement or commitment to do any of the foregoing.

 

4.8.       Certain Fees . No brokerage or finder’s fees or commissions are or will be payable by Parent to any broker, financial advisor or consultant, finder, placement agent, investment banker, bank or other person with respect to the Transactions.

 

4.9.        Litigation; Labor Matters; Compliance with Laws .

 

(a)  There is no suit, action or proceeding or investigation pending or, to the Knowledge of Parent, threatened against or affecting Parent or any basis for any such suit, action, proceeding or investigation that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect with respect to Parent or prevent, hinder or materially delay the ability of Parent to consummate the Transactions, nor is there any judgment, decree, injunction, rule or Order of any Governmental Entity or arbitrator outstanding against Parent having, or which, insofar as reasonably could be foreseen by Parent, in the future could have, any such effect.

 

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(b)  Parent is not a party to, or bound by, any collective bargaining agreement, Contract or other agreement or understanding with a labor union or labor organization, nor is it the subject of any proceeding asserting that it has committed an unfair labor practice or seeking to compel it to bargain with any labor organization as to wages or conditions of employment nor is there any strike, work stoppage or other labor dispute involving it pending or, to its Knowledge, threatened, any of which could have a Material Adverse Effect with respect to Parent.

 

(c)  The conduct of the business of Parent complies with all statutes, Laws, regulations, ordinances, rules, judgments, Orders, decrees or arbitration awards applicable thereto.

 

4.10.       Benefit Plans . Parent is not a party to any Benefit Plan under which Parent currently has an obligation to provide benefits to any current or former employee, officer or director of Parent.

 

4.11.       Tax Returns and Tax Payments .

 

(a)  Parent and each of its Subsidiaries has timely filed with the appropriate taxing authorities all Tax Returns required to be filed by it (taking into account all applicable extensions). All such Tax Returns are true, correct and complete in all respects. All Taxes due and owing by Parent and each of its Subsidiaries has been paid (whether or not shown on any Tax Return and whether or not any Tax Return was required). Neither Parent nor any of its Subsidiaries is currently the beneficiary of any extension of time within which to file any Tax Return or pay any Tax. No claim has ever been made in writing or otherwise addressed to Parent or any of its Subsidiaries by a taxing authority in a jurisdiction where Parent does not file Tax Returns that it is or may be subject to taxation by that jurisdiction. The unpaid Taxes of Parent did not, as of the Parent Balance Sheet Date, exceed the reserve for Tax liability (excluding any reserve for deferred Taxes established to reflect timing differences between book and Tax income) set forth on the face of the financial statements (rather than in any notes thereto). Since the Parent Balance Sheet Date, Parent has not incurred any liability for Taxes outside the ordinary course of business consistent with past custom and practice. As of the Closing Date, the unpaid Taxes of Parent and its Subsidiaries will not exceed the reserve for Tax liability (excluding any reserve for deferred Taxes established to reflect timing differences between book and Tax income) set forth on the books and records of Parent.

 

(b)  No material claim for unpaid Taxes has been made or become a Lien against the property of Parent or any of its Subsidiaries or is being asserted against Parent or any of its Subsidiaries, no audit of any Tax Return of Parent or any of its Subsidiaries is being conducted by a tax authority, and no extension of the statute of limitations on the assessment of any Taxes has been granted by Parent or any of its Subsidiaries and is currently in effect. Parent has withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, stockholder or other third party.

 

4.12.       Environmental Matters . Each of Parent and its Subsidiaries is in compliance with all requisite Environmental Laws in all material respects. Neither Parent nor any of its Subsidiaries has received any written notice regarding any violation of any Environmental Laws, including any investigatory, remedial or corrective obligations, which, if determined adversely to Parent or any of its Subsidiaries, would reasonably be expected to have, either individually or in the aggregate, a Material Adverse Effect. Each of Parent and its Subsidiaries holds all Permits and authorizations required under applicable Environmental Laws, unless the failure to hold such Permits and authorizations would not have a Material Adverse Effect on Parent, and is compliance with all terms, conditions and provisions of all such Permits and authorizations in all material respects. No releases of Hazardous Materials have occurred at, from, in, to, on or under any real property currently or formerly owned, operated or leased by Parent or any of its Subsidiaries or any predecessor thereof and no Hazardous Materials are present in, on, about or migrating to or from any such property which could result in any liability to Parent or any of its Subsidiaries. Each of Parent and its Subsidiaries has not transported or arranged for the treatment, storage, handling, disposal, or transportation of any Hazardous Material to any off-site location which could result in any liability to Parent or any of its Subsidiaries. Each of Parent and its Subsidiaries has no liability, absolute or contingent, under any Environmental Law that if enforced or collected would have a Material Adverse Effect on Parent or any of its Subsidiaries. There are no past, pending or threatened claims under Environmental Laws against Parent or any of its Subsidiaries and each of Parent and its Subsidiaries is not aware of any facts or circumstances that could reasonably be expected to result in a liability or claim against Parent or any of its Subsidiaries pursuant to Environmental Laws.

 

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4.13.       Material Contract Defaults . The Annual Report on Form 10-K for the Parent for the year ended December 31, 2013 and the Current Report on Form 8-K dated August 29, 2014 list the Parent’s Material Contracts. Parent is not, or has not received any notice or has any Knowledge that any other party is, in Material Contract Default under any Parent Material Contract; and there has not occurred any event that with the lapse of time or the giving of notice or both would constitute such a Material Contract Default. For purposes of this Agreement, a “ Parent Material Contract ” means any Contract that is effective as of the Closing Date to which the Parent is a party (i) with expected receipts or expenditures in excess of $5,000, (ii) requiring the Parent to indemnify any person, (iii) granting exclusive rights to any party, (iv) evidencing indebtedness for borrowed or loaned money in excess of $5,000, including guarantees of such indebtedness, or under which a security interest has been imposed on any of its Assets, tangible or intangible; (v) any agreement (or group of related agreements) for the lease of real or personal property, including capital leases; (vi) any licensing agreement, or any agreement forming a partnership, strategic alliances, profit sharing or joint venture; (vii) any profit sharing, deferred compensation, severance, or other material plan or arrangement for the benefit of its current or former officers, directors and managers or any of the Parent’s employees; (viii) any employment or independent contractor agreement providing post-termination or severance payments or benefits or that cannot be cancelled without more than thirty (30) days’ notice; (ix) any agreement with any current or former officer, director, shareholder, members, manager or affiliate of the Parent; (x) any agreements relating to the acquisition (by merger, purchase of units or assets or otherwise) by the Parent of any operating business or material assets or the capital stock of any other person; (xi) any agreements for the sale of any of the Assets of the Parent, other than in the ordinary course of business; (xii) any outstanding agreements of guaranty, surety or indemnification, direct or indirect, by the Parent; (xiii) any royalty agreements, licenses or other agreements relating to Intellectual Property (excluding licenses pertaining to “off-the-shelf” commercially available software used pursuant to shrink-wrap or click-through license agreements on reasonable terms for a license fee of no more than $5,000); and (xiv) any other agreement under which the consequences of a default or termination could reasonably be expected to have a Material Adverse Effect on the Parent.

 

4.14.       Accounts Receivable . All of the accounts receivable of Parent that are reflected in the Parent SEC Documents or the accounting records of Parent as of the Closing (collectively, the “ Parent Accounts Receivable ”) represent or will represent valid obligations arising from sales actually made or services actually performed in the ordinary course of business and are not subject to any defenses, counterclaims, or rights of set off other than those arising in the ordinary course of business and for which adequate reserves have been established. The Parent Accounts Receivable are fully collectible to the extent not reserved for on the balance sheet on which they are shown.

 

4.15.       Properties . Each of Parent and its Subsidiaries has valid land use rights for all real property that is material to its business and good, clear and marketable title to all the tangible properties and tangible Assets reflected in the latest balance sheet as being owned by Parent or acquired after the date thereof which are, individually or in the aggregate, material to Parent’s business (except properties sold or otherwise disposed of since the date thereof in the ordinary course of business), free and clear of all Material Liens, encumbrances, claims, security interest, options and restrictions of any nature whatsoever. Any real property and facilities held under lease by Parent or its Subsidiaries are held by them under valid, subsisting and enforceable leases of which each of Parent and its Subsidiaries is in compliance, except as could not, individually or in the aggregate, have or reasonably be expected to result in a Material Adverse Effect.

 

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4.16.       Intellectual Property . Each of Parent and its Subsidiaries owns or has valid rights to use the Trademarks, trade names, domain names, copyrights, patents, logos, licenses and computer software programs (including, without limitation, the source codes thereto) that are necessary for the conduct of its business as now being conducted. All of Parent’s and its Subsidiaries’ licenses to use Software programs are current and have been paid for the appropriate number of users. To the Knowledge of Parent, none of Parent’s or its Subsidiaries’ Intellectual Property infringe upon the rights of any third party that may give rise to a cause of action or claim against Parent or each of its successors.

 

4.17.       Board Determination . The Board of Directors of Parent has unanimously determined as of the Closing Date that the terms of the Transactions are fair to and in the best interests of Parent and its stockholders.

 

4.18.       Due Authorization . Parent represents that the issuance of the Exchange Consideration will be in compliance with the Delaware General Corporation Law and the Certificate of Incorporation and Bylaws of Parent. The Exchange Consideration has been duly and validly authorized and, upon issuance in accordance with this Agreement, will be duly issued, fully paid and nonassessable and free (and not issued or sold in violation) of statutory and contractual preemptive rights, resale rights, rights of first refusal and similar rights, taxes, claims, liens, charges, encumbrances or other restrictions (other than as provided herein and restrictions under federal and applicable state securities laws).

 

4.19.       Undisclosed Liabilities. Parent has no liabilities or obligations of any nature (whether fixed or unfixed, secured or unsecured, known or unknown and whether absolute, accrued, contingent, or otherwise).

 

4.20.       Full Disclosure . All of the representations and warranties made by Parent in this Agreement, including the Parent Disclosure Schedules attached hereto, and all statements set forth in the certificates delivered by Parent at the Closing pursuant to this Agreement, are true, correct and complete in all material respects and do not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make such representations, warranties or statements, in light of the circumstances under which they were made, misleading. The copies of all documents furnished by Parent pursuant to the terms of this Agreement are complete and accurate copies of the original documents. The schedules, certificates, and any and all other statements and information, whether in written or electronic form, to the Company or its representatives by or on behalf of Parent or their Affiliates in connection with the negotiation of this Agreement and the transactions contemplated hereby do not contain any material misstatement of fact or omit to state a material fact or any fact necessary to make the statements contained therein not misleading.

 

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ARTICLE 5

 

COVENANTS OF THE COMPANY

 

5.1.        Conduct of the Company Business . From the date of this Agreement and until the Closing Date, or until the prior termination of this Agreement, the Company shall not, unless agreed to in writing by Parent:

 

(a)  engage in any transaction, except in the normal and ordinary course of business, or create or suffer to exist any Lien or other encumbrance upon any of its assets or which will not be discharged in full prior to the Closing Date;

 

(b)  sell, assign or otherwise transfer any of its assets, or cancel or compromise any debts or claims relating to its assets, other than for fair value, in the ordinary course of business, and consistent with past practice;

 

(c)  fail to use reasonable efforts to preserve intact its present business organizations, keep available the services of its employees and preserve its material relationships with customers, suppliers, licensors, licensees, distributors and others, to the end that its good will and ongoing business not be impaired prior to the Closing Date;

 

(d)  intentionally permit any Material Adverse Effect to occur with respect to the Company;

 

(e)  make any material change in its accounting or bookkeeping methods, principles or practices, except as required by GAAP; or

 

(f)  authorize any, or commit or agree to take any of, the foregoing actions.

 

5.2.        Satisfaction of Conditions Precedent . From and after the date of this Agreement until the earlier of the Closing Date or the termination of this Agreement in accordance with its terms, the Company will use its commercially reasonable efforts to satisfy or cause to be satisfied all the conditions precedent that are set forth in Article 8, and the Company will use its commercially reasonable efforts to cause the Transactions to be consummated.

 

5.3.        No Other Negotiations . As of the date of this Agreement, the Company has not entered into any agreement or understanding with, and is not engaging in any discussions with any third party concerning an Alternative Acquisition including, without limitation, any agreement or understanding that would require the Company to notify any third party of the terms of this Agreement. From and after the date of this Agreement until the earlier of the Closing Date or the termination of this Agreement in accordance with its terms, the Company shall not, directly or indirectly, (a) initiate, solicit, encourage, negotiate, accept or discuss any transaction or series of transactions with any Person, other than Parent and its Affiliates involving any Alternative Acquisition, (b) provide information with respect to the Company to any Person, other than Parent and its Affiliates, relating to a possible Alternative Acquisition by any Person, other than Parent and its Affiliates, (c) enter into an agreement with any Person, other than Parent and its Affiliates, providing for a possible Alternative Acquisition, or (d) make or authorize any statement, recommendation or solicitation in support of any possible Alternative Acquisition by any Person, other than by Parent and its Affiliates.

 

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If the Company receives any unsolicited offer, inquiry or proposal to enter into discussions or negotiations relating to an Alternative Acquisition, or that could reasonably expected to lead to an Alternative Acquisition, or any request for nonpublic information relating to the Company, the Company shall promptly notify Parent thereof, including information as to the identity of the party making any such offer, inquiry or proposal and the specific terms of such offer, inquiry or proposal, as the case may be, and shall keep Parent promptly informed of any developments with respect to same.

 

5.4.        Access . The Company shall afford to Parent, and to the officers, employees, accountants, counsel, financial advisors and other representatives of Parent, reasonable access during normal business hours during the period prior to the Closing Date or the termination of this Agreement to all of the Company’s properties, books, contracts, commitments, personnel and records and, during such period, the Company shall furnish promptly to Parent, (a) a copy of each report, schedule, and other documents filed by it during such period pursuant to the requirements of federal or state securities Laws and (b) all other information concerning its business, properties and personnel as Parent or its representatives may reasonably request.

 

5.5.        Notification of Certain Matters . The Company shall give prompt notice to Parent of (i) the occurrence or non-occurrence of any event the occurrence or non-occurrence of which would cause any Company representation or warranty contained in this Agreement to be untrue or inaccurate at or prior to the Closing Date and (ii) any failure of the Company to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder; provided, however, that the delivery of any notice pursuant to this Section 5.5 shall not limit or otherwise affect the remedies available hereunder to Parent.

 

ARTICLE 6

COVENANTS OF THE PARENT

 

6.1.        Conduct of the Parent Business . From the date of this Agreement and until the Closing Date, or until the prior termination of this Agreement, Parent shall not, unless agreed to in writing by the Company:

 

(a)  engage in any transaction, except in the normal and ordinary course of business, or create or suffer to exist any Lien or other encumbrance upon any of its assets or which will not be discharged in full prior to the Closing Date;

 

(b)  sell, assign or otherwise transfer any of its assets, or cancel or compromise any debts or claims relating to its assets, other than for fair value, in the ordinary course of business, and consistent with past practice;

 

(c)  fail to use reasonable efforts to preserve intact its present business organizations, keep available the services of its employees and preserve its material relationships with customers, suppliers, licensors, licensees, distributors and others, to the end that its good will and ongoing business not be impaired prior to the Closing Date;

 

(d)  intentionally permit any Material Adverse Effect to occur with respect to the Parent;

 

(e)  make any material change with respect in its accounting or bookkeeping methods, principles or practices, except as required by GAAP; or

 

(f)  authorize any, or commit or agree to take any of, the foregoing actions.

 

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6.2.        Access . Parent shall afford to the Company, and to the officers, employees, accountants, counsel, financial advisors and other representatives of the Company, reasonable access during normal business hours during the period prior to the Closing Date or the termination of this Agreement to all of the Parent’s properties, books, contracts, commitments, personnel and records and, during such period, the Parent shall furnish promptly to the Company, (a) a copy of each report, schedule, registration statements and other documents filed by it during such period pursuant to the requirements of federal or state securities Laws and (b) all other information concerning its business, properties and personnel as the Company or its representatives may reasonably request.

 

6.3.        Notification of Certain Matters . Parent shall give prompt notice to the Company of (i) the occurrence or non-occurrence of any event the occurrence or non-occurrence of which would cause any Parent representation or warranty contained in this Agreement to be untrue or inaccurate at or prior to the Closing Date and (ii) any failure of Parent to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder; provided, however, that the delivery of any notice pursuant to this Section 6.3 shall not limit or otherwise affect the remedies available hereunder to the Company.

 

6.4.        Director and Officer Appointments . As of the Closing Date, Parent shall have taken all action, including compliance with Rule 14f-1 under the Exchange Act, if applicable, to cause (a) the persons as set forth on Schedule 6.4 to be appointed Parent’s directors and officers, and (b) the current officers and directors of Parent as set forth on Schedule 6.4 to resign from Parent.

 

6.5.        Satisfaction of Conditions Precedent . During the term of this Agreement, Parent will use its commercially reasonable efforts to satisfy or cause to be satisfied all the conditions precedent that are set forth in Article 8, and Parent will use its commercially reasonable efforts to cause the Transactions to be consummated.

 

6.6.        Delivery of Certificates for Exchange Consideration . Within 10 business days of the Closing, the Parent shall deliver or cause to be delivered to the Shareholders certificates for the Exchange Consideration.

 

6.7 .         No Other Negotiations . As of the date of this Agreement, the Parent has not entered into any agreement or understanding with, and is not engaging in any discussions with any third party concerning an Alternative Acquisition including, without limitation, any agreement or understanding that would require the Parent to notify any third party of the terms of this Agreement. From and after the date of this Agreement until the earlier of the Closing Date or the termination of this Agreement in accordance with its terms, the Parent shall not, directly or indirectly, (a) initiate, solicit, encourage, negotiate, accept or discuss any Alternative Acquisition, (b) provide information with respect to the Parent to any Person, other than Company and its Affiliates, relating to a possible Alternative Acquisition by any Person, other than Company and its Affiliates, (c) enter into an agreement with any Person, other than Company and its Affiliates, providing for a possible Alternative Acquisition, or (d) make or authorize any statement, recommendation or solicitation in support of any possible Alternative Acquisition by any Person, other than by Company and its Affiliates.

 

If the Parent receives any unsolicited offer, inquiry or proposal to enter into discussions or negotiations relating to an Alternative Acquisition, or that could reasonably expected to lead to an Alternative Acquisition, or any request for nonpublic information relating to the Parent, the Parent shall promptly notify Company thereof, including information as to the identity of the party making any such offer, inquiry or proposal and the specific terms of such offer, inquiry or proposal, as the case may be, and shall keep Company promptly informed of any developments with respect to same.

 

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ARTICLE 7

 

COVENANTS OF PARENT AND THE COMPANY

 

7.1.        Notices of Certain Events . The Company and Parent shall promptly notify each party of:

 

(a)  any notice or other communication from any Person alleging that the consent of such Person is or may be required in connection with the Transactions;

 

(b)  any notice or other communication from any Governmental Entity in connection with the Transactions; and

 

(c)  any actions, suits, claims, investigations or proceedings commenced or, to its Knowledge, threatened against, relating to or involving or otherwise affecting such party that, if pending on the date of this Agreement, would have been required to be disclosed pursuant to Articles 3 or 4 or that relate to the consummation of the Transactions or any other development causing a breach of any representation or warranty made by a party hereunder. Delivery of notice pursuant to this Section 7.1 shall not limit or otherwise affect remedies available to any party hereunder.

 

7.2.        Public Announcements . No party shall have the right to issue any press release or other public statement with respect to this Agreement or the transactions contemplated herein without the prior written consent of each other party (not to be unreasonably withheld, delayed, denied or conditioned), except as required by Law.

 

7.3.        Transfer Taxes . Parent and the Company shall cooperate in the preparation, execution and filing of all returns, questionnaires, applications or other documents regarding any real property transfer or gains, sales, use, transfer, value added, stock transfer and stamp taxes, any transfer, recording, registration and other fees, and any similar taxes which become payable in connection with the transactions contemplated hereby that are required or permitted to be filed on or before the Closing Date. Parent and the Company agree that the Company will pay any real property, transfer or gains tax, stamp tax, stock transfer tax, or other similar tax imposed on the Transactions or the surrender of the Shares pursuant thereto (collectively, “ Transfer Taxes ”), excluding any Transfer Taxes as may result from the transfer of beneficial interests in the Shares other than as a result of the transactions contemplated under this Agreement, and any penalties or interest with respect to the Transfer Taxes. The Company agrees to cooperate with Parent in the filing of any returns with respect to the Transfer Taxes.

 

7.4.        Reasonable Efforts . The parties further agree to use commercially reasonable efforts to take, or cause to be taken, all actions, and to do, or cause to be done, and to assist and cooperate with the other parties in doing, all things necessary, proper or advisable to consummate and make effective, and to satisfy all conditions to, in the most expeditious manner practicable, the Transactions, including (i) the obtaining of all other necessary actions or nonactions, waivers, consents, licenses, Permits, authorizations, Orders and approvals from Governmental Entities and the making of all other necessary registrations and filings, (ii) the obtaining of all consents, approvals or waivers from third parties related to or required in connection with the Transactions or required to prevent a Material Adverse Effect on the Company from occurring prior to or after the Closing Date, (iii) the satisfaction of all conditions precedent to the parties’ obligations hereunder, and (iv) the execution and delivery of any additional instruments necessary to consummate the Transactions contemplated by, and to fully carry out the purposes of, this Agreement.

 

7.5.        Fees and Expenses . Each party will be responsible for all of the legal, accounting and other expenses incurred by such party hereto in connection with the Transactions.

 

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7.6.        Regulatory Matters and Approvals. Each of the parties hereto will give any notices to, make any filings with, and use its commercially reasonable efforts to obtain any authorizations, consents, and approvals of governments and governmental agencies in connection with the matters referred to in Sections 3.5 and 4.5 above.

 

7.7.        Transfer Restrictions.

 

(a)  The Company realizes that the Exchange Consideration is not registered under the Securities Act, or any foreign or state securities Laws. The Company agrees that the Exchange Consideration will and may not be sold, offered for sale, pledged, hypothecated, or otherwise transferred (collectively, a “ Transfer ”) except in compliance with the Securities Act, if applicable, and applicable foreign and state securities Laws, and with an opinion of transferor’s counsel to such effect, the substance of which shall be reasonably acceptable to the Parent and Parent’s transfer agent, provided that the Exchange Consideration may be pledged in connection with a bona fide margin account secured by such securities. The Company understands that the Exchange Consideration can only be Transferred pursuant to registration under the Securities Act or pursuant to an exemption therefrom. The Company understands that to Transfer the Exchange Consideration may require in some jurisdictions specific approval by the appropriate governmental agency or commission in such jurisdiction.

 

(b)  To enable Parent to enforce the transfer restrictions contained in Section 7.7(a), the Company hereby consents to the placing of legends upon, and stop-transfer orders with the transfer agent of the Common Stock with respect to the Exchange Consideration, including, without limitation, the following:

 

THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THESE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT SECURED BY SUCH SECURITIES.

 

7.8.        Current Report. Parent shall file a Current Report on Form 8-K with the SEC within four (4) business days of the Closing Date containing information about the Transactions and pro forma financial statements of Parent and the Company and audited financial statements of the Company as required by Regulation S-K under the Securities Act (the “ 8-K Report ”). The Company agrees to provide any necessary information for preparation of 8-K Report.

 

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ARTICLE 8

 

CONDITIONS TO CLOSING

 

8.1.        Condition to Obligation of Each Party to Effect the Transactions. The respective obligations of Parent, each Shareholder and the Company to consummate the transactions contemplated herein are subject to the satisfaction or waiver in writing at or prior to the Closing Date of the following conditions.

 

(a)   No Injunctions . No temporary restraining Order, preliminary or permanent injunction issued by any court of competent jurisdiction preventing or prohibiting the consummation of the Transactions contemplated herein shall be in effect; provided, however, that each of Parent and the Company shall have used its commercially reasonable efforts to prevent the entry of such Orders or injunctions and to appeal as promptly as possible any such Orders or injunctions and to appeal as promptly as possible any such Orders or injunctions that may be entered.

 

(b) Stockholder Representation Letters . Each Shareholder shall have executed and delivered to Parent and Company a stockholder representation letter in substantially the form attached hereto as Exhibit C and Parent and Company shall be reasonably satisfied that the issuance of Parent Common Stock pursuant to the Transactions is exempt from the registration requirements of the Securities Act.

 

8.2         Additional Conditions to Obligations of Parent. The obligations of Parent to consummate the Transactions are also subject to the satisfaction or waiver in writing at or prior to the Closing Date of the following conditions.

 

(a)  Representations and Warranties . The representations and warranties of the Company and each Shareholder contained in this Agreement and in any certificate or other writing delivered to Parent pursuant hereto shall be true and correct on and as of the Closing Date with the same force and effect as if made on and as of the Closing Date, and Parent shall have received a certificate to such effect signed by the President and the Chief Executive Officer of the Company.

 

(b)   Agreements and Covenants . The Company and each Shareholder shall have performed or complied with all agreements and covenants required by this Agreement to be performed or complied with by them on or prior to the Closing Date, and Parent shall have received a certificate to such effect signed by the President and Chief Executive Officer of the Company.

 

(c)   Certificate of Secretary . The Company shall have delivered to Parent a certificate executed by the Secretary of the Company certifying: (i) resolutions duly adopted by the Board of Directors of the Company authorizing this Agreement and the Transactions; (ii) the Company Charter Documents as in effect immediately prior to the Closing Date, including all amendments thereto; and (iii) the incumbency of the officers of the Company executing this Agreement and all agreements and documents contemplated hereby.

 

(d)   Consents Obtained . All consents, waivers, approvals, authorizations or Orders required to be obtained, and all filings required to be made, by the Company for the authorization, execution and delivery of this Agreement and the consummation by it of the transactions contemplated hereby shall have been obtained and made by the Company, except for such consents, waivers, approvals, authorizations and Orders, and such filings, which would not be reasonably likely to have a Material Adverse Effect on the Company.

 

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(e)   Absence of Material Adverse Effect . Since the date of this Agreement, there shall not have been any Material Adverse Effect on the Company other than any change that shall result from general economic conditions or conditions generally affecting the industry in which the Company conducts operations.

 

(f)   Company Financial Statements . Parent shall have received from the Company the Company Financial Statements and pro forma financial statements for the periods and in form and content required to be included in the 8-K Report.

 

(g)  Delivery of Stock Certificates. Each Shareholder shall have delivered to the Parent (i) certificates representing the Shares, together with stock powers and signature medallion guarantees (or other acceptable proof of signature) for the transfer of the Shares to the Parent or (ii) such other proof of ownership as shall be reasonably acceptable to the Parent;

 

8.3         Additional Conditions to Obligations of the Company and the Shareholders. The obligations of the Company and each Shareholder to consummate the Transactions are also subject to the satisfaction or waiver in writing at or prior to the Closing Date of the following conditions.

 

(a)          Representations and Warranties . The representations and warranties of Parent contained in this Agreement and in any certificate or other writing delivered to the Company pursuant hereto shall be true and correct on and as of the Closing Date with the same force and effect as if made on and as of the Closing Date, and the Company shall have received a certificate to such effect signed by the President and the Chief Executive Officer of Parent.

 

(b)          Agreements and Covenants . Parent shall have performed or complied with all agreements and covenants required by this Agreement to be performed or complied with by them on or prior to the Closing Date, and the Company shall have received a certificate to such effect signed by the President and Chief Executive Officer of Parent.

 

(c)          Certificate of Secretary . Parent shall have delivered to the Company a certificate executed by the Secretary of Parent certifying: (i) resolutions duly adopted by the Board of Directors of Parent authorizing this Agreement and the Transactions (including the authorizations described in Section 4.18 above); (ii) the Certificate of Incorporation and Bylaws of Parent as in effect immediately prior to the Closing Date, including all amendments thereto; and (iii) the incumbency of the officers of Parent executing this Agreement and all agreements and documents contemplated hereby.

 

(d)          Consents Obtained . All consents, waivers, approvals, authorizations or Orders required to be obtained, and all filings required to be made, by Parent for the authorization, execution and delivery of this Agreement and the consummation by it of the transactions contemplated hereby shall have been obtained and made by Parent, except for such consents, waivers, approvals, authorizations and Orders, and such filings, which would not be reasonably likely to have a Material Adverse Effect on Parent.

 

(e)          Absence of Material Adverse Effect . Since the date of the this Agreement, there shall not have been any Material Adverse Effect on Parent, other than any change that shall result from general economic conditions or conditions generally affecting the industry in which Parent conducts operations.

 

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(f)          Transactions Capitalization and Parent Common Stock Lockup . As of the Closing Date, the authorized capital stock of Parent shall consist of 1,000,000,000 shares of Parent Common Stock of which there will be 23,330,662 issued and outstanding shares of Parent Common Stock .

 

(g)          Officers and Directors . Parent shall have delivered to the Company, in compliance with Rule 14f-1 under the Exchange Act, if applicable, evidence of appointment of those new directors and officers as further described in Section 6.4. Parent shall also have delivered to the Company, in compliance with Rule 14f-1 under the Exchange Act , if applicable, a letter of resignation executed by each Parent officer and director further described in Section 6.4 to be effective upon the Closing Date.

 

(h)          No Liabilities . As of the Closing Date, Parent shall have no actual or contingent liabilities, and Parent will have no other obligations of any nature (whether fixed or unfixed, secured or unsecured, known or unknown and whether absolute, accrued, contingent, or otherwise) (including, without limitation, any Contracts), except for its obligations incurred under this Agreement, the Transaction Documents, and up to a maximum of $30,000 for legal and accounting expenses incurred in connection with the Transactions.

 

(i)          Common Stock . As of the Closing Date, the Parent Common Stock shall be eligible for clearance through the book-entry system of The Depository Trust Corporation and Parent will have filed all materials and fulfilled all requirements for the Parent Common Stock to be quoted on the OTCBB under the name “Cardigant Medical, Inc.” under the symbol “CARD” of such other symbol that is acceptable to the Company.

 

(j)          Exchange Act Reporting . Parent will have made all required filings with the SEC under the Exchange Act, and such filings will have complied in all material respects with applicable requirements under the Exchange Act.

 

ARTICLE 9

TERMINATION

 

9.1.        Termination . This Agreement may be terminated at any time prior to the Closing Date:

 

(a)  by mutual written agreement of the Company and Parent duly authorized by the Boards of Directors of the Company and Parent;

 

(b)  by either the Company or Parent, if the other party (which, in the case of Company, shall mean Company or any Shareholder) has breached any representation, warranty, covenant or agreement of such other party set forth in this Agreement and such breach has resulted or can reasonably be expected to result in a Material Adverse Effect on such other party or would prevent or materially delay the consummation of the Transactions;

 

(c)  by any party, if all the conditions to the obligations of such party for Closing the Transactions shall not have been satisfied or waived on or before the Final Date (as defined below) other than as a result of a breach of this Agreement by the terminating party; or

 

(d)  by any party, if a permanent injunction or other Order by any Federal or state court which would make illegal or otherwise restrain or prohibit the consummation of the Transactions shall have been issued and shall have become final and nonappealable;

 

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As used herein, the “ Final Date ” shallOctober 31, 2014.

 

9.2.        Notice of Termination . Any termination of this Agreement under Section 9.1 above will be effective immediately upon by the delivery of written notice of the terminating party to the other parties hereto specifying with reasonable particularity the reason for such termination.

 

9.3.        Effect of Termination . In the case of any termination of this Agreement as provided in this Section 9, this Agreement shall be of no further force and effect and nothing herein shall relieve any party from liability for any breach of this Agreement.

 

ARTICLE 10

 

GENERAL PROVISIONS

 

10.1.        Notices . All notices required or permitted hereunder shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the party to be notified; (b) when sent by confirmed facsimile if sent during normal business hours of the recipient, if not, then on the next business day; (c) five days after having been sent by registered or certified mail, return receipt requested, postage prepaid; or (d) two days after deposit with a nationally recognized overnight courier, specifying not later than two day delivery, with written verification of receipt. All communications shall be sent to the parties at the following addresses or facsimile numbers specified below (or at such other address or facsimile number for a party as shall be designated by ten days advance written notice to the other parties hereto):

 

(a) If to Parent:

 

Cardigant Medical, Inc.

1500 Rosecrans Avenure, Suite 500,

Manhattan Beach, CA 90266

Fax:

 

(b) If to the Company or any Shareholder:

 

Hong Kong Takung Assets and Equity of Artworks Exchange Co.,Limited

Flat/RM 03-04 20/F Hutchison House

10 Harcourt Road, Central Hong Kong
Fax: +852 2790 7868

with a copy to (which shall not constitute notice):

 

Sichenzia Ross Friedman Ference LLP

61 Broadway

New York, New York 10006

Attn: Benjamin Tan, Esq.
Fax: (212) 930-9725

 

The Company hereby undertakes to forward immediately (by the means set forth in Section 10.1(a), (b), (c) or (d) above) to any Shareholder any notice provided to it by the Parent to such Shareholder in accordance with this Section 10.1 to the address of such Shareholder as appears on the Company's shareholder register, provided that any such delivery by the Parent to such Shareholder shall be deemed effective on the day that is twice the number of days (or business days, as applicable) set forth in Section 10.1(b), (c) or (d) above.

 

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10.2.        Amendment . To the extent permitted by Law, this Agreement may be amended by a subsequent writing signed by each of the parties upon the approval of the Boards of Directors of the Company, the Parent and the Shareholders, as the case may be.

 

10.3.        Waiver . At any time prior to the Closing, any party hereto may with respect to any other party hereto (a) extend the time for performance of any of the obligations or other acts, (b) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto, or (c) waive compliance with any of the agreements or conditions contained herein. Any such extension or waiver shall be valid if set forth in an instrument in writing signed by the party or parties to be bound thereby.

 

10.4.        Failure or Indulgence Not Waiver; Remedies Cumulative . No failure or delay on the part of any party hereto in the exercise of any right hereunder shall impair such right or be construed to be a waiver of, or acquiescence in, any breach of any representation, warranty or agreement herein, nor shall any single or partial exercise of any such right preclude other or further exercise thereof or of any other rights. Except as otherwise provided hereunder, all rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available.

 

10.5.        Headings . The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement.

 

10.6.        Severability . If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of Law, or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible, in a mutually acceptable manner, to the end that transactions contemplated hereby are fulfilled to the extent possible.

 

10.7.        Entire Agreement . This Agreement (including the Company Disclosure Schedule and the Parent Disclosure Schedule together with the Transaction Documents and the exhibits and schedules attached hereto and thereto and the certificates referenced herein) constitutes the entire agreement and supersedes all prior agreements and undertakings both oral and written, among the parties, or any of them, with respect to the subject matter hereof and, except as otherwise expressly provided herein.

 

10.8.        Assignment . No party may assign this Agreement or assign its respective rights or delegate their duties (by operation of Law or otherwise), without the prior written consent of the other parties. This Agreement will be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and permitted assigns.

 

10.9.        Parties In Interest . This Agreement shall be binding upon and inure solely to the benefit of each party hereto and their permitted assigns and respective successors, and nothing in this Agreement, express or implied, is intended to or shall confer upon any other Person any right, benefit or remedy of any nature whatsoever under or by reason of this Agreement, including, without limitation, by way of subrogation.

 

10.10.     Governing Law . This Agreement will be governed by, and construed and enforced in accordance with the Laws of the State of New York as applied to Contracts that are executed and performed in New York, without regard to the principles of conflicts of Law thereof. Each party agrees that all legal proceedings concerning the interpretations, enforcement and defense of the Transactions and any other Transaction Documents shall be commenced exclusively in the state and federal courts sitting in the County of New York.

 

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10.11.       Counterparts . This Agreement may be executed simultaneously in two or more counterparts, any one of which need not contain the signatures of more than one party, but all such counterparts taken together will constitute one and the same Agreement. This Agreement, to the extent delivered by means of a facsimile machine or electronic mail (any such delivery, an “ Electronic Delivery ”), shall be treated in all manner and respects as an original agreement or instrument and shall be considered to have the same binding legal effect as if it were the original signed version thereof delivered in person. At the request of any party hereto, each other party hereto shall re-execute original forms hereof and deliver them in person to all other parties. No party hereto shall raise the use of Electronic Delivery to deliver a signature or the fact that any signature or agreement or instrument was transmitted or communicated through the use of Electronic Delivery as a defense to the formation of a contract, and each such party forever waives any such defense, except to the extent such defense related to lack of authenticity.

 

10.12.       Attorneys’ Fees . If any action or proceeding relating to this Agreement, or the enforcement of any provision of this Agreement is brought by a party hereto against any party hereto, the prevailing party shall be entitled to recover reasonable attorneys’ fees, costs and disbursements (in addition to any other relief to which the prevailing party may be entitled).

 

10.13.       Representation. The parties to this Agreement, and each of them, acknowledge, agree, and represent that it: (a) has been represented in connection with the negotiation and preparation of this Agreement by counsel of that party’s choosing ; (b) has authority to enter into and sign the Agreement; and (c) enters into and signs the same by its own free will.

 

10.14.       Drafting. The parties to this Agreement acknowledge that each of them have participated in the drafting and negotiation of this Agreement. The parties intend for this Agreement to be construed and interpreted neutrally in accordance with the plain meaning of the language contained herein, and not presumptively construed against any actual or purported drafter of any specific language contained herein.

 

10.15.       Interpretation. For purposes of this Agreement, references to the masculine gender shall include feminine and neuter genders and entities. Where a reference in this Agreement is made to a Section, Exhibit or Schedule, such reference shall be to a Section of, Exhibit to or Schedule of this Agreement unless otherwise indicated. Whenever the words “include,” “includes” or “including” are used in this Agreement, they shall be deemed to be followed by the words “without limitation.” References to a “party” or “parties” shall mean Parent, the Company and/or Shareholders, as applicable. The words “hereof,” “herein” and “hereunder” and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. References to “this Agreement” shall include the Company Disclosure Schedule and the Parent Disclosure Schedule.

 

10.16       Remedies. In addition to being entitled to exercise all rights provided herein or granted by law, including recovery of damages, each Shareholder, Parent and the Company will be entitled to specific performance under this Agreement. Each of the parties hereto agree that monetary damages may not be adequate compensation for any loss incurred by reason of any breach of obligations described in the foregoing sentence and hereby agrees to waive in any action for specific performance of any such obligation the defense that a remedy at law would be adequate.

 

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10.17       Independent Nature of Each Shareholder's Obligations and Rights . The obligations of each Shareholder under this Agreement are several and not joint with the obligations of any other Shareholder (or, for the avoidance of doubt, with the obligations of the Company or the Parent under this Agreement), and each Shareholder shall not be responsible in any way for the performance of the obligations of any other Shareholder party to this Agreement (or, for the avoidance of doubt, the performance of the obligations of the Company or the Parent under this Agreement). Nothing contained herein and no Shareholder action taken by any Shareholder pursuant hereto, shall be deemed to constitute such Shareholder as a party to or member of a partnership, an association, a joint venture, or any other kind of entity, or create a presumption that any Shareholder is in any way acting in concert or as a group with any of the other parties hereto with respect to such obligations or the transactions contemplated by this Agreement. No party is in any way whatsoever authorized to bind any other party hereto. Each Shareholder shall be entitled to independently protect and enforce its rights, including without limitation the rights arising out of this Agreement, and it shall not be necessary for any other Shareholder to be joined as an additional party in any proceeding for such purpose.

 

[ Remainder of Page Intentionally Left Blank; Signature Pages to Follow ]

 

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IN WITNESS WHEREOF, each of the parties have caused this Share Exchange Agreement to be executed as of the date first written above them or their respective officers thereunto duly authorized.

 

  Parent:
   
  CARDIGANT MEDICAL, INC.,  a Delaware corporation
   
  By:  
   
  Name:  Jerett Creed
   
  Title:  President and CEO
   
  Company:
   
  HONG KONG TAKUNG   Assets and Equity
OF ARTWORKS Exchange Co., LIMITED  ,  a
Hong Kong corporation
   
  By:  
   
  Name:  Xiao Di
   
  Title:  General Manager
   
  Shareholders:
   
  LOYAL HEAVEN LIMITED
   
  By:
  Name:
  Title:
   
  KIRIN LINKAGE LIMITED
   
  By:
  Name:
  Title:

 

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EXHIBIT A

 

CERTAIN DEFINITIONS

 

The following terms, as used in the Agreement, have the following meanings:

 

Accounts Receivable ” shall have the meaning set forth in Section 3.15 of the Agreement.

 

Affiliate(s) ” shall have the meaning set forth in Rule 12b-2 of the regulations promulgated under the Exchange Act.

 

Alternative Acquisition ” means any recapitalization, restructuring, financing, merger, consolidation, sale, license or encumbrance or other business combination transaction or extraordinary corporate transaction of the Company or the Parent (as applicable) which would or could reasonably be expected to impede, interfere with, prevent or materially delay the Transactions, including a firm proposal to make such an acquisition.

 

Agreement ” shall have the meaning set forth in the Preamble.

 

Assets ” of a Person shall mean all of the assets, properties, businesses and rights of such Person of every kind, nature, character and description, whether real, personal or mixed, tangible or intangible, accrued or contingent, or otherwise relating to or utilized in such Person’s business, directly or indirectly, in whole or in part, whether or not carried on the books and records of such Person, and whether or not owned in the name of such Person or any Affiliate of such Person and wherever located.

 

Benefit Plans ” shall have the meaning set forth in Section 3.10 of the Agreement.

 

Closing ” shall have the meaning set forth in Section 1.2 of the Agreement.

 

Closing Date ” shall have the meaning set forth in Section 1.2 of the Agreement.

 

Code ” means the Internal Revenue Code of 1986, as amended.

 

Company ” shall have the meaning set forth in the Preamble.

 

Company Balance Sheet Date ” shall have the meaning set forth in Section 3.6(b) of the Agreement.

 

Company Disclosure Schedule ” shall have the meaning set forth in the opening paragraph of Article 3 of the Agreement.

 

Company Financial Statements ” shall have the meaning set forth in Section 3.6(a) of the Agreement.

 

Company Material Contract ” shall have the meaning set forth in Section 3.14 of the Agreement.

 

Company Stock ” means the total outstanding capital stock of the Company as of the Closing Date.

 

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Contract ” means any written or oral agreement, arrangement, commitment, contract, indenture, instrument, lease, obligation, plan, restriction, understanding or undertaking of any kind or character, or other document to which any Person is a party or by which such Person is bound or affecting such Person’s capital stock, Assets or business.

 

Copyrights ” shall have the meaning set forth in Section 3.17(i) of the Agreement.

 

Default ” means (i) any breach or violation of or default under any Contract, Order or Permit, (ii) any occurrence of any event that with the passage of time or the giving of notice or both would constitute a breach or violation of or default under any Contract, Order or Permit, or (iii) any occurrence of any event that with or without the passage of time or the giving of notice would give rise to a right to terminate or revoke, change the current terms of, or renegotiate, or to accelerate, increase, or impose any liability under, any Contract, Order or Permit.

 

Electronic Delivery ” shall have the meaning set forth in Section 10.11 of the Agreement.

 

Environmental Laws ” mean any and all federal, state, local and foreign statutes, laws, judicial decisions, regulations, ordinances, rules, judgments, orders, decrees, codes, plans, injunctions, Permits, concessions, grants, franchises, licenses, agreements and governmental restrictions, relating to human health, the environment or to emissions, discharges or releases of pollutants, contaminants or other Hazardous Material or wastes into the environment, including without limitation ambient air, surface water, ground water or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants or other Hazardous Material or wastes or the clean-up or other remediation thereof.

 

Exchange Act ” has the meaning set forth in Section 3.5 of the Agreement.

 

Exchange Act Documents ” has the meaning set forth in Section 3.21 of the Agreement.

 

Exchange Consideration ” shall have the meaning as set forth in Section 1.1 of the Agreement.

 

Final Date ” shall have the meaning set forth in Section 9.1 of the Agreement.

 

FINRA ” means Financial Industry Regulatory Authority, Inc. .

 

GAAP ” means U.S. generally accepted accounting principles.

 

Governmental Entity ” shall mean any government or any agency, bureau, board, directorate, commission, court, department, official, political subdivision, tribunal, or other instrumentality of any government, whether federal, state or local, domestic or foreign.

 

Hazardous Material ” means any toxic, radioactive, corrosive or otherwise hazardous substance, including petroleum, its derivatives, by-products and other hydrocarbons, or any substance having any constituent elements displaying any of the foregoing characteristics, which in any event is regulated under any Environmental Law.

 

Intellectual Property ” shall have the meaning as set forth in Section 3.17(i) of the Agreement.

 

Knowledge ” means the actual knowledge of the officers of a party, and knowledge that a reasonable person in such capacity should have after due inquiry.

 

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