NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.
|
ORGANIZATION
AND PRINCIPAL ACTIVITIES
|
Bat
Group, Inc. (formerly known as China Commercial Credit, Inc. or China Bat Group, Inc. ) (“GLG” or “the Company”),
is a holding company that was incorporated under the laws of the State of Delaware on December 19, 2011. On January 11, 2019,
the Company filed a Certificate of Amendment of the Certificate of Incorporation with the Secretary of State of Delaware to effect
a name change to China Bat Group, Inc. and on June 3, 2019, the Company further changed its name to Bat Group, Inc.
On
March 22, 2018, the Company formed HC High Summit Holding Limited (“HC High BVI”), a wholly owned subsidiary, in British
Virgin Island (“BVI”). HC High BVI is authorized to issue a maximum of 50,000 shares of one
class,
at par value of $1.00 per share.
On
April 16, 2018, HC High BVI formed a wholly owned subsidiary, HC High Summit Limited (“HC High HK”) in Hong Kong.
On April 17, 2018, the Company, through HC High HK, established Hao Limo Technology (Beijing) Co. Ltd. (“Hao Limo”).
On
May 17, 2018, Hao Limo entered into a series of agreements (the “Tianxing VIE Agreements”) with Beijing Tianxing Kunlun
Technology Co. Ltd. (“Beijing Tianxing”) and Shun Li and Jialin Cui, the shareholders of Beijing Tianxing. The Tianxing
VIE Agreements are designed to provide Hao Limo with the power, rights and obligations equivalent in all material respects to
those it would possess as the sole equity holder of Beijing Tianxing, including absolute control rights and the rights to the
management, operations, assets, property and revenue of Beijing Tianxing. The purpose of the VIE Agreements is solely to give
Hao Limo the exclusive control over Beijing Tianxing’s management.
As of June 30, 2019, Beijing
Tianxing has six wholly owned subsidiaries: Beijing Tianrenshijia Apparel Co., Ltd., Beijing Tongxingyi Feed Co., Ltd.,
Beijing Eignty Weili Technology Co., Ltd., Beijing Saikesheng Garments Co., Ltd., Beijing Yimingzhu Restaurant Management
Co., Ltd., Beijing Kemao Jiye Commercial Co., Ltd., Car Master (Beijing) Information Consulting Co., Ltd. Each of these
subsidiaries owns a license to hold cars in Beijing or Zhejiang, and was inactive for the six months ended June 30, 2019 and
2018.
The
Company, its subsidiaries and VIE are primarily engaged in operating leasing business of used luxurious cars in China, after it
disposed its direct loans, loan guarantees and financial leasing services to small-to-medium sized businesses, farmers and individuals
(the “Micro-lending Business”) in July 2018. The Company rents out its owned luxurious pre-owned automobiles to customers
for short period, normally within 7 days. The Company conducted this business under the brand name “Batcar” through
the Company’s VIE entity, Beijing Tianxing Kunlun Technology Co. Ltd (“Beijing Tianxing”).
VIE
AGREEMENTS WITH BEIJING YOUJIAO AND TERMINATION OF VIE AGREEMENTS WITH BEIJING YOUJIAO
On
June 19, 2018, Hao Limo entered into a series of agreements (the “Youjiao VIE Agreements”) with Beijing Youjiao and
Aizhen Li. The Youjiao VIE Agreements were designed to provide Hao Limo with the power, rights and obligations equivalent in all
material respects to those it would possess as the sole equity holder of Beijing Youjiao, including absolute control rights and
the rights to the management, operations, assets, property and revenue of Beijing Youjiao. On November 8, 2018, Hao Limo entered
into certain termination agreement with Beijing Youjiao and Aizhen Li to terminate.
BAT
GROUP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.
|
ORGANIZATION
AND PRINCIPAL ACTIVITIES (CONTINUED)
|
DISPOSITION
OF GLG BVI
On
June 19, 2018, the Company, HK Xu Ding Co, Limited, a private limited company duly organized under the laws of Hong Kong (the
“Purchaser”) and CCCR International Investment Ltd., a business company incorporated in the British Virgin Islands
with limited liability which was previously 100% owned by the Company (“GLG BVI”) entered into certain Share Purchase
Agreement (the “Purchase Agreement”). Pursuant to the Purchase Agreement, the Purchaser agreed to purchase GLG BVI
in exchange of cash purchase price of $500,000.
GLG
BVI is the sole shareholder of GLG International Investment Ltd. (“GLG HK”), a company incorporated under the laws
of the Hong Kong S.A.R. of the PRC, which is the sole shareholder of WFOE. WFOE, via a series of contractual arrangements, controls
Wujiang Luxiang. GLG HK is the sole shareholder of PFL.
Upon
closing of the disposition on June 21, 2018, the Purchaser became the sole shareholder of GLG BVI and as a result, assume all
assets and obligations of all the subsidiaries and VIE entities owned or controlled by GLG BVI, including but not limited to Wujiang
Luxiang and PFL.
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
|
(a)
|
Basis
of presentation and principle of consolidation
|
The
interim unaudited condensed consolidated financial statements are prepared and presented in accordance with accounting principles
generally accepted in the United States (“U.S. GAAP”).
The
unaudited interim financial information as of June 30, 2019 and for the three and six months ended June 30, 2019 and 2018 have
been prepared without audit, pursuant to the rules and regulations of the SEC and pursuant to Regulation S-X. Certain information
and footnote disclosures, which are normally included in annual financial statements prepared in accordance with U.S. GAAP, have
been omitted pursuant to those rules and regulations. As of June 30, 2019, the Company has one VIE –Beijing Tianxing, and
Beijing Tianxing has six subsidiaries, each of which is entitled to a license to hold cars in Beijing. The unaudited interim financial
information should be read in conjunction with the audited financial statements and the notes thereto, included in the Form 10-K
for the fiscal year ended December 31, 2018, which was filed with the SEC on April 5, 2019.
In
the opinion of management, all adjustments (including normal recurring adjustments) necessary to present a fair statement of the
Company’s unaudited financial position as of June 30, 2019, its unaudited results of operations for the three and six months
ended June 30, 2019 and 2018, and its unaudited cash flows for the three and six months ended June 30, 2019 and 2018, as applicable,
have been made. The unaudited interim results of operations are not necessarily indicative of the operating results for the full
fiscal year or any future periods.
(b)
Consolidation of Variable Interest Entity
The
Company had Beijing Tianxing as its only one VIE as of June 30, 2019 and December 31, 2018. Material terms of each of the Tianxing
VIE Agreements are described below:
Exclusive
Business Cooperation Agreement
Pursuant
to the Exclusive Business Cooperation Agreement between Beijing Tianxing and Hao Limo, Hao Limo provides Beijing Tianxing with
technical support, consulting services and management services on an exclusive basis, utilizing its advantages in technology,
human resources, and information. Additionally, Beijing Tianxing granted an irrevocable and exclusive option to Hao Limo to purchase
from Beijing Tianxing, any or all of Beijing Tianxing’s assets at the lowest purchase price permitted under the PRC laws.
Should Hao Limo exercise such option, the parties shall enter into a separate asset transfer or similar agreement. For services
rendered to Beijing Tianxing by Hao Limo under this agreement, Hao Limo is entitled to collect a service fee calculated based
on the time of services rendered multiplied by the corresponding rate, plus amount of the services fees or ratio decided by the
board of directors of Hao Limo based on the value of services rendered by Hao Limo and the actual income of Beijing Tianxing from
time to time, which is substantially equal to all of the net income of Beijing Tianxing.
BAT
GROUP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
The
Exclusive Business Cooperation Agreement shall remain in effect for ten years unless it is terminated by Hao Limo with 30-day
prior written notice. Beijing Tianxing does not have the right to terminate the agreement unilaterally. Hao Limo may unilaterally
extend the term of this agreement with prior written notice.
Share
Pledge Agreement
Under
the Share Pledge Agreement among Beijing Tianxing, the shareholders of Beijing Tianxing, and Hao Limo, the shareholders of Beijing
Tianxing pledged all of her equity interests in Beijing Tianxing to Hao Limo to guarantee the performance of Beijing Tianxing’s
obligations under the Exclusive Business Cooperation Agreement. Under the terms of the agreement, in any event of default, as
set forth in the Share Pledge Agreement, including that Beijing Tianxing or the shareholders of Beijing Tianxing breach their
respective contractual obligations under the Exclusive Business Cooperation Agreement, Hao Limo, as pledgee, will be entitled
to certain rights, including, but not limited to, the right to dispose of the pledged equity interest in accordance with applicable
PRC laws. Hao Limo shall have the right to collect any and all dividends declared or generated in connection with the equity interest
during the term of pledge.
The
Share Pledge Agreement shall be effective until all payments due under the Exclusive Business Cooperation Agreement have been
paid by Beijing Tianxing. Hao Limo shall cancel or terminate the Share Pledge Agreement upon Beijing Tianxing’s full payment
of fees payable under the Exclusive Business Cooperation Agreement.
Exclusive
Option Agreement
Under
the Exclusive Option Agreement, the shareholders of Beijing Tianxing irrevocably granted Hao Limo (or its designee) an exclusive
option to purchase, to the extent permitted under PRC law, once or at multiple times, at any time, part or all of their equity
interests in Beijing Tianxing. The option price is equal to the capital paid in by the shareholders of Beijing Tianxing subject
to any appraisal or restrictions required by applicable PRC laws and regulations.
The
agreement remains effective for a term of ten years and may be renewed at Hao Limo’s election.
Power
of Attorney
Under
the Power of Attorney, the shareholders of Beijing Tianxing authorized Hao Limo to act on her behalf as her exclusive agent and
attorney with respect to all rights as shareholder, including but not limited to: (a) attending shareholders’ meetings;
(b) exercising all the shareholder’s rights, including voting, that shareholders are entitled to under the laws of China
and the Articles of Association of Beijing Tianxing, including but not limited to the sale or transfer or pledge or disposition
of shares held by the shareholders of Beijing Tianxing in part or in whole; and (c) designating and appointing on behalf of the
shareholders of Beijing Tianxing the legal representative, the executive director, supervisor, the chief executive officer and
other senior management members of Beijing Tianxing.
Although
it is not explicitly stipulated in the Power of Attorney, the term of the Power of Attorney shall be the same as the term of that
of the Exclusive Option Agreement.
This
Power of Attorney is coupled with an interest and shall be irrevocable and continuously valid from the date of execution of this
Power of Attorney, so long as the shareholders of Beijing Tianxing is a shareholder of Beijing Tianxing.
Timely
Reporting Agreement
To
ensure Beijing Tianxing promptly provides all of the information that Hao Limo and the Company need to file various reports with
the SEC, a Timely Reporting Agreement was entered between Beijing Tianxing and the Company.
Under
the Timely Reporting Agreement, Beijing Tianxing agreed that it is obligated to make its officers and directors available to the
Company and promptly provide all information required by the Company so that the Company can file all necessary SEC and other
regulatory reports as required.
BAT
GROUP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
Although
it is not explicitly stipulated in the Timely Reporting Agreement, the parties agreed its term shall be the same as that of the
Exclusive Business Cooperation Agreement. The Tianxing VIE Agreements became effective immediately upon their execution.
VIE
is an entity that have either a total equity investment that is insufficient to permit the entity to finance its activities without
additional subordinated financial support, or whose equity investors lack the characteristics of a controlling financial interest,
such as through voting rights, right to receive the expected residual returns of the entity or obligation to absorb the expected
losses of the entity. The variable interest holder, if any, that has a controlling financial interest in a VIE is deemed to be
the primary beneficiary and must consolidate the VIE. Hao Limo is deemed to have a controlling financial interest and be the primary
beneficiary of Beijing Tianxing, because it has both of the following characteristics:
1.
|
power
to direct activities of a VIE that most significantly impact the entity’s economic performance, and
|
2.
|
obligation
to absorb losses of the entity that could potentially be significant to the VIE or right to receive benefits from the entity
that could potentially be significant to the VIE.
|
Pursuant
to the VIE Agreements, Beijing Tianxing pays service fees equal to all of its net income to Hao Limo. At the same time, Hao Limo
is entitled to receive all of expected residual returns. The VIE Agreements are designed so that Beijing Tianxing operates for
the benefit of the Company. Accordingly, the accounts of Beijing Tianxing are consolidated in the accompanying financial statements
pursuant to ASC 810-10, Consolidation. In addition, their financial positions and results of operations are included in the Company’s
unaudited condensed consolidated financial statements.
In
addition, as all of these VIE agreements are governed by PRC law and provide for the resolution of disputes through arbitration
in the PRC, they would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal
procedures. The legal environment in the PRC is not as developed as in other jurisdictions, such as the United States. As a result,
uncertainties in the PRC legal system could further limit the Company’s ability to enforce these VIE agreements. Furthermore,
these contracts may not be enforceable in China if PRC government authorities or courts take a view that such contracts contravene
PRC laws and regulations or are otherwise not enforceable for public policy reasons. In the event the Company is unable to enforce
these VIE agreements, it may not be able to exert effective control over Beijing Tianxing and its ability to conduct its business
may be materially and adversely affected.
All
of the Company’s main current operations are conducted through Beijing Tianxing and its subsidiaries since June 2018. Current
regulations in China permit Beijing Tianxing to pay dividends to the Company only out of its accumulated distributable profits,
if any, determined in accordance with their articles of association and PRC accounting standards and regulations. The ability
of Beijing Tianxing to make dividends and other payments to the Company may be restricted by factors including changes in applicable
foreign exchange and other laws and regulations.
BAT
GROUP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
The
following financial statement balances and amounts only reflect the financial position and financial performances of Beijing Tianxing,
which were included in the consolidated financial statements as of June 30, 2019 and December 31, 2018:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Cash
|
|
$
|
51,200
|
|
|
$
|
991,385
|
|
Loans receivable from third parties
|
|
|
873,769
|
|
|
|
-
|
|
Other current assets
|
|
|
210,234
|
|
|
|
87,922
|
|
Deposits for investments in equity investees
|
|
|
582,513
|
|
|
|
|
|
Investment in an equity investee
|
|
|
291,256
|
|
|
|
-
|
|
Operating lease assets, net
|
|
|
3,085,073
|
|
|
|
1,634,018
|
|
Other noncurrent assets
|
|
|
241,008
|
|
|
|
5,524
|
|
Total Assets
|
|
$
|
5,335,053
|
|
|
$
|
2,718,849
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Advances from customers
|
|
$
|
39,319
|
|
|
$
|
6,209
|
|
Other current liabilities
|
|
|
200,620
|
|
|
|
102,549
|
|
Third parties loans
|
|
|
2,257,237
|
|
|
|
218,100
|
|
Due to GLG and Hao Limo *
|
|
|
3,865,178
|
|
|
|
2,937,927
|
|
Total Liabilities
|
|
$
|
6,362,354
|
|
|
$
|
3,264,785
|
|
*
Payable due to GLG and Hao Limo is eliminated upon consolidation.
|
|
For the
Three Months Ended
June 30,
|
|
|
For the
Six Months Ended
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
540,895
|
|
|
$
|
96,721
|
|
|
$
|
940,894
|
|
|
$
|
96,721
|
|
Operating
expenses
|
|
$
|
(954,233
|
)
|
|
$
|
(89,009
|
)
|
|
$
|
(1,894,015
|
)
|
|
$
|
(89,009
|
)
|
Net
(loss) income
|
|
$
|
(463,804
|
)
|
|
$
|
8,007
|
|
|
$
|
(993,034
|
)
|
|
$
|
8,007
|
|
|
|
For the
Six Months Ended
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Net Cash Provided by Operating Activities
|
|
$
|
655,481
|
|
|
|
2,633,546
|
|
Net Cash Used in by Investing Activities
|
|
|
(3,671,685
|
)
|
|
|
(1,962,767
|
)
|
Net Cash Provided by Financing Activities
|
|
|
2,063,193
|
|
|
|
-
|
|
Effect of Exchange Rate Changes on Cash
|
|
|
12,826
|
|
|
|
(17,828
|
)
|
Net (Decrease) Increase in Cash
|
|
|
(940,185
|
)
|
|
|
652,951
|
|
Cash at Beginning of Period
|
|
|
991,385
|
|
|
|
-
|
|
Cash at End of Period
|
|
$
|
51,200
|
|
|
$
|
652,951
|
|
BAT
GROUP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
The
preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ
from those estimates. On an ongoing basis, management reviews these estimates using the currently available information. Changes
in facts and circumstances may cause the Company to revise its estimates. Significant accounting estimates reflected in the financial
statements include: (i) useful lives and residual value of long-lived assets; (ii) the impairment of long-lived assets; (iii)
the valuation allowance of deferred tax assets; and (iv) contingencies and litigation.
|
(d)
|
Foreign
currency translation
|
The
reporting currency of the Company is United States Dollars (“US$”), which is also the Company’s functional currency.
The PRC subsidiaries and VIEs maintain their books and records in its local currency, the Renminbi Yuan (“RMB”), which
is their functional currencies as being the primary currency of the economic environment in which these entities operate.
For
financial reporting purposes, the financial statements of the PRC subsidiaries and VIEs prepared using RMB, are translated into
the Company’s reporting currency, US$, at the exchange rates quoted by www.oanda.com. Assets and liabilities are translated
using the exchange rate at each balance sheet date. Revenue and expenses are translated using average rates prevailing during
each reporting period, and shareholders’ equity is translated at historical exchange rates, except for the change in accumulated
deficit during the year which is the result of the income statement translation process. Adjustments resulting from the translation
are recorded as a separate component of accumulated other comprehensive income in shareholders’ equity.
|
|
June
30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Balance
sheet items, except for equity accounts
|
|
|
6.8668
|
|
|
|
6.8776
|
|
|
|
For
the
Three
Months Ended
June 30,
|
|
|
For
the
Six
Months Ended
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Items
in the statements of operations and comprehensive loss, and statements of cash flows
|
|
|
6.8223
|
|
|
|
6.3779
|
|
|
|
6.7856
|
|
|
|
6.3681
|
|
Transactions
denominated in currencies other than the functional currency are translated into prevailing functional currency at the exchange
rates prevailing at the dates of the transactions. The resulting exchange differences are included in the unaudited condensed
consolidated statements of comprehensive income (loss).
|
(e)
|
Fair
value measurement
|
The
Company has adopted ASC Topic 820, Fair Value Measurement and Disclosure, which defines fair value, establishes a framework for
measuring fair value in GAAP, and expands disclosures about fair value measurements. It does not require any new fair value measurements,
but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information.
It establishes a three-level valuation hierarchy of valuation techniques based on observable and unobservable inputs, which may
be used to measure fair value and include the following:
Level
1
|
–
|
Quoted
prices in active markets for identical assets or liabilities.
|
Level
2
|
–
|
Inputs
other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities;
quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market
data for substantially the full term of the assets or liabilities.
|
Level
3
|
–
|
Unobservable
inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
|
BAT
GROUP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
Classification
within the hierarchy is determined based on the lowest level of input that is significant to the fair value measurement. The carrying
value of financial items of the Company, including cash and cash equivalents, loan receivable due from third parties, due from
a related party and other payable, approximate their fair values due to their short-term nature and are classified within Level
1 of the fair value hierarchy. Investments in financial products are held to their maturities and are carried at amortized cost,
which approximates fair value.
During
the three months and six months ended June 30, 2018, the Company recorded $19,000 and $166,540 in “Changes in fair value
of noncurrent liabilities”. This is related to distribution of the Settlement Shares to the class plaintiffs approved by
the Court in December 2017. On January 19, 2018 and April 10, 2018, the Company issued 712,500 and 237,500 class settlement shares,
at the market share price of $1.68 and $1.18 per share, respectively. As the Company is a public entity with quoted market price,
the fair value of other noncurrent liabilities were classified as level 1. The expenses were accrued by reference to the quoted
market share price per share on each reporting date.
The
inputs used to measure the estimated fair value of warrants are classified as Level 3 fair value measurement due to the significance
of unobservable inputs using company-specific information. The valuation methodology used to estimate the fair value of warrant
liabilities is discussed in Note 13.
Investment
security represents the Company’s investment in one equity investee that is not accounted for under the equity method or cost method.
Beginning
on January 1, 2019, the Company adopted ASU 2016-01, “Financial Instruments — Overall (Subtopic 825-10): Recognition
and Measurement of Financial Assets and Financial Liabilities,” including related technical corrections and improvements issued
within ASU 2018-13. ASU 2016-01 amended various aspects of the recognition, measurement, presentation, and disclosure for
financial instruments, and simplified the impairment assessment and enhanced the disclosure requirements of equity investments.
Prior
to the adoption of ASU 2016-01, the cost method was used to account for certain equity investments in privately held companies
over which the Company neither has control nor significant influence through investments in common stock or in-substance common
stock. Upon the adoption of ASU 2016-01, the Company no longer accounts for these equity securities using the cost method. Beginning
on January 1, 2019, the Company elected to record a majority of equity investments in privately held companies using the measurement
alternative at cost, less impairment, with subsequent adjustments for observable price changes resulting from orderly transactions
for identical or similar investments of the same issuer that were completed on or after January 1, 2019. As of June 30, 2018 and
December 31, 2018, the Company had investment security of $200,000 and $nil, respectively.
|
(g)
|
Investment
in an equity investee
|
The
Company applies the equity method to account for equity investments in common stock according to ASC 323 “Investments — Equity
Method and Joint Ventures,” over which it has significant influence but does not own a majority equity interest or otherwise
control.
Under
the equity method, the Company’s share of the post-acquisition profits or losses of the equity investee is recognized in
the consolidated income statements and its share of post-acquisition movements in accumulated other comprehensive income is recognized
in other comprehensive income. The Company records its share of the results of the equity investees on a one quarter in arrears
basis. The excess of the carrying amount of the investment over the underlying equity in net assets of the equity investee represents
goodwill and intangible assets acquired. When the Company’s share of losses in the equity investee equals or exceeds its
interest in the equity investee, the Company does not recognize further losses, unless the Company has incurred obligations or
made payments or guarantees on behalf of the equity investee.
The
Company continually reviews its investments in equity investees to determine whether a decline in fair value below the carrying
value is other-than-temporary. The primary factors the Company considers in its determination include the financial condition,
operating performance and the prospects of the equity investee; other company specific information such as recent financing rounds;
the geographic region, market and industry in which the equity investee operates; and the length of time that the fair value of
the investment is below its carrying value. If the decline in fair value is deemed to be other-than-temporary, the carrying value
of the equity investee is written down to fair value.
As of June 30, 2019, the Company made
investments aggregating $291,256 in one equity investee, over which the Company owned more than 20% but less than 50% equity interests
and exercised significant influence.
BAT
GROUP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
|
(h)
|
Investments
in financial products
|
Investments
in financial products consist primarily of investments in three-year close-ended financial products operated by a private equity
fund. The financial products bear variable return rate and redeemable on each anniversary after the Company entered into the agreement.
Investments in financial products are held to their maturities and are carried at amortized cost, which approximates fair value.
The Company reviews its investments for other-than-temporary impairment (“OTTI”) based on the specific identification
method. The Company considers available quantitative and qualitative evidence in evaluating potential impairment of its investments.
If the cost of an investment exceeds the investment’s fair value, the Company considers, among other factors, general market
conditions, expected future performance of the investees, the duration and the extent to which the fair value of the investment
is less than the cost, and the Company’s intent and ability to hold the investment. OTTI is recognized as a loss in the
income statement.
|
(i)
|
Operating
lease asset, net
|
Operating
lease asset, net, represents the automobiles that are underlying our automotive lease contracts and is reported at cost, less
accumulated depreciation and net of impairment charges and origination fees or costs. Depreciation of vehicles is recorded on
a straight-line basis to an estimated residual value over the useful life of nine years. We periodically evaluate our depreciation
rate for leased vehicles based on expected residual values and adjust depreciation expense over the remaining life of the lease
if deemed necessary.
We
have significant investments in the residual values of the assets in our operating lease portfolio. The residual values represent
an estimate of the values of the assets at the end of the lease contracts. At contract inception, we determine pricing based on
the projected residual value of the lease vehicle. This evaluation is primarily based on a proprietary model, which includes variables
such as age, expected mileage, seasonality, segment factors, vehicle type, economic indicators, production cycle, automotive manufacturer
incentives, and shifts in used vehicle supply. This internally-generated data is compared against third-party, independent data
for reasonableness. Realization of the residual values is dependent on our future ability to market the vehicles under the prevailing
market conditions. Over the life of the lease, we evaluate the adequacy of our estimate of the residual value and make adjustments
to the depreciation rates to the extent the expected value of the vehicle at lease termination changes. In addition to estimating
the residual value at lease termination, we also evaluate the current value of the operating lease asset and test for impairment
to the extent necessary when there is an indication of impairment based on market considerations and portfolio characteristics.
Impairment is determined to exist if fair value of the leased asset is less than carrying value and it is determined that the
net carrying value is not recoverable. The net carrying value of a leased asset is not recoverable if it exceeds the sum of the
undiscounted expected future cash flows expected to result from the lease payments and the estimated residual value upon eventual
disposition. If our operating lease assets are considered to be impaired, the impairment is measured as the amount by which the
carrying amount of the assets exceeds the fair value as estimated by discounted cash flows. For the three and six months ended
June 30, 2019, we accrued impairment of $nil and $96,318 for an operating lease asset. We accrue rental income on our operating
leases when collection is reasonably assured.
|
(j)
|
Income
from operating lease
|
Income
from operating lease represents lease origination fees and rental fee, netting off lease origination costs. In accordance with
ASC 842, Leases, the Company recognized the income from operating lease on a straight-line basis over the scheduled lease term. For
the three and six months ended June 30, 2019, the Company generated income from operating lease of $540,895 and $940,894, respectively.
The
Company accounts for income taxes in accordance with the U.S. GAAP for income taxes. Under the asset and liability method as required
by this accounting standard, the recognition of deferred income tax liabilities and assets for the expected future tax consequences
of temporary differences between the income tax basis and financial reporting basis of assets and liabilities. Provision for income
taxes consists of taxes currently due plus deferred taxes.
The
charge for taxation is based on the results for the year as adjusted for items which are non-assessable or disallowed. It is calculated
using tax rates that have been enacted or substantively enacted by the balance sheet date.
Deferred
tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between
the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis. Deferred tax assets
are recognized to the extent that it is probable that taxable income to be utilized with prior net operating loss carried forward.
Deferred tax is calculated using tax rates that are expected to apply to the period when the asset is realized or the liability
is settled. Deferred tax is charged or credited in the income statement, except when it is related to items credited or charged
directly to equity. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely
than not that some portion or all of the deferred tax assets will not be realized. Current income taxes are provided for in accordance
with the laws of the relevant taxing authorities.
BAT
GROUP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
An
uncertain 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 amount recognized is the largest amount
of tax benefit that is greater than 50% likely of being realized on examination. Penalties and interest incurred related to underpayment
of income tax are classified as income tax expense in the period incurred. The Company did not have unrecognized uncertain tax
positions or any unrecognized liabilities, interest or penalties associated with unrecognized tax benefit as of June 30, 2019
and December 31, 2018. As of June 30, 2019, income tax returns for the tax years ended December 31, 2014 through December 31,
2018 remain open for statutory examination by PRC tax authorities.
|
(l)
|
(Loss)
Income per share
|
Basic (loss) income per share is computed
by dividing the net (loss) income by the weighted average number of common shares outstanding during the period. Diluted (loss)
income per share is the same as basic (loss) income per share due to the lack of dilutive items in the Company for the three and
six months ended June 30, 2019 and 2018. The number of warrants is excluded from the computation because of its anti-dilutive
effect.
Share-based
awards granted to the Company’s nonemployees are measured at fair value on grant date and share-based compensation expense
is recognized (i) immediately at the grant date if no vesting conditions are required, or (ii) using the accelerated attribution
method, net of estimated forfeitures, over the requisite service period. The fair value of restricted shares is determined with
reference to the fair value of the underlying shares.
At
each date of measurement, the Company reviews internal and external sources of information to assist in the estimation of various
attributes to determine the fair value of the share-based awards granted by the Company, including but not limited to the fair
value of the underlying shares, expected life, expected volatility and expected forfeiture rates. The Company is required to consider
many factors and make certain assumptions during this assessment. If any of the assumptions used to determine the fair value of
the share-based awards changes significantly, share-based compensation expense may differ materially in the future from that recorded
in the current reporting period.
The Company issued warrants to four individuals
in private placements and to three external investors in registered direct offering, through which the Company issued both common
shares and warrants as separable units, and both instrument is registered when issued. Warrants requiring share settlement are
classified as equity.
The
capital raised from the private placement is allocated between the fair value of the common stocks and warrants. The Company determined
the fair value of warrants by application of the Black-Scholes-Merton formula.
Certain
items in the financial statements of comparative period have been reclassified to conform to the audited financial statements
and the notes thereto, included in the Form 10-K for the fiscal year ended December 31, 2018, which was filed with the SEC on
April 5, 2019, primarily for the effects of discontinued operations.
BAT
GROUP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
|
(p)
|
Recent
accounting pronouncement
|
Recently
announced accounting standards
In
April 2019, the FASB issued ASU 2019-04 “Codification Improvements to Topic 326, Financial Instruments-Credit Losses,
Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments.” Apart from the amendments to ASU 2016-13 as mentioned
below, the ASU also included subsequent amendments to ASU 2016-01, which we adopted in January 1, 2018. The guidance in relation
to the amendments to ASU 2016-01 is effective for us for the year ending December 31, 2020 and interim reporting periods
during the year ending December 31, 2020. Early adoption is permitted.
In
October 2018, the FASB issued ASU2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable
Interest Entities. ASU 2018-17 expands the accounting alternative that allows private companies the election not to apply the
variable interest entity guidance to qualifying common control leasing arrangements. ASU 2018-17 broadens the scope of the private
company alternative to include all common control arrangements that meet specific criteria (not just leasing arrangements). ASU
2018-17 also eliminates the requirement that entities consider indirect interests held through related parties under common control
in their entirety when assessing whether a decision-making fee is a variable interest. Instead, the reporting entity will consider
such indirect interests on a proportionate basis. The amendments are effective for public business entities for fiscal years ending
after December 15, 2019. Early adoption is permitted. The Company is currently assessing the timing and impact of adopting the
updated provisions to its consolidated financial statements.
In
August 2018, the FASB issued ASU 2018-13, Fair Value Measurement - Disclosure Framework (Topic 820). The updated guidance improves
the disclosure requirements on fair value measurements. The updated guidance if effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures.
The Company is currently assessing the timing and impact of adopting the updated provisions to its consolidated financial statements.
The
Company does not believe other recently issued but not yet effective accounting standards would have a material effect would have
a material effect on the consolidated financial position, statements of operations and cash flows.
Recently
adopted accounting standards
In
February 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2018-02, Income Statement - Reporting Comprehensive Income (Topic 220). The new guidance permits, but does not require, companies
to reclassify the stranded tax effects of the Tax Cuts and Jobs Act (the “Act”) on items within accumulated other
comprehensive income to retained earnings. This ASU is effective for fiscal years beginning after December 15, 2018, including
interim periods within those fiscal years. The Company adopted this standard in the first quarter of 2019 and did not elect to
reclassify the stranded tax effects of the Act on items within accumulated other comprehensive income to retained earnings. The
Company uses the portfolio method for releasing the stranded tax effects from accumulated other comprehensive income.
In
June 2018, the FASB issued ASU 2018-07, “Compensation — Stock Compensation (Topic 718): Improvements
to Nonemployee Share-Based Payment Accounting,” which expands the scope of ASC 718 to include share-based payment transactions
for acquiring goods and services from non-employees. An entity should apply the requirements of ASC 718 to non-employee awards
except for specific guidance on inputs to an option pricing model and the attribution of cost. The amendments specify that ASC
718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed
in a grantor’s own operations by issuing share-based payment awards. We adopted the new guidance beginning on January 1,
2019. The adoption of this guidance did have a material impact on our financial position, results of operations and cash flows.
In
February 2016, the Financial Accounting Standards Board (“FASB”) issued an accounting standard update (ASC Topic 842)
that amends the accounting guidance on leases. The new standard establishes a right-of-use (ROU) model that requires a lessee
to record an ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will
be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement.
The FASB also subsequently issued amendments to the standard, including providing an additional and optional transition method
to adopt the new standard, described below, as well as certain practical expedients related to land easements and lessor accounting.
BAT
GROUP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
The
accounting standard update originally required the use of a modified retrospective approach reflecting the application of the
standard to leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial
statements with the option to elect certain practical expedients. A subsequent amendment to the standard provides an additional
and optional transition method that allows entities to initially apply the new leases standard at the adoption date and recognize
a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity’s
reporting for the comparative periods presented in the financial statements in which it adopts the new leases standard will continue
to be in accordance with current GAAP (ASC Topic 840) if the optional transition method is elected. The new accounting standard
is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. We adopted this
accounting standard effective January 1, 2019, using the optional transition method with no restatement of comparative periods.
Therefore, the comparative information has not been adjusted and continues to be reported under ASC Topic 840. Our adoption of
the new standard did not result in a cumulative effect adjustment to retained earnings.
We
elected certain practical expedients available under the transition guidance within the new standard, which among other things,
allowed us to carry forward the historical lease classification of our existing leases. We did not elect the use-of-hindsight
or the practical expedient pertaining to land easements; the latter not being applicable to us. The new standard also provides
practical expedients for an entity’s ongoing accounting. We elected the short-term lease recognition exemption for all leases
that qualify. As a result, for those leases that qualify, we will not recognize ROU assets or lease liabilities, and we did not
recognize ROU assets or lease liabilities for existing short-term leases of those assets in transition. We also elected the practical
expedient to not separate lease and non-lease components of leases for the majority of our classes of underlying assets. Consequently,
on adoption and as of June 30, 2019, recognized right-of-use lease assets of $63,481 and finance lease liabilities of $63,481 (Note
17).
In
assessing the Company’s liquidity and its ability to continue as a going concern, the Company monitors and analyzes its
cash and its ability to generate sufficient cash flow in the future to support its operating and capital expenditure commitments.
The Company’s liquidity needs are to meet its working capital requirements and operating expenses obligations.
As
of June 30, 2019, the Company had cash balance of $1,307,186 and a negative working capital of $10,635. The management
estimated the operating expenses obligation for the next twelve months after issuance of the financial statements to be
$4,630,000, which will be partially covered by the cash flows of $4,100,00
million
generated from our luxurious car leasing business with our increased investments in luxurious used cars, and collection of
$1 million from our investments in financial products. The Company plans to fund its operations through revenue generated
from its operating lease income, private placements from investors, and financial support commitments from the
Company’s Chief Executive Officer and shareholder. The Company’s ability to fund these needs will depend on its
future performance, which will be subject in part to general economic, competitive and other factors beyond its control.
Based on the current operating plan, the management believes that the Company will continue as a going concern
in
the following 12 months.
Assets
that potentially subject the Company to significant concentration of credit risk primarily consist of cash and cash equivalents.
The maximum exposure of such assets to credit risk is their carrying amount as at the balance sheet dates. As of June 30, 2019,
approximately $1,237,600 was deposited with a bank in the United States which was insured by the government up to $250,000. As
of June 30, 2019 and December 31, 2018, approximately $69,586 and $1,067,657, respectively, were primarily deposited in financial
institutions located in Mainland China, which were uninsured by the government authority. To limit exposure to credit risk relating
to deposits, the Company primarily place cash deposits with large financial institutions in China which management believes are
of high credit quality.
The
Company’s operations are carried out in Mainland China. Accordingly, the Company’s business, financial condition and
results of operations may be influenced by the political, economic and legal environments in the PRC as well as by the general
state of the PRC’s economy. In addition, the Company’s business may be influenced by changes in governmental policies
with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, rates and methods
of taxation, and the extraction of mining resources, among other factors.
BAT
GROUP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The
Company is also exposed to liquidity risk which is risk that it is unable to provide sufficient capital resources and liquidity
to meet its commitments and business needs. Liquidity risk is controlled by the application of financial position analysis and
monitoring procedures. When necessary, the Company will turn to other financial institutions and the owners to obtain short-term
funding to meet the liquidity shortage.
|
(c)
|
Foreign
currency risk
|
Substantially
all of the Company’s operating activities and the Company’s major assets and liabilities are denominated in RMB, except
for the cash deposit of approximately$1,237,600 which was in U.S. dollars as of June 30, 2019, which is not freely convertible
into foreign currencies. All foreign exchange transactions take place either through the Peoples’ Bank of China (“PBOC”)
or other authorized financial institutions at exchange rates quoted by PBOC. Approval of foreign currency payments by the PBOC
or other regulatory institutions requires submitting a payment application form together with suppliers’ invoices and signed
contracts. The value of RMB is subject to changes in central government policies and to international economic and political developments
affecting supply and demand in the China Foreign Exchange Trading System market. Where there is a significant change in value
of RMB, the gains and losses resulting from translation of financial statements of a foreign subsidiary will be significant affected.
It
is possible that the VIE Agreements among Beijing Tianxing, Hao Limo, and the Beijing Tianxing Shareholders would not be enforceable
in China if PRC government authorities or courts were to find that such contracts contravene PRC laws and regulations or are otherwise
not enforceable for public policy reasons. In the event that the Company were unable to enforce these contractual arrangements,
the Company would not be able to exert effective control over the VIE. Consequently, the VIE’s results of operations, assets
and liabilities would not be included in the Company’s consolidated financial statements. If such were the case, the Company’s
cash flows, financial position, and operating performance would be materially adversely affected. The Company’s contractual
arrangements with Beijing Tianxing, Hao Limo, and the Beijing Tianxing Shareholders are approved and in place. Management believes
that such contracts are enforceable, and considers the possibility remote that PRC regulatory authorities with jurisdiction over
the Company’s operations and contractual relationships would find the contracts to be unenforceable.
The
Company’s operations and businesses rely on the operations and businesses of Beijing Tianxing, the VIE of the Company, which
holds certain recognized revenue-producing assets including the luxury used cars. The VIE also has an assembled workforce, focused
primarily on promotion and marketing, whose costs are expensed as incurred. The Company’s operations and businesses may
be adversely impacted if the Company loses the ability to use and enjoy assets held by its VIE.
|
5.
|
LOANS
RECEIVABLE FROM THIRD PARTIES
|
|
|
June
30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
receivable from third parties
|
|
$
|
1,103,769
|
|
|
$
|
-
|
|
In
January and June 2019, the Company entered into loan agreements with two and four third parties, respectively. Pursuant to
the loan agreements, the Company disbursed loans aggregating approximately $1.1 million to these third parties, to be
matured in September 2019 through June 2020. The Company charged the third parties interest rates ranging between 9% and 16% per annum.
Principal and interest are repaid on maturity of the loan. As of June 30, 2019, the Company recorded a balance of interest
receivable of $30,861 within the account of “other current assets” of the unaudited condensed consolidated
balance sheets.
BAT
GROUP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of June 30, 2019, the Company had investment
security of $200,000 in one
privately held company over which the Company owns 4.22% shareholding.
The Company neither has control nor significant influence through investments in common stock or in-substance common stock.
As
of June 30, 2019, the equity investee had cash injected from its shareholders and common stocks on their balance sheets, and had
no revenues or net income for the period from its inception to June 30, 2019.
7.
|
DEPOSITS FOR INVESTMENTS IN EQUITY INVESTEES
|
As of June 30, 2019, the Company prepaid
aggregating $582,513 in two equity investees. The Company owned 40% equity interests in both equity investees and exercised significant
influence over each of the equity investees. Both equity investees were set up in July 2019.
As of June 30, 2019, the Company’s
deposits for investments in equity investees were comprised of the following:
|
|
June 30,
2019
|
|
|
|
|
|
Shanghai Huxin Technology Co., Ltd.
|
|
$
|
291,256
|
|
Shanghai Yaoku Technology Co., Ltd.
|
|
|
291,257
|
|
|
|
$
|
582,513
|
|
8.
|
INVESTMENT IN AN EQUITY INVESTEE
|
As of June 30, 2019, the Company had an
investment of $291,256 in one equity investee. The Company owned 40% equity interests in the equity investee and exercised significant
influence over the equity investee. The equity investee was newly set up and has not commenced operations as of June 30, 2019.
As of June 30, 2019, the equity investee had cash injected from its shareholders and common stocks on their balance sheets, and
had no revenues or net income for the period from its inception to June 30, 2019.
|
9.
|
INVESTMENTS
IN FINANCIAL PRODUCTS
|
On May 28, 2019, the Company entered in
a financial product investment agreement with a private equity fund (“PE fund”) with a total investing amount of $1,000,000.
The balance of investments in financial products consisted investments in three-year close-ended financial products operated by
this PE fund. The financial products bear variable return rate and was redeemable on each anniversary after the Company entered
into the agreement. The Company classified these financial assets as held-to-maturity financial assets and recorded the assets
at amortized cost, which approximates fair value published by the PE fund. As of June 30, 2019, the fair value of the investments
was equal to the cost of investment, and the Company did not provide OTTI on investments in financial products.
For
the three and six months ended June 30, 2019, the Company did not have any unrealized holding gains or losses on these investments
in financial products.
BAT
GROUP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
10.
|
OPERATING
LEASE ASSETS, NET
|
As
of June 30, 2019, the Company had investments in fifteen used luxurious cars, among which the Company purchased and obtained ownership
in thirteen cars, and prepaid for two cars.
As
of June 30, 2019 and December 31, 2018, the Company, by reference to the market price, determined the fair value of two and one
used luxurious cars was below the original carrying amount of the leased asset and had accumulated impairment of $272,568 and
$177,630, respectively. As a result, the Company accrued additional impairment of $nil and $96,318 for these operating lease asset
for the three and six months ended June 30, 2019.
As
of the June 30, 2019, the balance of the used luxurious cars is comprised of the following:
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Used
luxurious cars
|
|
$
|
3,280,712
|
|
|
$
|
1,728,538
|
|
Less:
accumulated depreciation
|
|
|
(195,639
|
)
|
|
|
(94,520
|
)
|
|
|
$
|
3,085,073
|
|
|
$
|
1,634,018
|
|
For
the three months ended June 30, 2019 and 2018, the Company charged depreciation expenses of $55,321 and $12,458 on used luxurious
cars, respectively. For the six months ended June 30, 2019 and 2018, the Company charged depreciation expenses of $102,179 and
$12,458 on the luxurious cars, respectively.
As of June 30, 2019, ten of the thirteen
used luxurious cars was pledged for borrowings from third parties.
|
|
June
30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third
parties loans
|
|
$
|
2,257,237
|
|
|
$
|
218,100
|
|
As of June 30, 2019 and December 31, 2018,
the Company had borrowings of $2,257,237 and $218,100 from eight and two third parties. The borrowings were due in August 2019
through January 2020. The interest rate charged on the borrowings ranged between 7% and 10.5%. For the three months ended June
30, 2019 and 2018, the Company charged interest expenses of $30,675 and $nil on the borrowings, respectively. For the six months
ended June 30, 2019 and 2018, the Company charged interest expenses of $37,544 and $nil on the borrowings, respectively.
BAT
GROUP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
12.
|
OTHER
CURRENT LIABILITIES
|
|
|
June
30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Deposit
payable
|
|
$
|
50,606
|
|
|
$
|
35,565
|
|
Accrued
litigation fees
|
|
|
82,500
|
|
|
|
82,500
|
|
Accrued
interest expenses
|
|
|
37,100
|
|
|
|
722
|
|
Accrued
payroll
|
|
|
21,802
|
|
|
|
17,983
|
|
Other
tax payable
|
|
|
18,069
|
|
|
|
7,817
|
|
Others
|
|
|
2,975
|
|
|
|
40,462
|
|
|
|
$
|
213,052
|
|
|
$
|
185,049
|
|
Common
Stock
The
Company is authorized to issue up to 100,000,000 shares of Common Stock.
As
of December 31, 2018, there were 25,119,532 shares of common stock issued and outstanding. On January 11, 2019, the Company filed
a Certificate of Amendment of the Certificate of Incorporation with the Secretary of State of Delaware to effect a 1 for 5 reverse
stock split (the “Reverse Split”) of the shares of the Company’s issued and outstanding common stock, par value
$0.001. As a result of the Reverse Split, all references to numbers of common shares and per-share data in the accompanying unaudited
condensed consolidated financial statements have been adjusted to reflect such issuance of shares on a retrospective basis. As
such, the 25,119,532 shares issued and outstanding as of December 31, 2018 decreased to 5,023,906 shares.
On March 8, 2019, the Company issued 502,391
restricted shares to its service providers as compensation for various services provided for the three months ended March 31,
2019, including asset management consulting services, tax consulting services, customer relationship services, valuation services and
IT services. The restricted shares are fully vested while the transferability is restricted until September 5, 2019. The fair
value of the services provided was in in the total amount of $884,208, at a per share price at the market price of the grant date.
A summary of RSU activity for the year ended June 30, 2019 is as follows:
|
|
Number
of Shares
|
|
|
Weighted-Average
Grant Date Fair Value
|
|
Balance of RSUs
outstanding at December 31, 2018
|
|
|
-
|
|
|
|
-
|
|
Grants
of RSUs
|
|
|
502,391
|
|
|
|
1.76
|
|
Vested
RSUs
|
|
|
(502,391
|
)
|
|
|
1.76
|
|
Forfeited
RSUs
|
|
|
-
|
|
|
|
-
|
|
Balance
of unvested RSUs at June 30, 2019
|
|
$
|
-
|
|
|
$
|
-
|
|
Registered
direct offering
On
April 11, 2019, the Company and certain institutional investors (the “Purchasers”) entered into a securities purchase
agreement (the “Purchase Agreement”), pursuant to which the Company agreed to sell to such investors an aggregate
of 1,680,000 shares of common stock (the “Common Stock”) in a registered direct offering and warrants to purchase
up to approximately 1,680,000 shares of the Company’s Common Stock in a concurrent private placement, for gross proceeds
of approximately $3.7 million (the “Financing”). The warrants will be exercisable immediately following the date of
issuance and have an exercise price of $2.20. The warrants will expire 5 years from the earlier of the date on which the shares
of Common Stock issuable upon exercise of the warrants may be sold pursuant to an effective registration statement or may be exercised
on a cashless basis and be immediately sold pursuant to Rule 144. The purchase price for each share of Common Stock and the corresponding
warrant is $2.20. Each warrant is subject to anti-dilution provisions to reflect stock dividends and splits or other similar transactions,
but not as a result of future securities offerings at lower prices. The warrants contain a mandatory exercise right for the Company
to force exercise of the warrants if the Company’s common stock trades at or above $6.60 for 20 consecutive trading days
provided, among other things, that the shares issuable upon exercise of the warrants are registered or could be sold pursuant
to Rule 144 and the daily trading volume exceeds 200,000 shares per trading day on each trading day in a period of 20 consecutive
trading days prior to the applicable date.
BAT
GROUP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
13.
|
CAPITAL
TRANSACTION (CONTINUED)
|
On
May 20, 2019, Bat Group, Inc. (the “Company”) and certain institutional investors (the “Purchasers”) entered
into a securities purchase agreement (the “Purchase Agreement”), pursuant to which the Company agreed to sell to such
investors an aggregate of 1,440,000 shares of common stock (the “Common Stock”) in a registered direct offering and
warrants to purchase up to approximately 1,080,000 shares of the Company’s Common Stock in a concurrent private placement,
for gross proceeds of approximately $1.5 million (the “Financing”). The warrants will be exercisable after 6 months
of the date of issuance and have an exercise price of $1.32. The warrants will expire 5.5 years from the date of issuance. Each
warrant is subject to anti-dilution provisions to reflect stock dividends and splits or other similar transactions, but not as
a result of future securities offerings at lower prices. The warrants contain a mandatory exercise right for the Company to force
exercise of the warrants if the Company’s common stock trades at or above $3.96 for 20 consecutive trading days provided,
among other things, that the shares issuable upon exercise of the warrants are registered or could be sold pursuant to Rule 144
and the daily trading volume exceeds 200,000 shares per trading day on each trading day in a period of 20 consecutive trading
days prior to the applicable date. In addition, the Company agreed to reduce the exercise of the warrants issued on April 15,
2019 from $2.20 to $1.32.
As
of June 30, 2019 and December 31, 2018, the Company had 8,646,297 shares and 5,023,906 shares issued and outstanding, respectively.
Warrants
A
summary of warrants activity for the six months ended June 30, 2019 was as follows:
|
|
Number
of
shares
|
|
|
Weighted
average life
|
|
Expiration
dates
|
|
|
|
|
|
|
|
|
Balance
of warrants outstanding as of December 31, 2018
|
|
|
273,370
|
|
|
3.94
years
|
|
|
Grants of Warrants
on April 11, 2019
|
|
|
1,680,000
|
|
|
5
years
|
|
April
15, 2024
|
Grants
of Warrants on May 20 2019
|
|
|
1,080,000
|
|
|
5.5
years
|
|
November
23, 2024
|
Balance
of warrants outstanding as of December 31, 2018
|
|
|
3,033,370
|
|
|
4.88
years
|
|
|
In
connection with the direct offering closed on April 11, 2019, the Company issued warrants to investors to purchase a total of
1,680,000 ordinary shares with a warrant term of five (5) years. The warrants have an exercise price of US$2.20 per share. On
May 20, 2019, the exercise price was reduced to $1.32.
In
connection with the direct offering closed on May 20, 2019, the Company issued warrants to investors to purchase a total of 1,080,000
ordinary shares with a warrant term of five and a half (5.5) years. The warrants have an exercise price of US$1.32 per share.
Both
warrants are subject to anti-dilution provisions to reflect stock dividends and splits or other similar transactions, but not
as a result of future securities offerings at lower prices. The warrants did not meet the definition of liabilities or derivatives,
and as such they are classified as an equity.
As
of April 11, 2019 and May 20, 2019, the Company estimated fair value of the both warrants at US$1,638,000 and $762,480, respectively,
using the Black-Scholes valuation model, which took into consideration the underlying price of ordinary shares, a risk-free interest
rate, expected term and expected volatility. As a result, the valuation of the warrant was categorized as Level 3 in accordance
with ASC 820, “Fair Value Measurement”.
The
key assumption used in estimates are as follows:
|
|
April
11,
|
|
|
May
20,
|
|
|
|
2019
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terms of warrants
|
|
|
60
months
|
|
|
|
66
months
|
|
Exercise
price
|
|
|
1.32
|
|
|
|
1.32
|
|
Risk
free rate of interest
|
|
|
2.77
|
%
|
|
|
2.77
|
%
|
Dividend
yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Annualized
volatility of underlying stock
|
|
|
55.6
|
%
|
|
|
57.04
|
%
|
BAT
GROUP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
14.
|
EARNINGS
(LOSS) PER SHARE
|
The
following table sets forth the computation of basic and diluted loss per common share for the three and six months ended June
30, 2019 and 2018, respectively:
|
|
For
the Three Months Ended
June
30,
|
|
|
For
the Six Months Ended
June
30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$
|
(1,114,601
|
)
|
|
$
|
9,386,183
|
|
|
$
|
(2,886,684
|
)
|
|
$
|
8,875,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Shares Outstanding-Basic and Diluted
|
|
|
7,530,693
|
|
|
|
4,442,320
|
|
|
|
6,348,064
|
|
|
|
4,216,133
|
|
Loss
(income) per share- basic and diluted
|
|
$
|
(0.14
|
)
|
|
$
|
2.14
|
|
|
$
|
(0.45
|
)
|
|
$
|
2.16
|
|
Net
loss per share from continuing operations – basic and diluted
|
|
$
|
(0.14
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.45
|
)
|
|
$
|
(0.23
|
)
|
Net
income per share from discontinued operations – basic and diluted
|
|
$
|
-
|
|
|
$
|
2.23
|
|
|
$
|
-
|
|
|
$
|
2.39
|
|
On
January 11, 2019, the Company amended the certificate of incorporation to effect a one-for-five reverse stock split of our issued
and outstanding shares of common stock. All references to numbers of common shares and per-share data in the accompanying unaudited
condensed consolidated financial statements have been adjusted to reflect such issuance of shares on a retrospective basis. As
such, the weighted average shares outstanding – basic and diluted of 22,211,600 shares issued and outstanding as for the
three months ended June 30, 2018 decreased to 4,442,320 shares, and the weighted average shares outstanding – basic and
diluted of 21,080,665 shares issued and outstanding as for the six months ended June 30, 2018 decreased to 4,216,133 shares issued
and outstanding.
Basic
loss per share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period.
Diluted loss per share is the same as basic loss per share due to the lack of dilutive items in the Company for the three and
six months ended June 30, 2019 and 2018. The number of warrants is excluded from the computation as the anti-dilutive effect.
The United States of America
On December 22, 2017, the Tax Cuts and
Jobs Act of 2017 (the “Tax Act”) was signed into law, which has made significant changes to the Internal Revenue Code.
Those changes include, but are not limited to, a U.S. corporate tax rate decrease from 35% to 21% effective for tax years beginning
after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, and
a one-time transition tax on the deemed repatriation of cumulative foreign earnings as of December 31, 2017. Accordingly, the Company
reevaluated its deferred tax assets on net operating loss carryforward in the U.S and concluded there was no effect on the Company’s
income tax expenses as the Company has no deferred tax assets generated since inception.
PRC
Effective January 1, 2008, the New Taxation
Law of PRC stipulates that domestic enterprises and foreign invested enterprises (the “FIEs”) are subject to a uniform
tax rate of 25%. Under the PRC tax law, companies are required to make quarterly estimate payments based on 25% tax rate; companies
that received preferential tax rates are also required to use a 25% tax rate for their installment tax payments. The overpayment,
however, will not be refunded and can only be used to offset future tax liabilities.
The Company evaluates the level of authority
for each uncertain tax position (including the potential application of interest and penalties) based on the technical merits,
and measures the unrecognized benefits associated with the tax positions. For the three and six months ended June 30, 2019 and
2018, the Company had no unrecognized tax benefits. Due to uncertainties surrounding future utilization, the Company estimates
there will not be sufficient future income to realize the deferred tax assets. As of June 30, 2019 and December 31, 2018, the Company
had deferred tax assets of $2,352,834 and $1,714,344, respectively. The Company maintains a full valuation allowance on its net
deferred tax assets as of June 30, 2019.
BAT
GROUP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
15.
|
INCOME
TAXES (CONTINUED)
|
The
Company does not anticipate any significant increase to its liability for unrecognized tax benefit within the next 12 months.
The Company will classify interest and penalties related to income tax matters, if any, in income tax expense.
The
Company does not have any current and deferred tax expenses for the three and six months ended June 30, 2019 and 2018.
The
Company accounts for uncertainty in income taxes using a two-step approach to recognizing and measuring uncertain tax positions.
The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that
it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation
processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized
upon settlement. Interest and penalties related to uncertain tax positions are recognized and recorded as necessary in the provision
for income taxes. The Company is subject to income taxes in the PRC. According to the PRC Tax Administration and Collection Law,
the statute of limitations is three years if the underpayment of taxes is due to computational errors made by the taxpayer or
the withholding agent. The statute of limitations is extended to five years under special circumstances, where the underpayment
of taxes is more than RMB 100,000. In the case of transfer pricing issues, the statute of limitation is ten years. There is no
statute of limitation in the case of tax evasion. There were no uncertain tax positions as of June 30, 2019 and December 31, 2018
and the Company does not believe that its unrecognized tax benefits will change over the next twelve months.
|
16.
|
RELATED
PARTY TRANSACTIONS AND BALANCES
|
As of June 30, 2019, the Company had amount of $8,254 due to
a related party. The balance represented operating expenses paid on behalf the Company by Mr. Jiaxi Gao, the Chief Executive Officer
of the Company.
On March 8, 2019, the Company issued 133,333
restricted shares to Mr. Shun Li for his management consulting services provided during January 15, 2019 and March 31, 2019. The
restricted shares are fully vested while the transferability is restricted until September 5, 2019. The fair value of the services
provided was in in the total amount of $234,666, at a per share price at the market price of the grant date.
BAT
GROUP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
17.
|
COMMITMENTS
AND CONTINGENCIES
|
During the three and six months ended
June 30, 2019, we entered into one and three additional lease contracts, all of which with a lease term of 12 months. As of June
30, 2019, we had four office lease agreements with fixed monthly rental fee with third parties which expires through September
2020. None of these lease agreements provided either the Company or the lessor with an option to extend or terminate the
lease agreements, nor agreed any residual value guarantee or restrictions or covenants.
As
permitted by ASC 842, leases with expected durations of less than 12 months from inception (i.e. short-term leases) were excluded
from the Company’s calculation of its lease liability and right-of-use lease asset. Furthermore, as permitted by ASC 842,
the Company elected to apply the package of practical expedients, which allows companies not to reassess: (a) whether its expired
or existing contracts are or contain leases, (b) the lease classification for any expired or existing leases, and (c) initial
direct costs for any existing leases. As of June 30, 2019, the Company had one lease agreement with a lease term of 24 months
from its inception, with lease payment due in October 2019. Consequently, ROU assets and lease liabilities shall be recognized
on adoption of ASC 842. As of June 30, 2019, the Company recognized ROU assets and lease liabilities of $63,481 and $63,481, respectively.
The
following table sets forth the Company’s contractual obligations as of June 30, 2019 in future periods:
|
|
Rental payments
|
|
|
|
|
|
Year ending June 30, 2020
|
|
$
|
76,367
|
|
Year ending June 30, 2021
|
|
|
-
|
|
Total
|
|
$
|
76,367
|
|
Rent expense for the three months ended
June 30, 2019 and 2018 was $28,125 and $14,250, respectively. Rent expense for the six months ended June 30, 2019 and 2018 was
$44,749 and $26,389, respectively.
BAT
GROUP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
17.
|
COMMITMENTS
AND CONTINGENCIES (CONTINUED)
|
|
a)
|
2014
Class Action litigation
|
On
August 6, 2014, a purported shareholder Andrew Dennison filed a putative class action complaint in the United States District
Court District of New Jersey (the “N.J. district court”) relating to a July 25, 2014 press release about the Company’s
progress in recovering a significant portion of the $5.4 million the Company paid in the first quarter of 2014 on behalf of loan
guarantee customers. The action, Andrew Dennison v. Bat Group, Inc., et al., Case No. 2:2014-cv-04956, alleges that the Company
and its current and former officers and directors Huichun Qin, Long Yi, Jianming Yin, Jinggen Ling, Xiangdong Xiao, and John F.
Levy violated the federal securities laws by misrepresenting in prior public filings certain material facts about the risks associated
with its loan guarantee business. On October 2, 2014, purported shareholders Zhang Yun and Sanjiv Mehrotra (the “Yun Group”)
asserted substantially similar claims against the same defendants in a putative class action captioned Zhang Yun v. Bat Group,
Inc., et al., Case No. 2:14-cv-06136 (D. N.J.). Neither complaint states the amount of damages sought.
On
or about October 6, 2014, Dennison, the Yun Group and another purported shareholder, Jason Stark, filed motions to consolidate
the cases, be appointed as lead plaintiff and to have their respective counsel appointed as lead counsel.
On
October 31, 2014, the N.J. district court entered an order consolidating the cases under the caption “In re China Commercial
Credit Inc. Securities Litigation” and appointing the Yun Group as lead plaintiff (“Class Plaintiff”) and the
Yun Group’s counsel as lead counsel. On November 18, 2014, the Yun Group and the Company, which at that point was the only
defendant served, entered into a stipulation to transfer of the case to the Southern District of New York. On December 18, 2014,
Mr. Levy, who had by then been served, joined in the stipulation.
On
December 29, 2014, the N.J. district court entered an order transferring the action. The transfer was effected on January 22,
2015, and assigned docket number 1:15-cv-00557-ALC (S.D.N.Y.) (the “Securities Class Action”). Under the schedule
stipulated by the parties, the Yun Group was to file an amended complaint within 60 days of the date that the transfer was effected,
and the defendants’ date to answer or move was within 60 days of that filing.
On
April 7, 2015, the Class Plaintiff filed a Second Amended Class Action Complaint (the “CAC”). The CAC also asserts
securities law claims against defendants Axiom Capital Management, Inc., Burnham Securities Inc. and ViewTrade Securities, Inc.
(collectively, the “Underwriter Defendants”). The CAC alleges that the Company engaged in a fraudulent scheme by engaging
in undisclosed and improper lending practices and made misleading representations regarding its underwriting policies, the loan
portfolio quality, the loan loss allowance, compliance with U.S. GAAP and its internal control systems. In accordance with the
Court’s procedures, the Company and Mr. Levy and the Underwriter Defendants requested a Pre-Motion Conference in anticipation
of filing a motion to dismiss the CAC, which was held on June 25, 2015. At the conference, the Court adjourned the date to answer
or move in order to provide the Class Plaintiff with time to serve certain overseas defendants. After the conference, the Class
Plaintiff voluntarily dismissed Jianming Yin, Jinggen Ling and Xiangdong Xiao from the action, and Long Yi agreed to waive service, which
left Huichun Qin as the sole remaining defendant to serve.
On
November 22, 2016, the Company entered into a Stipulation and Agreement of Settlement (the “Stipulation”) to
settle the Securities Class Action. The Stipulation resolved the claims asserted against the Company and certain of its
current and former officers and directors in the Securities Class Action without any admission or concession of wrongdoing or
liability by the Company or the other defendants. The Stipulation also provides, among other things, a settlement payment by
the Company of $245,000 in cash and the issuance of 950,000 shares of its common stock (the “Settlement Shares”)
to the plaintiff’s counsel and class members. The terms of the Stipulation were subject to approval by the Court
following notice to all class members. The issuance of the Settlement Shares are exempt from registration pursuant to Section
3(a)(10) of the Securities Act of 1933, as amended. A fairness hearing was held on May 30, 2017, and the Court approved the
settlement.
BAT
GROUP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
17.
|
COMMITMENTS
AND CONTINGENCIES (CONTINUED)
|
On
December 22, 2017, the Court entered a distribution order approving the distribution of the Settlement Stock to the class plaintiffs.
The $245,000 cash portion of the settlement has been paid in full. The 712,500 Class Settlement Shares were issued on or about
January 19, 2018. The settlement has been finalized, and that thereafter there are no remaining claims outstanding as against
the Company with respect to this litigation. On April 10, 2018, the 237,500 of plaintiff attorney fee shares were issued to plaintiff’s
attorney’s broker account.
Two
of the Underwriter Defendants, Axiom Capital Management, Inc., and ViewTrade Securities, Inc., have asserted their respective
rights to indemnification under the Underwriting Agreements entered into in connection with the Company’s initial public
offering and secondary offering. On or about March 16, 2016, CCCR entered into an Advance Funding and Escrow Agreement (“Advance
Funding Agreement”), under which the CCCR agreed to deposit shares into escrow to fund the advancement obligation, with
the initial deposit to be 637,592 shares which was valued at Two Hundred Thousand Dollars ($200,000), based upon 80% of the 30
day volume weighted average trading price for each of the 30 consecutive trading days prior to the date of the agreement. As of
the completion of the settlement, an aggregate of 527,078 shares are unused in the escrow account and the Underwriter Defendants
acknowledged there is no additional payment of fees and expenses owed to the Underwriter Defendants and the Advance Funding Agreement
shall be terminated. The Company has instructed the transfer agent to cancel the 527,078 shares and return them to authorized
shares. As of the date of this Form 10-Q, the Company is working with its counsel and the escrow agent to complete such cancelation.
|
b)
|
2015
Derivative Action
|
On
February 3, 2015, a purported shareholder Kiran Kodali filed a putative shareholder derivative complaint in the United States
District Court for the Southern District of New York, captioned Kiran Kodali v. Huichun Qin, et al., Case No. 15-cv-806. The action
alleges that the Company and its current and former officers and directors Huichun Qin, Long Yi, Jianming Yin, Jinggen Ling, Chunfang
Shen, John F. Levy, Xiaofang Shen and Chunjiang Yu violated their fiduciary duties, grossly mismanaged the Company and were unjustly
enriched based upon the transfer that was the subject of the Internal Review and other grounds substantially similar to those
asserted in the class action complaints. Kodali did not serve a demand upon the Company and alleges that demand is excused. The
Company and Mr. Levy are the only defendants who have been served. An amended derivative complaint was filed on April 20, 2015.
On
May 29, 2015, the Court “so ordered” a stipulation among Kodali, the Company, and Mr. Levy staying all proceedings
in the derivative case, except for service of process on individual defendants, until the earlier of thirty days of termination
of the stipulation, dismissal of the class action with prejudice or the date any of the defendants in the class action file an
answer to the CAC.
The
Company intends to vigorously defend against it. At this stage of the proceedings, the Company is not able to estimate the probability
of success or loss. The Court ordered GLG to answer or otherwise move with respect to this action on or before November 13, 2017.
Thereafter, GLG and Mr. Levy submitted a pre-motion letter to the Court requesting permission to move to dismiss the derivative
complaint; submission of this letter stayed the proceedings pending the Court’s review thereof. The Court held a hearing
on this pre-motion letter on January 22, 2018, denying permission to file a motion to dismiss the complaint without prejudice
and setting forth a schedule under which Kodali must serve the remaining defendants in the derivative litigation. On or about
August 22, 2018, our new litigation counsel noticed their appearance in the Action. The parties filed a Joint Status Report on
August 22, 2018, advising the Court that the parties continued to have discussions regarding a potential resolution of the matter.
The parties have come to a potential agreement regarding a monetary settlement. However, the parties continued to discuss the
non-monetary aspects of a potential resolution. On January 18, 2019, the parties to the derivative action entered into a Stipulation
of Settlement and Plaintiff filed an Unopposed Motion for Preliminary Approval of Proposed Derivative Settlement (“Motion”).
On April 4, 2019, the Court preliminarily approved the Stipulation and settlement set forth therein, including the terms and conditions
for settlement and dismissal with prejudice of the Derivative Action, subject to further consideration at the Settlement Hearing
to be held on July 11, 2019 at the United States District Court for the Southern District of New York.
BAT
GROUP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
17.
|
COMMITMENTS
AND CONTINGENCIES (CONTINUED)
|
On
July 16, 2019, the Company received a copy of the final order and judgment that the Court entered on July 11, 2019, approving
the settlement set forth in the Stipulation. The Stipulation provides for dismissal of the Derivative Action as to the Company
and the Individual Defendants, and the Company agrees to adopt or maintain certain corporate governance reforms for at least three
years. The Stipulation also provides for attorneys’ fees and expenses to be paid by the Individual Defendants’ insurance
carriers to plaintiffs’ counsel.
The
Company and its directors were party to a lawsuit filed on September 1, 2017, by certain a stockholder of the Company on behalf
of himself and similarly situated stockholders of the Company GLG in the Chancery Court of the State of Delaware (the “Delaware
Chancery Court”) (Case No. 2017-0633-JTL) (the “Action”), Plaintiff stockholders which sought injunctive relief,
costs, and attorney’s fees. Plaintiff’s Verified Class Action Complaint (“Complaint”) alleged that the
Company’s directors breached their fiduciary duties to the Company’s stockholders by failing to disclose all necessary
material information relating to the Company’s entry into an Exchange Agreement (“Exchange Agreement”) with
Sorghum Investment Holdings Limited (“Sorghum”) on August 9, 2017, and preventing the Company’s stockholders
from casting a fully informed vote on the Company’s acquisition of Sorghum, and other proposals contained in the Company’s
preliminary proxy statement, dated August 14, 2017 (“Preliminary Proxy Statement”).
On
October 10, 2017, the Company filed Amendment No. 1 to its Preliminary Proxy Statement (the “Amended Preliminary Proxy”)
with the U.S. Securities and Exchange Commission (the “Commission”) in response to the Commission’s September
8, 2017 comment letter (“Comment Letter”). After reviewing the Amended Preliminary Proxy, Plaintiff determined
that the Company’s Amended Preliminary Proxy rendered the claims asserted in Plaintiff’s Complaint moot and/or otherwise
unsuitable for further pursuit. On October 19, 2017, the Company and Plaintiff entered into a stipulation (“Stipulation”)
wherein Plaintiff agreed to voluntarily dismiss his claims against the Company, and its directors, with prejudice. The Delaware
Chancery Court granted the Stipulation on October 20, 2017, and entered an Order dismissing the Action with prejudice. In accordance
with the Order, the Company will advise the Delaware Chancery Court within fifteen (15) days of the earlier of (a) the stockholder
vote on the Exchange Agreement relating to the proposals, or (b) the termination of the Exchange Agreement, and whether the parties
to the Action have reached an agreement with respect to Plaintiff’s anticipated request for fees and expenses. Currently,
no compensation in any form has passed from the Company, or its directors, to Plaintiff or Plaintiff’s attorneys in the
Action, and the Company has not made a promise to give any such compensation. On or about November 6, 2017, the Company filed
Amendment No. 2 to its Preliminary Proxy Statement with the Commission in further response to the Comment Letter. On December
29, 2017, the Company received notice from Sorghum notifying the Company that the Exchange Agreement is terminated. The Company
advised Plaintiff of the termination of the Exchange Agreement on January 9, 2018.
|
d)
|
2017
Arbitration with Sorghum
|
On
December 21, 2017, the Company delivered notice (“Notice”) to Sorghum notifying Sorghum that certain recent actions
of Sorghum constituted breaches of Sorghum’s covenants under the Exchange Agreement. Specifically, we believe that Sorghum
is in breach of Section 6.9 (a) and Section 6.11 (b) of the Exchange Agreement which required Sorghum to use commercially reasonable
efforts and to cooperate fully with the other parties to consummate the transactions contemplated by the Exchange Agreement and
to make its directors, officers and employees available in connection with responding in a timely manner to SEC comments. According
to the terms of the Exchange Agreement, the Company is entitled to terminate the Exchange Agreement if the breach is not cured
within twenty (20) days after the Notice is provided to Sorghum.
BAT
GROUP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
17.
|
COMMITMENTS
AND CONTINGENCIES (CONTINUED)
|
On
January 25, 2018, the Company filed an arbitration demand (“Arbitration Demand”) with the American Arbitration
Association (“AAA”) against Sorghum in connection with Sorghum’s breach of the Exchange Agreement.
The AAA has forwarded the Company’s Arbitration Demand to Sorghum, and Sorghum’s response to the
Arbitration Demand was due on or before February 14, 2018. Sorghum has not provided a written response to the Company’s
Arbitration Demand. In accordance with the Commercial Arbitration Rules of the AAA (“Rules”), Sorghum’s
failure to respond is deemed as a general denial of the Company’s claims. On April 10, 2018, the AAA initially
appointed Barbara Mentz, Esq. (“Arbitrator Mentz”) as arbitrator in accordance with the arbitration clause
contained in the Exchange Agreement. On March 28, 2018, the AAA conducted an initial telephonic conference with
Arbitrator Barbara Mentz, but neither Sorghum nor its counsel appeared for the call. On March 28, 2018, after the
Company’s counsel appeared for the initial telephonic conference, Sorghum and its counsel contacted the AAA claiming
that it was not in receipt of the AAA’s correspondence although the AAA forwarded its correspondence to Sorghum’s
Chief Executive Officer’s active email. In response, the AAA scheduled another telephonic conference for April 9, 2018.
All parties appeared at the April 9, 2018 conference, and approved Arbitrator Mentz’s appointment. On April 11, 2018,
pursuant to the Rules, Sorghum filed its answer and counterclaim. The Company filed a written denial to
Sorghum’s counterclaim on April 26, 2018. On May 2, 2018, the parties jointly requested an extension of time to file
their respective proposals for resolution with the AAA, and Arbitrator Mentz granted the extension. On May 17, 2018, Sorghum
requested another extension and Arbitrator Mentz granted the extension. In accordance with Arbitrator Mentz’s Order,
the parties’ proposals was due May 31, 2018. On May 30, 2018, due to a delay in receiving additional evidence from a
relevant third party, the Company requested an extension of time to file its proposal for resolution, which Arbitrator Mentz
granted extending the deadline to June 7, 2018. To provide additional time to allow certain relevant documents to be
translated due to the unavailability of the parties’ mutually accepted translator, the Company requested a final
extension of time to June 14, 2018, to submit the parties’ proposal for resolution. Arbitrator Mentz granted the
Company’s request. On June 14, 2018, the Company submitted its proposal for resolution to the AAA. On July 30, 2018,
Arbitrator Mentz entered a reasoned award, accepting the Company’s proposal for resolution, awarding the Company
damages of $1,436,521.50 against Sorghum and denying Sorghum’s Counterclaim against the Company in its entirety with
prejudice. Sorghum has sought to vacate the arbitration award by filing a petition to vacate the arbitration award in the
Supreme Court for the State of New York, New York County. The Company intends to vigorously oppose and move to confirm the
arbitration award. The Court has scheduled a hearing for May 1, 2019.
|
e)
|
2018
Court Matter with Shanghai Nonobank Financial Information Service Co. Ltd.
|
On
August 2, 2018, the Company became party to an action filed by Shanghai Nonbank Financial Information Service Co. Ltd.
(“Plaintiff”) in the Supreme Court for the State of New York, New York County (“NY Supreme Court”)
(Index No. 653834/2018) (the “Action”). Plaintiff’s complaint seeks to recover approximately $3.5 million
of Plaintiff’s funds that were allegedly required to be held in escrow in New York pursuant to an agreement by and
between Plaintiff, Yang Jie and Yi Lin (the “Complaint”). Plaintiff has alleged that the funds were required to be held in escrow in a New York
attorney trust account pending the alleged consummation of a merger between Plaintiff’s parent company and the Company.
Plaintiff alleged two causes of action against the Company for fraud/fraudulent inducement and conversion. On August 30,
2018, the Company filed a motion to dismiss Plaintiff’s causes of action against the Company. The Court has scheduled oral arguments on the
Company’s motion to dismiss for May 1, 2019.
On
July 15, 2019, the Company received a copy of the decision and order the Court entered on July 12, 2019, granting the Company’s
motion to dismiss the Complaint in its entirety as against the Company without prejudice, with costs and disbursements to the
Company as taxed by the Clerk of the Court, and the Clerk is directed to enter judgment accordingly in favor of the Company.
BAT
GROUP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
18.
|
DISPOSITION
OF GLG BVI
|
On
June 19, 2018, the Company, HK Xu Ding Co., Limited, a private limited company duly organized under the laws of Hong Kong (the
“Purchaser”) and CCCR International Investment Ltd., a business company incorporated in the British Virgin Islands
with limited liability (“GLG BVI”) entered into certain Share Purchase Agreement (the “Purchase Agreement”).
Pursuant to the Purchase Agreement, the Purchaser agreed to purchase GLG BVI in exchange of cash purchase price of $500,000. The
consideration was paid as of June 30, 2018.
GLG
BVI is the sole shareholder of GLG International Investment Ltd. (“GLG HK”), a company incorporated under the laws
of the Hong Kong S.A.R. of the PRC, which is the sole shareholder of WFOE. WFOE, via a series of contractual arrangements, controls
Wujiang Luxiang. GLG HK is the sole shareholder of PFL.
On
July 10, 2018, the parties completed all the share transfer registration procedure as required by the laws of British Virgin Islands
and all the other closing conditions have been satisfied, as a result, the Disposition contemplated by the Purchase Agreement
is completed. Upon completion of the Disposition, the Purchaser became the sole shareholder of GLG BVI and as a result, assumed
all assets and obligations of all the subsidiaries and VIE entities owned or controlled by GLG BVI. Upon the closing of the transaction,
the Company does not bear any contractual commitment or obligation to the microcredit business or the employees of GLG BVI and
its subsidiaries and VIEs, nor to the Purchaser.
On
June 17, 2018, management was authorized to approve and commit to a plan to sell GLG BVI, therefore the major assets and liabilities
relevant to the disposal are reported as components of total assets and liabilities separate from those balances of the continuing
operations. At the same time, the results of all discontinued operations, less applicable income taxes, are reported as components
of net income (loss) separate from the net loss of continuing operations in accordance with ASC 205-20-45. The assets relevant
to the sale of GLG BVI with a carrying value of $6.2 million were classified as assets held for sale as of June 19, 2018. The
liabilities relevant to the sale of GLG BVI with a carrying value of $10.5 million were classified as liabilities held for sale
as of June 19, 2018. A net gain of $9.7 million was recognized as the net gain from disposal of discontinued operation in 2018.
In
accordance with ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity,
a disposal of a component of an entity or a group of components of an entity is required to be reported as discontinued operations
if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial
results when the components of an entity meets the criteria in paragraph 205-20-45-1E to be classified as held for sale. When
all of the criteria to be classified as held for sale are met, including management, having the authority to approve the action,
commits to a plan to sell the entity, the major current assets, other assets, current liabilities, and noncurrent liabilities
shall be reported as components of total assets and liabilities separate from those balances of the continuing operations. At
the same time, the results of all discontinued operations, less applicable income taxes (benefit), shall be reported as components
of net income (loss) separate from the net income (loss) of continuing operations in accordance with ASC 205-20-45.
As
the transaction was closed on June 17, 2018, the Company had no assets and liabilities held for sale in the in the condensed consolidated
balance sheet as of June 30, 2019 and December 31, 2018.
BAT
GROUP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
18.
|
DISPOSITION
OF GLG BVI (CONTINUED)
|
The
following is a reconciliation of the amounts of major classes of income from operations classified as discontinued operations
in the condensed consolidated statements of operations and comprehensive loss for the three and six months ended June 30, 2019
and 2018:
|
|
For
the
Three
Months Ended
June 30,
|
|
|
For
the
Six
Months Ended
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Discontinued
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest and fees income
|
|
$
|
-
|
|
|
$
|
6,213
|
|
|
$
|
-
|
|
|
$
|
106,985
|
|
Reversal
of provision for loan losses and financing lease losses
|
|
|
-
|
|
|
|
87,318
|
|
|
|
-
|
|
|
|
417,600
|
|
Reversal
of provision of (Provision for) financial guarantee services
|
|
|
-
|
|
|
|
162
|
|
|
|
-
|
|
|
|
(104,229
|
)
|
Non-interest
expenses
|
|
|
-
|
|
|
|
7,534
|
|
|
|
-
|
|
|
|
(142,600
|
)
|
Net
gain from discontinued operations
|
|
|
-
|
|
|
|
9,794,873
|
|
|
|
-
|
|
|
|
9,794,873
|
|
Net
income from discontinued operations
|
|
$
|
-
|
|
|
$
|
9,896,100
|
|
|
$
|
-
|
|
|
$
|
10,072,629
|
|
Total
operating cash flows provided by discontinued operations for the six months ended June 30, 2019 and 2018 were $nil and $1,769,566,
respectively. For the six months ended June 30, 2018, the operating cash flows provided by discontinued operations was mainly
caused by net loss incurred by discontinued operations of $277,756 and increased receivables due from the Company of $1.2 million.
Total investing cash flows used in discontinued
operations for the six months ended June 30, 2019 and 2018 were $nil and $1,270,070. The cash provided by investing activities
for the six months ended June 30, 2018 was net effects of disbursement of loans to third parties of $3,391,907 against collection
of $1,943,958 from third party customers of direct loan services.
|
19.
|
NASDAQ
NOTIFICATION ON NON-COMPLIANCE
|
On
June 12, 2019, the
Company
received
a notification letter (the “
Notification
”) from the Nasdaq Listing Qualifications
Staff of The NASDAQ Stock Market LLC (“
Nasdaq
”) notifying the Company
that did not meet the following requirements: (i) because the exercise price for the warrants issued on April 11, 2019 had been
reduced from $2.20 to $1.32 on May 20, 2019, below the minimum price requirements set forth in Nasdaq Listing Rule 5635(d)(1),
the Company was required to obtain shareholder approval as set forth in Nasdaq Listing Rule 5635(d)(2); (ii) Staff has determined
to aggregate the offering pursuant to the Securities Purchase Agreement dated April 11, 2019 and the offering pursuant to the
Securities Purchase Agreement dated May 20, 2019 for purposes of the Nasdaq’s shareholder approval rules; and (iii) the
Company was also required to submit a Listing of Additional Shares Notification Form as set forth in Nasdaq Listing Rule 5250(e)(2)(D)
15 days prior to issuing any common stock, or any security convertible into common stock in a transaction that may result in the
potential issuance of common stock (or securities convertible into common stock) greater than 10% of either the total shares outstanding
or the voting power outstanding on a pre-transaction basis.
On
July 3, 2019, t
he
Company received a notification letter from the Nasdaq notifying
the Company that the minimum bid price per share for its common shares has been below $1.00 for a period of 30 consecutive business
days and the Company therefore no longer meets the minimum bid price requirements set forth in Nasdaq Listing Rule 5550(a)(2).
The notification received has no immediate effect on the listing of the Company’s
common stock on Nasdaq. Under the Nasdaq Listing Rules, the Company has until December 30, 2019 to regain compliance. If at any
time during such 180-day period the closing bid price of the Company’s common shares is at least $1 for a minimum of 10
consecutive business days, Nasdaq will provide the Company written confirmation of compliance.
If
the Company does not regain compliance during such 180-day period, the Company may be eligible for an additional 180 calendar
days, provided that the Company meets the continued listing requirement for market value of publicly held shares and all other
initial listing standards for Nasdaq except for Nasdaq Listing Rule 5550(a)(2), and provide a written notice of its intention
to cure this deficiency during the second compliance period, by effecting a reverse stock split, if necessary.
BAT
GROUP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
20.
|
PARENT-ONLY
FINANCIALS (UNAUDITED)
|
The
Company performed a test on the restricted net assets of its consolidated subsidiary and related VIEs in accordance with Rule
4-08(e)(3) Regulation S-X promulgated by the SEC, “General Notes to Financial Statements” and concluded that it was
applicable to the Company and the Company is required to disclose the required financial information for the parent company.
The
subsidiaries and related VIEs of the Company did not pay any dividends to the Company for the periods presented. For the purpose
of presenting parent only financial information, the Company records its investment in its subsidiaries and related VIEs under
the equity method of accounting. Such investment is presented on the separate condensed balance sheets of the Company as “investment
in subsidiaries” and the losses of the subsidiaries and related VIEs are presented as “share of loss of subsidiaries”.
Certain information and footnote disclosures generally included in financial statements prepared in accordance with U.S. GAAP
have been condensed or are not required.
BAT
GROUP, INC.
UNAUDITED
CONDENSED BALANCE SHEETS
|
|
June
30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Cash
|
|
$
|
1,237,600
|
|
|
$
|
416,459
|
|
Loan
receivable from third parties
|
|
|
230,000
|
|
|
|
-
|
|
Due
from VIE
|
|
|
2,855,087
|
|
|
|
3,537,214
|
|
Other
current assets
|
|
|
13,000
|
|
|
|
-
|
|
Total
current assets
|
|
|
4,335,687
|
|
|
|
3,953,673
|
|
|
|
|
|
|
|
|
|
|
Investments
in subsidiaries
|
|
|
-
|
|
|
|
-
|
|
Investments
in equity investees
|
|
|
200,000
|
|
|
|
-
|
|
Investments
in financial products
|
|
|
1,000,000
|
|
|
|
-
|
|
Total
Assets
|
|
$
|
5,535,687
|
|
|
$
|
3,953,673
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Other
current liabilities
|
|
$
|
82,500
|
|
|
$
|
82,500
|
|
Total
Liabilities
|
|
|
82,500
|
|
|
|
82,500
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
Equity
|
|
|
|
|
|
|
|
|
Series
A Preferred Stock (par value $0.001 per share, 1,000,000 shares authorized at June 30, 2019 and December 31, 2018, respectively;
nil shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively)
|
|
|
-
|
|
|
|
-
|
|
Series
B Preferred Stock (par value $0.001 per share, 5,000,000 shares authorized at June 30, 2019 and December 31, 2018, respectively;
nil shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively)
|
|
|
-
|
|
|
|
-
|
|
Common
stock (par value $0.001 per share, 100,000,000 shares authorized; 8,646,297 and 5,023,906 shares issued and outstanding at
June 30, 2019 and December 31, 2018, respectively)*
|
|
|
8,646
|
|
|
|
5,024
|
|
Additional
paid-in capital
|
|
|
34,299,372
|
|
|
|
29,834,296
|
|
Accumulated
deficit
|
|
|
(28,326,750
|
)
|
|
|
(25,457,090
|
)
|
Accumulated
other comprehensive loss
|
|
|
(528,081
|
)
|
|
|
(511,057
|
)
|
Total
Shareholders’ Equity
|
|
|
5,453,187
|
|
|
|
3,871,173
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Shareholders’ Equity
|
|
$
|
5,535,687
|
|
|
$
|
3,953,673
|
|
|
*
|
Retrospectively
restated for effect of reverse stock split.
|
BAT
GROUP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
20.
|
PARENT-ONLY
FINANCIALS (UNAUDITED) (CONTINUED)
|
BAT
GROUP, INC.
CONDENSED
STATEMENTS OF OPERATIONS
|
|
For the
Three
Months Ended
June 30,
|
|
|
For the
Six
Months Ended
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general, and administrative expenses
|
|
$
|
(574,051
|
)
|
|
$
|
(381,839
|
)
|
|
$
|
(1,863,247
|
)
|
|
$
|
(796,726
|
)
|
Changes in fair value of noncurrent liabilities
|
|
|
-
|
|
|
|
(19,000
|
)
|
|
|
-
|
|
|
|
(166,540
|
)
|
Total operating expenses
|
|
|
(574,051
|
)
|
|
|
(400,839
|
)
|
|
|
(1,863,247
|
)
|
|
|
(963,266
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income net
|
|
|
636
|
|
|
|
-
|
|
|
|
636
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before income taxes
|
|
|
(573,415
|
)
|
|
|
(400,839
|
)
|
|
|
(1,862,611
|
)
|
|
|
(963,266
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expenses
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net income from discontinued operations
|
|
|
-
|
|
|
|
9,896,100
|
|
|
|
-
|
|
|
|
10,072,629
|
|
Equity of (loss) income in subsidiaries
|
|
|
(466,419
|
)
|
|
|
8,007
|
|
|
|
(1,007,049
|
)
|
|
|
8,007
|
|
Net (loss) income
|
|
$
|
(1,039,834
|
)
|
|
$
|
9,503,268
|
|
|
$
|
(2,869,660
|
)
|
|
$
|
9,117,370
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
(74,767
|
)
|
|
|
(117,085
|
)
|
|
|
(17,024
|
)
|
|
|
(242,305
|
)
|
Comprehensive (loss) income
|
|
$
|
(1,114,601
|
)
|
|
$
|
9,386,183
|
|
|
$
|
(2,886,684
|
)
|
|
$
|
8,875,065
|
|