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 September 30, 2019, Beijing Tianxing
has six wholly owned subsidiaries, including:
|
●
|
Beijing Tianrenshijia Apparel Co., Ltd.
|
|
●
|
Beijing Blue Light Marching Technology
Co., Ltd. (Formerly known as “Beijing Tongxingyi Feed Co., Ltd.”)
|
|
●
|
Beijing Eighty Weili Technology Co., Ltd.
|
|
●
|
Beijing Bat Riding Technology Co., Ltd
(Formerly known as “Beijing Saikesheng Garments Co., Ltd.”)
|
|
●
|
Beijing Blue Light Riding Technology Co.,
Ltd. (Formerly known as “Beijing Yimingzhu Restaurant Management Co., Ltd.’), and
|
|
●
|
Car Master (Beijing) Information Consulting
Co., Ltd.
|
In addition, the Company has one subsidiary
over which the Company has 60% ownership, Beijing Blue Light Super Car Technology Co., Ltd (Formerly known as “Beijing Keao
Jiye Commercial Co., Ltd.”). The remaining 40% of ownership interest is owned by an employee of the Company.
Each of these subsidiaries owns a license
to hold cars in Beijing or Zhejiang, and was either inactive or generated minimal revenues for the nine months ended September
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 September 30, 2019 and for the three and nine months ended September 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 September 30, 2019, the Company has one VIE –Beijing Tianxing,
and Beijing Tianxing has seven 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 September 30, 2019, its unaudited results of operations for the three and nine months ended
September 30, 2019 and 2018, and its unaudited cash flows for the three and nine months ended September 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 September 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 September 30, 2019 and December 31, 2018:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Cash
|
|
$
|
1,121,326
|
|
|
$
|
991,385
|
|
Loans receivable from third parties
|
|
|
952,608
|
|
|
|
-
|
|
Due from GLG and Hao Limo*
|
|
|
372,470
|
|
|
|
-
|
|
Due from related parties
|
|
|
476,975
|
|
|
|
-
|
|
Other current assets
|
|
|
219,629
|
|
|
|
87,922
|
|
Investment in equity investees
|
|
|
840,536
|
|
|
|
-
|
|
Operating lease assets, net
|
|
|
2,529,976
|
|
|
|
1,634,018
|
|
Other noncurrent assets
|
|
|
53,351
|
|
|
|
5,524
|
|
Total Assets
|
|
$
|
6,566,871
|
|
|
$
|
2,718,849
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Advances from customers
|
|
$
|
101,640
|
|
|
$
|
6,209
|
|
Other current liabilities
|
|
|
215,329
|
|
|
|
102,549
|
|
Third parties loans
|
|
|
2,255,439
|
|
|
|
218,100
|
|
Due to GLG and Hao Limo **
|
|
|
5,073,533
|
|
|
|
2,937,927
|
|
Total Liabilities
|
|
$
|
7,645,941
|
|
|
$
|
3,264,785
|
|
* Receivable due from GLG and Hao Limo
is eliminated upon consolidation.
** Payable due to GLG and Hao Limo is eliminated
upon consolidation.
|
|
For the
Three Months Ended
September 30,
|
|
|
For the
Nine Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
564,614
|
|
|
$
|
140,856
|
|
|
$
|
1,505,508
|
|
|
$
|
237,577
|
|
Operating expenses
|
|
$
|
(674,943
|
)
|
|
$
|
(270,403
|
)
|
|
$
|
(2,568,958
|
)
|
|
$
|
(359,412
|
)
|
Net loss
|
|
$
|
(83,225
|
)
|
|
$
|
(385,469
|
)
|
|
$
|
(1,076,259
|
)
|
|
$
|
(377,462
|
)
|
|
|
For the
Nine Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Net Cash Provided by Operating Activities
|
|
$
|
1,707,853
|
|
|
|
1,806,279
|
|
Net Cash Used in by Investing Activities
|
|
|
(3,670,694
|
)
|
|
|
(1,796,637
|
)
|
Net Cash Provided by Financing Activities
|
|
|
2,127,225
|
|
|
|
-
|
|
Effect of Exchange Rate Changes on Cash
|
|
|
(34,443
|
)
|
|
|
(3,793
|
)
|
Net Increase in Cash
|
|
|
129,941
|
|
|
|
5,849
|
|
Cash at Beginning of Period
|
|
|
991,385
|
|
|
|
-
|
|
Cash at End of Period
|
|
$
|
1,121,326
|
|
|
$
|
5,849
|
|
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.
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Balance sheet items, except for equity accounts
|
|
|
7.1383
|
|
|
|
6.8776
|
|
|
|
For the
Three Months Ended
September 30,
|
|
|
For the
Nine Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Items in the statements of operations and comprehensive (loss) income, and statements of cash flows
|
|
|
7.0163
|
|
|
|
6.8048
|
|
|
|
6.8634
|
|
|
|
6.5153
|
|
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 related parties and
third parties loans, approximate their fair values due to their short-term nature and are classified within Level 1 of the fair
value hierarchy. Noncurrent loan receivable due from a third party, a related party loan, and investments in financial products
are held to their maturities and are carried at amortized cost, which approximates fair value.
During the three months and nine months
ended September 30, 2018, the Company recorded $nil 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 12.
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 September 30, 2019
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 September 30, 2019, the Company had
investments aggregating $840,536 in three equity investees, 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 (“PE fund”).
The financial products bear variable return rate and redeemable on each anniversary after the Company entered into the agreement.
Upon the adoption of ASU 2016-01, the Company carries these investments in PE fund 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.
The
Company’s impairment analysis considers both qualitative and quantitative factors that may have a significant effect on the fair
value of these investments in financial products.
(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 nine months ended September 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 nine months ended
September 30, 2019, the Company generated income from operating lease of $564,614 and $1,505,508, 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 September 30, 2019 and December 31, 2018. As of September
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
nine months ended September 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 September 30, 2019, recognized
right-of-use lease assets, net of $55,283 and operating lease liabilities of $nil (Note 16).
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 September 30, 2019, the Company had
cash balance of $1,496,797 and a positive working capital of $471,970. The management estimated the operating expenses obligation
for the next twelve months after issuance of the financial statements to be $4.1 million, which will be partially covered by the
cash flows of $2.8 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, and collection of $0.5 million from related
parties. 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 September 30, 2019, approximately $341,297 was deposited
with a bank in the United States which was insured by the government up to $250,000. As of September 30, 2019 and December 31,
2018, approximately $1,155,500 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$341,297 which was in U.S. dollars as of September 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
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
|
|
Loans receivable from third parties
|
|
$
|
1,500,639
|
|
|
$
|
-
|
|
Less: loan receivable from third parties, current
|
|
|
1,451,608
|
|
|
|
-
|
|
Loan receivable from a third party, noncurrent
|
|
$
|
49,031
|
|
|
$
|
-
|
|
During the three and nine months ended
September 30, 2019, the Company entered into loan agreements with three and seven third parties, respectively. Pursuant to the
loan agreements, the Company disbursed loans aggregating approximately $1.5 million to these third parties, to be matured in September
2019 through August 2021. 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. For the four loans matured in September 2019, which are aggregating approximately
$1.3 million, the Company has agreed to extend the loans for another twelve month.
As of September 30, 2019, the Company recorded
a balance of interest receivable of $54,182 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 September 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 September 30, 2019, the equity investee was in setup stage, which had cash injected from its shareholders
and common stocks on their balance sheets, and had no revenues but expenses for the period from its inception to September 30,
2019.
The Company’s impairment analysis considers both qualitative and quantitative factors that may have a
significant effect on the fair value of the equity security. For the three and nine months ended September 30, 2019, no impairment
or downward adjustments were made to the investment security.
7.
|
INVESTMENTS IN EQUITY INVESTEES
|
As of September 30, 2019, the Company had
investments aggregating $840,536 in three equity investees. The Company owned 40% equity interests in each of the equity investees
and exercised significant influence over the equity investees, respectively.
The Company’s investments in equity
investees were comprised of the following:
|
|
September 30, 2019
|
|
|
|
Balance
|
|
|
% of ownership
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Chengdu Jianluo Technology Co., Ltd.
|
|
$
|
280,179
|
|
|
|
40
|
%
|
Shanghai Huxin Technology Co., Ltd.
|
|
|
280,179
|
|
|
|
40
|
%
|
Shanghai Yaoku Technology Co., Ltd.
|
|
|
280,178
|
|
|
|
40
|
%
|
|
|
|
|
|
|
|
|
|
|
|
$
|
840,536
|
|
|
|
|
|
The equity investees were newly set up
and has not commenced operations as of September 30, 2019. As of September 30, 2019, the equity investees had cash injected from
its shareholders and common stocks on their balance sheets, and had no revenues or net income (loss) for the period from its inception
to September 30, 2019. The Company expected these equity investees to commence operations during the three months ended December
31, 2019.
8.
|
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 elected to account for these investments in PE fund 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.
The
Company’s impairment analysis considers both qualitative and quantitative factors that may have a significant effect on the fair
value of these investments in financial products. For the three and nine months ended September 30, 2019, no impairment or downward
adjustments were made to the investments in PE fund.
BAT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
9.
|
OPERATING LEASE ASSETS, NET
|
As of September 30, 2019, the Company had
investments in eleven used luxurious cars. During the nine months ended September 30, 2019, the Company disposed of three used
luxurious cars with original amount aggregating $792,626, and accumulated depreciation expenses aggregating $19,094. The Company
earned a gain of $7,851 from the disposal.
As of September 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 $262,202 and $177,630, respectively. As a result,
the Company accrued additional impairment of $nil and $96,318 for these operating lease assets for the three and nine months ended
September 30, 2019.
As of the September 30, 2019, the balance
of the used luxurious cars is comprised of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
|
|
Used luxurious cars
|
|
$
|
2,780,772
|
|
|
$
|
1,728,538
|
|
Less: accumulated depreciation
|
|
|
(250,796
|
)
|
|
|
(94,520
|
)
|
|
|
$
|
2,529,976
|
|
|
$
|
1,634,018
|
|
For the three months ended September 30,
2019 and 2018, the Company charged depreciation expenses of $83,806 and $46,396 on used luxurious cars, respectively. For the nine
months ended September 30, 2019 and 2018, the Company charged depreciation expenses of $185,985 and $58,854 on the luxurious cars,
respectively.
As of September 30, 2019, all used luxurious
cars was pledged for borrowings from third parties.
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Third parties loans
|
|
$
|
2,136,363
|
|
|
$
|
218,100
|
|
As of September 30, 2019 and December 31,
2018, the Company had borrowings of $2,136,363 and $218,100 from seven and two third parties. The borrowings were due in October
2019 through September 2020. The interest rate charged on the borrowings ranged between 7% and 10.5%. For the three months ended
September 30, 2019 and 2018, the Company charged interest expenses of $45,943 and $nil on the borrowings, respectively. For the
nine months ended September 30, 2019 and 2018, the Company charged interest expenses of $83,487 and $nil on the borrowings, respectively.
11.
|
OTHER CURRENT LIABILITIES
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Deposit payable
|
|
$
|
83,616
|
|
|
$
|
35,565
|
|
Accrued litigation fees
|
|
|
82,500
|
|
|
|
82,500
|
|
Accrued interest expenses
|
|
|
81,169
|
|
|
|
722
|
|
Accrued payroll
|
|
|
20,329
|
|
|
|
17,983
|
|
Other tax payable
|
|
|
9,326
|
|
|
|
7,817
|
|
Others
|
|
|
11,467
|
|
|
|
40,462
|
|
Other current liabilities
|
|
$
|
288,407
|
|
|
$
|
185,049
|
|
BAT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
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 nine months ended September 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 September 30, 2019
|
|
$
|
-
|
|
|
$
|
-
|
|
Registered direct offering
On April 11, 2019, the Company and certain
institutional investors entered into a securities purchase agreement, pursuant to which the Company agreed to sell to such investors
an aggregate of 1,680,000 shares of 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 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.
On May 20, 2019, the Company and certain
institutional investors entered into a securities purchase agreement, pursuant to which the Company agreed to sell to such investors
an aggregate of 1,440,000 shares of 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 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.
As of September 30, 2019 and December 31,
2018, the Company had 8,646,297 shares and 5,023,906 shares issued and outstanding, respectively.
In addition, with the registered direct
offering and warrants to purchase up to approximately 1,080,000 shares on May 20, 2019, the Company agreed to reduce the exercise
of the warrants issued on April 15, 2019 from $2.20 to $1.32 (“Replacement Warrants”).
However, the Company’s issuance of the Replacement Warrants had resulted in noncompliance
of Nasdaq Listing Rules 5635(d)(1) and 5635(d)(2), subjecting the Company to a potential delisting from the Nasdaq Capital Market
in the event the deficiency is not cured.
On
August 30, 2019, the Company and the Purchasers entered into an amendment and exchange agreement (the “Exchange Agreement”),
pursuant to which the Company shall issue to the Purchasers exchange warrants (the “Exchange Warrants”) to purchase
up to 1,680,000 shares of Common Stock with an exercise price of $2.20 in exchange for the cancellation and termination of the
Replacement Warrants.
BAT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
12.
|
CAPITAL TRANSACTION (CONTINUED)
|
Warrants
A summary of warrants activity for the
nine months ended September 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 September 30, 2019
|
|
|
3,033,370
|
|
|
4.63 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 $2.20 per share. On May 20, 2019, the exercise price was reduced
to $1.32, and on August 30, 2019 the exercise price was revised to $2.20.
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 $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.
On April 11, 2019 and May 20, 2019, the
Company estimated fair value of the both warrants at $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”.
On August 30, 2019, the Company updated
the estimation of fair value of warrants issued on April 11, 2019 as a result of the change in exercise price of the warrants from
$1.32 to $2.20. Accordingly the fair value of the Replacement Warrant decreased from $1,638,000 to $1,357,440.
The key assumption used in estimates are
as follows:
|
|
April 11,
|
|
|
August 30,
|
|
|
May 20,
|
|
|
|
2019
|
|
|
2019
|
|
|
2019
|
|
|
|
|
|
|
(Replacement Warrants)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terms of warrants
|
|
|
60 months
|
|
|
|
55.3 months
|
|
|
|
66 months
|
|
Exercise price
|
|
|
1.32
|
|
|
|
2.20
|
|
|
|
1.32
|
|
Risk free rate of interest
|
|
|
2.77
|
%
|
|
|
2.77
|
%
|
|
|
2.77
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Annualized volatility of underlying stock
|
|
|
55.6
|
%
|
|
|
63.45
|
%
|
|
|
57.04
|
%
|
BAT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
13.
|
EARNINGS (LOSS) PER SHARE
|
The following table sets forth the computation
of basic and diluted loss per common share for the three and nine months ended September 30, 2019 and 2018, respectively:
|
|
For the
Three Months Ended
September 30,
|
|
|
For the
Nine Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(392,843
|
)
|
|
$
|
(635,017
|
)
|
|
$
|
(3,262,994
|
)
|
|
$
|
8,482,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares Outstanding-Basic and Diluted
|
|
|
8,646,297
|
|
|
|
4,919,122
|
|
|
|
7,122,560
|
|
|
|
4,458,093
|
|
(Loss) income per share - basic and diluted
|
|
$
|
(0.05
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.46
|
)
|
|
$
|
1.90
|
|
Net loss per share from continuing operations – basic and diluted
|
|
$
|
(0.05
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.46
|
)
|
|
$
|
(0.36
|
)
|
Net income per share from discontinued operations – basic and diluted
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2.26
|
|
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 24,595,612 shares issued and outstanding as for the three
months ended September 30, 2018 decreased to 4,919,122 shares, and the weighted average shares outstanding – basic and diluted
of 22,290,464 shares issued and outstanding as for the nine months ended September 30, 2018 decreased to 4,458,093 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 nine months ended September 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 nine months ended September 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 September 30, 2019 and December 31, 2018,
the Company had deferred tax assets of $2,462,039 and $1,714,344, respectively. The Company maintains a full valuation allowance
on its net deferred tax assets as of September 30, 2019.
BAT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
14.
|
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 nine months ended September 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 September 30, 2019 and December 31, 2018 and the Company does not believe
that its unrecognized tax benefits will change over the next twelve months.
15.
|
RELATED PARTY TRANSACTIONS AND BALANCES
|
1) Nature of relationships with related parties
Name
|
|
Relationship with the Company
|
Chengdu Jianluo Technology Co., Ltd.
(“Chengdu Jianluo”)
|
|
An associate of the Company, over which the Company has 40% equity interest and exercises significant influence
|
Shanghai Huxin Technology Co., Ltd.
(“Shanghai Huxin”)
|
|
An associate of the Company, over which the Company has 40% equity interest and exercises significant influence
|
Jiaxi Gao
|
|
Chief Executive Office of the Company
|
Tao Sun
|
|
Senior Management of the Company
|
Shun Li
|
|
Senior Management of the Company
|
2) Balances with related parties
Due from related parties
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Chengdu Jianluo (i)
|
|
$
|
459,591
|
|
|
$
|
-
|
|
Shanghai Huxin (ii)
|
|
|
17,384
|
|
|
|
-
|
|
Total Due from related parties
|
|
$
|
476,975
|
|
|
$
|
-
|
|
|
(i)
|
The balance due from Chengdu Jianluo consisted of receivables for transfers of two used luxurious
cars at consideration aggregating $459,381.
|
|
(ii)
|
The balance due from Shanghai Huxin represented a loan due from the related party. The balance
is collected on demand, and no interest income is charged to the associate.
|
BAT GROUP, INC.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
15.
|
RELATED PARTY
TRANSACTIONS AND BALANCES (CONTINUED)
|
Due to related parties
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Chengdu Jianluo
|
|
$
|
8,405
|
|
|
$
|
-
|
|
Jiaxi Gao
|
|
|
7,940
|
|
|
|
-
|
|
Total Due to related parties
|
|
$
|
16,345
|
|
|
$
|
-
|
|
The balances due to both related parties
represent the operating expenses paid by the related parties on behalf of the Company. The balances are payable on demand. The
balances are interest free.
Related party loan, noncurrent
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tao Sun
|
|
$
|
148,495
|
|
|
$
|
-
|
|
The balance of related party loan was payable
in September 2022, with an interest rate of 7.5%.
3) Transactions with related parties
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.
In July 2019, the Company transferred two
used luxurious cars to Chendu Jianluo in exchange for consideration of $459,381. The original amount of the car aggregated $470,420,
and the accumulated depreciation expenses aggregated $11,039. The Company did not has any gain or loss from the transfer.
On September 2, 2019, the Company entered
into a loan agreement with Mr. Tao Sun to borrow $148,495 for a period from September 16, 2019 through September 15, 2022. The
interest rate charged on the borrowing was 7.5%. For the three and nine months ended September 30, 2019, the Company was charged
interest expenses of $933.
16.
|
COMMITMENTS AND CONTINGENCIES
|
During the three and nine months ended
September 30, 2019, we entered into one and three additional lease contracts, all of which with a lease term of 12 months. As of
September 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 September
30, 2019, the Company had one lease agreement with a lease term of 24 months from its inception, with prepayments of remaining
lease liabilities. Consequently, ROU assets and lease liabilities shall be recognized on adoption of ASC 842. As of September 30,
2019, the Company recognized ROU assets of $55,283 and operating lease liabilities of $nil, respectively.
BAT GROUP, INC.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
16.
|
COMMITMENTS AND CONTINGENCIES (CONTINUED)
|
The following table sets forth the Company’s
contractual obligations as of September 30, 2019 in future periods:
|
|
Rental payments
|
|
|
|
|
|
Three months ended December 31, 2019
|
|
$
|
11,683
|
|
Year ending December 31, 2020
|
|
|
-
|
|
Total
|
|
$
|
11,683
|
|
Rent expense for the three months ended
September 30, 2019 and 2018 was $14,321 and $16,234, respectively. Rent expense for the nine months ended September 30, 2019 and
2018 was $59,070 and $42,623, respectively.
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
16.
|
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
16.
|
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
16.
|
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 Court
heard the Company and Sorghum’s arguments on May 1, 2019, and entered an order vacating the arbitration award. The Company
vigorously opposed and moved to confirm the arbitration award on May 6, 2019. On June 5, 2019, the Company filed a notice of appeal
with the New York Supreme Court Appellate Division First Department. The appeal is currently scheduled to be mediated on November
20, 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 Nonobank 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
17.
|
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 September 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 People’s
Republic of China (“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 September
30, 2019 and December 31, 2018.
BAT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
17.
|
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 nine months ended September 30, 2019 and 2018:
|
|
For the
Three Months Ended
September 30,
|
|
|
For the
Nine months Ended
September 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 nine months ended September 30, 2019 and 2018 were $nil and $1,769,566, respectively. For the nine
months ended September 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 nine months ended September 30, 2019 and 2018 were $nil and $1,270,070. The cash provided by investing activities
for the nine months ended September 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.
18.
|
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
August 30, 2019, the Company and the Purchasers entered into an amendment and exchange agreement (the “Exchange Agreement”),
pursuant to which the Company shall issue to the Purchasers exchange warrants (the “Exchange Warrants”)
to purchase up to 1,680,000 shares of Common Stock with an exercise price of $2.20 in exchange for the cancellation and termination
of the Replacement Warrants.
On
September 16, 2019, the Company received a written notification from the NASDAQ Stock
Market Listing Qualifications Staff (the “Staff”) indicating that the
Company has regained compliance with the shareholder approval requirements set forth in Listing Rule 5635(d) and the Listing of
Additional Shares notification requirements under Listing Rule 5250(e)(2)(D) for continued listing on the NASDAQ Capital Market
based on the Staff’s review of the Company’s submitted materials.
In addition, on
July 3, 2019, the 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
|
(1)
|
Entry into Share Purchase Agreement for Private Placement
|
On October 8, 2019, the Company entered into
certain securities purchase agreements (“Reg. S SPAs”) with certain non-U.S. Persons (“Reg. S Investors”)
as defined in Regulation S of the Securities Act of 1933 (the “Securities Act”), as amended pursuant
to which the Company agreed to sell an aggregate of 1,685,000 shares of its common stock, par value $0.001 per share, at a per
share purchase price of $0.35. The net proceeds to the Company from such Offering is approximately $588,000, which has been collected
in September 2019 in advance.
On November 13, 2019, the Company issued 1,685,000
shares of Common Stock to the Reg. S Investors pursuant to the Reg. S SPAs, since all the closing conditions have been satisfied.
The issuance and sale are exempted from the
registration requirements of the Securities Act pursuant to Regulation S promulgated thereunder.
|
(2)
|
Entry into Share Purchase Agreement for Purchase of an Equity Investee
|
On
October 14, 2019, the Company entered into certain share purchase agreements (the
“SPA”) with Zhuji Xingmai Network Technology Co., Ltd. (the “Seller”),
PRC, and Hangzhou Yihe Network Technology Co., Ltd. (the “Target”),
both of which are limited liability companies in PRC. The Seller is the record holder and beneficial owner of all issued and outstanding
capital stock of the Target. Pursuant to the SPA, the Company agreed to transfer to the Seller an aggregate of 1,253,814 shares
of its common stock, par value $0.001 per share, and the Seller agreed to transfer to the Company such number of shares which represents
20% of the capital stock of the Target (the “Target’s Shares”, and
the transaction contemplated therein, the “Acquisition”).
The closing of the Acquisition is subject
to various conditions to closing, including, among other things, (a) Nasdaq’s approval of the listing of the Company’s
Shares; (b) accuracy of the parties’ representations and warranties at the time of closing.
|
(3)
|
Change of the Number of Board of Directors and Appointment of Directors.
|
Effective
October 17, 2019, the Company’s board of directors (the “Board”)
increased the number of directors serving on the Board to 7, appointed Ms. Renmei Ouyang as the Chairwoman of the Board and the
Chief Operating Officer (the “COO”) of the Company, and appointed Mr.
Weicheng Pan as a director of the Company to fill the two vacancies on the Board.