NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,
2019 AND 2018
1.
|
ORGANIZATION AND PRINCIPAL ACTIVITIES
|
China Bat Group, Inc., (formerly known
as China Commercial Credit, 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. (the
“Name Change”) and 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. (collectively, the “Charter Amendment”). The Charter Amendment
became effective on January 17, 2019. As a result of the Name Change, the Company’s CUSIP number changed to 16955B106. 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 employees. As of March 31, 2019 and December 31, 2018, the Company had 5,526,297 shares
and 5,023,906 shares issued and outstanding, respectively.
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 and operations. Beijing Tianxing has the requisite license to carry out used luxurious car leasing
business in China.
During the year ended December 31, 2018,
Beijing Tianxing has acquired five subsidiaries, each with a license to hold a car in Beijing or Zhejiang. On acquisition date,
the asset, liability and net asset of the five companies are comprised of followings:
Name of the Company
|
|
Acquisition date
|
|
Total assets
|
|
|
Total liabilities
|
|
|
Cash consideration
|
|
Beijing Tianrenshijia Apparel Co., Ltd.
|
|
2018/5/16
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Beijing Tongxingyi Feed Co., Ltd.
|
|
2018/5/22
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Beijing Eignty Weili Technology Co., Ltd.
|
|
2018/5/23
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Beijing Saikesheng Garments Co., Ltd.
|
|
2018/7/25
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Beijing Yimingzhu Restaurant Management Co., Ltd.
|
|
2018/7/24
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
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 the Youjiao VIE Agreements entered in June 19, 2018 (the “Termination Agreement”).
The Termination Agreement became effective immediately upon its execution.
DESPOSITION 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.
CHINA BAT GROUP, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,
2019 AND 2018
1.
|
ORGANIZATION AND PRINCIPAL ACTIVITIES (CONTINUED)
|
VIE AGREEMENTS WITH BEIJING TIANXING
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.
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.
CHINA BAT GROUP, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,
2019 AND 2018
1.
|
ORGANIZATION AND PRINCIPAL ACTIVITIES (CONTINUED)
|
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.
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.
CHINA BAT GROUP, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,
2019 AND 2018
1.
|
ORGANIZATION AND PRINCIPAL ACTIVITIES (CONTINUED)
|
Below is the Company’s structure
chart after the completion of the Termination Agreement with Youjiao and Purchase Agreement with HK Xu Ding Co., Ltd.
CHINA BAT GROUP, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,
2019 AND 2018
|
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 March 31, 2019 and for the three months ended March 31, 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 March 31, 2019, the Company has one VIE –Beijing Tianxing, and Beijing Tianxing has five
subsidiaries (See Note 1 for subsidiary information), each of which is entitled to a license to hold a car 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 March 31, 2019, its unaudited results of operations for the three months ended March 31, 2019
and 2018, and its unaudited cash flows for the three months ended March 31, 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)
|
Recently
announced accounting standards
|
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.
CHINA BAT GROUP, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,
2019 AND 2018
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
|
(c)
|
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 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.
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 March
31, 2019, we did not recognize ROU assets or lease liabilities as we did not enter into new lease agreements with lease term over
12 months for the three months ended March 31, 2019 (Note 16).
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.
CHINA BAT GROUP, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,
2019 AND 2018
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
|
(e)
|
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.
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
Balance sheet items, except for equity accounts
|
|
|
6.7119
|
|
|
|
6.8776
|
|
|
|
For the Three Months Ended
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Items in the statements of operations and comprehensive loss, and statements of
cash flows
|
|
|
6.7485
|
|
|
|
6.3582
|
|
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 consolidated statements of comprehensive loss.
Pursuant to ASC 830-30-40-1, upon sale
or upon complete or substantially complete liquidation of an investment in a foreign entity, the amount attributable to that entity
and accumulated in the translation adjustment component of equity shall be both:
|
a.
|
Removed
from the separate component of equity
|
|
b.
|
Reported
as part of the gain or loss on sale or liquidation of the investment for the period during
which the sale or liquidation occurs.
|
CHINA BAT GROUP, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,
2019 AND 2018
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
|
(f)
|
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.
|
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 approximate their fair values due to their short-term nature and are
classified within Level 1 of the fair value hierarchy.
During the three months ended March 31,
2018, the Company recorded $147,540 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.
The Company recorded expenses of $147,540 for the year ended December 31, 2018 under the account of “Changes in fair value
of noncurrent liabilities”. 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.
|
(g)
|
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 months ended March 31, 2019, we accrued impairment
of $96,318 for one operating lease asset. We accrue rental income on our operating leases when collection is reasonably assured.
When a lease vehicle is returned to us,
either at the end of the lease term or through repossession, the asset is reclassified from operating lease assets to property
and equipment, net and recorded at the lower-of-cost or estimated fair value, less costs to sell. Any losses recognized at this
time are recorded as depreciation expense. Subsequent decline in value and any gain or loss recognized at the time of sale is
recognized presented as a component of depreciation expense and a remarketing gain or loss.
CHINA BAT GROUP, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,
2019 AND 2018
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
|
(h)
|
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 months ended March
31, 2019, the Company generated income from operating lease of $399,999.
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.
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 March 31, 2019 and December 31, 2018. As of
March 31, 2019, income tax returns for the tax years ended December 31, 2013 through December 31, 2018 remain open for statutory
examination by PRC tax authorities.
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 months ended March 31, 2019 and 2018. The
number of warrants is omitted excluded from the computation as the anti-dilutive effect.
Comprehensive loss includes net loss and
other comprehensive foreign currency adjustments income. Comprehensive loss is reported in the statements of operations and comprehensive
loss.
Accumulated other comprehensive income,
as presented on the balance sheets are the cumulative foreign currency translation adjustments.
CHINA BAT GROUP, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,
2019 AND 2018
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
|
(l)
|
Commitments
and contingencies
|
In the normal course of business, the
Company is subject to loss contingencies, such as legal proceedings and claims arising out of its business, that cover a wide
range of matters, including, among others, government investigations and tax matters. In accordance with ASC No. 450 Sub topic
20, “Loss Contingencies”, the Company records accruals for such loss contingencies when it is probable that a liability
has been incurred and the amount of loss can be reasonably estimated.
Share-based awards granted to the Company’s
employees 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 had warrants to four individuals
in private placements, through which the Company issued both common shares and warrants as separable units, and neither 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.
|
(o)
|
Discontinued
operation
|
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.
The Company disposed of its microcredit
service segment in June 2018, which met all the conditions required in order to be classified as a discontinued operation (Note
1). Accordingly, the operating results of microcredit service segment are reported as an income from discontinued operations in
the accompanying unaudited condensed consolidated financial statements for the three months ended March 31, 2018. For additional
information, see Note 6, “Disposition of GLG BVI”.
In addition, the Company disposed of Beijing
Youjiao in November 2018 which was a VIE of the Company since May 2018 (Note 1). Though Beijing Youjiao met all the conditions
required in order to be classified as a discontinued operation, it had no financial impact on the condensed consolidated balance
sheet as of March 31, 2019 and December 31, 2018, and the condensed consolidated statements of operations and comprehensive loss
for the three months ended March 31, 2019 and 2018.
CHINA BAT GROUP, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,
2019 AND 2018
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.
Since the Company disposed its microcredit
business and launched luxurious car leasing business in May 2018. As of March 31, 2019, the Company had cash balance of $340,695
and a negative working capital of $30,135. In April 2019, the Company raised a gross proceed of $3.7 million through a public
placement. The management estimated the operating expenses obligation for the next twelve months after issuance of the financial
statements to be $500,000. Therefore, the management believes that the Company will continue as a going concern in the following
12 months.
|
4.
|
VARIABLE
INTEREST ENTITIES AND OTHER CONSOLIDATION MATTERS
|
As a result of Termination Agreements
into which Hao Limo and Beijing Youjiao entered on November 8, 2018, the Company had Beijing Tianxing as its only one VIE as of
March 31, 2019 and December 31, 2018.
On June 19, 2018, Hao Limo entered into
VIE Agreements with Beijing Tianxing. The key terms of these VIE Agreements are summarized in “Note 1 - Organization and
Nature of Operation” above.
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.
CHINA BAT GROUP, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,
2019 AND 2018
|
4.
|
VARIABLE
INTEREST ENTITIES AND OTHER CONSOLIDATION MATTERS (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 March 31, 2019 and December 31, 2018:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(unaudited)
|
|
|
|
|
Cash
|
|
$
|
262,683
|
|
|
$
|
991,385
|
|
Other current assets
|
|
|
656,569
|
|
|
|
87,922
|
|
Operating lease assets, net
|
|
|
1,939,377
|
|
|
|
1,634,018
|
|
Property and equipment, net
|
|
|
5,106
|
|
|
|
5,524
|
|
Total Assets
|
|
$
|
2,863,735
|
|
|
$
|
2,718,849
|
|
|
|
|
|
|
|
|
|
|
Unearned income
|
|
$
|
29,669
|
|
|
$
|
6,209
|
|
Other current liabilities
|
|
|
915,231
|
|
|
|
320,649
|
|
Due to CCC
|
|
|
2,919,911
|
|
|
|
2,937,927
|
|
Total Liabilities
|
|
$
|
3,864,811
|
|
|
$
|
3,264,785
|
|
|
|
For the Three Months Ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Revenue
|
|
$
|
399,999
|
|
|
$
|
-
|
|
Net loss
|
|
$
|
529,230
|
|
|
$
|
-
|
|
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 March 31, 2019, approximately $55,907 was deposited
with a bank in the United States which was insured by the government up to $250,000. As of March 31, 2019 and December 31, 2018,
approximately $284,788 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.
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.
CHINA BAT GROUP, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,
2019 AND 2018
|
(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$55,907 which was in U.S. dollars as of March 31, 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.
CHINA BAT GROUP, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,
2019 AND 2018
|
6.
|
DESPOSITION
OF GLG BVI
|
On June 19, 2018, the Company, HK Xu Ding
Co., Limited, a private limited company duly organized under the laws of Hong Kong (the “Purchaser”) and CCCR International
Investment Ltd., a business company incorporated in the British Virgin Islands with limited liability (“GLG BVI”)
entered into certain Share Purchase Agreement (the “Purchase Agreement”). Pursuant to the Purchase Agreement, the
Purchaser agreed to purchase GLG BVI in exchange of cash purchase price of $500,000. The consideration was paid as of June 30,
2018.
GLG BVI is the sole shareholder of GLG
International Investment Ltd. (“GLG HK”), a company incorporated under the laws of the Hong Kong S.A.R. of the PRC,
which is the sole shareholder of WFOE. WFOE, via a series of contractual arrangements, controls Wujiang Luxiang. GLG HK is the
sole shareholder of PFL.
On July 10, 2018, the parties completed
all the share transfer registration procedure as required by the laws of British Virgin Islands and all the other closing conditions
have been satisfied, as a result, the Disposition contemplated by the Purchase Agreement is completed. Upon completion of the
Disposition, the Purchaser became the sole shareholder of GLG BVI and as a result, assumed all assets and obligations of all the
subsidiaries and VIE entities owned or controlled by GLG BVI. Upon the closing of the transaction, the Company does not bear any
contractual commitment or obligation to the microcredit business or the employees of GLG BVI and its subsidiaries and VIEs, nor
to the Purchaser.
On June 17, 2018, management was authorized
to approve and commit to a plan to sell GLG BVI, therefore the major assets and liabilities relevant to the disposal are reported
as components of total assets and liabilities separate from those balances of the continuing operations. At the same time, the
results of all discontinued operations, less applicable income taxes, are reported as components of net income (loss) separate
from the net loss of continuing operations in accordance with ASC 205-20-45. The assets relevant to the sale of GLG BVI with a
carrying value of $6.2 million were classified as assets held for sale as of June 19, 2018. The liabilities relevant to the sale
of GLG BVI with a carrying value of $10.5 million were classified as liabilities held for sale as of June 19, 2018. A net gain
of $9.7 million was recognized as the net gain from disposal of discontinued operation in 2018.
In accordance with ASU No. 2014-08,
Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, a disposal of a component of an entity
or a group of components of an entity is required to be reported as discontinued operations if the disposal represents a strategic
shift that has (or will have) a major effect on an entity’s operations and financial results when the components of an entity
meets the criteria in paragraph 205-20-45-1E to be classified as held for sale. When all of the criteria to be classified as held
for sale are met, including management, having the authority to approve the action, commits to a plan to sell the entity, the
major current assets, other assets, current liabilities, and noncurrent liabilities shall be reported as components of total assets
and liabilities separate from those balances of the continuing operations. At the same time, the results of all discontinued operations,
less applicable income taxes (benefit), shall be reported as components of net income (loss) separate from the net income (loss)
of continuing operations in accordance with ASC 205-20-45.
As the transaction was closed on June
17, 2018, the Company had no assets and liabilities held for sale in the in the condensed consolidated balance sheet as of March
31, 2019 and December 31, 2018.
CHINA BAT GROUP, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,
2019 AND 2018
|
6.
|
DESPOSITION
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 months ended March 31, 2019 and 2018:
|
|
For the Three Months Ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Discontinued Operations
|
|
|
|
|
|
|
Total interest and fees income
|
|
$
|
-
|
|
|
$
|
100,772
|
|
Reversal of provision for loan losses and financing lease losses
|
|
|
-
|
|
|
|
330,282
|
|
Provision for financial guarantee services
|
|
|
-
|
|
|
|
(104,391
|
)
|
Non-interest expenses
|
|
|
-
|
|
|
|
(150,134
|
)
|
Net gain from discontinued operations
|
|
|
-
|
|
|
|
-
|
|
Net income from discontinued operations
|
|
$
|
-
|
|
|
$
|
176,529
|
|
Total operating cash flows used in discontinued
operations for the three months ended March 31, 2019 and 2018 were $nil and $193,759, respectively. For the three months ended
March 31, 2018, the operating cash flows provided by discontinued operations was mainly caused by net income generated by discontinued
operations of $176,520 against a reversal of provision for loan losses of $330,282.
Total investing cash flows provided discontinued
operations for the three months ended March 31, 2019 and 2018 were $nil and $332,996. The cash provided by investing activities
for the three months ended March 31, 2018 was net effects of disbursement of loans to third parties of $1,635,683 against collection
of $1,402,912 from third party customers of direct loan services, collection from guarantees for loan paid on behalf of customers
of $172,544, and collection of short-term investments of $393,193 from financial institutions.
|
|
March 31,
|
|
|
December
31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(unaudited)
|
|
|
|
|
Loan to a third parties
|
|
$
|
595,956
|
|
|
$
|
-
|
|
Deferred rental expenses
|
|
|
31,787
|
|
|
|
43,233
|
|
Interest receivable
|
|
|
12,429
|
|
|
|
-
|
|
Deposits
|
|
|
10,385
|
|
|
|
6,877
|
|
Petty cash
|
|
|
2,338
|
|
|
|
37,812
|
|
Others
|
|
|
3,674
|
|
|
|
-
|
|
|
|
$
|
656,569
|
|
|
$
|
87,922
|
|
Loan to third parties and interest
receivable
In January 2019, the Company entered into
loan agreements with two third parties, pursuant to which the Company disbursed loans aggregating $592,724 to the third parties,
both with a loan period matured on September 30, 2019. The Company charged both third parties an interest rate of 10% per annum.
Principal and interest are repaid on maturity of the loan. As of March 31, 2019, the Company recorded a balance of interest receivable
of $12,429.
CHINA BAT GROUP, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,
2019 AND 2018
|
8.
|
OPERATING
LEASE ASSETS, NET
|
The Company started its used luxurious
car leasing business in China since May 2018.
As of December 31, 2018, the Company had
investments in six used luxurious cars. During the three months ended March 31, 2019, the Company purchased two used luxurious
cars. As of March 31, 2019, the Company had investments in eight used luxurious cars.
As of March 31, 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 $278,859 and $177,630, respectively. As a result,
the Company accrued impairment of $96,318 for the additional one operating lease asset for the three months ended March 31, 2019.
As of the March 31, 2019, the balance
of the used luxurious cars is comprised of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(unaudited)
|
|
|
|
|
Used luxurious cars
|
|
$
|
2,362,202
|
|
|
$
|
1,906,168
|
|
Less: accumulated depreciation
|
|
|
(143,966
|
)
|
|
|
(94,520
|
)
|
accumulated
impairment
|
|
|
(278,859
|
)
|
|
|
(177,630
|
)
|
|
|
$
|
1,939,377
|
|
|
$
|
1,634,018
|
|
For the three months ended March 31, 2019,
the Company charged depreciation expenses of $46,858 and impairment losses of $96,318 on used luxurious cars. The depreciation
expenses of $23,588 and $23,270 were charged to accounts of “net depreciation expense on operating lease assets” and
“other operating expenses”, respectively.
As of March 31, 2019, one of the eight
used luxurious cars was pledged for borrowings from third parties. The pledge of the car will be released in May 2019.
|
9.
|
OTHER
CURRENT LIABILITIES
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(unaudited)
|
|
|
|
|
Deposit payable
|
|
$
|
42,937
|
|
|
$
|
35,565
|
|
Accrued litigation fees
|
|
|
82,500
|
|
|
|
82,500
|
|
Accrued interest expenses
|
|
|
6,906
|
|
|
|
722
|
|
Accrued payroll
|
|
|
21,940
|
|
|
|
17,983
|
|
Other tax payable
|
|
|
12,840
|
|
|
|
7,817
|
|
Others
|
|
|
11,167
|
|
|
|
40,462
|
|
|
|
$
|
178,290
|
|
|
$
|
185,049
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(unaudited)
|
|
|
|
|
Borrowings from third parties
|
|
$
|
819,440
|
|
|
$
|
218,100
|
|
As of March 31, 2019 and December 31,
2018, the Company had borrowings of $819,440 and $218,100 from seven and two third parties. The interest rate charged on the borrowings
ranged between 7% and 10.5%. For the three months ended March 31, 2019 and 2018, the Company charged interest expenses of $6,869
and $nil on the borrowings, respectively.
CHINA BAT GROUP, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,
2019 AND 2018
|
11.
|
OTHER
OPERATING EXPENSES
|
|
|
For the Three Months Ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Legal and consulting expenses
|
|
$
|
524,746
|
|
|
$
|
203,560
|
|
Car expenses
|
|
|
46,394
|
|
|
|
-
|
|
Impairment losses on one operating lease asset
|
|
|
96,318
|
|
|
|
-
|
|
Travel expenses
|
|
|
4,069
|
|
|
|
31,375
|
|
Audit-related expense
|
|
|
51,863
|
|
|
|
20,600
|
|
Promotion expenses
|
|
|
43,121
|
|
|
|
-
|
|
Depreciation and amortization
|
|
|
23,820
|
|
|
|
-
|
|
Entertainment expenses
|
|
|
3,106
|
|
|
|
-
|
|
Bank charges
|
|
|
3,812
|
|
|
|
435
|
|
Other expenses
|
|
|
127,845
|
|
|
|
25,125
|
|
|
|
$
|
925,094
|
|
|
$
|
281,095
|
|
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 employees as compensation for the services provided over the past one year. The restricted shares are
exercisable on September 5, 2019. The fair value of the services provided was in in the total amount of US$884,208, at a per share
price at the market price of the issuance date. A summary of RSU activity for the year ended March 31, 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 March 31, 2019
|
|
|
-
|
|
|
$
|
-
|
|
As of March 31, 2019 and December 31,
2018, the Company had 5,526,297 shares and 5,023,906 shares issued and outstanding, respectively.
Warrants
As of March 31, 2019 and December 31,
2018, the Company had outstanding warrants to purchase 273,370 shares with fair value of $280,830.
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
|
Number of warrants
|
|
|
Fair value of warrants
|
|
|
Number of warrants
|
|
|
Fair value of warrants
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
Yang Jie
|
|
|
218,370
|
|
|
$
|
222,453
|
|
|
|
218,370
|
|
|
$
|
222,453
|
|
Long Yi
|
|
|
55,000
|
|
|
|
58,377
|
|
|
|
55,000
|
|
|
|
58,377
|
|
Total
|
|
|
273,370
|
|
|
$
|
280,830
|
|
|
|
273,370
|
|
|
$
|
280,830
|
|
As
of March 31, 2019 and December 31, 2018, the Company had 251,609 restricted shares which were authorized but unissued. As of March
31, 2109 and 2018, the Company had no authorized but unissued warrants.
CHINA BAT GROUP, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,
2019 AND 2018
The following table sets forth the computation
of basic and diluted loss per common share for the three months ended March 31, 2019 and 2018, respectively:
|
|
For the Three Months Ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Net Loss
|
|
$
|
(1,829,826
|
)
|
|
$
|
(385,898
|
)
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares Outstanding-Basic and Diluted
|
|
|
5,169,041
|
|
|
|
3,966,933
|
|
Loss per share- basic and diluted
|
|
$
|
(0.354
|
)
|
|
$
|
(0.097
|
)
|
Net loss per share from continuing operations – basic and diluted
|
|
$
|
(0.354
|
)
|
|
$
|
(0.142
|
)
|
Net income per share from discontinued operations – basic and diluted
|
|
$
|
-
|
|
|
$
|
0.045
|
|
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 19,834,665 shares issued and outstanding as for the three months ended March 31, 2018 decreased to
3,966,933 shares.
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 months ended March 31, 2019 and 2018. The
number of warrants is excluded from the computation as the anti-dilutive effect.
CHINA BAT GROUP, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,
2019 AND 2018
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 months ended March 31, 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. The Company maintains a full valuation allowance on its
net deferred tax assets as of March 31, 2019.
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 months ended March 31, 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 March 31, 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
|
As of March 31, 2019 and December 31,
2018, the Company had no balances due from or due to related parties.
During the three months ended March 31,
2019 and 3018, the Company did not incur significant related party transactions.
CHINA BAT GROUP, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,
2019 AND 2018
|
16.
|
COMMITMENTS
AND CONTINGENCIES
|
We
leased certain office space in New York, NY where we paid a monthly rent of US$3,600 for the three months ended March 31, 2019.
During the three months ended March 31, 2019, we entered into two additional lease contracts, both of which with a lease term of
12 months. As of March 31, 2019, we had one rental free office lease agreement with a third party and three 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 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 March 31, 2019, the Company had one lease agreement with a lease term of 24 months from its inception.
Consequently, ROU and lease liabilities shall be recognized on adoption of ASC 842. However since the lease liability is
expected to be due in October 2019 according to the lease agreement, we did not recognize ROU assets or lease liabilities
because it had insignificant financial impact on the unaudited condensed consolidated balance sheets and it had no financial
impact on the revenues, net income and retained earnings.
The following table sets forth the Company’s
contractual obligations as of March 31, 2019 in future periods:
|
|
Rental payments
|
|
|
|
|
|
Year ending March 31, 2020
|
|
$
|
35,186
|
|
Year ending March 31, 2021
|
|
|
30,518
|
|
Total
|
|
$
|
65,704
|
|
Rent expense for the three months ended
March 31, 2019 and 2018 was $16,624 and $12,139, respectively.
CHINA BAT GROUP, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,
2019 AND 2018
|
16.
|
COMMITMENTS
AND CONTINGENCIES (CONTINUED)
|
|
a)
|
2014
Class Action litigation
|
On August 6, 2014, a purported shareholder
Andrew Dennison filed a putative class action complaint in the United States District Court District of New Jersey (the “N.J.
district court”) relating to a July 25, 2014 press release about the Company’s progress in recovering a significant
portion of the $5.4 million the Company paid in the first quarter of 2014 on behalf of loan guarantee customers. The action, Andrew
Dennison v. China 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. China 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.
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.
CHINA BAT GROUP, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,
2019 AND 2018
|
16.
|
COMMITMENTS
AND CONTINGENCIES (CONTINUED)
|
|
2)
|
Contingencies
(continued)
|
|
a)
|
2014
Class Action litigation (continued)
|
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.
On April 12, 2019, the Company filed a
Current Report on Form 8-K, properly providing the notice of settlement to the Company’s shareholders in accordance with
the Stipulation of Settlement.
CHINA BAT GROUP, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,
2019 AND 2018
|
16.
|
COMMITMENTS
AND CONTINGENCIES (CONTINUED)
|
|
2)
|
Contingencies
(continued)
|
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 the 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.
CHINA BAT GROUP, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,
2019 AND 2018
|
16.
|
COMMITMENTS
AND CONTINGENCIES (CONTINUED)
|
|
2)
|
Contingencies
(continued)
|
|
d)
|
2017
Arbitration with Sorghum (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 did not provide a written response to the Company’s Arbitration Demand by the deadline.
However, in accordance with the Commercial Arbitration Rules of the AAA (“Rules”), Sorghum’s failure to respond
is deemed as a general denial of the Company’s claims. On April 10, 2018, the AAA initially appointed Barbara Mentz, Esq.
(“Arbitrator Mentz”) as arbitrator in accordance with the arbitration clause contained in the Exchange Agreement
.
On March 28, 2018, the AAA conducted an initial telephonic conference with Arbitrator Barbara Mentz, but neither Sorghum nor its
counsel appeared for the call. On March 28, 2018, after the Company’s counsel appeared for the initial telephonic conference,
Sorghum and its counsel contacted the AAA claiming that it was not in receipt of the AAA’s correspondence although the AAA
forwarded its correspondence to Sorghum’s Chief Executive Officer’s active email. In response, the AAA scheduled another
telephonic conference for April 9, 2018. All parties appeared at the April 9, 2018 conference, and approved Arbitrator Mentz’s
appointment. On April 11, 2018, pursuant to the Rules, Sorghum filed its answer and counterclaim. The Company filed a written
denial to Sorghum’s counterclaim on April 26, 2018. On May 2, 2018, the parties jointly requested an extension of time to
file their respective proposals for resolution with the AAA, and Arbitrator Mentz granted the extension. On May 17, 2018, Sorghum
requested another extension and Arbitrator Mentz granted the extension. In accordance with Arbitrator Mentz’s Order, the
parties’ proposals was due May 31, 2018. On May 30, 2018, due to a delay in receiving additional evidence from a relevant
third party, the Company requested an extension of time to file its proposal for resolution, which Arbitrator Mentz granted extending
the deadline to June 7, 2018. To provide additional time to allow certain relevant documents to be translated due to the unavailability
of the parties’ mutually accepted translator, the Company requested a final extension of time to June 14, 2018, to submit
the parties’ proposal for resolution. Arbitrator Mentz granted the Company’s request. On June 14, 2018, the Company
submitted its proposal for resolution to the AAA. On July 30, 2018, Arbitrator Mentz entered a reasoned award, accepting the Company’s
proposal for resolution, awarding the Company damages of $1,436,521.50 against Sorghum and denying Sorghum’s Counterclaim
against the Company in its entirety with prejudice. Sorghum has sought to vacate the arbitration award by filing a petition to
vacate the arbitration award in the Supreme Court for the State of New York, New York County. The Company intends to vigorously
oppose and move to confirm the arbitration award. The Court has scheduled a hearing for May 1, 2019.
|
e)
|
2018
Court Matter with Shanghai Nonobank Financial Information Service Co. Ltd.
|
On August 2, 2018, the Company became
party to an action filed by Shanghai Nonbank Financial Information Service Co. Ltd. (“Plaintiff”) in the Supreme Court
for the State of New York, New York County (“NY Supreme Court”) (Index No. 653834/2018) (the “Action”).
Plaintiff’s Complaint seeks to recover approximately $3.5 million of Plaintiff’s funds that were allegedly required
to be held in escrow in New York pursuant to an agreement by and between Plaintiff, Yang Jie and Yi Lin. Plaintiff alleges 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. The Complaint alleges 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 Complaint. The Court has
scheduled oral arguments on the Company’s motion to dismiss for May 1, 2019.
CHINA BAT GROUP, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,
2019 AND 2018
|
17.
|
NASDAQ
NOTIFICATION ON REGAIN OF COMPLIANCE
|
On February 7,
2019, the Company received a written notification from the NASDAQ Stock Market Listing Qualifications Staff (the “Nasdaq
Staff”) indicating that the Company has regained compliance with the periodic filing requirement for continued listing on
the NASDAQ Capital Market pursuant to NASDAQ Listing Rule 5500(a)(2) (the “Minimum Bid Price Requirement”) based on
the closing bid price of the Company’s common stock being at $1.00 per share or greater for ten consecutive business days,
from January 17 through February 6, 2019.
|
18.
|
PARENT-ONLY
FINANCIALS
|
CHINA BAT GROUP,
INC.
CONDENSED BALANCE
SHEETS
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Cash
|
|
$
|
55,907
|
|
|
$
|
416,459
|
|
Due from VIE
|
|
|
3,492,778
|
|
|
|
3,537,214
|
|
Total current assets
|
|
|
3,548,685
|
|
|
|
3,953,673
|
|
|
|
|
|
|
|
|
|
|
Investment in subsidiaries
|
|
|
-
|
|
|
|
-
|
|
Total Assets
|
|
$
|
3,548,685
|
|
|
$
|
3,953,673
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
Other current liabilities
|
|
$
|
82,500
|
|
|
$
|
82,500
|
|
Total
Liabilities
|
|
|
82,500
|
|
|
|
82,500
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ Equity
|
|
|
|
|
|
|
|
|
Series A Preferred Stock (par value $0.001 per
share, 1,000,000 shares authorized at December 31, 2018 and 2017, respectively; nil shares issued and outstanding at March
31, 2019 and December 31, 2018, respectively)
|
|
$
|
-
|
|
|
$
|
-
|
|
Series B Preferred Stock (par value $0.001 per
share, 5,000,000 shares authorized at March 31, 2019 and December 31, 2018, respectively; nil shares issued and outstanding
at March 31, 2019 and December 31, 2018, respectively)
|
|
|
-
|
|
|
|
-
|
|
Common stock (par value $0.001 per share, 100,000,000 shares authorized;
5,526,297 and 5,023,906 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively)*
|
|
|
5,526
|
|
|
|
5,024
|
|
Additional paid-in capital
|
|
|
31,200,889
|
|
|
|
29,834,296
|
|
Accumulated deficit
|
|
|
(27,286,916
|
)
|
|
|
(25,457,090
|
)
|
Accumulated other comprehensive
loss
|
|
|
(453,314
|
)
|
|
|
(511,057
|
)
|
Total
Shareholders’ Equity
|
|
|
3,466,185
|
|
|
|
3,871,173
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
and Shareholders’ Equity
|
|
$
|
3,548,685
|
|
|
$
|
3,953,673
|
|
|
*
|
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 25,119,532 shares issued and outstanding
as of December 31, 2018 decreased to 5,023,906 shares.
|
CHINA BAT GROUP, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,
2019 AND 2018
CHINA BAT GROUP, INC.
CONDENSED STATEMENTS OF OPERATIONS
|
|
For the Three Months Ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
Salaries and employee surcharge
|
|
$
|
(982,221
|
)
|
|
$
|
(121,653
|
)
|
Rental expenses
|
|
|
-
|
|
|
|
(12,139
|
)
|
Other operating expenses
|
|
|
(306,975
|
)
|
|
|
(281,095
|
)
|
Changes in fair value of noncurrent liabilities
|
|
|
-
|
|
|
|
(147,540
|
)
|
Total operating expenses
|
|
|
(1,289,196
|
)
|
|
|
(562,427
|
)
|
|
|
|
|
|
|
|
|
|
Net loss before income taxes
|
|
|
(1,289,196
|
)
|
|
|
(562,427
|
)
|
Income tax expense
|
|
|
-
|
|
|
|
-
|
|
Equity of (loss) income in subsidiaries
|
|
|
(540,630
|
)
|
|
|
176,529
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,829,826
|
)
|
|
$
|
(385,898
|
)
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
57,743
|
|
|
|
(125,220
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(1,772,083
|
)
|
|
$
|
(511,118
|
)
|
CHINA BAT GROUP, INC.
CONDENSED STATEMENTS OF CASH FLOWS
|
|
For the Three Months Ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,829,826
|
)
|
|
$
|
(385,898
|
)
|
Adjustments to reconcile net income to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Equity loss (income) of subsidiaries
|
|
|
540,630
|
|
|
|
(176,529
|
)
|
Restricted shares issued to employees
|
|
|
884,208
|
|
|
|
-
|
|
Changes in fair value of noncurrent liabilities
|
|
|
-
|
|
|
|
147,540
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Due from VIE
|
|
|
44,436
|
|
|
|
-
|
|
Net Cash Used in Operating Activities
|
|
|
(360,552
|
)
|
|
|
(414,887
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Net Cash Provided by Investing Activities
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Net Cash Provided by Financing Activities
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Effect of Exchange Rate Changes on Cash
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net Increase in Cash
|
|
|
(360,552
|
)
|
|
|
(414,887
|
)
|
Cash at Beginning of Period
|
|
|
416,459
|
|
|
|
1,359,630
|
|
Cash at End of Period
|
|
$
|
55,907
|
|
|
$
|
944,743
|
|
CHINA BAT GROUP, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,
2019 AND 2018
1) On April 11, 2019, the Company and
certain institutional investors (the “Purchasers”) entered into a securities purchase agreement (the “Purchase
Agreement”), pursuant to which the Company agreed to sell to such investors an aggregate of 1,680,000 shares of common stock
(the “Common Stock”) in a registered direct offering and warrants to purchase up to approximately 1,680,000 shares
of the Company’s Common Stock in a concurrent private placement, for gross proceeds of approximately $3.7 million (the “Financing”).
The warrants will be exercisable immediately following the date of issuance and have an exercise price of $2.20. The warrants
will expire 5 years from the earlier of the date on which the shares of Common Stock issuable upon exercise of the warrants may
be sold pursuant to an effective registration statement or may be exercised on a cashless basis and be immediately sold pursuant
to Rule 144. The purchase price for each share of Common Stock and the corresponding warrant is $2.20. Each warrant is subject
to anti-dilution provisions to reflect stock dividends and splits or other similar transactions, but not as a result of future
securities offerings at lower prices. The warrants contain a mandatory exercise right for the Company to force exercise of the
warrants if the Company’s common stock trades at or above $6.60 for 20 consecutive trading days provided, among other things,
that the shares issuable upon exercise of the warrants are registered or could be sold pursuant to Rule 144 and the daily trading
volume exceeds 200,000 shares per trading day on each trading day in a period of 20 consecutive trading days prior to the applicable
date.
The Company currently intends to use the
net proceeds from the Financing for working capital and general corporate purposes. The Financing is closed on April 15, 2019,
subject to satisfaction of customary closing conditions.
The Company entered into a letter agreement
dated February 25, 2019 (the “Letter Agreement’) with Maxim Group LLC, as exclusive placement agent (the “Placement
Agent”), pursuant to which the Placement Agent agreed to act as the sole lead/exclusive placement agent in connection with
the Financing. The Company agreed to pay the Placement Agent an aggregate fee equal to 7% of the gross proceeds raised
in the Financing. The Company also agreed to reimburse the Placement Agent for certain expenses, including for fees and expenses
related to legal expenses limited to $90,000.
2)
On May 6, 2019, Mr. Teck Chuan Yeo resigned from his position as director of the Company, effective immediately. His resignation
was not a result of any disagreement with the Company relating to its operations, policies or practices. Effective May 6, 2019,
the Company’s board of directors appointed Ms. Siyuan Zhu as a new member of the Board and Chairwoman of the Audit Committee
to fill the vacancy created by the resignation of Mr. Teck Chuan Yeo.