GLG TD Holdings Inc

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Bat Group, Inc. (formerly known as China Commercial Credit, Inc. or China Bat Group, Inc. ) (“GLG” or “the Company”), is a holding company that was incorporated under the laws of the State of Delaware on December 19, 2011. On January 11, 2019, the Company filed a Certificate of Amendment of the Certificate of Incorporation with the Secretary of State of Delaware to effect a name change to China Bat Group, Inc. and on June 3, 2019, the Company further changed its name to Bat Group, Inc.

On March 22, 2018, the Company formed HC High Summit Holding Limited (“HC High BVI”), a wholly owned subsidiary, in British Virgin Island (“BVI”). HC High BVI is authorized to issue a maximum of 50,000 shares of one

class, at par value of $1.00 per share.

On April 16, 2018, HC High BVI formed a wholly owned subsidiary, HC High Summit Limited (“HC High HK”) in Hong Kong. On April 17, 2018, the Company, through HC High HK, established Hao Limo Technology (Beijing) Co. Ltd. (“Hao Limo”).

On May 17, 2018, Hao Limo entered into a series of agreements (the “Tianxing VIE Agreements”) with Beijing Tianxing Kunlun Technology Co. Ltd. (“Beijing Tianxing”) and Shun Li and Jialin Cui, the shareholders of Beijing Tianxing. The Tianxing VIE Agreements are designed to provide Hao Limo with the power, rights and obligations equivalent in all material respects to those it would possess as the sole equity holder of Beijing Tianxing, including absolute control rights and the rights to the management, operations, assets, property and revenue of Beijing Tianxing. The purpose of the VIE Agreements is solely to give Hao Limo the exclusive control over Beijing Tianxing’s management.

As of June 30, 2019, Beijing Tianxing has six wholly owned subsidiaries: Beijing Tianrenshijia Apparel Co., Ltd., Beijing Tongxingyi Feed Co., Ltd., Beijing Eignty Weili Technology Co., Ltd., Beijing Saikesheng Garments Co., Ltd., Beijing Yimingzhu Restaurant Management Co., Ltd., Beijing Kemao Jiye Commercial Co., Ltd., Car Master (Beijing) Information Consulting Co., Ltd. Each of these subsidiaries owns a license to hold cars in Beijing or Zhejiang, and was inactive for the six months ended June 30, 2019 and 2018.

The Company, its subsidiaries and VIE are primarily engaged in operating leasing business of used luxurious cars in China, after it disposed its direct loans, loan guarantees and financial leasing services to small-to-medium sized businesses, farmers and individuals (the “Micro-lending Business”) in July 2018. The Company rents out its owned luxurious pre-owned automobiles to customers for short period, normally within 7 days. The Company conducted this business under the brand name “Batcar” through the Company’s VIE entity, Beijing Tianxing Kunlun Technology Co. Ltd (“Beijing Tianxing”).

VIE AGREEMENTS WITH BEIJING YOUJIAO AND TERMINATION OF VIE AGREEMENTS WITH BEIJING YOUJIAO

On June 19, 2018, Hao Limo entered into a series of agreements (the “Youjiao VIE Agreements”) with Beijing Youjiao and Aizhen Li. The Youjiao VIE Agreements were designed to provide Hao Limo with the power, rights and obligations equivalent in all material respects to those it would possess as the sole equity holder of Beijing Youjiao, including absolute control rights and the rights to the management, operations, assets, property and revenue of Beijing Youjiao. On November 8, 2018, Hao Limo entered into certain termination agreement with Beijing Youjiao and Aizhen Li to terminate.

BAT GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DISPOSITION OF GLG BVI

On June 19, 2018, the Company, HK Xu Ding Co, Limited, a private limited company duly organized under the laws of Hong Kong (the “Purchaser”) and CCCR International Investment Ltd., a business company incorporated in the British Virgin Islands with limited liability which was previously 100% owned by the Company (“GLG BVI”) entered into certain Share Purchase Agreement (the “Purchase Agreement”). Pursuant to the Purchase Agreement, the Purchaser agreed to purchase GLG BVI in exchange of cash purchase price of $500,000.

GLG BVI is the sole shareholder of GLG International Investment Ltd. (“GLG HK”), a company incorporated under the laws of the Hong Kong S.A.R. of the PRC, which is the sole shareholder of WFOE. WFOE, via a series of contractual arrangements, controls Wujiang Luxiang. GLG HK is the sole shareholder of PFL.

Upon closing of the disposition on June 21, 2018, the Purchaser became the sole shareholder of GLG BVI and as a result, assume all assets and obligations of all the subsidiaries and VIE entities owned or controlled by GLG BVI, including but not limited to Wujiang Luxiang and PFL.

The interim unaudited condensed consolidated financial statements are prepared and presented in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”).

The unaudited interim financial information as of June 30, 2019 and for the three and six months ended June 30, 2019 and 2018 have been prepared without audit, pursuant to the rules and regulations of the SEC and pursuant to Regulation S-X. Certain information and footnote disclosures, which are normally included in annual financial statements prepared in accordance with U.S. GAAP, have been omitted pursuant to those rules and regulations. As of June 30, 2019, the Company has one VIE –Beijing Tianxing, and Beijing Tianxing has six subsidiaries, each of which is entitled to a license to hold cars in Beijing. The unaudited interim financial information should be read in conjunction with the audited financial statements and the notes thereto, included in the Form 10-K for the fiscal year ended December 31, 2018, which was filed with the SEC on April 5, 2019.

In the opinion of management, all adjustments (including normal recurring adjustments) necessary to present a fair statement of the Company’s unaudited financial position as of June 30, 2019, its unaudited results of operations for the three and six months ended June 30, 2019 and 2018, and its unaudited cash flows for the three and six months ended June 30, 2019 and 2018, as applicable, have been made. The unaudited interim results of operations are not necessarily indicative of the operating results for the full fiscal year or any future periods.

(b) Consolidation of Variable Interest Entity

The Company had Beijing Tianxing as its only one VIE as of June 30, 2019 and December 31, 2018. Material terms of each of the Tianxing VIE Agreements are described below:

Exclusive Business Cooperation Agreement

Pursuant to the Exclusive Business Cooperation Agreement between Beijing Tianxing and Hao Limo, Hao Limo provides Beijing Tianxing with technical support, consulting services and management services on an exclusive basis, utilizing its advantages in technology, human resources, and information. Additionally, Beijing Tianxing granted an irrevocable and exclusive option to Hao Limo to purchase from Beijing Tianxing, any or all of Beijing Tianxing’s assets at the lowest purchase price permitted under the PRC laws. Should Hao Limo exercise such option, the parties shall enter into a separate asset transfer or similar agreement. For services rendered to Beijing Tianxing by Hao Limo under this agreement, Hao Limo is entitled to collect a service fee calculated based on the time of services rendered multiplied by the corresponding rate, plus amount of the services fees or ratio decided by the board of directors of Hao Limo based on the value of services rendered by Hao Limo and the actual income of Beijing Tianxing from time to time, which is substantially equal to all of the net income of Beijing Tianxing.

BAT GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Exclusive Business Cooperation Agreement shall remain in effect for ten years unless it is terminated by Hao Limo with 30-day prior written notice. Beijing Tianxing does not have the right to terminate the agreement unilaterally. Hao Limo may unilaterally extend the term of this agreement with prior written notice.

Share Pledge Agreement

Under the Share Pledge Agreement among Beijing Tianxing, the shareholders of Beijing Tianxing, and Hao Limo, the shareholders of Beijing Tianxing pledged all of her equity interests in Beijing Tianxing to Hao Limo to guarantee the performance of Beijing Tianxing’s obligations under the Exclusive Business Cooperation Agreement. Under the terms of the agreement, in any event of default, as set forth in the Share Pledge Agreement, including that Beijing Tianxing or the shareholders of Beijing Tianxing breach their respective contractual obligations under the Exclusive Business Cooperation Agreement, Hao Limo, as pledgee, will be entitled to certain rights, including, but not limited to, the right to dispose of the pledged equity interest in accordance with applicable PRC laws. Hao Limo shall have the right to collect any and all dividends declared or generated in connection with the equity interest during the term of pledge.

The Share Pledge Agreement shall be effective until all payments due under the Exclusive Business Cooperation Agreement have been paid by Beijing Tianxing. Hao Limo shall cancel or terminate the Share Pledge Agreement upon Beijing Tianxing’s full payment of fees payable under the Exclusive Business Cooperation Agreement.

Exclusive Option Agreement

Under the Exclusive Option Agreement, the shareholders of Beijing Tianxing irrevocably granted Hao Limo (or its designee) an exclusive option to purchase, to the extent permitted under PRC law, once or at multiple times, at any time, part or all of their equity interests in Beijing Tianxing. The option price is equal to the capital paid in by the shareholders of Beijing Tianxing subject to any appraisal or restrictions required by applicable PRC laws and regulations.

The agreement remains effective for a term of ten years and may be renewed at Hao Limo’s election.

Power of Attorney

Under the Power of Attorney, the shareholders of Beijing Tianxing authorized Hao Limo to act on her behalf as her exclusive agent and attorney with respect to all rights as shareholder, including but not limited to: (a) attending shareholders’ meetings; (b) exercising all the shareholder’s rights, including voting, that shareholders are entitled to under the laws of China and the Articles of Association of Beijing Tianxing, including but not limited to the sale or transfer or pledge or disposition of shares held by the shareholders of Beijing Tianxing in part or in whole; and (c) designating and appointing on behalf of the shareholders of Beijing Tianxing the legal representative, the executive director, supervisor, the chief executive officer and other senior management members of Beijing Tianxing.

Although it is not explicitly stipulated in the Power of Attorney, the term of the Power of Attorney shall be the same as the term of that of the Exclusive Option Agreement.

This Power of Attorney is coupled with an interest and shall be irrevocable and continuously valid from the date of execution of this Power of Attorney, so long as the shareholders of Beijing Tianxing is a shareholder of Beijing Tianxing.

Timely Reporting Agreement

To ensure Beijing Tianxing promptly provides all of the information that Hao Limo and the Company need to file various reports with the SEC, a Timely Reporting Agreement was entered between Beijing Tianxing and the Company.

Under the Timely Reporting Agreement, Beijing Tianxing agreed that it is obligated to make its officers and directors available to the Company and promptly provide all information required by the Company so that the Company can file all necessary SEC and other regulatory reports as required.

BAT GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Although it is not explicitly stipulated in the Timely Reporting Agreement, the parties agreed its term shall be the same as that of the Exclusive Business Cooperation Agreement. The Tianxing VIE Agreements became effective immediately upon their execution.

VIE is an entity that have either a total equity investment that is insufficient to permit the entity to finance its activities without additional subordinated financial support, or whose equity investors lack the characteristics of a controlling financial interest, such as through voting rights, right to receive the expected residual returns of the entity or obligation to absorb the expected losses of the entity. The variable interest holder, if any, that has a controlling financial interest in a VIE is deemed to be the primary beneficiary and must consolidate the VIE. Hao Limo is deemed to have a controlling financial interest and be the primary beneficiary of Beijing Tianxing, because it has both of the following characteristics:

Pursuant to the VIE Agreements, Beijing Tianxing pays service fees equal to all of its net income to Hao Limo. At the same time, Hao Limo is entitled to receive all of expected residual returns. The VIE Agreements are designed so that Beijing Tianxing operates for the benefit of the Company. Accordingly, the accounts of Beijing Tianxing are consolidated in the accompanying financial statements pursuant to ASC 810-10, Consolidation. In addition, their financial positions and results of operations are included in the Company’s unaudited condensed consolidated financial statements.

In addition, as all of these VIE agreements are governed by PRC law and provide for the resolution of disputes through arbitration in the PRC, they would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal environment in the PRC is not as developed as in other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could further limit the Company’s ability to enforce these VIE agreements. Furthermore, these contracts may not be enforceable in China if PRC government authorities or courts take a view that such contracts contravene PRC laws and regulations or are otherwise not enforceable for public policy reasons. In the event the Company is unable to enforce these VIE agreements, it may not be able to exert effective control over Beijing Tianxing and its ability to conduct its business may be materially and adversely affected.

All of the Company’s main current operations are conducted through Beijing Tianxing and its subsidiaries since June 2018. Current regulations in China permit Beijing Tianxing to pay dividends to the Company only out of its accumulated distributable profits, if any, determined in accordance with their articles of association and PRC accounting standards and regulations. The ability of Beijing Tianxing to make dividends and other payments to the Company may be restricted by factors including changes in applicable foreign exchange and other laws and regulations.

BAT GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following financial statement balances and amounts only reflect the financial position and financial performances of Beijing Tianxing, which were included in the consolidated financial statements as of June 30, 2019 and December 31, 2018:

* Payable due to GLG and Hao Limo is eliminated upon consolidation.

BAT GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

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.

Transactions denominated in currencies other than the functional currency are translated into prevailing functional currency at the exchange rates prevailing at the dates of the transactions. The resulting exchange differences are included in the unaudited condensed consolidated statements of comprehensive income (loss).

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:

BAT GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Classification within the hierarchy is determined based on the lowest level of input that is significant to the fair value measurement. The carrying value of financial items of the Company, including cash and cash equivalents, loan receivable due from third parties, due from a related party and other payable, approximate their fair values due to their short-term nature and are classified within Level 1 of the fair value hierarchy. Investments in financial products are held to their maturities and are carried at amortized cost, which approximates fair value.

During the three months and six months ended June 30, 2018, the Company recorded $19,000 and $166,540 in “Changes in fair value of noncurrent liabilities”. This is related to distribution of the Settlement Shares to the class plaintiffs approved by the Court in December 2017. On January 19, 2018 and April 10, 2018, the Company issued 712,500 and 237,500 class settlement shares, at the market share price of $1.68 and $1.18 per share, respectively. As the Company is a public entity with quoted market price, the fair value of other noncurrent liabilities were classified as level 1. The expenses were accrued by reference to the quoted market share price per share on each reporting date.

The inputs used to measure the estimated fair value of warrants are classified as Level 3 fair value measurement due to the significance of unobservable inputs using company-specific information. The valuation methodology used to estimate the fair value of warrant liabilities is discussed in Note 13.

Investment security represents the Company’s investment in one equity investee that is not accounted for under the equity method or cost method.

Beginning on January 1, 2019, the Company adopted ASU 2016-01, “Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” including related technical corrections and improvements issued within ASU 2018-13. ASU 2016-01 amended various aspects of the recognition, measurement, presentation, and disclosure for financial instruments, and simplified the impairment assessment and enhanced the disclosure requirements of equity investments.

Prior to the adoption of ASU 2016-01, the cost method was used to account for certain equity investments in privately held companies over which the Company neither has control nor significant influence through investments in common stock or in-substance common stock. Upon the adoption of ASU 2016-01, the Company no longer accounts for these equity securities using the cost method. Beginning on January 1, 2019, the Company elected to record a majority of equity investments in privately held companies using the measurement alternative at cost, less impairment, with subsequent adjustments for observable price changes resulting from orderly transactions for identical or similar investments of the same issuer that were completed on or after January 1, 2019. As of June 30, 2018 and December 31, 2018, the Company had investment security of $200,000 and $nil, respectively.

The Company applies the equity method to account for equity investments in common stock according to ASC 323 “Investments — Equity Method and Joint Ventures,” over which it has significant influence but does not own a majority equity interest or otherwise control.

Under the equity method, the Company’s share of the post-acquisition profits or losses of the equity investee is recognized in the consolidated income statements and its share of post-acquisition movements in accumulated other comprehensive income is recognized in other comprehensive income. The Company records its share of the results of the equity investees on a one quarter in arrears basis. The excess of the carrying amount of the investment over the underlying equity in net assets of the equity investee represents goodwill and intangible assets acquired. When the Company’s share of losses in the equity investee equals or exceeds its interest in the equity investee, the Company does not recognize further losses, unless the Company has incurred obligations or made payments or guarantees on behalf of the equity investee.

The Company continually reviews its investments in equity investees to determine whether a decline in fair value below the carrying value is other-than-temporary. The primary factors the Company considers in its determination include the financial condition, operating performance and the prospects of the equity investee; other company specific information such as recent financing rounds; the geographic region, market and industry in which the equity investee operates; and the length of time that the fair value of the investment is below its carrying value. If the decline in fair value is deemed to be other-than-temporary, the carrying value of the equity investee is written down to fair value.

As of June 30, 2019, the Company made investments aggregating $291,256 in one equity investee, over which the Company owned more than 20% but less than 50% equity interests and exercised significant influence.

BAT GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Investments in financial products consist primarily of investments in three-year close-ended financial products operated by a private equity fund. The financial products bear variable return rate and redeemable on each anniversary after the Company entered into the agreement. Investments in financial products are held to their maturities and are carried at amortized cost, which approximates fair value. The Company reviews its investments for other-than-temporary impairment (“OTTI”) based on the specific identification method. The Company considers available quantitative and qualitative evidence in evaluating potential impairment of its investments. If the cost of an investment exceeds the investment’s fair value, the Company considers, among other factors, general market conditions, expected future performance of the investees, the duration and the extent to which the fair value of the investment is less than the cost, and the Company’s intent and ability to hold the investment. OTTI is recognized as a loss in the income statement.

Operating lease asset, net, represents the automobiles that are underlying our automotive lease contracts and is reported at cost, less accumulated depreciation and net of impairment charges and origination fees or costs. Depreciation of vehicles is recorded on a straight-line basis to an estimated residual value over the useful life of nine years. We periodically evaluate our depreciation rate for leased vehicles based on expected residual values and adjust depreciation expense over the remaining life of the lease if deemed necessary.

We have significant investments in the residual values of the assets in our operating lease portfolio. The residual values represent an estimate of the values of the assets at the end of the lease contracts. At contract inception, we determine pricing based on the projected residual value of the lease vehicle. This evaluation is primarily based on a proprietary model, which includes variables such as age, expected mileage, seasonality, segment factors, vehicle type, economic indicators, production cycle, automotive manufacturer incentives, and shifts in used vehicle supply. This internally-generated data is compared against third-party, independent data for reasonableness. Realization of the residual values is dependent on our future ability to market the vehicles under the prevailing market conditions. Over the life of the lease, we evaluate the adequacy of our estimate of the residual value and make adjustments to the depreciation rates to the extent the expected value of the vehicle at lease termination changes. In addition to estimating the residual value at lease termination, we also evaluate the current value of the operating lease asset and test for impairment to the extent necessary when there is an indication of impairment based on market considerations and portfolio characteristics. Impairment is determined to exist if fair value of the leased asset is less than carrying value and it is determined that the net carrying value is not recoverable. The net carrying value of a leased asset is not recoverable if it exceeds the sum of the undiscounted expected future cash flows expected to result from the lease payments and the estimated residual value upon eventual disposition. If our operating lease assets are considered to be impaired, the impairment is measured as the amount by which the carrying amount of the assets exceeds the fair value as estimated by discounted cash flows. For the three and six months ended June 30, 2019, we accrued impairment of $nil and $96,318 for an operating lease asset. We accrue rental income on our operating leases when collection is reasonably assured.

Income from operating lease represents lease origination fees and rental fee, netting off lease origination costs. In accordance with ASC 842, Leases, the Company recognized the income from operating lease on a straight-line basis over the scheduled lease term. For the three and six months ended June 30, 2019, the Company generated income from operating lease of $540,895 and $940,894, respectively.

The Company accounts for income taxes in accordance with the U.S. GAAP for income taxes. Under the asset and liability method as required by this accounting standard, the recognition of deferred income tax liabilities and assets for the expected future tax consequences of temporary differences between the income tax basis and financial reporting basis of assets and liabilities. Provision for income taxes consists of taxes currently due plus deferred taxes.

The charge for taxation is based on the results for the year as adjusted for items which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis. Deferred tax assets are recognized to the extent that it is probable that taxable income to be utilized with prior net operating loss carried forward. Deferred tax is calculated using tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it is related to items credited or charged directly to equity. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Current income taxes are provided for in accordance with the laws of the relevant taxing authorities.

BAT GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

An uncertain tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the period incurred. The Company did not have unrecognized uncertain tax positions or any unrecognized liabilities, interest or penalties associated with unrecognized tax benefit as of June 30, 2019 and December 31, 2018. As of June 30, 2019, income tax returns for the tax years ended December 31, 2014 through December 31, 2018 remain open for statutory examination by PRC tax authorities.

Basic (loss) income per share is computed by dividing the net (loss) income by the weighted average number of common shares outstanding during the period. Diluted (loss) income per share is the same as basic (loss) income per share due to the lack of dilutive items in the Company for the three and six months ended June 30, 2019 and 2018. The number of warrants is excluded from the computation because of its anti-dilutive effect.

Share-based awards granted to the Company’s nonemployees are measured at fair value on grant date and share-based compensation expense is recognized (i) immediately at the grant date if no vesting conditions are required, or (ii) using the accelerated attribution method, net of estimated forfeitures, over the requisite service period. The fair value of restricted shares is determined with reference to the fair value of the underlying shares.

At each date of measurement, the Company reviews internal and external sources of information to assist in the estimation of various attributes to determine the fair value of the share-based awards granted by the Company, including but not limited to the fair value of the underlying shares, expected life, expected volatility and expected forfeiture rates. The Company is required to consider many factors and make certain assumptions during this assessment. If any of the assumptions used to determine the fair value of the share-based awards changes significantly, share-based compensation expense may differ materially in the future from that recorded in the current reporting period.

The Company issued warrants to four individuals in private placements and to three external investors in registered direct offering, through which the Company issued both common shares and warrants as separable units, and both instrument is registered when issued. Warrants requiring share settlement are classified as equity.

The capital raised from the private placement is allocated between the fair value of the common stocks and warrants. The Company determined the fair value of warrants by application of the Black-Scholes-Merton formula.

Certain items in the financial statements of comparative period have been reclassified to conform to the audited financial statements and the notes thereto, included in the Form 10-K for the fiscal year ended December 31, 2018, which was filed with the SEC on April 5, 2019, primarily for the effects of discontinued operations.

BAT GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Recently announced accounting standards

In April 2019, the FASB issued ASU 2019-04 “Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments.” Apart from the amendments to ASU 2016-13 as mentioned below, the ASU also included subsequent amendments to ASU 2016-01, which we adopted in January 1, 2018. The guidance in relation to the amendments to ASU 2016-01 is effective for us for the year ending December 31, 2020 and interim reporting periods during the year ending December 31, 2020. Early adoption is permitted.

In October 2018, the FASB issued ASU2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities. ASU 2018-17 expands the accounting alternative that allows private companies the election not to apply the variable interest entity guidance to qualifying common control leasing arrangements. ASU 2018-17 broadens the scope of the private company alternative to include all common control arrangements that meet specific criteria (not just leasing arrangements). ASU 2018-17 also eliminates the requirement that entities consider indirect interests held through related parties under common control in their entirety when assessing whether a decision-making fee is a variable interest. Instead, the reporting entity will consider such indirect interests on a proportionate basis. The amendments are effective for public business entities for fiscal years ending after December 15, 2019. Early adoption is permitted. The Company is currently assessing the timing and impact of adopting the updated provisions to its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement - Disclosure Framework (Topic 820). The updated guidance improves the disclosure requirements on fair value measurements. The updated guidance if effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures. The Company is currently assessing the timing and impact of adopting the updated provisions to its consolidated financial statements.

The Company does not believe other recently issued but not yet effective accounting standards would have a material effect would have a material effect on the consolidated financial position, statements of operations and cash flows.

Recently adopted accounting standards

In February 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220). The new guidance permits, but does not require, companies to reclassify the stranded tax effects of the Tax Cuts and Jobs Act (the “Act”) on items within accumulated other comprehensive income to retained earnings. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company adopted this standard in the first quarter of 2019 and did not elect to reclassify the stranded tax effects of the Act on items within accumulated other comprehensive income to retained earnings. The Company uses the portfolio method for releasing the stranded tax effects from accumulated other comprehensive income.

In June 2018, the FASB issued ASU 2018-07, “Compensation — Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting,” which expands the scope of ASC 718 to include share-based payment transactions for acquiring goods and services from non-employees. An entity should apply the requirements of ASC 718 to non-employee awards except for specific guidance on inputs to an option pricing model and the attribution of cost. The amendments specify that ASC 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. We adopted the new guidance beginning on January 1, 2019. The adoption of this guidance did have a material impact on our financial position, results of operations and cash flows.

In February 2016, the Financial Accounting Standards Board (“FASB”) issued an accounting standard update (ASC Topic 842) that amends the accounting guidance on leases. The new standard establishes a right-of-use (ROU) model that requires a lessee to record an ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The FASB also subsequently issued amendments to the standard, including providing an additional and optional transition method to adopt the new standard, described below, as well as certain practical expedients related to land easements and lessor accounting.

BAT GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The accounting standard update originally required the use of a modified retrospective approach reflecting the application of the standard to leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements with the option to elect certain practical expedients. A subsequent amendment to the standard provides an additional and optional transition method that allows entities to initially apply the new leases standard at the adoption date and recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity’s reporting for the comparative periods presented in the financial statements in which it adopts the new leases standard will continue to be in accordance with current GAAP (ASC Topic 840) if the optional transition method is elected. The new accounting standard is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. We adopted this accounting standard effective January 1, 2019, using the optional transition method with no restatement of comparative periods. Therefore, the comparative information has not been adjusted and continues to be reported under ASC Topic 840. Our adoption of the new standard did not result in a cumulative effect adjustment to retained earnings.

We elected certain practical expedients available under the transition guidance within the new standard, which among other things, allowed us to carry forward the historical lease classification of our existing leases. We did not elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter not being applicable to us. The new standard also provides practical expedients for an entity’s ongoing accounting. We elected the short-term lease recognition exemption for all leases that qualify. As a result, for those leases that qualify, we will not recognize ROU assets or lease liabilities, and we did not recognize ROU assets or lease liabilities for existing short-term leases of those assets in transition. We also elected the practical expedient to not separate lease and non-lease components of leases for the majority of our classes of underlying assets. Consequently, on adoption and as of June 30, 2019, recognized right-of-use lease assets of $63,481 and finance lease liabilities of $63,481 (Note 17).

In assessing the Company’s liquidity and its ability to continue as a going concern, the Company monitors and analyzes its cash and its ability to generate sufficient cash flow in the future to support its operating and capital expenditure commitments. The Company’s liquidity needs are to meet its working capital requirements and operating expenses obligations.

As of June 30, 2019, the Company had cash balance of $1,307,186 and a negative working capital of $10,635. The management estimated the operating expenses obligation for the next twelve months after issuance of the financial statements to be $4,630,000, which will be partially covered by the cash flows of $4,100,00   million generated from our luxurious car leasing business with our increased investments in luxurious used cars, and collection of $1 million from our investments in financial products. The Company plans to fund its operations through revenue generated from its operating lease income, private placements from investors, and financial support commitments from the Company’s Chief Executive Officer and shareholder. The Company’s ability to fund these needs will depend on its future performance, which will be subject in part to general economic, competitive and other factors beyond its control. Based on the current operating plan, the management believes that the Company will continue as a going concern   in the following 12 months.

Assets that potentially subject the Company to significant concentration of credit risk primarily consist of cash and cash equivalents. The maximum exposure of such assets to credit risk is their carrying amount as at the balance sheet dates. As of June 30, 2019, approximately $1,237,600 was deposited with a bank in the United States which was insured by the government up to $250,000. As of June 30, 2019 and December 31, 2018, approximately $69,586 and $1,067,657, respectively, were primarily deposited in financial institutions located in Mainland China, which were uninsured by the government authority. To limit exposure to credit risk relating to deposits, the Company primarily place cash deposits with large financial institutions in China which management believes are of high credit quality.

The Company’s operations are carried out in Mainland China. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC as well as by the general state of the PRC’s economy. In addition, the Company’s business may be influenced by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, rates and methods of taxation, and the extraction of mining resources, among other factors.

BAT GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company is also exposed to liquidity risk which is risk that it is unable to provide sufficient capital resources and liquidity to meet its commitments and business needs. Liquidity risk is controlled by the application of financial position analysis and monitoring procedures. When necessary, the Company will turn to other financial institutions and the owners to obtain short-term funding to meet the liquidity shortage.

Substantially all of the Company’s operating activities and the Company’s major assets and liabilities are denominated in RMB, except for the cash deposit of approximately$1,237,600 which was in U.S. dollars as of June 30, 2019, which is not freely convertible into foreign currencies. All foreign exchange transactions take place either through the Peoples’ Bank of China (“PBOC”) or other authorized financial institutions at exchange rates quoted by PBOC. Approval of foreign currency payments by the PBOC or other regulatory institutions requires submitting a payment application form together with suppliers’ invoices and signed contracts. The value of RMB is subject to changes in central government policies and to international economic and political developments affecting supply and demand in the China Foreign Exchange Trading System market. Where there is a significant change in value of RMB, the gains and losses resulting from translation of financial statements of a foreign subsidiary will be significant affected.

It is possible that the VIE Agreements among Beijing Tianxing, Hao Limo, and the Beijing Tianxing Shareholders would not be enforceable in China if PRC government authorities or courts were to find that such contracts contravene PRC laws and regulations or are otherwise not enforceable for public policy reasons. In the event that the Company were unable to enforce these contractual arrangements, the Company would not be able to exert effective control over the VIE. Consequently, the VIE’s results of operations, assets and liabilities would not be included in the Company’s consolidated financial statements. If such were the case, the Company’s cash flows, financial position, and operating performance would be materially adversely affected. The Company’s contractual arrangements with Beijing Tianxing, Hao Limo, and the Beijing Tianxing Shareholders are approved and in place. Management believes that such contracts are enforceable, and considers the possibility remote that PRC regulatory authorities with jurisdiction over the Company’s operations and contractual relationships would find the contracts to be unenforceable.

The Company’s operations and businesses rely on the operations and businesses of Beijing Tianxing, the VIE of the Company, which holds certain recognized revenue-producing assets including the luxury used cars. The VIE also has an assembled workforce, focused primarily on promotion and marketing, whose costs are expensed as incurred. The Company’s operations and businesses may be adversely impacted if the Company loses the ability to use and enjoy assets held by its VIE.

In January and June 2019, the Company entered into loan agreements with two and four third parties, respectively. Pursuant to the loan agreements, the Company disbursed loans aggregating approximately $1.1 million to these third parties, to be matured in September 2019  through June 2020. The Company charged the third parties interest rates ranging between 9% and 16% per annum. Principal and interest are repaid on maturity of the loan. As of June 30, 2019, the Company recorded a balance of interest receivable of $30,861 within the account of “other current assets” of the unaudited condensed consolidated balance sheets.

BAT GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of June 30, 2019, the Company had investment security of $200,000 in one privately held company over which the Company owns 4.22% shareholding. The Company neither has control nor significant influence through investments in common stock or in-substance common stock. As of June 30, 2019, the equity investee had cash injected from its shareholders and common stocks on their balance sheets, and had no revenues or net income for the period from its inception to June 30, 2019.

As of June 30, 2019, the Company prepaid aggregating $582,513 in two equity investees. The Company owned 40% equity interests in both equity investees and exercised significant influence over each of the equity investees. Both equity investees were set up in July 2019.

As of June 30, 2019, the Company’s deposits for investments in equity investees were comprised of the following:

As of June 30, 2019, the Company had an investment of $291,256 in one equity investee. The Company owned 40% equity interests in the equity investee and exercised significant influence over the equity investee. The equity investee was newly set up and has not commenced operations as of June 30, 2019. As of June 30, 2019, the equity investee had cash injected from its shareholders and common stocks on their balance sheets, and had no revenues or net income for the period from its inception to June 30, 2019.

On May 28, 2019, the Company entered in a financial product investment agreement with a private equity fund (“PE fund”) with a total investing amount of $1,000,000. The balance of investments in financial products consisted investments in three-year close-ended financial products operated by this PE fund. The financial products bear variable return rate and was redeemable on each anniversary after the Company entered into the agreement. The Company classified these financial assets as held-to-maturity financial assets and recorded the assets at amortized cost, which approximates fair value published by the PE fund. As of June 30, 2019, the fair value of the investments was equal to the cost of investment, and the Company did not provide OTTI on investments in financial products.

For the three and six months ended June 30, 2019, the Company did not have any unrealized holding gains or losses on these investments in financial products.

BAT GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of June 30, 2019, the Company had investments in fifteen used luxurious cars, among which the Company purchased and obtained ownership in thirteen cars, and prepaid for two cars.

As of June 30, 2019 and December 31, 2018, the Company, by reference to the market price, determined the fair value of two and one used luxurious cars was below the original carrying amount of the leased asset and had accumulated impairment of $272,568 and $177,630, respectively. As a result, the Company accrued additional impairment of $nil and $96,318 for these operating lease asset for the three and six months ended June 30, 2019. 

As of the June 30, 2019, the balance of the used luxurious cars is comprised of the following:

For the three months ended June 30, 2019 and 2018, the Company charged depreciation expenses of $55,321 and $12,458 on used luxurious cars, respectively. For the six months ended June 30, 2019 and 2018, the Company charged depreciation expenses of $102,179 and $12,458 on the luxurious cars, respectively.

As of June 30, 2019, ten of the thirteen used luxurious cars was pledged for borrowings from third parties.

As of June 30, 2019 and December 31, 2018, the Company had borrowings of $2,257,237 and $218,100 from eight and two third parties. The borrowings were due in August 2019 through January 2020. The interest rate charged on the borrowings ranged between 7% and 10.5%. For the three months ended June 30, 2019 and 2018, the Company charged interest expenses of $30,675 and $nil on the borrowings, respectively. For the six months ended June 30, 2019 and 2018, the Company charged interest expenses of $37,544 and $nil on the borrowings, respectively.

Common Stock

The Company is authorized to issue up to 100,000,000 shares of Common Stock.

As of December 31, 2018, there were 25,119,532 shares of common stock issued and outstanding. On January 11, 2019, the Company filed a Certificate of Amendment of the Certificate of Incorporation with the Secretary of State of Delaware to effect a 1 for 5 reverse stock split (the “Reverse Split”) of the shares of the Company’s issued and outstanding common stock, par value $0.001. As a result of the Reverse Split, all references to numbers of common shares and per-share data in the accompanying unaudited condensed consolidated financial statements have been adjusted to reflect such issuance of shares on a retrospective basis. As such, the 25,119,532 shares issued and outstanding as of December 31, 2018 decreased to 5,023,906 shares.

On March 8, 2019, the Company issued 502,391 restricted shares to its service providers as compensation for various services provided for the three months ended March 31, 2019,   including asset management consulting services, tax consulting services, customer relationship services, valuation services and IT services. The restricted shares are fully vested while the transferability is restricted until September 5, 2019. The fair value of the services provided was in in the total amount of $884,208, at a per share price at the market price of the grant date. A summary of RSU activity for the year ended June 30, 2019 is as follows:

Registered direct offering  

On April 11, 2019, the Company and certain institutional investors (the “Purchasers”) entered into a securities purchase agreement (the “Purchase Agreement”), pursuant to which the Company agreed to sell to such investors an aggregate of 1,680,000 shares of common stock (the “Common Stock”) in a registered direct offering and warrants to purchase up to approximately 1,680,000 shares of the Company’s Common Stock in a concurrent private placement, for gross proceeds of approximately $3.7 million (the “Financing”). The warrants will be exercisable immediately following the date of issuance and have an exercise price of $2.20. The warrants will expire 5 years from the earlier of the date on which the shares of Common Stock issuable upon exercise of the warrants may be sold pursuant to an effective registration statement or may be exercised on a cashless basis and be immediately sold pursuant to Rule 144. The purchase price for each share of Common Stock and the corresponding warrant is $2.20. Each warrant is subject to anti-dilution provisions to reflect stock dividends and splits or other similar transactions, but not as a result of future securities offerings at lower prices. The warrants contain a mandatory exercise right for the Company to force exercise of the warrants if the Company’s common stock trades at or above $6.60 for 20 consecutive trading days provided, among other things, that the shares issuable upon exercise of the warrants are registered or could be sold pursuant to Rule 144 and the daily trading volume exceeds 200,000 shares per trading day on each trading day in a period of 20 consecutive trading days prior to the applicable date.

BAT GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

On May 20, 2019, Bat Group, Inc. (the “Company”) and certain institutional investors (the “Purchasers”) entered into a securities purchase agreement (the “Purchase Agreement”), pursuant to which the Company agreed to sell to such investors an aggregate of 1,440,000 shares of common stock (the “Common Stock”) in a registered direct offering and warrants to purchase up to approximately 1,080,000 shares of the Company’s Common Stock in a concurrent private placement, for gross proceeds of approximately $1.5 million (the “Financing”). The warrants will be exercisable after 6 months of the date of issuance and have an exercise price of $1.32. The warrants will expire 5.5 years from the date of issuance. Each warrant is subject to anti-dilution provisions to reflect stock dividends and splits or other similar transactions, but not as a result of future securities offerings at lower prices. The warrants contain a mandatory exercise right for the Company to force exercise of the warrants if the Company’s common stock trades at or above $3.96 for 20 consecutive trading days provided, among other things, that the shares issuable upon exercise of the warrants are registered or could be sold pursuant to Rule 144 and the daily trading volume exceeds 200,000 shares per trading day on each trading day in a period of 20 consecutive trading days prior to the applicable date. In addition, the Company agreed to reduce the exercise of the warrants issued on April 15, 2019 from $2.20 to $1.32.

As of June 30, 2019 and December 31, 2018, the Company had 8,646,297 shares and 5,023,906 shares issued and outstanding, respectively.

In connection with the direct offering closed on April 11, 2019, the Company issued warrants to investors to purchase a total of 1,680,000 ordinary shares with a warrant term of five (5) years. The warrants have an exercise price of US$2.20 per share. On May 20, 2019, the exercise price was reduced to $1.32.

In connection with the direct offering closed on May 20, 2019, the Company issued warrants to investors to purchase a total of 1,080,000 ordinary shares with a warrant term of five and a half (5.5) years. The warrants have an exercise price of US$1.32 per share.

Both warrants are subject to anti-dilution provisions to reflect stock dividends and splits or other similar transactions, but not as a result of future securities offerings at lower prices. The warrants did not meet the definition of liabilities or derivatives, and as such they are classified as an equity.

As of April 11, 2019 and May 20, 2019, the Company estimated fair value of the both warrants at US$1,638,000 and $762,480, respectively, using the Black-Scholes valuation model, which took into consideration the underlying price of ordinary shares, a risk-free interest rate, expected term and expected volatility. As a result, the valuation of the warrant was categorized as Level 3 in accordance with ASC 820, “Fair Value Measurement”. 

The key assumption used in estimates are as follows: