Ucommune International Ltd 6-K, filed Sep 28, 2022
Ucommune International Ltd (UK)
About this 6-K
Ucommune International Ltd filed this 6-K on September 28, 2022.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934
For the Month of September 2022
Commission File Number:
(Exact name of registrant as specified in its charter)
Floor 8, Tower D
No. 2 Guang Hua Road
Chaoyang District, Beijing
People’s Republic of China, 100026
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.
Form 20-F ☒ Form 40-F ☐
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation ST Rule 101(b)(1): Not Applicable
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation ST Rule 101(b)(7): Not Applicable
EXPLANATORY NOTE
This current report on Form 6-K (“this report” or “this Form 6-K”) and all the exhibits hereto are incorporated by reference into the registration statement on Form F-3 of Ucommune International Ltd (the “Company”) (File No. 333-257664) which was declared effective on July 22, 2022 and Form F-3 of the Company (File No. 333-266899) which was declared effective on September 20, 2022 and shall be a part thereof from the date on which this report is furnished, to the extent not superseded by documents or reports subsequently filed or furnished.
1
EXHIBIT INDEX
| Exhibit | Description | |
| 99.1 | Unaudited Condensed Consolidated Financial Statements and Related Notes for the Six Months Ended June 30, 2021 and 2022 | |
| 99.2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations in connection with the Unaudited Condensed Consolidated Financial Statements as of and for the Six Months Ended June 30, 2022 | |
| 101.INS | Inline XBRL Instance Document | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
2
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| UCOMMUNE INTERNATIONAL LTD | ||
| By: | /s/ Xin Guan | |
| Xin Guan CEO | ||
Date: September 28, 2022
[Signature Page to Form 6-K]
3
Exhibit 99.1
UCOMMUNE INTERNATIONAL LTD
Index to the unaudited condensed consolidated financial statements
F-1
UCOMMUNE INTERNATIONAL LTD
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share data, or otherwise noted)
As
of | As
of | |||||||||||
| 2021 | 2022 | |||||||||||
| RMB | RMB | USD | ||||||||||
| (Unaudited) | (Note 2) | |||||||||||
| ASSETS | ||||||||||||
| Current assets: | ||||||||||||
| Cash and cash equivalents | ||||||||||||
| Restricted cash | ||||||||||||
| Short-term investments | ||||||||||||
| Accounts receivable, net of allowance of RMB | ||||||||||||
| Prepaid expenses and other current assets, net | ||||||||||||
| Amounts due from related parties, current | ||||||||||||
| Total current assets | ||||||||||||
| Non-current assets | ||||||||||||
| Long-term investments | ||||||||||||
| Property and equipment, net | ||||||||||||
| Right-of-use assets, net | ||||||||||||
| Intangible assets, net | ||||||||||||
| Goodwill | ||||||||||||
| Rental deposit | ||||||||||||
| Long-term prepaid expenses | ||||||||||||
| Amounts due from related parties, non-current | ||||||||||||
| Other assets, non-current | ||||||||||||
| Total non-current assets | ||||||||||||
| TOTAL ASSETS | ||||||||||||
F-2
UCOMMUNE INTERNATIONAL LTD
CONDENSED CONSOLIDATED BALANCE SHEETS — (Continued)
(Amounts in thousands, except share and per share data, or otherwise noted)
| As of December 31, | As of June 30, | |||||||||||
| 2021 | 2022 | |||||||||||
| RMB | RMB | USD | ||||||||||
| (Unaudited) | (Note 2) | |||||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||
| Current liabilities: | ||||||||||||
| Short-term borrowings | ||||||||||||
| Long-term borrowings, current portion | ||||||||||||
| Accounts payable | ||||||||||||
| Accrued expenses and other current liabilities | ||||||||||||
| Amounts due to related parties, current | ||||||||||||
| Deferred workspace membership fee | ||||||||||||
| Contract liabilities | ||||||||||||
| Income taxes payable | ||||||||||||
| Deferred subsidy income | ||||||||||||
| Convertible bond | ||||||||||||
| Share-based liabilities, current | ||||||||||||
| Put option liabilities | ||||||||||||
| Lease liabilities, current | ||||||||||||
| Total current liabilities | ||||||||||||
F-3
UCOMMUNE INTERNATIONAL LTD
CONDENSED CONSOLIDATED BALANCE SHEETS — (Continued)
(Amounts in thousands, except share and per share data, or otherwise noted)
As
of | As
of | |||||||||||
| 2021 | 2022 | |||||||||||
| RMB | RMB | USD | ||||||||||
| (Unaudited) | (Note 2) | |||||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||
| Non-current liabilities: | ||||||||||||
| Long-term borrowings | ||||||||||||
| Refundable deposits from members, non-current | ||||||||||||
| Deferred tax liabilities | ||||||||||||
| Lease liabilities, non-current | ||||||||||||
| Warrant liabilities | ||||||||||||
| Share-based liabilities, non-current | ||||||||||||
| Total non-current liabilities | ||||||||||||
| TOTAL LIABILITIES | ||||||||||||
| Commitments and contingencies (Note 15) | ||||||||||||
| SHAREHOLDERS’ EQUITY | ||||||||||||
| Class A ordinary shares ( | ||||||||||||
| Class B ordinary shares ( | ||||||||||||
| Additional paid-in capital(i) | ||||||||||||
| Statutory reserves | ||||||||||||
| Accumulated deficit | ( | ) | ( | ) | ( | ) | ||||||
| Accumulated other comprehensive income | ||||||||||||
| Total Ucommune International Ltd shareholders’ equity | ||||||||||||
| Noncontrolling interests | ||||||||||||
| TOTAL EQUITY | ||||||||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||
| (i) |
The accompanying notes are an integral part of these consolidated financial statements.
F-4
UCOMMUNE INTERNATIONAL LTD
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except share and per share data, or otherwise noted)
| For the Six Months Ended June 30, | ||||||||||||
| 2021 | 2022 | 2022 | ||||||||||
| RMB | RMB | USD | ||||||||||
| (Note 2) | ||||||||||||
| Revenue: | ||||||||||||
| Workspace membership revenue | ||||||||||||
| Marketing and branding service revenue (including services provided to a related party of RMB | ||||||||||||
| Other service revenue (including services provided to related parties of RMB | ||||||||||||
| Total revenue | ||||||||||||
| Cost of revenue: | ||||||||||||
| Workspace membership (including services provided by related parties of RMB | ( | ) | ( | ) | ( | ) | ||||||
| Marketing and branding service (including services provided by related parties of RMB | ( | ) | ( | ) | ( | ) | ||||||
| Other services | ( | ) | ( | ) | ( | ) | ||||||
| Total cost of revenue | ( | ) | ( | ) | ( | ) | ||||||
| Operating expenses: | ||||||||||||
| Impairment loss on long-lived assets and long-term prepaid expenses | ( | ) | ( | ) | ( | ) | ||||||
| Impairment loss on goodwill | ( | ) | ( | ) | ||||||||
| Sales and marketing expenses | ( | ) | ( | ) | ( | ) | ||||||
| General and administrative expenses | ( | ) | ( | ) | ( | ) | ||||||
| Change in fair value of warrant liability | ( | ) | ( | ) | ( | ) | ||||||
| Change in fair value of put option liability | ||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ||||||
| Interest expense, net | ( | ) | ( | ) | ( | ) | ||||||
| Subsidy income | ||||||||||||
| Impairment loss on long-term investments | ( | ) | ||||||||||
F-5
UCOMMUNE INTERNATIONAL LTD
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS — (Continued)
(Amounts in thousands, except share and per share data, or otherwise noted)
| For the Six Months Ended June 30, | ||||||||||||
| 2021 | 2022 | 2022 | ||||||||||
| RMB | RMB | USD | ||||||||||
| (Note 2) | ||||||||||||
| Loss on disposal of subsidiaries | ( | ) | ( | ) | ( | ) | ||||||
| Other income, net | ||||||||||||
| Loss before income taxes and loss from equity method investments | ( | ) | ( | ) | ( | ) | ||||||
| Provision for income taxes | ( | ) | ( | ) | ( | ) | ||||||
| Loss from equity method investments | ( | ) | ||||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ||||||
| Less: Net income/(loss) attributable to noncontrolling interests | ( | ) | ( | ) | ||||||||
| Net loss attributable to Ucommune International Ltd | ( | ) | ( | ) | ( | ) | ||||||
| Net loss per share attributable to ordinary shareholders of Ucommune International Ltd(i) | ||||||||||||
| ( | ) | ( | ) | ( | ) | |||||||
| Weighted average shares used in calculating net loss per share(i) | ||||||||||||
| (i) |
The accompanying notes are an integral part of these consolidated financial statements.
F-6
UCOMMUNE INTERNATIONAL LTD
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Amounts in thousands, except share and per share data, or otherwise noted)
| For the Six Months Ended June 30, | ||||||||||||
| 2021 | 2022 | 2022 | ||||||||||
| RMB | RMB | USD | ||||||||||
| (Note 2) | ||||||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ||||||
| Other comprehensive loss, net of tax | ||||||||||||
| Foreign currency translation adjustments | ( | ) | ||||||||||
| Total Comprehensive loss | ( | ) | ( | ) | ( | ) | ||||||
| Less: Comprehensive income/(loss) attributable to noncontrolling interest | ( | ) | ( | ) | ||||||||
| Comprehensive loss attributable to Ucommune International Ltd’s shareholders | ( | ) | ( | ) | ( | ) | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-7
UCOMMUNE INTERNATIONAL LTD
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Amounts in thousands, except share and per share data, or otherwise noted)
| Ordinary Shares | Additional | Accumulated other | Total Ucommune International Ltd | Total | ||||||||||||||||||||||||||||||||
| Shares(i) | Amount (i) | paid-in capital(i) | Statutory Reserve | Accumulated deficit | comprehensive loss | shareholders’ equity | Noncontrolling interests | shareholders’ equity | ||||||||||||||||||||||||||||
| Balance as of December 31, 2020 | ( | ) | ||||||||||||||||||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Share issuance upon the underwritten public offering, net of issuance costs | ||||||||||||||||||||||||||||||||||||
| Issuance of Earn-out shares to the Founder | ( | ) | ||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||||||||||||||||||
| Capital contribution from noncontrolling shareholders | — | |||||||||||||||||||||||||||||||||||
| Acquisition of noncontrolling interests | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||
| Disposal of subsidiary | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||
| Round-up of fractional shares in connection with share consolidation | ||||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2021 (unaudited) | ( | ) | ||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2021 in RMB | ( | ) | ||||||||||||||||||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | ( | ) | |||||||||||||||||||||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||||||||||||||||||
| Capital contribution from noncontrolling shareholders | — | |||||||||||||||||||||||||||||||||||
| Round-up of fractional shares in connection with share consolidation | ||||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2022 in RMB (unaudited) | ( | ) | ||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2022 in USD (unaudited) | ( | ) | ||||||||||||||||||||||||||||||||||
| (i) |
The accompanying notes are an integral part of these consolidated financial statements.
F-8
UCOMMUNE INTERNATIONAL LTD
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands, except share and per share data, or otherwise noted)
| For the Six Months Ended June 30, | ||||||||||||
| 2021 | 2022 | 2022 | ||||||||||
| RMB | RMB | USD | ||||||||||
| (Note 2) | ||||||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ( | ) | ||||||
| Cash Flows from investing activities | ||||||||||||
| Settlement of term deposits | ||||||||||||
| Purchase of short-term investments | ( | ) | ( | ) | ( | ) | ||||||
| Settlement of short-term investments | ||||||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ( | ) | ||||||
| Proceeds from disposal of property and equipment | ||||||||||||
| Purchase of intangible asset | ||||||||||||
| Loan collected from third parties | ||||||||||||
| Payment for long-term investment | ( | ) | ||||||||||
| Cash deduction due to disposal of subsidiaries | ( | ) | ( | ) | ||||||||
| Cash received for business acquisitions, net of cash paid | ||||||||||||
| Proceeds from disposal of subsidiaries | ||||||||||||
| Investment of cash in Trust Account | ( | ) | ||||||||||
| Net used in investing activities | ( | ) | ( | ) | ( | ) | ||||||
| Cash flows from financing activities | ||||||||||||
| Capital reduction in a subsidiary | ||||||||||||
| Capital contribution from noncontrolling shareholders | ||||||||||||
| Acquisition of noncontrolling interests | ( | ) | ||||||||||
| Loan repaid to related parties | ( | ) | ||||||||||
| Loan received from third parties | ||||||||||||
| Loan repaid to third parties | ( | ) | ( | ) | ( | ) | ||||||
| Cash received from issuing convertible bond | ||||||||||||
| Underwritten public offering financing, net of listing fee | ||||||||||||
| Net cash provided by/(used in) financing activities | ( | ) | ( | ) | ||||||||
| Effects of exchange rate changes | ( | ) | ||||||||||
| Net decrease in cash, cash equivalents and restricted cash | ( | ) | ( | ) | ( | ) | ||||||
| Cash, cash equivalents and restricted cash – beginning of the period | ||||||||||||
| Cash, cash equivalents and restricted cash – end of the period | ||||||||||||
| Supplemental disclosure of cash flow information: | ||||||||||||
| Interest paid | ||||||||||||
| Income taxes paid | ||||||||||||
| Supplemental disclosure of noncash information: | ||||||||||||
| Payable for purchase of property and equipment | ||||||||||||
| Payable for investments and acquisitions | ||||||||||||
| Right-of-use assets obtained in exchange for new operating lease liabilities | ||||||||||||
| ROU assets disposed as reduction of operating lease liabilities due to lease termination | ||||||||||||
F-9
UCOMMUNE INTERNATIONAL LTD
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS — (Continued)
(Amounts in thousands, except share and per share data, or otherwise noted)
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the consolidated statements of cash flows:
| As of December 31, | As of June 30, | |||||||||||
| 2021 | 2022 | 2022 | ||||||||||
| RMB | RMB | USD | ||||||||||
| (Note 2) | ||||||||||||
| Cash and cash equivalents | ||||||||||||
| Restricted cash, current | ||||||||||||
| Total cash, cash equivalents and restricted cash | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-10
UCOMMUNE INTERNATIONAL LTD
NOTES TO UNAUDITED CONDENSED CONSOLIDATED STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2021 and 2022
(Amounts in thousands, except share and per share data, or otherwise noted)
| 1. | ORGANIZATIONS AND PRINCIPAL ACTIVITIES |
Ucommune Group Holdings Limited (“Ucommune Group”) was founded in 2018 and was incorporated in the Cayman Islands. On June 29, 2020, Orisun Acquistion Corp. (“Orisun”), a special purpose acquisition company (“SPAC”), entered into a share exchange agreement (the “Share Exchange Agreement”) with Ucommune Group. Pursuant to the Share Exchange Agreement, Ucommune International Ltd (“the Company”), which is a subsidiary wholly owned by Orisun, acquired all of the issued and outstanding ordinary shares of Ucommune Group from the shareholders of Ucommune Group by newly issuing ordinary shares of Orisun to the shareholders of Ucommune Group (“SPAC Transaction”). The SPAC Transaction was consummated on November 17, 2020. Ucommune Group’s shareholders remains the controlling financial interests of Ucommune Group after the SPAC Transaction, which was accounted for as a reverse recapitalization and fully described below. In connection with the closing of the SPAC Transaction, Orisun had been ceased and Ucommune International Ltd continued as the surviving company.
Ucommune International Ltd, its consolidated subsidiaries, variable interest entities (“VIEs”) and VIEs’ subsidiaries (collectively referred to as the “Group”) is primarily engaged in providing long-term leasing, on-demand and short-term leasing solutions to freelancers, start-up entrepreneurs, small medium enterprises and corporations by delivering well-furnished and fully-serviced space on a flexible basis in the People’s Republic of China (“PRC”). The individuals and enterprises registered on U bazaar, a mobile app of the Group are referred to as members.
| a. | Reverse recapitalization |
On November 17, 2020,
the Company consummated the SPAC Transaction pursuant to the Share Exchange Agreement, where the Company acquired
Ucommune Group was determined
to be the accounting acquirer given Ucommune Group effectively controlled the combined entity after the SPAC Transaction. The transaction
is not a business combination because the Company was not a business. The transaction is accounted for as a reverse recapitalization,
which is equivalent to the issuance of shares by Ucommune Group for the net monetary assets of the Company, accompanied by a recapitalization.
Ucommune Group is determined as the predecessor and the historical financial statements of Ucommune Group became the Company’s historical
financial statements, with retrospective adjustments to give effect of the reverse recapitalization.
The par value of ordinary shares
remained $
Upon the consummation of the
SPAC Transaction, the net assets of the Company were USD
F-11
In addition, 4.0 million earnout shares (“Earnout Shares”) were granted to certain shareholders of Ucommune Group. The shareholders may be entitled to receive Earnout Shares as follows: (a) 2,000,000 Class A Ordinary Shares if (i) the volume weighted average price(“VWAP”)of the Company Class A Ordinary Shares equals or exceeds $16.50 (or any foreign currency equivalent) in any twenty trading days within a thirty trading day period before December 31, 2022 on any securities exchange or securities market on which the Company Ordinary Shares are then traded or (ii) the revenue of Ucommune Group exceeds RMB850,000,000 in the fiscal year of 2020 pursuant to the audited consolidated financial statements of Ucommune Group as of and for the fiscal year ended December 31, 2020; (b) 1,000,000 Class A Ordinary Shares if (i) the VWAP of the Company Class A Ordinary Shares equals or exceeds $22.75 (or any foreign currency equivalent) in any twenty trading days within a thirty trading day period before December 31, 2023 on any securities exchange or securities market on which the Company Ordinary Shares are then traded or (ii) the revenue of Ucommune Group exceeds RMB1,275,000,000 in the fiscal year of 2021 pursuant to the audited consolidated financial statements of Ucommune Group as of and for the fiscal year ended December 31, 2021; and (c) 1,000,000 Class A Ordinary Shares if (i) the VWAP of the Company Class A Ordinary Shares equals or exceeds $30.00 (or any foreign currency equivalent) in any twenty trading days within a thirty trading day period before December 31, 2024 on any securities exchange or securities market on which the Company Ordinary Shares are then traded or (ii) the revenue of Ucommune Group exceeds RMB1,912,000,000 in the fiscal year of 2022 pursuant to the audited consolidated financial statements of Ucommune Group as of and for the fiscal year ended December 31, 2022.
| b. | Reorganization |
Prior to the SPAC Transaction, Ucommune Group undertook a series of steps as follows to restructure its business (the “Reorganization”):
Ucommune (Beijing) Venture Investment Co., Ltd. (“Ucommune Venture”) was established in April 2015, as a limited liability company in the PRC incorporated by Dr. Daqing Mao and other co-founders. After the incorporation, Ucommune Venture completed a series of financing by issuing equity interests with certain preferential rights to investors.
During September 2018 to June 2019, Ucommune Venture undertook a series of reorganization transactions to re-domicile its business from the PRC to the Cayman Islands (the “Re-domiciliation”). The Re-domiciliation was executed in the following steps:
| 1) | In September 2018, Ucommune Group was incorporated in the Cayman Islands to be the holding company of the Group. In December 2018, the Company established Ucommune Group Holdings (Hong Kong) Limited (“Ucommune HK”), a wholly owned subsidiary of the Company as an intermediate holding company. In January 2019, Ucommune HK established a wholly foreign owned enterprise, Ucommune (Beijing) Technology Co., Ltd. (“WFOE”), for the purpose of establishing a VIE structure as further described in 3) below. |
| 2) | In May and June 2019, Ucommune Group issued an aggregate
of |
| 3) | In May 2019, a series of VIE agreements were entered into between WFOE, Ucommune Venture and the shareholders of Ucommune Venture. Those arrangements effectively provided control over the operations of Ucommune Venture to WFOE. Upon the completion of step 2) and 3), the Re-domiciliation was completed. |
Prior to the Re-domiciliation, Ucommune Group and Ucommune Venture are under the same ownership. The Re-domiciliation was accounted for as a reorganization of entities under common ownership. As a result, the accompanying financial statements have been prepared on a combined basis using historical cost.
F-12
| c. | The VIE arrangements |
The Company operates substantially all of its business through its VIEs including Ucommune Venture and Beijing U Bazaar. On May 20, 2019, WFOE entered into a series of contractual arrangements with Ucommune Venture, Beijing U Bazaar, and the respective equity interest holders. The series of contractual agreements include exclusive business cooperation agreement, exclusive call option agreement, equity pledge agreement, powers of attorney and spousal consent letters.
The Group believes that these contractual arrangements enable the Company to (1) have power to direct the activities that most significantly affects the economic performance of the VIEs, and (2) receive the economic benefits of the VIEs that could be significant to the VIEs. Accordingly, the Company is considered the primary beneficiary of the VIEs and is able to consolidate the VIEs and VIEs’ subsidiaries.
The Group’s business
has been directly operated by the VIEs and their subsidiaries. As of December 31, 2021, and June 30, 2022, the VIEs and their subsidiaries
accounted for an aggregate of
The following financial information of the Company’s VIEs and VIEs’ subsidiaries after the elimination of inter-company transactions and balances as of December 31, 2021 and June 30, 2022 and for the six months ended June 30, 2021 and 2022 was included in the accompanying condensed consolidated financial statements:
| As of December 31, | As of June 30, | |||||||||||
| 2021 | 2022 | |||||||||||
| RMB | RMB (Unaudited) | USD (Note 2) | ||||||||||
| Cash and cash equivalents | ||||||||||||
| Other current assets | ||||||||||||
| Total current assets | ||||||||||||
| Property and equipment, net | ||||||||||||
| Right-of-use assets, net | ||||||||||||
| Goodwill | ||||||||||||
| Other non-current assets | ||||||||||||
| Total non-current assets | ||||||||||||
| TOTAL ASSETS | ||||||||||||
| Accounts payable | ||||||||||||
| Lease liabilities, current | ||||||||||||
| Other current liabilities | ||||||||||||
| Total current liabilities | ||||||||||||
| Lease liabilities, non-current | ||||||||||||
| Other non-current liabilities | ||||||||||||
| Total non-current liabilities | ||||||||||||
| Total liabilities | ||||||||||||
| For the Six Months Ended June 30, | ||||||||||||
| 2021 | 2022 | 2022 | ||||||||||
| RMB | RMB | USD | ||||||||||
| Net revenues | ||||||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ||||||
| Net cash provided by/(used in) operating activities | ( | ) | ( | ) | ||||||||
| Net cash used in investing activities | ( | ) | ( | ) | ( | ) | ||||||
| Net cash provided by/(used in) financing activities | ( | ) | ( | ) | ||||||||
F-13
There are no consolidated VIEs’ assets that are collateral for the VIEs’ obligations. No creditors (or beneficial interest holders) of the VIEs have recourse to the general credit of the Company or any of its consolidated subsidiaries. No terms in any arrangements, considering both explicit arrangements and implicit variable interests, require the Company or its subsidiaries to provide financial support to the VIEs. However, if the VIEs ever need financial support, the Company or its subsidiaries may, at its option and subject to statutory limits and restrictions, provide financial support to the VIE through loans to the shareholders of the VIEs or entrustment loans to the VIEs.
| d. | Recent development |
Novel coronavirus (COVID-19) was first found in December of 2019. Subsequently, COVID-l9 spread rapidly around the world. To reduce the impacts of the pandemic, the governments of many countries implemented measures such as quarantines, travel restrictions, and the temporary restrictions of business activities. This has resulted in a material and negative effect on the economy and rental market in China and caused significant loss of our business, decrease in our occupancy rates, particularly in the quarters ended March 31, 2020 and June 30, 2020 until the quarters ended June 30, 2022, which in turn resulted in a decrease in our revenue.
The COVID-19 pandemic has created unique global and industry-wide challenges, including challenges to many aspects of our business. Substantially all of our revenues and workforce are concentrated in China. The extent to which COVID-19 impacts our financial position, results of operations and cash flows in 2022 will depend on the future developments of the outbreak, including new information concerning the global severity of and actions taken to contain the outbreak, which are highly uncertain and unpredictable. In addition, our financial position, results of operations and cash flows could be adversely affected to the extent that the outbreak harms the Chinese economy in general.
| 2. | SIGNIFICANT ACCOUNTING POLICIES |
| a. | Basis of presentation and use of estimates |
The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) which include the Company, its subsidiaries, its VIEs and VIEs’ subsidiaries under which they are under common ownership. These accounting principles require management to make certain estimates and assumptions that affect the amounts in the accompanying financial statements. Actual results may differ from those estimates. The Group bases its estimates on past experience and various other factors believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.
Significant accounting estimates reflected in the Group’s financial statements include, but are not limited to, valuation allowance for deferred tax assets, incremental borrowing rate, allowance for doubtful accounts, impairment of right-of-use (“ROU”) assets, other long-lived assets, goodwill and long-term investments, and valuation of the Group’s share-based liabilities, warrant liabilities and put option liabilities. Actual results may differ materially from those estimates.
The accompanying condensed consolidated financial statements have been prepared assuming that the Group will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The realization of assets and the satisfaction of liabilities in the normal course of business is dependent on, among other things, the Group’s ability to generate sufficient cash flows from operations, and the Group’s ability to arrange adequate financing arrangements.
The Group has incurred recurring
operating losses since its inception, including net losses of RMB
Historically, the Group has relied principally on both operational sources of cash and non-operational sources of financing from investors to fund its operations and business development. The Group’s ability to continue as a going concern is dependent on management’s ability to successfully execute its business plan which includes continued business transition from asset-heavy model to asset-light model in order to improve the profitability, continued exploration of new business opportunities that have synergies with our core business, push collection of long term receivables, controlling operating costs and optimizing operational efficiency to improve the Group’s cash flow from operations. The Group also plans to raise additional capital, including among others, obtaining debt financing, to support its future operation.
F-14
The Group continues to explore opportunities to grow its business. However, it has not yet achieved a business scale that is able to generate a sufficient level of revenues to achieve net profit and positive cash flows from operating activities, and the Group expects the operating losses and negative cash flows from operations will continue for the foreseeable future. If it is unable to grow the business to achieve economies of scale in the future, it will become even more difficult for the Group to sustain a sufficient source of cash to cover its operating costs. There can be no assurance, however, that the Group will be able to obtain additional financing on terms acceptable to the Group, in a timely manner, or at all. In the event that financing sources are not available, or that the Group is unsuccessful in increasing its gross profit margin, push collection of long term receivables and reducing operating losses, the Group may be unable to implement its current plans for expansion, repay debt obligations or respond to competitive pressures, any of which would have a material adverse effect on the Group’s business, financial condition and results of operations and would materially adversely affect its ability to continue as a going concern.
The Group’s condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of such uncertainties.
| b. | Impairment of ROU assets and other long-lived assets |
The Group reviews its ROU assets
and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may
no longer be recoverable. Factors the Group considers to be important which could trigger an impairment review primarily includes (a) Significant
underperformance relative to projected operating results; (b) Significant changes in the overall business strategy; (c) Significant
adverse changes in legal or business environment and (d) Significant competition, unfavorable industry trend, or economic outlook.
When these events occur, the Group measures impairment by comparing the carrying value of the ROU assets and other long-lived assets to
the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposal. If the sum of
the expected undiscounted cash flow is less than the carrying amount of the assets, the Group would recognize an impairment loss based
on the fair value of the assets. The Company measured the fair value of impaired space by using discounted cash flow model. The estimates
used in projected future cash flows include rental charges, occupancy rate, operating costs. The weighted average cost of capital is used
as the discount rate. The Group recorded RMB
| c. | Convenience translation |
The Group’s business
is primarily conducted in China and substantially all of the revenues are denominated in Renminbi (“RMB”). However, periodic
reports made to shareholders will include current period amounts translated into US dollars using the exchange rate as of balance sheet
date, for the convenience of the readers.
F-15
| d. | Cash and cash equivalents |
Cash and cash equivalents comprise cash at banks and on hand, which have original maturities of three months or less when purchased and are subject to an insignificant risk of changes in value. The carrying value of cash equivalents approximates market value.
| e. | Property and equipment, net |
Property and equipment is stated at cost and is depreciated using the straight-line method over the estimated useful lives of the assets, as follows:
| Category | Estimated useful life | |
| Leasehold improvement | ||
| Building | ||
| Furniture | ||
| Office equipment | ||
| Vehicles |
Repair and maintenance costs are charged to expenses as incurred, whereas the costs of renewals and betterment that extend the useful lives of property and equipment are capitalized as additions to the related assets. Retirements, sales and disposals of assets are recorded by removing the cost and accumulated depreciation from the assets and accumulated depreciation accounts with any resulting gain or loss reflected in the combined and consolidated statements of operations.
| f. | Goodwill |
The excess of the purchase price over the fair value of net assets acquired is recorded on the combined and consolidated balance sheets as goodwill. Goodwill is not amortized, but tested for impairment annually or more frequently if event and circumstances indicate that it might be impaired.
Goodwill is tested for impairment at the reporting unit level on an annual basis (December 31 for the Group) and between annual tests if an event occurs or circumstances change that would more-likely-than-not reduce the fair value of a reporting unit below its carrying value. These events or circumstances include a significant change in stock prices, business environment, legal factors, financial performances, competition, or events affecting the reporting unit. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit.
Management has determined that the Group has three reporting units within the entity at which goodwill is monitored for internal management purposes. Starting from January 1, 2020, the Group adopted ASU 2017-04, which simplifies the accounting for goodwill impairment by eliminating Step 2 from the goodwill impairment test. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, versus determining an implied fair value in Step 2 to measure the impairment loss. Management evaluated the recoverability of goodwill by performing a qualitative assessment before using the quantitative impairment test approach at the reporting unit level. Based on an assessment of the qualitative factors, management determined that it is more-likely-than-not that the fair value of three and one reporting unit are less than its carrying amount as of December 31, 2021 and June 30, 2022.
Therefore, management performed quantitative assessment using the discounted cash flow method and taking into account the market capitalization when determining the fair value of each reporting unit. Key assumptions used to determine the estimated fair value include: (a) internal cash flows forecasts including expected revenue growth, operating margins and estimated capital needs, (b) an estimated terminal value using a terminal year long-term future growth rate determined based on the growth prospects of each reporting unit; (c) a discount rate that reflects the weighted-average cost of capital adjusted for the relevant risk associated with each reporting unit’s operations and the uncertainty inherent in the Group’s internally developed forecasts; and (d) the EBITDA multiples used in the market approach fair value method. The estimates used to calculate the fair value of a reporting unit change from year to year based on operating results and market conditions. Changes in these estimates and assumptions could materially affect the determination of fair value and goodwill impairment for the reporting unit.
F-16
Based on the result of the
Group’s goodwill impairment assessment, RMB
| g. | Convertible bond and detachable warrants |
The Group issued convertible bond with detachable warrants in January 2022. The Group has evaluated that the convertible bond with detachable warrants is a bundle of freestanding financial instruments and should be separately accounted. With respect to the convertible bond, the Group has evaluated whether the conversion feature of the bond is considered an embedded derivative instrument subject to bifurcation in accordance with ASC 815 —Accounting for Derivative Instruments and Hedging Activities (“ASC 815”). Based on the Group's evaluation, the conversion feature is not considered to be bifurcated because the conversion feature is either clearly and closely related to the Convertible Bond or meet the scope exception under ASC 815-10-15. The Group has determined that there was no beneficial conversion feature attributable to the convertible bond, as the effective conversion price is not below fair value of the equity interest to be converted on the commitment dates.
The Group has evaluated the embedded put option in accordance with ASC815 has had determined the put option meet the definition of a derivative and need to be bifurcated and measured under the fair value as the convertible bond was issued at a substantial discount and is contingently exercisable. The Group classifies put option in its condensed consolidated balance sheet as a liability which is revalued at each balance sheet date subsequent to the initial issuance.
The Group has evaluated the detachable warrants in accordance with ASC 815 has had determined the detachable warrants meet the definition of a derivative and need to be measured under the fair value. The Group classifies warrants in its condensed consolidated balance sheet as a liability which is revalued at each balance sheet date subsequent to the initial issuance.
| h. | Lease |
After adoption of ASC 842, the Group made an accounting policy election for all lease related asset classes, to account for the lease and non-lease components as a single lease component. The Group has also made an accounting policy election to exempt leases with an initial term of 12 months or less from being recognized on the balance sheet. Short-term leases are not significant in comparison to the Group’s overall lease portfolio. Payments related to those leases continue to be recognized in the combined and consolidated statement of operations on a straight-line basis over the lease term.
From the Perspective of Lessee
The Group leases properties for its co-working space and other locations. At the commencement of each lease, management determines its classification as an operating or finance lease. For leases that qualify as operating leases, the Group recognizes the associated lease expense on a straight-line basis over the term of the lease beginning on the date of initial possession, which is generally when the Group enters the leased premises and begins to make improvements in preparation for its intended use.
At the commencement date of a lease, the Group recognizes a lease liability for future fixed lease payments and a ROU asset representing the right to use the underlying asset during the lease term.
The future fixed lease payments are discounted using the incremental borrowing rate as the rate implicit in the lease is not readily determinable. The incremental borrowing rate is estimated on a portfolio basis and incorporating lease term, currency risk, credit risk and an adjustment for collateral.
For the initial measurement of the lease liabilities for leases commencing after January 1, 2017, the Group uses the discount rate as of the commencement date of the lease, incorporating the entire lease term. Current maturities and long-term portions of operating lease liabilities are classified as lease liabilities, current and lease liabilities, non-current, respectively, in the combined and consolidated balance sheets.
F-17
The ROU asset is measured at the amount of the lease liabilities with adjustments, if applicable, for lease prepayments made prior to or at lease commencement, initial direct costs incurred and lease incentives. Variable lease expenses include rent contingent payments based on percentages of revenue as defined in the lease. It is not included in lease expenses before it incurs or becomes probable.
From the Perspective of Lessor
The Group recognizes workspace membership revenue under ASC 842, and all the lease contracts are operating leases. The Group provides various leasing solutions for its members and generates revenues from monthly rent in the form of membership services fees or office desk rental fee. The workspace memberships enable members to access to office space, use of a shared internet connection, access to certain facilities (kitchen, common areas, etc.), as well as fee-based for the use of conference room. The price of each membership varies, based on the basis of the particular characteristics of the office space occupied by the member, the geographic location of the workspace, and the amount of desk space in the contract. The members do not have options to purchase underlying assets at termination. Renewal of memberships are on a negotiation basis before termination. The majority of the Group’s lease contracts are fixed lease payment contracts. The Group’s variable lease payments consist of certain contracts indexed to future sales revenues of the lessees. Variable membership fees are recognized when incurred. Workspace membership revenue consists primarily of fees from members and is recognized ratably, on a monthly basis, over the lease term, as access to office space is provided. The Group applied practical expedients to choose not to separate lease and non-lease components for all lease related asset classes. The consolidated component is accounted for under ASC842. The lease term for most of the membership services is less than one year. The leases do not have renewal options and penalty is imposed if the lessees early terminate the leases. Workspace membership fees are generally collected in advance each quarter. Members are generally required to provide the Group with a deposit which is normally one-month service fee. Pursuant to the term of membership agreement, the amount of deposit may be applied against the member’s unpaid balance.
The residual value of the Group’s lease assets represents the fair value of the leased assets at the end of the lease terms. The Group relies on industry data, historical experience, independent appraisals and the experience of the management team to value lease residuals.
Operating lease income from fixed payments and variable lease income for the six months ended June 30, 2021 and 2022 were as follows:
| For the six months ended June 30, | ||||||||
| 2021 | 2022 | |||||||
| RMB | RMB | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Operating lease income from fixed payments | ||||||||
| Variable operating lease income | ||||||||
| Total | ||||||||
Lease payments receivable for the following five years as of June 30, 2022 were as follows:
| As of June 30, 2022 | ||||
| RMB | ||||
| (Unaudited) | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total | ||||
F-18
| i. | Revenue recognition |
Revenue is recognized when control of promised goods or services is transferred to the Group’s customers in an amount of consideration to which the Group expects to be entitled to in exchange for those goods or services. The Group follows the five steps approach for revenue recognition under Topic 606: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the Group satisfies a performance obligation.
The primary sources of the Group’s revenues are as follows:
| (i) | Workspace membership revenue |
As set out in Note 2 “Lease, from the perspective of lessor”, workspace membership revenue is recognized under ASC 842.
| (ii) | Marketing and branding services revenue |
Marketing and branding services revenue primarily consists of advertising services revenue, generated by a subsidiary acquired in 2018. The service provided is accounted for as a single performance obligation and revenue is recognized over the service period by using the advertisement placed as output method.
| (iii) | Other services revenue |
Other services revenue primarily consists of 1) interior design and construction revenue, 2) co-working space management fees, 3) SaaS services and IOT solutions revenue and 4) charges to members for ancillary services including printing copying, etc. Design and construction revenue is generated from two subsidiaries acquired in 2018 and one subsidiary acquired in 2021. Design revenue is recognized over time based on the basis of direct measurements of the value to the customer of the services transferred to date relative to the remaining services promised under the contract. Construction revenue is recognized over time based on a percentage of contract costs incurred to date compared to the total estimated contract cost. Co-working space management fees is derived from managing branded co-working space locations for leased property owners. The fee generally consists of a monthly base amount plus revenue sharing. Revenue is recognized over time when service is provided. Variable consideration is estimated as the most likely amount to which the Group expects to be entitled. SaaS service and IOT solution is generated from a subsidiary acquired in 2019 and recognized upon the service was completed. Revenue from ancillary services to members is recorded upon performance obligation delivered per contracts.
Contract liabilities primarily result from the timing difference between the Group’s satisfaction of performance obligation and the customers’ payment. Substantial all marketing and branding revenue, and other services revenue is recognized over time during the six months ended June 30, 2021 and 2022.
| j. | Share-based compensation |
Share-based compensation expense arises from the Company’s share-based awards granted to its employees and non-employees.
In determining the fair value of share options granted, a binomial option pricing model is applied.
Share-based compensation expense for share options granted is recognized on a tranche-by-tranche method over the requisite service period. The Company elected to not estimate the forfeiture rate, but to account for the forfeiture when forfeitures occur.
A change in any of the terms or conditions of share awards is accounted for as a modification. The Company calculates the incremental compensation cost of modification as the excess of the fair value of the modified awards over the fair value of the original awards immediately before its terms are modified, measured based on the share price and other pertinent factors at the modification date. The Company recognizes, over the remaining requisite service period of the modified awards, the sum of the incremental compensation cost and the remaining unrecognized compensation cost, if any, for the original award on the modification date.
F-19
| k. | Warrant liability |
In connection with the issuances of ordinary shares, the Group may issue options or warrants to purchase ordinary shares. In certain circumstances, these options or warrants may be classified as liabilities, rather than as equity.
Warrants classified as equity are initially recorded at fair value and subsequent changes in fair value are not recognized as long as the warrants continue to be classified as equity. Warrants classified as liabilities are initially recorded at fair value with gains and losses arising from changes in fair value recognized in the consolidated statements of operations during the period in which such instruments are outstanding.
| l. | Recent accounting pronouncements not yet adopted |
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments — Credit Losses (Topic 326) (“ASU 2016-13”), which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss methodology with an expected credit loss methodology, which will result in more timely recognition of credit losses. ASU 2016-13 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2019, excluding entities eligible to be smaller reporting companies as defined by the SEC. For all other entities, ASU 2016-13 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Group is an emerging-growth company and has elected to adopt the new standard as of the effective date applicable to nonissuers. The Group is evaluating the impact of the adoption of this standard on its consolidated financial statements.
In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805) (“ASU 2021-08”), which requires that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. At the acquisition date, an acquirer should account for the related revenue contracts in accordance with Topic 606 as if it had originated the contracts. ASU 2021-08 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years for public business entities. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. The amendments in this Update should be applied prospectively to business combinations occurring on or after the effective date of the amendments. The Group is evaluating the impact of the adoption of this standard on its consolidated financial statements
Recently adopted accounting pronouncements
In August 2020, the FASB issued ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which focuses on amending the legacy guidance on convertible instruments and the derivatives scope exception for contracts in an entity’s own equity. ASU 2020-06 simplifies an issuer’s accounting for convertible instruments by reducing the number of accounting models that require separate accounting for embedded conversion features. ASU 2020-06 also simplifies the settlement assessment that entities are required to perform to determine whether a contract qualifies for equity classification. Further, ASU 2020-06 enhances information transparency by making targeted improvements to the disclosures for convertible instruments and earnings-per-share (EPS) guidance, i.e., aligning the diluted EPS calculation for convertible instruments by requiring that an entity use the if-converted method and that the effect of potential share settlement be included in the diluted EPS calculation when an instrument may be settled in cash or shares, adding information about events or conditions that occur during the reporting period that cause conversion contingencies to be met or conversion terms to be significantly changed. The Group adopted this guidance on January 1, 2022 with no material impact on its condensed consolidated financial statements and related disclosures as a result of adopting new standard.
F-20
| 3. | RISKS AND CONCENTRATION |
Foreign currency risk
The RMB is not a freely convertible
currency. The State Administration for Foreign Exchange, under the authority of the Peoples Bank of China, controls the conversion of
RMB into other currencies. The value of the RMB is subject to changes in central government policies, international economic and political
developments affecting supply and demand in the China Foreign Exchange Trading System market. The Group’s cash and cash equivalents
denominated in RMB amounted to RMB
Concentration risks
Financial instruments that
potentially expose the Group to significant concentration of credit risk primarily consist of cash and cash equivalents and short-term
investments. As of December 31, 2021 and June 30, 2022, substantially all of the Group’s cash and cash equivalents and short-term
investments were deposited in financial institutions located in the PRC. There are
There are
| 4. | PREPAID EXPENSES AND OTHER CURRENT ASSETS, NET |
Prepaid expenses and other current assets consisted of the following:
As of 2021 | As of June 30, 2022 | |||||||
| RMB | RMB | |||||||
| (Unaudited) | ||||||||
| Advances to suppliers(i) | ||||||||
| Prepaid VAT | ||||||||
| Rental deposit, current | ||||||||
| Staff advances | ||||||||
| Prepaid consulting expenses | ||||||||
| Short-term construction deposits | ||||||||
| Prepaid short-term rent | ||||||||
| Interest receivable | ||||||||
| Receivables from third-party payment platform | ||||||||
| Others(ii) | ||||||||
| Total | ||||||||
| Less: Allowance for doubtful accounts | ( | ) | ( | ) | ||||
| Total | ||||||||
The Group recognized bad debt
loss for prepayment and other current assets of RMB
Notes:
| (i) |
| (ii) |
F-21
| 5. | PROPERTY AND EQUIPMENT, NET |
Property and equipment, net, consisted of the following:
As of 2021 | As of June 30, 2022 | |||||||
| RMB | RMB | |||||||
| (Unaudited) | ||||||||
| Leasehold improvement | ||||||||
| Buildings | ||||||||
| Furniture | ||||||||
| Office equipment | ||||||||
| Vehicles | ||||||||
| Total cost of property and equipment | ||||||||
| Less: Accumulated depreciation | ( | ) | ( | ) | ||||
| Impairment loss | ( | ) | ( | ) | ||||
| Add: Foreign exchange differences | ||||||||
| Construction in progress | ||||||||
| Total | ||||||||
Depreciation expenses for the six
months ended June 30, 2021 and 2022 were RMB
Loss on disposal for the six
months ended June 30, 2021 was RMB
The building located in Kaifeng,
Henan Province, with carrying amount of RMB
The building located in Ningbo,
Zhejiang Province, with carrying amount of RMB
As of June 30, 2022, the Group had no significant outstanding capital commitments.
| 6. | GOODWILL |
Goodwill consisted of the following:
As of 2021 | As of June 30, 2022 | |||||||
| RMB | RMB | |||||||
| (Unaudited) | ||||||||
| Beginning Balance | ||||||||
| Acquisitions | — | |||||||
| Impairment loss | ( | ) | ( | ) | ||||
| Ending Balance | — | |||||||
During the six months ended June 30, 2022, goodwill was from the others reporting unit. The Group performed qualitative assessment for the others reporting unit and considers primary factors such as the impact of COVID-19, overall financial performance of the reporting unit, continuous decrease in the Group’s share price and other specific information related to the operations.
Based on the quantitative goodwill
impairment test, the Group recorded goodwill impairment loss of RMB
F-22
| 7. | LEASE |
From the Perspective of Lessee
The Group leases real estate
for terms between
The Group sub-leased the leased premises to provide various lease solutions. All of the Group’s leases are operating leases under ASC 842.
Supplemental balance sheet information related to the leases were as follows:
As of 2021 | As of June 30, 2022 | |||||||
| RMB | RMB | |||||||
| (Unaudited) | ||||||||
| ROU assets | ||||||||
| Operating lease liabilities – current | ( | ) | ( | ) | ||||
| Operating lease liabilities – non-current | ( | ) | ( | ) | ||||
| Weighted average remaining lease terms | ||||||||
| Weighted average incremental borrowing rate | % | % | ||||||
The loss from termination of
leases for the six months ended June 30, 2021 and 2022 were RMB
The components of lease expenses for the six months ended June 30, 2021 and 2022 were as follows:
| For the six months ended June 30, 2021 | For the six months ended June 30, 2022 | |||||||
| RMB | RMB | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Operating lease expenses for variable payments | ||||||||
| Operating lease expenses for fixed payments | ||||||||
| Short-term lease expenses | ||||||||
| Total | ||||||||
| For the six months ended June 30, 2021 | For the six months ended June 30, 2022 | |||||||
| RMB | RMB | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Operating cash flows for operating leases | ||||||||
F-23
Supplemental noncash information:
| For the six months ended June 30, 2021 | For the six months ended June 30, 2022 | |||||||
| RMB | RMB | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Operating lease liabilities arising from obtaining ROU assets | ||||||||
The future lease payments as of June 30, 2022 were as follows:
As of June 30, | ||||
| RMB | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total lease payments | ||||
| Less: imputed interest | ( | ) | ||
| Total lease liabilities | ||||
| 8. | ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES |
Accrued expenses and other current liabilities consisted of the following:
As of 2021 | As of June 30, 2022 | |||||||
| RMB | RMB | |||||||
| (Unaudited) | ||||||||
| Penalty payable | ||||||||
| Refundable deposits from members, current | ||||||||
| Payable for investments and acquisitions | ||||||||
| Payable to former shareholders of acquirees | ||||||||
| Accrued payroll | ||||||||
| VAT payable | ||||||||
| Other taxes payable | ||||||||
| Interests payable | ||||||||
| Others | ||||||||
| Third-party loans | ||||||||
| Amounts reimbursable to employees | ||||||||
| Total | ||||||||
F-24
| 9. | COST OF REVENUE (EXCLUDING IMPAIRMENT LOSS) |
Cost of revenue (excluding impairment loss) consisted of the following:
| For the six months ended June 30, 2021 | For the six months ended June 30, 2022 | |||||||
| RMB | RMB | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Lease expenses | ||||||||
| Employee compensation and benefits | ||||||||
| Depreciation and amortization | ||||||||
| Advertising costs | ||||||||
| Other operating costs(i) | ||||||||
| Total | ||||||||
Notes:
| (i) |
| 10. | INCOME TAXES |
Cayman Islands& BVI
The Company and Ucommune Group are tax-exempted companies incorporated in the Cayman Islands. A subsidiary, Ucommune International Limited, is incorporated in BVI. The foregoing companies are not subject to income tax.
United States (“U.S.”)
Ucommune N.Y. Corp. is
incorporated in the U.S. and is subject to the U.S. federal income taxes. According to U.S. tax reform, a flat corporate
income tax rate of
Hong Kong
Ucommune HK was established
in Hong Kong and is subject to a two-tiered income tax rate for taxable income earned in Hong Kong effectively since April 1,
2018. The first
F-25
Singapore
Ucommune Singapore Pte. Ltd.
was established in Singapore and is subject to Singapore corporate income taxes at the rate of
PRC
Effective from
According to Caishui [2019]
No. 13, Caishui [2021] No. 12 and Caishui [2022] No.13, small and low-profit enterprises have updated their preferential tax conditions.
The entity should meet the three conditions: 1. The annual taxable income does not exceed RMB
For small, low-profit enterprises
whose annual taxable income does not exceed RMB
| For the six months ended June 30, 2021 | For the six months ended June 30, 2022 | |||||||
| RMB | RMB | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Current tax expense | ||||||||
| Deferred tax benefit | ( | ) | ( | ) | ||||
| Total | ||||||||
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Group’s deferred tax assets were as follows:
As of 2021 | As of June 30, 2022 | |||||||
| RMB | RMB | |||||||
| (Unaudited) | ||||||||
| Deferred tax assets: | ||||||||
| Allowance for doubtful accounts | ||||||||
| Impairment loss on long-lived assets and long-term prepaid expenses | ||||||||
| Impairment loss on long-term investments | ||||||||
| Accrued Liabilities | ||||||||
| Deductible temporary difference related to advertising expenses | ||||||||
| Deferred subsidy income | ||||||||
| Net operating loss carrying forwards | ||||||||
| Total deferred tax assets | ||||||||
| Less: valuation allowance | ( | ) | ( | ) | ||||
| Deferred tax assets, net | ||||||||
F-26
Net change in the valuation allowance of deferred tax assets are summarized as follows:
| RMB | ||||
| Net change of valuation allowance of Deferred tax assets | ||||
| Balance at December 31, 2020 | ||||
| Additions-change to tax expense | ||||
| NOL Reductions/expirations | ( | ) | ||
| Balance at December 31, 2021 | ||||
| Additions-change to tax expense | ||||
| NOL Reductions/expirations | ( | ) | ||
| Balance at June 30, 2022 | ||||
The significant components of deferred taxes liability were as follows:
As of 2021 | As of June 30, 2022 | |||||||
| RMB | RMB | |||||||
| (Unaudited) | ||||||||
| Deferred tax liabilities: | ||||||||
| Acquired intangible assets | ||||||||
The aggregate NOLs as of June
30, 2022 was RMB
The Group does not file combined
or consolidated tax returns, therefore, losses from individual subsidiaries of the Group may not be used to offset other subsidiaries’
earnings within the Group. Valuation allowance is considered on each individual subsidiary basis. Valuation allowance of RMB
The impact of an uncertain
income tax position on the income tax return is recognized at the largest amount that is more-likely-than-not to be sustained upon audit
by the relevant tax authority. An uncertain income tax position will not be recognized if it has less than a
The Group has concluded that there are no significant uncertain tax positions requiring recognition in financial statements for the year ended December 31, 2021 and six months ended June 30, 2022. The Group did not incur any significant interest and penalties related to potential underpaid income tax expenses and also does not anticipate any significant increases or decreases in unrecognized tax benefits in the next 12 months. The Group has no material unrecognized tax benefits which would favorably affect the effective income tax rate in future years.
According to the PRC Tax Administration
and Collection Law, the tax authority may require the taxpayer or the withholding agent to make delinquent tax payment within three years
if the underpayment of taxes is resulted from the tax authority’s act or error. No late payment surcharge will be assessed under
such circumstances. The statute of limitation will be three years if the underpayment of taxes is due to the computational errors
made by the taxpayer or the withholding agent. Late payment surcharge will be assessed in such case. The statute of limitation will be
extended to five years under special circumstances which are not clearly defined (but an underpayment of tax liability exceeding
RMB
F-27
Therefore, the Group is subject to examination by the PRC tax authorities based on the above.
The reconciliation of the effective tax rate and the statutory income tax rate applicable to PRC operations was as follow:
| For the six months ended June 30, 2021 | For the six months ended June 30, 2022 | |||||||
| RMB | RMB | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Loss before provision for income taxes and loss from equity method investment | ( | ) | ( | ) | ||||
| Income tax expense computed at an applicable tax rate of | ( | ) | ( | ) | ||||
| Effect of non-deductible items | ||||||||
| Effect of preferential tax rate | ( | ) | ||||||
| Effect of income tax rate difference in other jurisdictions | ||||||||
| Change in valuation allowance | ||||||||
| Total | ||||||||
New EIT Law includes a provision
specifying that legal entities organized outside of the PRC will be considered residents for Chinese Income tax purposes if the place
of effective management or control is within the PRC. The implementation rules to the New EIT Law provide that non-resident legal
entities will be considered PRC residents if substantial and overall management and control over the manufacturing and business operations,
personnel, accounting, properties, etc. occurs within the PRC. Despite the present uncertainties resulting from the limited PRC tax
guidance on the issue, the Group does not believe that the legal entities organized outside of the PRC within the Group should be treated
as residents for EIT law purposes. If the PRC tax authorities subsequently determine that the Company and its subsidiaries registered
outside the PRC should be deemed a resident enterprise, the Company and its subsidiaries registered outside the PRC will be subject to
the PRC income tax at a rate of
If the Company were to be a non-resident for PRC tax purpose, dividends paid to it out of profits earned by PRC subsidiaries after January 1, 2008 would be subject to 10% withholding tax, if no tax treaty is applicable. In addition, under tax treaty between the PRC and Hong Kong, if the foreign investor is incorporated in Hong Kong and qualifies as the beneficial owner, the applicable withholding tax rate may be reduced to 5%, if the investor holds at least 25% in the Foreign Invested Enterprise (“FIE”); or 10%, if the investor holds less than 25% in the FIE.
| 11. | CONVERTIBLE BOND AND DETACHABLE WARRANTS |
On
January 26, 2022,
F-28
The Bond matures on January 25, 2023 and pays interest in cash at the rate of 8.0% per annum, payable quarterly on January 1, April 1, July 1 and October 1, beginning on April 1, 2022. The Company may also elect to pay accrued interest in Class A ordinary shares, at a rate of 12.0% per annum, assuming a conversion rate equal to the lesser of (a) the conversion price then in effect or (b) the average of the volume weighted average price of Class A ordinary shares for the five consecutive trading days ending on the applicable interest payment date. The Bond is convertible at the option of the purchaser into Class A ordinary shares equal to 125% of the principal amount of the Bond at an initial conversion price equal to the lesser of (i) $1.00 ($20 retrospectively restated for effect of share consolidation on April 21, 2022), subject to certain adjustments, and (ii) 100% of the lowest daily volume weighted average price of Class A ordinary shares during the ten consecutive trading days prior to the conversion date.
On March 1, 2022, the
Company and the Purchaser entered amendment agreements to the Securities Purchase Agreement, Bond, and JAK Warrants to set a floor price
of $
No fractional shares will be issued upon exercise of the new warrant. No new warrants will be exercisable for cash unless the Company has an effective and current registration statement covering the shares of common stock issuable upon exercise of the new warrants and a current prospectus relating to such shares of common stock.
The JAK Warrants are classified
as a liability. The Company uses the binomial lattice model to value JAK Warrants and the fair value allocated to the JAK Warrants at
the date of issuance was RMB
| 12. | SHARE-BASED COMPENSATION |
| a. | Incentive Plan |
| 2019 Plan |
On September 19, 2019,
September 1, 2020 and October 13, 2020, Ucommune Group granted
For type 1,
For type 2,
For type 3,
F-29
For type 4,
On September 1,2020, The
vesting schedule of the award options for certain employees and non-employees has been changed from “
2020 Plan
In connection with the SPAC Transaction, the Company adopted the 2020 Plan on November 17, 2020 (the “Replacement Date”), which is also the effective date of the SAPC Transaction to assume and replace the 2019 Plan. The Company rolled over options granted under the 2019 Plan with nearly the same terms. One option granted under the 2019 Plan was assumed and replaced by 0.4783 option under the 2020 Plan and the exercise price of the options was increased from $0.0001 per share to $0.00021 (0.0001 divided by 0.4783) per share (from $0.002 per share to $0.00418 retrospectively restated for effect of share consolidation on April 21, 2022). The 2020 Plan provides for the issuance of up to an aggregate of 7,188,661 of Class A ordinary shares (359,433 of its share options retrospectively restated for effect of share consolidation on April 21, 2022).
The fair value of option granted was estimated on the date of grant using the binominal option- pricing model with the following assumptions used for grants during the applicable periods:
| For the years ended December 31, | For the six months ended June 30, | |||||||||||
| 2019 | 2020 | 2022 | ||||||||||
| RMB | RMB | RMB | ||||||||||
| Risk-free interest rate | % | % | % | |||||||||
| Volatility | % | % | % | |||||||||
| Dividend yield | ||||||||||||
| Life of options (in years) | ||||||||||||
| Fair value of underlying ordinary shares* | ||||||||||||
| * |
| (1) | Risk-free interest rate |
Risk-free interest rate was estimated based on the daily treasury long term rate of the U.S. Treasury Department with a maturity period close to the expected term of the options, plus the country default spread of China.
| (2) | Volatility |
The volatility of the underlying ordinary shares during the lives of the options was estimated based on the historical stock price volatility of comparable listed companies over a period comparable to the expected term of the options.
| (3) | Dividend yield |
The dividend yield was estimated by the Group based on its expected dividend policy over the expected term of the options.
| (4) | Life of options |
Life of options is extracted from option agreements.
F-30
Prior to the consummation of the SPAC Transaction, the estimated fair value of the ordinary shares underlying the options as of the valuation date was determined based on a contemporaneous valuation. When estimating the fair value of the ordinary shares on the valuation dates, management has considered a number of factors, including the result of a third party appraisal of the Company, while taking into account standard valuation methods and the achievement of certain events. The fair value of the ordinary shares in connection with the option grants on the valuation date was determined with the assistance of an independent third-party appraiser. The fair values of the underlying ordinary shares on each date of the grant after November 17, 2020, were the closing prices of the Company’s ordinary shares traded in the stock exchange.
A summary of options activities during the six months ended June 30, 2022 is presented below:
| Number of options* | Weighted average exercise price USD* | Weighted average grant date fair value RMB* | Weighted average remaining contractual term (years) | Aggregate intrinsic value | ||||||||||||||||
| Options outstanding at December 31, 2020 | ||||||||||||||||||||
| Granted | ||||||||||||||||||||
| Exercised | ( | ) | ||||||||||||||||||
| Forfeited | ( | ) | ||||||||||||||||||
| Options outstanding at December 31, 2021 | ||||||||||||||||||||
| Granted | ||||||||||||||||||||
| Exercised | ( | ) | ||||||||||||||||||
| Forfeited | ||||||||||||||||||||
| Options outstanding at June 30, 2022 | ||||||||||||||||||||
| Options vested and expected to vest as of June 30, 2022 | ||||||||||||||||||||
| Options exercisable as of June 30, 2022 | ||||||||||||||||||||
| * |
The aggregate intrinsic value
was calculated as the difference between the exercise price of the underlying awards and the closing stock price of $
The fair values of the options granted for the six months ended June 30, 2022 are as follows:
| For the six months ended June 30, 2022 | ||||
| RMB | ||||
| Weighted average grant date fair value of option per share* | ||||
| Aggregate grant date fair value of options** | ||||
| * |
| ** | In |
F-31
As of June 30, 2022, there
was approximately RMB
Total share-based compensation expense for the six months ended June 30, 2022 were as follows:
| For the six months ended June 30, | ||||||||
| 2021 | 2022 | |||||||
| Cost of revenue | ||||||||
| Selling and marketing | ||||||||
| General and administrative | ||||||||
| Total share-based compensation expense | ||||||||
| b. | Earn-out compensation from SPAC Transaction |
In connection with SPAC Transaction, 4,000,000 Earnout Shares (200,000 of its earnout shares retrospectively restated for effect of share consolidation on April 21, 2022) were granted to certain shareholders of Ucommune Group as disclosed in Note 1 (b).
The Company accounted for the Earnout Shares as share-based compensation under ASC 718. The Company determined the fair value of the earn-out shares using binomial model, which includes significant unobservable inputs that are classified as level 3 in the fair value hierarchy. Assumptions used to estimate the fair values of the share options granted or modified were as follows:
| For the years ended December 31, 2020 | ||||
| RMB | ||||
| Risk-free interest rate | % | |||
| Volatility | % | |||
| Dividend yield | ||||
| Life (in years) | ||||
| Fair value of the underlying ordinary shares (USD)* | ||||
| * |
Total share-based compensation expense of earn-out shares for the six months ended June 30, 2022 were as follows:
| For the six months ended June 30, | ||||||||
| 2021 | 2022 | |||||||
| General and administrative | ||||||||
| c. | Share Incentive |
In May 2021, the Group acquired 100% equity interests of Guangdong Wanhe Green Technology Co., Ltd (“Guangdong Wanhe”) and Share Incentive in term of the Group’s share of RMB 29.0 million were awarded to certain management of Guangdong Wanhe. The management may be entitled to receive the Share Incentive as follows: (a) 40% of the Share Incentive and an additional share award of RMB 1.15 million if the revenue of Guangdong Wanhe exceeds RMB30,000,000 for the period from acquisition date through December 31, 2021 pursuant to the audited consolidated financial statements of Guangdong Wanhe; (b) 40% of the Share Incentive if the revenue of Guangdong Wanhe exceeds RMB55,000,000 in the fiscal year of 2022 pursuant to the audited consolidated financial statements of Guangdong Wanhe as of and for the fiscal year ended December 31, 2022; (c) 20% of the Share Incentive if the revenue of Guangdong Wanhe exceeds RMB65,000,000 in the fiscal year of 2023 pursuant to the audited consolidated financial statements of Guangdong Wanhe as of and for the fiscal year ended December 31, 2023. In addition, shares valued at 5% of the overfulfilled revenue should be awarded for each performance evaluation period. The Share Incentive should be automatically forfeited if the employment terminates during the performance evaluation period.
F-32
Total share-based compensation expense of Share Incentive for the six months ended June 30, 2022 were as follows:
| For the six months ended June 30, 2022 | ||||
| General and administrative | ||||
| 13. | NET LOSS PER SHARE |
For the six months ended June 30, 2021 and 2022, for the purpose of calculating net loss per share as a result of the reorganization as described in Note 1, the number of shares used in the calculation reflects the outstanding shares of the Company as if the reorganization took place at the beginning of the period presented.
Basic and diluted net loss per share for each of the year presented were calculated as follows:
| For the six months ended June 30, 2021 | For the six months ended June 30, 2022 | |||||||
| RMB | RMB | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Numerator: | ||||||||
| Net loss attributable to Ucommune International Ltd’s shareholders | ( | ) | ( | ) | ||||
| Denominator: | ||||||||
| ( | ) | ( | ) | |||||
| * |
| ** |
| 14. | RELATED PARTIES BALANCES AND TRANSACTIONS |
The Group had the following related parities:
| a. | Executive Officers and companies controlled by executive officers |
| b. | Equity method investees |
| c. | Companies controlled by the same controlling shareholders. |
| d. | The |
| e. | The wholly owned subsidiary of d. |
F-33
| I. | Balances: |
The Group had the following related party balances:
| Relationship | Notes | As of December 31, 2021 | As of June 30, 2022 | |||||||||||||
| RMB | RMB | |||||||||||||||
| (Unaudited) | ||||||||||||||||
| Amounts due from related parties: | ||||||||||||||||
| Guangdong Advertising Co., Ltd. | (d) | (i) | ||||||||||||||
| Youxiang Group | (c) | (ii) | ||||||||||||||
| Others | (iii) | |||||||||||||||
| Relationship | Notes | As of December 31, 2021 | As of June 30, 2022 | |||||||||||||
| RMB | RMB | |||||||||||||||
| (Unaudited) | ||||||||||||||||
| Amounts due to related parties: | ||||||||||||||||
| Youxiang Group | (c) | (iv) | ||||||||||||||
| Guangdong Marketing Advertising Group | (e) | (v) | ||||||||||||||
| Others | ||||||||||||||||
Notes:
| (i) |
| (ii) |
| (iii) |
| (iv) |
| (v) |
| II. | Transactions: |
Lease expenses
| Six months Ended June 30, 2021 | Six months Ended June 30, 2022 | |||||||||||||||
| Relationship | Notes | RMB | RMB | |||||||||||||
| (Unaudited) | (Unaudited) | |||||||||||||||
| Youxiang Group | (c) | (i) | ||||||||||||||
F-34
Revenues
| Six months Ended June 30, 2021 | Six months Ended June 30, 2022 | |||||||||||
| Relationship | Notes | RMB | RMB | |||||||||
| (Unaudited) | (Unaudited) | |||||||||||
| Youxiang Group | (c) | (ii) | ||||||||||
| Guangdong Advertising Co., Ltd. | (d) | (iii) | ||||||||||
Property management expense
| Six months Ended June 30, 2021 | Six months Ended June 30, 2022 | |||||||||||
| Relationship | Notes | RMB | RMB | |||||||||
| (Unaudited) | (Unaudited) | |||||||||||
| Youxiang Group | (c) | (iv) | ||||||||||
Purchase of advertisement distribution resources
| Six months Ended June 30, 2021 | Six months Ended June 30, 2022 | |||||||||||||||
| Relationship | Notes | RMB | RMB | |||||||||||||
| (Unaudited) | (Unaudited) | |||||||||||||||
| Guangdong Advertising Co., Ltd. | (d) | (v) | ||||||||||||||
| Guangdong Advertising Marketing Group | (e) | (v) | ||||||||||||||
Other income from lease expense waivers
| Six months Ended June 30, 2021 | Six months Ended June 30, 2022 | |||||||||||||||
| Relationship | Notes | RMB | RMB | |||||||||||||
| (Unaudited) | (Unaudited) | |||||||||||||||
| Youxiang Group | (c) | (vi) | ||||||||||||||
Notes:
| (i) |
| (ii) |
| (iii) |
| (iv) |
| (v) |
| (vi) |
F-35
| 15. | COMMITMENTS AND CONTINGENCIES |
Capital commitment
As of June 30, 2022, the Group had no significant outstanding capital commitments.
Contingencies
From time to time, the Group is involved in various other legal and regulatory proceedings arising in the normal course of business. While the Group cannot predict the occurrence or outcome of these proceedings with certainty, it does not believe that an adverse result in any pending legal or regulatory proceeding, individually or in the aggregate, would be material to the Group’s consolidated financial condition or cash flows.
| 16. | SUBSEQUENT EVENTS |
In July 2022, the Company disposed
of one of its buildings located in Kaifeng, Henan Province to Youxiang Group with a total consideration of RMB
On August 29, 2022, the Company and the Purchaser entered into amendment agreements (“Amendment”) to the Securities Purchase Agreement, Bond, and JAK Warrants to change the floor price to $4.50 per Ordinary Share from $6.0 per Ordinary Share as amended on March 1, 2022 for the conversion price of the Bond and exercise price of the Warrants. The Company has evaluated the accounting impact on private placement and determined that the amendment has no impact on the condensed consolidated financial statements.
The Company has evaluated subsequent events through the issuance of the condensed consolidated financial statements and no other subsequent event is identified that would have required adjustment or disclosure in the condensed consolidated financial statements.
F-36
Exhibit 99.2
Conventions Which Apply to this Discussion
Except where the context otherwise requires and for purposes of the discussion in this Exhibit 99.2, or this discussion, only:
| ● | “Business Combination” refers to (1) reincorporation of Orisun Acquisition Corp in Cayman Islands by merging with and into Ucommune; and (2) merger of Everstone International Ltd, a Cayman Islands exempted company, with and into Ucommune Group Holdings Limited, or Ucommune Group Holdings, resulting in Ucommune Group Holdings being a wholly owned subsidiary of the Parent; |
| ● | “China” or “PRC” refers to the People’s Republic of China, excluding, for the purpose of this discussion only, Taiwan, Hong Kong and the Macau Special Administrative Region; |
| ● | “Class A ordinary shares” refers to the Class A ordinary shares, par value US$0.002 per share (or, US$0.0001 per share prior to the effectiveness of Share Consolidation), of the Parent, carrying one vote per share; |
| ● | “Class B ordinary shares” refers to the Class B ordinary shares, par value US$0.002 per share (or, US$0.0001 per share prior to the effectiveness of Share Consolidation), of the Parent, carrying 35 votes per share; |
| ● | “Frost & Sullivan” refers to Frost & Sullivan (Beijing) Inc., Shanghai Branch Co., a third-party industry research firm; |
| ● | “Greater China” refers to, for the purpose of this discussion only, China as well as Hong Kong, Macau Special Administrative Region and Taiwan; |
| ● | “HK subsidiaries” refers to the Parent’s subsidiaries incorporated in Hong Kong; |
| ● | “Hong Kong” or “HK” refers to the Hong Kong Special Administrative Region of the PRC; |
| ● | “individual members using workstations” refers to the individuals that use Ucommune’s workstations under a membership agreement as of a given date, excluding the individuals that have access to a workstation on as-needed basis; |
| ● | “mature spaces” refers to spaces that have been open for more than 24 months; |
| ● | “members” refers to the individuals and enterprises that have registered on U Bazaar and have received reward points as of a given date; |
| ● | “new tier-1 cities” refers to the relatively developed cities following the tier-1 cities: Chengdu, Hangzhou, Nanjing, Qingdao, Kunming, Shenyang, Tianjin, Wuhan, Xi’an, Changsha, Chongqing, Suzhou, Ningbo, Zhengzhou and Dongguan; |
| ● | “ordinary shares” refers to the Class A ordinary shares and the Class B ordinary shares, both of par value US$0.002 per share (or, US$0.0001 per share prior to the effectiveness of Share Consolidation); |
| ● | “Parent” refers to Ucommune International Ltd, a Cayman Islands company; |
| ● | “PIPE investment” refers to the investment of US$60.9 million in by certain backstop investors in connection with the Business Combination. |
| ● | “PRC subsidiaries” refers to the Parent’s subsidiaries incorporated in the PRC, including the WFOEs; |
| ● | “RMB” or “Renminbi” refers to the legal currency of the PRC; |
| ● | “Share Consolidation” refers to the share consolidation of 20 ordinary shares with par value of US$0.0001 each in the Parent’s issued and unissued share capital into one ordinary share with par value of US$0.002 each of the Parent effected on April 21, 2022; |
| ● | “SME” refers to small and medium enterprises; |
| ● | “space(s) operated by Ucommune’s associate(s)” refers to the co-working space(s) in which Ucommune has a minority interest investment but are operated by Ucommune’s associate(s); and Ucommune accounts for its investment under the equity method but does not consolidate the revenue of such spaces into the unaudited condensed consolidated financial statements; |
| ● | “tier-1 cities” refers to the most developed cities in the PRC: Beijing, Shanghai, Guangzhou and Shenzhen; |
| ● | “Ucommune” or the “group” refers to the Parent, its subsidiaries and, in the context of describing the operations and unaudited condensed consolidated financial statements, the consolidated VIEs; |
| ● | “US$,” “dollars” or “U.S. dollars” refers to the legal currency of the United States; |
| ● | “variable interest entities” or “VIEs” refers to Ucommune (Beijing) Venture Investment Co., Ltd., or Ucommune Venture, Beijing U Bazaar Technology Co., Ltd. and Beijing Weixue Tianxia Education Technology Co., Ltd. (including each of their consolidated subsidiaries in China, if any), which are PRC companies in which the Parent does not have equity interests but whose financial results have been consolidated into the unaudited condensed consolidated financial statements in accordance United States generally accepted accounting principles, or U.S. GAAP, due to the Parent being the primary beneficiary of, such entities; and |
| ● | “WFOEs” refers to Ucommune (Beijing) Technology Co., Ltd. and Beijing Melo Technology Co., Ltd., both are the Parent’s wholly foreign owned entities domiciled in China;. |
Unless otherwise noted, all statistics with respect to Ucommune’s co-working spaces, cities covered by its co-working space network, managed area of co-working spaces, workstations, occupancy rates and members exclude the spaces operated by Ucommune’s associates.
Certain amounts, percentages and other figures, such as key operating data, presented in this discussion have been subject to rounding adjustments. Accordingly, figures shown as totals, dollars or percentages may not represent the arithmetic summation or calculation of the figures that accompany them.
Unless otherwise noted, all translations from Renminbi to U.S. dollars and from U.S. dollars to Renminbi in this discussion are made at RMB6.6981 to US$1.00, the exchange rate set forth in the H.10 statistical release of the Federal Reserve Board on June 30, 2022. The Parent makes no representation that any Renminbi or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or Renminbi, as the case may be, at any particular rate, the rates stated below, or at all. On September 23, 2022, the noon buying rate for Renminbi was RMB7.1266 to US$1.00.
This discussion contains information derived from various public sources and certain information from an industry report commissioned by Ucommune and prepared by Frost & Sullivan, a third-party industry research firm, to provide information regarding its industry and market position. Such information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to these estimates. The industry in which Ucommune operates is subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Item 3. Key Information — D. Risk Factors” in the annual report on Form 20-F filed by the Parent with the U.S. Securities and Exchange Commission, or the SEC, on May 10, 2022, or the Parent’s 20-F. These and other factors could cause the results to differ materially from those expressed in these publications and reports.
2
SELECTED UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENT INFORMATION OF PARENT, THE VIES, THE WFOES, THE HK SUBSIDIARIES AND OTHER SUBSIDIARIES.
The following unaudited condensed consolidated financial statement information presents information related to the Parent, which is the investment holding company, the VIEs, the WFOEs, the HK subsidiaries and other subsidiaries as of and for the periods indicated.
| As of June 30, 2022 | ||||||||||||||||||||||||||||
| Parent | VIE and its Subsidiaries | WFOEs | HK Subsidiaries | Other Subsidiaries | Eliminating Entries | Total | ||||||||||||||||||||||
| (RMB in thousands) | ||||||||||||||||||||||||||||
| Cash and cash equivalent | 172 | 59,778 | 6,822 | 11,240 | 2,929 | — | 80,941 | |||||||||||||||||||||
| Inter-Company balances due from VIEs/Subsidiaries | 499,221 | — | — | — | — | (499,221 | ) | — | ||||||||||||||||||||
| Other current assets | 22,512 | 328,162 | 21,796 | 3,923 | 317,171 | (415,442 | ) | 278,122 | ||||||||||||||||||||
| Total current assets | 521,905 | 387,940 | 28,618 | 15,163 | 320,100 | (914,663 | ) | 359,063 | ||||||||||||||||||||
| Property and equipment, net | — | 217,362 | 10 | — | — | — | 217,372 | |||||||||||||||||||||
| Right of use assets, net | — | 518,160 | — | 1,225 | 12,793 | — | 532,178 | |||||||||||||||||||||
| Goodwill | — | — | — | — | — | — | — | |||||||||||||||||||||
| Other non-current assets | — | 225,125 | — | 6,356 | 1,994 | — | 233,475 | |||||||||||||||||||||
| Total non-current assets | — | 960,647 | 10 | 7,581 | 14,787 | — | 983,025 | |||||||||||||||||||||
| Total assets | 521,905 | 1,348,587 | 28,628 | 22,744 | 334,887 | (914,663 | ) | 1,342,088 | ||||||||||||||||||||
| Accounts payable | 2,014 | 214,904 | — | — | 2,324 | (4,483 | ) | 214,759 | ||||||||||||||||||||
| Investment deficit in subsidiaries and consolidated VIEs | 290,091 | — | — | — | — | (290,091 | ) | — | ||||||||||||||||||||
| Inter-Company balances due to Parent/VIEs/Subsidiaries | — | 204,713 | 9,698 | 120,453 | 164,358 | (499,222 | ) | — | ||||||||||||||||||||
| Lease liabilities, current | — | 245,678 | — | 5,775 | 16,097 | — | 267,550 | |||||||||||||||||||||
| Other current liabilities | 58,701 | 387,396 | 18,579 | 40,915 | 550,792 | (705,358 | ) | 351,025 | ||||||||||||||||||||
| Total current liabilities | 350,806 | 1,052,691 | 28,277 | 167,143 | 733,571 | (1,499,154 | ) | 833,334 | ||||||||||||||||||||
| Lease liabilities, non-current | — | 292,386 | — | — | 4,454 | — | 296,840 | |||||||||||||||||||||
| Other non-current liabilities | 39,497 | 21,740 | — | — | — | — | 61,237 | |||||||||||||||||||||
| Total non-current liabilities | 39,497 | 314,126 | — | — | 4,454 | — | 358,077 | |||||||||||||||||||||
| Total liabilities | 390,303 | 1,366,817 | 28,277 | 167,143 | 738,025 | (1,499,154 | ) | 1,191,411 | ||||||||||||||||||||
| Total Equity/(Deficit) | 131,602 | (18,230 | ) | 351 | (144,399 | ) | (403,138 | ) | 584,491 | 150,677 | ||||||||||||||||||
3
| For the Six Months Ended June 30, 2022 | ||||||||||||||||||||||||||||
| Parent | VIE and its Subsidiaries | WFOEs | HK Subsidiaries | Other Subsidiaries | Eliminating Entries | Total | ||||||||||||||||||||||
| (RMB in thousands) | ||||||||||||||||||||||||||||
| Total revenue | — | 283,515 | 263 | 1,460 | 14,198 | (2,109 | ) | 297,327 | ||||||||||||||||||||
| Total cost of revenue | — | (284,371 | ) | — | — | (24,015 | ) | — | (308,386 | ) | ||||||||||||||||||
| Operating expenses: | (10,744 | ) | (209,328 | ) | (1,125 | ) | (2,635 | ) | (12,233 | ) | (10,768 | ) | (246,833 | ) | ||||||||||||||
| Loss from operations | (10,744 | ) | (210,184 | ) | (862 | ) | (1,175 | ) | (22,050 | ) | (12,877 | ) | (257,892 | ) | ||||||||||||||
| Loss from equity method investments | (218,525 | ) | — | — | — | — | 218,525 | — | ||||||||||||||||||||
| Net loss | (229,269 | ) | (198,796 | ) | (862 | ) | (1,175 | ) | (27,288 | ) | 205,648 | (251,742 | ) | |||||||||||||||
| For the Six Months Ended June 30, 2022 | ||||||||||||||||||||||||||||
| Parent | VIE and its Subsidiaries | WFOEs | HK Subsidiaries | Other Subsidiaries | Eliminating Entries | Total | ||||||||||||||||||||||
| (RMB in thousands) | ||||||||||||||||||||||||||||
| Net cash used in operating activities | (18,758 | ) | (14,274 | ) | (2,772 | ) | (16,429 | ) | (54,992 | ) | — | (107,225 | ) | |||||||||||||||
| Purchase of short-term investments | — | (116,680 | ) | (14,000 | ) | — | — | — | (130,680 | ) | ||||||||||||||||||
| Settlement of short-term investments | — | 105,529 | 17,073 | — | — | — | 122,602 | |||||||||||||||||||||
| Purchase of property and equipment | — | (25,019 | ) | — | (939 | ) | — | — | (25,958 | ) | ||||||||||||||||||
| Other investing activities | — | 3,110 | — | — | — | — | 3,110 | |||||||||||||||||||||
| Net cash (used in)/provided by investing activities | — | (33,060 | ) | 3,073 | (939 | ) | — | — | (30,926 | ) | ||||||||||||||||||
| Loan received from third parties | — | 2,126 | — | — | — | — | 2,126 | |||||||||||||||||||||
| Loan repaid to third parties | — | (20,957 | ) | — | — | — | — | (20,957 | ) | |||||||||||||||||||
| Cash received from issuing convertible bond | 17,684 | — | — | — | — | — | 17,684 | |||||||||||||||||||||
| Other financing activities | — | 879 | — | — | — | — | 879 | |||||||||||||||||||||
| Net cash provided by/(used in) financing activities | 17,684 | (17,952 | ) | — | — | — | — | (268 | ) | |||||||||||||||||||
| Effects of exchange rate changes | (38 | ) | — | — | (628 | ) | 3,531 | — | 2,865 | |||||||||||||||||||
| Net increase/(decrease) in cash, cash equivalents and restricted cash | (1,112 | ) | (65,286 | ) | 301 | (17,996 | ) | (51,461 | ) | — | (135,554 | ) | ||||||||||||||||
| Cash, cash equivalents and restricted cash – beginning of the period | 1,284 | 125,064 | 6,521 | 29,236 | 54,390 | — | 216,495 | |||||||||||||||||||||
| Cash, cash equivalents and restricted cash – end of the period | 172 | 59,778 | 6,822 | 11,240 | 2,929 | — | 80,941 | |||||||||||||||||||||
4
The following table sets forth the roll-forwards of the investment in the subsidiaries and the VIEs line item for the periods indicated:
| Inter-group Balances Due from VIEs/Subsidiaries: | Parent Company | VIE and its Subsidiaries | WFOEs | HK Subsidiaries | Other Subsidiaries | |||||||||||||||
| (RMB in thousands) | ||||||||||||||||||||
| December 31, 2021 | 395,756 | — | — | 224,954 | — | |||||||||||||||
| Loss from equity method investment | (218,525 | ) | — | — | — | — | ||||||||||||||
| Additional long-term investment held by ESOP(1) | 22,596 | — | — | — | — | |||||||||||||||
| Foreign exchange gain for Long-term investments | 3,463 | — | — | — | — | |||||||||||||||
| Intercompany loan lent | 11,209 | — | 119,659 | 8,967 | 14,716 | |||||||||||||||
| Intercompany loan collected | (5,369 | ) | — | (119,659 | ) | (6,926 | ) | (14,716 | ) | |||||||||||
| June 30, 2022 | 209,130 | — | — | 226,995 | — | |||||||||||||||
| (1) | Ucommune International Ltd issued share incentives to its employees using its ordinary shares. Upon the consummation of the Business Combination, the shares previously granted became effective and vest according to the related share incentive agreements. Therefore, the parent company recognized long-term investments to the subsidiaries and the subsidiaries recognized share-based compensation expenses. |
| Inter-group Balances Due to VIEs/Subsidiaries: | Parent Company | VIE and its Subsidiaries | WFOEs | HK Subsidiaries | Other Subsidiaries | |||||||||||||||
| (RMB in thousands) | ||||||||||||||||||||
| December 31, 2021 | — | 196,429 | 12,256 | 348,723 | 160,928 | |||||||||||||||
| Intercompany loan received | — | 123,702 | — | 2,687 | 28,162 | |||||||||||||||
| Intercompany loan repayment | — | (115,418 | ) | (2,558 | ) | (3,962 | ) | (24,732 | ) | |||||||||||
| June 30, 2022 | — | 204,713 | 9,698 | 347,448 | 164,358 | |||||||||||||||
5
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of the Parent’s financial condition and results of operations in conjunction with the Parent’s unaudited condensed consolidated financial statements and the related notes included elsewhere in this current report on Form 6-K of the Parent, or this Form 6-K. This discussion contains forward-looking statements that involve risks and uncertainties. The actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Item 3. Key Information — D. Risk Factors” in the Parent’s Form 20-F and in the Parent’s other filings with the SEC.
Overview
Ucommune’s brand is the most recognized agile office space brand in China according to Frost & Sullivan. Ucommune operates the largest agile office space community in China in terms of the number of agile office spaces, aggregate managed area and number of cities covered in China as of December 31, 2019, according to Frost & Sullivan. Ucommune had 284 agile office spaces across 75 cities as of June 30, 2022.
As of June 30, 2022, Ucommune had 220 spaces in operation, providing approximately 66,500 workstations to its members and Ucommune also had 64 spaces under construction or preparation for construction. As of June 30, 2022, Ucommune had 3 spaces operated by Ucommune’s associates across 2 cities in Greater China and New York. As of June 30, 2022, Ucommune had approximately 1,186,440 members, including approximately 1,149,830 individuals and 36,610 enterprises, ranging from large enterprises to SMEs.
Ucommune has been developing its asset-light model, under which Ucommune provides space design and build as well as management services to develop and manage agile office spaces for landlords who bear most of the capital investments to build and launch new spaces. The asset-light model allows more landlords to benefit from Ucommune’s professional capabilities and strong brand recognition, which in turn enables Ucommune’s business to scale in a cost-efficient manner.
As of June 30, 2022, Ucommune had 171 spaces under the asset-light model with managed area of approximately 739,780 m2, representing 77% of the aggregate managed area of approximately 958,985 m2 of all spaces. In the first half of 2022, Ucommune launched 17 new spaces under its asset-light model with managed area of approximately 300,980 m2, representing a 11% increase and a 69% increase in the number and managed area of new spaces under its asset-light model in the first half of 2021. In the first half of 2022, Ucommune generated operating profit from the subsidiary that operates agile office spaces under its asset-light model. Ucommune intends to focus on expanding its asset-light business as one of its major growth drivers.
Cooperating with over 700 business partners, Ucommune provides a comprehensive suite of U Plus services, including individual services, such as catering, fitness, healthcare, training and entertainment; general corporate services, such as corporate secretary, human resources, legal, finance, IT support and tax services; incubation and corporate venturing services; design and build services; advertising and branding services; and services to further energize Ucommune’s community.
Ucommune receives revenue from members by providing U Plus services and charging members fees based on the services provided, such as design and build services, and advertising and branding services. Ucommune also generates revenue from its business partners and investees through different arrangements, including (i) revenue sharing arrangements under which it shares part of the revenue of its business partners as fees, and (ii) fixed fee arrangements under which it charges its business partners and investees fixed fees for leasing its spaces to provide services.
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Key Operating Data
Ucommune regularly monitors a number of operating metrics in order to measure its current performance and project its future performance. These metrics aid Ucommune in developing and refining its growth strategies and making strategic decisions.
| As of June 30, 2022 | ||||
| Number of cities | 75 | |||
| Number of Spaces | 284 | |||
| Number of spaces under self-operated model(1) | 113 | |||
| Number of spaces under asset-light model | 171 | |||
| Managed area (m2)(2) | 958,985 | |||
| Managed area under self-operated model(2) | 219,205 | |||
| Managed area under asset-light model(2) | 739,780 | |||
| Number of spaces in operation | 220 | |||
| Number of workstations of spaces in operation(2)(3) | 66,500 | |||
| Number of members(2) | 1,186,440 | |||
| Number of individual members(2) | 1,149,830 | |||
| Number of individual members using workstations(2) | 39,780 | |||
| Number of enterprise members(2) | 36,610 | |||
| Occupancy rate for all spaces in operation(2) | 60 | % | ||
| Occupancy rate for mature spaces(2) | 64 | % | ||
| (1) | As spaces under U Studio category are small offices, Ucommune counts one or more small offices operated under U Studio category in one building as one space. As of June 30, 2022, Ucommune cooperated with 131 landlords counted by property ownership certificate, respectively, under U Studio category. |
| (2) | Approximate number subject to rounding adjustments. |
| (3) | As spaces under U Studio category are small offices, Ucommune leases the entire space to members instead of leasing all or some of the workstations therein. Therefore, the number of workstations under U Studio category is counted by dividing the managed area of the spaces in operation under U Studio category by the average area per workstation of 4.5 m2. |
Key Factors Affecting the Results of Operations
Ucommune operates in China’s agile office space industry, and its results of operations and financial condition are influenced by the macroeconomic factors affecting this industry. These factors include China’s economic growth, the impact of COVID-19 outbreak on the economy in China or worldwide, the emergence of China’s new economy and internet companies under favorable policies encouraging entrepreneurship and innovation, and urbanization of the workforce.
The COVID-19 outbreak has materially adversely affected the Parent’s financial condition and results of operation. Net revenue in the first half of 2022 decreased partially due to the temporary closure of its spaces during the outbreak of COVID-19 and loss of major customers for advertising and marketing services. The COVID-19 outbreak has resulted in, and may intensify global economic distress, and the extent to which it may affect the Parent’s financial condition, results of operations, and cash flows will depend on future developments, which are highly uncertain and cannot be reasonably estimated at this time. See “Item 3. Key Information — D. Risk Factors — Risks Relating to Our Business and Industry — We face risks related to natural disasters, extreme weather conditions, health epidemics and other catastrophic incidents, which could significantly disrupt our operations” from the Parent’s Form 20-F.
The Parent’s financial condition and results of operations are also affected by a number of emerging market trends, such as companies’ rising needs for cost-efficient and flexible office space solutions and one-stop services for both corporates and employees, and new demand for intelligent office systems and working environments.
In addition, as Ucommune generates a portion of net revenue from providing marketing and branding services, the results of operations are also affected by the general factors affecting its advertisers and their marketing and branding budgets.
Ucommune’s results of operations and financial condition are also subject to changes in the regulatory regime governing China’s agile office space industry, as well as the U Plus services it provides. The PRC government regulates various aspects of Ucommune’s operations, such as leasing, design and build and the operation of office spaces and online advertising and branding content. See “Item 3. Key Information — D. Risk Factors — Risks Relating to Doing Business in China — Regulation and censorship of information disseminated over the internet in China may adversely affect our business and reputation and subject us to liability for information displayed on our website” from the Parent’s Form 20-F.
Ucommune’s results of operations and financial condition also depend on a number of company-specific factors, including the factors discussed below.
7
Ucommune’s Ability to Refine its Agile office Space Network
Given that the majority of net revenue is from workspace membership, net revenue growth depends primarily on Ucommune’s ability to refine its agile office space network and expand its community. Since the launch of its first agile office space in September 2015, Ucommune has expanded its operations across 42 cities primarily through its self-operating model. Ucommune derives substantially all of its net revenue from operations within Greater China.
Ucommune has developed an asset-light model by providing landlords with its design and build and operation capabilities. Ucommune’s asset-light model has two categories, i.e., U Brand and U Partner. Under U Brand, Ucommune primarily receives management fees from landlords. Under U Partner, Ucommune primarily shares revenue with landlords.
Ucommune operates agile office spaces under its asset-light model through one subsidiary. In the first half of 2022, the net revenue and operating profit of this subsidiary were relatively insignificant to the group. However, the subsidiary generated operating profit while Ucommune incurred overall loss from operations.
Ucommune plans to refine its agile office space network by exploring growth under the asset-light model and pursuing targeted expansion. Ucommune’s spaces under the asset-light model increased from 47 as of December 31, 2019 to 125 as of December 31, 2020, to 165 as of December 31, 2021 and to 171 as of June 30, 2022. Ucommune also plans to enhance its leading position by expanding across tier-1 and new tier-1 cities in China and into overseas markets.
With the expansion of its agile office space network, Ucommune’s business may be exposed to additional risks. For example, the impairment loss on property and equipment, right-of-use assets and non-current assets was RMB97.7 million (US$14.6 million) in the first half of 2022, as compared to RMB9.7 million in the first half of 2021, primarily associated with the spaces where carrying value is not expected to be fully recoverable.
The changes in impairment loss on long-lived assets and long-term prepaid expenses are affected by various factors, primarily including Ucommune’s spaces in operation and the new operating risks and challenges associated with its expansion into existing markets and new markets, and therefore are subject to fluctuations. See “Item 3. Key Information — D. Risk Factors — Risks Relating to Our Business and Industry — Our expansion into new regions, markets and business areas may pose increased risks” from the Parent’s Form 20-F. However, the Parent believes that Ucommune can improve the performance of its spaces in operation leveraging its management capabilities and its experience of expanding into new markets.
Ucommune’s Ability to Manage Costs and Expenses Effectively
Ucommune’s ability to manage its costs and expenses effectively is critical to the success of its business. Ucommune has benefited from the use of technologies and the standardization of its processes and achieved economies of scale as Ucommune has developed a core competency in the efficient sourcing, design and build, and operation of its spaces. Building on its operating capabilities, Ucommune has also developed an asset-light model, which can free up a large amount of capital investments to build out and launch new spaces. The cost of revenue (excluding impairment loss) as a percentage of net revenue decreased from the first half of 2021 to the first half of 2022.
The financial and business performance of Ucommune’s agile office spaces under the U Space category highly depends on its ability to source and lease suitable properties on reasonable terms. Ucommune plans to utilize its management team’s expertise in developing and operating commercial properties and its strong relationships with landlords to identify new locations suitable for the expansion of its business and to negotiate leasing terms of such properties to effectively manage its costs and expenses.
Ucommune’s design and build capabilities enable it to shorten the time from taking possession of a new space to making the space ready for leasing to members. Ucommune typically completes this process within three to five months for spaces under the U Space category. According to Frost & Sullivan, the industry average time from taking possession of a space to operation is approximately nine months.
The Parent expects the costs and expenses to increase in absolute amount as Ucommune expands its business and to decrease a percentage of net revenue as Ucommune improves operational efficiency, achieves economies of scale and enhances its brand recognition.
8
Growth in Ucommune’s Member Base and Pricing of its Agile Office Space Services
Ucommune generates most of its net revenue from providing various agile office space solutions to its members from whom Ucommune collects monthly rent in the form of membership service fees in accordance with membership service contracts or office workstation rental fees in accordance with office workstation rental contracts. The key contract terms and services provided under both membership service contracts and office workstation rental contracts are identical. Therefore, the results of operations are directly affected by the growth in its member base and the pricing of its agile office space services. The number of individual members increased from approximately 688,900 as of December 31, 2019 to approximately 1,013,600 as of December 31, 2020, increased to approximately 1,141,780 as of December 31, 2021 and increased to approximately 1,149,830 as of June 30, 2022.
The pricing of Ucommune’s agile office space services is affected by its service positioning strategy, locations of its spaces, brand recognition, the competitive landscape of the agile office space industry in China and the design and build and maintenance cost of its agile office spaces. Ucommune’s ability to maintain or increase the pricing of its agile office space services largely depends on its ability to compete effectively and differentiate its services through its strong brand recognition, its unique and nationwide agile office space network and its ability to meet its members’ needs for office space solutions.
Development of U Plus Services
Ucommune derives revenue from U Plus services in cooperation with its business partners and investees. As of June 30, 2022, Ucommune had over 700 business partners. Ucommune’s member base has grown rapidly, increasing from approximately 715,600 as of December 31, 2019 to approximately 1,044,700 as of December 31, 2020, further to approximately 1,176,970 as of December 31, 2021 and further to approximately 1,186,440 as of June 30, 2022. As its business grows, Ucommune has opportunities to provide more services and build a vibrant community serving wider group of members beyond the physical spaces.
The growth of net revenue from U Plus services depends on Ucommune’s own capabilities, including through acquisitions or strategic investments, or through selected quality business partners to provide services that match the needs of its members at reasonable prices. Ucommune plans to make ongoing efforts, including investing time and money, to identify the needs of its members and provide quality and diversified services to them.
Acquisition Activities to Expand Offerings
Ucommune has made acquisitions or investments that it believes will expand its agile office space network and service offerings that benefit its members and have the potential to become meaningful revenue streams in the future. For example, in 2018, Ucommune acquired a company engaging in marketing and branding services and two companies engaging in interior design and construction services. Ucommune intends to continue selectively pursuing strategic partnerships and acquisitions, which could include investments in private or public entities, strategic alliances, or securities offerings through the Parent or its subsidiaries, to expand the Ucommune community.
Key Components of Results of Operations
Ucommune has three operating segments including (i) workspace membership, (ii) marketing and branding services, and (iii) other services. Operating segments are defined as components of an enterprise engaging in business activities for which separate financial information is available. The Parent’s chief operating decision makers regularly evaluate Ucommune’s operating segments in deciding how to allocate resources and assess performance. See the combined and consolidated financial statements included in the Parent’s Form 20-F and in this 6-K for additional information regarding the three reportable segments.
9
Net Revenue
The following table sets forth a breakdown of net revenue, in absolute amounts and as percentages of total net revenue, for the periods indicated.
| For the Six Months Ended June 30, | ||||||||||||||||||||
| 2021 | 2022 | |||||||||||||||||||
| RMB | % | RMB | US$ | % | ||||||||||||||||
| (in thousands, except for percentages) | ||||||||||||||||||||
| Net Revenue | ||||||||||||||||||||
| Workspace membership revenue | 185,079 | 37.0 | 161,336 | 24,087 | 54.3 | |||||||||||||||
| Marketing and branding services revenue | 238,692 | 47.6 | 98,164 | 14,655 | 33.0 | |||||||||||||||
| Other services revenue | 77,264 | 15.4 | 37,827 | 5,647 | 12.7 | |||||||||||||||
| Total net revenue | 501,035 | 100.0 | 297,327 | 44,389 | 100.0 | |||||||||||||||
Workspace Membership Revenue. The Parent generates a majority of net revenue by Ucommune’s providing of various agile office space solutions to members from whom Ucommune collects monthly rent in the form of membership service fees or office workstation rental fees. Workspace membership net revenue primarily includes fees generated through the agile office spaces services under Ucommune’s self-operated model, fees generated through revenue sharing under U Partner, and also includes other net revenue in relation to utilizing Ucommune’s spaces, such as net revenue generated from service fees for using its conference rooms.
Marketing and Branding Services Revenue. Marketing and branding services net revenue includes advertising services net revenue, primarily generated by integrated branding services and online targeted marketing services provided by Zhuhai Shengguang Zhongshuo Digital Marketing Co., Ltd. that Ucommune acquired in December 2018.
Other Services Revenue. Other services net revenue primarily consists of (i) interior design and construction net revenue generated from two companies that Ucommune acquired in July 2018, (ii) management fees generated from Ucommune’s agile office spaces under U Brand, (iii) SaaS services and internet of things, or IOT, solutions revenue and (iv) charges to members for ancillary services such as printing and copying fees.
Cost of Revenue (Excluding Impairment Loss)
The following table sets forth a breakdown of the cost of revenue (excluding impairment loss), in absolute amounts and as percentages of total cost of revenue (excluding impairment loss), for the periods indicated.
| For the Six Months Ended June 30, | ||||||||||||||||||||
| 2021 | 2022 | |||||||||||||||||||
| RMB | % | RMB | US$ | % | ||||||||||||||||
| (in thousands, except for percentages) | ||||||||||||||||||||
| Cost of revenue (excluding impairment loss)(1) | ||||||||||||||||||||
| Workspace membership | 244,817 | 46.2 | 180,925 | 27,011 | 58.7 | |||||||||||||||
| Marketing and branding services | 228,266 | 43.1 | 97,184 | 14,509 | 31.5 | |||||||||||||||
| Other services | 57,027 | 10.7 | 30,277 | 4,520 | 9.8 | |||||||||||||||
| Total cost of revenue (excluding impairment loss) | 530,110 | 100.0 | 308,386 | 46,040 | 100.0 | |||||||||||||||
| (1) | Cost of revenue does not include impairment loss, and Ucommune generally does not consider impairment on a routine basis when operating and managing its agile office space business. |
Workspace Membership. Cost of revenue (excluding impairment loss) for workspace membership primarily consists of (i) lease expenses, (ii) employee compensation and benefits, (iii) depreciation and amortization expenses, and (iv) other workspace operating costs, such as costs for daily maintenance and cleaning, and insurance costs.
10
Marketing and Branding Services. Cost of revenue (excluding impairment loss) for marketing and branding services primarily consists of costs associated with advertisement distribution and content design, and employee compensation and benefits.
Other Services. Cost of revenue (excluding impairment loss) for other services primarily consists of costs in relation to Ucommune’s interior design and construction services, costs in relation to revenue from asset-light model, costs in relation to SaaS services and IOT solutions and other ancillary costs.
Impairment Loss on Long-lived Assets and Long-term Prepaid Expenses
Impairment loss on long-lived assets and long-term prepaid expenses was impairment loss recognized whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset and long-term prepaid expenses may no longer be recoverable.
Impairment Loss on Goodwill
Impairment loss on goodwill was recognized whenever the carrying amount of a reporting unit exceeds its fair value.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of (i) marketing and promotion expenses, (ii) compensation for Ucommune’s sales and marketing personnel and (iii) share-based compensation expense.
General and Administrative Expenses
General and administrative expenses consist primarily of (i) compensation for Ucommune’s management and administrative personnel, (ii) expenses in connection with its operation and financing supporting functions such as legal and human resources, (iii) share-based compensation expense, and (iv) other administrative expenses.
Change in Fair Value of Warrant Liability
Warrants classified as liabilities are initially recorded at fair value with gains and losses arising from changes in fair value recognized in the unaudited condensed consolidated statements of operations during the period in which such instruments are outstanding.
Change in Fair Value of Put Option Liability
Put option classified as liabilities is initially recorded at fair value with gains and losses arising from changes in fair value recognized in the unaudited condensed consolidated statements of operations during the period in which such instruments are outstanding.
Impairment Loss on Long-term Investments
Impairment loss on long-term investments was recognized when the investees’ operating performances indicate that the carrying value of the investment is no longer recoverable.
Loss on Disposal of Subsidiaries
Loss on disposal of subsidiaries was generated from the disposal of several subsidiaries.
Taxation
Cayman Islands
Ucommune International Ltd, the Parent, and Ucommune Group Holdings, the Parent’s subsidiary, are incorporated in the Cayman Islands. Under the current laws of the Cayman Islands, these entities are not subject to income, corporation or capital gains tax in the Cayman Islands. In addition, payment of dividends, if any, is not subject to withholding tax in the Cayman Islands.
11
British Virgin Islands
Ucommune International Limited, the Parent’s subsidiary incorporated in the British Virgin Islands, is not subject to income tax in the British Virgin Islands.
Hong Kong
Ucommune HK, the Parent’s subsidiary incorporated in Hong Kong, is subject to a two-tiered income tax rate for taxable income earned in Hong Kong effectively since April 1, 2018. The first two million Hong Kong dollars of profits earned by a company are subject to be taxed at an income tax rate of 8.25%, while the remaining profits will continue to be taxed at the existing tax rate, 16.5%. No provision for Hong Kong profits tax has been made in the unaudited condensed consolidated financial statements it had no assessable income for the six months ended June 30, 2022.
Singapore
Ucommune Singapore Pte. Ltd., the Parent’s subsidiary incorporated in Singapore, is subject to Singapore corporate income taxes at the rate of 17% for the six months ended June 30, 2022.
United States
Ucommune N.Y. Corp. is incorporated in the U.S. and is subject to the U.S. federal income taxes. According to U.S. tax reform, a flat corporate income tax rate of 21% was effective beginning in 2018.
With effect from January 1, 2018, the tax act introduced a provision to tax global intangible low-taxed income, or GILTI. The Parent will account for future tax liability arising from GILTI, if any, as a period cost.
As a result of the tax act, the Parent has evaluated whether it has an additional tax liability from the GILTI inclusion on current earnings and profits of its foreign controlled corporations. The law also provides that corporate taxpayers may benefit from a 50% reduction in the GILTI inclusion, which effectively reduces the tax rate on the foreign income to 10.5%. The GILTI inclusion further provides for a foreign tax credit in connection with the foreign taxes paid. As of June 30, 2022, the Parent does not have any aggregated positive tested income; and as such, did not record a liability for GILTI tax.
PRC
Effective from January 1, 2008, a new Enterprise Income Tax Law, or the PRC EIT Law, combined the previous income tax laws for foreign invested and domestic invested enterprises in the PRC by the adoption of a unified tax rate of 25% for most enterprises with the following exceptions.
According to the requirements of Cai Shui [2014] No. 26, enterprises that qualify as encouraged industrial enterprises located in Heng Qin New Area in Guangdong province, Ping Tan Comprehensive Experimental Area in Fujian province and Qian hai shen gang Modern Service Cooperation Zone in Shenzhen are subject to a tax rate of 15%. The notification will be implemented from January 1, 2014 to December 31, 2020, subject to extension. One of the PRC subsidiaries, Zhuhai Shengguang Zhongshuo Digital Marketing Co., Ltd., an advertising company, was established in September 2015 in Heng Qin New Area. Its main business belongs to one of the industries in the tax preferential catalogue, which accounts for more than 70% of the total income of enterprises, so it has enjoyed 15% preferential tax rate of income tax.
According to Caishui [2019] No. 13, Caishui [2021] No. 12, small and low-profit enterprises shall meet three conditions for enjoying preferential tax conditions, including (i) annual taxable income of no more than RMB3 million, (ii) no more than 300 employees, and (iii) total assets of no more than RMB50 million. Small, low-profit enterprises whose annual taxable income is no more than RMB1 million is subject to the preferential income tax rate of 2.5% (only 12.5% of such taxable income shall be subject to enterprise income tax at a tax rate of 20%). Small, low-profit enterprises whose annual taxable income exceed RMB1 million but no more than RMB3 million is subject to the preferential income tax rate of 10% (only 50%) of such taxable income shall be subject to enterprise income tax at a tax rate of 20%). According to Caishui [2022] No.13, which became effective on January 1, 2022, small, low-profit enterprises whose annual taxable income exceed RMB1 million but no more than RMB3 million is subject to the preferential income tax rate of 5% (only 25% of such taxable income shall be subject to enterprise income tax at a tax rate of 20%).
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The Parent, as the ultimate Cayman Islands holding company, may receive dividends from Ucommune Group Holdings, the group’s another Cayman Islands holding company wholly owned by the Parent. Ucommune Group Holdings may receive dividends from the PRC subsidiaries through Ucommune HK. The PRC EIT Law and its implementing rules provide that dividends paid by a PRC entity to a nonresident enterprise for income tax purposes is subject to PRC withholding tax at a rate of 10%, subject to reduction by an applicable tax treaty with China. Pursuant to the Arrangement between Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income, the withholding tax rate in respect to the payment of dividends by a PRC enterprise to a Hong Kong enterprise may be reduced to 5% from a standard rate of 10% if the Hong Kong enterprise directly holds at least 25% of the PRC enterprise.
Pursuant to the Notice of the State Administration of Taxation on the Issues concerning the Application of the Dividend Clauses of Tax Agreements, or SAT Circular 81, a Hong Kong resident enterprise must meet the following conditions, among others, in order to apply for the reduced withholding tax rate: (i) it must be a company; (ii) it must directly own the required percentage of equity interests and voting rights in the PRC resident enterprise; and (iii) it must have directly owned such required percentage in the PRC resident enterprise throughout the 12 months prior to receiving the dividends.
In October 2019, the State Administration of Taxation, or the SAT, promulgated the Administrative Measures for Non-Resident Taxpayers Enjoying Treaties Benefits, or Announcement 35, which became effective on January 1, 2020. Announcement 35 provides that nonresident enterprises do not need to obtain pre-approval from the relevant tax authority in order to enjoy the reduced withholding tax. Instead, nonresident enterprises and their withholding agents may, by self-assessment and on confirmation that the prescribed criteria to enjoy the tax treaty benefits are met, directly apply the reduced withholding tax rate, and file necessary forms and supporting documents when performing tax filings, which will be subject to post-tax filing examinations by the relevant tax authorities.
Accordingly, Ucommune Group Holdings (Hong Kong) Limited, or Ucommune HK, may be able to benefit from the 5% withholding tax rate for the dividends it receives from the PRC subsidiaries, if it satisfies the conditions prescribed under SAT Circular 81 and other relevant tax rules and regulations. However, according to SAT Circular 81 and Announcement 35, if the relevant tax authorities believe that the primary purpose of the transactions or arrangements is to enjoy a favorable tax treatment, the relevant tax authorities may adjust the favorable withholding tax in the future.
If the holding companies in the Cayman Islands or any of the Parent’s subsidiaries outside of China were deemed to be a “resident enterprise” under the PRC EIT Law, the Parent and its subsidiaries would be subject to enterprise income tax on the group’s worldwide income at a rate of 25%. See “Item 3. Key Information — D. Risk Factors — Risks Relating to Doing Business in China — If we are classified as a PRC resident enterprise for PRC enterprise income tax purposes, such classification could result in unfavorable PRC tax consequences to us and our non-PRC shareholders” from the Parent’s Form 20-F.
Critical Accounting Policies, Judgments and Estimates
The Parent prepares the consolidated financial statements in conformity with U.S. GAAP, which requires it to make judgments, estimates and assumptions. The Parent continually evaluates these estimates and assumptions based on the most recently available information, its own historical experience and various other assumptions that it believes to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from the Parent’s expectations as a result of changes in its estimates. Some of its accounting policies require a higher degree of judgment than others in their application and require the Parent to make significant accounting estimates.
The critical accounting policies, judgments and estimates that the Parent believes to have the most significant impact on the unaudited condensed consolidated financial statements are described below, which should be read in conjunction with the unaudited condensed consolidated financial statements and accompanying notes and other disclosures included elsewhere in this Form 6-K. When reviewing the financial statements, you should consider:
| ● | the selection of critical accounting policies, |
| ● | the judgments and other uncertainties affecting the application of such policies, |
| ● | the sensitivity of reported results to changes in conditions and assumptions. |
The critical accounting policies and practices include the following: (i) impairment of right-of-use assets and other long-lived assets; (ii) lease; (iii) revenue recognition; (iv) convertible bond and detachable warrants; (v) goodwill and (vi) share-based compensation. See Note 2 — Significant Accounting Policies to the unaudited condensed consolidated financial statements for the disclosure of these accounting policies. The Parent believes the following accounting estimates involve the most significant judgments used in the preparation of the financial statements.
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Impairment of Right-of-use Assets and Other Long-lived Assets
The Parent reviews its right-of-use assets, or ROU assets, and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. Factors the Parent considers to be important which could trigger an impairment review primarily include:
| ● | significant underperformance relative to projected operating results; |
| ● | significant changes in the overall business strategy; |
| ● | significant adverse changes in the legal or business environment; and |
| ● | significant competition, unfavorable industry trends or economic outlook. |
When these events occur, the Parent measures impairment by comparing the carrying value of the ROU assets and other long-lived assets to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposal. If the sum of the expected undiscounted cash flow is less than the carrying amount of the assets, the Parent will recognize an impairment loss based on the fair value of the assets.
The Parent measures the fair value of impaired space by using discounted cash flow model. The estimates used in projected future cash flows include rental charges, occupancy rate and operating costs. The weighted average cost of capital is used as the discount rate.
Lease
The Parent early adopted Accounting Standard Codification, or ASC, Topic 842 — Leases, or ASC 842, on January 1, 2017 on a modified retrospective basis. In connection with the adoption of ASC 842, the Parent made an accounting policy election for all lease related asset classes, to account for the lease and non-lease components as a single lease component. The Parent has also made an accounting policy election to exempt leases with an initial term of 12 months or less from being recognized on the balance sheet. Short-term leases are not significant in comparison to the Parent’s overall lease portfolio. Payments related to those leases continue to be recognized in the unaudited condensed consolidated statement of operations on a straight-line basis over the lease term.
From the Perspective of Lessee
Ucommune leases properties for its collaborative workspaces and other locations. At the commencement of each lease, management determines the classification as an operating or finance lease. In the six months ended June 30, 2021 and 2022, the Parent did not enter into any finance lease. For leases that qualify as operating leases, the Parent recognizes the associated lease expense on a straight-line basis over the term of the lease beginning on the date of initial possession. The date of initial possession is generally when Ucommune enters the leased premises and begins to make improvements in preparation for its intended use.
At the commencement date of a lease, the Parent recognizes a lease liability for future fixed lease payments and a ROU asset representing the right to use the underlying asset during the lease term. The future fixed lease payments are discounted using the incremental borrowing rate as the rate implicit in the lease is not readily determinable. The incremental borrowing rate is estimated on a portfolio basis and incorporates lease term, currency risk, credit risk and an adjustment for collateral. Upon adoption of ASU 2016-02 on January 1, 2017, the Parent elected to use the remaining lease term as of January 1, 2017 in the estimation of the applicable discount rate for leases that were in place at adoption.
For the initial measurement of the lease liabilities for leases commencing after January 1, 2017, the Parent uses the discount rate as of the commencement date of the lease, incorporating the entire lease term. Current maturities and long-term portions of operating lease liabilities are classified as lease liabilities, current and lease liabilities, non-current, respectively, in the unaudited condensed consolidated balance sheets.
The ROU asset is measured at the amount of the lease liabilities with adjustments, if applicable, for lease prepayments made prior to or at lease commencement, initial direct costs incurred and lease incentives. Variable lease expenses includes rent contingent payments based on percentages of revenue as defined in the lease. It is not included in lease expenses it incurred or becomes probable.
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From the Perspective of Lessor
The Parent recognizes workspace membership revenue under ASC 842, and all the leases contracts are operating leases. Ucommune provides various leasing solutions for its members and generates revenues from monthly rent in the form of membership service fees or workstation rental fee.
The workspace memberships enable members to access to office space, use of a shared internet connection, access to certain facilities (kitchen, common areas and related areas), as well as service fees for the use of conference room and prints/copies. The price of each membership varies, based on the particular characteristics of the office space occupied by the member, the geographic location of the workspace, and the number of workstations in the contract.
The members do not have options to purchase underlying assets at termination. Renewal of memberships are on a negotiation basis before termination. The majority of the lease contracts are fixed lease payment contracts. The Parent’s variable lease payments consists of certain contracts indexed to future sales revenues of the lessees. Variable membership fees are recognized when incurred.
Workspace membership revenue consists primarily of fees from members and is recognized ratably, on a monthly basis, over the lease term, as access to office space is provided. The Parent applied practical expedients to choose not to separate lease and non-lease components for all lease related asset classes. The consolidated component is accounted for under ASC 842. The lease term for most of the membership services is less than one year.
The leases do not have renewal options and penalties are imposed if the lessees early terminate the leases. Workspace membership fees are generally collected in advance each quarter. Members are generally required to provide Ucommune with a deposit which is normally one-month service fee. Pursuant to the term of membership agreement, the amount of deposit may be applied against the member’s unpaid balance.
The residual value of the lease assets represents the fair value of the leased assets at the end of the lease terms. The Parent relies on industry data, historical experience, independent appraisals and the experience of the management team to value lease residuals.
Revenue Recognition
Revenue is recognized when control of promised goods or services is transferred to Ucommune’s customers in an amount of consideration to which Ucommune expects to be entitled in exchange for those goods or services. The Parent follows the five steps approach for revenue recognition under Topic 606:
| ● | identify the contract(s) with a customer, |
| ● | identify the performance obligations in the contract, |
| ● | determine the transaction price, |
| ● | allocate the transaction price to the performance obligations in the contract, and |
| ● | recognize revenue when (or as) Ucommune satisfies a performance obligation. |
The primary sources of the revenues are as follows:
Workspace Membership Revenue
Workspace membership revenue is recognized under ASC 842. See “— Lease — From the Perspective of Lessor.”
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Marketing and Branding Services Revenue
Marketing and branding services revenue primarily consists of advertising services revenue, generated by a subsidiary acquired in 2018. The service provided is accounted for as a single performance obligation and revenue is recognized over the service period by using the advertisement placed as output method.
Other Services Revenue
Other services revenue primarily consists of (i) interior design and construction net revenue, (ii) co-working space management fees, (iii) SaaS services and IOT solutions revenue and (iv) charges to members for ancillary services including printing, copying and related services.
Design and construction revenue is generated from two companies acquired in 2018 and one subsidiary acquired in 2021. Design revenue is recognized over time based on the basis of direct measurements of the value to the customer of the services transferred to date relative to the remaining services promised under the contract. Construction revenue is recognized over time based on a percentage of contract costs incurred to date compared to the total estimated contract cost.
Co-working space management fees are derived from managing branded co-working space locations for leased property owners. The fee generally consists of a monthly base amount plus revenue sharing. Revenue is recognized over time when service is provided.
SaaS service and IOT solution is generated from a subsidiary acquired in 2019 and recognized upon the service is completed. Revenue from ancillary services to members is recorded upon performance obligation delivered per contracts.
Convertible bond and detachable warrants
The Parent issued a convertible bond with detachable warrants in January 2022. The Parent has determined that the convertible bond with detachable warrants is a bundle of freestanding financial instruments and should be accounted for separately. With respect to the convertible bond, the Parent has evaluated whether the conversion feature of the bond is considered an embedded derivative instrument subject to bifurcation in accordance with ASC 815 —Accounting for Derivative Instruments and Hedging Activities (“ASC 815”). Based on the Parent's evaluation, the conversion feature is not considered to be bifurcated because the conversion feature is either clearly and closely related to the convertible bond or meets the scope exception under ASC 815-10-15. The Parent has determined that there was no beneficial conversion feature attributable to the convertible bond, as the effective conversion price is not below fair value of the equity interest to be converted on the commitment dates.
The Parent has evaluated the embedded put option in accordance with ASC815 has had determined that the put option meets the definition of a derivative and needs to be bifurcated and measured at fair value, as the convertible bond was issued at a substantial discount and is contingently exercisable. The Parent classifies the put option in its unaudited condensed consolidated balance sheet as a liability which is revalued at each balance sheet date subsequent to the initial issuance.
The Parent has evaluated the detachable warrants in accordance with ASC 815 has had determined the detachable warrants meet the definition of a derivative and need to be measured at fair value. The Parent classifies the warrants in its unaudited condensed consolidated balance sheet as liabilities which are revalued at each balance sheet date subsequent to initial issuance.
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Goodwill
The excess of the purchase price over the fair value of net assets acquired is recorded on the unaudited condensed consolidated balance sheets as goodwill. Goodwill is not amortized, but tested for impairment annually or more frequently if event and circumstances indicate that it might be impaired.
The Parent has determined that it has three reporting units within the entity at which goodwill is monitored for internal management purposes. Starting from January 1, 2020, the Parent adopted ASU 2017-04, which simplifies the accounting for goodwill impairment by eliminating Step 2 from the goodwill impairment test. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, versus determining an implied fair value in Step 2 to measure the impairment loss. The Parent evaluated the recoverability of goodwill by performing a qualitative assessment before using the quantitative impairment test approach at the reporting unit level. Based on an assessment of the qualitative factors, the Parent determined that it is more-likely-than-not that the fair value of the three and one reporting unit are less than its carrying amount as of December 31, 2021 and June 30, 2022.
Therefore, the Parent performed a quantitative assessment using the discounted cash flow taking into account the market capitalization when determining the fair value of each reporting unit. Key assumptions used to determine the estimated fair value include: (a) internal cash flows forecasts including expected revenue growth, operating margins and estimated capital needs, (b) an estimated terminal value using a terminal year long-term future growth rate determined based on the growth prospects of each reporting unit; (c) a discount rate that reflects the weighted-average cost of capital adjusted for the relevant risk associated with each reporting unit’s operations and the uncertainty inherent in the group’s internally developed forecasts; and (d) the EBITDA multiples used in the market approach fair value method. The estimates used to calculate the fair value of a reporting unit change from year to year based on operating results and market conditions. Changes in these estimates and assumptions could materially affect the determination of fair value and goodwill impairment for the reporting unit.
Based on the results of the goodwill impairment assessment, RMB1,504.5 million and RMB43.0 million (US$6.4 million) impairment loss on goodwill was provided for the year ended December 31, 2021 and the six months ended June 30, 2022 as the carrying value of the reporting units are in excess of their fair value.
Share-based Compensation
Share-based compensation expense arises from the share-based awards granted to the Parent’s employees and consultants.
In determining the fair value of share options granted, a binomial option pricing model is applied.
Share-based compensation expense for share options granted is recognized on a tranche-by-tranche method over the requisite service period. The Parent elected to not estimate the forfeiture rate, but to account for the forfeiture when forfeitures occur.
A change in any of the terms or conditions of share awards is accounted for as a modification. The Parent calculates the incremental compensation cost of modification as the excess of the fair value of the modified awards over the fair value of the original awards immediately before its terms are modified, measured based on the share price and other pertinent factors at the modification date. The Parent recognizes, over the remaining requisite service period of the modified awards, the sum of the incremental compensation cost and the remaining unrecognized compensation cost, if any, for the original award on the modification date.
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Results of Operations
The following table summarizes the unaudited condensed consolidated results of operations both in absolute amounts and as percentages of total net revenue for the periods presented. This information should be read together with the unaudited condensed consolidated financial statements and related notes included elsewhere in this Form 6-K. The operating results in any period are not necessarily indicative of the results that may be expected for any future period.
| For the Six Months Ended June 30, | ||||||||||||||||||||
| 2021 | 2022 | |||||||||||||||||||
| RMB | % | RMB | US$ | % | ||||||||||||||||
| (in thousands, except for percentages, shares and per share data) | ||||||||||||||||||||
| Unaudited Condensed Consolidated Statements of Operation Data | ||||||||||||||||||||
| Net revenue | ||||||||||||||||||||
| Workspace membership revenue | 185,079 | 37.0 | 161,336 | 24,087 | 54.3 | |||||||||||||||
| Marketing and branding services revenue | 238,692 | 47.6 | 98,164 | 14,655 | 33.0 | |||||||||||||||
| Other services revenue | 77,264 | 15.4 | 37,827 | 5,647 | 12.7 | |||||||||||||||
| Total net revenue | 501,035 | 100.0 | 297,327 | 44,389 | 100.0 | |||||||||||||||
| Cost of revenue (excluding impairment loss) | ||||||||||||||||||||
| Workspace membership | (244,817 | ) | (48.9 | ) | (180,925 | ) | (27,011 | ) | (60.9 | ) | ||||||||||
| Marketing and branding services | (228,266 | ) | (45.6 | ) | (97,184 | ) | (14,509 | ) | (32.7 | ) | ||||||||||
| Other services | (57,027 | ) | (11.4 | ) | (30,277 | ) | (4,520 | ) | (10.2 | ) | ||||||||||
| Total cost of revenue (excluding impairment loss) | (530,110 | ) | (105.8 | ) | (308,386 | ) | (46,040 | ) | (103.7 | ) | ||||||||||
| Impairment loss on long-lived assets and long-term prepaid expenses | (9,742 | ) | (1.9 | ) | (97,740 | ) | (14,592 | ) | (32.9 | ) | ||||||||||
| Impairment loss on goodwill | — | — | (43,011 | ) | (6,421 | ) | (14.5 | ) | ||||||||||||
| Sales and marketing expenses | (28,141 | ) | (5.6 | ) | (14,853 | ) | (2,217 | ) | (5.0 | ) | ||||||||||
| General and administrative expenses | (227,892 | ) | (45.5 | ) | (75,327 | ) | (11,246 | ) | (25.3 | ) | ||||||||||
| Change in fair value of warrant liability | (20,181 | ) | (4.0 | ) | (16,103 | ) | (2,404 | ) | (5.4 | ) | ||||||||||
| Change in fair value of put option liability | — | — | 201 | 30 | 0.1 | |||||||||||||||
| Loss from operations | (315,031 | ) | (62.9 | ) | (257,892 | ) | (38,501 | ) | (86.7 | ) | ||||||||||
| Interest expense, net | (664 | ) | (0.1 | ) | (5,515 | ) | (823 | ) | (1.9 | ) | ||||||||||
| Subsidy income | 2,623 | 0.5 | 2,644 | 395 | 0.9 | |||||||||||||||
| Impairment loss on long-term investments | (461 | ) | (0.1 | ) | — | — | — | |||||||||||||
| Loss on disposal of subsidiaries | (950 | ) | (0.2 | ) | (4,498 | ) | (672 | ) | (1.5 | ) | ||||||||||
| Other income, net | 31,855 | 6.4 | 17,291 | 2,581 | 5.8 | |||||||||||||||
| Loss before income taxes and loss from equity method investments | (282,628 | ) | (56.4 | ) | (247,970 | ) | (37,020 | ) | (83.4 | ) | ||||||||||
| Provision for income taxes | (1,082 | ) | (0.2 | ) | (3,772 | ) | (563 | ) | (1.3 | ) | ||||||||||
| Loss from Equity method investments | (27 | ) | 0.0 | — | — | — | ||||||||||||||
| Net loss | (283,737 | ) | (56.6 | ) | (251,742 | ) | (37,583 | ) | (84.7 | ) | ||||||||||
| Less: net loss attributable to non-controlling interests | 14,385 | 2.9 | (22,473 | ) | (3,355 | ) | (7.6 | ) | ||||||||||||
| Net loss attributable to Ucommune International Ltd | (298,122 | ) | (59.5 | ) | (229,269 | ) | (34,228 | ) | (77.1 | ) | ||||||||||
| Net loss per share attributable to ordinary shareholders of Ucommune international Ltd.(1) | ||||||||||||||||||||
| –Basic and diluted(1) | (70.55 | ) | N/A | (52.42 | ) | (7.83 | ) | N/A | ||||||||||||
| Weighted average shares used in calculating net loss per share(1) | ||||||||||||||||||||
| –Basic and diluted(1) | 4,225,852 | N/A | 4,373,728 | 4,373,728 | N/A | |||||||||||||||
| (1) | Par value of ordinary shares, additional paid-in capital and share data have been retroactively restated to give effect to the reverse recapitalization, see Note 1(a) to the unaudited condensed consolidated financial statements included elsewhere in this Form 6-K. Further, the ordinary shares are presented on a retroactive basis to reflect the Parent’s Share Consolidation on April 21, 2022. |
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Results of Operation
Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021
Net Revenue
Total net revenue decreased by 40.7% to RMB297.3 million (US$44.4 million) for the six months ended June 30, 2022 from RMB501.0 million for the six months ended June 30, 2021. Revenues from the asset-light model increased by 45.7% to RMB37.3 million (US$5.6 million) for the six months ended June 30, 2022 from RMB25.6 million for the six months ended June 30, 2021.
Workspace Membership Services Revenues
Workspace membership services revenues decreased by 12.8% to RMB161.3 million (US$24.1 million) for the six months ended June 30, 2022 from RMB185.1 million for the six months ended June 30, 2021, mainly due to the closure of unprofitable spaces in operation and the contraction of self-operated coworking space services resulting from the transformation to an asset-light model.
Marketing and Branding Services Revenues
Marketing and branding services revenues decreased by 58.9% to RMB98.2 million (US$14.7 million) for the six months ended June 30, 2022 from RMB238.7 million for the six months ended June 30, 2021, primarily due to the loss of major customers and the reduction in service fees charged to customers.
Other Services Revenues
Other services revenues decreased by 51.0% to RMB37.8 million (US$5.6 million) for the six months ended June 30, 2022 from RMB77.3 million for the six months ended June 30, 2021, primarily due to decreased net revenues from SaaS services, interior design and construction services as a result COVID-19 resurging in first half of 2022.
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Cost of Revenue (excluding Impairment Loss)
Total cost of revenue (excluding impairment loss) decreased by 41.8% to RMB308.4 million (US$46.0 million) for the six months ended June 30, 2022 from RMB530.1 million for the six months ended June 30, 2021. Cost of revenue from the asset-light model increased by 62.8% to RMB31.6 million (US$4.7 million) for the six months ended June 30, 2022 from RMB19.4 million for the six months ended June 30, 2021, which were in line with the increase in revenues from the asset-light model businesses.
Workspace Membership
Costs of workspace membership decreased by 26.1% to RMB180.9 million (US$27.0 million) for the six months ended June 30, 2022 from RMB244.8 million for the six months ended June 30, 2021, mainly due to decreased operating costs related to leases and staff and share-based compensation expense. Cost of revenue (excluding impairment loss) for workspace membership accounted for 48.9% and 60.9% of total net revenue for the six months ended June 30, 2021 and 2022, respectively.
Marketing and Branding Services
Costs of marketing and branding services decreased by 57.4% to RMB97.2 million (US$14.5 million) for the six months ended June 30, 2022 from RMB228.3 million for the six months ended June 30, 2021, mainly due to decreased advertising costs, which was in line with the decrease in advertising revenue. Cost of revenue (excluding impairment loss) for marketing and branding services accounted for 45.6% and 32.7% of total net revenue for the six months ended June 30, 2021 and 2022, respectively.
Other Services
Costs of other services decreased by 46.9% to RMB30.3 million (US$4.5 million) for the six months ended June 30, 2022 from RMB57.0 million for the six months ended June 30, 2021, mainly due to decreased construction and design service cost and software and hardware purchase cost. Cost of revenue (excluding impairment loss) for other services accounted for 11.4% and 10.2% of total net revenue for the six months ended June 30, 2021 and 2022, respectively.
Impairment Loss on Long-lived Assets and long-term prepaid expenses
Impairment loss on long-lived assets and long-term prepaid expenses increased by 903.3% to RMB97.7 million (US$14.6 million) for the six months ended June 30, 2022 from RMB9.7 million for the six months ended June 30, 2021, primarily due to an increase in impairment costs for non-current assets where the carrying value is not expected to be fully recoverable, as a result of significant deterioration in the commercial housing industry and unexpected duration of COVID-19 during the six months ended June 30, 2022.
Impairment Loss on Goodwill
Impairment loss on goodwill was RMB43.0 million (US$6.4 million) for the six months ended June 30, 2022 from nil for the six months ended June 30, 2021, primarily due to the carrying amount of the others reporting units exceeding their respective fair value as Ucommune’s business was adversely affected by COVID-19.
Sales and Marketing Expenses
Sales and marketing expenses decreased by 47.2% to RMB14.9 million (US$2.2 million) for the six months ended June 30, 2022 from RMB28.1 million for the six months ended June 30, 2021, mainly due to the decrease in share-based compensation expenses. Sales and marketing expenses accounted for 5.6% and 5.0% of total net revenue for the six months ended June 30, 2021 and 2022, respectively.
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General and Administrative Expenses
General and administrative expenses decreased by 66.9% to RMB75.3 million (US$11.2 million) for the six months ended June 30, 2022 from RMB227.9 million for the six months ended June 30, 2021, mainly due to a decrease in share-based compensation expense. General and administrative expenses accounted for 45.5% and 25.3% of total net revenue for the six months ended June 30, 2021 and 2022, respectively.
Change in Fair Value of Warrant Liability
Change in fair value of warrant liability was RMB16.1 million (US$2.4 million) for the six months ended June 30, 2022, as compared to RMB20.2 million for the six months ended June 30, 2021, primarily attributable to the fair value change of warrants issued on February 2, 2021 in connection with the Parent’s underwritten public offering, and the fair value change of warrants in connection with the issuing of convertible bond on January 26, 2022.
Change in Fair Value of Put Option Liability
Change in fair value of put option liability was RMB0.2 million (US$30.0 thousand) for the six months ended June 30, 2022, as compared to nil for the six months ended June 30, 2021, primarily attributable to the fair value change of a put option in connection with the issuing of a convertible bond on January 26, 2022.
Loss from Operations
As a result of the foregoing, loss from operations was RMB257.9 million (US$38.5 million) for the six months ended June 30, 2022, as compared to RMB315.0 million for the six months ended June 30, 2021.
Interest Expense, Net
Interest expense, net was RMB5.5 million (US$0.8 million) for the six months ended June 30, 2022, as compared to RMB0.7 million for the six months ended June 30, 2021. The Parent generated interest income from Ucommune’s bank balances and short-term investments and incurred interest expense on convertible bond, bank loans and other borrowings. The increase in interest expense, net for the six months ended June 30, 2022 was primarily due to interest paid under a convertible bond issued during the six months ended June 30, 2022.
Subsidy Income
Subsidy income was subsidies granted by local governments to support the development and operation of agile office spaces. Subsidy income was RMB2.6 million (US$0.4 million) for the six months ended June 30, 2022, as compared to RMB2.6 million for the six months ended June 30, 2021.
Impairment Loss on Long-term Investments
Impairment loss on long-term investments was nil for the six months ended June 30, 2022, as compared to RMB0.5 million for the six months ended June 30, 2021.
Loss on Disposal of Subsidiaries
Loss on disposal of subsidiaries was RMB1.0 million and RMB4.5 million (US$0.7 million) for the six months ended June 30, 2021 and 2022, respectively, primarily attributable to losses from the disposal of several subsidiaries for the six months ended June 30, 2021 and 2022.
Other Income, Net
Other income, net, was RMB17.3 million (US$2.6 million) for the six months ended June 30, 2022, as compared to RMB31.9 million for the six months ended June 30, 2021, mainly due to more early termination of lease contracts which resulted in more corresponding reversal of expenses for the six months ended June 30, 2021.
Provision for Income Taxes
Provision for income taxes was RMB1.1 million and RMB3.8 million (US$0.6 million) for the six months ended June 30, 2021 and 2022, respectively.
21
Loss from Equity Method Investments
Loss from equity method investments was RMB27.0 thousand and nil for the six months ended June 30, 2021 and 2022, respectively, primarily attributable to losses recorded in connection with investees for the six months ended June 30, 2021.
Net Loss
As a result of the foregoing, net loss decreased by 11.3% to RMB251.7 million (US$37.6 million) for the six months ended June 30, 2022 from RMB283.7 million for the six months ended June 30, 2021.
Non-GAAP Financial Measures
To supplement the unaudited condensed consolidated financial statements, which are prepared and presented in accordance with U.S. GAAP, the Parent uses the following non-GAAP financial measures for the unaudited condensed consolidated results: EBITDA (including EBITDA margin), adjusted EBITDA (including adjusted EBITDA margin) and adjusted net loss. The Parent believes that EBITDA, adjusted EBITDA and adjusted net loss help understand and evaluate Ucommune’s core operating performance.
EBITDA, adjusted EBITDA and adjusted net loss are presented to enhance investors’ overall understanding of Ucommune’s financial performance and should not be considered a substitute for, or superior to, the financial information prepared and presented in accordance with U.S. GAAP. Investors are encouraged to review the reconciliation of the historical non-GAAP financial measures to their most directly comparable GAAP financial measures. As EBITDA, adjusted EBITDA and adjusted net loss have material limitations as analytical metrics and may not be calculated in the same manner by all companies, they may not be comparable to other similarly titled measures used by other companies.
In light of the foregoing limitations, you should not consider EBITDA, adjusted EBITDA and adjusted net loss as substitutes for, or superior to, net loss prepared in accordance with U.S. GAAP. The Parent encourages investors and others to review its financial information in its entirety and not rely on any single financial measure. For more information on these non-GAAP financial measures, see the table below.
EBITDA represents net loss before interest expense, net, provision for income taxes, depreciation of property and equipment and amortization of intangible assets.
Adjusted EBITDA represents net loss before (i) interest expense, net, other income, net, provision for income taxes and loss on disposal of subsidiaries and (ii) certain non-cash expenses, consisting of share-based compensation expense, impairment loss on long-term investments, impairment loss on long-lived assets and long-term prepaid expenses, impairment loss on goodwill, depreciation of property and equipment, amortization of intangible assets, change in fair value of warrant liability and change in fair value of put option liability, which the Parent does not believe are reflective of Ucommune’s core operating performance during the periods presented.
Adjusted net loss represents net loss before share-based compensation expense, impairment loss on long-lived assets and long-term prepaid expenses, impairment loss on long-term investment, impairment loss on goodwill, change in fair value of warrant liability, change in fair value of put option liability and loss on disposal of subsidiaries.
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The following table sets forth a reconciliation of net loss to EBITDA and adjusted EBITDA for the periods indicated:
| For the Six Months Ended June 30, | ||||||||||||
| 2021 | 2022 | |||||||||||
| RMB | RMB | US$ | ||||||||||
| (in thousands) | ||||||||||||
| Net loss | (283,737 | ) | (251,742 | ) | (37,583 | ) | ||||||
| Interest expense, net | 664 | 5,515 | 823 | |||||||||
| Provision for income taxes | 1,082 | 3,772 | 563 | |||||||||
| Depreciation of property and equipment | 39,125 | 27,617 | 4,123 | |||||||||
| Amortization of intangible assets | 4,657 | 2,230 | 333 | |||||||||
| EBITDA (non-GAAP) | (238,209 | ) | (212,608 | ) | (31,741 | ) | ||||||
| Share-based compensation expense | 183,817 | 24,544 | 3,664 | |||||||||
| Impairment loss on long-lived assets and long-term prepaid expenses | 9,742 | 97,740 | 14,592 | |||||||||
| Impairment loss on goodwill | — | 43,011 | 6,421 | |||||||||
| Change in fair value of warrant liability | 20,181 | 16,103 | 2,404 | |||||||||
| Change in fair value of put option liability | — | (201 | ) | (30 | ) | |||||||
| Impairment loss on long-term investments | 461 | — | — | |||||||||
| Loss on disposal of subsidiaries | 950 | 4,498 | 672 | |||||||||
| Other income, net | (31,855 | ) | (17,291 | ) | (2,581 | ) | ||||||
| Adjusted EBITDA (non-GAAP) | (54,913 | ) | (44,204 | ) | (6,599 | ) | ||||||
The table below sets forth a reconciliation of net loss to adjusted net loss for the periods indicated:
| For the Six Months Ended June 30, | ||||||||||||
| 2021 | 2022 | |||||||||||
| RMB | RMB | US$ | ||||||||||
| (in thousands) | ||||||||||||
| Net loss | (283,737 | ) | (251,742 | ) | (37,583 | ) | ||||||
| Share-based compensation expense | 183,817 | 24,544 | 3,664 | |||||||||
| Impairment loss on long-lived assets and long-term prepaid expenses | 9,742 | 97,740 | 14,592 | |||||||||
| Impairment loss on goodwill | — | 43,011 | 6,421 | |||||||||
| Change in fair value of warrant liability | 20,181 | 16,103 | 2,404 | |||||||||
| Change in fair value of put option liability | — | (201 | ) | (30 | ) | |||||||
| Impairment loss on long-term investments | 461 | — | — | |||||||||
| Loss on disposal of subsidiaries | 950 | 4,498 | 672 | |||||||||
| Adjusted net loss (non-GAAP) | (68,586 | ) | (66,047 | ) | (9,860 | ) | ||||||
Liquidity and Capital Resources
Cash Flows and Working Capital
The Parent’s principal sources of liquidity have been cash from capital contributions by its shareholders and capital market financings, and short-term/long-term borrowings. As of June 30, 2021 and 2022, cash and cash equivalents were RMB306.1 million and RMB80.9 million (US$12.1 million), respectively. Cash and cash equivalents consist primarily of cash at bank and on hand and are primarily denominated in Renminbi, U.S. dollars and Hong Kong dollars.
Historically, the Parent has not been profitable nor generated positive net cash flows. For the six months ended June 30, 2021 and 2022, the Parent incurred losses from operations of RMB315.0 million and RMB257.9 million (US$38.5 million), respectively and generated negative cash flows from operating activities of RMB109.7 million and RMB107.2 million (US$16.0 million), respectively. In addition, as of June 30, 2022, the Parent had short-term borrowings of RMB35.4 million (US$5.3 million), current portion of long-term borrowings of RMB14.5 million (US$2.2 million), working capital deficit (defined as total current assets deducted by total current liabilities) of RMB474.3 million (US$70.8 million) and an accumulated deficit of RMB4,466.9 million (US$666.9 million). In addition, as of June 30, 2022, the Parent had unused credit lines of RMB58.1 million (US$8.7 million).
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Ucommune is seeking to expand its asset-light model, under which Ucommune can reduce upfront capital investments for opening new spaces. The Parent regularly monitors its current and expected liquidity requirements to help ensure that it maintains sufficient cash balances to meet Ucommune’s existing and reasonably likely long-term liquidity needs.
Ucommune has the intention and ability to extend or renew the bank borrowings, or to borrow new loans from commercial banks or other institutions or entities in the next 12 months after the publication date of the unaudited condensed consolidated financial statements.
In January 2022, the Parent closed a private placement for the offering of a US$3,000,000 principal amount 8% senior convertible debenture (the “Debenture”), a warrant to purchase 3,750,000 Class A ordinary shares of the Parent, at an exercise price of US$4.05 per Class A ordinary share (187,500 Class A ordinary shares at an exercise price of US$81.00 after retroactively adjusted to reflect the 20-to-1 Share Consolidation effected on April 21, 2022), a warrant to purchase 18,750,000 Class A ordinary shares, at an exercise price of US$1.00 per 1.25 ordinary shares (937,500 Class A ordinary shares at an exercise price of US$20.00 per 1.25 ordinary shares after retroactively adjusted to reflect the 20-to-1 Share Consolidation effected on April 21, 2022), and a warrant to purchase 18,750,000 Class A ordinary shares, at an exercise price of US$4.05 per ordinary share (937,500 Class A ordinary shares at an exercise price of US$81.00 after retroactively adjusted to reflect the 20-to-1 Share Consolidation effected on April 21, 2022) (collectively, the “JAK Warrants”). The net proceeds to the Parent from the offering were approximately US$2.6 million.
On March 1, 2022, the Parent and the holder of the Debenture amended the debenture and warrants to set a floor price of US$0.30 per share (before retroactively adjusted to reflect the 20-to-1 Share Consolidation effected on April 21, 2022) for the conversion price for the Debenture and the exercise price of the JAK Warrants.
On April 21, 2022, due to adjustment mechanisms in the Debenture and JAK Warrants as a result of the Parent’s 20-to-1 Share Consolidation, the conversion price of the Debenture and exercise price of the JAK Warrants became US$6.00 per share.
On August 29, 2022, the Parent and the holder of the Debenture entered into amendments to the Debenture, JAK Warrants and related securities purchase agreement, which became effective on September 6, 2022. Such amendments lowered the conversion price of the Debenture, the exercise price of the JAK Warrants and the floor price to US$4.50.
The Parent has incurred recurring operating losses since its inception, including net losses of RMB283.7 million and RMB251.7 million (US$37.6 million) for the six months ended June 30, 2021 and 2022, respectively. The COVID-19 pandemic negatively impacted the Parent’s business operations in 2021 and 2022 and has continued to impact its financial position, results of operations and cash flows. These conditions raise substantial doubt about the Parent’s ability to continue as a going concern.
Historically, the Parent has relied principally on both operational sources of cash and non-operational sources of financing from investors to fund its operations and business development. The Parent’s ability to continue as a going concern is dependent on management’s ability to successfully execute its business plan which includes continued business transition from an asset-heavy model to an asset-light model to improve profitability, continued exploration of new business opportunities that have synergies with its core business, collect long term receivables, control operating costs and optimize operational efficiency to improve its cash flow from operations. The Parent also plans to raise additional capital, including among others, obtaining debt financing, to support its future operations.
The Parent continues to explore opportunities to grow its business. However, the Parent has not yet achieved a business scale able to generate a sufficient level of revenues to achieve net profit and positive cash flows from operating activities, and the Parent expects that operating losses and negative cash flows from operations will continue for the foreseeable future. If the Parent is unable to grow Ucommune’s business to achieve economies of scale in the future, it will become even more difficult for the Parent to sustain a sufficient source of cash to cover its operating costs. There can be no assurance, however, that the Parent will be able to obtain additional financing on terms acceptable to Ucommune, in a timely manner, or at all. In the event that financing sources are not available, or that the Parent is unsuccessful in increasing its gross profit margin, collecting long term receivables and reducing operating losses, the Parent may be unable to implement its current plans for expansion, repay debt obligations or respond to competitive pressures, any of which would have a material adverse effect on its business, financial condition and results of operations and materially adversely affect its ability to continue as a going concern.
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The Parent’s unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of such uncertainties.
The Parent intends to finance future working capital requirements and capital expenditures from cash generated from operating activities and funds raised from financing activities. The Parent may, however, require additional cash due to changing business conditions or other future developments, including any investments or acquisitions Ucommune may decide to pursue.
If the Parent’s existing cash is insufficient to meet Ucommune’s requirements, the Parent or its subsidiaries may seek to issue debt or equity securities or Ucommune may seek to obtain additional credit facilities. Financing may be unavailable in the amounts Ucommune needs or on terms acceptable to Ucommune, if at all. Issuance of additional equity securities, including convertible debt securities, would dilute earnings per share. The incurrence of debt would divert cash for working capital and capital expenditures to service debt obligations and could result in operating and financial covenants that restrict Ucommune’s operations and its ability to pay dividends to the Parent’s shareholders.
If the Parent and its subsidiaries are unable to obtain additional equity or debt financing as required, Ucommune’s business operations and prospects may suffer. See “Item 3. Key Information — D. Risk Factors — Risks Relating to Our Business and Industry — We require significant capital to fund our operations and growth. If we cannot obtain sufficient capital on acceptable terms, our business, financial condition and prospects may suffer” from the Parent’s Form 20-F.
As a holding company with no material operations of its own, the Parent operates its businesses in the PRC through the PRC subsidiaries and the consolidated VIEs in China. Under PRC laws and regulations, the Parent may provide funding to the PRC subsidiaries in China through capital contributions or loans, subject to the approval of government authorities and limits on the amount of capital contributions and loans. In addition, the PRC subsidiaries may only provide Renminbi funding to the consolidated VIEs through entrusted loans. See “Item 3. Key Information — D. Risk Factors — Risks Relating to Doing Business in China — PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay us from using the proceeds of securities offerings, to make loans or additional capital contributions to our PRC subsidiaries, which could materially adversely affect our liquidity and our ability to fund and expand our business” from the Parent’s Form 20-F.
The ability of the PRC subsidiaries to make dividends or other cash payments to their shareholders, which are the Parent’s subsidiaries incorporated in Hong Kong and indirectly wholly-owned by the Parent, is subject to restrictions under PRC laws and regulations. See “Item 3. Key Information — D. Risk Factors — Risks Relating to Doing Business in China — We may rely on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our PRC subsidiaries to make payments to us could materially adversely affect our ability to conduct our business” from the Parent’s Form 20-F and “Item 3. Key Information — D. Risk Factors — Risks Relating to Doing Business in China — If we are classified as a PRC resident enterprise for PRC enterprise income tax purposes, such classification could result in unfavorable PRC tax consequences to us and our non-PRC shareholders” from the Parent’s Form 20-F
The following table presents the selected unaudited condensed consolidated cash flow data for the periods indicated.
| For the Six Months Ended June 30, | ||||||||||||
| 2021 | 2022 | |||||||||||
| RMB | RMB | US$ | ||||||||||
| (in thousands) | ||||||||||||
| Net cash used in operating activities | (109,696 | ) | (107,225 | ) | (16,008 | ) | ||||||
| Net cash used in investing activities | (28,367 | ) | (30,926 | ) | (4,617 | ) | ||||||
| Net cash provided by/(used in) financing activities | 113,030 | (268 | ) | (41 | ) | |||||||
| Effects of exchange rate changes | (1,760 | ) | 2,865 | 428 | ||||||||
| Net decrease in cash, cash equivalents and restricted cash | (26,793 | ) | (135,554 | ) | (20,238 | ) | ||||||
| Cash, cash equivalents and restricted cash – beginning of the periods | 400,790 | 216,495 | 32,322 | |||||||||
| Cash, cash equivalents and restricted cash – end of the periods | 373,997 | 80,941 | 12,084 | |||||||||
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Operating Activities
Net cash used in operating activities for the six months ended June 30, 2022 was RMB107.2 million (US$16.0 million). The difference between net loss of RMB251.7 million (US$37.6 million) and the net cash used by operating activities was mainly due to (i) amortization of right-of-use assets of RMB101.4 million (US$15.1 million) primarily associated with right-of-use of our spaces, (ii) impairment loss on long-lived assets and long-term prepaid expenses of RMB97.7 million (US$14.6 million), (iii) impairment loss on goodwill of RMB43.0 million (US$6.4 million), (iv) depreciation of property and equipment of RMB27.6 million (US$4.1 million), and (v) share-based compensation of RMB24.5 million (US$3.7 million), partially offset by (i) a decrease in lease liabilities of RMB104.1 million (US$15.5 million), and (ii) a decrease in deferred workspace membership fee of RMB40.3 million (US$6.0 million).
Investing Activities
Net cash used in investing activities for the six months ended June 30, 2022 was RMB30.9 million (US$4.6 million), primarily attributable to (i) purchase of short-term investments of RMB130.7 million (US$19.5 million), and (ii) purchase of property, plant and equipment of RMB26.0 million (US$3.9 million), partially offset by (i) settlement of short-term investments of RMB122.6 million (US$18.3 million), and (ii) loan collected from third parties of RMB3 million (US$0.4 million).
Financing Activities
Net cash used in financing activities for the six months ended June 30, 2022 was RMB0.3 million (US$41.0 thousand), primarily attributable to loan repayment to third parties of RMB21.0 million (US$3.1 million), partially offset by (i) proceeds of RMB17.7 million (US$2.6 million) from the financing in connection with the Parent’s issuing of convertible bond in January 2022, (ii) loans received from third parties of RMB2.1 million (US$0.3 million), and (iii) capital contribution from noncontrolling shareholders of RMB0.9 million (US$0.1 million).
Capital Expenditures
Capital expenditures are incurred primarily in connection with purchase of property and equipment and purchase of intangible assets. Capital expenditures were RMB38.6 million and RMB26.0 million (US$3.9 million) for the six months ended June 30, 2021 and 2022, respectively. The Parent has no significant outstanding commitments for capital expenditures as of June 30, 2022. See “— Contractual Obligations.” The Parent intends to fund its future capital expenditures with its existing cash balance and proceeds from securities offerings.
Contractual Obligations
The following table sets forth the contractual obligations and commitments as of June 30, 2022.
| Payments Due by Years Ending | ||||||||||||||||||||
| Total | Less than 1 year | 1 – 3 years | 3 – 5 year | More than 5 years | ||||||||||||||||
| (RMB in thousands) | ||||||||||||||||||||
| Short-term borrowings(1) | 35,446 | 35,446 | — | — | — | |||||||||||||||
| Long-term borrowings(2) | 15,432 | 14,523 | 909 | — | — | |||||||||||||||
| Lease commitments(3) | 630,998 | 267,550 | 172,463 | 120,559 | 70,426 | |||||||||||||||
| Total contractual obligations | 681,876 | 317,519 | 173,372 | 120,559 | 70,426 | |||||||||||||||
| (1) | Short-term borrowings represent borrowings from commercial banks with annual interest rate from 4.25% to 6.80%, and borrowings from others with annual interest rate from 0% to 15.00%. |
| (2) | Long-term borrowings primarily consist of loans from commercial bank with an annual interest rate from 5.00% to 7.92%. |
| (3) | Lease commitments relate to Ucommune’s obligation to pay under lease agreements. |
Holding Company Structure
Ucommune International Ltd, the Parent, is the ultimate Cayman Islands holding company with no material operations of its own. The Parent operates its business through its subsidiaries and the consolidated VIEs. As a result, the Parent’s ability to pay dividends depends upon dividends paid by its subsidiaries. If its subsidiaries or any newly formed subsidiaries incur debt on their own behalf in the future, the instruments governing their debt may restrict their ability to pay dividends to the Parent.
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In addition, the PRC subsidiaries are permitted to pay dividends to their shareholders, which are the Parent’s subsidiaries incorporated in Hong Kong and indirectly wholly-owned by the Parent, only out of their retained earnings, if any, as determined in accordance with the Accounting Standards for Business Enterprise as promulgated by the Ministry of Finance of the PRC, or PRC GAAP. In accordance with PRC company laws, the consolidated VIEs in China must make appropriations from their after-tax profit to non-distributable reserve funds including (i) statutory surplus fund and (ii) discretionary surplus fund. The appropriation to the statutory surplus fund must be at least 10% of the after-tax profits calculated in accordance with PRC GAAP. Appropriation is not required if the statutory surplus fund has reached 50% of the registered capital of the consolidated VIEs. Appropriation to discretionary surplus fund is made at the discretion of the consolidated VIEs.
Pursuant to the law applicable to China’s foreign investment enterprises, the Parent’s subsidiaries that are foreign investment enterprises in the PRC have to make appropriation from their after-tax profit, as determined under PRC GAAP, to reserve funds including (i) general reserve fund, (ii) enterprise expansion fund and (iii) staff bonus and welfare fund. The appropriation to the general reserve fund must be at least 10% of the after-tax profits calculated in accordance with PRC GAAP. Appropriation is not required if the reserve fund has reached 50% of the registered capital of the Parent’s subsidiary. Appropriation to the other two reserve funds is at the discretion of the Parent’s subsidiary.
Cash may be transferred within the group in the following manner when needed: (i) the Parent may transfer funds to its subsidiaries, including the PRC subsidiaries, by way of capital contributions or loans in accordance with the internal cash management policies described below and the “major operational decision management system” which is established by the risk control and compliance department of the Parent, discussed, considered and reviewed by the management team of the Parent, including its chief executive officer and chief financial officer, and approved by the chairman of the board of directors of the Parent; (ii) the Parent and its subsidiaries may provide loans to the VIEs and vice versa in accordance with the internal cash management policies; (iii) funds may be transferred from the VIEs to the WFOEs, as service fees for services contemplated by the VIE agreements namely, the Exclusive Business Cooperation Agreement relating to Ucommune Venture and Beijing U Bazaar and the Exclusive Technology Consulting and Service Agreement relating to Weixue Tianxia; (iv) the PRC subsidiaries, including the WFOEs, may pay dividends to their shareholders, which are the Parent’s subsidiaries incorporated in Hong Kong and indirectly wholly-owned by the Parent, out of their retained earnings in accordance with their articles of association and in compliance with applicable PRC laws and regulations; and (v) the Parent’s non-PRC subsidiaries may make dividends or other distributions to the Parent in accordance with the articles of association or incorporation documents of the relevant non-PRC subsidiaries and in compliance with applicable local laws and regulations. Because the Parent is the primary beneficiary of the VIEs through contractual arrangements and the Parent and its subsidiaries do not have equity ownership in the VIEs, neither the Parent nor its subsidiaries are able to make direct capital contributions to the VIEs or their respective subsidiaries, and the VIEs are not able to make dividends or other distributions to the Parent. See “Item 3. Key Information — A. Selected Financial Data — Selected Condensed Combined and Consolidated Financial Statement Information of Parent, the VIEs, the WFOEs, the HK Subsidiaries and other Subsidiaries” from the Parent’s Form 20-F and “Selected Unaudited Condensed Consolidated Financial Statement Information of Parent, the VIEs, the WFOEs, the HK Subsidiaries and other Subsidiaries” herein.
Since January 1, 2018, cash has been transferred through the group in terms of loans; there have been no other transfers, dividends or distributions made to date between the Parent as the holding company, its subsidiaries and the consolidated VIEs, or to investors; and there have been no other cash flows and transfers of other assets by type that have occurred between the Parent as the holding company, its subsidiaries, and the consolidated VIEs. As of the date of hereof, none of the Parent’s subsidiaries had distributed any dividends or made any other distributions to the Parent. As of the same date, the Parent had not distributed any dividends or made any other distributions to U.S. investors. See “Item 3. Key Information — A. Selected Financial Data — Selected Condensed Combined and Consolidated Financial Statement Information of Parent, the VIEs, the WFOEs, the HK Subsidiaries and other Subsidiaries — Inter-group balances due from VIEs/Subsidiaries — Intercompany loan lent” from the Parent’s Form 20-F and “Selected Unaudited Condensed Consolidated Financial Statement Information of Parent, the VIEs, the WFOEs, the HK Subsidiaries and other Subsidiaries — Inter-group balances due from VIEs/Subsidiaries — Intercompany loan lent” herein. The WFOEs and the VIEs do not intend to distribute earnings or settle amounts owed under the VIE agreements.
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As an offshore holding company, the Parent is permitted under PRC laws and regulations to provide funding from the proceeds of its offshore fund-raising activities to the PRC subsidiaries only through loans or capital contributions, and to the consolidated affiliated entity only through loans, in each case subject to the satisfaction of the applicable government registration and approval requirements. Before the Parent or its offshore entities provide loans to their onshore entities (i.e. the PRC subsidiaries and the VIE entities), the borrower must make filings about details of the loans with the State Administration of Foreign Exchange, or SAFE, or its local counterparts in accordance with relevant PRC laws and regulations. The PRC subsidiaries and the VIE entities that receive the loans are only allowed to use the loans for the purposes set forth in these laws and regulations. See “Item 3. Key Information — D. Risk Factors — Risks Relating to Doing Business in China — PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay us from using the proceeds of securities offerings, to make loans or additional capital contributions to our PRC subsidiaries, which could materially adversely affect our liquidity and our ability to fund and expand our business” from the Parent’s Form 20-F. As a result, there is uncertainty with respect to the Parent’s ability to provide prompt financial support to the PRC subsidiaries and the consolidated VIEs when needed. In August 2020, Ucommune Venture entered into a loan agreement with Ucommune HK, under which Ucommune HK agreed to provide loans of up to a total of US$60 million to Ucommune Venture and Ucommune Venture could drawdown the loans in multiple tranches (up to an aggregate of US$60 million) within three years from the date of the first drawdown. Thereafter, both parties entered into two supplement agreements in January 2021 and March 2021. As of the date hereof, Ucommune HK has provided a total of US$41 million in loans to Ucommune Venture, of which US$4 million have been repaid, under such loan agreements since the completion of the Business Combination in November 2020, using proceeds from the Parent’s previous PIPE financing and follow-on offerings. Such loans were included in intercompany loans, and disclosed as roll-forwards of the investment in subsidiaries and VIEs. See “Item 3. Key Information — A. Selected Financial Data — Selected Condensed Combined and Consolidated Financial Statement Information of Parent, the VIEs, the WFOEs, the HK Subsidiaries and other Subsidiaries” from the Parent’s Form 20-F and “ Selected Unaudited Condensed Consolidated Financial Statement Information of Parent, the VIEs, the WFOEs, the HK Subsidiaries and other Subsidiaries — Inter-group balances due from VIEs/Subsidiaries — Intercompany loan lent” herein.
The Parent, its subsidiaries and the VIEs are subject to restrictions on foreign exchange and their ability to transfer cash between entities, across borders, and to U.S. investors. Under PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval of SAFE, by complying with certain procedural requirements. However, approval from or registration with appropriate government authorities is required where Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. As a result, the PRC subsidiaries and the VIEs need to obtain SAFE approval to use cash generated from operations to pay off their respective debt in a currency other than Renminbi owed to entities outside China, or to make other capital expenditure payments outside China in a currency other than Renminbi. See “Item 3. Key Information — D. Risk Factors — Risks Relating to Doing Business in China — Governmental control of currency conversion may limit our ability to utilize our net revenue effectively and our ability to transfer cash between our PRC subsidiaries and us, across borders, and to investors and affect the value of your investment” from the Parent’s Form 20-F.
Ucommune has established stringent controls and procedures for cash flows within the group based on internal cash management policies established by the group finance department in Beijing, discussed, considered and reviewed by the relevant departments in the group and approved by the chairman of the board of directors of the Parent. Each transfer of cash among the Parent, its subsidiaries and the VIEs is subject to internal approval of each relevant company. To effect a cash transfer, a number of steps are needed, including but not limited to the issuance of payment receipt, logging into the online banking system and completing its verification process, inspection of the invoice, and payment execution. Only the finance department of each relevant company is authorized to make cash transfers. Within the finance department, the roles of payment approval, payment execution, record keeping, and auditing are segregated to minimize risk.
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The PRC subsidiaries may pay dividends to their shareholders, which are the Parent’s subsidiaries incorporated in Hong Kong and indirectly wholly-owned by the Parent, out of their retained earnings in accordance with their articles of association and in compliance with applicable PRC laws and regulations. As of the date hereof, none of the Parent’s subsidiaries had distributed any dividends or made any other distributions to the Parent or Ucommune Group Holdings. As of the same date, the Parent had not distributed any dividends or made any other distributions to U.S. investors. The PRC subsidiaries and the VIEs are subject to restrictions and limitations on their ability to distribute earnings from their businesses to the Parent and U.S. investors as well as their ability to settle amounts owed under the VIE agreements. The PRC subsidiaries’ ability to distribute dividends is based upon their distributable earnings. PRC regulations permit a PRC subsidiary to pay dividends to its shareholders only out of its accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, each of the PRC subsidiaries and the VIEs is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. See “Item 3. Key Information — D. Risk Factors — Risks Relating to Doing Business in China — We may rely on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our PRC subsidiaries to make payments to us could materially adversely affect our ability to conduct our business” from the Parent’s Form 20-F.
Notwithstanding the foregoing, the PRC subsidiaries may use their own retained earnings (rather than Renminbi converted from foreign currency denominated capital) to provide financial support to their consolidated affiliated entity either through entrusted loans from the PRC subsidiaries to the consolidated VIEs or direct loans to such consolidated affiliated entity’s nominee shareholders, which would be contributed to the consolidated variable entity as capital injections. Such direct loans to the nominee shareholders would be eliminated in the unaudited condensed consolidated financial statements against the consolidated affiliated entity’s share capital.
Off-Balance Sheet Commitments and Arrangements
Ucommune has not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. The Parent has not entered into any derivative contracts that are indexed to its shares and classified as shareholder’s equity or that are not reflected in the unaudited condensed consolidated financial statements. Furthermore, the Parent does not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. The Parent does not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to Ucommune or engages in leasing, hedging or product development services with Ucommune.
Quantitative and Qualitative Disclosure about Market Risk
Foreign Currency Risk
The RMB is not a freely convertible currency. SAFE, under the authority of the Peoples Bank of China, controls the conversion of RMB into other currencies. The value of the RMB is subject to changes in central government policies, international economic and political developments affecting supply and demand in the China Foreign Exchange Trading System market. Cash and cash equivalents denominated in RMB amounted to RMB175.4 million and RMB66.7 million (US$10.0 million) as of June 30, 2021 and 2022, respectively.
Inflation Risk
Since Ucommune’s inception, inflation in China has not materially impacted the results of operations. Although Ucommune has not been materially affected by inflation since Ucommune’s inception, Ucommune may be affected in the future by higher rates of inflation in China.
Internal Control Over Financial Reporting
Prior to the business combination, the Parent was a private company with limited accounting personnel and other resources with which to address its internal control over financial reporting. As defined in the standards established by U.S. Public Company Accounting Oversight Board, or the PCAOB, a “material weakness” is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
In connection with the internal investigation conducted by the Parent’s Board of Directors with the assistance from external legal advisors in 2020, the following material weaknesses were identified in March 2020, including
| ● | The lack of an Audit & Risk Committee and Chief Compliance officer to monitor all company policies, and ensure that the policies are implemented and followed; |
| ● | A lack of financial compliance training related to the disclosure obligations by shareholders, directors and officers during a U.S. IPO to the Parent’s management personnel as well as other staff; |
| ● | A failure to strictly implement the internal contract initiation and approval procedures to prohibit any unusual bypassing conduct of such procedures and improve employee’s awareness of such procedures by distributing relevant policies and delivering training; |
| ● | A lack of proper contract approval procedures and policies, in which all related party transactions or above a certain amount must be reviewed; |
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| ● | A lack of internal file management procedures and lack of a more effective file records management system; |
| ● | A lack of effective chop usage registration records with identifiable contract information, and lack of a parallel searchable chop usage registration records management system; and |
| ● | A lack of compliance policies related to conflict of interest, related party transactions, ethics, and related matters. |
The Parent has already made improvements in relating to above material weaknesses, including:
| ● | The establishment of Audit & Risk Committee and the appointment of an independent director as the Chair of Audit & Risk Committee, and the appointment of the Chief Risk Officer to monitor company’s policies since February 2020, who also report directly to Audit & Risk Committee; |
| ● | The implementation of financial compliance related training and the plan to hold such training regularly in the future; |
| ● | The release of the policies regarding to significant operation activities to all employees, and the improvement on OA system to ensure all internal contracts are proposed and approved properly; |
| ● | The strengthen approval of contracts relating to related party transactions or contacts of a significant amount; |
| ● | The establishment of an internal file management system; |
| ● | The improvement of the chop management procedure and the implementation of an effective chop usage registration records; and |
| ● | The establishment of new compliance policy related to conflicts of interest, related party transaction and ethics. |
All those improvements have been effectively implemented before June 30, 2020 and all above material weaknesses are assessed to be remediated by June 30, 2020.
In connection with the audits of the combined and consolidated financial statements included elsewhere in the Parent’s Form 20-F, the Parent and its independent registered public accounting firm identified the following material weaknesses in internal control over financial reporting. The independent registered public accounting firm has not conducted an audit of the Parent’s internal control over financial reporting.
The material weaknesses that have been identified relate to:
| ● | A lack of comprehensive accounting policies and procedures manual in accordance with U.S. GAAP, and |
| ● | Insufficient accounting personnel with appropriate experience and knowledge to address complex accounting matters in accordance with U.S. GAAP. |
Neither the Parent nor its independent registered public accounting firm undertook a comprehensive assessment of internal control under the Sarbanes-Oxley Act of 2002 for purposes of identifying and reporting any weakness in internal control over financial reporting. Once the Parent ceases to be an “emerging growth company” as such term is defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, the independent registered public accounting firm must attest to and report on the effectiveness of internal control over financial reporting. Had the Parent performed a formal assessment of internal control over financial reporting or had the independent registered public accounting firm performed an audit of internal control over financial reporting, additional control deficiencies may have been identified. The material weaknesses, if not timely remedied, may lead to significant misstatements in the unaudited condensed consolidated financial statements in the future.
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To remedy the identified material weaknesses, the Parent has adopted and will adopt further measures to improve internal control over financial reporting, as follows.
| ● | The Parent has implemented, and plan to continue to develop, a full set of U.S. GAAP accounting policies and financial reporting procedures as well as related internal control policies, including implementing a comprehensive accounting manual to guide the day-to-day accounting operation and reporting work; |
| ● | The Parent has recruited staff with knowledge of U.S. GAAP and SEC regulations in its finance and accounting department; |
| ● | The Parent has also supplemented and enhanced internal training and development programs for financial reporting personnel; and |
| ● | When entering into complex transactions, the Parent plans to utilize a third party consultant for accounting services as additional resources. |
The Parent intends to remediate these material weaknesses in multiple phases and expect that it will incur certain costs for implementing the remediation measures. The implementation of the measure, however, may not fully address the material weaknesses identified in internal control over financial reporting, and the Parent cannot conclude that the material weaknesses have been fully remedied as of June 30, 2022. In addition, the Parent cannot assure you that the Parent will be able to continue implementing these measures in the future. See “Item 3. Key Information — D. Risk Factors — Risk Factors Relating to Our Business and Industry — If we fail to implement and maintain an effective system of internal controls to remediate our material weaknesses over financial reporting, we may be unable to accurately report our results of operations, meet our reporting obligations or prevent fraud, and investor confidence and the market price of the ordinary shares may be materially adversely affected.”
As a company with less than US$1.07 billion in revenue for the Parent’s last fiscal year, the Parent qualifies as an “emerging growth company” pursuant to the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002 in the assessment of the emerging growth company’s internal control over financial reporting.
Recent Accounting Pronouncements
For detailed discussion on recent accounting pronouncements, see Note 2 to the Parent’s unaudited condensed consolidated financial statements, which are included elsewhere in this Form 6-K.
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