| Principal Accounting Policies | 2. Principal Accounting Policies (a) Basis of preparation The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). In the opinion of the Company’s management, the accompanying unaudited interim condensed consolidated financial statements contain all normal recurring adjustments necessary for a fair statement of the Company’s consolidated financial position and results of operations and cash flows as of June 30, 2019 and for the six-month periods ended June 30, 2018 and 2019. The year-end condensed balance sheet data as of December 31, 2018 was derived from audited financial statements, but does not include all disclosures required by US GAAP. The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the balance sheet dates and the reported amounts of revenues and expenses during the reporting periods. Actual results could materially differ from those estimates. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements included in the Company’s Annual Report on Form 20-F Significant accounting policies followed by the Company in the preparation of the accompanying consolidated financial statements are summarized below. (b) Use of estimates The preparation of the Group’s consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from such estimates. The Company believes that revenue recognition, liabilities related to loyalty programs, consolidation of VIEs, determination of share-based compensation and impairment assessment of long-lived assets that reflect more significant judgments are estimates used in the preparation of its consolidated financial statements. Management bases the estimates on historical experience and on various other assumptions as discussed elsewhere to the consolidated financial statements that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could materially differ from these estimates. (c) Consolidation The Group’s consolidated financial statements include the financial statements of the Company, its subsidiaries, its VIEs and VIEs’ subsidiaries for which the Company or its subsidiary is the primary beneficiary. All transactions and balances among the Company, its subsidiaries, its VIEs have been eliminated upon consolidation. A subsidiary is an entity in which the Company, directly or indirectly, controls more than one half of the voting powers; or has the power to appoint or remove the majority of the members of the board of directors or to cast a majority of votes at the meeting of directors; or has the power to govern the financial and operating policies of the investee under a statute or agreement among the shareholders or equity holders. A VIE is an entity in which the Company, or its subsidiary, through contractual agreements, bears the risks of, and enjoys the rewards normally associated with ownership of the entity. In determining whether the Company or its subsidiaries are the primary beneficiary, the Company considered whether it has the power to direct activities that are significant to the VIEs’ economic performance, and also the Group’s obligation to absorb losses of the VIEs that could potentially be significant to the VIEs or the right to receive benefits from the VIEs that could potentially be significant to the VIEs. The Company’s WOFEs and ultimately the Company hold all the variable interests of the VIEs and its subsidiaries, and have been determined to be the primary beneficiaries of the VIEs. The following table sets forth the assets, liabilities, results of operations and cash flows of VIEs and its subsidiaries, which are included in the Group’s consolidated financial statements. Transactions between the VIEs and its subsidiaries are eliminated in the balances presented below: As of December 31, 2018 June 30, 2019 Assets Current assets Cash and cash equivalents 19,464,246 8,037,363 Short-term investments 5,000,000 77,250,000 Accounts receivable, net 200,289,537 407,093,056 Amount due from subsidiaries of the Company 291,902,904 549,272,236 Amount due from related parties — 92,962,134 Prepayments and other current assets 80,565,668 95,686,339 Total current asset 597,222,355 1,230,301,128 Non-current Investments — 5,000,000 Property and equipment, net 13,376,314 17,649,497 Right-of-use — 52,419,053 Intangible assets — 2,612,613 Other non-current 8,945,774 25,596,111 Total non-current 22,322,088 103,277,274 Total assets 619,544,443 1,333,578,402 Liabilities Current liabilities Accounts payable 73,087,671 238,068,415 Amount due to subsidiaries of the Company 629,835,620 1,497,513,909 Registered users’ loyalty payable 249,881,449 172,120,365 Advance from advertising customers 152,181,358 164,606,216 Salary and welfare payable 41,665,582 72,032,140 Tax payable 100,757,561 91,918,811 Lease liabilities, current — 24,935,349 Accrued liabilities related to users’ loyalty programs 44,133,812 46,255,061 Accrued liabilities and other current liabilities 360,711,336 461,629,127 Total current liabilities 1,652,254,389 2,769,079,393 Non-current Lease liabilities, non-current — 22,207,796 Total non-current — 22,207,796 Total liabilities 1,652,254,389 2,791,287,189 Six months ended June 30, 2018 2019 Net revenues 712,036,682 2,762,489,629 Net loss (514,632,981 ) (909,376,001 ) Six months ended June 30, 2018 2019 Net cash used in operating activities (280,080,346 ) (336,305,135 ) Net cash provided by/(used in) investing activities 92,990,105 (88,029,748 ) Net cash provided by financing activities 275,200,311 412,908,000 Net increase/(decrease) in cash and cash equivalents 88,110,070 (11,426,883 ) In accordance with the aforementioned VIE agreements, the Company has power to direct activities of the VIEs, and can have assets transferred out of VIEs. Therefore the Company considers that there is no asset in VIEs that can be used only to settle obligations of the VIEs, except for registered capital, as of December 31, 2018 and June 30, 2019. As the VIEs and their subsidiaries were incorporated as limited liability company under the PRC Company Law, the creditors do not have recourse to the general credit of the Company for all the liabilities of the VIEs. There were no pledges or collateralization of the Affiliated Entities’ assets. As the Company is conducting its business mainly through the Affiliated Entities, the Company may provide such support on a discretionary basis in the future, which could expose the Company to a loss. There is no VIEs where the Company has variable interest but is not the primary beneficiary. The Group believes that the contractual arrangements among its shareholders and WFOEs comply with PRC law and are legally enforceable. However, uncertainties in the PRC legal system could limit the Company’s ability to enforce these contractual arrangements and if the shareholders of the VIEs were to reduce their interests in the Company, their interests may diverge from that of the Company and that may potentially increase the risk that they would seek to act contrary to the contractual terms. The Company’s ability to control the VIEs also depends on the voting rights proxy and the effect of the share pledge under the Equity Interest Pledge Agreement and the WFOEs have to vote on all matters requiring shareholder approval in the VIEs. As noted above, the Company believes this voting right proxy is legally enforceable but may not be as effective as direct equity ownership. (d) Functional Currency and Foreign Currency Translation The Group uses Renminbi (“RMB”) as its reporting currency. The functional currency of the Company and its subsidiaries incorporated outside of PRC is the United States dollar (“US$”), while the functional currency of the PRC entities in the Group is RMB as determined based on the criteria of ASC 830, Foreign Currency Matters. Transactions denominated in other than the functional currencies are re-measured re-measured The financial statements of the Group are translated from the functional currency to the reporting currency, RMB. Assets and liabilities of the subsidiaries are translated into RMB using the exchange rate in effect at each balance sheet date. Income and expense items are generally translated at the average exchange rates prevailing during the fiscal year. Foreign currency translation adjustments arising from these are accumulated as a separate component of shareholders’ deficit on the consolidated financial statement. The exchange rates used for translation on December 31, 2018 and June 30, 2019 were US$1.00= RMB6.8632 and RMB6.8747, respectively, representing the index rates stipulated by the People’s Bank of China. (e) Convenience Translation Translations of balances in the Group’s consolidated balance sheet, consolidated statement of operations and comprehensive loss and consolidated statement of cash flows from RMB into US$ as of and for the six months ended June 30, 2019 are solely for the convenience of the readers and were calculated at the rate of US$1.00 = RMB6.865, representing the certified exchange rate published by the US Federal Reserve Board on June 28, 2019. No representation is made that the RMB amounts could have been, or could be, converted, realized or settled into US$ at that rate on June 30, 2019, or at any other rate. (f) Fair value of financial instruments Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Group considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability. The established fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels of inputs that may be used to measure fair value include: Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2: Observable, market-based inputs, other than quoted prices, in active markets for identical assets or liabilities. Level 3: Unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities. Accounting guidance also describes three main approaches to measuring the fair value of assets and liabilities: (1) market approach; (2) income approach and (3) cost approach. The market approach uses prices and other relevant information generated from market transactions involving identical or comparable assets or liabilities. The income approach uses valuation techniques to convert future amounts to a single present value amount. The measurement is based on the value indicated by current market expectations about those future amounts. The cost approach is based on the amount that would currently be required to replace an asset. The Group’s financial instruments consist principally of cash and cash equivalents, short-term investments, accounts receivable, accounts payable, advance from advertising customers, registered users’ loyalty payable, other liabilities, and a convertible loan that was issued in April 2019. As of December 31, 2018 and June 30, 2019, the carrying values of cash and cash equivalents, accounts receivable, accounts payable, advance from customers, registered users’ loyalty payable and other liabilities approximated their fair values reported in the consolidated balance sheets due to the short-term maturities of these instruments. As of June 30, 2019, the estimated fair value of the long-term convertible loan approximates its carrying value due to the short duration between the issuance and period-end On a recurring basis, the Group measures its short-term investments at fair value. The following table sets forth the Group’s assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy: As of December 31, 2018 Level 1 Level 2 Level 3 Balance at Assets Short-term investments—Wealth management products — 115,436,080 — 115,436,080 As of June 30, 2019 Level 1 Level 2 Level 3 Balance at Assets Short-term investments—Wealth management products — 184,088,800 — 184,088,800 (g) Cash and Cash Equivalents Cash and cash equivalents include cash in bank and time deposits placed with banks or other financial institutions, which have original maturities of three months or less at the time of purchase and are readily convertible to known amounts of cash. (h) Short-term investments Short-term investments include investments in wealth management products issued by certain banks which are redeemable by the Company at any time. The wealth management products are unsecured with variable interest rates and primarily invested in debt securities issued by the PRC government, corporate debt securities and central bank bills. The Company measures the short-term investments at fair value using the quoted subscription or redemption prices published by these banks. The change in fair value is recorded as interest income amounted to RMB1.7 million and RMB3.6 million in the consolidated statements of comprehensive loss for the six months ended June 30, 2018 and June 30, 2019, respectively. (i) Accounts receivable, net Accounts receivable are presented net of allowance for doubtful accounts. The Group uses specific identification in providing for bad debts when facts and circumstances indicate that collection is doubtful and based on factors listed in the following paragraph. If the financial conditions of its customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowance may be required. The Company maintains an allowance for doubtful accounts which reflects its best estimate of amounts that potentially will not be collected. The Company determines the allowance for doubtful accounts on general basis taking into consideration various factors including but not limited to historical collection experience and credit-worthiness of the customers as well as the age of the individual receivables balance. Additionally, the Company makes specific bad debt provisions based on any specific knowledge the Company has acquired that might indicate that an account is uncollectible. The facts and circumstances of each account may require the Company to use substantial judgment in assessing its collectability. (j) Property and equipment, net Property and equipment are stated at historical cost less accumulated depreciation and impairment loss, if any. Depreciation is calculated using the straight-line method over their estimated useful lives. The estimated useful lives are as follows: Leasehold improvements Over the shorter of lease term or 2 – 5 years Office equipment 3 – 5 years Expenditures for maintenance and repairs are expensed as incurred. The gain or loss on the disposal of property and equipment is the difference between the net sales proceeds and the carrying amount of the relevant assets and is recognized in the consolidated statements of comprehensive loss. (k) Equity investments The Company’s long-term investments were accounted for using the equity method, which are securities that the Company does not control, but are able to exert significant influence over the investee. These investments are measured at cost less any impairment, plus or minus the Company’s share of equity method investee income or loss. An impairment loss on the equity method investments is recognized in earnings when the decline in value is determined to be other-than-temporary. The Company monitors its investments for other-than-temporary impairment by considering factors including, but not limited to, current economic and market conditions, the operating performance of the companies including current earnings trends and other company-specific information. As of June 30, 2019, the Company’s equity investment is an investment in a fund that has not completed set-up. (l) Goodwill and intangible assets Intangible assets Intangible assets include the acquired right to operate an online audio/video content platform (Note 9) and computer software, which are amortized using the straight-line method over their estimated useful li v The estimated useful lives are as follows: Acquired right to operate an online audio/video content platform 10 years Computer software 3 - 10 years The estimated life of intangible assets subject to amortization is reassessed if circumstances occur that indicate the life has changed. Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. No impairment of intangible assets was recognized for the six-month Goodwill Goodwill represents the excess of the total cost of the acquisition over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed of the acquired entity as a result of the Company’s acquisitions of interests in its subsidiaries and VIEs. Goodwill is not amortized but is tested for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that it might be impaired. The Company first assesses qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50%) that the fair value of the reporting unit is less than its carrying value. In the qualitative assessment, the Company considers primary factors such as industry and market considerations, overall financial performance of the reporting unit and other specific information related to the operations. If the reporting unit does not pass the qualitative assessment, the Company estimates its fair value and compares the fair value with the carrying value of its reporting unit, including goodwill. If the fair value is greater than the carrying value of its reporting unit, no impairment is recorded. If the fair value is less than the carrying value, an impairment loss is recognized for the amount that the carrying amount of a reporting unit, including goodwill, exceeds its fair value, limited to the total amount of goodwill allocated to that reporting unit. The impairment charge would be recorded to earnings in the consolidated statements of operations. Application of a goodwill impairment test requires significant management judgment, including the identification of reporting units and the determination of the fair value of each reporting unit. The Company estimates the fair value of the reporting unit using a discounted cash flow model. This valuation approach considers various assumptions including projections of future cash flows, perpetual growth rates and discount rates. The assumptions about future cash flows and growth rates are based on management’s assessment of a number of factors, including the reporting unit’s recent performance against budget, performance in the market that the reporting unit serves, as well as industry and general economic data from third party sources. Discount rate assumptions reflect an assessment of the risk inherent in those future cash flows. Changes to the underlying businesses could affect the future cash flows, which in turn could affect the fair value of the reporting unit. Management performs its annual goodwill impairment test as of . Each quarter the Company reviews the events and circumstances to determine if there are indicators that goodwill may be impaired. As of June 30 , 2019 , there is no event or any circumstance that the Company identified, which indicated that the fair value of the Company’s reporting unit was substantially lower than the respective carrying value. There was no six-month , 2018 and 2019 . (m) Impairment of long-lived assets other than Goodwill For other long-lived assets including property and equipment and other non-current (n) Leases Prior to the adoption of ASC 842 on January 1, 2019: Leases, including leases of office spaces, where substantially all the rewards and risks of ownership of assets remain with the lessor are accounted for as operating leases. Payments made under operating leases are recognized as an expense on a straight-line basis over the lease term. The Group had no capital leases for any of the years stated herein. Upon and hereafter the adoption of ASC 842 on January 1, 2019: The Company determines if an arrangement is a lease or contains a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets and operating lease liabilities, current and non-current, in the Company’s consolidated balance sheets. The Company does not have any finance leases as of the adoption date or June , . ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. When determining the lease term, the Company includes options to extend or terminate the lease when it is reasonably certain that it will exercise that option, if any. As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate, which it calculates based on the credit quality of the Company and by comparing interest rates available in the market for similar borrowings, and adjusting this amount based on the impact of collateral over the term of each lease. The Company has elected to adopt the following lease practical expedients in conjunction with the adoption of ASU 2016-02: (i) elect for each lease to not separate non-lease components from lease components and instead to account for each separate lease component and the non-lease components associated with that lease component as a single lease component; (ii) for leases that have lease terms of months or less and does not include a purchase option that is reasonably certain to exercise, the Company elected not to apply ASC recognition requirements; and (iii) the Company elected to apply the package of practical expedients for existing arrangements entered into prior to January , to not reassess (a) whether an arrangement is or contains a lease, (b) the lease classification applied to existing leases, and (c) initial direct costs. (o) Advances from advertising customers Certain third party advertising customers pay in advance to purchase advertising services. Cash proceeds received from customers are initially recorded as advances from advertising customers and are recognized as revenues when revenue recognition criteria are met. (p) Revenue recognition A. Significant accounting policy The Group has adopted the new revenue standard, ASC 606, by applying the full retrospective method. Revenues are recognized when or as the control of a good or service is transferred to the customer. Depending on the terms of the contract and the laws that apply to the contract, control of the goods and services may be transferred over time or at a point in time. Control of the goods and services is transferred over time if the Group’s performance: • provides all of the benefits received and consumed simultaneously by the customer; • creates and enhances an asset that the customer controls as the Group performs; or • does not create an asset with an alternative use to the Group and the Group has an enforceable right to payment for performance completed to date. If control of the goods and services transfers over time, revenue is recognized over the period of the contract by reference to the progress towards complete satisfaction of that performance obligation. Otherwise, revenue is recognized at a point in time when the customer obtains control of the goods and services. The progress towards complete satisfaction of the performance obligation is measured based on one of the following methods that best depict the Group’s performance in satisfying the performance obligation: • direct measurements of the value transferred by the Group to the customer; or • the Group’s efforts or inputs to the satisfaction of the performance obligation. B. Nature of services The following is a description of principal activities from which the Group generates its revenue. (i) Advertising and marketing T The determination of whether revenue should be reported on a gross or net basis is based on an assessment of whether the Group is acting as the principal or an agent in the transaction. In determining whether the Group acts as the principal or an agent, the Group follows the accounting guidance for principal-agent considerations. Such determination involves judgment and is based on evaluation of the terms of each arrangement. a. Advertising and marketing services provided to advertising customers Before February 2018, the Group engaged certain advertising customers through a third-party advertising agent (“advertising agent”). In the arrangement with this advertising agent, it served as the Group’s sales agent in selling the Group’s advertising solutions to other second-tier advertising agents. The end advertisers are the customers of the Group as they specifically select Qutoutiao to display its advertisement and the performance obligation of the Group is to provide the underlying advertising display services. The advertising agent earns a commission of 2% of the advertising revenue in the arrangement in return for providing bidding system for placement on Qutoutiao which the Company recognized as cost of revenue. The Group provides advertising and marketing services to advertising customers and recognizes advertising and marketing revenue on a gross basis as clicks are delivered. The Group receives refundable advance payments from advertising customers through this advertising agent and reconciles the advertising and marketing revenue with this advertising agent on a weekly basis. If the advance payment deposited in the Group is not ultimately used for the advertisement on Qutoutiao, the Group refunds the advance payment back to advertising customers through this advertising agent. In February 2018, the Group acquired 100% equity interests of this advertising agent with a total consideration of RMB15.0 million (Note 3). After the acquisition, the Group effectively provides advertising and marketing services to these advertising customers directly and continues to recognize revenue on a gross basis as impressions are delivered. Besides this arrangement, the Group also provides advertising and marketing service to advertising customers directly. S In May 2019, the Group also started a new business stream of providing integrated marketing solution services to its customers based on their customized needs. The services include but are not limited to design and execute of a systematic marketing plan online and offline, come up with best solutions for online promotion of the customers’ mobile application by selecting appropriate advertisement platforms, design the advertisement clips, monitor advertisement effects, organize offline marketing campaigns featuring social media influencers and circulate marketing messages to the customers’ end consumers. The Group pays the vendors or suppliers when costs are incurred and advertisements are displayed while the Group charges the service fees to the customers based on specified achievements, i.e. a Gross Merchandise Volume (“GMV”) which revenue is recognized based on number of first effective purchase, or Cost per Action (“CPA”) basis which revenue is recognized based on number of registered new users. The Group is the primary obligor ultimately responsible for delivering the tailored marketing services to the customers in the arrangement, it has the discretion in pricing and takes certain risks of loss as the achievements can’t be guaranteed while the costs can have already been incurred. Hence, the Group provides the tailored marketing planning and solution services to customers as the principal and recognizes the revenue on a gross basis . b. Advertising and marketing services provided to advertising platforms The Group provides advertising and marketing services to other third-party advertising platforms. In the arrangement with these advertising platforms, these advertising platforms are the customers of the Group and the performance obligation of the Group is to provide traffic service to these advertising platforms. Therefore, the Group recognizes revenue based on the net amount as impressions or clicks are delivered. The Group reconciles and settles the advertising revenue with these advertising platforms on a monthly basis. (ii) Other services a. Online marketplace service The Group operates an online marketplace which users can access merchandise offered by third-party merchandise suppliers. The suppliers are the customers of the Group as these suppliers are the primary obligor to provide goods and delivery service to the users and the performance obligation of the Group is to provide matching service for the suppliers. The Group acts as an agent in this transaction and recognize revenue when the matching service is completed. The Group settles the payment with suppliers on a monthly basis. b. Agent and platform service After the acquisition of the advertising agent in February 2018 (Note 3), the Group also provides agent and platform service by facilitating the advertising customers to select third-party advertising platforms to display their advertisements. The Group recognizes revenue from the advertising customers based on the net amount equal to certain agreed percentage of the gross revenue earned by the third-party advertising platforms when impressions or clicks are successfully delivered. C. Disaggregation of revenue In the following table, revenue is disaggregated by major service line and gross vs net recognition. Six months ended June 30, 2018 2019 RMB RMB US$(Note 2(e)) Major service line Advertising and marketing service provided to advertising customers, recorded gross (1)(3) 533,983,843 1,894,943,812 276,029,688 Advertising and marketing service provided to advertising platforms, recorded net 135,887,052 550,236,683 80,151,010 Other service (2) 47,963,837 59,616,169 8,684,074 717,834,732 2,504,796,664 364,864,772 (1) For the six months ended June 30, 2018 and 2019, revenue in advertising services provided to advertising customers , , respectively, and includes advertising and marketing services provided to related parties which amounted to RMB 1.2 144.5 (2) For the six months ended June 30, 2018 and 2019, revenue in other services include the agent and platform services which amounted to RMB44.0 million and RMB28.9 million, respectively. For the six months ended June 30, 2018, the aforementioned agent and platform services also include RMB 5.3 (q) Cost of revenues The Group’s cost of revenues consists primarily of (i) agent fees retained by the third party advertising agents, and c in-house (r) Research and development expenses Research and development expenses consist primarily of (i) salary and welfare for research and development personnel, (ii) office rental expenses and (iii) depreciation of office premise and servers utilized by research and development personnel. Costs incurred during the research stage are expensed as incurred. Costs incurred in the development stage, prior to the establishment of technological feasibility, which is when a working model is available, are expensed when incurred. The Company accounts for internal use software development costs in accordance with guidance on intangible assets and internal |
