| SIGNIFICANT ACCOUNTING POLICIES | 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 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. b. Going Concern 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 RMB323 million and RMB52 million for the year ended December 31, 2022 and the six months ended
June 30, 2023, respectively. Net cash used in operating activities was RMB176 million and net cash provided by operating activities
was RMB31 million for the year ended December 31, 2022 and the six months ended June 30, 2023, respectively. Accumulated
deficit was RMB4,574 million as of June 30, 2023. As of June 30, 2023, the Company had cash and cash equivalents of RMB58 million
and working capital deficit (defined as total current assets deducted by total current liabilities) of RMB274 million. The COVID-19 pandemic
negatively impacted the Group’s business operations for the year ended December 31, 2022 and the six months ended June 30, 2023.
These conditions raise substantial doubt about the Group’s ability to continue as a going concern. 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 its 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. 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.
c. 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 and occupancy rate. The gross yield rate is used as the discount
rate. The Group recorded nil nil nil nil
d. 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. Translations of balances in the consolidated balance sheets and the related consolidated statements
of operations, comprehensive loss, change in shareholders’ equity and cash flows from RMB into US dollars as of and for the six
months ended June 30, 2023 are solely for the convenience of the readers and were calculated at the rate of USD1.00=RMB7.2513 representing
the noon buying rate set forth in the H.10 statistical release of the U.S. Federal Reserve Board on June 30, 2023. No representation
is made that the RMB amounts could have been, or could be, converted, realized or settled into USD at that rate on June 30, 2023, or at
any other rate.
e. Allowance
for credit losses On January 1, 2023, the Group adopted ASC 326, Credit Losses (“ASC
326”) which replaced previously issued guidance regarding the impairment of financial instruments with an expected loss methodology
that will result in more timely recognition of credit losses. The Group used a modified retrospective approach and did not restate the
comparable prior periods, which resulted in RMB6,223 credit losses for accounts receivable and RMB85 credit losses for prepayment and
other current assets recorded in the opening balance of accumulated deficit, a cumulative effect to increase the opening balance of accumulated deficit on January 1, 2023 by RMB6,308. Upon adoption of ASC
326, the Group maintains an allowance for credit losses in accordance with ASC 326 and records the allowance for credit losses as an
offset to assets such as accounts receivable, prepayments and other current assets and due from related parties which are not under
common control, etc., and the estimated credit losses charged to the allowance is classified as “General and administrative
expenses” in the consolidated statements of comprehensive loss. The Group assesses collectability by reviewing receivables on a
collective basis where similar characteristics exist, primarily based on size, nature and on an individual basis when we identify
specific customers with known disputes or collectability issues. In determining the amount of the allowance for credit losses, the
Group considers historical collectability based on past due status, the age of the receivable balances, credit quality of the
Group’s customer or vendor based on ongoing credit evaluations, current economic conditions, reasonable and supportable
forecasts of future economic conditions, and other factors that may affect the Group’s ability to collect from customers. Bad
debts are written off as incurred. The Group generally does not require collateral from its customers. f. Long-term investments The Group’s long-term
investments include equity securities without readily determinable fair values and equity method investments. Equity securities without
readily determinable fair values For equity securities without
readily determinable fair value, the Group elected to use the measurement alternative to measure those investments at cost, minus impairment,
if any, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of
the same issuer. The adoption did not have a material impact on the Group’s consolidated financial position or results of operations,
in accordance with ASC Topic 321, Investments—Equity Securities. The Group reviews its equity
securities without readily determinable fair value for impairment at each reporting period. If a qualitative assessment indicates that
the investment is impaired, the Group estimates the investment’s fair value in accordance with the principles of ASC Topic 820—Fair
Value Measurement (“ASC 820”). If the fair value is less than the investment’s carrying value, the Group would recognize
an impairment loss in the consolidated statements of operations. Equity method investments Investee companies over which
the Group has the ability to exercise significant influence, but does not have a controlling interest through investment in common shares
or in-substance common shares, are accounted for using the equity method. Significant influence is generally considered exist when the
Group has an ownership interest in the voting stock of the investee between 20% and 50%, and other factors, such as representation on
the investee’s board of directors, voting rights and the impact of commercial arrangements, are also considered in determining whether
the equity method of accounting is appropriate. Under the equity method,
the Group initially records its investment at cost and subsequently recognizes the Group’s proportionate share of each equity investee’s
net income or loss after the date of investment into accumulated deficit and accordingly adjusts the carrying amount of the investment.
The Group reviews its equity method investments for impairment whenever an event or circumstance indicates that any OTTI has occurred.
The Group considers available quantitative and qualitative evidence in evaluating potential impairment of its equity method investment. An impairment charge is recorded
when the carrying amount of the investment exceeds its fair value and this condition is determined to be other-than-temporary. Nonmonetary transactions The Group engages in nonmonetary
exchanges of equity interest of certain long-term investments. The transaction price of the nonmonetary consideration is based on the
fair values of the assets involved. The cost of equity interest acquired in exchange is initially measured at the fair value of the assets
the Group surrendered to obtain them. 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 adoption of ASU 2020-06 since January 1, 2022. 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 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 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 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, 2022 and 2023 were as follows:
For the six months ended
2022 2023
RMB RMB
(Unaudited) (Unaudited)
Operating lease income from fixed payments 161,336 70,793
Variable operating lease income — —
Total 161,336 70,793 Lease payments receivable for
the following five years as of June 30, 2023 were as follows:
RMB
(Unaudited)
For the period ending December 31,
2023 80,875
For the year ending December 31,
2024 79,904
2025 30,619
2026 13,332
2027 8,615
Thereafter 68,842
Total 282,187
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. The Group is the principal in providing the marketing and branding services
to customers. The services provided are accounted for as a single performance obligation and revenue is recognized on gross basis over
time throughout the contract terms by using both output and input 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. The Group identified the services as one single performance
obligation. 1) Interior design and construction
revenue Interior design and construction
revenue is generated from two subsidiaries acquired in 2018 and one subsidiary acquired in 2021. Revenue is recognized over time based
on 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. 2) Co-working space management
fees 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. 3) SaaS services and IOT
solutions revenue SaaS service and IOT solution
is generated from a subsidiary acquired in 2019 and recognized at a point in time upon the service was completed. 4) Ancillary services revenue 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, 2022 and 2023.
Balance of contract liabilities were RMB11,715 and RMB12,974 as of December 31, 2022 and June 30, 2023, respectively. Revenue recognized
that was included in deferred revenue balance at the beginning of year were RMB16,605 and RMB4,927, the year ended December 31, 2022 and
the six months ended June 30, 2023, respectively.
j. 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.
k. Recent
accounting pronouncements not yet adopted 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 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
adopted the new credit loss guidance beginning January 1, 2023 on a modified retrospective basis, with a cumulative-effect to
increase the opening balance of accumulated deficit on January 1, 2023 by RMB6,308. The Group’s primary
financial instruments in-scope for ASU 2016-13 are accounts receivable and prepaid expenses and other current assets. Given the
short-term nature of the receivables and minimal expected credit losses, the adoption of this guidance did not have a material
impact on the Group’s consolidated financial statements. |
