Exhibit 99.1
INDEX TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| Page |
| |
Unaudited Condensed Consolidated Balance Sheets as of December 31, 2020 and June 30, 2021 | F-2 |
| |
F-3 | |
| |
F-4 | |
| |
F-5 | |
| |
F-6 | |
| |
Notes to the Unaudited Condensed Consolidated Financial Statements | F-7 |
F-1
COOTEK (CAYMAN) INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
| | | | | | |
|
| |
| As of December 31, |
| As of June 30, |
| | Note | | 2020 | | 2021 |
| | | | US$ | | US$ |
| | | | | | |
ASSETS |
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
Cash and cash equivalents |
|
|
| 24,669,133 |
| 35,667,074 |
Restricted cash |
|
|
| 3,264,145 |
| 3,293,189 |
Short-term investments |
|
|
| 50,028 |
| 50,036 |
Accounts receivable, net of allowance for doubtful accounts of US$1,161,955 and US$1,180,423 as of December 31, 2020 and June 30, 2021, respectively |
| 3 |
| 28,127,346 |
| 31,450,765 |
Prepaid expenses and other current assets |
| 4 |
| 12,073,226 |
| 8,965,912 |
Total current assets |
|
|
| 68,183,878 |
| 79,426,976 |
Long-term restricted cash | | | | 21,689,436 | | — |
Property and equipment, net |
| 5 |
| 5,393,742 |
| 4,100,477 |
Intangible assets, net |
|
|
| 396,495 |
| 325,631 |
Operating lease right-of-use assets | | | | — | | 1,818,213 |
Long-term investments |
|
|
| 306,518 |
| 619,801 |
Other non-current assets |
|
|
| 932,311 |
| 1,210,757 |
TOTAL ASSETS |
|
|
| 96,902,380 |
| 87,501,855 |
LIABILITIES AND SHAREHOLDERS' DEFICIT |
|
|
|
|
|
|
Current liabilities (including amounts of the consolidated VIEs without recourse to the Company. See Note 2(b)): |
|
|
|
|
|
|
Accounts payable |
|
|
| 76,125,973 |
| 50,245,783 |
Short-term borrowings |
| 6 |
| 10,958,022 |
| 15,162,304 |
Accrued salary and benefits |
|
|
| 9,143,476 |
| 6,554,525 |
Operating lease liabilities, current | | | | — | | 1,321,794 |
Accrued expenses and other current liabilities |
| 7 |
| 10,686,518 |
| 6,684,535 |
Convertible notes | | 8 | | — | | 16,242,636 |
Derivative liabilities | | 8 | | — | | 1,577,128 |
Deferred revenue |
|
|
| 3,331,511 |
| 3,085,999 |
Total current liabilities |
|
|
| 110,245,500 |
| 100,874,704 |
Other non-current liabilities |
|
|
| 459,435 |
| 391,370 |
Operating lease liabilities, non-current | | | | — | | 230,804 |
TOTAL LIABILITIES |
| |
| 110,704,935 |
| 101,496,878 |
| | | | | | |
Commitments and contingencies |
| 14 |
|
|
|
|
| | | | | | |
Shareholders' deficit: |
|
|
|
|
|
|
Class A ordinary shares (US$0.00001 par value; 13,750,000,000 shares authorized as of December 31, 2020 and June 30, 2021; 2,845,646,241 and 3,092,501,391 shares issued as of December 31, 2020 and June 30, 2021, respectively; 2,801,135,191 and 3,029,253,241 shares outstanding as of December 31, 2020 and June 30, 2021, respectively) |
|
|
| 28,456 |
| 30,925 |
Class B ordinary shares (US$0.00001 par value; 250,000,000 shares authorized;246,224,465 shares issued and outstanding as of December 31, 2020 and June 30, 2021) |
|
|
| 2,462 |
| 2,462 |
Treasury shares (44,511,050 and 63,248,150 shares as of December 31, 2020 and June 30, 2021, respectively) |
| 11 |
| (4,672,334) |
| (5,229,132) |
Additional paid-in capital |
|
|
| 193,918,852 |
| 206,158,746 |
Accumulated deficit |
|
|
| (200,965,075) |
| (213,099,385) |
Accumulated other comprehensive loss |
|
|
| (2,114,916) |
| (1,858,639) |
Total shareholders' deficit |
|
|
| (13,802,555) |
| (13,995,023) |
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT |
|
|
| 96,902,380 |
| 87,501,855 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
F-2
COOTEK (CAYMAN) INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
| | | | | | |
| | | | For the six months ended June 30, | ||
|
| Note |
| 2020 |
| 2021 |
| | | | US$ | | US$ |
| | | | | | |
Net revenues | | |
| 233,408,923 |
| 164,768,953 |
Cost of revenues (including share-based compensation expense of US$123,596 and US$133,332 in the six months ended June 30, 2020 and 2021, respectively) | | |
| (10,272,307) |
| (17,666,891) |
Gross profit | | |
| 223,136,616 |
| 147,102,062 |
Operating expenses: | | |
|
|
|
|
General and administrative expenses (including share-based compensation expense of US$789,019 and US$855,522 in the six months ended June 30, 2020 and 2021, respectively) | | |
| (7,437,572) |
| (10,436,181) |
Research and development expenses (including share-based compensation expense of US$1,343,182 and US$1,101,542 in the six months ended June 30, 2020 and 2021, respectively) | | |
| (14,950,270) |
| (18,746,520) |
Sales and marketing expenses (including share-based compensation expense of US$109,460 and US$54,844 in the six months ended June 30, 2020 and 2021, respectively) | | |
| (208,434,709) |
| (130,523,018) |
Other operating income, net | | 9 |
| 836,239 |
| 2,261,854 |
Total operating expenses | | |
| (229,986,312) |
| (157,443,865) |
Loss from operations | | |
| (6,849,696) | | (10,341,803) |
Interest income (expense), net | | |
| 234,231 | | (1,649,293) |
Foreign exchange losses, net | | | | (474) | | (224,533) |
Fair value change of derivatives | | |
| — | | 85,227 |
Loss before income taxes | | | | (6,615,939) | | (12,130,402) |
Income tax expense | | 10 |
| (3,200) | | (25) |
Share of loss in equity method investment |
| |
| — | | (3,883) |
Net Loss | | |
| (6,619,139) | | (12,134,310) |
Deemed dividend in relation to the convertible note (see Note 8) | | |
| — | | (1,368,866) |
Net Loss attributable to ordinary shareholders | | |
| (6,619,139) | | (13,503,176) |
| | | | | | |
Net Loss per ordinary share: |
| 13 | | | | |
Basic and diluted | | |
| (0.002) | | (0.004) |
| | | | | | |
Net Loss per ADS (each of ADS represents 50 Class A ordinary shares): | | |
| | | |
Basic and diluted | | | | (0.11) | | (0.21) |
Weighted average shares used in calculating net loss per ordinary share: | | |
| |
| |
Basic and diluted | | |
| 3,094,780,922 |
| 3,187,723,620 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
F-3
COOTEK (CAYMAN) INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
| | | | |
| | For the six months ended June 30, | ||
|
| 2020 |
| 2021 |
| | US$ | | US$ |
| | | | |
Net Loss | | (6,619,139) | | (12,134,310) |
Other comprehensive income |
| |
| |
Foreign currency translation adjustments, net of tax of nil |
| 175,320 |
| 256,277 |
Comprehensive loss attributable to CooTek (Cayman) Inc. |
| (6,443,819) |
| (11,878,033) |
Deemed dividend in relation to convertible note (see Note 8) | | — | | (1,368,866) |
Total comprehensive loss attributable to ordinary shares of Cootek (Cayman) Inc. | | (6,443,819) | | (13,246,899) |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
F-4
COOTEK (CAYMAN) INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | Accumulated | | |
| | | | | | | | | | | | | | Additional | | | | other | | Total |
| | Class A | | Class B | | | | | | paid-in | | Accumulated | | comprehensive | | shareholders' | ||||
| | Ordinary shares | | Ordinary shares | | Treasury shares | | capital | | deficit | | (loss) income | | equity | ||||||
| | Shares | | US$ | | Shares | | US$ | | Shares | | US$ | | US$ | | US$ | | US$ | | US$ |
| | | | | | | | | | | | | | | | | | | | |
Balance at January 1, 2020 |
| 2,880,056,332 |
| 28,800 |
| 246,224,465 |
| 2,462 |
| 9,937,000 |
| (1,063,547) |
| 194,971,827 |
| (153,598,346) |
| (1,432,833) |
| 38,908,363 |
Net Loss |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (6,619,139) |
| — |
| (6,619,139) |
Foreign currency translation adjustments |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 175,320 |
| 175,320 |
Share-based compensation expenses |
| — |
| — |
| — |
| — |
| — |
| — |
| 2,365,257 |
| — |
| — |
| 2,365,257 |
Cash settlement on vested options and RSUs |
| — |
| — |
| — |
| — |
| — |
| — |
| (823,226) |
| — |
| — |
| (823,226) |
Repurchase of ordinary shares | | — | | — | | — | | — | | 47,099,300 | | (5,871,945) | | — | | — | | — | | (5,871,945) |
Exercise of share options |
| 7,760,550 |
| 78 |
| — |
| — |
| — |
| — |
| 235,821 |
| — |
| — |
| 235,899 |
Issuance of ordinary shares upon vesting of restricted shares |
| 2,878,650 |
| 29 |
| — |
| — |
| — |
| — |
| (29) |
| — |
| — |
| — |
Balance at June 30, 2020 |
| 2,890,695,532 |
| 28,907 |
| 246,224,465 |
| 2,462 |
| 57,036,300 |
| (6,935,492) |
| 196,749,650 |
| (160,217,485) |
| (1,257,513) |
| 28,370,529 |
| | | | | | | | | | | | | | | | | | | | |
Balance at January 1, 2021 |
| 2,845,646,241 |
| 28,456 |
| 246,224,465 |
| 2,462 |
| 44,511,050 |
| (4,672,334) |
| 193,918,852 |
| (200,965,075) |
| (2,114,916) |
| (13,802,555) |
Net loss |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (12,134,310) |
| — |
| (12,134,310) |
Foreign currency translation adjustments |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 256,277 |
| 256,277 |
Share-based compensation expenses | | — | | — | | — | | — | | — | | — | | 2,145,240 | | — | | — | | 2,145,240 |
Repurchase of ordinary shares | | — | | — | | — | | — | | 24,237,100 | | (1,322,195) | | — | | — | | — | | (1,322,195) |
Conversion of convertible notes |
| 243,011,300 |
| 2,430 |
| — |
| — |
| — |
| — |
| 11,860,953 |
| — |
| — |
| 11,863,383 |
Beneficial conversion feature on convertible notes (see Note 8) | | — | | — | | — | | — | | — | | — | | (1,368,866) | | — | | — | | (1,368,866) |
Commitment fee paid to holders of convertible notes through issuance of treasury shares (see Note 8) |
| — |
| — |
| — |
| — |
| (5,500,000) |
| 765,397 |
| (436,247) |
| — |
| — |
| 329,150 |
Exercise of share options |
| 1,970,650 |
| 20 |
| — |
| — |
| — |
| — |
| 38,833 |
| — |
| — |
| 38,853 |
Issuance of ordinary shares upon vesting of restricted shares |
| 1,873,200 |
| 19 |
| — |
| — |
| — |
| — |
| (19) |
| — |
| — |
| — |
Balance at June 30, 2021 |
| 3,092,501,391 |
| 30,925 |
| 246,224,465 |
| 2,462 |
| 63,248,150 |
| (5,229,132) |
| 206,158,746 |
| (213,099,385) |
| (1,858,639) |
| (13,995,023) |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
F-5
COOTEK (CAYMAN) INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | |
| | For the six months ended June 30, | ||
|
| 2020 |
| 2021 |
| | US$ | | US$ |
| | | | |
Cash flows from operating activities: | |
| |
|
Net Loss |
| (6,619,139) |
| (12,134,310) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | |
Depreciation and amortization |
| 1,540,415 |
| 1,844,170 |
Provision for allowance of doubtful accounts |
| 645,117 |
| 245,224 |
Share-based compensation expense |
| 2,365,257 |
| 2,145,240 |
Amortization of issuance cost and debt discounts related to convertible notes | | — | | 1,609,658 |
Change in fair value of derivatives | | — | | (85,227) |
Loss on disposal of property and equipment |
| (13,329) |
| (9,362) |
Share of loss in equity method investment | | — | | 3,883 |
Noncash lease expense | | — | | 768,735 |
Changes in assets and liabilities: |
|
|
| |
Accounts receivable |
| (7,758,577) |
| (3,159,059) |
Prepaid expenses and other current assets |
| (2,212,436) |
| 3,130,888 |
Other non-current assets |
| (522,341) |
| (271,642) |
Accounts payable |
| 28,487,419 |
| (25,939,096) |
Accrued salary and benefits |
| 1,066,086 |
| (2,701,173) |
Accrued expenses and other current liabilities |
| 2,278,206 |
| (4,136,119) |
Operating lease liabilities | | — | | (1,031,554) |
Deferred revenue |
| 1,139,348 |
| (721,749) |
Other non-current liabilities |
| (34,032) |
| (73,277) |
Net cash provided by (used in) operating activities |
| 20,361,994 |
| (40,514,770) |
Cash flows from investing activities: |
|
|
|
|
Purchases of property, equipment and intangible assets |
| (1,507,494) |
| (610,463) |
Purchases of short-term investments |
| (13,000,000) |
| — |
Maturity of short-term investments |
| 21,188 |
| — |
Purchases of long-term investments |
| (141,253) |
| (314,091) |
Net cash used in investing activities |
| (14,627,559) |
| (924,554) |
Cash flows from financing activities: |
|
|
|
|
Proceeds from short-term borrowings |
| 14,571,130 |
| 65,182,723 |
Repayment of short-term borrowings |
| (8,865,969) |
| (61,057,629) |
Proceeds from issuance of ordinary shares upon exercise of share options |
| 235,778 |
| 37,521 |
Proceeds from issuance of convertible notes, net of debt discounts and issuance cost of US$2.8 million | | — | | 27,175,000 |
Cash paid to settle vested share options and restricted shares |
| (823,226) |
| — |
Payments of share repurchases |
| (5,871,945) |
| (1,322,195) |
Net cash (used in) provided by financing activities |
| (754,232) |
| 30,015,420 |
Net increase (decrease) in cash, cash equivalents, and restricted cash |
| 4,980,203 |
| (11,423,904) |
Cash, cash equivalents, and restricted cash at beginning of period |
| 59,966,031 |
| 49,622,714 |
Effect of exchange rate changes on cash, cash equivalents and restricted cash |
| (25,117) |
| 761,453 |
Cash, cash equivalents, and restricted cash at end of period |
| 64,921,117 |
| 38,960,263 |
Supplemental disclosure of cash flow information: |
|
|
|
|
Income taxes paid |
| 3,200 |
| 25 |
Interest paid |
| 249,187 |
| 262,215 |
Supplemental disclosure of noncash investing and financing activities: |
|
|
|
|
Purchases of property and equipment included in payables |
| 54,814 |
| 231,823 |
Conversion of convertible notes into ordinary shares | | — | | 10,494,517 |
Reconciliation in amounts on unaudited condensed statements of consolidated balance sheets: |
| |
| |
Cash and cash equivalents |
| 64,860,916 |
| 35,667,074 |
Restricted cash |
| 60,201 |
| 3,293,189 |
Total cash, cash equivalents, and restricted cash |
| 64,921,117 |
| 38,960,263 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
F-6
COOTEK (CAYMAN) INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Principal Activities
CooTek (Cayman) Inc. (the “Company”) was incorporated in the Cayman Islands on March 5, 2012. The Company, its subsidiaries, its consolidated Variable Interest Entities (“VIEs”) and VIEs’ subsidiaries (collectively referred to as the “Group”) are a fast-growing mobile internet company with a global vision, offering mobile applications including a portfolio of content-rich mobile applications.
2. Summary of Significant Accounting Policies
(a) Basis of Presentation
The unaudited condensed consolidated financial statements of the Group have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”), regarding interim financial reporting, and include all normal and recurring adjustments that management of the Group considers necessary for a fair presentation of its financial position and operating results. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these financial statements should be read in conjunction with the Group’s annual consolidated financial statements and notes thereto, included in the Company’s 2020 Annual Report on Form 20-F filed with the SEC on April 26, 2021, referred to as the Company’s 2020 Annual Report.
The Group has incurred net losses of US$47.4 million for the year ended December 31, 2020 and US$12.1 million for the six months ended June 30, 2021, respectively. The accumulated deficit amounted to US$213.1 million as of June 30, 2021. Net cash used in operating activities were US$40.5 million for six months ended June 30, 2021. As of June 30, 2021, the Group’s current liabilities exceed its current assets by US$21.4 million.
The Group’s liquidity is dependent on its ability to enhance its operating cash flow position, obtain capital financing from equity interest investors and borrowings from commercial banks to funds its general operations including its marketing activities. The Group’s ability to continue as a going concern is dependent on the following factors:
● | The successful implementation of a balanced growth strategy and an effective financial management which can contribute to the optimization of the operating cost and expense structure. To implement the plans, the Group will continue to improve the stickiness of its existing users by offering higher quality and diversified contents and user incentive program and optimize the new user acquisition strategy to efficiently control and reduce these user related costs. The Group will further strengthen the monetization capability by diversifying its revenue structure and improving the return on investment of its key products. |
● | Obtaining funds from outside sources of financing to generate positive financing cash flows. In August 2021, the Company completed its offering to a third party investor and issued 990,034 ADSs representing 49,501,700 of the Group’s ordinary shares with the net proceeds deducting underwriting discount and offering costs of US$1.4 million. Further, as of the date of this report, a standby equity distribution agreement with an outside investor to sell up to US$20.0 million of the Company’s ADS is also available for the Company to execute at the Company’s request. |
● | While there can be no assurance that the Group will be able to refinance its short-term bank borrowings as they become due, historically, the Group has renewed its short term credit facility upon the maturity of the loans and believes the Group will continue to be able to do so. Further, the convertible note payable and related derivative liabilities amounted to US$17.8 million as of June 30, 2021 can be settled in cash, ADSs through conversion of the note or a combination of both at the Company’s option. |
If the Group does not have, or is not able to obtain, sufficient funds, the Group may have to adjust its operation plan and reduce operating expenses devoted to maintain existing users and acquire new users.
Management has concluded, after giving consideration to its plans as noted above, that the Group has sufficient cash and liquidity to fund its operations for one year from the date of the issuance of the unaudited condensed consolidated financial statements. Accordingly, the unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and liquidation of liabilities during the normal courses of operations.
F-7
COOTEK (CAYMAN) INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies (Continued)
(b) Principles of Consolidation
The consolidated financial statements include the financial information of the Company, its wholly owned subsidiaries, its consolidated VIEs and VIEs’ subsidiaries. All intercompany balances and transactions have been eliminated upon consolidation.
Applicable PRC laws and regulations currently limit foreign ownership of companies that provide internet content distribution services and any other restrictions. The Company is deemed a foreign legal person under PRC laws and accordingly subsidiaries owned by the Company are not eligible to engage in provisions of internet content or online services. The Group therefore conducts its online business through the following major consolidated VIEs:
● | Shanghai Chu Bao (CooTek) Information Technology Co., Ltd. (“Chu Bao”) |
● | Yingsun Information Technology (Ningbo) Co., Ltd. (“Yingsun”) * |
● | Shanghai Qiaohan Technology Co., Ltd. (“Qiaohan”) |
● | Molihong (Shenzhen) Internet Technology Co., Ltd. (“Molihong”) |
● | Shanghai Dengyong Information Technology Co., Ltd. (“Dengyong”) |
● | Shanghai Qinglin Network Technology Co., Ltd. (“Qinglin”) |
* The Group restructured its VIEs and Yingsun was directly controlled by one of subsidiaries of the Group since November 2020.
F-8
COOTEK (CAYMAN) INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies (Continued)
(b) Principles of Consolidation (Continued)
The following consolidated financial statement balances and amounts of the Group’s VIEs were included in the accompanying unaudited condensed consolidated financial statements after the elimination of intercompany balances and transactions among the Company, its subsidiaries and its VIEs.
| | | | |
| | As of December 31, | | As of June 30, |
| | 2020 | | 2021 |
|
| US$ |
| US$ |
| | | | |
ASSETS |
|
|
|
|
Cash and cash equivalents |
| 7,105,349 |
| 9,974,475 |
Restricted cash |
| 138,964 |
| 137,262 |
Accounts receivable, net |
| 16,115,202 |
| 11,465,907 |
Prepaid expense and other assets |
| 7,912,712 |
| 5,476,313 |
Long-term restricted cash |
| 21,689,436 |
| — |
Property and equipment, net |
| 36,422 |
| 178,460 |
Intangible assets, net |
| — |
| 174 |
Operating lease right-of-use assets | | — | | 845,606 |
Long-term investments | | 306,518 | | 619,801 |
Other non-current assets |
| 224,235 |
| 168,220 |
Total Assets |
| 53,528,838 |
| 28,866,218 |
LIABILITIES |
|
|
|
|
Accounts payable |
| 43,099,067 |
| 26,256,751 |
Short-term bank borrowings |
| 267,917 |
| 5,059,507 |
Accrued salary and benefits |
| 694,225 |
| 1,196,802 |
Operating lease liabilities, current | | — | | 640,524 |
Accrued expenses and other current liabilities |
| 4,228,532 |
| 3,154,297 |
Deferred revenue |
| 620,688 |
| 740,332 |
Operating lease liabilities, non-current | | — | | 63,154 |
Total Liabilities |
| 48,910,429 |
| 37,111,367 |
| | | | |
| | For the six months ended June 30, | ||
| | 2020 | | 2021 |
|
| US$ |
| US$ |
| | | | |
Net revenues | | 222,094,810 | | 59,215,128 |
Income from operations |
| 20,820,074 |
| 33,276,801 |
Net income |
| 21,049,088 |
| 33,309,155 |
Net cash provided by operating activities |
| 36,430,919 |
| 22,842,292 |
Net cash used in investing activities |
| (127,142) |
| (469,818) |
Net cash provided by financing activities |
| — |
| 4,765,123 |
The VIEs’ assets are comprised of recognized and unrecognized revenue-producing assets. The recognized revenue producing assets mainly include purchased servers and software, which are presented in the account of “Property and equipment, net” and “Intangible assets, net”. The unrecognized revenue-producing assets mainly consist of the Internet Content Provider license (“ICP” license), trademarks, copyrights and registered patents, which are not recognized in the consolidated balance sheets.
Revenues of VIEs included in the consolidated financial statements mainly include revenue of advertising services. The VIEs contributed 95% and 36% of the Group’s consolidated net revenues for the six months ended June 30, 2020 and 2021, respectively. As of December 31, 2020 and June 30, 2021, the VIEs accounted for an aggregate of 55% and 33% respectively, of the consolidated total assets, and 44% and 37% respectively, of the consolidated total liabilities.
F-9
COOTEK (CAYMAN) INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies (Continued)
(b) Principles of Consolidation (Continued)
There are no terms in any arrangements, considering both explicit arrangements and implicit variable interests that require the Company or its subsidiaries to provide financial support to the VIEs. However, if the VIEs were ever to need financial support, the Group may, at its option and subject to statutory limits and restrictions, provide financial support to its VIE through loans to the shareholders of the VIEs.
The Group believes that there are no assets held in the VIEs that can be used only to settle obligations of the VIEs, except for registered capital and the PRC statutory reserves. As the VIEs are incorporated as limited liability companies under the PRC Company Law, creditors of the VIEs do not have recourse to the general credit of the Company for any of the liabilities of the VIEs. Relevant PRC laws and regulations restrict the VIEs from transferring a portion of their net assets, equivalent to the balance of its statutory reserve and its share capital, to the Company in the form of loans and advances or cash dividends.
(c) Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates. The Group bases its estimates on historical 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 including but not limited to allowance for doubtful accounts, accruals for user incentive programs, valuation allowances of deferred tax assets, valuation of share-based compensation, and valuation of embedded derivative liabilities. Actual results may differ materially from those estimates.
(d) Fair Value
Fair value reflects 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 considers assumptions that market participants would use when pricing the assets or liabilities.
The Group applies a fair value hierarchy that 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. This guidance specifies a hierarchy of valuation techniques, which is based on whether the inputs into the valuation technique are observable or unobservable. The hierarchy is as follows:
● | Level 1— Valuation techniques in which all significant inputs are unadjusted quoted prices from active markets for assets or liabilities that are identical to the assets or liabilities being measured. |
● | Level 2— Valuation techniques in which significant inputs include quoted prices from active markets for assets or liabilities that are similar to the assets or liabilities being measured and/or quoted prices for assets or liabilities that are identical or similar to the assets or liabilities being measured from markets that are not active. Also, model-derived valuations in which all significant inputs and significant value drivers are observable in active markets are Level 2 valuation techniques. |
● | Level 3— Valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are valuation technique inputs that reflect the Group’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. |
F-10
COOTEK (CAYMAN) INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies (Continued)
(d) Fair Value (Continued)
The fair value guidance describes three main approaches to measure 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.
When available, the Group uses quoted market prices to determine the fair value of an asset or liability. If quoted market prices are not available, the Group will measure fair value using valuation techniques that use, when possible, current market-based or independently sourced market parameters, such as interest rates and currency rates.
Financial instruments not reported at fair value include cash and cash equivalents, restricted cash, short-term investments, accounts receivable, accounts payable, other current liabilities, short-term bank borrowings, and convertible note payable (see Note 8). The embedded monthly redemption right of the convertible note was measured at fair value and the Group determined these recurring fair value measurements reside primarily within Level 3 of the fair value hierarchy because the absence of observable inputs used in Monte Carlo simulation. The significant inputs applied in Monte Carlo simulation include expected volatility, dividend yield and present value discount rate. The carrying amounts of other financial instruments as of December 31, 2020 and June 30, 2021 were considered representative of their fair values due to their short-term nature.
Equity investments with readily determinable fair value are carried at fair value based on quoted market prices or estimated based on market conditions and risks existing at each balance sheet date. Equity investments without readily determinable fair value are measured at cost less impairment, and are adjusted for observable price changes in orderly transactions for an identical or similar investment of the same issuer.
(e) Foreign Currency Translation
The functional currency of the Group is the United States Dollar (“US$”). The functional currency of the subsidiaries and the VIEs in the PRC is Renminbi (“RMB”). The functional currency of all the other subsidiaries is US$.
Foreign currency transactions have been translated into the functional currency at the exchange rates prevailing on the date of transactions. Foreign currency denominated monetary assets and liabilities are re-measured into the functional currency at exchange rates prevailing on the balance sheet date. Exchange gains and losses have been included in the determination of net income.
The Group has chosen the US$ as its reporting currency. Assets and liabilities have been translated using exchange rates prevailing on the balance sheet date. Equity accounts are translated at historical exchange rates. Income statement items have been translated using the average exchange rate for the year. Translation adjustments have been reported as cumulative translation adjustments and are shown as a component of other comprehensive loss in the consolidated statements of comprehensive loss and consolidated statements of changes in shareholders’ equity.
(f) Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents consist of cash on hand, demand deposits and floating rate financial instruments which are unrestricted as to withdrawal or use, and which have original maturities of three months or less when purchased.
F-11
COOTEK (CAYMAN) INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies (Continued)
(f) Cash, Cash Equivalents and Restricted Cash (Continued)
As of June 30, 2021, restricted cash were US$3.3 million, mainly consisting of amount of US$3.1 million held in the Group’s bank account as guarantee deposit for loan facility provided by the bank. Long term restricted cash of US$21.7 million frozen by local authorities on the alleged illegal acts of certain customers has been released upon the completion of investigations as of June 30, 2021.
(g) Revenue Recognition
Mobile Advertising
The Group generates substantially all of its revenue through mobile advertising and recognizes the revenue according to ASC Topic 606.
The Group provides advertising services to customers for promotion of their brands and products through its mobile applications, including a portfolio of content-rich mobile applications. The Group has two general pricing models for its advertising products: cost over a time period and cost for performance basis including per impression basis. For advertising contracts over a time period, the Group generally recognizes revenue ratably over time, because the customer simultaneously receives and consumes the benefits as the Group performs throughout a fixed contract term. For contracts that are charged on the cost for performance basis, the Group charges an agreed-upon fee to its customers determined based on the effectiveness of advertising links, which is typically measured by clicks, transactions, installations, user registrations, and other actions originating from the Group’s mobile applications. Revenue is recognized at a point in time when there is an effective click, transaction, installations, user registrations, and other actions originating from the Group’s mobile applications. For contracts that are charged on the cost per impression basis, the Group recognizes the revenue at a point in time when the impressions are delivered. Revenue for performance-based advertising services is recognized at a point in time when all the revenue recognition criteria are met.
For certain of the Group’s advertising service arrangements, customers are required to pay a deposit before using Group’s services. Deposits received are recorded as deferred revenue on the consolidated balance sheets. Service fees due to the Group are deducted from the deposited amounts when performance criteria have been satisfied.
Others
The Group also generates other revenues through cloud call business, licensing of its portfolio products and VIP user subscription fee. The revenue is recognized when service is rendered.
Sales Incentives
The Group provides sales incentives to certain customers in the form of sales rebates which entitle them to receive reductions in the price. The Group accounts for these incentives granted to customers as variable consideration and records it as reduction of revenue. The amount of variable consideration is measured based on the most likely amount of incentives to be. For the six months ended June 30, 2020 and 2021, the rebates recorded by the Group were US$39,890,475 and US$8,271,721, respectively.
F-12
COOTEK (CAYMAN) INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies (Continued)
(g) Revenue Recognition (Continued)
Disaggregation of Revenue
In the following table, revenue is disaggregated by revenue streams and geographic location of customers’ headquarters.
| | | | |
| | For the six months ended June 30, | ||
|
| 2020 |
| 2021 |
| | US$ | | US$ |
| | | | |
Revenue: | | | | |
Advertising revenue |
| 232,196,523 |
| 162,485,069 |
Other revenue | | 1,212,400 | | 2,283,884 |
Total |
| 233,408,923 |
| 164,768,953 |
| | | | |
| | For the six months ended June 30 | ||
|
| 2020 |
| 2021 |
| | US$ | | US$ |
| | | | |
PRC | | 229,056,601 | | 146,244,089 |
USA |
| 4,345,679 |
| 18,497,598 |
Others | | 6,643 | | 27,266 |
Total |
| 233,408,923 |
| 164,768,953 |
Contract Balances
Timing of revenue recognition may differ from the timing of invoicing to customers. Accounts receivable represents the amount to be collected from customers and the service has been delivered.
Contract liabilities include payments received in advance of performance under the contract or for differences between the amount billed to a customer and the revenue recognized for the completed performance obligation which is presented as deferred revenue on the consolidated balance sheets. Due to the generally short-term duration of the Group’s contracts, the majority of the performance obligations are satisfied in one year. The movements of the Group’s accounts receivable and deferred revenue are as follows:
| | | | |
|
| Accounts Receivable |
| Deferred Revenue |
| | US$ | | US$ |
| | | | |
Opening Balance at January 1, 2020 | | 27,254,634 | | 3,887,908 |
Increase, net | | 6,788,404 | | 2,272,367 |
Ending Balance at June 30, 2020 | | 34,043,038 | | 6,160,275 |
| | | | |
Opening Balance at January 1, 2021 |
| 28,127,346 |
| 3,331,511 |
Increase (Decrease), net | | 3,323,419 | | (245,512) |
Ending Balance at June 30, 2021 |
| 31,450,765 |
| 3,085,999 |
The Group recognized revenue of US$3,631,753 and US$3,014,390 by the reducing the balance of deferred revenue in the six months ended June 30, 2020 and 2021, respectively, which were included in the balance of deferred revenue at the beginning of the each period.
F-13
COOTEK (CAYMAN) INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies (Continued)
(h) Sales and Marketing Expenses
Sales and marketing expenses primarily consist of advertising and promotion expenses, expenses incurred for the user incentive programs, salaries and benefits of sales and marketing personnel and fees paid to mobile device manufacturers to pre-install the Group’s smart input products. Advertising and promotion expenses which mainly include user acquisition costs that represent payment to the third parties for online user acquisition of the Group’s products via social media and demand-side platforms amounted to US$204,965,757 and US$100,148,612 for the six months ended June 30, 2020 and 2021, respectively. The Group launched the user incentive programs for its registered users in its various applications to enhance user engagements.
(i) Concentration and Risks
Financial instruments that potentially expose the Group to concentration of credit risk consist primarily of cash and cash equivalents, short-term investments, accounts receivable and prepayments. The Group places its cash and cash equivalents and short-term investments with financial institutions with high-credit ratings and quality. The Group conducts credit evaluations of customers, and generally does not require collateral or other security from its customers. The Group establishes an allowance for doubtful accounts primarily based upon the age of the receivables and factors surrounding the credit risk of specific customers. With respect to prepayments, the Group performs on-going credit evaluations of the financial condition of these suppliers and has noted no significant credit risk.
Concentration of Customers
The following customers accounted for 10% or more of revenue:
| | | | | | | | | |
| | For the six months ended June 30, |
| ||||||
| | 2020 | | 2021 |
| ||||
|
| US$ |
| % |
| US$ |
| % |
|
| | | | | | | | | |
Company A | | * | | * | | 51,491,841 | | 31.25 | % |
Company B |
| 57,697,809 | | 24.72 | % | 47,918,394 |
| 29.08 | % |
The following customers accounted for 10% or more of accounts receivable:
| | | | | | | | | |
| | As of December 31, | | As of June 30, |
| ||||
| | 2020 | | 2021 |
| ||||
|
| US$ |
| % |
| US$ |
| % |
|
| | | | | | | | | |
Company A | | 11,559,398 | | 39.47 | % | 10,800,500 | | 33.10 | % |
Company B |
| 7,498,563 |
| 25.60 | % | 8,984,343 |
| 27.53 | % |
Concentration of Vendors
The Group uses certain vendors to acquire users and those cost are recorded as sales and marketing expenses. Vendors accounted for 10% or more are listed as below:
| | | | | | | | | |
| | For the six months ended June 30, |
| ||||||
| | 2020 | | 2021 |
| ||||
|
| US$ |
| % |
| US$ |
| % |
|
| | | | | | | | | |
Company C | | 28,470,964 | | 13.66 | % | * | | * | |
Company D | | * | | * | | 15,719,126 | | 12.04 | % |
Company E | | * | | * | | 14,692,089 | | 11.26 | % |
F-14
COOTEK (CAYMAN) INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies (Continued)
(i) Concentration and Risks (Continued)
The following vendors accounted for 10% or more of accounts payable:
| | | | | | | | | |
| | As of December 31, | | As of June30, |
| ||||
| | 2020 | | 2021 |
| ||||
|
| US$ |
| % |
| US$ |
| % |
|
| | | | | | | | | |
Company E | | 16,072,255 | | 21.11 | % | 7,915,959 | | 15.75 | % |
Company C | | 9,461,038 | | 12.43 | % | * | | * | |
Company F | | 7,604,056 | | 10.00 | % | * | | * | |
Company G | | * | | * | | 9,324,356 | | 18.56 | % |
Company D |
| * |
| * | | 6,778,899 |
| 13.49 | % |
*Less than 10%.
Business and Economic Risks
The Group participates in the dynamic and competitive high technology industry and believes that changes in any of the following areas could have a material adverse effect on the Group’s future financial position, results of operations and cash flows: changes in the overall demand for services and products; competitive pressures due to existing and new entrants; advances and new trends in new technologies and industry standards; changes in certain strategic relationships or customer relationships; regulatory considerations; copyright regulations; brand maintenance and enhancement; and risks associated with the Group’s ability to attract and retain employees necessary to support its growth.
The Group’s operations could be adversely affected by significant political, economic and social uncertainties in the PRC.
Foreign Currency Risk
The RMB is not a freely convertible currency. The State Administration for Foreign Exchange in the PRC, 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 and restricted cash denominated in RMB amounted to RMB280,266,558 (amounted to US$42,953,388) and RMB218,843,110 (amounted to US$33,876,119) as of December 31, 2020 and June 30, 2021, respectively.
(j) Leases
The Group leases office space in different cities in PRC and USA under non-cancellable operating lease agreements that expire at various dates through October 2023. Before January 1, 2021, the Group applied the ASC 840, Leases, under which each lease is classified at the inception date as either a capital lease or an operating lease. All the Group’s leases were classified as operating lease under ASC 840.
Effective January 1, 2021, the Group adopted ASU No. 2016-02 “Leases” (ASC 842) using the modified retrospective approach. The Group elected the transition package of practical expedients permitted within the standard, which allowed it not to reassess initial direct costs, lease classification, or whether the contracts contain or are leases for any leases that existed prior to January 1, 2021. The Group also elected the short-term lease exemption for all contracts with an original lease term of 12 months or less. Upon the adoption, the Group recognized operating lease right of use (“ROU”) assets of US$2,563,151 with corresponding lease liabilities of US$2,470,968 on the consolidated balance sheets. The operating lease ROU assets include adjustments for prepayments. The adoption did not impact the Group’s beginning retained earnings as of January 1, 2021, or the Group’s prior years’ financial statements.
F-15
COOTEK (CAYMAN) INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies (Continued)
(j) Leases (Continued)
Under ASC 842, the Group determines whether an arrangement constitutes a lease and records lease liabilities and ROU assets on its consolidated balance sheets at the lease commencement. The Group measures the operating lease liabilities at the commencement date based on the present value of remaining lease payments over the lease term, which is computed using the Group’s incremental borrowing rate, an estimated rate the Group would be required to pay for a collateralized borrowing equal to the total lease payments over the lease term. The Group measures the operating lease ROU assets based on the corresponding lease liability adjusted for payments made to the lessor at or before the commencement date, and initial direct costs it incurs under the lease. The Group begins recognizing operating lease expense based on lease payments on a straight-line basis over the lease term after the lessor makes the underlying asset available to the Group. Some of the Group’s lease contracts include options to extend the leases for an additional period which has to be agreed with the lessors based on mutual negotiation. After considering the factors that create an economic incentive, the Group does not include renewal option periods in the lease term for which it is not reasonably certain to exercise.
During the six months ended June 30, 2020 and 2021, the Group incurred operating lease costs amounting to US$710,590 and US$893,050 (excluding US$57,975 for short-term leases not capitalized as ROU assets), respectively. Cash payments against operating lease liabilities were US$830,591 for the six months ended June 30, 2021.
As of June 30, 2021, Group’s operating leases had a weighted average remaining lease term of 1.1 years and a weighted average discount rate of 6.0%. Future lease payments under operating leases as of June 30, 2021 were as follows:
| | |
|
| As of June 30, |
| | 2021 |
| | US$ |
| | |
The remaining of 2021 |
| 795,955 |
2022 |
| 752,277 |
2023 |
| 62,374 |
Total lease payment |
| 1,610,606 |
Less: imputed interest |
| (58,008) |
Total lease liability balance |
| 1,552,598 |
Less: Operating lease liabilities, current |
| (1,321,794) |
Long-term operating lease liabilities |
| 230,804 |
As of December 31, 2020, the future minimum lease payments under the Group’s non-cancelable operating lease agreements based on ASC 840 are as follows:
| | |
|
| As of December 31, |
| | 2020 |
| | US$ |
| | |
2021 |
| 1,650,102 |
2022 |
| 947,794 |
2023 |
| 62,003 |
Total lease commitment |
| 2,659,899 |
F-16
COOTEK (CAYMAN) INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies (Continued)
(k) Convertible Notes, Beneficial Conversion Feature (“BCF”) and Redemption Feature
The Group issued convertible notes in January and March of 2021. The Group has evaluated whether the conversion feature of the notes is considered an embedded derivative instrument subject to bifurcation in accordance with ASC 815, Accounting for Derivative Instruments and Hedging Activities. Based on the Group’s evaluation, the conversion feature is not considered an embedded derivative instrument subject to bifurcation as conversion option does not provide the holder of the notes with means to net settle the contracts. Convertible notes, for which the embedded conversion feature does not qualify for derivative treatment, are evaluated to determine if the effective rate of conversion per the terms of the convertible note agreement is below market value. In these instances, the value of the BCF is determined as the intrinsic value of the conversion feature is recorded as deduction to the carrying amount of the notes and credited to additional paid-in-capital. The value of the BCF is recorded in the financial statements as a debt discount from the face amount of the notes, which is then accreted to interest expense over the life of the related debt using the effective interest method. The Group presents the occurred debt issuance costs as a direct deduction from the convertible note rather than as an asset. Amortization of the costs is reported as interest expense. At the date of above conversion, the remaining amount has been fully amortized to interest expense.
The convertible notes issued in March of 2021 also include a monthly redemption feature which trigger a mandatory monthly redemption of a portion of the principal amount plus an 8% redemption premium and accrued and unpaid interest to be redeem in cash, the shares of the Group or a combination of both at the option of the Group if certain conditions relating to trading prices of the Group’s shares are not met (“Monthly Redemption”). The Group has evaluated whether the Monthly Redemption feature is considered an embedded derivative instrument subject to bifurcation in accordance with ASC 815, Accounting for Derivative Instruments and Hedging Activities. Based on the Group’s evaluation, the monthly redemption has an underlying based on the fair value of the Group’s shares. An underlying that is based on common stock is not considered to be clearly and closely related to a debt host instrument, therefore, the Monthly Redemption feature should be separately accounted for as a stand-alone derivative under ASC 815 since it is not clearly and closely related to the host contract. This derivative is presented at fair value with change in fair value recognized in earnings. For the convertible notes issued with this derivative, a portion of the note’s proceed is allocated to the derivative based on the fair value at the date of the issuance. The allocated fair value for the derivative is recorded as a debt discount from the face amount of the notes, which is then accredited to interest expense over the life of the related debt using the effective interest method.
(l) Net loss per share
Basic net loss per share is computed by dividing income attributable to holders of ordinary shares by the weighted average number of ordinary shares outstanding during the year or the period. Diluted net loss per share reflects the potential dilution that could occur if securities or other contracts to issue ordinary shares were exercised or converted into ordinary shares, which consist of the ordinary shares issuable upon the conversion of the convertible notes (using the if-converted method) and ordinary shares issuable upon the exercise of share options and vest of nonvested restricted share units (using the treasury stock method).
(o) Recent Accounting Pronouncements
New accounting pronouncements recently adopted
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize a right-of-use asset and lease liability on their balance sheet for all leases with terms beyond twelve months. Effective January 1, 2021, the Group adopted the requirements of this ASU using the modified retrospective approach with comparative periods continuing to be reported under Topic 840. The Group elected the transition package of practical expedients permitted within the standard. As a result, the Group did not reassess initial direct costs, lease classification, or whether the contracts contain or are leases. Upon the adoption on January 1, 2021, the Group recognized operating lease right of use (“ROU”) assets of USD$2,563,151 with corresponding lease liabilities of USD$2,470,968 on the consolidated balance sheets. The consolidated financial statements for the six-month ended June 30, 2021 are presented under the new standard, while comparative periods presented have not been adjusted and continue to be reported in accordance with the previous standard.
F-17
COOTEK (CAYMAN) INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies (Continued)
New accounting pronouncements not yet adopted
In June 2016, the FASB issued ASU 2016-13, Credit Losses, Measurement of Credit Losses on Financial Instruments. This ASU provides more useful information about expected credit losses to financial statement users and changes how entities will measure credit losses on financial instruments and timing of when such losses should be recognized. This ASU is effective for annual and interim periods beginning after December 15, 2019 for the public business entities. Early adoption is permitted for all entities for annual periods beginning after December 15, 2018, and interim periods therein. In November 2019, the FASB issued ASU No. 2019-10 which delayed the effective date of ASU 2016-13 for smaller reporting companies (as defined by the U.S. Securities and Exchange Commission) and other non-SEC reporting entities to fiscal years beginning after December 15, 2022, including interim periods within those fiscal periods. Early adoption is permitted. The Group is currently assessing the impact the guidance will have on its consolidated financial statements.
3. Accounts Receivable, net
Accounts receivable, net, consisted of the following:
| | | | |
|
| As of December 31, |
| As of June 30, |
| | 2020 | | 2021 |
| | US$ | | US$ |
| | | | |
Accounts receivable |
| 29,289,301 |
| 32,631,188 |
Allowance for doubtful accounts: |
| |
| |
Balance at beginning of the year/period |
| (1,774,192) |
| (1,161,955) |
Provision for allowance for doubtful accounts |
| (359,252) |
| (38,571) |
Write-off |
| 964,474 |
| 20,471 |
Foreign exchange effect |
| 7,015 |
| (368) |
Balance at end of the year/period |
| (1,161,955) |
| (1,180,423) |
Accounts receivable, net |
| 28,127,346 |
| 31,450,765 |
4. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the followings:
| | | | |
|
| As of December 31, |
| As of June 30, |
| | 2020 | | 2021 |
|
| US$ |
| US$ |
| | | | |
Value added tax recoverable |
| 5,498,400 |
| 3,262,544 |
Other receivables |
| 3,875,800 |
| 2,698,071 |
Advance to suppliers |
| 882,793 |
| 2,009,847 |
Others |
| 1,816,233 |
| 995,450 |
Prepaid expenses and other current assets |
| 12,073,226 |
| 8,965,912 |
F-18
COOTEK (CAYMAN) INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Property and Equipment, net
Property and equipment, net, consisted of the followings:
| | | | |
|
| As of December 31, |
| As of June 30, |
| | 2020 | | 2021 |
| | US$ | | US$ |
| | | | |
Electronic equipment |
| 12,729,696 |
| 13,128,249 |
Office equipment and furniture |
| 363,163 |
| 319,251 |
Motor vehicles |
| 82,470 |
| 240,513 |
Leasehold improvements |
| 1,714,381 |
| 1,730,934 |
Construction in progress |
| 5,811 |
| — |
Total |
| 14,895,521 |
| 15,418,947 |
Less: Accumulated depreciation |
| (9,501,779) |
| (11,318,470) |
Property and equipment, net |
| 5,393,742 |
| 4,100,477 |
For the six months ended June 30, 2020 and 2021 depreciation expenses were US$1,492,217 and US$1,769,428, respectively.
6. Short-term Borrowings
The Group’s short-term borrowings consisted of the following:
| | | | |
|
| As of December 31, |
| As of June 30, |
| | 2020 | | 2021 |
| | US$ | | US$ |
| | | | |
Bank borrowings | | 10,958,022 | | 9,752,171 |
Others | | — | | 5,410,133 |
Short-term Borrowings |
| 10,958,022 |
| 15,162,304 |
In July 2016, the Group entered into a credit facility agreement with a commercial bank under which the Group can draw-down up to US$6.0 million by October, 2018. In June 2020, the Group renewed the bank credit facility under which the Group can borrow up to US$11.0 million collateralized by its accounts receivable by June 2021. The interest rate for this credit facility is the Loan Prime Rate (“LPR”) plus 1.30%. Cash amount of US$3.1 million has been deposited in the bank as guarantee in December 2020 as well. In 2020, the Group has aggregately drawn down the credit facility of US$28.8 million and repaid US$24.1 million, and the weighted average interest rate for borrowings drawn under such credit facility was 5.15%. In June 2021, the Group renewed the bank credit facility under which the Group can borrow up to US$10.0 million collateralized by its accounts receivable by June 2022, which contains maximum quarterly net loss and maximum monthly debt ratio as financial covenants. The interest rate for this credit facility is the LPR base interest rate plus 1.30%. During the six months ended June 30, 2021, the Group has aggregately drawn down the credit facility of US$59.7 million and repaid US$61.1 million with the weighted average interest rate of 5.15%. As of June 30, 2021, the Group has fully used this credit facility and the Group is in compliance of the financial covenants.
In July 2018, the Group entered into a credit facility agreement with a commercial bank under which the Group can draw-down up to US$4.0 million by July 2019. In June 2020, the Group renewed the bank credit facility under which the Group can borrow up to US$4.0 million collateralized by its accounts receivable by June 2021. The interest rate for this credit facility is Libor plus 3.5%, determined on the draw-down date. In 2020, the Group has aggregately drawn down the credit facility of US$4.0 million and repaid US$7.2 million, and the weighted average interest rate for borrowings drawn under such credit facility was 4.39%. As of December 31, 2020, the Group has fully repaid the loan under this agreement and there is no transaction under this agreement during the six months ended June 30, 2021. The credit facility has been terminated in June 2021.
In March 2021, the Group entered into two short-term interest-free loan agreements with a local Hi-tech industrial park, under which the Group received a total of US$5.4 million and fully repaid the amount by the end of August 2021.
F-19
COOTEK (CAYMAN) INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following:
| | | | |
|
| As of December 31, |
| As of June 30, |
| | 2020 | | 2021 |
| | US$ | | US$ |
| | | | |
Other tax payables (Note 1) |
| 4,386,517 |
| 2,018,564 |
Accruals for user incentive programs |
| — |
| 1,863,526 |
Accrued expenses (Note 2) | | 2,772,237 | | 1,840,150 |
Accrued loss contingencies relating litigation and asserted claims | | 2,872,150 | | 676,526 |
Others |
| 655,614 |
| 285,769 |
Total |
| 10,686,518 |
| 6,684,535 |
Note 1: Other tax payables as of June 30, 2021, mainly consisted of value-added tax payable of US$1.4 million and other taxes such as individual income tax and stamp duty tax.
Note 2: Accrued expenses mainly consisted of accrued professional service fees and other miscellaneous expenses related to marketing and operation activities.
F-20
COOTEK (CAYMAN) INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Convertible notes and Standby Equity Distribution Agreement
January 2021 Notes
On January 19, 2021, the Group issued a convertible note for a principle amount of US$10.0 million with a 3% discount, an annual interest rate of 5% and a maturity date of January 19, 2022. The Group received a cash proceed of US$8.9 million from this issuance. The note is convertible into the Group’s shares at the option of the holders based on a conversion prices determined to be the lower of (1) US$4.20 per ADS, or (2) 88% of the lowest daily volume weighted average trading price (“VWAP”) of the Group’s ADSs during the ten consecutive trading days immediately preceding the conversion date or other date of determination.
The January 2021 Notes also include provision which require the Group to pay the note holders a commitment fee of 1,750,000 ordinary shares at the date of closing which is considered to be further discount on the note provided to the debt holders. The Group settle this commitment fee by issuing 1,750,000 ordinary shares out of treasury shares to the convertible note holders. The Group has recognized this commitment fees amounted to US$0.1 million determined based on the fair value of shares issued at the date of closing as a part of debt discount.
The note has been fully converted to 196,665,850 ordinary shares with a conversion price of US$0.0508 per ordinary share during three-month period ended March 31, 2021. The Group recorded a beneficial conversion feature amounted to US$1.4 million representing the difference between the conversion price and the fair value per share as deemed dividend relating to this conversion as the conversion price is determined to be lower than fair value at the date of conversion.
Loan discount of US$0.4 million and issuance costs of US$0.7 million relating to the January 2021 Notes are being amortized to interest expense using effective interest method.
March 2021 Notes
On March 19, 2021, the Group issued a convertible note for a principle amount of US$20.0 million with a 2% discount, an annual interest of 5% per year, and a fixed conversion price of US$5.0 per ADS. The maturity date of the March 2021 Notes is March 19, 2022. The Group received a cash proceed of US$18.2 million from this issuance.
The March 2021 Notes also include provision which require the Group to pay the note holders a commitment fee of 3,750,000 ordinary shares at the date of closing which is considered to be further discount on the note provided to the debt holders. The Group settle this commitment fee by issuing 3,750,000 ordinary shares out of treasury shares to the convertible note holders. The Group has recognized this commitment fees amounted to US$0.2 million determined based on the fair value of shares issued at the date of closing as a part of debt discount.
Beginning from June 1, 2021 and continuing on the first day of each calendar month thereafter through January 2022, a portion of the principal amount plus an 8% redemption premium and plus accrued and unpaid interest will be subject to redemption in cash, ADSs through conversion of the note or a combination of both at the Group’s option in the event that the daily VWAP on each of the five consecutive trading days immediately prior to the redemption date does not exceed a price equal to 108% of the fixed conversion price (the “Monthly Redemption”). In the event that the daily VWAP on each of the five consecutive trading days immediately prior to the scheduled redemption date exceeds a price equal to 108% of the fixed conversion price, then no Monthly Redemption shall be due on such scheduled redemption date.
In accordance with ASC 815, the Group determined that the Monthly Redemption feature was an embedded financial instrument which required bifurcation from the host debt instrument. The Group performs a valuation with the assistance of a third party appraiser to evaluate fair value of the embedded derivative associated with this note at the date of issuance and subsequently at each reporting date. Initially, the Group recorded a derivative liability relating to the Monthly Redemption feature in the amount US$1,662,355 based on its fair value at the date of issuance. A portion of the note's proceed is allocated to the derivative based on the fair value at the date of the issuance. The allocated fair value for the derivative is recorded as a debt discount from the face amount of the notes, which is then accredited to interest expense over the life of the related debt using the effective interest method. This derivative liability is revalued at each reporting date and immediately prior to conversion with changes in fair value recorded to fair value change at derivative liabilities in the statement of operations. As of June 30, 2021, the fair value of the derivative liability is determined to be US$1,577,128 and the gain of US$85,227 representing the change in fair value has been recorded in earnings for the six-month period ended June 30, 2021.
F-21
COOTEK (CAYMAN) INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Convertible notes and Standby Equity Distribution Agreement (Continued)
Total discount of US$2 million and issuance costs of US$1.6 million relating to the March 2021 Notes are being amortized to interest expense using effective interest method.
Monthly Redemption has been triggered in June, July and August 2021. In June, the Group redeemed the loan principle, redemption premium and unpaid interests total amounted to US$1.7 million through issuance of 46,345,450 ordinary shares with a conversion price of US$0.0358 per ordinary shares. In July and August of 2021, the Group redeemed the loan principal, redemption premium and unpaid interests amounted with a payment of US$4.2 million in cash and issuance of 33,113,400 ordinary shares with a conversion price of US$0.0299 per ordinary shares.
F-22
COOTEK (CAYMAN) INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Convertible notes and Standby Equity Distribution Agreement (Continued)
Standby Equity Distribution Agreement with YA II PN, Ltd.
On January 22, 2021, the Company entered into a standby equity distribution agreement (the “SEDA”) with this investor pursuant to which the Company has an option to sell up to US$20.0 million of its ADSs solely at the Company’s request any time during the 36 months following the date of the SEDA at a price determined to be at 90% of the market price, which is defined as the lowest daily VWAP of the Company’s ADSs during the five consecutive trading days commencing on the trading day following the date the Company submits an advance notice to this investor. As at June 30, 2021 the outstanding equity financing available was US$20.0 million.
9. Other operating income, net
| | | | |
| | For the six months ended June 30, | ||
| | 2020 |
| 2021 |
| | US$ | | US$ |
|
| | | |
Government subsidies |
| 1,019,411 |
| 2,015,207 |
Contingent losses |
| (445,684) |
| — |
Others |
| 262,512 |
| 246,647 |
Total |
| 836,239 |
| 2,261,854 |
10. Income Taxes Expense
The current and deferred portion of income tax expenses included in the consolidated statements of operations are as follows:
| | | | |
|
| For the six months ended June 30, | ||
|
| 2020 |
| 2021 |
| | US$ | | US$ |
Current tax expenses | | 3,200 |
| 25 |
Deferred tax benefits | | — |
| — |
Total | | 3,200 |
| 25 |
The Group’s effective tax rates were nil for the six months ended June 30, 2020 and 2021, respectively.
The Group recorded a full valuation allowance against deferred tax assets of all its consolidated entities because all entities were in a cumulative loss position as of December 31, 2020 and June 30, 2021. No unrecognized tax benefits and related interest and penalties were recorded in any of the periods presented.
11. Treasury Shares
Treasury shares represent shares repurchased by the Group that are no longer outstanding and are held by the Group. On May 18, 2020, the Company announced a share repurchase program (the “2020 Program”) whereby the Company is authorized to repurchase its class A ordinary shares in the form of ADSs with an aggregate value of up to US$20.0 million during the 12-month period starting from May 18, 2020. As of June 30, 2021, the Company had used an aggregate of US$6.0 million to repurchase 1.4 million ADSs under the 2020 Program and recorded as treasury stock. The 2020 Program is terminated on May 17, 2021. For the six months ended June 30, 2020 and 2021, under the repurchase plan, the Group had repurchased an aggregate of 47,099,300 ordinary shares on the open market for a total cash consideration of US$5,871,945 and an aggregate of 24,237,100 ordinary shares on the open market for a total cash consideration of US$1,322,195, which were accounted for as the cost of the treasury shares, respectively.
As of June 30, 2021, an aggregate of 5,500,000 ordinary shares had been paid as commitment fee paid to Investors for convertible notes through treasury shares, which led to the decrease of US$765,397 in treasury shares.
As of June 30, 2021, 135,205,591 treasury shares have been cancelled.
F-23
COOTEK (CAYMAN) INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Share-Based Compensation
Share Options
The options have a contractual term of ten years. The vesting date starts on the grant date or the commencement date of a participant’s employment agreement. The options vest 20% or 25% on each of the four or five anniversary dates of the vesting date and upon continued employment. In the event of termination of a participant’s employment, the unvested options shall be terminated immediately. The participant’s right to exercise the vested options shall be terminated 2 or 3 months after the termination of the employment.
The Group uses the binomial option pricing model and the following assumptions to estimate the fair value of the options at the date of granted:
| | | | |
|
| |
| Six Months ended |
| | Year ended December 31 | | June 30 |
| | 2020 | | 2021 |
| | | | |
Average risk-free rate of interest |
| 0.67% | | 1.47% |
Expected volatility |
| 43.15%-43.38% | | 38.71%-41.64% |
Dividend yield |
| 0% | | 0% |
Contractual term |
| 10 years | | 10 years |
Fair value of the underlying shares on the date of option grants |
| 0.05-0.13 | | 0.03-0.05 |
The risk-free rate of interest is based on the US Treasury yield curve as of valuation date. Volatility is estimated based on annualized standard deviation of daily stock price return of comparable companies for the period before valuation date and with similar span as the expected expiration term. The Group has never declared or paid any cash dividends on its capital stock, and the Group does not anticipate any dividend payments in the foreseeable future.
On November 6, 2018, the Board of Directors approved an option modification to reduce the exercise price of certain options granted to employees. All other terms of the share options granted remain unchanged. The modification resulted in incremental compensation cost of US$285,661 at the modification date, which is subject to be adjusted based on the employment, US$28,894 and US$7,891 was recorded during the six months ended June 30, 2020 and 2021, respectively. The remaining US$16,284 will be amortized over the remaining vesting period of the modified options in the second half year of 2021. Due to the termination of employment of certain participants, the Group will not recognize the rest of unvested amount of the modified options related.
A summary of the aggregate option activity and information regarding options outstanding as of June 30, 2021 is as follows:
| | | | |
|
| |
| Weighted |
| | Number of | | average exercise |
| | options | | price |
| | | | US$ |
| | | | |
Outstanding on January 1, 2021 |
| 290,614,107 |
| 0.02 |
Granted |
| 72,757,400 |
| 0.00 |
Forfeited |
| (36,721,500) |
| 0.00 |
Exercised |
| (1,970,650) |
| 0.02 |
Outstanding on June 30, 2021 |
| 324,679,357 |
| 0.02 |
Options exercisable on June 30, 2021 |
| 160,621,328 |
| 0.05 |
Vested or expected to vest as of June 30, 2021 |
| 324,679,357 |
| 0.02 |
The weighted average grant date fair values of options granted during the six months ended June 30, 2020 and 2021 were US$0.1 and US$0.03, respectively.
For the six months ended June 30, 2021, 1,970,650 of options were exercised with an aggregate intrinsic value of US$30,297. For the six months ended June 30, 2020, 13,564,950 of options were exercised with an aggregate intrinsic value of US$1,437,435.
F-24
COOTEK (CAYMAN) INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Share-Based Compensation (Continued)
Share Options (Continued)
For the six months ended June 30, 2020 and 2021 excluding the incremental compensation cost resulted from the modification discussed above, the Group recognized share-based compensation expense of US$1,428,823 and US$1,255,165, respectively. As of June 30, 2021, there was US$9,440,523 in total unrecognized compensation cost related to non-vested share options, which is expected to be recognized over a weighted-average period of 3.02 years.
Restricted Share Units
In the six months ended June 30, 2021, the Group did not granted additional Restricted Share Units (“RSUs”). The RSUs have a contractual term of ten years and vest 25% on each anniversary over four years from the grant date. The vesting of these RSUs is conditioned on continued employment. Compensation expense based on fair value is amortized over the requisite service period of award using the straight line vesting attribution method.
A summary of the RSUs activity for the nine months ended June 30, 2021 is as follows:
| | | | |
|
| |
| Weighted average |
| | Number of | | grant date |
| | restricted shares | | fair value |
| | | | |
Unvested restricted shares outstanding at January 1, 2021 |
| 37,740,804 |
| 0.20 |
Granted |
| — |
| — |
Vested |
| (1,793,200) |
| 0.20 |
Forfeited |
| (3,695,150) |
| 0.20 |
Unvested restricted shares outstanding at June 30, 2021 |
| 32,252,454 |
| 0.20 |
Expected to vest at June 30, 2021 |
| 32,252,454 |
| 0.20 |
The share-based compensation expense related to RSUs of US$907,541 and US$882,184 were recognized by the Group for the six months ended June 30, 2020 and 2021, respectively.
As of June 30, 2021, there was US$2,221,352 in unrecognized compensation costs, net of actual forfeitures, related to unvested restricted shares, which is expected to be recognized over a weighted-average period of 1.53 years.
13. Net Loss Per Share
Net loss per share was computed by dividing net loss attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding for the six months ended June 30, 2020 and 2021:
| | | | |
| | For the six months ended June 30, | ||
| | 2020 | | 2021 |
|
| US$ |
| US$ |
| | | | |
Numerator: | | | | |
Net loss—basic and diluted |
| (6,619,139) |
| (12,134,310) |
Deemed dividend in relation to convertible notes | | — | | (1,368,866) |
Net loss attributable to ordinary shareholders |
| (6,619,139) |
| (13,503,176) |
Shares (Denominator): |
|
|
|
|
Weighted average number of ordinary shares outstanding |
|
|
|
|
Basic |
| 3,094,780,922 |
| 3,187,723,620 |
Diluted |
| 3,094,780,922 |
| 3,187,723,620 |
Net loss earnings per share—basic and diluted |
| (0.002) |
| (0.004) |
F-25
COOTEK (CAYMAN) INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Net Loss Per Share (Continued)
As a result of the Group’s net loss for the six months ended June 30, 2020 and 2021, diluted net loss per share does not include the following instruments as their inclusion would be antidilutive:
| | | | |
| | For the six months ended June 30, | ||
|
| 2020 |
| 2021 |
| | | | |
Share options | | 261,092,616 | | 324,679,357 |
Restricted shares units |
| 29,108,747 |
| 32,252,454 |
Shares of convertible notes | | — | | 208,927,671 |
Total |
| 290,201,363 |
| 565,859,482 |
14. Commitments and Contingencies
Commitments
The Group did not have other significant capital commitments or significant guarantees as of December 31, 2020 and June 30, 2021, respectively.
Contingencies
From time to time, the Group is a party to various legal actions arising in the ordinary course of business. The Group accrues costs associated with these matters when they become probable and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. The Group’s management does not expect any liability from the disposition of such claims and litigation individually or in the aggregate would have a material adverse impact on the Group’s consolidated financial position, results of operations and cash flows.
15. Segment Information
The Group has only one reportable segment since the Group does not distinguish revenues, costs and expenses between segments in its internal reporting, and reports costs and expenses by nature as a whole.
The Group’s chief operating decision maker, who has been identified as the Chief Executive Officer, reviews the consolidated results when making decisions about allocating resources and assessing performance of the Group as a whole. The Group does not distinguish among markets or segments for the purpose of internal reports.
Information about the Group’s non-current assets is presented based on the geographical location of the assets as follows:
| | | | |
|
| As of December 31, |
| As of June 30, |
| | 2020 | | 2021 |
| | US$ | | US$ |
| | | | |
PRC |
| 26,560,143 |
| 6,406,133 |
USA |
| 2,158,359 |
| 1,668,746 |
Total |
| 28,718,502 |
| 8,074,879 |
F-26