Form 6-K
false2021-03-310001769256--09-30As of September 30, 2020 and March 31, 2021, the balance due from a rental service company represented the reimbursement renovation costs due from the rental service company. The Company started to cooperate with a rental service company to source and renovate apartments since August 2018. For certain identified newly sourced apartments, the rental service company reimburses the Company for costs incurred for the renovation. The Company then makes payments to the rental service company in installments equal to the reimbursed renovation costs plus interest and tax over a period of five years.The deductible input VAT represented the excess of input VAT arising from purchases over output VAT arising from sales under the PRC tax laws and regulations. The deductible input VAT is carried forward to future period. As of March 31, 2021, the Company assessed certain PRC subsidiaries would not generate sufficient revenues and output VAT for the balance to be deducted in the next twelve months, the Company reclassified the deductible input VAT to the account of “other assets” as a noncurrent asset.Upon asset acquisition with Beautiful House, the Group engaged a third party service provider to provide apartment operation services to the Group. 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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM
6-K
 
 
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE
13a-16
OR
15d-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934
For the month of July, 2021
Commission File Number:
001-39111
 
 
Q&K International Group Limited
(Registrant’s Name)
 
 
Suite 1607, Building A
No.596 Middle Longhua Road
Xuhui District, Shanghai, 200032
People’s Republic of China
(Address of principal executive offices)
 
 
Indicate by check mark whether the registrant files or will file annual reports under cover of Form
20-F
or Form
40-F.
Form
20-F  
☒            Form
40-F  
Indicate by check mark if the registrant is submitting the Form
6-K
in paper as permitted by Regulation
S-T
Rule 101(b)(1):   ☐
Indicate by check mark if the registrant is submitting the Form
6-K
in paper as permitted by Regulation
S-T
Rule 101(b)(7):   ☐
 
 
 

EXHIBIT INDEX
 
Number
  
Description of Document
   
99.1
  
Management’s Discussion and Analysis of Financial Condition and Results of Operations and Recent Developments
   
99.2
  
Unaudited Condensed Consolidated Financial Statements
   
101.INS
  
Inline XBRL Instance Document — the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
   
101.SCH
  
Inline XBRL Taxonomy Extension Schema Document
   
101.CAL
  
Inline XBRL Taxonomy Extension Calculation Linkbase Document
   
101.DEF
  
Inline XBRL Taxonomy Extension Definition Linkbase Document
   
101.LAB
  
Inline XBRL Taxonomy Extension Label Linkbase Document
   
101.PRE
  
Inline XBRL Taxonomy Extension Presentation Linkbase Document
   
104
  
Cover Page Interactive Data File (embedded within the Inline XBRL document)
 
2

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
Q&K International Group Limited
   
By:
 
/s/ Chengcai Qu
Name:
 
Chengcai Qu
Title:
 
Chairman of the Board of Directors, Chief
Executive Officer, Chief Operating Officer and Vice President
Date: July 2
7
, 2021
 
3
EX-99.1

Exhibit 99.1

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Discussion and analysis below are limited to the operations of Q&K International Group Limited (“we” or “us”).

Summary Consolidated Financial and Operating Data

The summary unaudited interim consolidated financial information for the six months ended March 31, 2020 and 2021 and as of March 31, 2021 has been derived from our unaudited interim condensed consolidated financial statements as of and for the six months ended March 31, 2021 included in this current report. Our unaudited interim condensed consolidated financial statements have been prepared on a basis consistent with our audited consolidated financial statements. The summary consolidated balance sheet data as of September 30, 2020 has been derived from our audited consolidated financial statements included in our annual report on Form 20-F for the fiscal year ended September 30, 2020 filed with the SEC on February 16, 2021 (the “FY 2020 annual report”). The summary consolidated financial data should be read in conjunction with those financial statements and the accompanying notes and “Item 5. Operating and Financial Review and Prospects” included in our FY 2020 annual report.

Summary Unaudited Condensed Consolidated Statements of Comprehensive Loss

 

     Six months ended March 31,  
     2020      2021  
     RMB      RMB      US$  
     (in thousands)  

Net revenue:

        

Rental service

     555,706        541,671        82,675  

Value-added services and others

     71,395        73,538        11,224  
  

 

 

    

 

 

    

 

 

 

Total net revenues

     627,101        615,209        93,899  
  

 

 

    

 

 

    

 

 

 

Operating costs and expenses:

        

Operating cost

     (682,225      (684,205      (104,431

Selling and marketing expenses

     (40,450      (12,503      (1,908

General and administrative expenses

     (65,089      (46,243      (7,058

Research and development expenses

     (15,412      (4,765      (727

Pre-operation expenses

     (12,725      —          —    

Impairment loss on long-lived assets

     (250,048      (42,584      (6,500

Other expense, net

     (13,870      (26,426      (4,033
  

 

 

    

 

 

    

 

 

 

Total operating costs and expenses

     (1,079,819      (816,726      (124,657
  

 

 

    

 

 

    

 

 

 

Loss from operations

     (452,718      (201,517      (30,758

Interest expense, net

     (61,518      (64,287      (9,812

Debt extinguishment cost

     —          (41,964      (6,405

Foreign exchange loss, net

     (4      (192      (29

Fair value change of contingent earn-out liabilities

     97,417        —          —    
  

 

 

    

 

 

    

 

 

 

Loss before income taxes

     (416,823      (307,960      (47,004

Income tax expense

     (26      (25      (4
  

 

 

    

 

 

    

 

 

 

Net loss

     (416,849      (307,985      (47,008

Less: net loss attributable to noncontrolling interests

     (26      (11      (2
  

 

 

    

 

 

    

 

 

 

Net loss attributable to Q&K International Group Limited ordinary shareholders

     (416,823      (307,974      (47,006
  

 

 

    

 

 

    

 

 

 

Net loss per share attributable to ordinary shareholders of Q&K International Group Limited—Basic and diluted

     (0.34      (0.23      (0.03

Weighted average number of ordinary shares used in computing net loss per share—Basic and diluted

     1,226,807,606        1,352,152,052        1,352,152,052  

Net loss

     (416,849      (307,985      (47,008

Other comprehensive income (loss), net of tax of nil:

        

Foreign currency translation adjustments

     (1,464      13,500        2,061  
  

 

 

    

 

 

    

 

 

 

Comprehensive loss

     (418,313      (294,485      (44,947

Less: comprehensive loss attributable to noncontrolling interests

     (26      (11      (2
  

 

 

    

 

 

    

 

 

 

Net loss attributable to Q&K International Group Limited ordinary shareholders

     (418,287      (294,474      (44,945
  

 

 

    

 

 

    

 

 

 


Summary Condensed Consolidated Balance Sheet Data

 

     As of
September 30,
     As of March 31,  
     2020      2021  
     RMB      RMB      US$  
     (in thousands)  
            (Unaudited)  

Total current assets

     203,004        134,640        20,549  

Total non-current assets

     647,726        555,354        84,764  
  

 

 

    

 

 

    

 

 

 

Total assets

     850,730        689,994        105,313  
  

 

 

    

 

 

    

 

 

 

Total current liabilities

     1,961,740        2,022,766        308,734  

Total non-current liabilities

     883,440        898,540        137,144  
  

 

 

    

 

 

    

 

 

 

Total liabilities

     2,845,180        2,921,306        445,878  
  

 

 

    

 

 

    

 

 

 

Total current assets less current liabilities

     (1,758,736      (1,888,126      (288,185

Net liabilities

     1,994,450        2,231,312        340,565  
  

 

 

    

 

 

    

 

 

 

Total Q&K International Group Limited shareholders’ deficit

     (2,004,078      (2,240,929      (342,033

Noncontrolling interest

     9,628        9,617        1,468  
  

 

 

    

 

 

    

 

 

 

Total shareholders’ deficit

     (1,994,450      (2,231,312      (340,565
  

 

 

    

 

 

    

 

 

 

Total liabilities and shareholders’ deficit

     850,730        689,994        105,313  
  

 

 

    

 

 

    

 

 

 

Summary Unaudited Condensed Statement of Cash Flows

 

     Six months ended March 31,  
     2020      2021  
     RMB      RMB      US$  
     (in thousands)  

Net cash used in operating activities

     (179,718      (77,566      (11,836

Net cash used in investing activities

     (75,439      (3,879      (592

Net cash provided by financing activities

     134,664        68,386        10,400  

Effect of foreign exchange rate changes

     4,044        7,763        1,389  
  

 

 

    

 

 

    

 

 

 

Net (decrease) in cash, cash equivalents and restricted cash

     (116,449      (5,296      (639
  

 

 

    

 

 

    

 

 

 

Cash, cash equivalents and restricted cash at the beginning of period

     250,814        31,766        4,679  
  

 

 

    

 

 

    

 

 

 

Cash, cash equivalents and restricted cash at the end of period

     134,365        26,470        4,040  
  

 

 

    

 

 

    

 

 

 

 

2


Key Operating Data

The table below sets forth our key operating data as of March 31, 2020 and 2021:

 

     As of March 31,  
     2020      2021  

Number of rental units contracted

     98,379        75,153  

Number of rental units under renovation

     2,001        —    

Number of available rental units

     96,378        75,153  

Number of occupied rental units

     76,724        66,015  

Number of vacant available rental units

     19,654        9,138  

Number of rental units managed but not contracted by us(1)

     —          25,375  

 

(1)

refers to the number of rental units that (i) we provide our rental management service for and (ii) are leased in from landlords by third-parties

The table below sets forth the numbers of available rental units as of March 31, 2020 and 2021:

 

     As of March 31,  
     2020      2021  

East China(1)

     88,655        21,359  

North China(2)

     2,642        24,835  

Southwest China(3)

     —          20,562  

Others(4)

     5,081        8,397  

 

(1)

includes Fuzhou, Hangzhou, Hefei, Nanjing, Ningbo, Shanghai, Suzhou, Jinan and Qingdao

(2)

includes Beijing, Shijiazhuang, Tianjin and Xi’an

(3)

includes Chengdu, Kunming and Chongqing

(4)

includes Nanchang, Nanning, Wuhan and Changsha

The table below sets forth our key operating data for the six months ended March 31, 2020 and 2021:

 

     Six months ended
March 31,
 
     2020     2021  

Period-average occupancy rate (%)

     87.7     86.6

Average monthly rental (RMB)

    

before discount for rental prepayment

     1,094       1,031  

after discount for rental prepayment

     1,072       1,024  

Rental spread margin (%)

    

before discount for rental prepayment

     22.9     13.0

after discount for rental prepayment

     21.3     12.3

Results of Operations

Net Revenues

Our total net revenues decreased by 1.9% from RMB627.1 million in the six months ended March 31, 2020 to RMB615.2 million (US$93.9 million) in the six months ended March 31, 2021.

 

   

Rental service. Our net revenue from rental service decreased by 2.5% from RMB555.7 million in in the six months ended March 31, 2020 to RMB541.7 million (US$82.7 million) in the six months ended March 31, 2021, primarily attributable to decreases in our average monthly rental and average occupancy rate. The decrease in our average monthly rental was primarily because a majority of the rental units we managed during the six months ended March 31, 2021, particularly the approximately 72,000 rental units from our acquisition of lease contracts and related assets in July 2020, were located outside the tier 1 cities in China, where the average monthly rental was lower compared to those in the tier 1 cities in China. As a result, our rental spread margin decreased during the same periods. The decrease in our period-average occupancy rate was primarily due to the impact of the COVID-19 pandemic.

 

3


   

Value-added services and others. Our net revenues from value-added services and others increased by 3.0% from RMB71.4 million in the six months ended March 31, 2020 to RMB73.5 million (US$11.2 million) in the six months ended March 31, 2021, primarily due to a decrease in revenues from broadband internet and utility service. This was partially offset by an increase in revenue from indemnity, as an increased number of tenants and landlords terminated their leases with us before expiration of the lock-in period and we forfeited their deposits or received compensation from them for their early termination.

Operating Costs and Expenses

Our total operating costs and expenses decreased by 24.4% from RMB1,079.8 million in the six months ended March 31, 2020 to RMB816.7 million (US$124.7 million) in the six months ended March 31, 2021, primarily due to a decrease in impairment loss, selling and marketing expenses, general and administrative expenses and research and development expense.

 

   

Operating cost. Our operating cost slightly increased from RMB682.2 million in the six months ended March 31, 2020 to RMB684.2 million (US$104.4 million) in the six months ended March 31, 2021.

 

   

Selling and marketing expenses. Our selling and marketing expenses decreased by 69.1% from RMB40.5 million in the six months ended March 31, 2020 to RMB12.5 million (US$1.9 million) in the six months ended March 31, 2021, primarily due to our cost-saving and personnel cost optimizing efforts, including providing less promotions in response to the COVID-19 pandemic.

 

   

General and administrative expenses. Our general and administrative expenses decreased by 29.0% from RMB65.1 million in the six months ended March 31, 2020 to RMB46.2 million (US$7.1 million) in the six months ended March 31, 2021, primarily attributable to decreases in the number of our staff and the share-based compensation expense due to our cost-saving efforts. The decrease was partially offset by an increase in consultant fees in relation to our acquisition of lease contracts and related assets for approximately 72,000 rental units in China.

 

   

Research and development expenses. Our research and development expenses decreased by 69.1% from RMB15.4 million in the six months ended March 31, 2020 to RMB4.8 million (US$0.7 million) in the six months ended March 31, 2021, primarily because we continuously reduced investments in the IT infrastructure as the system becomes mature.

 

   

Pre-operation expenses. We incurred pre-operation expenses of RMB12.7 million in the six months ended March 31, 2020, and did not incur pre-operation expenses in the six months ended March 31, 2021, primarily because we hardly developed any new rental units in the six months ended March 31, 2021.

 

   

Impairment loss on long-lived assets. Our impairment loss on long-lived assets decreased by 83.0% from RMB250.0 million in the six months ended March 31, 2020 to RMB42.6 million (US$6.5 million) in the six months ended March 31, 2021, primarily because large provisions was provided in 2020 for the impact of the COVID-19 pandemic on our business.

 

   

Other expense, net. Our net other expense increased by 90.5% from RMB13.9 million in the six months ended March 31, 2020 to RMB26.4 million (US$4.0 million) in the six months ended March 31, 2021, primarily attributable to the disposal of our fixed assets due to the termination of leases with landlords.

Loss from Operations

As a result of the foregoing, our loss from operations decreased by 55.5% from RMB452.7 million in the six months ended March 31, 2020 to RMB201.5 million (US$30.8 million) in the six months ended March 31, 2021.

 

4


Interest Expense, Net

Our net interest expense increased by 4.5% from RMB61.5 million in the six months ended March 31, 2020 to RMB64.3 million (US$9.8 million) in the six months ended March 31, 2021. The increase was mainly attributable to the issuance of series 1 and series 2 convertible notes.

Debt extinguishment cost

We recorded an RMB42.0 million (US$6.4 million) of debt extinguishment cost in the six months ended March 31, 2021. This debt extinguishment cost is related to the extension of our loan from Azure Investments Ltd., which was originally due on September 30, 2020. We transferred 77,250,000 Class A ordinary shares which were our treasure shares to Azure Investments Ltd., which was recorded as debt extinguishment cost.

Fair value change of contingent earn-out liabilities

We did not have any fair value change of contingent earn-out liabilities in the six months ended March 31, 2021, compared to a loss of RMB97.4 million in the six months ended March 31, 2020. The loss in the six months ended March 31, 2020 was primarily because the contingent earn-out liabilities was waived upon completion of our initial public offering.

Loss before income taxes

As a result of the foregoing, our loss before income taxes increased from RMB416.8 million in the six months ended March 31, 2020 to RMB308.0 million (US$47.0 million) in the six months ended March 31, 2021.

Income Tax Expense

Our income tax expense was RMB26 thousand in the six months ended March 31, 2020 and RMB25 thousand (US$4 thousand) in the six months ended March 31, 2021. We incurred income tax expense despite our loss before income tax as certain of our subsidiaries in the PRC had income before taxes and income tax was assessed accordingly on these subsidiaries.

Net Loss

As a result of the foregoing, we recorded a net loss of RMB416.8 million in the six months ended March 31, 2020 and RMB308.0 million (US$47.0 million) in the six months ended March 31, 2021.

Liquidity and Capital Resources

As of March 31, 2021, we had RMB26.4 million (US$4.0 million) in cash and cash equivalents and RMB107 thousand (US$16 thousand) in restricted cash. We did not have any capital commitment as of March 31, 2021.

As of March 31, 2021, we recorded negative working capital, and our current liabilities exceeded our current assets by RMB1,888.1 million (US$288.2 million). We recorded accumulated deficits of RMB4,117.5 million as of March 31, 2021 and net cash used in operating activities of RMB77.6 million (US$11.8 million) for the six months ended March 31, 2021. Our businesses have been negatively impacted by the COVID-19 coronavirus outbreak to a certain extent. During the COVID-19 pandemic in China, we adopted a defensive strategy after a prudent assessment of the broader macroeconomic downturn by consolidating internal resources, further improving operating efficiencies and focusing on asset quality improvement rather than aggressive expansion. During the six months ended March 31, 2021, our average month-end occupancy rate and the rental spread margin before discount for rental prepayments decreased as compared to the six months ended March 31, 2020 mainly due to the impact of the COVID-19 pandemic. These factors raise substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

 

5


As of March 31, 2021, we had short-term borrowings (including the portion of long-term borrowings due within one year) of RMB785.4 million (US$119.9 million) and long-term borrowings (excluding the portion of long-term borrowings due within one year) of RMB448.5 million (US$68.5 million). As of March 31, 2021, long-term loans in the amount of RMB448.5 million (US$68.5 million) would be due for repayment after one year, but within five years. As of March 31, 2021, we had outstanding convertible notes in the principal amount of US$45.5 million.

In July 2020, we executed convertible notes and warrant purchase agreements with investors. As of July 27, 2021, we have raised proceeds of US$48.1 million in aggregate from the investors by issuing convertible notes according to these agreements, and have not incurred issuance cost. Pursuant to these agreements with investors, we are able to issue additional convertible notes to raise proceeds of US$51.9 million in aggregate in the future.

In April 2021, we entered into two bank borrowing extension agreements with Shanghai Huarui Bank (“SHRB”), pursuant to which SHRB extended due date of one borrowing with the principal of RMB100.0 million to February 2022, and due date of the borrowing with the principal of RMB89.4 million to March 2022.

In July 2021, one of our principal shareholders has agreed to consider to provide us with necessary financial support in the form of debt and/or equity, to enable us to meet our other liabilities and commitments as they become due for at least twelve months from the issuance date of this current report.

In July and August 2021, we are planning to raise proceeds through registered direct offering.

Cash Flows

Our net cash used in operating activities in the six months ended March 31, 2021 was RMB77.6 million (US$11.8 million), which was primarily attributable to a net loss of RMB308.0 million (US$47.0 million) adjusted by non-cash items of RMB136.5 million (US$20.8 million) and a net working capital inflow of RMB93.9 million (US$14.3 million). The non-cash items of RMB136.5 million (US$20.8 million) were primarily attributable to (i) depreciation and amortization of RMB49.8 million (US$7.6 million), (ii) impairment loss of RMB42.6 million (US$6.5 million) as we continuously evaluate the rental units and other assets in our portfolio, such as the rental income that we expect to receive, and recognize an impairment loss equal to the difference between the carrying amount and fair value of these assets, and (iii) debt extinguishment cost of RMB$42.0 million (US$6.4 million), partially offset by the deferred rent of RMB42.3 million (US$6.5 million). The net working capital inflow of RMB93.9 million (US$14.3 million) was primarily attributable to (i) an increase in accrued expenses and other current liabilities of RMB78.4 million (US$12.0 million), (ii) an increase in accounts payable of RMB57.6 million (US$8.8 million) and (iii) a decrease in prepaid rent and deposit of RMB39.7 million (US$6.1 million), partially offset by (i) a decrease in deferred revenue of RMB54.1 million (US$8.3 million) and (ii) an increase in other assets of RMB32.0 million (US$4.9 million).

Our net cash used in investing activities in the six months ended March 31, 2021 was RMB3.9 million (US$0.6 million), due to our purchases of property and equipment of RMB3.9 million (US$0.6 million).

Our net cash provided by financing activities in the six months ended March 31, 2021 was RMB68.4 million (US$10.4 million). This was primarily attributable to (i) proceeds from issuance of convertible notes of RMB84.6 million (US$12.9 million), (ii) proceeds from short-term bank borrowings of RMB52.5 million (US$8.0 million) and (iii) proceeds from long-term bank borrowings of RMB39.4 million (US$6.0 million), partially offset by repayment of rental installment loans of RMB124.9 million (US$19.1 million).

We did not have any off-balance sheet arrangement as of March 31, 2021.

Recent Developments

In April 2021, Mr. Bing Xiao has resigned as our director for personal reasons and has no disagreement with us.

 

6


In April 2021, we entered into a share charge agreement with Shanghai Huarui Bank Co., Ltd. (“Huarui”) (the “Agreement”). Pursuant to the Agreement, we have charged 77,100,000 of our Class A ordinary shares, which are our treasury shares, and other property in connection with these shares as set forth in the Agreement (collectively, the “Charged Property”), to Huarui (the “Charge”). The Charge is to secure the payment and other obligations of our subsidiaries, as borrowers, under certain loan agreements with Huarui, as lender, with an aggregate outstanding principal amount of RMB383.3 million. If an event of default occurs under these loan agreements, subject to the terms in the Agreement, Huarui will be authorized to arrange for the Charged Property to be registered in the name of Huarui or its nominee, and will be entitled to exercise all voting and/or consensual powers pertaining to the Charged Property following the transfer of the legal title of the Charged Property to Huarui or its nominee. For purposes of the Charge, we issued 77,100,000 Class A ordinary shares to a third party in April 2021, and repurchased all of these shares and held them as treasury shares on the same day.

In July 2020, we entered into a series of asset purchase agreements with Great Alliance Coliving Limited and its affiliates (collectively, “GA”) to acquire assets, including approximately 72,000 apartment rental contracts with leasehold improvements attached to it, and trademarks of Beautiful House. As of March 31, 2021, the remaining consideration for the acquisition consisted of US$23.2 million in cash and RMB289.7 million worth of our Class A ordinary shares which were recorded in the account of “payable for asset acquisition” and “additional paid-in capital”, respectively. In May 2021, we entered into supplemental agreements with GA, pursuant to which we settled the remaining consideration by delivering 186,375,850 Class A ordinary shares to GA. They are entitled to sell these Class A ordinary shares in the open market, subject to certain lock-up arrangements. In addition, among the 186,375,850 Class A ordinary shares delivered, we are obliged to (i) make up the shortfall if the proceeds GA receives from the sale of 57,786,458 Class A ordinary shares are lower than US$0.4014 per share and (ii) repurchase 20,860,749 Class A ordinary shares at US$0.4015 per share in instalments if GA do not trade these shares in the open market, subject to the terms and conditions set forth in the agreements with GA.

Updates and risks related to PRC laws and regulations on cybersecurity and data protection

The regulatory framework for the collection, use, safeguarding, sharing, transfer and other processing of personal information and important data worldwide is rapidly evolving in PRC and is likely to remain uncertain for the foreseeable future. Regulatory authorities in China have implemented and are considering a number of legislative and regulatory proposals concerning data protection. For example, the PRC Cyber Security Law, which became effective in June 2017, established China’s first national-level data protection for “network operators,” which may include all organizations in China that connect to or provide services over the internet or other information network. The PRC Data Security Law, which was promulgated by the Standing Committee of PRC National People’s Congress, or the SCNPC, on June 10, 2021 and will become effective on September 1, 2021, outlines the main system framework of data security protection. Furthermore, the Opinions on Strictly Cracking Down on Illegal Securities Activities in Accordance with the Law, or the Opinions on Strictly Cracking Down on Illegal Securities Activities, which were issued by the General Office of the State Council and another authority on July 6, 2021, require the relevant regulators to coordinate and accelerate amendments of legislation on the confidentiality and archive management related to overseas issuance and listing of securities, and to improve the legislation on data security, cross-border data flow and management of confidential information.

In addition, regulations, guidelines and other measures are expected to be adopted. Drafts of some of these laws, regulations or measures have now been published, including (i) the draft rules on cross-border data transfers of personal information and important data published by Cyberspace Administration of China in 2017, which may, upon enactment, require security review before transferring human health-related data out of China (ii) the Draft Personal Information Protection Law promulgated by the SCNPC in 2020 and passed the second deliberation of the SCNPC in April 2021, which outlines the main system framework and comprehensive requirements of personal information protection and processing, and (iii) the draft amendment to the Measures for Cyber Security Review published by Cyberspace Administration of China in July 2021, which provides that, among others, an application for cybersecurity review must be made by an issuer that is a “critical information infrastructure operator” or a “data processing operator” as defined therein before such issuer’s securities become listed in a foreign country, if the issuer possesses personal information of more than 1 million users, and that the relevant governmental authorities in the PRC may initiate cybersecurity review if such governmental authorities determine an operator’s cyber products or services, data processing or potential listing in a foreign country affect or may affect China’s national security.

As there are still uncertainties regarding these new laws and regulations as well as the amendment, interpretation and implementation of the existing laws and regulations related to cybersecurity and data protection, we cannot assure you that we will be able to comply with these laws and regulations in all respects. The regulatory authorities may deem our activities or services non-compliant and therefore require us to suspend or terminate our business. We may also be subject to fines, legal or administrative sanctions and other adverse consequences, and may not be able to become in compliance with relevant laws and regulations in a timely manner, or at all. These may materially and adversely affect our business, financial condition, results of operations and reputation.

Currency Convenience Translation

The conversion of Renminbi into U.S. dollars herein, made solely for the convenience of the readers, is based on the noon buying rate on March 31, 2021 set forth in the H.10 statistical release of the U.S. Federal Reserve Board, which was RMB6.5518 to US$1.00. No representation is intended to imply that the Renminbi amounts could have been, or could be, converted, realized, or settled into U.S. dollars at that rate or any other rate, or at all. The PRC government restricts or prohibits the conversion of Renminbi into foreign currency and foreign currency into Renminbi for certain types of transactions. The percentages stated herein are calculated based on Renminbi.

 

7

EX-99.2
50000000000500000000002022-03-312021-10-312022-02-282022-03-31P5YP3Y2021-10-312022-03-312022-02-282022-02-282022-12-312022-12-31
Exhibit 99.2
Q&K INTERNATIONAL GROUP LIMITED
UNAUDIED CONDENSED CONSOLIDATED BALANCE SHEETS
(Renminbi and USD in thousands, except for share and per share data, unless otherwise stated)
 
    
As of

September 30, 2020
    
As of March 31, 2021
 
    
RMB
    
RMB
    
USD
 
ASSETS
                          
Current assets:
                          
Cash and cash equivalents
     22,879        26,363        4,024  
Restricted cash
     8,887        107        16  
Accounts receivable, net
     1,943        1,844        281  
Amounts due from related parties
     168        —          —    
Prepaid rent and deposit
     51,281        11,624        1,774  
Advances to suppliers
     16,043        20,025        3,056  
Other current assets
     101,803        74,677        11,398  
    
 
 
    
 
 
    
 
 
 
Total current assets
  
 
203,004
 
  
 
134,640
 
  
 
20,549
 
    
 
 
    
 
 
    
 
 
 
Non-current
assets:
                          
Property and equipment, net
     358,022        298,792        45,605  
Intangible assets, net
     222,123        157,171        23,989  
Land use rights
     10,448        10,305        1,573  
Other assets
     57,133        89,086        13,597  
    
 
 
    
 
 
    
 
 
 
Total
non-current
assets
  
 
647,726
 
  
 
555,354
 
  
 
84,764
 
    
 
 
    
 
 
    
 
 
 
Total assets
  
 
850,730
 
  
 
689,994
 
  
 
105,313
 
    
 
 
    
 
 
    
 
 
 
LIABILITIES AND SHAREHOLDERS’ DEFICIT
                          
LIABILITIES (including amounts of the consolidated VIEs without recourse to the Company)
                          
Current liabilities:
                          
Accounts payable
     294,469        348,217        53,148  
Amounts due to related parties
     6,594        12        2  
Deferred revenue
     152,619        98,527        15,038  
Short-term debt
     762,136        785,417        119,878  
Rental installment loans
     54,505        31,396        4,792  
Deposits from tenants
     82,191        69,682        10,636  
Payable for asset acquisition
     165,808        165,808        25,307  
Accrued expenses and other current liabilities
     443,418        523,707        79,933  
    
 
 
    
 
 
    
 
 
 
Total current liabilities
  
 
1,961,740
 
  
 
2,022,766
 
  
 
308,734
 
    
 
 
    
 
 
    
 
 
 
Non-current
liabilities:
                          
Long-term debt
     464,920        448,496        68,454  
Convertible note, net
     206,466        285,736        43,612  
Long-term deferred rent
     212,054        164,308        25,078  
    
 
 
    
 
 
    
 
 
 
Total
non-current
liabilities
  
 
883,440
 
  
 
898,540
 
  
 
137,144
 
    
 
 
    
 
 
    
 
 
 
Total liabilities
  
 
2,845,180
 
  
 
2,921,306
 
  
 
445,878
 
    
 
 
    
 
 
    
 
 
 

Q&K INTERNATIONAL GROUP LIMITED
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(Renminbi and USD in thousands, except for share and per share data, unless otherwise stated)
 
    
As of

September 30,
2020
   
As of March 31, 2021
 
    
RMB
   
RMB
   
USD
 
Commitments and contingencies (Note 14)
                  
Shareholders’ deficit:
                        
Ordinary shares (US$0.00001 par value per share; 5,000,000,0000 shares authorized; 1,436,010,850 and 1,461,010,850 shares issued and outstanding as of September 30, 2020 and March 31, 2021, respectively)
     92       94       14  
Treasury shares, at cost
     (298,110     —         —    
Additional
paid-in
capital
     2,085,099       1,844,610       281,543  
Accumulated deficit
     (3,809,516     (4,117,490 )     (628,452 )
Accumulated other comprehensive income
     18,357       31,857       4,862  
    
 
 
   
 
 
   
 
 
 
Total Q&K International Group Limited shareholders’ defici
t
  
 
(2,004,078
 
 
(2,240,929
 
 
(342,033
Noncontrolling interest
     9,628       9,617       1,468  
    
 
 
   
 
 
   
 
 
 
Total shareholders’ deficit
  
 
(1,994,450
 
 
(2,231,312
 
 
(340,565
    
 
 
   
 
 
   
 
 
 
Total liabilities and shareholders’ defici
t
  
 
850,730
 
 
 
689,994
 
 
 
105,313
 
    
 
 
   
 
 
   
 
 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Q&K INTERNATIONAL GROUP LIMITED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Renminbi and USD in thousands, except for share and per share data, unless otherwise stated)
 
    
Six months ended March 31,
 
    
2020
   
2021
 
    
RMB
   
RMB
   
USD
 
Net revenues:
                        
Rental service
     555,706       541,671       82,675  
Value-added services and others
     71,395       73,538       11,224  
    
 
 
   
 
 
   
 
 
 
Total net revenues
  
 
627,101
 
 
 
615,209
 
 
 
93,899
 
    
 
 
   
 
 
   
 
 
 
Operating costs and expenses:
                        
Operating cost
     (682,225     (684,205     (104,431
Selling and marketing expenses
     (40,450     (12,503     (1,908
General and administrative expenses
     (65,089     (46,243     (7,058
Research and development expenses
     (15,412     (4,765     (727
Pre-operation
expenses
     (12,725     —         —    
Impairment loss on long-lived assets
     (250,048     (42,584     (6,500
Other expense, net
     (13,870
)
 
    (26,426     (4,033
    
 
 
   
 
 
   
 
 
 
Total operating costs and expenses
  
(1,079,819)
   
(816,726)
   
(124,657)
 
    
 
 
   
 
 
   
 
 
 
Loss from operations
  
 
(452,718
)  
 
(201,517
 
 
(30,758
Interest expense, net
     (61,518     (64,287 )     (9,812 )
Debt extinguishment cost
 
 
 
 
 
(41,964
)
 
 
(6,405
)
 
Foreign exchange loss, net
     (4     (192     (29
Fair value change of contingent
earn-out
liabilities
     97,417       —         —    
    
 
 
   
 
 
   
 
 
 
Loss before income taxes
  
 
(416,823
 
 
(307,960
)
 
(47,004
)
Income tax expense
     (26     (25     (4
    
 
 
   
 
 
   
 
 
 
Net loss
  
 
(416,849
 
 
(307,985
)  
 
(47,008
)
Less: net loss attributable to noncontrolling interests
     (26     (11     (2
    
 
 
   
 
 
   
 
 
 
Net loss attributable to Q&K International Group Limited ordinary shareholders
  
 
(416,823
 
 
(307,974
)  
 
(47,006
)
    
 
 
   
 
 
   
 
 
 
Net loss per share attributable to ordinary shareholders of Q&K International Group Limited—Basic and diluted
     (0.34     (0.23 )     (0.03 )
Weighted average number of ordinary shares used in computing net loss per share—Basic and diluted
     1,226,807,606       1,352,152,052       1,352,152,052  

Q&K INTERNATIONAL GROUP LIMITED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Renminbi and USD in thousands, except for share and per share data, unless otherwise stated)
 
    
Six months ended March 31,
 
    
2020
   
2021
 
    
RMB
   
RMB
   
USD
 
Net loss
  
 
(416,849
 
 
(307,985
 
 
(47,008
Other comprehensive income (loss), net of tax of nil:
                        
Foreign currency translation adjustments
     (1,464     13,500       2,061  
    
 
 
   
 
 
   
 
 
 
Comprehensive loss
  
(418,313
)
 
(294,485
 
(44,947
)
 
Less: comprehensive loss attributable to noncontrolling interests
     (26     (11     (2
    
 
 
   
 
 
   
 
 
 
Net loss attributable to Q&K International Group Limited ordinary shareholders
  
(418,287
)  
(294,474
)
 
 
(44,945
)
  
    
 
 
   
 
 
   
 
 
 
 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Q&K INTERNATIONAL GROUP LIMITED
UAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIT
(Renminbi in thousands, except for share data, unless otherwise stated)
 
    
Six months ended March 31, 2020
 
    
Ordinary shares
    
Series A non-redeemable

preferred shares
   
Treasury
stock
    
Additional
paid in
capital
    
Accumulated
other
comprehensive
(loss) income
   
Accumulated
deficit
   
Total
   
Noncontrolling
interests
   
Total
shareholders’
deficit
 
    
Number of
shares
    
Amount
    
Number of
shares
   
Amount
                                             
Balance at September 30, 2019
  
 
430,450,490
 
  
 
27
 
  
 
255,549,510
 
 
 
35,777
 
 
 
—  
 
  
 
—  
 
  
 
(5,908
 
 
(2,275,924
 
 
(2,246,028
 
 
9,677
 
 
 
(2,236,351
Issuance of ordinary shares in connection with initial public offering (“IPO”), net off issuance of cost of RMB 29,289
     93,150,000        6        —         —         —          289,021        —         —         289,027       —         289,027  
Conversion of Series A
non-redeemable
preferred shares into ordinary shares
     255,549,510        17        (255,549,510     (35,777     —          35,760        —         —         —         —         —    
Conversion of mezzanine equity into ordinary shares
     656,860,850        42        —         —         —          1,425,436        —         —         1,425,478       —         1,425,478  
Share-based compensation
     —          —          —         —         —          39,901        —         —         39,901       —         39,901  
Net loss
     —          —          —         —         —          —       
 
—  
 
    (416,823     (416,823     (26     (416,849
Foreign currency translation adjustments
     —          —          —         —         —          —         
(1,464
    —        
(1,464
    —        
(1,464
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance at March 31, 2020
  
 
1,436,010,850
 
  
 
92
 
  
 
—  
 
 
 
—  
 
 
 
—  
 
  
 
1,790,118
 
  
 
(7,372
 
 
(2,692,747
 
 
(909,909
 
 
9,651
 
 
 
(900,258
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 

    
Six months ended March 31, 2021
 
    
Ordinary shares
    
Series A non-redeemable

preferred shares
    
Treasury
stock
   
Additional
paid in
capital
    
Accumulated
other
comprehensive
(loss) income
    
Accumulated
deficit
   
Total
   
Noncontrolling
interests
   
Total
shareholders’
deficit
 
    
Number of
shares
    
Amount
    
Number of
shares
    
Amount
                                              
Balance at September 30, 2020
  
 
1,436,010,850
 
  
 
92
 
  
 
—  
 
  
 
—  
 
  
 
(298,110
 
 
2,085,099
 
  
 
18,357
 
  
 
(3,809,516
 
 
(2,004,078
 
 
9,628
 
 
 
(1,994,450
Transfer of treasury shares to extinguish debt with a lender
     —          —          —          —          298,110      
(256,146
)
 
    —         
    41,964       —         41,964  
Share-based compensation
     —          —          —          —          —         15,348        —          —         15,348       —         15,348  
Exercise of share-based compensation
     25,000,000        2        —          —          —         —          —          —         2       —         2  
Warrants issued in connection with convertible notes
     —          —          —          —          —         309     
 
—  
 
     —         309       —         309  
Net loss
     —          —          —          —          —         —       
 
—  
 
     (307,974 )     (307,974 )     (11     (307,985 )
Foreign currency translation adjustments
     —          —          —          —          —         —          13,500        —         13,500       —         13,500  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
 
Balance at March 31, 2021
  
 
1,461,010,850
 
  
 
94
 
     —          —          —      
 
1,844,610
 
  
 
31,857
 
  
 
(4,117,490
)  
 
(2,240,929
 
 
9,617
 
 
 
(2,231,312
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Q&K INTERNATIONAL GROUP LIMITED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Renminbi and USD in thousands, unless otherwise stated)
 
    
Six months ended March 31,
 
    
2020
   
2021
 
    
RMB
   
RMB
   
USD
 
Operating activities:
                        
Net loss
     (416,849     (307,985 )     (47,008 )
Adjustments to reconcile net loss to net cash used in operating activities:
                        
Share-based compensation
     39,901       15,348       2,343  
Depreciation and amortization
     16,244       49,804       7,602  
Loss from disposal of property, plant and equipment
     107,219       28,372       4,330  
Accretion of interest expense
     —         678       103  
Fair value change of contingent
earn-out
liabilities
     (97,417     —         —    
Debt extinguishment cost
 
 
 
 
 
41,964
 
 
 
6,405
 
Deferred rent
     17,841       (42,277     (6,452
Impairment loss
     250,048       42,586       6,500  
Changes in operating assets and liabilities:
                        
Accounts receivable
     (1,990     99       15  
Amounts due from related parties
     4,658       168       26  
Prepaid rent and deposit
     53,100       39,657       6,053  
Advances to suppliers
     54,219       (3,982     (608
Other current assets
     (205,976     27,128       4,141  
Other assets
     (66,878     (31,953     (4,877
Accounts payable
     145,104       57,625       8,795  
Amounts due to related parties
     1,997       (6,582     (1,005 )
Deferred revenue
     (21,340     (54,092     (8,256
Deposits from tenants
     (35,961     (12,509     (1,909
Accrued expenses and other current liabilities
     (23,638     78,385       11,966  
    
 
 
   
 
 
   
 
 
 
Net cash used in operating activitie
s
  
 
(179,718
 
 
(77,566
 
 
(11,836
    
 
 
   
 
 
   
 
 
 
Investing activities:
                        
Purchases of property and equipment
     (75,439     (3,879     (592
    
 
 
   
 
 
   
 
 
 
Net cash used in investing activities
  
 
(75,439
 
 
(3,879
 
 
(592
    
 
 
   
 
 
   
 
 
 
Financing activities:
                        
Proceeds from IPO, net off issuance cost of RMB 29,289
     289,027       —         —    
Proceeds from issuance of convertible notes
     —         84,638       12,880  
Proceeds from short-term bank borrowings
     247,552       52,452       8,006  
Repayment of short-term bank borrowings
     (65,000     (1,200     (183
Proceeds from long-term bank borrowings
     —         39,400       6,014  
Repayment of long-term bank borrowings
     (45,863     (861     (131
Proceeds from rental installment loans
     251,779       19,049       2,907  
Repayment of rental installment loans
     (556,750     (124,908     (19,065
Proceeds from capital lease and other financing arrangement payable
     65,415       —         —    
Repayment of capital lease and other financing arrangement payable
     (51,496     (184     (28
    
 
 
   
 
 
   
 
 
 
Net cash provided by financing activities
  
 
134,664
 
 
 
68,386
 
 
 
10,400
 
    
 
 
   
 
 
   
 
 
 
Effect of foreign exchange rate changes
     4,044       7,763       1,389  
    
 
 
   
 
 
   
 
 
 
Net (decrease) in cash, cash equivalents and restricted cash
     (116,449     (5,296     (639
Cash, cash equivalents and restricted cash at the beginning of the period
     250,814       31,766       4,679  
    
 
 
   
 
 
   
 
 
 
Cash, cash equivalents and restricted cash at the end of the period
     134,365       26,470       4,040  
    
 
 
   
 
 
   
 
 
 
Supplemental disclosure of cash flow information:
                        
Interest paid, net of amounts capitalized
     9,139       445       68  
Income taxes paid
     80       —         —    

    
As of
September 30,
2020
   
As of March 31,
2021
 
    
RMB
   
RMB
    
USD
 
Reconciliation to amounts on the consolidated balance sheets:
                         
Cash and cash equivalents
     22,879       26,363        4,024  
Restricted cash
     8,887       107        16  
    
 
 
   
 
 
    
 
 
 
Total cash, cash equivalents and restricted cash
  
 
31,766
 
 
 
26,470
 
  
 
4,040
 
    
 
 
   
 
 
    
 
 
 
Supplemental schedule of
non-cash
investing and financing activities:
                         
Purchases of property and equipment included in payables
     (74,103     —          —    
Acquisition of rental assets financed by ADS (Note 4)
     (22,540     —          —    
Conversion of Series A
non-redeemable
preferred shares and mezzanine into ordinary shares
     (1,425,478     —          —    
Transfer of treasury shares to extinguish debt with a lender
     —         41,964        6,405  
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Q&K INTERNATIONAL GROUP LIMITED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Renminbi in thousands, except for share data and per share data, unless otherwise stated)
 
1.
ORGANIZATION AND PRINCIPAL ACTIVITIES
Q&K International Group Limited (the “Company” or “Q&K”), its subsidiaries and consolidated variable interest entities (the “Group”) is a rental apartment operation platform in the People’s Republic of China (the “PRC”), that provides rental and value-added services to young, emerging urban residents since 2012. The Group sources and converts apartments to standardized furnished rooms and leases to young people seeking affordable residence in cities in the PRC
.
The Company completed its initial public offering (IPO) on the Nasdaq Global Market in November 2019, for a net offering size of approximately US$44,534 (equivalent to RMB289,027). The Company offered 2,700,000 ADSs in the IPO, with each ADS represents 30 Class A ordinary shares, par value $0.00001 per share at $17 per ADS. In addition, the underwriters of the Company’s IPO have exercised in full their over-allotment option to purchase additional 405,000 ADSs, with each ADS represents 30 Class A ordinary shares, par value $0.00001 per share at $17 per ADS.
 
2.
SUMMARY OF PRINCIPAL ACCOUNTING POLICIES
Basis of presentation
The unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Security and Exchange Commission and accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial reporting. Certain information and footnote disclosures normally included in financial statements prepared in conformity with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these statements should be read in conjunction with the Company’s audited consolidated financial statements for the years ended September 30, 2020 filed on February 16, 2021.
In the opinion of the management, the accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments, which are necessary for a fair presentation of financial results for the interim periods presented. The Company believes that the disclosures are adequate to make the information presented not misleading. The accompanying unaudited condensed consolidated financial statements have been prepared using the same accounting policies as used in the preparation of the Company’s consolidated financial statements for the year ended September 30, 2020. The results of operations for the six months ended March 31, 2020 and 2021 are not necessarily indicative of the results for the full years.
Going concern
The Group has been incurring losses from operations since its inception. Accumulated deficits amounted to RMB 3,809,516 and RMB 4,117,490 as of September 30, 2020 and March 31, 2021, respectively. Net cash used in operating activities were RMB 77,566 and RMB 179,718 for the six months ended March 31, 2021 and 2020, respectively. As of September 30, 2020 and March 31, 2021, current liabilities exceeded current assets by RMB 1,758,736 and RMB 1,888,126, respectively.
In addition, the Company’s operations have been affected by the outbreak and spread of the coronavirus disease 2019
(COVID-19),
which in March 2020, was declared a pandemic by the World Health Organization. The
COVID-19
outbreak caused lockdowns, travel restrictions, and closures of businesses. The Company’s businesses have been negatively impacted by the
COVID-19
coronavirus outbreak to a certain extent.
Due to the outbreak of
COVID-19,
in early February 2020, the Chinese government required the nationwide closure of many business activities in the PRC to prevent the spread of
COVID-19
and protect public health. During this period, the Company adopted a defensive strategy after a prudent assessment of the broader macroeconomic downturn by consolidating internal resources, further improving operating efficiencies and focusing on asset quality improvement rather than aggressive expansion. During the six months ended March 31, 2021, the
average month-end occupancy
rate and the rental spread margin before discount for rental prepayments decreased as compared to the same period ended March 31, 2020 mainly due to the impact
of COVID-19.
These factors raise substantial doubt about the Group’s ability to continue as a going concern. The financial statements do not include any adjustments that might be necessary if the Group is unable to continue as a going concern.
The Group intends to meet the cash requirements for the next 12 months from the issuance date of this report through a combination of bank loans, issuance of convertible notes, and principal shareholder’s financial support. The Group will focus on the following activities:
 
   
In July 2020, the Company has executed a convertible note and warrant purchase agreement with two investors (Note 7). By the date of this report, the Company issued the several instalments of Notes and raised proceeds aggregating
$48,076
(equivalent to
RMB 329,045
)
from the investor. No issuance cost was incurred. Pursuant to the convertible and warrant purchase agreement with investors, the Company is able to issue additional Notes to raise proceeds of $51,924 in the future; 

 
 
In April 2021, the Company entered into two bank borrowing extension agreements with SHRB, pursuant to which the bank extended due date of one borrowing with the principal of RMB 100,000 to February 2022, and due date of the one borrowing with the principal of RMB 89,400 to March 2022,
 
 
 
Between July and August 2021, the Company plans raise proceeds through registered direct offering, and
 
 
 
In July 2021, a principal shareholder of the Company, has agreed to consider to provide necessary financial support in the form of debt and/or equity, to the Group to enable the Group to meet its other liabilities and commitments as they become due for at least twelve months from the issuance date of this unaudited condensed consolidated financial statements.
However, future financing requirements will depend on many factors, including the scale and pace of the expansion of the Group’s apartment network, efficiency in apartment operation, including apartment renovation and pricing, the expansion of the Group’s sales and marketing activities, and potential investments in, or acquisitions of, businesses or technologies. Inability to access financing on favorable terms in a timely manner or at all would materially and adversely affect the Group’s business, results of operations, financial condition, and growth prospects.
Capitalization of interest
Interest cost incurred on funds used to construct leasehold improvements during the active construction period is capitalized. The interest capitalized is determined by applying the borrowing interest rate to the average amount of accumulated capital expenditures for the assets under construction during the period. Total interest expenses incurred were RMB 61,518 and RMB 64,287 for the six months ended March 31, 2020 and 2021, respectively, out of which no interest expenses were capitalized during relevant periods.
Land use rights
Land use rights, which are all located in the PRC, are recorded at cost and amortized on a straight-line basis over the remaining term of the land certificates, which is between 30 to 50 years. Amortization expense of land use rights for the six months ended March 31, 2020 and 2021 amounted to RMB143 and RMB143, respectively.
Impairment of long-lived assets
The Group evaluates its long-lived assets and finite lived intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When these events occur, the Group measures impairment by comparing the carrying amount of the assets to future undiscounted net cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flows is less than the carrying amount of the assets, the Group recognizes an impairment loss equal to the difference between the carrying amount and fair value of these assets.
The Group performed an impairment test of its long-lived assets associated with certain apartments due to the continued underperformance relative to the projected operating results, and recognized impairment losses of RMB 250,048 and RMB 42,584 during the six months ended March 31, 2020 and 2021, respectively.
Capital lease and other financing arrangement
Leases of leasehold improvements or furniture, fixtures and equipment that transfer to the Group substantially all of the risks and rewards of ownership by the end of the lease term are classified as capital leases. The leasehold improvements and liability are measured initially at an amount equal to the lower of their fair value or the present value of the minimum lease payments. Subsequent to initial recognition, the assets are accounted for in accordance with the accounting policy applicable to that asset.
Minimum lease payments made under capital leases are apportioned between the finance expense and the reduction of the outstanding lease liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the lease liability.
The Company started to cooperate with a rental service company to source and renovate apartments since August 2018. For certain identified newly sourced apartments, the rental service company reimburses the Company for costs incurred for the renovation. The Company then makes payments to the rental service company in installments equal to the reimbursed renovation costs plus interest and tax over a period of five years. At the end of the five-year period, the ownership of the renovation will be transferred to the Company. The Company accounts for this arrangement with the rental service company as a capital lease.

As of March 31, 2021, the Company had capital lease payable of RMB 68,080. The leasehold improvements or furniture, fixtures and equipment used in apartments obtained under such capital lease arrangements are with aggregate initial value of RMB 136,146 and carrying value of RMB 42,073 as of March 31, 2021.
Under the same arrangement above, the Company also sells leasehold improvements and furniture, fixtures and equipment of certain existing apartments to the rental service company at carrying value and simultaneously leases them back. Such transaction fails sales and lease-back accounting and is accounted for as a financing arrangement. The proceeds received from the rental service company are reported as other financing arrangement payable. As of March 31, 2021, the Company has RMB 388,537 other financing arrangement payable. The underlying leasehold improvements and furniture, fixtures and equipment are with aggregate initial value of RMB 374,609 and carrying value of RMB 115,765 as of March 31, 2021.
Lease accounting with tenants
The Group sources apartments from landlords and converts them into standardized furnished rooms to lease to tenants seeking affordance residences in China. Revenues are primarily derived from the lease payments from its tenants and are recorded net of tax.
The Group typically enters into 12 to
26-month
leases with tenants and a majority of which have a
lock-in
period of 12 months or longer. The
lock-in
period represents the term during which termination will result in the forfeiture of deposit, which is typically 1 or 2 months’ rent. The Group determines that the
lock-in
period is the lease term under ASC 840. Upon termination of leases, the Group returns unused portions of any prepaid rentals to the tenant within a prescribed period of time. Deposit can only be returned for termination after
lock-in
period. Monthly rent is fixed throughout the lease term and there is no rent- free period or rent escalations during the period. The Group determines all lease arrangements with tenants are operating leases since the benefits and risks incidental to ownership remains with the Group. Revenue is recognized on a straight-line basis starting from the commencement date stated in the lease agreements.
In April 2020, the Group started to modify arrangements with a rental service company for apartments in certain cities. For some apartments under this arrangement, the Group no longer leases in apartments from the rental service company or enters into new
lease-out
agreements with tenants. Instead, the Group transferred existing leases with tenants to the rental service company. The rental service company maintains the
lease-in
agreements with the landlords of the apartments, collects rental from the tenants directly and enters into
lease-out
agreements with new tenants directly. The Group and a third-party contractor are engaged by the rental service company to manage these apartments. Pursuant to this arrangement, the Group is responsible for supervising the third-party contractor including in its identification of potential tenants and daily operation, and receives fee income equals to the rental income from tenants minus the rental fee to landlords. For each of these apartments, if the rental collected from the tenants is less than the rental paid to the landlords, the Group is required to pay the rental service company this difference. As of March 31, 2021, the Group had transferred 25,375 of its rental units contracted and managed these rental units under this modified arrangement. Referring to ASC
840-10-15-6(a),
the Group determines that it
leases-in
apartments from the rental service company, and
leased-out
apartment to tenants through the rental service company, because the Group has the ability and right to operate the apartments while obtaining more than a minor amount of the output of the apartments. The lease term ranged between 12 and 26 months, and a majority of which have a
lock-in
period of 12 months or longer. Monthly rent with tenants is fixed throughout the lease term and there is no rent-free period or rent escalations during the period. The Group determines all lease arrangements with tenants are operating leases since the benefits and risks incidental to ownership remains with the Group. Revenue is recognized on a straight-line basis starting from the commencement date stated in the lease agreements.
The
gross
cost for leasehold improvements and furniture, fixtures and equipment used in apartments were RMB 403,191 and RMB 191,117, respectively, the accumulated depreciation was RMB 136,692 and RMB 46,539, respectively and the impairment losses was RMB 132,278 and RMB 89,850, respectively as of March 31, 2021. Future rentals expected to be collected from outstanding leases existing as of March 31, 2021 totaled RMB 488,482, for which RMB 324,084 and RMB 164,398 to be collected for the year ending September 30, 2021 and 2022, respectively.
Rental incentives
Tenants who prepay rent are entitled to rental discounts. Tenants who prepay rent of at least the first six months of the lease term can enjoy a 5% rental discount, and tenants who prepay at least the first twelve months of lease term rental can enjoy a 10% rental discount (subject to a RMB200 limit per month). Such incentives are only applicable during the
lock-in
period. The Group considers the rental discounts as a lease incentive and records it as a reduction in revenue on a straight line basis over the lease term. The Group recorded RMB 11,765 and RMB 3,980 of rental incentives for the six months ended March 31, 2020 and 2021, respectively.

Lease accounting with landlords
The Group leases apartments from landlords usually for a period of five to six years which may be extended for an additional three or two years at the discretion of the landlords. Since all the benefits and risks incidental to ownership remains with the landlord, the Group determines that these arrangements are operating leases. The Group typically negotiates a rent free period of
90-120
days and locks in a fixed rent for the first three years and approximately 5% annual,
non-compounding
increase for the rest of the lease period. As such, typically all leases with landlords contain rent holidays and fixed escalations of rental payments during the lease term. The Group determines the lease term under ASC 840 to include the years that can be early terminated by the landlords. The Group records total lease expense on a straight-line basis over the lease term and the difference between the straight-line lease expense and cash payments under the lease is recorded as deferred rent on the unaudited consolidated balance sheets. As of September 30, 2020 and March 31, 2021, deferred rent of RMB 2,503 and RMB 8,443 were recorded in accrued expenses and other current liabilities and RMB 212,054 and RMB 164,308 were recorded as long-term deferred rent, respectively.
Rental expense to the landlords recorded in unaudited condensed consolidated statements of comprehensive losses were RMB 512,753 and RMB 506,225 for the six months ended March 31, 2020 and 2021, respectively.
Treasury shares
The Company accounts for treasury shares using the cost method. Under this method, the cost incurred to purchase the shares is recorded in the treasury shares account on the consolidated balance sheets. At retirement of the treasury shares, the ordinary shares account is charged only for the aggregate par value of the shares. The excess of the acquisition cost of treasury shares over the aggregate par value is allocated between additional paid- in capital (up to the amount credited to the additional
paid-in
capital upon original issuance of the shares) and retained earnings.
For the year ended September 30, 2020, the Group repurchased 77,250,000 ordinary shares from certain major investors in the IPO, through cash payment of RMB 248,859 and issuance of convertible notes of RMB 49,251 (equivalent to $7,232
). As of March 31, 2021, the Company transferred treasury shares of
77,250,000
to one of its debtors as a debt extinguishment cost, with a fair value of RMB 41,964, or $6,405.
The fair value is determined at the trading price of per share price of
 $0.083 on the date of transferring treasury shares. As of March 31, 2021, the Company had
no
outstanding treasury shares.
Convenience translation
The Group’s business is primarily conducted in the PRC and all of the revenues are denominated in RMB. The financial statements of the Group are stated in RMB. Translations of balances in the consolidated balance sheet, and the related consolidated statements of comprehensive loss, shareholders’ equity and cash flows from RMB into US dollars as of and for the six months ended March 31, 2021 are solely for the convenience of the readers and were calculated at the rate of USD1.00=RMB 6.5518, representing the noon buying rate set forth in the H.10 statistical release of the U.S. Federal Reserve Board on March 31, 2021. No representation is made that the RMB amounts could have been, or could be, converted, realized or settled into USD at that rate on March 31, 2021, or at any other rate.
Fair value
The Group defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Group considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.
The established fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels of inputs may be used to measure fair value include:
Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2 applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
The Group’s financial instruments include cash and cash equivalents, restricted cash, accounts receivable, amounts due from related parties, accounts payable, amounts due to related parties, short-term debt, rental installment loans, deposits from tenants, other current liabilities, long-term debt, convertible note, and contingent
earn-out
liabilities.

The following table summarizes the fair value of the Group’s financial liabilities that are accounted for at fair value on a recurring basis, by level within the fair value hierarchy, for the six months ended March 31, 2020 and 2021:
 
                
Fair Value Measurements at Reporting Date Using
        
Six Months Ended March 31,
  
Description
  
Fair Value as of
March 31
RMB
    
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
RMB
    
Significant
Other
Observable
Inputs
(Level 2)
RMB
    
Significant
Unobservable
Inputs
(Level 3)
RMB
    
Total Gain
for
the Six
Months
Ended
March 31,
RMB
 
2020
  
Contingent earn-out
                                           97,417  
2021
   liabilities   
 
  
 
                    
 
  
 
  
 
  
 
The Group determines the fair value with the help from third party professional valuation specialists, and the assumptions used in estimating fair value require significant judgment. The use of different assumptions and judgments could result in a materially different estimate of fair value. Key inputs in determining the fair value of the contingent
earn-out
liabilities include assumptions such as operating income, operating cost, number of new apartments acquired, probabilities of qualified IPO, etc., and changes in these assumptions would affect the number and value of future additional shares to be issued. Contingent
earn-out
liabilities are classified in Level 3 of the valuation hierarchy. The contingent earn-out liabilities related to the EBITDA feature of Series C and Series C-1 convertible redeemable preferred shares at fair value, and all the holders of the Series C-2, Series C-1 and Series C convertible redeemable preferred shares have waived the EBITDA feature upon IPO in November 2019. As of March 31, 2021 and September 30, 2020, the Company had no contingent earn-out liabilities.
The following table presents the Group’s assets measured at fair value on a
non-recurring
basis for the six months ended March 31, 2020 and 2021:
 
                
Fair Value Measurements at Reporting Date Using
 
Six Months Ended March 31,
  
Description
  
Fair Value as of
March 31
RMB
    
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
RMB
    
Significant
Other
Observable
Inputs
(Level 2)
RMB
    
Significant
Unobservable
Inputs
(Level 3)
RMB
    
Total
Loss for
the Six
Months
Ended
March 31,
RMB
 
2020
   Property and
equipment
     246,139                       
246,139
       250,048  
2021
     20,452                         
20,452
       16,004  
2021
   Apartment rental
agreements
     75,074                           
75,074
       26,580  
2021
   Trademarks      81,469                           
81,469
       —    
Fair value of the property and equipment was determined by the Group based on the income approach using the discounted cash flow associated with the underlying assets, which incorporated certain assumptions including projected rooms’ revenue, growth rates and projected operating costs based on current economic condition, expectation of management and projected trends of current operating results. As a result, the Group has determined that the majority of the inputs used to value its property and equipment are unobservable inputs that fall within Level 3 of the fair value hierarchy. The revenue growth rate and the discount rate were the significant unobservable inputs used in the fair value measurement, which were 4% and 10% for the six months ended March 31, 2020 and 3% and 11% for the six months ended March 31, 2021, respectively.
As a result of reduced expectations of future cash flows from certain leased apartments, the Group determined that the property and equipment was not fully recoverable and consequently recorded impairment charges of RMB 250,048 and RMB 16,004 for the six months ended March 31, 2020 and 2021, respectively.
The Group acquired from Great Alliance Coliving Limited. and its affiliates (“Beautiful House”) certain assets, including approximately 72,000 apartment rental contracts and leasehold improvements attached to the apartments, and trademarks of Beautiful House. The Company determined the estimated fair values using Level 3 inputs after review and consideration of relevant information, which are unobservable inputs that fall within Level 3 of the fair value hierarchy.
 
   
The apartment rental agreements with both landlords and tenants were valued using the multiperiod excess earnings method, which incorporated certain assumptions including projected rooms’ revenue, growth rates and projected operating costs based on current economic condition, expectation of management and projected trends of current operating results. The revenue growth rate and the discount rate were the significant unobservable inputs used in the fair value measurement, which were negative 12.5% and 19%, and
 
   
T
he trademarks were valued using the relief from royalty method, which incorporated certain assumptions including projected revenues contributed by trademarks, royalty savings and projected trends of operating results. The revenue growth rate and the discount rate were the significant unobservable inputs used in the fair value measurement, which were negative 10% and 19%

As of March 31, 2021, the Group reviewed the fair value of the apartment rental agreements based on the income approach using the discounted cash flow associated with the underlying assets, which incorporated certain assumptions including projected rooms’ revenue, growth rates and projected operating costs based on current economic condition, expectation of management and projected trends of current operating results. As a result, the Group has determined that the majority of the inputs used to value its property and equipment are unobservable inputs that fall within Level 3 of the fair value hierarchy. The revenue growth rate and the discount rate were the significant unobservable inputs used in the fair value measurement, which were 3% and 11%
for the six months ended March 31, 2021. As a result of reduced expectations of future cash flows from certain leased apartments, the Group consequently recorded impairment charges of RMB
26,580 for the six months ended March 31, 2021
.
The financial instruments primarily including cash and cash equivalents, restricted cash, account receivables, amounts due from related parties, account payables, amounts due to related parties, short-term debt, rental installment loans, deposits from tenants, other liabilities, are carried at cost which approximates their fair value due to the short-term nature of these instruments. The convertible note and long-term debt approximates their fair values, because the bearing interest rate approximates market interest rate, and market interest rates have not fluctuated significantly since the commencement of loan contracts signed.
Recent accounting pronouncements
In February 2016, the FASB issued ASU
2016-02,
Leases (Topic 842). The guidance supersedes existing guidance on accounting for leases with the main difference being that operating leases are to be recorded in the statement of financial position as
right-of-use
assets and lease liabilities, initially measured at the present value of the lease payments. For operating leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and liabilities. For public business entities, the guidance is effective for fiscal years beginning after December 15, 2018, including final periods within those fiscal years. In transition, entities are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. In July 2018, the FASB issued ASU
No. 2018-10
Codification Improvements to Topic 842, Leases and ASU
No. 2018-11,
Leases (Topic 842), Targeted Improvements. ASU
No. 2018-10
affects narrow aspects of the guidance issued in the amendments in Update
2016-02
and ASU
No. 2018-11
allows for an additional optional transition method where comparative periods presented in the financial statements in the period of adoption will not be restated and instead, companies will recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. In November 2019, the FASB issued ASU
2019-10,
Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates. ASU
2019-10
amends the effective dates for ASU
2016-02.
The Group is an EGC and expects to adopt ASU
2016-02
utilizing the optional transition approach allowed under ASU
2018-11
and apply the package of practical expedients beginning October 1, 2021. The Group expects material changes to its consolidated balance sheet to recognize
right-of-use
lease assets and related lease liabilities for operating leases. The Group is in the process of evaluating the impact on its consolidated financial statements upon adoption.
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. Early adoption is permitted for all entities for annual periods beginning after December 15, 2018, and interim periods therein. The updates should be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach). ASU
2019-10
amends the effective dates for ASU
2016-13.
The Group is an EGC and has elected to adopt the new standard as of the effective date applicable to nonissuers and will implement the new standard on October 1, 2023. The Group is in the process of evaluating the impact on its consolidated financial statements upon adoption.
In August 2018, the FASB released ASU
2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. ASU
2018-13
modifies the disclosure requirements on fair value measurements. The provisions of ASU
2018-13
are to be applied using a prospective or retrospective approach, depending on the amendment, and are effective for interim periods and fiscal years beginning after October 1, 2020, with early adoption permitted. The Group does not believe the standard will materially affect the consolidated statements of income or consolidated statements of cash flows.
In December 2019, the FASB issued ASU
No. 2019-12, Income
Taxes (Topic 740)—Simplifying the Accounting for Income Taxes. ASU
2019-12
is intended to simplify accounting for income taxes. It removes certain exceptions to the general principles in Topic 740 and amends existing guidance to improve consistent application. ASU
2019-12
is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years, which is 2022 fiscal year for the Company, with early adoption permitted. The Company does not expect adoption of the new guidance to have a significant impact on its consolidated financial statements.

3.
OTHER CURRENT ASSETS
 
    
As of September 30,

2020
    
As of March 31,
2021
 
Due from a rental service company (1)
     52,410        52,410  
Deductible input value added tax (“VAT”) (2)
     35,660        —    
Due from a service provider (3)
     9,501        17,625  
Others
     4,232        4,642  
    
 
 
    
 
 
 
Total
  
 
101,803
 
  
 
74,677
 
    
 
 
    
 
 
 
 
(1)
As of September 30, 2020 and March 31, 2021, the balance due from a rental service company represented the reimbursement renovation costs due from the rental service company. The Company started to cooperate with a rental service company to source and renovate apartments since August 2018. For certain identified newly sourced apartments, the rental service company reimburses the Company for costs incurred for the renovation. The Company then makes payments to the rental service company in installments equal to the reimbursed renovation costs plus interest and tax over a period of five years.
(2)
The deductible input VAT represented the excess of input VAT arising from purchases
over
output VAT arising from sales under the PRC tax laws and regulations. The deductible input VAT is carried forward to future period. As of March 31, 2021, the Company assessed certain PRC subsidiaries would not generate sufficient revenues and output VAT for the balance to
be deducted
in the next twelve months, the Company reclassified the deductible input VAT to the account of “other assets” as a noncurrent asset.
(3)
Upon asset acquisition with Beautiful House, the Group engaged a third party service provider to provide apartment operation services to the Group. To support the operation services, the Company made interest free loans to the service provider and the loans are repayable on demand.
 
4.
PROPERTY AND EQUIPMENT, NET
Property and equipment, net consist of the following:
 
    
As of September 30,

2020
    
As of March 31,
2021
 
Cost:
                
Buildings
     40,167        40,167  
Leasehold improvements
     316,665        270,914  
Furniture, fixtures and equipment used in apartments
     122,171        101,267  
Vehicle
     3,043        3,043  
Office furniture, fixtures and equipment
     20,504        20,454  
Less: Accumulated depreciation
     (217,582      (206,542
Construction in progress
     73,054        69,489  
    
 
 
    
 
 
 
Property and equipment, net
  
 
358,022
 
  
 
298,792
 
    
 
 
    
 
 
 
In December 2019, the Company acquired from a third party certain rental assets with fair value of RMB 22,540. The consideration was 7,662,060 shares of the Company’s Class A ordinary shares. As of March 31, 2021, the share consideration was not paid and was in the account of “additional
paid-in
capital”.
Depreciation expenses were RMB106,754 and RMB18,603 for the six months ended March 31, 2020 and 2021,
respectively. Impairment expenses were RMB 313,355 and RMB 16,005 for the six months ended March 31, 2020 and 2021, respectively. 
 
5.
INTANGIBLE ASSETS, NET
Intangible assets, net consist of the following:
 
    
As of September 30,

2020
    
As of March 31,
2021
 
Cost:
 
 
 
 
 
 
 
 
Apartment rental contracts
     209,636        173,658  
Trademarks
     86,900        86,900  
Software
     2,275        2,275  
Less: Accumulated amortization
     (76,688      (105,662
    
 
 
    
 
 
 
Intangible assets, net
  
 
222,123
 
  
 
157,171
 
    
 
 
    
 
 
 

Amortization expenses were RMB 322 and RMB 31,058 for the six months ended March 31, 2020 and 2021,
respectively. Impairment expenses were RMB 620,225 and RMB 26,580 for the six months ended March 31, 2020 and 2021, respectively
.
 
The following table sets forth the Group’s amortization expenses for the five years since March 31, 2021: