SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
Commission File Number: 001-37925
(Registrant’s name)
F4/F5,Building C, Sunland International
999 Zhouhai Road
Pudong, Shanghai 200137
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 on paper as permitted by Regulation S-T Rule 101(b)(1): ◻
Indicate by check mark if the registrant is submitting the Form 6-K on paper as permitted by Regulation S-T Rule 101(b)(7): ◻
INCORPORATION BY REFERENCE
All exhibits to this current report on Form 6-K are incorporated by reference into the registration statement on Form F-3 of GDS Holdings Limited (File No. 333-222659), and shall be a part thereof from the date on which this report is furnished, to the extent not superseded by documents or reports subsequently filed or furnished.
2
EXHIBITS
Exhibit 23.1—Consent of Independent Registered Public Accounting Firm
Exhibit 99.1—Consolidated Financial Statements
EX-101.INS XBRL Taxonomy Instance Document
EX-101.SCH XBRL Taxonomy Extension Schema Document
EX-101.CAL XBRL Taxonomy Calculation Linkbase Document
EX-101.DEF XBRL Taxonomy Extension Definition Linkbase Document
EX-101.LAB XBRL Taxonomy Label Linkbase Document
EX-101.PRE XBRL Taxonomy Presentation Linkbase Document
3
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.
GDS Holdings Limited | ||
Date: October 19, 2020 | By: | /s/ William Wei Huang |
Name: | William Wei Huang | |
Title: | Chief Executive Officer | |
4
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
The Board of Directors
GDS Holdings Limited:
We consent to the incorporation by reference in the registration statement (No. 333-222659) on Form F-3 of GDS Holdings Limited of our report dated October 19, 2020, with respect to the consolidated balance sheets of GDS Holdings Limited, as of June 30, 2020 and December 31, 2019, the related consolidated statements of operations, comprehensive loss, changes in shareholders’ equity, and cash flows for the six-month period ended June 30, 2020, and the related notes, which report appears in the Form 6-K of GDS Holdings Limited dated October 19, 2020.
Our report states that the accompanying consolidated statements of operations, comprehensive loss, changes in shareholders’ equity, and cash flows for the six-month period ended June 30, 2019, and the related notes, were not audited by us and, accordingly, we do not express an opinion on them.
/s/ KPMG Huazhen LLP
Shanghai, China
October 19, 2020
Exhibit 99.1
GDS HOLDINGS LIMITED AND SUBSIDIARIES
Index to Consolidated Financial Statements
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
GDS Holdings Limited:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of GDS Holdings Limited and subsidiaries (the “Company”) as of June 30, 2020 and December 31, 2019, the related consolidated statements of operations, comprehensive loss, changes in shareholders’ equity, and cash flows for the six-month period ended June 30, 2020, and the related notes (collectively, the “Consolidated Financial Statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2020 and December 31, 2019, and the results of its operations and its cash flows for the six-month period ended June 30, 2020, in conformity with U.S. generally accepted accounting principles.
The accompanying consolidated statements of operations, comprehensive loss, changes in shareholders’ equity, and cash flows for the six-month period ended June 30, 2019, and the related notes, were not audited by us and, accordingly, we do not express an opinion on them.
Basis for Opinion
The Consolidated Financial Statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these Consolidated Financial Statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the Consolidated Financial Statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the Consolidated Financial Statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the Consolidated Financial Statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the Consolidated Financial Statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the Consolidated Financial Statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the Consolidated Financial Statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matter does not alter in any way our opinion on the Consolidated Financial Statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Realizability of deferred tax assets associated with the Company’s net operating loss carry forwards
As discussed in Note 20 of the Consolidated Financial Statements, the Company’s net deferred tax assets were RMB136,809 thousand as of June 30, 2020. This balance is net of a valuation allowance of RMB246,750 thousand. The deferred tax assets for net operating loss carry forwards and related valuation allowance were RMB316,985 thousand and RMB207,304 thousand, respectively. The Company evaluated the realizability of the deferred tax assets associated with the Company’s net operating loss carry forwards to determine whether there was more than a 50% likelihood that these deferred tax assets would be realized, based on the Company’s expectations of future taxable income and timing of net operating losses carry forwards expirations.
We identified the realizability of deferred tax assets associated with the Company’s net operating loss carry forwards as a critical audit matter. A high degree of subjective auditor judgment was required to evaluate if sufficient future taxable income will be generated to support the realization of the net operating losses carry forwards before their expiration.
F-2
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the critical audit matter. This included controls related to the development of the forecast of the future taxable income and the timing of utilization of net operating losses carry forwards. We evaluated the utilization rates used in the development of forecast of future taxable income, by comparing the utilization rates of certain data centers to historical actual utilization rates and the Company’s business plans of the data centers which was approved by the board of directors. To assess the Company’s ability to accurately forecast, we compared the Company’s historical revenue forecasts to actual results. We performed sensitivity analysis over amount and timing of forecasted taxable income of certain data centers to assess the impact on utilization of net operating losses carry forwards prior to expiration.
/s/ KPMG Huazhen LLP
We have served as the Company’s auditor since 2015.
Shanghai, China
October 19, 2020
F-3
CONSOLIDATED BALANCE SHEETS
(In thousands of RMB, except share data and per share data, or otherwise noted)
As of | ||||||
| Note |
| December 31, 2019 |
| June 30, 2020 | |
Assets | ||||||
Current assets | ||||||
Cash | 3 | |||||
Restricted cash | 3 | |||||
Accounts receivable, net of allowance for doubtful accounts | 4 | |||||
Value-added-tax ("VAT") recoverable | ||||||
Prepaid expenses | ||||||
Other current assets | ||||||
Total current assets | ||||||
Property and equipment, net | 5 | |||||
Intangible assets, net | 6 | |||||
Prepaid land use rights, net | 7 | |||||
Operating lease right-of-use assets | 12 | |||||
Goodwill | 8 | |||||
Deferred tax assets | 20 | |||||
Restricted cash | 3 | |||||
VAT recoverable | ||||||
Other non-current assets | ||||||
Total assets | ||||||
Liabilities, Redeemable Preferred Shares and Shareholders’ Equity | ||||||
Current liabilities | ||||||
Short-term borrowings and current portion of long-term borrowings (including RMB |
| 9 |
| |
| |
Accounts payable (including RMB |
| |
| | ||
Accrued expenses and other payables (including RMB |
| 11 |
| |
| |
Deferred revenue (including RMB | 4 |
| |
| | |
Operating lease liabilities, current (including RMB |
| 12 |
| |
| |
Finance lease and other financing obligations, current (including RMB | 12 | | | |||
Total current liabilities |
| |
| | ||
Long-term borrowings, excluding current portion (including RMB | 9 |
| |
| | |
Convertible bonds payable | 10 |
| |
| | |
Operating lease liabilities, non-current (including RMB | 12 |
| |
| | |
Finance lease and other financing obligations, non-current (including RMB | 12 |
| |
| | |
Deferred tax liabilities (including RMB | 20 | | | |||
Other long-term liabilities (including RMB | 13 |
| |
| | |
Total liabilities |
| |
| | ||
Redeemable preferred shares(US$ | 14 | | | |||
Shareholders' Equity | ||||||
Ordinary shares (US$ |
| 17 |
| |
| |
Additional paid-in capital |
| |
| | ||
Accumulated other comprehensive loss |
| ( |
| ( | ||
Accumulated deficit |
|
| ( |
| ( | |
Total shareholders' equity |
| |
| | ||
Commitments and contingencies |
| 25 | ||||
Total liabilities, redeemable preferred shares and shareholders' equity |
| |
| | ||
See accompanying notes to consolidated financial statements.
F-4
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of RMB, except share data and per share data, or otherwise noted)
Six-month periods ended June 30, | ||||||
| Note |
| 2019 |
| 2020 | |
(unaudited) | ||||||
Net revenue |
| 19 |
| | | |
Cost of revenue |
| ( | ( | |||
Gross profit |
| | | |||
Operating expenses | ||||||
Selling and marketing expenses |
| ( | ( | |||
General and administrative expenses |
| ( | ( | |||
Research and development expenses |
| ( | ( | |||
Income from operations |
| | | |||
Other income (expenses): | ||||||
Interest income |
| | | |||
Interest expenses |
| ( | ( | |||
Foreign currency exchange loss, net |
| ( | ( | |||
Government grants |
| | | |||
Gain from purchase price adjustment | 8 |
| — | | ||
Others, net | | | ||||
Loss before income taxes |
| ( | ( | |||
Income tax expenses |
| 20 |
| ( | ( | |
Net loss |
| ( | ( | |||
Change in redemption value of redeemable preferred shares |
| 14 |
| ( | — | |
Cumulative dividend on redeemable preferred shares |
| 14 |
| ( | ( | |
Net loss attributable to ordinary shareholders |
| ( | ( | |||
Loss per ordinary share | ||||||
Basic and diluted |
| 22 |
| ( | ( | |
Weighted average number of ordinary share outstanding | ||||||
Basic and diluted |
| 22 |
| | | |
See accompanying notes to consolidated financial statements.
F-5
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands of RMB, except share data and per share data, or otherwise noted)
Six-month periods ended June 30, | ||||
| 2019 |
| 2020 | |
(unaudited) | ||||
Net loss | ( | ( | ||
Other comprehensive income | ||||
Foreign currency translation adjustments, net of | | | ||
Comprehensive loss | ( | ( | ||
See accompanying notes to consolidated financial statements.
F-6
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands of RMB, except share data and per share data, or otherwise noted)
Additional | Accumulated other | |||||||||||||
Ordinary Shares | paid-in | comprehensive | Accumulated | Total | ||||||||||
| Note |
| Number |
| Amount |
| capital |
| income (loss) |
| deficit |
| equity | |
(unaudited) | ||||||||||||||
Balance at January 1, 2019 | | | | ( | ( | | ||||||||
Loss for the period | — | — | — | — | ( | ( | ||||||||
Other comprehensive income | — | — | — | | — | | ||||||||
Total comprehensive loss | — | — | — | | ( | ( | ||||||||
Issuance of ordinary shares | 17 | | | | — | — | | |||||||
Shares surrendered | ( | — | — | — | — | — | ||||||||
Shares issued to depository bank | 22 | | | ( | — | — | — | |||||||
Change in redemption value of redeemable preferred shares | 22 | — | — | ( | — | — | ( | |||||||
Redeemable preferred shares dividends | 22 | — | — | ( | — | — | ( | |||||||
Share-based compensation | 18 | — | — | | — | — | | |||||||
Exercise of share options | | — | | — | — | | ||||||||
Settlement of liability-classified restricted shares award | 18 | | — | | — | — | | |||||||
Settlement of share options and restricted share awards with shares held by depository bank | ( | — | — | — | — | — | ||||||||
Balance at June 30, 2019 |
| |
| |
| | ( | ( | | |||||
Additional | Accumulated other | |||||||||||||
Ordinary Shares | paid-in | comprehensive | Accumulated | Total | ||||||||||
| Note |
| Number |
| Amount |
| capital |
| income (loss) |
| deficit |
| equity | |
Balance at January 1, 2020 | | | | ( | ( | | ||||||||
Loss for the period | — | — | — | — | ( | ( | ||||||||
Other comprehensive income | — | — | — | | — | | ||||||||
Total comprehensive loss | — | — | — | | ( | ( | ||||||||
Issuance of ordinary shares | 17 | | | | — | — | | |||||||
Redeemable preferred shares dividends | 22 | — | — | ( | — | — | ( | |||||||
Share-based compensation | 18 | — | — | | — | — | | |||||||
Exercise of share options | 18 | | — | | — | — | | |||||||
Vesting of restricted shares | 18 | | — | — | — | — | — | |||||||
Settlement of liability-classified restricted shares award | 18 | | — | | — | — | | |||||||
Settlement of share options and restricted share awards with shares held by depository bank | ( | — | — | — | — | — | ||||||||
Balance at June 30, 2020 |
| |
| |
| | ( | ( | | |||||
See accompanying notes to consolidated financial statements.
F-7
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of RMB, except share data and per share data, or otherwise noted)
| Six-month periods ended June 30, | |||||
Note | 2019 | 2020 | ||||
(unaudited) | ||||||
Cash flows from operating activities: |
| |||||
Net loss | ( | ( | ||||
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||
Amortization of debt issuance cost and debt discount | | | ||||
Depreciation and amortization | | | ||||
Operating lease cost relating to prepaid land use rights | — | | ||||
Gain on disposal of property and equipment | ( | ( | ||||
Share-based compensation expense | 18 | | | |||
Gain from purchase price adjustment | — | ( | ||||
Loss from equity method investment | — | | ||||
Allowance for doubtful accounts | 4 | | | |||
Deferred tax benefit | 20 | ( | ( | |||
Changes in operating assets and liabilities, net of effect of acquisitions: |
|
| ||||
Accounts receivable |
|
|
| ( | ( | |
VAT recoverable |
|
|
| ( | ( | |
Prepaid expenses |
|
|
| ( | ( | |
Other current assets |
|
|
| ( | ( | |
Other non-current assets |
|
|
| ( | ( | |
Accounts payable |
|
|
| | | |
Deferred revenue |
|
|
| | ( | |
Accrued expenses and other payables |
|
|
| | | |
Other long-term liabilities |
|
|
| | | |
Operating leases |
|
|
| | ( | |
Net cash provided by operating activities |
|
|
| | | |
Cash flows from investing activities |
|
| ||||
Payments for purchase of property and equipment and land use rights |
|
| ( | ( | ||
Cash acquired from the business combinations | 8 | — | | |||
Cash paid for the business combinations | — | ( | ||||
Cash paid for the asset acquisitions |
|
| ( | ( | ||
Cash paid for equity investments |
|
| ( | — | ||
Refund of deposits (deposits paid) for potential acquisitions | | ( | ||||
Proceeds from sale of property and equipment | | | ||||
Net cash used in investing activities |
|
|
| ( | ( | |
See accompanying notes to consolidated financial statements.
F-8
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(In thousands of RMB, except share data and per share data, or otherwise noted)
| Six-month periods ended June 30, | |||||
Note | 2019 | 2020 | ||||
(unaudited) | ||||||
Cash flows from financing activities: |
|
| ||||
Proceeds from short-term borrowings | | | ||||
Proceeds from long-term borrowings | | | ||||
Repayment of short-term borrowings | ( | ( | ||||
Repayment of long-term borrowings | ( | ( | ||||
Payment of issuance cost of borrowings | ( | ( | ||||
Proceeds from exercise of stock options | | | ||||
Net proceeds from issuance of ordinary shares | 17 | | | |||
Net proceeds from issuance of redeemable preferred shares |
| 14 | | — | ||
Payment of redeemable preferred shares dividends |
| 14 | ( | ( | ||
Payment under finance lease and other financing obligations |
| 12 | ( | ( | ||
Proceeds from other financing arrangements | — | | ||||
Deferred payments for purchase of property and equipment | — | ( | ||||
Payment of contingent consideration for the acquisition of subsidiaries | ( | ( | ||||
Net cash provided by financing activities |
| | | |||
Effect of exchange rate changes on cash and restricted cash |
| | | |||
Net increase in cash and restricted cash |
| | | |||
Cash and restricted cash at beginning of period |
| | | |||
Cash and restricted cash at end of period |
| | | |||
Supplemental disclosures of cash flow information |
| |||||
Interest paid |
| | | |||
Income tax paid |
| | | |||
Supplemental disclosures of non-cash investing and financing activities |
| |||||
Changes in consideration payable for the acquisition of subsidiaries |
| | | |||
Settlement of liability-classified restricted share award | 18 |
| | | ||
See accompanying notes to consolidated financial statements.
F-9
GDS HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of RMB, except share data and per share data, or otherwise noted)
1 DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
(a)Description of business
GDS Holdings Limited (the “Parent” or “GDS Holdings”) was incorporated in the Cayman Islands on December 1, 2006. GDS Holdings and its consolidated subsidiaries and consolidated variable interest entities (collectively referred to as the “Company”) are principally engaged in providing colocation, managed hosting and managed cloud services in the People’s Republic of China (the “PRC” excluding Taiwan, the Hong Kong Special Administrative Region (the “Hong Kong SAR”) and the Macau Special Administrative Region for the purposes of these consolidated financial statements only) and Hong Kong SAR. The Company operates its data centers in Hong Kong SAR, Shanghai Municipality, Beijing Municipality, Jiangsu Province, Guangdong Province, Sichuan Province, Hebei Province and Inner Mongolia of the PRC and serves customers that primarily operate in the cloud, internet and banking industries.
(b)Basis of presentation
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”).
The consolidated financial statements are presented in Renminbi (“RMB”), rounded to the nearest thousand.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The accompanying consolidated financial statements include the financial statements of GDS Holdings, its subsidiaries and consolidated variable interest entities and variable interest entities' subsidiaries for which the Company is the primary beneficiary.
In certain regions of the PRC, the Company's operations are conducted through Shanghai Xinwan Enterprise Management Co., Ltd. ("Management HoldCo"), Beijing Wanguo Chang’an Science and Technology Co., Ltd. (“GDS Beijing"), GDS Beijing's subsidiaries and Shanghai Shu’an Data Services Co., Ltd. (“GDS Shanghai") (referred to as the “VIEs”) to comply with the PRC laws and regulations, which prohibit foreign investments in companies that are engaged in data center related business in those regions. Individuals acting as nominee equity holders ultimately hold the legal equity interests of the VIEs on behalf of the Company.
The equity holders of GDS Beijing and GDS Shanghai were William Wei Huang, CEO of the Company, and his relative. In order to enhance corporate governance and facilitate administration of the VIEs, in December 2019, GDS Holdings completed transfer of ownership of the
This restructuring could reduce risk by allocating ownership of the VIEs among a larger number of individual management shareholders, and strengthen corporate governance with the establishment of the board of directors in the VIEs and its subsidiaries. This restructuring could also create a more stable ownership structure by avoiding reliance on a single or small number of natural persons, and by buffering the ownership of the VIEs with an additional layer of legal entities, creating an institutional structure that is tied to the Company's management philosophy and culture.
F-10
GDS HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of RMB, except share data and per share data, or otherwise noted)
VIE Agreements were entered into among GDS Beijing, GDS Shanghai, Management HoldCo, its shareholders and GDS Investment Company. The following is a summary of the contractual VIE Agreements entered among GDS Investment Company, GDS Beijing, GDS Shanghai, Management HoldCo and its shareholders.
Equity Interest Pledge Agreements. Pursuant to the equity interest pledge agreements, each shareholder of Management HoldCo has pledged all of his or her equity interest in Management HoldCo as a continuing first priority security interest in favor of GDS Investment Company, as applicable, to respectively guarantee Management HoldCo's and its shareholders' performance of their obligations under the relevant contractual arrangement, and Management HoldCo has pledged all of its equity interest in GDS Beijing and GDS Shanghai as a continuing first priority security interest in favor of GDS Investment Company, as applicable, to respectively guarantee their performance of their obligations under the relevant contractual arrangement, which include the exclusive technology license and service agreement, loan agreement, exclusive call option agreement, and shareholder voting rights proxy agreement, and intellectual property rights license agreement. If GDS Beijing or GDS Shanghai or Management HoldCo or any of its shareholders breaches their contractual obligations under these agreements, GDS Investment Company, as pledgee, will be entitled to certain rights regarding the pledged equity interests, including receiving proceeds from the auction or sale of all or part of the pledged equity interests of Management HoldCo, GDS Beijing and GDS Shanghai in accordance with PRC law. Management HoldCo and each of its shareholders agrees that, during the term of the equity interest pledge agreements, it or he or she will not dispose of the pledged equity interests or create or allow creation of any encumbrance on the pledged equity interests without the prior written consent of GDS Investment Company. The equity interest pledge agreements remain effective until GDS Beijing and GDS Shanghai and Management HoldCo and its shareholders discharge all their obligations under the contractual arrangements. The equity pledge has been registered by Management HoldCo, GDS Beijing and GDS Shanghai in favor of GDS Investment Company with the relevant office of the Administration for Market Regulation in accordance with the PRC Property Rights Law.
Shareholder Voting Rights Proxy Agreements. Pursuant to the shareholder voting rights proxy agreements, each of GDS Beijing, GDS Shanghai, Management HoldCo and each of its shareholders has irrevocably appointed the PRC citizen(s) as designated by GDS Investment Company to act as GDS Beijing's, GDS Shanghai's, Management HoldCo's and its such shareholder 's exclusive attorney-in-fact to exercise all shareholder rights, including, but not limited to, voting on all matters of Management HoldCo, GDS Beijing, GDS Beijing's subsidiaries, GDS Shanghai and GDS Shanghai's subsidiaries requiring shareholder approval, and appointing directors and executive officers. GDS Investment Company is also entitled to change the appointment by designating another PRC citizen(s) to act as exclusive attorney- in-fact of GDS Beijing, GDS Shanghai, Management HoldCo and its shareholders with prior notice to Management HoldCo or its such shareholders. Each shareholder voting rights proxy agreement will remain in force for so long as Management HoldCo remains a shareholder of GDS Beijing or GDS Shanghai and the shareholder remains a shareholder of Management HoldCo, as applicable.
Exclusive Technology License and Service Agreements. Under the exclusive technology license and service agreements, GDS Investment Company licenses certain technology to each of Management Holdco, GDS Beijing and GDS Shanghai and GDS Investment Company has the exclusive right to provide Management HoldCo, GDS Beijing and GDS Shanghai with technical support, consulting services and other services. Without GDS Investment Company's prior written consent, each of Management HoldCo, GDS Beijing and GDS Shanghai agrees not to accept the same or any similar services provided by any third party. Each of Management HoldCo, GDS Beijing and GDS Shanghai agrees to pay service fees on a yearly basis and at an amount equivalent to all of its net profits as confirmed by GDS Investment Company. GDS Investment Company owns the intellectual property rights arising out of its performance of these agreements. In addition, each of Management HoldCo, GDS Beijing and GDS Shanghai has granted GDS Investment Company an exclusive right to purchase or to be licensed with any or all of the intellectual property rights of Management HoldCo, GDS Beijing or GDS Shanghai at the lowest price permitted under PRC law. Unless otherwise agreed by the parties, these agreements will continue remaining effective.
Intellectual Property Rights License Agreements. Pursuant to an intellectual property rights license agreement between GDS Investment Company and each of Management HoldCo, GDS Beijing and GDS Shanghai, Management HoldCo, GDS Beijing and GDS Shanghai has granted GDS Investment Company an exclusive license to use for free any or all of the intellectual property rights owned by each of them from time to time, and without the parties' prior written consent, Management HoldCo, GDS Beijing and GDS Shanghai cannot take any actions, including without limitation to, transferring or licensing outside its ordinary course of business any intellectual property rights to any third parties, which may affect or undermine GDS Investment Company's use of the licensed intellectual property rights from Management HoldCo, GDS Beijing and GDS Shanghai. The parties have also agreed under the agreement that GDS Investment Company should own the new intellectual property rights developed by it regardless whether such development is dependent on any of the intellectual property rights owned by Management HoldCo, GDS Beijing and
F-11
GDS HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of RMB, except share data and per share data, or otherwise noted)
GDS Shanghai. This agreement can only be early terminated by prior mutual consent of the parties and need to be renewed upon GDS Investment Company's unilateral request.
Exclusive Call Option Agreements. Pursuant to the exclusive call option agreements, Management HoldCo and each of its shareholders has irrevocably granted GDS Investment Company an exclusive option to purchase, or have its designated person or persons to purchase, at its discretion, to the extent permitted under PRC law, all or part of Management HoldCo's equity interests in GDS Beijing and GDS Shanghai or its such shareholders' equity interests in Management HoldCo. The purchase price should equal to the minimum price required by PRC law or such other price as may be agreed by the parties in writing. Without GDS Investment Company's prior written consent, Management HoldCo and its shareholders have agreed that each of Management HoldCo, GDS Beijing and GDS Shanghai shall not amend its articles of association, increase or decrease the registered capital, sell or otherwise dispose of its assets or beneficial interest, create or allow any encumbrance on its assets or other beneficial interests, provide any loans, distribute dividends to the shareholders and etc. These agreements will remain effective until all equity interests of Management HoldCo, GDS Beijing and GDS Shanghai held by their shareholders have been transferred or assigned to GDS Investment Company or its designated person(s).
Loan Agreements. Pursuant to the loan agreements between GDS Investment Company and Management HoldCo or its shareholders, GDS Investment Company has agreed to extend loans in an aggregate amount of RMB
Under the terms of the VIE Agreements, the Company has (i) the right to receive service fees on a yearly basis at an amount equivalent to all of the net profits of the VIEs under the exclusive technology license and services agreements when such services are provided; (ii) the right to receive all dividends declared by the VIEs and the right to all undistributed earnings of the VIEs; (iii) the right to receive the residual benefits of the VIEs through its exclusive option to acquire 100% of the equity interests in the VIEs, to the extent permitted under PRC law; and (iv) the right to require each of the shareholder of the VIEs to appoint the PRC citizen(s) as designated by GDS Investment Company to act as such shareholder 's exclusive attorney-in-fact to exercise all shareholder rights, including, but not limited to, voting on all matters of the VIEs requiring shareholder approval, disposing of all or part of the shareholder 's equity interest in the VIEs, and appointing directors and executive officers.
In accordance with Accounting Standards Codification (“ASC”) 810-10-25-38A, the Company has a controlling financial interest in the VIEs because the Company has (i) the power to direct activities of the VIEs that most significantly impact the economic performance of the VIEs; and (ii) the obligation to absorb the expected losses and the right to receive expected residual return of the VIEs that could potentially be significant to the VIEs. The terms of the VIE Agreements and the Company’s financial support to the VIEs were considered in determining that the Company is the primary beneficiary of the VIEs. Accordingly, the financial statements of the VIEs are consolidated in the Company’s consolidated financial statements.
Under the terms of the VIE Agreements, the VIEs’ equity holders have no rights to the net assets nor have the obligations to fund the deficit, and such rights and obligations have been vested to the Company. All of the equity (net assets) or deficits (net liabilities) and net income (loss) of the VIEs are attributed to the Company.
The Company has been advised by its PRC legal counsel that each of the VIE agreements is valid, binding and enforceable in accordance with its terms and applicable PRC laws and the ownership structure of the VIEs does not violate applicable PRC Laws. However, there are substantial uncertainties regarding the interpretation and application of PRC laws and future PRC laws and regulations. There can be no assurance that the PRC authorities will take a view that is not contrary to or otherwise different. If the current ownership structure of the Company and the VIE Agreements are determined to be in violation of any existing or future PRC laws and regulations, the PRC government could:
| ● | Levy fines on the Company or confiscate income of the Company; |
| ● | Revoke or suspend the VIEs' business or operating licenses; |
F-12
GDS HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of RMB, except share data and per share data, or otherwise noted)
| ● | Discontinue or place restrictions or onerous conditions on VIE's operations; |
| ● | Require the Company to discontinue their operations in the PRC; |
| ● | Require the Company to undergo a costly and disruptive restructuring; |
| ● | Take other regulatory or enforcement actions that could be harmful to the Company's business. |
The imposition of any of these government actions could result in the termination of the VIE agreements, which would result in the Company losing the (i) ability to direct the activities of the VIEs and (ii) rights to receive substantially all the economic benefits and residual returns from the VIEs and thus result in the deconsolidation of the VIEs in the Company's consolidated financial statements.
The following tables set forth the financial statement balances and amounts of the VIEs and their subsidiaries included in the consolidated financial statements after the elimination of intercompany balances and transactions among VIEs and their subsidiaries, including the liabilities with recourse to the primary beneficiary, which represented the borrowings guaranteed by GDS Holdings.
| As of | |||
| December 31, 2019 |
| June 30, 2020 | |
Assets |
|
|
|
|
Current assets |
|
|
|
|
Cash |
| |
| |
Accounts receivable, net of allowance for doubtful accounts |
| |
| |
VAT recoverable |
| |
| |
Prepaid expenses |
| |
| |
Other current assets |
| |
| |
Total current assets |
| |
| |
Property and equipment, net |
| |
| |
Intangible assets, net |
| |
| |
Operating lease right-of-use assets |
| |
| |
Deferred tax assets |
| |
| |
Restricted cash |
| |
| |
VAT recoverable |
| |
| |
Other non-current assets |
| |
| |
Total assets |
| |
| |
Liabilities | ||||
Current liabilities | ||||
Short-term borrowings and current portion of long-term borrowings |
| |
| |
Accounts payable |
| |
| |
Accrued expenses and other payables |
| |
| |
Deferred revenue |
| |
| |
Operating lease liabilities, current |
| |
| |
Finance lease and other financing obligations, current |
| |
| |
Total current third-party liabilities |
| |
| |
Long-term borrowings, excluding current portion |
| |
| |
Operating lease liabilities, non-current |
| |
| |
Finance lease and other financing obligations, non-current |
| |
| |
Deferred tax liabilities |
| |
| |
Other long-term liabilities |
| |
| |
Total third-party liabilities |
| |
| |
Amounts due to GDS Holdings and its non-VIE subsidiaries, net |
| |
| |
Total liabilities |
| |
| |
F-13
GDS HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of RMB, except share data and per share data, or otherwise noted)
As of December 31, 2019 and June 30, 2020, accounts receivable of RMB
Net revenue, net income, operating, investing and financing cash flows of the VIEs that were included in the Company’s consolidated financial statements for the six-month periods ended June 30, 2019 and 2020 are as follows:
Six-month periods ended June 30, | ||||
| 2019 |
| 2020 | |
(unaudited) | ||||
Net revenue |
| | | |
Net income |
| | | |
Net cash provided by operating activities | | | ||
Net cash used in investing activities | ( | ( | ||
Net cash used in financing activities | ( | ( | ||
The unrecognized revenue producing assets that are held by the VIEs comprise of internally developed software, intellectual property and trademarks which were not recorded on the Company’s consolidated balance sheets as they do not meet all the capitalization criteria.
Costs recognized by the VIEs for outsourcing and other services provided by other entities within the Company were RMB
(b) Use of estimates
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include, but are not limited to, the useful lives of long-lived assets, the fair values of assets acquired and liabilities assumed and the consideration transferred in a business combination, the fair value of the reporting unit for the goodwill impairment test, the allowance for doubtful accounts receivable, the valuation of derivatives, the realization of deferred income tax assets, the fair value of share-based compensation awards, the recoverability of long-lived assets, valuation of right-of-use assets and the fair value of the asset retirement obligation. Changes in facts and circumstances may result in revised estimates. Actual results could differ from those estimates, and as such, differences may be material to the consolidated financial statements.
(c) Cash and cash equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The Company does not have any cash equivalents as of December 31, 2019 and June 30, 2020.
(d) Restricted cash
Restricted cash represents amounts held by banks, which are not available for the Company’s use, as security for bank borrowings, related interests and certain special capital expenditures. Upon repayment of bank borrowings and the related interests, the deposits are released by the bank and available for general use by the Company.
(e) Fair value of financial instruments
The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels (Note 16 to the consolidated financial statements):
F-14
GDS HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of RMB, except share data and per share data, or otherwise noted)
| ● | Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date. |
| ● | Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability. |
| ● | Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. |
(f) Contract balances
The timing of revenue recognition, billings and cash collections result in accounts receivable, contract assets and contract liabilities (i.e. deferred revenue). Accounts receivable are recorded at the invoice amount, net of an allowance for doubtful account and is recognized in the period when the Company has transferred products or provided services to its customers and when its right to consideration is unconditional. Amounts collected on accounts receivable are included in net cash provided by operating activities in the consolidated statements of cash flows. Prior to the adoption of ASC 326, Financial Instruments – Credit Loss, the Company maintains an allowance for doubtful accounts for estimated losses inherent in its accounts receivable portfolio. In establishing the required allowance, management considers historical losses adjusted to take into account current market conditions and customers’ financial condition, the amount of receivables in dispute, the accounts receivable aging, and the customers’ repayment patterns. The Company reviews its allowance for doubtful accounts on a customer-by-customer basis. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Upon adoption of ASC 326 starting from January 1, 2020, the provision of credit losses for accounts receivable is based upon the current expected credit losses (“CECL”) model. The CECL model requires an estimate of the credit losses expected over the life of accounts receivable since initial recognition, and accounts receivable with similar risk characteristics are grouped together when estimating CECL. In assessing the CECL, the Company considers both quantitative and qualitative information that is reasonable and supportable, including historical credit loss experience, adjusted for relevant factors impacting collectability and forward-looking information indicative of external market conditions. While the Company uses the best information available in making determination, the ultimate recovery of recorded receivables is also dependent upon future economic events and other conditions that may be beyond the Company’s control. Accounts receivable that are ultimately deemed to be uncollectible, and for which collection efforts have been exhausted, are written off against the allowance for doubtful accounts. The Company does not have any off-balance-sheet credit exposure related to its customers.
A contract asset exists when the Company has transferred products or provided services to its customers but customer payment is contingent upon satisfaction of additional performance obligations. Contract assets are recorded in other current assets and other assets in the consolidated balance sheet.
Deferred revenue (a contract liability) is recognized when the Company has an unconditional right to a payment before it transfers goods or services to customers.
(g) Equity Method Investments
The Company’s investments in entities in which the Company can exercise significant influence but does not own a majority equity interest or control are generally accounted for under the equity method of accounting, as the Company concluded it does not have control, but has the ability to exercise significant influence over the investees. Equity method investments are initially measured at cost, and are subsequently adjusted for cash contributions, distributions and the Company’s share of the income and losses of the investees. The Company records its equity method investment in other non-current assets in the consolidated balance sheet. The Company’s proportionate share of the income or loss from its equity method investment are recorded in others, net in the consolidated statement of operations. The Company reviews its investment periodically to determine if any investment may be impaired considering both qualitative and quantitative factors that may have a significant impact on the investees’ fair value. The Company did not record any impairment charges related to its equity method investment for the six-month periods ended June 30, 2019 and 2020. Equity method investment is recorded in other non-current assets on the consolidated balance sheets.
F-15
GDS HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of RMB, except share data and per share data, or otherwise noted)
(h) Property and equipment
Property and equipment are carried at cost less accumulated depreciation and any recorded impairment. Property and equipment acquired under finance leases are initially recorded at the present value of minimum lease payments.
Gains or losses arising from the disposal of an item of property and equipment are determined based on the difference between the net disposal proceeds and the carrying amount of the item and are recognized in profit or loss on the date of disposal.
The estimated useful lives are presented below.
Land |
| Remaining lease terms |
Buildings |
| Shorter of the lease term and |
Data center equipment |
|
|
- Machinery |
| |
- Other equipment |
| |
Leasehold improvement |
| Shorter of the lease term and the |
| estimated useful lives of the assets | |
Furniture and office equipment |
| |
Vehicles |
|
Construction in progress primarily consists of the cost of data center buildings and the related construction expenditures that are required to prepare the data center buildings for their intended use.
No depreciation is provided in respect of construction in progress until it is substantially completed and ready for its intended use. Once a data center building is ready for its intended use and becomes operational, construction in progress is transferred to the respective category of property and equipment and is depreciated over the estimated useful life of the underlying assets.
Depreciation on property and equipment is calculated on the straight-line method over the estimated useful lives of the assets. For assets acquired under a finance lease, the assets are amortized in a manner consistent with the Company’s normal depreciation policy for owned assets if the lease transfers ownership to the Company by the end of the lease term or contains a bargain-purchase-option. Otherwise, assets acquired under a finance lease are amortized over the lease term.
(i) Long-lived assets held for sale
Long-lived assets are classified as held-for-sale if: (1) the Company has committed to a plan to sell the assets that are available for sale in its present condition, including initiating actions to complete the sale that is probable to qualify for as a completed sale within one year; (2) it is unlikely that significant changes to the plan will be made or the plan will be withdrawn; (3) the assets are being marketed for sale at a price that is reasonable in related to its current value. Long-lived assets held for sale are recorded at the lower of carrying value and fair value less cost to sell. A loss shall be recognized for any initial or subsequent write-down to fair-value less cost to sell. Long-lived assets held for sale are not depreciated while classified as held for sale.
(j) Leases
The Company is a lessee in several non-cancellable operating leases and finance leases, primarily for data centers, lands, offices and other equipment. The Company adopted ASC 842 on January 1, 2019, using a modified retrospective method.
The Company determines if an arrangement is or contains a lease at its inception.
The Company recognizes lease liabilities and right-of-use (“ROU”) assets at lease commencement date. Lease liabilities are initially and subsequently measured at the present value of unpaid lease payments at the lease commencement date and is subsequently measured at amortized cost using the effective-interest method. Since most of the Company’s leases do not provide an implicit rate, the Company uses its own incremental borrowing rate on a collateralized basis in determining the present value of unpaid lease payments.
F-16
GDS HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of RMB, except share data and per share data, or otherwise noted)
ROU assets are initially measured at cost, which consist of (i) initial measurement of the lease liability; (ii) lease payments made to the lessor at or before the commencement date less any lease incentives received; and (iii) initial direct costs incurred by the Company. Variable lease payments are excluded from the measurement of ROU assets and lease liabilities and are recognized in the period in which the obligation for those payments is incurred. For operating leases, the Company recognizes a single lease cost on a straight-line basis over the remaining lease term. For finance leases, the ROU assets are subsequently amortized using the straight-line method from the lease commencement date to the earlier of the end of its useful life or the end of the lease term. Amortization of the ROU assets are recognized and presented separately from interest expense on the lease liability.
ROU assets for operating and finance leases are periodically reduced by impairment losses. The Company uses the long-lived assets impairment guidance in ASC Subtopic 360-10, Property, Plant, and Equipment – Overall, to determine whether a ROU asset is impaired, and if so, the amount of the impairment loss to recognize.
Prior to the adoption of ASC 842, Leases, prepayment for land use rights are presented as prepaid land use rights on the consolidated balance sheet and are measured at cost and subsequently amortized using the straight-line method. Upon the adoption of ASC 842 on January 1, 2019, land use rights acquired are assessed in accordance with ASC 842 and recognized in operating lease right-of-use assets if they meet the definition of operating lease, or property and equipment if they meet the definition of finance lease.
The Company has elected not to recognize ROU assets and lease liabilities for short-term leases (i.e. leases that, at the commencement date, have a lease term of 12 months or less and do not include an option to purchase the underlying asset that the lessee is reasonably certain to exercise).
The Company records an asset and related financing obligation for the estimated construction costs under build-to-suit lease arrangements where it controls the asset during construction. Upon completion of the construction and commencement of the lease terms, the Company assesses whether these arrangements qualify for sales recognition under the deemed sale-leaseback transaction. If the arrangements do not qualify for sales recognition under the sale-leaseback accounting guidance, the Company continues to be the deemed owner of the build-to-suit assets for financial reporting purposes. The Company keeps the construction costs of the assets on its balance sheet. In addition, lease payments less the portion considered to be interest expense decrease the financing liability.
If a lease is modified and that modification is not accounted for as a separate contract, the classification of the lease is reassessed as of the effective date of the modification based on its modified terms and conditions and the facts and circumstances as of that date.
(k) Asset retirement costs
The Company’s asset retirement obligations are primarily related to its data center buildings, of which the majority are leased under long-term arrangements, and, in certain cases, are required to be returned to the landlords in their original condition.
The fair value of a liability for an asset retirement obligation is recognized in the period in which it is incurred. The corresponding asset retirement costs are capitalized as part of the cost of leasehold improvements and are depreciated over the shorter of the asset or the term of the lease subsequent to the initial measurement. The Company accretes the liability in relation to the asset retirement obligations over time and the accretion expense is recorded in cost of revenue.
Asset retirement obligations are recorded in other long-term liabilities. The following table summarizes the activity of the asset retirement obligation liability:
Asset retirement obligations as of December 31, 2019 |
| |
Additions |
| |
Accretion expense |
| |
Asset retirement obligations as of June 30, 2020 |
| |
(l) Intangible assets
Intangible assets acquired in the acquisitions comprised of customer relationships and licenses.
F-17
GDS HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of RMB, except share data and per share data, or otherwise noted)
The weighted-average amortization period by major intangible asset class is as follows:
Customer relationships |
| |
Licenses |
|
Customer relationships represent the orders, backlog and customer lists, which arise from contractual rights or through means other than contracts. Customer relationships are amortized using a straight-line method, as the pattern in which the economic benefits of the intangible assets are consumed or used up cannot be reliably determined. The amortization period of customer relationships is determined based on the remaining contractual period of the contracts with the customers at the time of acquisition and an estimate of the contract renewal period.
Licenses are amortized using a straight-line method over the estimated beneficial period. The amortization period of licenses is determined based on the terms of those licenses.
(m) Prepaid land use rights
The land use rights represent the amounts paid and relevant costs incurred for the rights to use land in the PRC and Hong Kong SAR acquired before the adoption of ASC 842, and are carried at cost less accumulated amortization. Amortization is provided on a straight-line basis over the remaining terms of the land use right ranging from
(n) Goodwill
Goodwill is an asset representing the future economic benefits arising from other assets acquired in the acquisition that are not individually identified and separately recognized.
Goodwill is not amortized but is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired. Goodwill is tested for impairment at the reporting unit level on an annual basis and between annual tests if an event occurs or circumstances change that would more-likely-than-not reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include a significant change in the stock prices, business climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of a reporting unit. Application of the goodwill impairment test requires judgment, including the identification of the reporting unit, assignment of assets and liabilities to the reporting unit, assignment of goodwill to the reporting unit, and determination of the fair value of each reporting unit.
The Company has the option to perform a qualitative assessment to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying value prior to performing the goodwill impairment test. If it is more-likely-than-not that the fair value of a reporting unit is greater than its carrying amount, the goodwill impairment test is not required. If the goodwill impairment test is required, the fair value of the reporting unit is compared with its carrying amount (including goodwill). If the fair value of the reporting unit is less than its carrying amount, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation and the residual fair value after this allocation is the implied fair value of the reporting unit goodwill. In assessing the qualitative factors, the Group considered the impact of key factors such as changes in the general economic conditions including the impact of COVID-19, changes in industry and competitive environment, stock price, actual revenue performance compared to previous years, and cash flow generation. Based on the results of the qualitative assessment completed as of June 30, 2020, there were no indicators of impairment. Therefore,
(o) Impairment of long-lived assets
Long-lived assets (primarily including property and equipment, operating lease right-of-use assets and prepaid land use rights) are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, the Company first compares undiscounted cash flows generated by that asset or asset group to its carrying amount. If the carrying amount of the long-lived assets or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying amount exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. For the purposes of impairment testing of
F-18
GDS HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of RMB, except share data and per share data, or otherwise noted)
long-lived assets, the Company has concluded that an individual data center is the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. When there were circumstances that require a long-lived asset or asset group for certain data centers be tested for possible impairment, the Company compared undiscounted cash flows generated by that asset or asset group to its carrying amount. As a result of the test, the carrying amount of the long-lived assets or asset group is recoverable on an undiscounted cash flow basis. Accordingly,
(p) Value-added-tax (“VAT”)
Entities that are VAT general taxpayers are permitted to offset qualified input VAT paid to suppliers against their output VAT upon receipt of appropriate supplier VAT invoices on an entity by entity basis. When the output VAT exceeds the input VAT, the difference is remitted to tax authorities, usually on a monthly basis; whereas when the input VAT exceeds the output VAT, the difference is treated as VAT recoverable which can be carried forward indefinitely to offset future net VAT payables. VAT related to purchases and sales which have not been settled at the balance sheet date is disclosed separately as an asset and liability, respectively, in the consolidated balance sheets.
As of December 31, 2019 and June 30, 2020, the Company recorded a VAT recoverable of RMB
(q) Derivative financial instruments
Derivative financial instruments are recognized initially at fair value. At the end of each reporting period, the fair value is remeasured. The gain or loss on remeasurement to fair value is recognized immediately in profit or loss.
The Company entered into interest rate swap and foreign currency forward contracts primarily for the purpose to manage the interest rate risk for the long-term borrowings. The Company has elected not to apply hedge accounting to these derivative instruments and recognized all derivatives on the Company’s consolidated balance sheets at fair value. The Company estimates the fair value of its interest rate swap and foreign currency forward contracts using a pricing model based on market observable inputs. Fair value gains or losses associated with interest rate swap and foreign currency forward contracts are recorded within interest expenses and foreign exchange gain (loss) in the Company’s consolidated statements of operations. Cash received or paid for realized gains or losses associated with interest rate swap and foreign currency forward contracts are included in operating cash flows in the consolidated statements of cash flows.
For further information on derivative financial instruments, see Note 15 below.
(r) Commitment and contingencies
Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred.
(s) Revenue recognition
The Company recognizes revenue as the Company satisfies a performance obligation by transferring control over a good or service to a customer. For each performance obligation satisfied over time, the Company recognizes revenue over time by measuring the progress toward complete satisfaction of that performance obligation. If the Company does not satisfy a performance obligation over time, the performance obligation is satisfied at a point in time. Revenue is measured as the amount of consideration to which the Company expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties.
For contracts with customers that contain multiple performance obligations, the Company accounts for individual performance obligations separately if they are distinct or as a series of distinct obligations if the individual performance obligations meet the
F-19
GDS HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of RMB, except share data and per share data, or otherwise noted)
series criteria. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. The transaction price is allocated to the separate performance obligation on a relative standalone selling price basis. The standalone selling price is determined based on overall pricing objectives, taking into consideration market conditions, geographic locations and other factors.
The Company derives revenue primarily from the delivery of (i) colocation services; (ii) managed services, including managed hosting services and managed cloud services. The remainder of the Company’s revenue is from IT equipment sales that are either sold on a stand-alone basis or bundled in a managed service contract arrangement and consulting services.
Colocation services are services where the Company provides space, power and cooling to customers for housing and operating their IT system equipment in the Company’s data centers.
Managed hosting services are services where the Company provides outsourced services to manage the customers’ data center operations, including data migration, IT operations, security and data storage.
Managed cloud services are services where the Company offers direct private connection to major cloud platforms, an innovative service platform for managing hybrid clouds and, where required, the resale of public cloud services.
Certain contracts with customers for colocation services and managed services provide for variable considerations that are primarily based on the usage of such services. Revenues on such contracts are recognized based on the agreed usage-based fees as the actual services are rendered throughout the contract term. Certain contracts with remaining customers provide for a fixed consideration over the contract service period. Revenue on such contracts are recognized on a straight-line basis over the term of the contract.
In certain colocation and managed hosting service contracts, the Company agrees to charge customers for their actual power consumption. Relevant revenue is recognized based on actual power consumption during each period. In certain other colocation and managed hosting service contracts, the Company specifies a fixed power consumption limit each month for customers. If a customer ’s actual power consumption is below the limit, no additional fee is charged. If the actual power consumption is above the limit, the Company charges the customer additional power consumption fees calculated based on the portion of actual power consumption exceeding the limit, multiplied by a fixed unit price, which is determined based on market price, without providing the customer with any rights to acquire additional goods or services. Accordingly, relevant revenue is recognized each month based on actual additional power consumption fees.
The Company’s colocation service and managed service contracts with customers contain both lease and non-lease components. The Company elected to adopt the practical expedient which allows lessors to combine lease and non-lease components and account for them as one component if i) they have the same timing and pattern of transfer; and ii) the lease component, if accounted for separately, would be classified as an operating lease. The Company elected to apply the practical expedient on the contracts that meet the conditions. In addition, the Company has performed a qualitative analysis to determine that the non-lease component is the predominant component of its revenue stream as the customer would ascribe more value to the services provided rather than to the lease component. Therefore, the combined component is accounted for in accordance with the current revenue accounting guidance (“Topic 606”). For contracts that do not meet the conditions required to adopt the practical expedient, the lease component is accounted for in accordance with the current lease accounting guidance (“Topic 842”), which is immaterial for the six-month periods ended June 30, 2019 and 2020. The Company has elected to apply the practical expedient on a prospective basis.
Revenue recognized for colocation or managed hosting and cloud services delivered prior to billing is recorded within accounts receivable. The Company generally bills the customer on a monthly or quarterly basis in arrears.
Cash received in advance from customers prior to the delivery of the colocation or managed hosting and cloud services is recorded as deferred revenue.
The sale of IT equipment is recognized when the customer obtains control of the equipment, which is typically when delivery has occurred, the customer accepts the equipment and the Company has no performance obligation after the delivery.
In certain managed service contracts, the Company sells and delivers IT equipment such as servers and computer terminals prior to the delivery of the services. Since sale of equipment can be distinguished and is separately identifiable from other promises in the contract and it is distinct within the context of the contract, the sale of equipment is considered a separate performance obligation.
F-20
GDS HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of RMB, except share data and per share data, or otherwise noted)
Accordingly, the contract consideration is allocated to the equipment and the managed services based on their relative standalone selling prices.
Consulting services are provided to customers for a fixed amount over the service period, usually less than
Revenue is generally recognized on a gross basis as the Company is primarily responsible for fulfilling the contract, assumes inventory risk and has discretion in establishing the price when selling to the customer. To the extent the Company does not meet the criteria for recognizing revenue on a gross basis, the Company records the revenue on a net basis.
(t) Cost of revenues
Cost of revenues consists primarily of utility costs, depreciation of property and equipment, rental costs, labor costs and other costs directly attributable to the provision of the service revenue.
(u) Research and development and advertising costs
Research and development and advertising costs are expensed as incurred. Research and development costs amounted to RMB
Advertising costs amounted to RMB
(v) Government grants
Government grants are recognized when received and when all the conditions for their receipt have been met. Subsidies that compensate the Company for expenses incurred are recognized as a reduction of expenses in the consolidated statements of operations. Subsidies that are not associated with expenses are recognized as other income.
Subsidies for the acquisition of property and equipment are recorded as a liability until earned and then depreciated over the useful life of the related assets as a reduction of the depreciation charges. Subsidies for obtaining the rights to use land are recorded as a liability until earned and then amortized over the land use right period as a reduction of the amortization charges of the related land use rights. In 2010 and 2011, the Company received government subsidies that required the Company to operate in a particular area for a certain period. The Company recorded the subsidies in other long-term liabilities when the subsidies were received and subsequently recognized as government subsidy income ratably over the period the Company is required to operate in the area. In 2017, the Company received government subsidies that required the Company to pass certain inspection on the related project. The Company recorded such subsidies in other long-term liabilities when received, which are reclassified to accrued expenses and other payables when the inspection is expected to be completed within one year, and will be recorded as government subsidy income when the conditions are met.
As of December 31, 2019 and June 30, 2020, deferred government grants of RMB
F-21
GDS HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of RMB, except share data and per share data, or otherwise noted)
(w) Capitalized interest
A reconciliation of total interest costs to “Interest expenses” as reported in the consolidated statements of operations for six-month periods ended June 30, 2019 and 2020 is as follows:
| Six-month periods ended June 30, | |||
| 2019 |
| 2020 | |
(unaudited) | ||||
Total interest costs |
| |
| |
Less: interest costs capitalized |
| ( |
| ( |
Interest expenses |
| |
| |
Interest costs that are directly attributable to the construction of an asset which necessarily takes a substantial period of time to get ready for its intended use or sale are capitalized as part of the cost of that asset. The capitalization of interest costs as part of the cost of a qualifying asset commences when expenditure for the asset is being incurred, interest costs are being incurred and activities that are necessary to prepare the asset for its intended use or sale are in progress. Capitalization of interest costs is ceased when the asset is substantially complete and ready for its intended use.
(x) Debt issuance costs
Debt issuance costs are capitalized and are amortized over the life of the related debts based on the effective interest method. Such amortization is included as a component of interest expense.
Unamortised debt issuance costs of RMB
(y) Income tax
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for deferred tax assets for which it is more likely than not that the related tax benefits will not be realized. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records interest related to unrecognized tax benefits in interest expense and penalties in general and administrative expenses.
(z) Share-based compensation
The Company accounts for the compensation cost from share-based payment transactions with employees based on the grant-date fair value of the equity instrument issued. The grant-date fair value of the award is recognized as compensation expense, net of forfeitures, over the period during which an employee is required to provide service in exchange for the award, which is generally the vesting period. When no future services are required to be performed by the employee in exchange for an award of equity instruments, and if such award does not contain a performance or market condition, the cost of the award is expensed on the grant date. The Company recognizes compensation cost for an award with only service conditions that has a graded vesting schedule on a straight-line basis over the requisite service period for the entire award, provided that the cumulative amount of compensation cost recognized at any date at least equals the portion of the grant-date value of such award that is vested at that date.
Awards granted to employees with performance conditions attached are measured at fair value on the grant date and are recognized as the compensation expenses in the period and thereafter when the performance goal becomes probable to achieve. Awards granted to employees with market conditions attached are measured at fair value on the grant date and are recognized as the compensation
F-22
GDS HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of RMB, except share data and per share data, or otherwise noted)
expenses over the estimated requisite service period, regardless of whether the market condition has been satisfied if the requisite service period is fulfilled.
The Company recognizes the estimated compensation cost of service-based restricted share based on the fair value of its ordinary shares on the date of the grant. The Company recognizes the compensation cost, net of forfeitures, over its respective vesting term. The Company recognizes the estimated compensation cost of performance-based restricted share based on the fair value of its ordinary shares on the date of the grant. The rewards are earned upon attainment of identified performance goals. The Company recognizes the compensation cost, net of forfeitures, over the performance period. The Company also adjusts the compensation cost based on the probability of performance goal achievement at the end of each reporting period.
The Company accounts for forfeitures when they occur. Compensation cost previously recognized are reversed in the period the award is forfeited, for an award that is forfeited before completion of the requisite service period.
Share-based payment transactions with nonemployees in which goods or services are received in exchange for equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. The measurement date of the fair value of the equity instrument issued is the earlier of either the date on which the counterparty’s performance is complete or the date at which a commitment for performance by the counterparty to earn the equity instrument is reached.
For further information on share-based compensation, see Note 18 below.
(aa) Employee benefits
Pursuant to relevant PRC regulations, the Company is required to make contributions to various defined contribution plans organized by municipal and provincial PRC governments. The contributions are made for each PRC employee at rates ranging from
(bb) Foreign currency translation and foreign currency risks
The functional currency of GDS Holdings is the USD (“US$”), whereas the functional currency of its subsidiaries and consolidated VIEs in PRC, subsidiaries in Hong Kong SAR and subsidiaries in Singapore is the RMB, Hong Kong dollar (“HKD”) and Singapore dollar (“SGD”), respectively. The reporting currency of the Company is RMB as the major operations of the Company are within the PRC.
Transactions denominated in currencies other than the functional currency are re- measured into the functional currency at the exchange rates prevailing on the transaction dates. Monetary assets and liabilities denominated in foreign currencies are remeasured at the exchange rates prevailing at the balance sheet date. Non-monetary items that are measured in terms of historical costs in foreign currency are re-measured using the exchange rates at the dates of the initial transactions. Exchange gains and losses are recognized in profit or loss and are reported in foreign currency exchange gain (loss) on a net basis.
The results of foreign operations are translated into RMB at the exchange rate as of the balance sheet date for assets and liabilities, the average daily exchange rate for each month for income and expense items and the historical exchange rates for equity accounts. Translation gains and losses are recorded in other comprehensive income and accumulated in the translation adjustment component of equity until the sale or liquidation of the foreign entity.
The RMB is not a freely convertible currency. The PRC State Administration for Foreign Exchange, under the authority of the PRC government, controls the conversion of RMB to foreign currencies. The value of the RMB is subject to changes of central government policies and international economic and political developments affecting supply and demand in the China foreign exchange trading system market. The Company’s cash and restricted cash denominated in RMB amounted to RMB
F-23
GDS HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of RMB, except share data and per share data, or otherwise noted)
As of June 30, 2020, the Company’s cash and restricted cash were deposited in major financial institutions located in PRC, Hong Kong SAR, US and Singapore, and were denominated in the following currencies:
| RMB |
| USD |
| HKD |
| JPY |
| EUR |
| SGD | |
In PRC |
| |
| |
| — |
| — |
| — |
| — |
In Hong Kong SAR |
| |
| |
| |
| |
| |
| — |
In US |
| — |
| |
| — |
| — |
| — |
| — |
In Singapore |
| — |
| |
| — |
| — |
| — |
| |
Total in original currency |
| |
| |
| |
| |
| |
| |
RMB equivalent |
| |
| |
| |
| |
| |
| |
(cc) Concentration of credit risk
Financial instruments that potentially expose the Company to concentrations of credit risk consist principally of cash and cash equivalent, restricted cash, and accounts receivable. The Company’s investment policy requires cash and cash equivalents and restricted cash to be placed with high-quality financial institutions and to limit the amount of credit risk from any one issuer. The Company regularly evaluates the credit standing of the counterparties or financial institutions.
The Company conducts credit evaluations on its customers prior to delivery of goods or services. The assessment of customer creditworthiness is primarily based on historical collection records, research of publicly available information and customer on-site visits by senior management. Based on this analysis, the Company determines what credit terms, if any, to offer to each customer individually. If the assessment indicates a likelihood of collection risk, the Company will not deliver the services or sell the products to the customer or require the customer to pay cash, post letters of credit to secure payment or to make significant down payments. Historically, credit losses on accounts receivable have been insignificant.
(dd) Earnings (loss) per share
Basic earnings (loss) per ordinary share is computed by dividing net income (loss) attributable to the Company’s ordinary shareholders by the weighted average number of ordinary shares outstanding during the year using the two-class method. Under the two-class method, net income (loss) attributable to the Company’s ordinary shareholders is allocated between ordinary shares and other participating securities based on participating rights in undistributed earnings. The Company’s redeemable preferred shares (Note 14) are participating securities since the holders of these securities participate in dividends on the same basis as ordinary shareholders. These participating securities are not included in the computation of basic loss per ordinary share in periods when the Company reports net loss, because these participating security holders have no obligation to share in the losses of the Company.
Diluted earnings (loss) per share is calculated by dividing net income (loss) attributable to the Company’s ordinary shareholders as adjusted for the effect of dilutive ordinary share equivalents, if any, by the weighted average number of ordinary and dilutive ordinary share equivalents outstanding during the year. Ordinary share equivalents include the ordinary shares issuable upon the exercise of the outstanding share options (using the treasury stock method) and conversion of redeemable preferred shares and convertible bonds (using the as-if- converted method). Potential dilutive securities are not included in the calculation of diluted earnings (loss) per share if the impact is anti-dilutive.
(ee) Changes in accounting principle
| 1) | The Company adopted ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement on January 1, 2020. This ASU changes the fair value measurement disclosure requirements of ASC 820. Under this ASU, key provisions include new, eliminated and modified disclosure. The adoption of this ASU does not have a material impact on the consolidated financial statements. |
| 2) | The Company adopted ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment on January 1, 2020. This ASU is to simplify the subsequent measurement of goodwill. The ASU eliminates step 2 from the goodwill impairment test and the requirements for any reporting unit with a zero or negative carrying amount to |
F-24
GDS HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of RMB, except share data and per share data, or otherwise noted)
| perform a qualitative assessment and, if it fails that qualitative test, to perform step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. This ASU is applied on a prospective basis. The adoption of this standard does not have impact on the Company’s consolidated financial statements. |
| 3) | The Company adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, and subsequent amendments to the initial guidance within ASU 2018-19, ASU 2019-04, ASU 2019-05, ASU 2019-11 and ASU 2020-02, collectively referred to as “ASC 326” on January 1, 2020 using the modified retrospective approach. ASC 326 requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. ASC 326 eliminates the probable initial recognition threshold in current GAAP and, instead, reflects an entity’s current estimate of all expected credit losses. This adoption did not have material impact on the Company’s consolidated financial statements. |
(ff) Recently Issued Accounting Standards
In December 2019, the FASB issued ASU 2019-12, Income Tax (Topic 740), Simplifying the Accounting for Income Taxes, which simplifies accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The ASU also improves consistent application of and simplifies GAAP for other areas of Topic 740 by clarifying and amending existing guidance. For public entities, the ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted including adoption in any interim period for periods for which financial statements have not yet been issued. The Company is currently evaluating the impact the adoption of this standard will have on its consolidated financial statements.
In January 2020, the FASB issued ASU 2020-01, Investments – Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815), which clarifies the interaction for equity securities under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815. ASU 2020-01 is effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact on the adoption of this standard will have on its consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40), which reduces the number of accounting models for convertible debt instruments and convertible preferred stock and clarifies the scope and certain requirements under Subtopic 815-40. The ASU also improves the guidance related to the disclosures and earnings-per-share (EPS) for convertible instruments and contract in entity's own equity. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact on the adoption of this standard will have on its consolidated financial statements.
F-25
GDS HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of RMB, except share data and per share data, or otherwise noted)
3 CASH AND RESTRICTED CASH
A reconciliation of cash and restricted cash in the consolidated balance sheets to the amounts in the consolidated statements of cash flows is as follows:
| As of | |||
December 31, | June 30, | |||
2019 | 2020 | |||
Cash |
| |
| |
Restricted cash - current assets |
| |
| |
Restricted cash - non-current assets |
| |
| |
Total cash and restricted cash shown in the consolidated statements of cash flows |
| |
| |
Restricted cash was mainly for the purpose of securing the repayment of long-term bank borrowings and related interests and certain specific capital expenditure.
4 CONTRACT BALANCES
Accounts Receivable, Net
Accounts receivable, net consisted of the following:
| As of | |||
December 31, | June 30, | |||
|
| 2019 |
| 2020 |
Accounts receivable |
| |
| |
Less: allowance for doubtful accounts |
| ( |
| ( |
Accounts receivable, net |
| |
| |
Including: | ||||
- Current portion | | | ||
- Non-current portion | | — | ||
As of December 31, 2019 and June 30, 2020, the accounts receivable expected to be received after one year amounted to RMB
Accounts receivable of RMB
F-26
GDS HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of RMB, except share data and per share data, or otherwise noted)
The following table presents the movement of the allowance for doubtful accounts:
| Six-month periods ended June 30, | |||
| 2019 |
| 2020 | |
(unaudited) | ||||
Balance at the beginning of the period |
| |
| |
Allowance made during the period |
| |
| |
Balance at the end of the period |
| |
| |
During the six-month periods ended June 30, 2019 and 2020, the Company made an allowance on accounts receivable of RMB81 (unaudited) and RMB319, respectively.
Deferred Revenue
The opening and closing balances of the Company’s deferred revenue are as following:
| Deferred revenue | |
Beginning balance as of January 1, 2020 |
| |
Decrease |
| ( |
Closing balance as of June 30, 2020 |
| |
The difference between the opening and closing balances of the Company's deferred revenue primarily results from the timing difference between the satisfaction of the Company's performance obligation and the customer's payment. As of December 31, 2019 and June 30, 2020, the deferred revenue expected to be recognized as revenue after one year amounted to RMB
Remaining performance obligations
The Company elected to apply the practical expedient that allows the Company not to disclose the remaining performance obligations for variable considerations. This includes usage-based contracts for certain colocation and managed hosting services.
As of June 30, 2020, approximately RMB
F-27
GDS HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of RMB, except share data and per share data, or otherwise noted)
5 PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following:
| As of | |||
|
| December 31, 2019 |
| June 30, 2020 |
At cost: |
|
|
|
|
Land |
| |
| |
Buildings |
| |
| |
Data center equipment |
| |
| |
Leasehold improvement |
| |
| |
Furniture and office equipment |
| |
| |
Vehicles |
| |
| |
| |
| | |
Less: Accumulated depreciation | ( | ( | ||
| | |||
Construction in progress |
| |
| |
Property and equipment, net |
| |
| |
| (1) | The carrying amounts of the Company’s acquired under finance leases and other financing arrangement were RMB |
| (2) | Depreciation of property and equipment (including assets acquired under finance leases and other financing arrangement) was RMB |
Six-month periods ended June 30, | ||||
| 2019 |
| 2020 | |
(unaudited) | ||||
Cost of revenue |
| | | |
General and administrative expenses |
| | | |
Research and development expenses | | | ||
| | | ||
| (3) | Property and equipment with net a book value of RMB |
| (4) | As of December 31, 2019 and June 30, 2020, payables for purchase of property and equipment that are contractually due beyond one year of RMB |
F-28
GDS HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of RMB, except share data and per share data, or otherwise noted)
6 INTANGIBLE ASSETS, NET
Intangible assets consisted of the following:
| As of | |||||
|
| Note |
| December 31, 2019 |
| June 30, 2020 |
Customer relationships | 8 | |
| | ||
Licenses | | | ||||
|
| | ||||
Less: accumulated amortization | ( |
| ( | |||
Intangible assets, net | |
| | |||
The Company's customer relationships were acquired in business combinations (Note 8). Amortization of intangible assets was RMB
Estimated future amortization expense related to these intangible assets is as follows:
Twelve-month periods ending June 30, |
|
|
2021 | | |
2022 |
| |
2023 |
| |
2024 |
| |
2025 |
| |
Thereafter |
| |
Total |
| |
7 PREPAID LAND USE RIGHTS
Prepaid land use rights, representing the amounts paid and relevant costs incurred for the rights to use land in the PRC and Hong Kong SAR acquired before the adoption of ASC 842, consisted of the following:
As of | ||||
December 31, | June 30, | |||
| 2019 |
| 2020 | |
Prepaid land use rights |
| |
| |
Less: Accumulated amortization |
| ( |
| ( |
Prepaid land use rights, net |
| |
| |
Amortization of prepaid land use rights was RMB
Prepaid land use rights with a net book value of RMB
Upon the adoption of ASC 842 on January 1, 2019, land use rights acquired are assessed in accordance with ASC 842 and recognized in operating lease right-of-use assets if they meet the definition of operating lease, or property and equipment if they meet the definition of finance lease (Note (2)(j)).
F-29
GDS HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of RMB, except share data and per share data, or otherwise noted)
8 BUSINESS COMBINATIONS
The movement of goodwill is set out as below:
| As of June 30, 2020 | |
Balance at the beginning of the period |
| |
Addition during the period |
| |
Balance at end of period |
| |
Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired in the acquisition. The goodwill is not deductible for tax purposes. Goodwill is assigned to the design, build-out and operation of data centers reporting unit.
Beijing 10, Beijing 11 and Beijing 12 Acquisition
On June 5, 2020, the Company consummated an acquisition of all equity interests in a target group from third parties for an aggregate cash consideration of RMB
The target group owns
The identifiable assets acquired and liabilities assumed in the business combination were recorded at their fair value on the acquisition date and consisted of the following major items.
| Note |
|
| |
Fair value of consideration |
|
|
| |
Effective settlement of pre-existing relationship upon consolidation |
| (i) |
| |
Recognized amounts of identifiable assets acquired and liabilities assumed: |
|
|
|
|
Cash |
|
|
| ( |
Accounts receivable |
|
|
| ( |
Property and equipment |
| (ii) |
| ( |
Operating lease ROU assets |
|
|
| ( |
Identifiable intangible assets |
| (iii) |
| ( |
Other assets |
|
|
| ( |
Accounts payable |
|
|
| |
Finance lease and other financing obligations, current |
|
|
| |
Operating lease liabilities, current |
|
|
| |
Finance lease and other financing obligations, non-current |
|
|
| |
Operating lease liabilities, non-current |
|
|
| |
Deferred tax liabilities |
|
|
| |
Other liabilities |
|
|
| |
Total identifiable net assets |
|
|
| ( |
Goodwill |
| (iv) |
| |
Note (i):Prior to the acquisition, the Company had receivables from the target group of RMB
Note (ii):Property and equipment acquired included properties acquired under finance lease of RMB
Note (iii):Identifiable intangible assets acquired consisted of customer relationships of RMB
F-30
GDS HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of RMB, except share data and per share data, or otherwise noted)
Note (iv):Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired in the acquisition. Goodwill is assigned to the design, build-out and operation of data centers reporting unit. Goodwill primarily represents the expected synergies from combining operations of the target group with those of the Company and intangible assets that do not qualify for separate recognition and is not deductible for tax purposes. In accordance with ASC 350, goodwill is not amortized but is tested for impairment.
The amounts of net revenue and net profit of the target group included in the Company’s consolidated statements of operations from the acquisition date to June 30, 2020 amounted to RMB
Supplemental pro forma financial information as if the acquisitions had occurred as of the earliest date presented has not been provided as the acquisitions are not material to the Company’s results of operations in the six-month period ended June 30, 2020.
Guangzhou 3 Acquisition
On May 2, 2018, the Company consummated an acquisition of all equity interests in a target group comprising onshore and offshore entities from third parties for an aggregate cash consideration of RMB
Asset acquisitions
In the six-month period ended June 30, 2020, the Company consummated several acquisitions of certain target entities for total cash considerations (net of the cash acquired) of RMB
9 LOANS AND BORROWINGS
The Company’s borrowings consisted of the following:
| As of | |||
December 31, | June 30, | |||
|
| 2019 |
| 2020 |
Short-term borrowings |
| |
| |
Current portion of long-term borrowings |
| |
| |
Sub-total |
| |
| |
Long-term borrowings, excluding current portion |
| |
| |
Total loans and borrowings |
| |
| |
F-31
GDS HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of RMB, except share data and per share data, or otherwise noted)
Short-term borrowings
The Company’s short-term borrowings consisted of the following:
| As of | |||
December 31, | June 30, | |||
|
| 2019 |
| 2020 |
Unsecured short-term borrowings |
| |
| |
Secured short-term borrowings |
| |
| |
| |
| | |
Short-term borrowings were secured by the following assets:
As of | ||||
| December 31, 2019 |
| June 30, 2020 | |
Accounts receivable (Note) | | | ||
The weighted average interest rates of short-term borrowings outstanding as of December 31, 2019 and June 30, 2020 were
Long-term borrowings
The Company’s long-term borrowings consisted of the following:
As of | ||||
| December 31, 2019 |
| June 30, 2020 | |
Unsecured long-term borrowings |
| |
| |
Secured long-term borrowings |
| |
| |
| |
| | |
Long-term borrowings were secured by the following assets:
As of | ||||
December 31, | June 30, | |||
| 2019 |
| 2020 | |
Accounts receivable (Note) |
| |
| |
Property and equipment, net |
| |
| |
Prepaid land use rights, net |
| |
| |
| |
| | |
Note: The Company applied accounts receivable generated from certain data center operation as collateral to secure borrowings.
The weighted average interest rates of long-term borrowings as of December 31, 2019 and June 30, 2020 were
F-32
GDS HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of RMB, except share data and per share data, or otherwise noted)
The outstanding long-term borrowings mature serially from 2020 to 2032. The aggregate maturities of the above long-term borrowings for each for the five years and thereafter subsequent to June 30, 2020 are as follows:
Long-term borrowings | ||
Twelve-months ending June 30, | ||
2021 |
| |
2022 |
| |
2023 |
| |
2024 |
| |
2025 |
| |
Thereafter |
| |
| |
The Company entered into secured loan agreements with various financial institutions for project development and working capital purpose with terms ranging from
As of June 30, 2020, the Company had total working capital and project financing credit facilities of RMB
More specifically, the terms of these secured loan facility agreements generally include one or more of the following conditions. If any of the below conditions were to be triggered, the Company could be obligated to notify the lender or repay any loans outstanding immediately or on an accelerated repayment schedule:
| (i) | STT Communications Ltd. ceases to, directly or indirectly, own at least |
| (ii) | STT GDC (a) is not or ceases to, directly or indirectly, be the beneficial owner of at least |
| (iii) | GDS Holdings and GDS Investment Company are not or cease to be, directly or indirectly, the legal and beneficial owner of |
| (iv) | Management HoldCo ceases to, directly or indirectly, own at least |
| (v) | GDS Beijing, GDS Suzhou and the relevant borrowing subsidiaries cease to, directly or indirectly, be the legal and beneficial owner of |
| (vi) | there are changes in the shareholding structure of a principal operating subsidiary of GDS Holdings, as defined in the relevant loan facility agreement; and |
| (vii) | the IDC license of GDS Beijing or the borrowing subsidiaries, or the authorization by GDS Beijing to one such subsidiary to operate the data center business and provide IDC services under the auspices of the IDC license held by GDS Beijing, is cancelled or fail to be renewed on or before the expiry date. |
F-33
GDS HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of RMB, except share data and per share data, or otherwise noted)
There are certain other events in the loan facility agreements the occurrence of which could obligate GDS Holdings to notify the lender or repay any loans outstanding immediately or on an accelerated repayment schedule, including, among others, if the borrowing subsidiary fails to use the loan in accordance with the use of proceeds as provided in the loan facility agreement, the borrowing subsidiary violates or fails to perform any of its commitments under the loan facility agreement, or if GDS Holdings is delisted before the maturity date under the relevant loan facility agreement. In addition, the terms of these loan agreements include financial covenants that limit certain financial ratios, such as the interest coverage ratio and gross leverage ratio, during the relevant period, as defined in the agreements. The terms of these loan agreements also include cross default provisions which could be triggered if the Company (i) fails to repay any financial indebtedness in an aggregate amount exceeding US$
10 CONVERTIBLE BONDS PAYABLE
Convertible Notes due June 1, 2025 issued by the Company (“Convertible Bonds due 2025”)
On June 5, 2018, the Company completed its issuance of Convertible Bonds due 2025 in an aggregate principal amount of US$
The key terms of the Convertible Bonds due 2025 are summarized as follows:
Maturity Date
| ● | June 1, 2025 |
Interest
| ● |
Repurchase of Notes
| ● | Holders will have the right to require the Company to repurchase for cash all of their notes, or any portion of the principal thereof that is equal to US$ |
Tax redemption
| ● | The Company may redeem, at its option, all but not part of the Convertible Bonds due 2025 if it becomes obligated to pay to the holder of any note ‘‘additional amounts’’ (which are more than a de minimis amount) as a result of any change in tax law at the price equal to |
F-34
GDS HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of RMB, except share data and per share data, or otherwise noted)
Conversion rights
| ● | Holders may convert their notes at their option at any time prior to the close of business on the third scheduled trading day immediately preceding the maturity date. |
| ● | The conversion rate is initially |
The Company determined that the embedded conversion option of the Convertible Bonds due 2025 was not required to be accounted for as an embedded derivative pursuant to ASC 815 Derivatives and Hedging. The Company also determined that there was no embedded beneficial conversion feature (“BCF”) attributable to Convertible Bonds due 2025 at the commitment date because the initial conversion price of Convertible Bonds due 2025 was greater than the fair value of the Company’s ordinary shares. Contingent BCF will be assessed upon occurrence of an adjusting event to the conversion price. The Company also determined there was no other embedded derivative to be separated from the Convertible Bonds due 2025.
The effective interest rate of the convertible bonds, after considering the related issuance cost, was
11 ACCRUED EXPENSES AND OTHER PAYABLES
Accrued expenses and other payables consisted of the following:
As of | ||||
December 31, | June 30, | |||
| 2019 |
| 2020 | |
Accrued interest expenses |
| |
| |
Accrued debt issuance costs and other financing costs |
| |
| |
Income tax payable |
| |
| |
Other tax payable |
| |
| |
Consideration payables for acquisitions |
| |
| |
Deferred government grants |
| |
| |
Accrued payroll and welfare benefits |
| |
| |
Accrued professional fees |
| |
| |
Accrued data center outsourcing service fees |
| |
| |
Amount due to related parties |
| |
| |
Amount due to a financial institution | | | ||
Interest rate swap contracts (Note 15) | | | ||
Other accrued operating expenses | | | ||
Other payables |
| |
| |
| |
| | |
12 LEASE
The Company enters into lease arrangements primarily for data center spaces, office spaces and equipment.
Data center buildings and land leases
During the six-month period ended June 30, 2020, the Company entered into lease agreements with the landlords to lease the buildings and land, including those acquired through acquisition of subsidiaries, for certain data centers. The Company assessed the lease classification of the building and land components separately at the commencement date. During the six-month period ended June 30, 2020, the Company recorded additional finance lease liabilities of RMB
Build-to-suit leases
F-35
GDS HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of RMB, except share data and per share data, or otherwise noted)
In July and August 2018, the Company entered into
Equipment lease
During the six-month period ended June 30, 2020, the Company entered into lease agreements with a third-party lessor for the leases of certain equipment in Hebei, China, in which the underlying assets needs to be constructed. The lessor purchased these underlying assets prior to the lease commencement for the construction based on the Company’s specifications and supervision. The Company had the right to obtain the partially constructed underlying assets at any point during the construction period by making a payment to the lessor, so the Company concluded that it controls the underlying assets before the lease commencement in accordance with ASC 842-40-55-5. Accordingly, the Company recorded an asset for the estimated construction costs incurred for the equipment and a liability for those costs funded by the lessor during the construction period. Upon completion of the construction, the Company will assess if the arrangement qualifies for sales recognition under the sale and lease back accounting guidance. The obligations under above lease arrangements are recognized as other financing obligations.
In 2019, the Company also entered into two lease agreements with a third-party lessor for the leases of certain equipment in Hebei, China. As the ownership of the underlying assets will be transferred to the Company by the end of the lease term, such leases are recognized as finance leases. The relevant leases commenced when the Company received the equipment. The amount paid by the lessor to its vendor for equipment which was not received by the Company at December 31, 2019, was recognized as other financing obligations. Such other financing obligations were reclassified to finance lease obligation upon commencement of the lease in the six-month period ended June 30, 2020.
The components of lease cost are as follows:
| Six-month periods ended June 30, | |||
2019 | 2020 | |||
(unaudited) | ||||
Finance lease cost: |
|
| ||
- Amortization of right-of-use assets |
| | | |
- Interest on lease liabilities |
| | | |
Operating lease cost |
| | | |
Short-term lease cost |
| | | |
Variable lease cost (Note) | — | ( | ||
Total lease cost |
| | | |
F-36
GDS HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of RMB, except share data and per share data, or otherwise noted)
Note: | During the six-month period ended June 30, 2020, the Company was granted lease concessions of RMB |
Supplemental cash flow information related to leases is as follows:
| Six-month periods ended June 30, | |||
2019 | 2020 | |||
(unaudited) | ||||
Cash paid for amounts included in measurement of lease liabilities (Note): |
|
| ||
- Operating cash flows from finance leases |
| ( | ( | |
- Operating cash flows from operating leases |
| ( | ( | |
- Financing cash flows from finance leases |
| ( | ( | |
Non-cash information on lease liabilities arising from obtaining ROU assets |
|
| ||
- Finance leases |
| | | |
- Operating leases |
| | | |
Note: | The above table does not include cash paid for purchase of land use rights and initial direct costs of leases of RMB |
Weighted average remaining lease term and weighted average discount rate for leases, excluding prepaid land use rights, are as follows:
| As of |
| |||
December 31, 2019 | June 30, 2020 |
| |||
Weighted average remaining lease term: |
|
| |||
- Finance leases |
| ||||
- Operating leases |
| ||||
Weighted average discount rate: |
|
| |||
- Finance leases |
| | % | | % |
- Operating leases |
| | % | | % |
F-37
GDS HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of RMB, except share data and per share data, or otherwise noted)
Maturities of lease and other financing obligations were as follows:
As of December 31, 2019 | As of June 30, 2020 | |||||||||||||||||||
Total of finance | Total of finance | |||||||||||||||||||
Finance | Other | lease and other | Operating | Finance | Other | lease and other | Operating | |||||||||||||
lease | financing | financing | lease | lease | financing | financing | lease | |||||||||||||
| obligations |
| obligations |
| obligations |
| obligations |
| Total |
| obligations |
| obligations |
| obligations |
| obligations |
| Total | |
Within 1 year | | | | | | | | | | | ||||||||||
After 1 year but within 2 years |
| |
| |
| |
| |
| | | | | | | |||||
After 2 years but within 3 years |
| |
| |
| |
| |
| | | | | | | |||||
After 3 years but within 4 years |
| |
| |
| |
| |
| | | | | | | |||||
After 4 years but within 5 years |
| |
| |
| |
| |
| | | | | | | |||||
After 5 years |
| |
| |
| |
| |
| | | | | | | |||||
Total |
| |
| |
| |
| |
| | | | | | | |||||
Less: total future interest |
| ( |
| ( |
| ( |
| ( |
| ( | ( | ( | ( | ( | ( | |||||
Less: estimated construction costs |
| — |
| ( |
| ( |
| — |
| ( | — | ( | ( | — | ( | |||||
Present value of lease and other financing obligations |
| |
| |
| |
| |
| | | | | | | |||||
Including: |
|
|
|
|
|
|
| |||||||||||||
- Current portion |
|
|
|
|
| |
| |
| | | | | |||||||
- Non-current portion |
|
|
|
|
| |
| |
| | | | | |||||||
As of June 30, 2020, the Company has additional leases, primarily for data center buildings, that have not yet commenced with total future lease payments of RMB
13 OTHER LONG-TERM LIABILITIES
Other long-term liabilities consisted of the following:
| As of | |||
| December 31, 2019 |
| June 30, 2020 | |
Consideration payable for acquisitions |
| |
| |
Payables for purchase of property and equipment |
| |
| |
Deferred revenue – non-current (Note 4) |
| |
| |
Deferred government grants |
| |
| |
Interest rate swap contracts (Note 15) |
| |
| — |
Asset retirement obligations |
| |
| |
Others |
| |
| |
Total |
| |
| |
14 REDEEMABLE PREFERRED SHARES
On March 27, 2019 (the “Issue Date”), GDS Holdings completed its issuance of
F-38
GDS HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of RMB, except share data and per share data, or otherwise noted)
The movement of redeemable preferred shares is set out as below:
| Redeemable preferred shares | |
Balance at January 1, 2020 |
| |
Accrual of redeemable preferred shares dividends |
| |
Settlement of redeemable preferred shares dividends |
| ( |
Foreign exchange impact |
| |
Balance at June 30, 2020 |
| |
Key terms of the convertible preferred shares
Dividends
The holders of the preferred shares are entitled to receive, in priority to the holders of the ordinary shares, cumulative preferred share dividends which are payable quarterly in arrears on March 15, June 15, September 15 and December 15, commencing on June 15, 2019 (each such payment date being a “Regular Dividend Payment Date”). The dividends are
Conversion
The holders of preferred shares have the right to convert any or all of their holdings of preferred shares Stated Value into Class A Ordinary Shares based on the conversion rate then in effect.
In addition, if, at any time beginning on March 15, 2022, (i) the volume-weighted average price (“VWAP”) per ADS of the GDS Holdings equals or exceeds US$
The initial conversion rate is corresponding to a conversion price of US$
Liquidation preference
Upon a liquidation, after satisfaction of all liabilities and obligations to creditors of the Company and before any distribution or payment shall be made to holders of ordinary shares, each holder of preferred shares shall be entitled to receive an amount per preferred share equal to the greater of: (1) the Stated Value of preferred shares plus any dividends accumulated but unpaid thereon after the immediately preceding Regular Dividend Payment Date to but excluding the date of liquidation; (2) the payment such holders would have received had such holders, immediately prior to such liquidation converted their preferred shares into Class A Ordinary Shares.
Optional Redemption by the Company
The preferred shares may be redeemed, in whole or in part, at any time after March 15, 2027, at the option of the Company at a redemption price per share equal to the sum of the Stated Value per preferred share to be redeemed plus an amount per share equal to accrued but unpaid dividends on such preferred shares after the immediately preceding Regular Dividend Payment Date to but excluding the date of redemption.
F-39
GDS HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of RMB, except share data and per share data, or otherwise noted)
Repurchase at the Option of the Holder Upon a Fundamental Change
Upon the occurrence of a Fundamental Change, as defined in the share subscription agreement, each holder of preferred shares shall have the right to require the Company to repurchase all or any portion of such holder’s preferred shares at a purchase price per preferred share equal to the greater of
| (i) | the sum of (x) 100% multiplied by the Stated Value per preferred share plus (y) an amount equal to accrued but unpaid dividends on such preferred share after the immediately preceding Regular Dividend Payment Date to but excluding the date of repurchase, plus (z) solely in the event that such Fundamental Change occurs prior to the third anniversary of the Issue Date, the present value of all undeclared dividends from the date of redemption to, and including, the third anniversary of the Issue Date, in each case, discounted to the date of redemption on the basis of actual days elapsed (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate, which is the yield to maturity at the time of computation of United States Treasury securities with a constant maturity, plus 50 basis points, and |
| (ii) | the amount of cash and/or other assets such holder would have received had such holder, immediately prior to the occurrence of such Fundamental Change, converted such preferred shares into Class A Ordinary Shares. |
Financing for Redemption of Convertible Preferred Shares
In the event that any preferred shares remain outstanding from and after the tenth anniversary of the Issue Date, the holders of preferred shares constituting at least
Voting rights
The holders of the preferred shares have voting rights equivalent to the ordinary shareholders on an “if converted” basis. In addition, the Company shall not take certain actions without first obtaining the written consent or affirmative vote at a meeting called for that purpose by holders of at least
The Company has classified these preferred shares as mezzanine equity in the consolidated balance sheets since they are contingently redeemable upon a Fundamental Change or include liquidation preference provisions that are not solely within the Company’s control. The Company evaluated the embedded conversion, call and put options in the preferred shares to determine if they require bifurcation and are accounted for as derivatives, and concluded that there were no embedded derivatives to be bifurcated from the preferred share pursuant to ASC 815. The Company also determined that there was no BCF attributable to the preferred shares because the initial conversion price was higher than the fair value of the Company's ordinary shares.
The Company incurred issuance cost of US$
15 DERIVATIVE FINANCIAL INSTRMENTS
As of December 31, 2019 and June 30, 2020, the Company had outstanding interest rate swap contracts with notional amounts of US$
F-40
GDS HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of RMB, except share data and per share data, or otherwise noted)
The following table reflects the fair values of derivatives included in the consolidated balance sheets as of December 31, 2019 and June 30, 2020:
| Consolidated balance |
| ||||
sheets location | As of | |||||
| December 31, 2019 |
| June 30, 2020 | |||
Interest rate swap contracts (not designated as hedging instruments) |
| Accrued expenses and | ||||
| other payables | | | |||
Interest rate swap contracts (not designated as hedging instruments) |
| Other long-term liabilities | | — | ||
The following table reflects the location in the consolidated statements of operations and the amount of realized and unrealized gains (losses) recognized for the derivative contracts not designated as hedging instruments for the six-month periods ended June 30, 2019 and 2020:
Consolidated | ||||||
statements of | ||||||
| operations location |
| Six-month periods ended June 30, | |||
| 2019 |
| 2020 | |||
(unaudited) | ||||||
Interest rate swap contracts (not designated as hedging instruments) — realized loss |
| Interest expenses |
| ( |
| ( |
Interest rate swap contracts (not designated as hedging instruments) — unrealized loss |
| Interest expenses |
| ( |
| ( |
| ( |
| ( | |||
16 FAIR VALUE MEASUREMENT
As of December 31, 2019 and June 30, 2020, the Company’s financial assets and liabilities measured at fair value on a recurring basis were as follows:
| Fair value measurement using Level 2 inputs | |||
As of | ||||
| December 31, 2019 |
| June 30, 2020 | |
Liabilities |
|
| ||
- Interest rate swap contracts (Note 15) | | | ||
Following is a description of the valuation techniques that the Company uses to measure fair value of other financial assets and financial liabilities:
| ● | Short-term financial instruments (cash, restricted cash, accounts receivable and payable, short-term borrowings, and accrued expenses and other payables)—cost approximates fair value because of the short maturity period. |
| ● | Long-term borrowings—fair value is based on the amount of future cash flows associated with each debt instrument discounted at the Company’s current borrowing rate for similar debt instruments of comparable terms. The carrying values of the long-term borrowings approximate their fair values as all the long-term debt carry variable interest rates which approximate rates currently offered by the Company’s bankers for similar debt instruments of comparable maturities. |
| ● | Convertible Bonds payable—the estimated fair value was RMB |
F-41
GDS HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of RMB, except share data and per share data, or otherwise noted)
17 ORDINARY SHARES
On March 19, 2019, the Company completed a public offering in which the Company offered and sold
In June 2020,
As of June 30, 2020, the Company’s outstanding share capital consisted of
18 SHARE-BASED COMPENSATION
Equity Incentive Plans
The Company adopted the 2014 Equity Incentive Plan (the “2014 Plan”) in July 2014 for the granting of share options to key employees, directors and external consultants in exchange for their services. The total number of shares, which may be issued under the 2014 Plan, is
The Company adopted the 2016 Equity Incentive Plan (the “2016 Plan”) in August 2016 for the granting of share options, stock appreciation rights and other stock-based award (collectively referred to as the Awards) to key employees and directors. The maximum aggregate number of shares, which may be subject to Awards under the Plan, is
A summary of the option activity is as follows:
|
|
| Weighted | |||
average | ||||||
Weighted | grant-date | |||||
Number | average | fair value | ||||
| of options |
| exercise price |
| per option | |
|
|
| (RMB) |
| (RMB) | |
Options outstanding January 1, 2020 |
| |
| |
| |
Exercised | ( | | | |||
Options outstanding at June 30, 2020 |
| |
| |
| |
Options vested and expect to vest at June 30, 2020 |
| |
| | |
Total intrinsic value of options exercised was RMB
F-42
GDS HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of RMB, except share data and per share data, or otherwise noted)
The following table summarizes information with respect to stock options outstanding and stock options exercisable as of June 30, 2020:
Weighted | ||||||
average | Weighted | |||||
Number |
| remaining |
| average | ||
| of shares |
| contractual life |
| exercise price | |
| (years) |
| (RMB) | |||
Options outstanding and exercisable | | |
As of December 31, 2019 and June 30, 2020, there were
Settlement of liability-classified restricted shares award
In March and May 2019, the Company issued a total of
In March and June 2020, the Company issued a total of
Pursuant to ASC 480-10-25-14, such award that is share-settleable for a fixed monetary amount is a liability-classified award and therefore is re-measured each reporting period until settlement.
Upon issuance of the shares to settle the obligation, equity is increased by the amount of the liability settled in shares and
A summary of the restricted share activity is as follows:
Weighted average grant- | ||||
Number of | date fair value per share | |||
| Shares |
| (RMB) | |
| ||||
Unvested at January 1, 2020 | | |||
Granted | | | ||
Vested | ( | | ||
Forfeited | ( | | ||
Unvested at June 30, 2020 |
| | |
The Company recognized share-based compensation expenses of RMB
Total intrinsic value of restricted shares vested was RMB
F-43
GDS HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of RMB, except share data and per share data, or otherwise noted)
A summary of share-based compensation expenses for the six-month periods ended June 30, 2019 and 2020 is as follows:
| Six-month periods ended June 30, | |||
|
| 2019 |
| 2020 |
(unaudited) | ||||
Costs of revenue |
| | | |
Selling and marketing expenses |
| | | |
General and administrative expenses |
| | | |
Research and development expenses | | | ||
Total share-based compensation expenses |
| | | |
19 REVENUE
Net revenue consisted of the following:
| Six-month periods ended June 30, | |||
| 2019 |
| 2020 | |
(unaudited) | ||||
Colocation services | | | ||
Managed service and others | | | ||
Service revenue | | | ||
IT equipment sales | | | ||
Total | | | ||
20 INCOME TAX
Pursuant to the rules and regulations of the Cayman Islands, GDS Holdings is not subject to any income tax in the Cayman Islands.
The Company's PRC entities are subject to the PRC Corporate Income Tax ("CIT") rate of
The Company’s Hong Kong SAR entities are subject to the Hong Kong SAR Profits Tax rate of
The Company's Singapore entities are subject to the Singapore CIT rate of
F-44
GDS HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of RMB, except share data and per share data, or otherwise noted)
The operating results before income tax and the provision for income taxes by tax jurisdictions for the six-month periods ended June 30, 2019 and 2020 is as follows:
| Six-month periods ended June 30, | |||
| 2019 |
| 2020 | |
(unaudited) | ||||
Loss (income) before income taxes: |
|
|
|
|
PRC |
| |
| ( |
Other jurisdictions |
| |
| |
Total loss before income taxes |
| |
| |
Current tax expenses: | ||||
PRC |
| |
| |
Total current tax expenses |
| |
| |
Deferred tax benefits: | ||||
PRC |
| ( |
| ( |
Total deferred tax benefits |
| ( |
| ( |
Total income tax expenses |
| |
| |
The actual income tax expense reported in the consolidated statements of operations differs from the amount computed by applying the PRC statutory income tax rate to loss before income taxes due to the following:
| Six-month periods ended June 30, |
| |||
| 2019 |
| 2020 |
| |
(unaudited) |
| ||||
PRC enterprise income tax rate |
| | % | | % |
Non-PRC resident enterprises not subject to income tax |
| ( | % | ( | % |
Tax differential for entities in non-PRC jurisdiction |
| ( | % | ( | % |
Preferential tax rate |
| % | ( | % | |
Tax effect of current period permanent differences |
| % | | % | |
Non-taxable income |
| % | | % | |
Change in valuation allowance |
| ( | % | ( | % |
Return to provision adjustment |
| | % | | % |
| ( | % | ( | % | |
F-45
GDS HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of RMB, except share data and per share data, or otherwise noted)
The components of deferred tax assets and liabilities are as follows:
| As of | |||
| December 31, 2019 |
| June 30, 2020 | |
Deferred tax assets: |
|
|
|
|
Allowance for accounts receivable |
| |
| |
Government subsidy |
| |
| |
Accrued expenses |
| |
| |
Asset retirement obligation |
| |
| |
Leases |
| — |
| |
Net operating loss carry forwards |
| |
| |
Total gross deferred tax assets |
| |
| |
Valuation allowance on deferred tax assets |
| ( |
| ( |
Deferred tax assets, net of valuation allowance |
| |
| |
Deferred tax liabilities: | ||||
Property and equipment |
| ( |
| ( |
Intangible assets |
| ( |
| ( |
Prepaid land use rights |
| ( |
| ( |
Leases |
| ( |
| — |
Accounts receivable |
| ( |
| — |
Total deferred tax liabilities |
| ( |
| ( |
Net deferred tax liabilities |
| ( |
| ( |
Analysis as: | ||||
Deferred tax assets |
| |
| |
Deferred tax liabilities |
| ( |
| ( |
Net deferred tax liabilities |
| ( |
| ( |
The following table presents the movement of the valuation allowance for the deferred tax assets:
| Six-month periods ended June 30, | |||
| 2019 |
| 2020 | |
(unaudited) | ||||
Balance at the beginning of the period |
| |
| |
Increase during the period |
| |
| |
Balance at the end of the period |
| |
| |
As of June 30, 2020, the Company’s net deferred tax assets were RMB
F-46
GDS HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of RMB, except share data and per share data, or otherwise noted)
those temporary differences become deductible or utilized. Management considers the scheduled reversal of deferred income tax liabilities, projected future taxable income and tax planning strategies in making this assessment.
The net operating losses carry forwards of the Company’s PRC subsidiaries amounted to RMB
Uncertainties exist with respect to how the current income tax law in the PRC applies to the Company’s overall operations, and more specifically, with regard to tax residency status. The 2008 Enterprise Income Tax Law (the “EIT Law”) includes a provision specifying that legal entities organized outside the PRC are considered residents for Chinese income tax purposes if the place of effective management or control is within the PRC. The implementation rules to the EIT Law provide that non-resident legal entities are considered PRC residents if substantial and overall management and control over the manufacturing and business operations, personnel, accounting, properties, etc., occurs within the PRC. Despite the present uncertainties resulting from the limited PRC tax guidance on the issue, the Company does not believe that the legal entities organized outside the PRC should be treated as residents for EIT Law purposes. If the PRC tax authorities subsequently determine that the Company and its subsidiaries registered outside the PRC are deemed resident enterprises, the Company and its subsidiaries registered outside the PRC will be subject to the PRC income tax at a rate of
If the Company were to be non-resident for PRC tax purposes, dividends paid to it from profits earned by the PRC subsidiaries after January 1, 2008 would be subject to a withholding tax. The EIT Law and its relevant regulations impose a withholding tax at
21 DISTRIBUTION OF PROFIT
Pursuant to the laws and regulations of the PRC, the Company’s PRC entities are required to allocate at least
These PRC entities are restricted in their ability to transfer the registered capital and general reserve fund to GDS Holdings in the form of dividends, loans or advances. The restricted portion amounted to RMB
F-47
GDS HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of RMB, except share data and per share data, or otherwise noted)
22 LOSS PER ORDINARY SHARE
The computation of basic and diluted loss per share is as follows:
| Six-month periods ended June 30, | |||
|
| 2019 |
| 2020 |
(unaudited) | ||||
Net loss |
| ( | ( | |
| ||||
Change in redemption value of redeemable preferred shares |
| ( | — | |
Cumulative dividend on redeemable preferred shares |
| ( | ( | |
Net loss attributable to ordinary shareholders |
| ( | ( | |
Weighted average number of ordinary shares outstanding - basic and diluted |
| | | |
Loss per ordinary share - basic and diluted |
| ( | ( | |
Note: During the year ended December 31, 2019, the Company issued
The following securities were excluded from the computation of diluted loss per share as inclusion would have been anti-dilutive. The share options and restricted shares below represented the maximum number of shares to be issued.
| Six-month periods ended June 30, | |||
|
| 2019 |
| 2020 |
(unaudited) | ||||
Share options/restricted shares |
| | | |
Convertible bonds payable |
| | | |
Total |
| | | |
23 SEGMENT INFORMATION
The Company has
During the six-month periods ended June 30, 2019 and 2020, substantially all of the Company’s operations are in the PRC. As of December 31, 2019 and June 30, 2020, the long-lived assets amounted to RMB
24 MAJOR CUSTOMERS
During the six-month period ended June 30, 2020, the Company had
F-48
GDS HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of RMB, except share data and per share data, or otherwise noted)
25 COMMITMENTS AND CONTINGENCIES
(a) Capital commitments
Capital commitments outstanding at December 31, 2019 and June 30, 2020 not provided for in the financial statements were as follows:
| As of | |||
December 31, | June 30, | |||
|
| 2019 |
| 2020 |
|
| |||
Contracted for |
| |
| |
Commitment for purchase of land use rights was RMB
(b) Lease commitments
The Company’s lease commitments are disclosed in note 12.
(c) Litigation contingencies
In August 2018, the Company and its chief executive officer and chief financial officer were named as defendants in a consolidated class action lawsuit filed in the United States District Court. The complaints in the action allege that the Company’s registration statements contained misstatements or omissions regarding its business, operation, and compliance in violation of the U.S. securities laws. As of December 31, 2019, the Company had unpaid legal cost and other related costs of approximately RMB
26 RELATED PARTY TRANSACTIONS
During the six-month periods ended June 30, 2019 and 2020, the related parties of the Company are as follows:
Name of party |
| Relationship |
STT GDC | Principal ordinary shareholder of the Company | |
STT Singapore DC Pte. Ltd. | Subsidiary of STT GDC | |
STT DEFU 2 Pte. Ltd. | Subsidiary of STT GDC |
In addition to the related party information disclosed elsewhere in the consolidated financial statements, the Company entered into the following material related party transactions.
(a) Major transactions with related parties
| Six-month periods ended June 30, | |||||
|
|
|
| 2019 |
| 2020 |
(unaudited) | ||||||
Commission income | ||||||
STT Singapore DC Pte. Ltd. | (i) | — | | |||
STT DEFU 2 Pte. Ltd. | (i) | — | | |||
— | | |||||
F-49
GDS HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of RMB, except share data and per share data, or otherwise noted)
(b) Major balances with related parties
| As of | |||||
|
| December 31, |
| June 30, | ||
|
| 2019 | 2020 | |||
|
| |||||
Amount due to related parties: | (i) | |||||
STT DEFU 2 Pte. Ltd. | | | ||||
STT Singapore DC Pte. Ltd. | | | ||||
| |
| | |||
Note (i): | During the year ended December 31, 2019, the Company successfully referred a customer to STT Singapore DC Pte. Ltd. and STT DEFU 2 Pte. Ltd. As of December 31, 2019, amount due to related parties represents the service fee received on behalf of the related parties for one of their customers, which is recorded in accrued expenses and other payables. |
During the six-month period ended June 30, 2020, the Company recognized RMB
These amounts due to related parties are trade in nature and are settled on a recurring basis.
F-50
GDS HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of RMB, except share data and per share data, or otherwise noted)
27 PARENT ONLY FINANCIAL INFORMATION
The following condensed parent company financial information of GDS Holdings has been prepared using the same accounting policies as set out in the accompanying consolidated financial statements except that the equity method has been used to account for investments in its subsidiaries. As of June 30, 2020, there were no material contingencies, significant provisions of long-term obligations, mandatory dividend or redemption requirements of redeemable stocks or guarantees of GDS Holdings, except for those, which have been separately disclosed in the consolidated financial statements.
Condensed Balance Sheets
| As of | |||
| December 31, 2019 |
| June 30, 2020 | |
Assets |
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Current assets |
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Cash |
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Prepaid expenses |
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Other current assets |
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Total current assets |
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Restricted cash |
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Investment and loans to subsidiaries |
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Other non-current assets |
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Total assets |
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Liabilities, Redeemable Preferred Shares and Shareholders’ Equity | ||||
Current liabilities | ||||
Accounts payable |
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Accrued expenses and other payables |
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Due to subsidiaries |
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Total current liabilities |
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Long-term borrowings |
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Convertible bonds payable |
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Other long-term liabilities |
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Total liabilities |
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Redeemable preferred shares (US$ |
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Shareholders' equity | ||||
Ordinary shares (US$ |
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Additional paid-in capital |
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Accumulated other comprehensive loss |
| ( |
| ( |
Accumulated deficit |
| ( |
| ( |
Total shareholders’ equity |
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Commitments and contingencies | ||||
Total liabilities, redeemable preferred shares and shareholders’ equity |
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F-51
GDS HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of RMB, except share data and per share data, or otherwise noted)
Condensed Statements of Operations
| Six-month periods ended June 30, | |||
| 2019 |
| 2020 | |
(unaudited) | ||||
Net revenue |
| |
| |
Cost of revenue |
| ( |
| ( |
Gross loss |
| ( |
| ( |
Operating expenses | ||||
Selling and marketing expenses |
| ( |
| ( |
General and administrative expenses |
| ( |
| ( |
Research and development expenses |
| ( |
| ( |
Loss from operations |
| ( |
| ( |
Other income (expenses): | ||||
Interest income |
| |
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Interest expenses |
| ( |
| ( |
Equity in (loss) income of subsidiaries |
| ( |
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Others, net |
| |
| ( |
Loss before income taxes |
| ( |
| ( |
Income tax expenses |
| |
| |
Net loss |
| ( |
| ( |
Condensed Statements of Comprehensive Loss
| Six-month periods ended June 30, | |||
| 2019 |
| 2020 | |
(unaudited) | ||||
Net loss |
| ( |
| ( |
Other comprehensive income: | ||||
Foreign currency translation adjustments, net of |
| |
| |
Comprehensive loss |
| ( |
| ( |
F-52
GDS HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of RMB, except share data and per share data, or otherwise noted)
Condensed Statements of Cash Flows
| Six-month periods ended June 30, | |||
| 2019 |
| 2020 | |
(unaudited) | ||||
Operating activities: |
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|
Net cash used in operating activities |
| ( |
| ( |
Investing activities | ||||
Increase of due from subsidiaries |
| ( |
| ( |
Net cash used in investing activities |
| ( |
| ( |
Financing activities: | ||||
Proceeds from long-term borrowings |
| |
| — |
Payment of issuance cost of borrowings |
| — |
| ( |
Proceeds from exercise of stock options |
| |
| |
Net proceeds from issuance of ordinary shares |
| |
| |
Net proceeds from issuance of redeemable preferred shares |
| |
| — |
Payment of redeemable preferred shares dividends |
| ( |
| ( |
Net cash provided by financing activities |
| |
| |
Effect of exchange rate changes on cash and restricted cash |
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Net increase in cash and restricted cash |
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Cash and restricted cash at beginning of period |
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Cash and restricted cash at end of period |
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Supplemental disclosures of cash flow information | ||||
Interest paid |
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Supplemental disclosures of non-cash investing and financing activities | ||||
Settlement of liability-classified restricted share award |
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28 SUBSEQUENT EVENTS
| a) | New loan facilities |
From July 2020 to October 19, 2020,
| b) | Coronavirus Outbreak |
Beginning in January 2020, the emergence and wide spread of the novel Coronavirus (“COVID-19”) has resulted in quarantines, travel restrictions, and the temporary closure of businesses and facilities in China and elsewhere. Substantially all of the Company’s revenue and workforce are concentrated in China. Any economic slowdown in China or worldwide due to COVID-19 may adversely affect the Company’s business operations, financial condition and operating results, including but not limited to negative impact to the Company’s total revenues, slower collection of accounts receivable and additional allowance for doubtful accounts. While many of the restrictions on movement within China have been relaxed, the economy is seemingly on the path of recovery and the Company’s business has not been materially impacted at this time, there remains uncertainty about the viral resurgence which may impact the business ongoing performance and development. With the uncertainties surrounding the COVID-19 outbreak until a cure and vaccine has be discovered, the threat to the business disruption and the related financial impact remains.
F-53
GDS HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of RMB, except share data and per share data, or otherwise noted)
| c) | Establishment of a joint venture |
In July 2020, the Company formed a joint venture (“JV”) to undertake a major new data center project in Beijing (“BJ13”) with a private equity fund (“CPE Fund”) controlled by CITIC Private Equity Funds Management Co., Limited. The Company initially owns a
| d) | Offer to acquire Beijing 14 |
On September 22, 2020, the Company extended a legally-binding offer to acquire
F-54