As filed with the Securities and Exchange Commission on August 6, 2020

Registration Statement No. 333-240081

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

 

 

AMENDMENT NO. 1

TO

FORM F-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

 

 

 

METEN EDTECHX EDUCATION GROUP LTD.

(Exact name of Registrant as specified in its charter)

 

Cayman Islands
(Jurisdiction of
Incorporation or Organization)
8200
(Primary Standard Industrial
Classification Code Number)
Not Applicable
(I.R.S. Employer
Identification Number)

 

c/o Meten International Education Group
3rd Floor, Tower A, Tagen Knowledge & Innovation Center
2nd Shenyun West Road, Nanshan District
Shenzhen, Guangdong Province 518045
The People’s Republic of China
+86 755 8294 5250
(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

 

Puglisi & Associates
850 Library Avenue, Suite 204
Newark, Delaware 19711
+1 302-738-6680
(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

 

Copies to:

Ning Zhang, Esq.
Yile Gao, Esq.
Morgan, Lewis & Bockius LLP
c/o Suites 1902-09, 19th Floor
Edinburgh Tower, The Landmark
15 Queen’s Road Central
Hong Kong
+852 3551 8500

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. ☐

 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933. ☐

 

Emerging growth company

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 7(a)(2)(B) of the Securities Act.

 

†The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012. 

 

 

 

CALCULATION OF REGISTRATION FEE

 

Title of Each Class of Securities to be Registered(1)  Amount
to be
Registered(2)
   Proposed
Maximum
Offering
Price per
Security
   Proposed
Maximum
Aggregate
Offering Price(2)
   Amount of
Registration
Fee
 
Ordinary shares, US$0.0001 par value (3)   12,955,000  $11.50(7)  $148,982,500   $3,881.02(11)
Units (4)   250,000   $12.00(8)  $3,000,000   $-(12)
Ordinary shares, US$0.0001 par value (5)   44,330,947  $11.84(9)  $524,878,412.48   $4,917.86(13)
Warrants (6)   6,260,000  $0.52(10)  $3,223,900.00   $173.80(14)
Total                 $647.80(15)

 

(1) Pursuant to Rule 429 under the Securities Act of 1933, as amended (the “Securities Act”), this registration statement (this “Registration Statement”) contains a combined prospectus that covers (i) ordinary shares, US$0.0001 par value, of the Registrant (“ordinary shares”), issuable upon the exercise of: (a) 250,000 warrants that are a part of 250,000 units issuable upon the exercise of outstanding options to purchase units (the “unit purchase options”) consisting of one ordinary share and one warrant to purchase one ordinary share (the “units”), (b) 10,105,000 warrants issued in connection with the Mergers (as defined below), (c) 2,000,000 warrants underlying units issued in connection with the Azimut Investment (as defined below); (d) 600,000 warrants held by certain holders who received redeemable warrants in connection with the consummation of the PIPE Investments (as defined below); (ii) 250,000 units issuable upon exercise of the unit purchase options held by certain holders of unit purchase options who received unit purchase options in connection with the consummation of the Mergers; (iii) 44,330,947 ordinary shares registered for resale by the selling securityholders; and (iv) 6,260,000 warrants registered for resale by the selling securityholders named in this Registration Statement, which warrants consist of (a) 3,660,000 warrants issued in connection with the Mergers, (b) 2,000,000 warrants underlying units issued in connection with the Azimut Investment, and (c) 600,000 warrants underlying units issued in connection with the PIPE Investments.
(2) Pursuant to Rule 416 under the Securities Act, this Registration Statement also covers any additional ordinary shares that may be offered or issued in connection with any share split, share capitalization or similar transaction.
(3) Consists of 12,955,000 ordinary shares issuable upon the exercise of: (i) 250,000 warrants that are part of 250,000 units issuable upon the exercise of outstanding unit purchase options; (ii) 10,105,000 warrants issued in connection with the Mergers, (iii) 2,000,000 warrants underlying units issued in connection with the Azimut Investment, and (iv) 600,000 warrants underlying units issued to a certain PIPE Investor (as defined below) in connection with the PIPE Investment.
(4) Consists of 250,000 units issuable upon exercise of the unit purchase options held by certain holders of unit purchase options who received unit purchase options in connection with the consummation of the Mergers.
(5) Consists of 44,330,947 ordinary shares registered for resale by the selling securityholders named in this Registration Statement, which ordinary shares consist of  (i) 34,870,947 ordinary shares issued in connection with the Mergers, (ii) 2,000,000 ordinary shares underlying units issued in connection with the Azimut Investment, (iii) 600,000 ordinary shares underlying units issued to a certain PIPE Investor in connection with the PIPE Investment; (iv) 600,000 ordinary shares issued to a certain PIPE Investor in connection with the PIPE Investment; (v) 2,000,000 ordinary shares issuable upon exercise of the 2,000,000 warrants underlying units issued in connection with the Azimut Investment; (vi) 600,000 ordinary shares issuable upon exercise of the 600,000 warrants underlying units issued to certain PIPE Investor in connection with the PIPE Investment; and (vii) 3,660,000 ordinary shares issuable upon exercise of warrants issued in connection with the Mergers.  
(6) Consists of 6,260,000 warrants registered for resale by the selling securityholders named in this Registration Statement, which warrants consist of (i) 3,660,000 warrants issued in connection with the Mergers, (ii) 2,000,000 warrants underlying units issued in connection with the Azimut Investment, and (iii) 600,000 warrants underlying units issued to a certain PIPE Investor in connection with the PIPE Investment.
(7) Pursuant to Rule 457(g) under the Securities Act, and solely for the purpose of calculating the registration fee, the proposed maximum offering price is $11.50, which is the exercise price of a warrant.
(8) Pursuant to Rule 457(g) under the Securities Act, and solely for the purpose of calculating the registration fee, the proposed maximum offering price is $12.00, which is the exercise price of a unit purchase option.
(9) Pursuant to Rule 457(c) under the Securities Act, and solely for the purpose of calculating the registration fee, the proposed maximum offering price is 11.84, which is the average of the high and low prices of the ordinary shares on July 10, 2020, on the Nasdaq Capital Market.
(10) Pursuant to Rule 457(c) under the Securities Act, and solely for the purpose of calculating the registration fee, the proposed maximum offering price is $0.515, which is the average of the high and low prices of the warrants on July 10, 2020, on the Nasdaq Capital Market.
(11) Pursuant to Rule 429(a), this Registration Statement carries over 10,355,000 unsold ordinary shares issuable upon the exercise of 10,355,000 warrants from the registration statement on Form F-4 (No. 333-235859), as amended (the “Prior Registration Statement”). Accordingly, no additional registration fee is due for the 10,355,000 unsold ordinary shares being carried forward.
(12) Pursuant to Rule 429(a), this Registration Statement carries over 250,000 ordinary shares and 250,000 warrants underlying the units from the Prior Registration Statement. Accordingly, no additional registration fee is due for the 250,000 ordinary shares and 250,000 warrants being carried forward.
(13) Pursuant to Rule 429(a), this Registration Statement carries over 34,870,947 unsold ordinary shares and 3,660,000 unsold ordinary shares issuable upon the exercise of 3,660,000 warrants from the Prior Registration Statement. Accordingly, no additional registration fee is due for the 34,870,947 unsold ordinary shares and 3,660,000 unsold ordinary shares issuable upon the exercise of 3,660,000 warrants being carried forward. Pursuant to Rule 457(g), no separate registration fee is required for the 2,600,000 shares issuable upon the exercise of the 2,600,000 warrants.
(14) Pursuant to Rule 429(a), this Registration Statement carries over 3,660,000 unsold warrants from the “Prior Registration Statement.” Accordingly, no additional registration fee is due for the 3,660,000 unsold warrants being carried forward.
(15) An aggregate registration fee of $10,539.39 in respect of 7,906,250 ordinary shares of the Registrant to be issued to holders of common stock of EdtechX Holdings Acquisition Corp. in connection with the Mergers was previously paid on January 9, 2020 in connection with the Prior Registration Statement. Of those 7,906,250 ordinary shares, 5,974,745 ordinary shares remain unissued and unsold, and are being deregistered from the Prior Registration Statement. In addition, an aggregate registration fee of $79,171.74 in respect of 59,391,607 ordinary shares of the Registrant to be issued to shareholders of Meten International Education Group in connection with the Mergers was previously paid on January 9, 2020 in connection with the Prior Registration Statement. Of those 59,391,607 ordinary shares, 270,271 ordinary shares remain unissued and unsold, and are being deregistered from the Prior Registration Statement. Pursuant to Rule 457(p) under the Securities Act, the Registrant hereby offsets the filing fee of $7,964.60 previously paid in connection with 5,974,745 ordinary shares and the filing fee of $360.28 previously paid in connection with 270,271 ordinary shares against the filing fee for this registration statement on Form F-1.

 

Pursuant to Rule 429(b) under the Securities Act, upon effectiveness, this Registration Statement shall constitute post-effective amendment no. 1 to the registration statement on Form F-4 (File No. 333-235859), which post-effective amendment shall hereafter become effective concurrently with the effectiveness of this Registration Statement in accordance with Section 8(c) of the Securities Act.

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

 

 

EXPLANATORY NOTE

 

Meten EdtechX Education Group Ltd. (“we”, the “Company” or the “Registrant”) was formed for the purpose of effecting the Agreement and Plan of Reorganization (the “Merger Agreement”), dated as of December 12, 2019, by and among EdtechX Holdings Acquisition Corp., a Delaware corporation (“EdtechX”), the Company, Meten Education Inc., a Delaware corporation and wholly owned subsidiary of the Company (“EdtechX Merger Sub”), Meten Education Group Ltd., a Cayman Islands exempted company and wholly owned subsidiary of the Company (“Meten Merger Sub,” and together with EdtechX Merger Sub, the “Merger Subs”), and Meten International Education Group, a Cayman Islands exempted company (“Meten International” or “Meten”).

 

Upon the terms and subject to the conditions of the Merger Agreement and in accordance with the Delaware General Corporation Law and the Companies Law of the Cayman Islands, the Company, EdtechX, the Merger Subs and Meten International entered into a merger transaction by which (i) EdtechX Merger Sub merged with and into EdtechX, with EdtechX being the surviving entity of the merger (the “EdtechX Merger”) and becoming a wholly-owned subsidiary of the Company (“Surviving Delaware Corporation”), and (ii) Meten Merger Sub merged with and into Meten International, with Meten International being the surviving entity of such merger (the “Meten Merger,” and together with the EdtechX Merger, the “Mergers”) and a wholly-owned subsidiary of the Company (“Surviving Cayman Islands Company”).

 

On March 30, 2020, the parties to the Merger Agreement consummated the Mergers. Immediately prior to the Mergers, the designees of Azimut Enterprises Holdings S.r.l. (the “Azimut Investor”) invested US$20 million in EdtechX to purchase 2,000,000 units of EdtechX (with each unit consisting of one ordinary share and one warrant to purchase one ordinary share of EdtechX at a price of US$11.50 per share) (the “Azimut Investment”), which units converted into the same number of our units upon closing of the Mergers. Concurrently with the closing of the Mergers, our PIPE financing with two unaffiliated third-party investors (each a “PIPE Investor”), one of which is Xiamen ITG Holding Group, a China-based Fortune Global 500 company (the “ITG Education”), in an aggregate investment of US$12 million was completed on March 30, 2020 (the “PIPE Investment”).

 

Combined Prospectus

 

This Registration Statement, which is a new registration statement, also constitutes post-effective amendment no. 1 on Form F-1 to the registration statement on Form F-4 (File No. 333-235859) filed by the Company and, in that regard, is being filed pursuant to the undertakings in Item 22 in such Form F-4 to file a post-effective amendment in relation thereto. Accordingly, this Registration Statement on Form F-1 contains a combined prospectus (the “Combined Prospectus”) pursuant to Rule 429 under the Securities Act of 1933, as amended (the “Securities Act”). The Combined Prospectus relates to the following registration statements:

 

(1) the Registration Statement on Form F-4 originally filed with the SEC on January 9, 2020 (File No. 333-235859), which was declared effective on March 16, 2020 (the “Prior Registration Statement”); and

 

(2) this Registration Statement on Form F-1 (this “Registration Statement”).

 

 

 

 

The Prior Registration Statement registered the offering of (a) 250,000 units (including 250,000 underlying ordinary shares and 250,000 underlying warrants) issuable upon exercise of the outstanding unit purchase options; and (b) 10,355,000 ordinary shares issuable upon the exercise of 10,355,000 warrants of the Company (including the 250,000 warrants issuable upon the exercise of outstanding unit purchase options), and the offering of such warrants and units in connection with the Mergers was also registered on the Prior Registration Statement. Pursuant to this Registration Statement, our offering of 250,000 units (including the underlying 250,000 warrants and 250,000 ordinary shares) issuable upon exercise of the outstanding unit purchase options and 10,355,000 ordinary shares issuable upon exercise of the warrants (including the warrants underlying the units purchasable upon exercise of the unit purchase options) is ongoing and remains registered pursuant to the Prior Registration Statement. Therefore, the Combined Prospectus covers such 250,000 units (including the underlying 250,000 warrants and 250,000 ordinary shares) issuable upon exercise of the unit purchase options and 10,355,000 ordinary shares issuable upon exercise of the warrants (including warrants underlying the units purchasable upon exercise of the unit purchase options). Upon the exercise of the warrants and unit purchase options, the ordinary shares and the warrants (including those underlying the units issuable upon exercise of unit purchase options) issued in connection with such exercise will be freely tradable under the U.S. securities laws, unless held by affiliates of ours (which securities shall be freely tradable under the U.S. securities laws if the related resales are also registered under the Registration Statement). Through the date hereof, none of the warrants or unit purchase options have been exercised by the holders thereof. Pursuant to Rule 416(a) of the Securities Act, the Prior Registration Statement also registered an indeterminable number of additional ordinary shares as may be issued to prevent dilution resulting from share splits, share capitalizations and similar transactions and accordingly the Combined Prospectus also covers any such additional ordinary shares. We are filing the Combined Prospectus to satisfy the requirements of the Securities Act and the rules and regulations thereunder for the offering registered on the Prior Registration Statement in order to maintain the effectiveness of the Prior Registration Statement to the extent that such Prior Registration Statement pertains to the ordinary shares issuable upon exercise of the warrants and the warrants and ordinary shares underlying the units issuable upon exercise of the unit purchase options.

 

Pursuant to Rule 429(b) under the Securities Act, upon effectiveness, this Registration Statement shall constitute post-effective amendment no. 1 to the Prior Registration Statement, which post-effective amendment shall hereafter become effective concurrently with the effectiveness of this Registration Statement in accordance with Section 8(c) of the Securities Act.

 

This Registration Statement registers the resale of 44,330,947 ordinary shares and 6,260,000 warrants by the selling securityholders named in the Combined Prospectus, comprising (a) 3,200,000 ordinary shares held by certain institutional investors that purchased in private placements (including 2,600,000 ordinary shares underlying the units held by certain institutional investors that purchased in private placements) that have requested such ordinary shares to be included in the registration statement of which this prospectus forms part, (b) 34,870,947 ordinary shares held by certain shareholders who received ordinary shares in connection with the consummation of the Mergers and became holders of our ordinary shares, (c) 3,660,000 warrants held by certain holders who received redeemable warrants in connection with the consummation of the Mergers (the “Converted Warrants”), (d) 2,600,000 warrants underlying the units held by certain institutional investors purchased in private placements (the “PIPE Warrants”) and that have requested such warrants to be included in the registration statement of which this prospectus forms part, (e) 2,600,000 ordinary shares issuable upon exercise of the PIPE Warrants held by certain institutional investors that purchased in private placements and that have requested such warrants to be included in the registration statement of which this prospectus forms part and (f) 3,660,000 ordinary shares issuable upon exercise of the Converted Warrants.

 

Upon the sale or distribution of the PIPE Warrants as described herein, the PIPE Warrants will become fungible with our redeemable warrants issued in the consummation of the Mergers. We expect these transferred PIPE Warrants (“Transferred Warrants”) will be quoted on the Nasdaq Capital Market under the same ticker symbol as our redeemable warrants: “METXW.”

 

In addition, this Registration Statement relates to the issuance by us of up to 2,600,000 ordinary shares that are issuable upon the exercise of the Transferred Warrants.

 

Deregistration of Securities from the Registration Statement on Form F-4 (File No. 333-235859)

 

In connection with the Mergers, the Prior Registration Statement registered up to a maximum number of securities specified in such Prior Registration Statement, not all of which were issued and sold in connection with the consummation of the Mergers on March 30, 2020. Accordingly, in accordance with the undertakings made by the Registrant in the Prior Registration Statement to remove from registration, by means of a post-effective amendment, any of the securities which remain unsold at the termination of the offering, the Registrant hereby deregisters the securities referred to below:

 

(1) In the Prior Registration Statement, the Registrant registered the issuance of 7,906,250 ordinary shares to be issued to holders of common stock of EdtechX in connection with the Mergers. As a result of the exercise of redemption rights in respect of 5,974,745 shares of common stock in connection with the consummation of the Mergers, 1,931,505 ordinary shares were issued to the holders of common stock in connection with the consummation of the Mergers. Accordingly, the Registrant hereby deregisters 5,974,745 ordinary shares that were registered on the Prior Registration Statement and were not issued and sold in connection with the consummation of the Mergers.
(2) In the Prior Registration Statement, the Registrant registered the issuance of 59,391,607 ordinary shares to be issued to shareholders of Meten in connection with the Mergers. As a result of certain shareholders’ election to receive cash consideration in an aggregate amount of $2,810,818.35 in lieu of 270,271 ordinary shares, the Company hereby deregisters 270,271 ordinary shares that were registered on the Prior Registration Statement and were not issued and sold in connection with the consummation of the Mergers.

 

The Prior Registration Statement is hereby amended, as appropriate, to reflect the deregistration of the securities referred to above.

 

 

 

 

The information in this preliminary prospectus is not complete and may be changed. The selling securityholders may not sell the securities described herein until the registration statement filed with the Securities and Exchange Commission is declared effective. This preliminary prospectus is not an offer to sell the securities described herein and it is not soliciting an offer to buy the securities described herein in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion, dated          , 2020.

 

PRELIMINARY PROSPECTUS

 

METEN EDTECHX EDUCATION GROUP LTD.

 

51,025,947 ORDINARY SHARES (INCLUDING SHARES ISSUED PURSUANT TO THE EXERCISE OF THE WARRANTS)

6,260,000 WARRANTS TO PURCHASE 6,260,000 ORDINARY SHARES

250,000 UNITS PURSUANT TO THE EXERCISE OF THE UNIT PURCHASE OPTIONS

 

This prospectus relates to the following securities of Meten EdtechX Education Group Ltd., a Cayman Islands exempted company (“we” or the “Company”):

 

(i) our offering of 250,000 units (including the underlying 250,000 warrants and 250,000 ordinary shares) issuable upon exercise of the outstanding unit purchase options and 10,355,000 ordinary shares issuable upon exercise of the warrants (including the warrants underlying the units purchasable upon exercise of the unit purchase options);

 

(ii) the resale of 44,330,947 ordinary shares and 6,260,000 warrants by selling securityholders named in the Combined Prospectus, comprising (a) 3,200,000 ordinary shares held by certain institutional investors that purchased in private placements (including 2,600,000 ordinary shares underlying the units held by certain institutional investors that purchased in private placements) that have requested such ordinary shares to be included in the registration statement of which this prospectus forms part, (b) 34,870,947 ordinary shares held by certain shareholders who received ordinary shares in connection with the consummation of the Mergers and became holders of our ordinary shares, (c) 3,660,000 warrants held by certain holders who received redeemable warrants in connection with the consummation of the Mergers (the “Converted Warrants”) , (d) 2,600,000 warrants underlying the units held by certain institutional investors purchased in private placements (the “PIPE Warrants”) and that have requested such warrants to be included in the registration statement of which this prospectus forms part, (e) 2,600,000 ordinary shares issuable upon exercise of the PIPE Warrants underlying the units held by certain institutional investors that purchased in private placements and that have requested such warrants to be included in the registration statement of which this prospectus forms part and (f) 3,660,000 ordinary shares issuable upon exercise of the Converted Warrants; and

 

(iii) the issuance by us of up to 2,600,000 ordinary shares that are issuable upon the exercise of the Transferred Warrants.

 

We expect the Transferred Warrants will be quoted on the Nasdaq Capital Market under the same ticker symbol as our redeemable warrants: “METXW.”

 

We are registering the offer and sale by the selling securityholders named herein of the ordinary shares and warrants to satisfy certain registration rights we have granted in favor of such selling securityholders. We will not receive any proceeds from the sale of our ordinary shares by the selling securityholders.

 

Upon exercise of the warrants, the ordinary shares issued will be freely tradable under the U.S. securities laws.

 

The selling securityholders may offer all or part of the shares for resale from time to time through public or private transactions, at either prevailing market prices or at privately negotiated prices. See “Plan of Distribution” beginning on page 148 of this prospectus for more information.

 

Our ordinary shares, US$0.0001 par value, are currently listed on the Nasdaq Capital Market under the symbol “METX,” and our warrants are currently quoted on the Nasdaq Capital Market under the symbol “METXW.” On July 10, 2020, the closing price for the ordinary shares on the Nasdaq Capital Market was US$11.93 per ordinary share and on July 10, 2020, the closing price for the warrants on the Nasdaq Capital Market was US$0.51 per warrant.

 

Investing in our ordinary shares involves risks. See “Risk Factors” beginning on page 11 of this prospectus.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the securities described herein or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

 

The date of this prospectus is        , 2020.

 

 

 

Table of Contents

 

  Page
   
FORWARD-LOOKING STATEMENTS 1
   
SUMMARY OF THE OFFERING 7
   
RISK FACTORS 11
   
USE OF PROCEEDS 53
   
BUSINESS 54
   
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA 92
   
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION 95
   
RECENT DEVELOPMENTS 125
   
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 134
   
PRINCIPAL SHAREHOLDERS 142
   
SELLING SECURITYHOLDERS 144
   
PLAN OF DISTRIBUTION 148
   
SHARES ELIGIBLE FOR FUTURE SALE 152
   
RELATED PARTY TRANSACTIONS 154
   
DESCRIPTION OF SHARE CAPITAL 156
   
TAXATION 160
   
ADDITIONAL INFORMATION 166
   
AVAILABLE INFORMATION 168
   
EXPLANATORY NOTE TO FINANCIAL STATEMENTS 169
   
METEN EDTECHX EDUCATION GROUP LTD. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS F-1
   
Report of Independent Registered Public Accounting Firm F-2
   
CONSOLIDATED BALANCE SHEET F-3
   
CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS F-4
   
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER’S DEFICIT F-5
   
CONSOLIDATED STATEMENT OF CASH FLOWS F-6
   
Meten International Education Group – Index to Consolidated Financial Statements F-1
   
Report of Independent Registered Public Accounting Firm F-11
   
CONSOLIDATED BALANCE SHEETS F-12
   
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS) F-16
   
CONSOLIDATED STATEMENTS OF CHANGES IN DEFICIT F-17
   
CONSOLIDATED STATEMENTS OF CASH FLOWS F-18
   
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS F-19
   
ANNEX A A-1
   
PART II INFORMATION NOT REQUIRED IN PROSPECTUS II-1

  

i

 

 

You should rely only on the information contained in this prospectus, any amendment or supplement to this prospectus or any free writing prospectus prepared by or on our behalf. Neither we, nor the selling securityholders, have authorized any other person to provide you with different or additional information. Neither we, nor the selling securityholders, take responsibility for, nor can we provide assurance as to the reliability of, any other information that others may provide. The information contained in this prospectus is accurate only as of the date of this prospectus or such other date stated in this prospectus, and our business, financial condition, results of operations and/or prospects may have changed since those dates.

 

The selling securityholders are not making an offer to sell the securities described herein in any jurisdiction where the offer or sale is not permitted. Except as otherwise set forth in this prospectus, neither we nor the selling securityholders have taken any action to permit a public offering of the securities described herein outside the United States or to permit the possession or distribution of this prospectus outside the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about and observe any restrictions relating to the offering of the securities described herein and the distribution of this prospectus outside the United States.

 

ii

 

 

FORWARD-LOOKING STATEMENTS

 

This prospectus contains forward-looking statements that are based on our current expectations, assumptions, estimates and projections about us and our industry. All statements other than statements of historical fact in this prospectus are forward-looking statements. These forward-looking statements are made under the “safe harbor” provision under Section 21E of the Securities Exchange Act of 1934, as amended, and as defined in the Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other factors, including those listed under “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Operating Results — Major Factors Affecting Our Results of Operations” and “Quantitative and Qualitative Disclosures About Market Risk,” and elsewhere in this prospectus that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements.

 

In some cases, these forward-looking statements can be identified by words and phrases such as “may,” “should,” “intend,” “predict,” “potential,” “continue,” “will,” “expect,” “anticipate,” “estimate,” “plan,” “believe,” “is /are likely to” or the negative form of these words and phrases or other comparable expressions. The forward-looking statements included in this prospectus relate to, among other things: 

 

  our goals and growth strategies;

 

  our future prospects and market acceptance of our courses and other products and services;

 

  our future business development, financial condition and results of operations;

 

  expected changes in our revenue, costs or expenditures;

 

  our ability to retain and increase our student enrollment;

 

  our plans to expand and enhance our courses and other products and services;

 

  our ability to engage, train and retain new teachers and consultants;

   

  our ability to maintain and improve technology infrastructure necessary to operate our online platform;

 

  our expectations regarding the demand for, and market acceptance of, our services and our brands;

 

  general economic and business conditions in the markets in which we operate;

 

  growth and competition in the ELT markets;

 

  relevant government policies and regulations relating to our corporate structure, business and industry;

 

  the impact of the outbreak of the coronavirus disease (“COVID-19”) and other pandemic or natural disaster; and

 

  the assumptions underlying or related to any of the foregoing.

 

These forward-looking statements involve various risks, assumptions and uncertainties. Although we believe that our expectations expressed in these forward-looking statements are reasonable, our expectations may turn out to be incorrect. Our actual results could be materially different from or worse than our expectations. You should read this prospectus and the documents that we refer to in this prospectus with the understanding that our actual future results may be materially different from and worse than what we expect. Other sections of this prospectus include additional factors which could adversely impact our business and financial performance. Moreover, we operate in an evolving environment. New risk factors and uncertainties emerge from time to time and it is not possible for our management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We qualify all of our forward-looking statements by these cautionary statements

 

1

 

 

You should not rely upon forward-looking statements as predictions of future events. The forward-looking statements made in this prospectus relate only to events or information as of the date on which the statements are made in this prospectus. All forward-looking statements included herein attributable to us or other parties or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We undertake no obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise, after the date of this prospectus or to reflect the occurrence of unanticipated events, except as otherwise required by the U.S. federal securities laws. 

 

Market Data and Forecasts

 

This prospectus also contains data related to China’s education and ELT markets that include projections based on a number of assumptions. These markets may not grow at the rates projected by market data, or at all. The failure of these markets to grow at the projected rates may have a material adverse effect on our business prospects, results of operations and the market price of our ordinary shares. In addition, the relatively new and rapidly changing nature of these markets subjects any projections or estimates relating to the growth prospects or future condition of these markets to significant uncertainties. If any one or more of the assumptions underlying the market data turns out to be incorrect, actual results may differ from the projections based on these assumptions. You should not place undue reliance on these forward-looking statements.

 

This prospectus contains information and statistics relating to China’s economy and the industries in which we operate derived from various publications issued by PRC governmental entities which have not been independently verified by us. The information in such official sources may not be consistent with other information compiled in or outside China.

 

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SUMMARY OF THE PROSPECTUS

 

This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our ordinary shares. Before making an investment decision, you should read this entire prospectus carefully, especially “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and notes thereto. Some of the statements in this prospectus constitute forward-looking statements that involve risks and uncertainties. See “Forward-Looking Statements” for more information.

 

Overview

 

We are a leading ELT service provider in China. China’s ELT market is segmented into general ELT, test-oriented ELT and after-school language training sectors. General ELT refers to services that help students improve their English language skills, particularly their English communication skills. Test-oriented ELT refers to services that help students achieve higher scores in specific standardized tests, including TOEFL, IELTS, GRE, SAT and other international standardized examinations. After-school language training refers to academic English language training services provided to K-12 students.

 

We offer a comprehensive ELT service portfolio comprising general adult ELT, junior ELT, overseas training services, online ELT and other English language-related services to students from a wide range of age groups. We conduct our business through our synergetic offline-online business model, which maximizes the compatibility within our business segments to scale up at relatively low costs. As of March 31, 2020, we had a nationwide offline learning center network of 128 self-operated learning centers (including 21 learning centers under the “ABC” brand of ABC Education Group, which we acquired in June 2018) covering 28 cities in 15 provinces, autonomous regions and municipalities in China, and 17 franchised learning centers (including four franchised learning centers under the “ABC” brand) covering 15 cities in 13 provinces and municipalities in China. Leveraging our experience gained from operating offline learning centers, we launched our online English learning platform “Likeshuo” in 2014 to further expand our service reach to a larger student base. As of March 31, 2020, we had approximately 1.4 million registered users on our “Likeshuo” platform and cumulatively over 257,000 paying users who purchased our online ELT courses or trial lessons. As of the same date, the cumulative number of student enrollments for our online ELT courses since 2014 was approximately 157,000 and we had delivered over 4.8 million accumulated course hours to our students online. We also have opened four experiential marketing stores in China to enable our prospective students to obtain in-person experience of live streaming online ELT courses delivered on our “Likeshuo” platform. We take advantage of our business model of combining our offline learning center network and online platform to deepen our market penetration and further develop our business.

 

Our qualified personnel, centralized management system driven by artificial intelligence, and technical expertise enable us to create a learning environment that caters to the specific learning demands of our students. We have a high-caliber teaching staff and an experienced content development team, who are supported by our centralized teaching and management systems to optimize our students’ learning experiences. As of March 31, 2020, we had a team of 2,257 full-time teachers, study advisors and teaching service staff, of which 1,059 were study advisors and teaching service staff for our offline and online businesses. As of the same date, we also had 246 full-time and part-time foreign teachers from English-speaking countries for our offline ELT services. We have a dedicated content development team focusing on developing practical and innovative education materials independently and in collaboration with our strategic partners. We have built highly centralized and scalable management systems to manage our teaching, marketing, finance and human resources activities across our offline and online businesses. In addition to our management systems, we have made significant investments in developing platforms and systems to support our teaching activities. For example, we utilize the intelligent tracking and learning coaching function of our artificial intelligence-driven teaching management systems to record and analyze our students’ real-time learning process and personalize the course content to address their learning needs.

 

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The Impact of the Coronavirus Disease 2019

 

There has been an outbreak of COVID-19 that was first reported in Wuhan, Hubei Province, in December 2019. The outbreak has endangered the health of many people residing in China and significantly disrupted travel and the local economy across the country. The development of such epidemic in China is beyond our control. In order to contain the COVID-19 outbreak, the MOE issued a notice in February 2020, which, among other things, postponed the commencement of the spring semester for 2019/2020 school year for all universities, middle and high schools, elementary schools and kindergartens in the PRC, and encouraged the proliferation of online teaching. It further stipulated that all training service providers in the PRC are required to temporarily cease providing offline training services to students until authorized by the provincial education bureaus.

 

Accordingly, we temporarily closed all of our learning centers in the PRC beginning in early February 2020. Leveraging our efficient and synergetic omnichannel business model, we have migrated all offline general adult ELT, overseas training and junior ELT courses to various online platforms to transition the relevant training services. These online platforms we utilized to facilitate the migration include our Likeshuo platform and our proprietary and third-party online platforms. Since the beginning of the COVID-19 outbreak in January 2020, while our offline general adult ELT, overseas training and junior ELT businesses have experienced temporary reductions in the course hours consumed and student enrollment, and consequently, our related gross billings for the period, such effect to our offline ELT business was partially offset by the growth of the gross billings of and the number of paying users for our online ELT business. We believe our omnichannel business model has enabled us to continue to provide training services throughout this time of crisis.

 

Given the gradual decline in the number of newly confirmed COVID-19 cases in China in recent weeks, the business activities in China’s major cities have started to resume. As such, we have re-opened 95 of our learning centers (including 84 self-operated learning centers and 11 franchised learning centers) by the end of June 2020 and had previously anticipated to re-open all of our learning centers by the end of July 2020. However, given the recent recurrence of COVID-19 cases in Beijing and its surrounding areas, we have postponed the re-opening of certain of our learning centers in these regions until the COVID-19 outbreak there is under firm control and as permitted to do so by the MOE and provincial education bureaus. We expect that the operation of both our offline ELT and online ELT services will return to normal once we have re-opened our learning centers. In addition, the PRC offline ELT industry generally experiences lower gross billings growth rate in the first quarter of each year due to the Chinese New Year holiday, and enjoys increases in gross billings growth during the summer months, which is the period when we anticipate that our learning centers will have been re-opened for business after the COVID-19 outbreak is under control in China. Please see “Business — Seasonality” for more information. To facilitate the re-opening of our learning centers, our management formulated and implemented emergency response measures: (i) we have set up a disease prevention and control task force, which is led by our Chief Executive Officer as the first person responsible for our epidemic prevention and control; and (ii) we will also conduct full disinfection and ventilation of our learning centers before they re-open, establish students’ health files and require them to register their health conditions and take body temperature measurements prior to returning to class.

 

In light of the foregoing and due to the fact that the existing nationwide restrictive measures on providing offline training services have gradually been lifted beginning in May 2020, the temporary suspension of our offline learning centers due to COVID-19 has had a material adverse effect on our business, financial condition and results of operations. We had recognized an aggregate RMB14.7 million of impairment losses for the three months ended March 31, 2020 and expect to recognize additional impairment in the second quarter of 2020. Our management will continue to assess the financial impact, including potential impairment of the Company's tangible and intangible assets. In addition, we may face challenges if the outbreak prolongs and we are forced to continue to close our learning centers for an extended period of time, which may impact the operation of our business and financial performance in 2020. Please see “Risk Factors —  Risks Related to Our Business and Operations — Any natural catastrophes, severe weather conditions, health epidemics, including COVID-19, and other extraordinary events could severely disrupt our business operations” and “Recent Developments” in this prospectus for more details.

 

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Implications of Being an Emerging Growth Company and a Foreign Private Issuer

 

We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As an emerging growth company, we may take advantage of certain exemptions from specified disclosure and other requirements that are otherwise generally applicable to public companies. These exemptions include:

 

being permitted to provide only two years of audited financial statements, in addition to any required unaudited interim financial statements, with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure;

 

not being required to comply with the auditor attestation requirements for the assessment of our internal control over financial reporting provided by Section 404 of the Sarbanes-Oxley Act of 2002;

 

reduced disclosure obligations regarding executive compensation; and

 

not being required to hold a nonbinding advisory vote on executive compensation or seek shareholder approval of any golden parachute payments not previously approved.

 

We may take advantage of these provisions for up to five years or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company upon the earliest to occur of (i) the last day of the fiscal year in which we have more than US$1.0 billion in annual revenue; (ii) the date we qualify as a “large accelerated filer,” with at least US$700 million of equity securities held by non-affiliates; (iii) the issuance, in any three-year period, by our company of more than US$1.0 billion in non-convertible debt securities; or (iv) the last day of the fiscal year ending after the fifth anniversary of the date of the first sale of common equity securities pursuant to an effective registration statement.

 

We are also considered a “foreign private issuer” and will report under the Exchange Act, as a non-U.S. company with foreign private issuer status. This means that, even after we no longer qualify as an emerging growth company, as long as we qualify as a foreign private issuer under the Exchange Act, we will be exempt from certain provisions of the Exchange Act that are applicable to U.S. domestic public companies, including:

 

the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act;

 

the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time;

 

the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q containing unaudited financial and other specified information, or current reports on Form 8-K, upon the occurrence of specified significant events; and

 

the selective disclosure rules by issuers of material nonpublic information under Regulation FD.

 

We may take advantage of these exemptions until such time as we are no longer a foreign private issuer. We would cease to be a foreign private issuer at such time as more than 50% of our issued and outstanding voting securities are held by U.S. residents and any of the following three circumstances applies: (i) the majority of our executive officers or directors are U.S. citizens or residents, (ii) more than 50% of our assets are located in the United States or (iii) our business is administered principally in the United States.

 

We may choose to take advantage of some but not all of these reduced burdens. We have taken advantage of reduced reporting requirements in this prospectus. Accordingly, the information contained herein may be different from the information you receive from our competitors that are public companies, or other public companies in which you have made an investment.

 

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Corporate Information

 

Our principal executive offices are located at 3rd Floor, Tower A, Tagen Knowledge & Innovation Center, 2nd Shenyun West Road, Nanshan District, Shenzhen, Guangdong Province 518000, the People’s Republic of China. Our telephone number at this address is +86 755 8294 5250 and our fax number is +86 755 8299 5963.

 

Our registered office in the Cayman Islands is located at Cricket Square, Hutchins Drive, PO Box 2681, Grand Cayman, KY1-1111, Cayman Islands.

 

Our agent for service of process in the United States is Puglisi & Associates, located at 850 Library Avenue, Suite 204, Newark, Delaware 19711.

 

Our corporate website is www.investor.metenedu-edtechx.com. The information contained on our website is not part of this prospectus.

 

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SUMMARY OF THE OFFERING

 

The summary below describes the principal terms of this offering. The “Description of Share Capital” section of this prospectus contains a more detailed description of our securities.

 

The offering of an aggregate of 51,025,947 ordinary shares, 6,260,000 warrants and 250,000 units are being offered hereby, comprising:

 

Securities Issuable upon Exercise of
Outstanding Warrants and Unit Purchase Options:

The offering of 250,000 units (including the underlying 250,000 warrants and 250,000 ordinary shares) issuable upon exercise of the unit purchase options and 10,355,000 ordinary shares issuable upon exercise of the warrants (including warrants underlying the units purchasable upon exercise of the unit purchase options). The offering of such warrants, the units (including underlying ordinary shares and warrants) issuable upon exercise of unit purchase options, and the ordinary shares issuable upon exercise of such warrants (including warrants underlying the units purchasable upon exercise of the unit purchase options) was registered on the Prior Registration Statement. Upon exercise and issuance, such ordinary shares and warrants (including those underlying the units issuable upon exercise of unit purchase options) will be freely tradable under U.S. securities laws, unless held by our affiliates(which securities shall be freely tradable under the U.S. securities laws if the related resales are also registered under the Registration Statement).
   
The issuance by us of up to 2,600,000 ordinary shares that are issuable upon the exercise of Transferred Warrants.
   

Securities Offered by Selling
Shareholders:

The resale of up to 44,330,947 of our ordinary shares and 6,260,000 warrants, which may be offered for sale from time to time by the selling securityholders named in this prospectus, comprising:
   
   

3,200,000 ordinary shares held by certain institutional investors that purchased in private placements (including 2,600,000 ordinary shares underlying the units held by certain institutional investors that purchased in private placements) and that have, through to the date hereof, requested such ordinary shares to be included in the registration statement of which this prospectus forms part;
       
   

34,870,947 ordinary shares held by certain shareholders who received ordinary shares in connection with the consummation of the Mergers and became a shareholder;
       

3,660,000 Converted Warrants held by certain holders who received redeemable warrants in connection with the consummation of the Mergers;

 

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2,600,000 warrants underlying the units held by certain institutional investors purchased in private placements (the “PIPE Warrants”) that have requested such warrants to be included in the registration statement of which this prospectus forms part;
       

2,600,000 ordinary shares issuable upon exercise of the PIPE Warrants underlying the units held by certain institutional investors that purchased in private placements and that have requested such warrants to be included in the registration statement of which this prospectus forms part
       

3,660,000 ordinary shares issuable upon exercise of the Converted Warrants. 

       

Ordinary Shares Outstanding

As of the date of this prospectus, our issued share capital consists of 53,292,842 ordinary shares issued and outstanding.

   

Warrants Outstanding

As of the date of this prospectus there are 12,705,000 warrants outstanding, consisting of (i) 10,105,000 warrants issued in connection with the consummation of the Mergers, and (iii) 2,600,000 warrants issued in a private placement to certain PIPE Investors.

   
 

The warrants are exercisable on a one-for-one basis for ordinary shares. Each warrant is currently exercisable for one ordinary share at a price of US$11.50 per ordinary share, which exercise price is payable to us.

   

Unit Purchase Options Outstanding

As of the date of this prospectus there are options outstanding for the purchase of 250,000 units.

   

The options relate to the purchase of one of our units consisting of one ordinary share and one warrant to purchase and ordinary share. Each option is currently exercisable for one unit at a price of US$12.00 per unit, which exercise price is payable to us.

  

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Lock-up

27,619,622 ordinary shares held by certain shareholders who are pre-merger shareholders of Meten and received ordinary shares in connection with the consummation of the Mergers are subject to certain lock-up agreement (the “Founder Lock-up Agreement”), pursuant to which they agree not to transfer such shares, until (i) with respect to 50% of such ordinary shares, the earlier of the date that is six months after the closing of the Mergers and the date on which the closing price of Company’s ordinary shares equals or exceeds $12.50 per share (as adjusted for share splits, share capitalizations, reorganizations and recapitalizations) for any 20 trading days within any 30-trading day period after closing and (ii) with respect to the remaining 50% of such ordinary shares, one year after closing, or earlier, in either case, if, subsequent to the closing, the Company consummates a liquidation, merger, stock exchange or other similar transaction which results in all holders of the Company’s ordinary shares ceasing to hold more than fifty percent (50%) of the then outstanding Company ordinary shares or having the right to exchange their ordinary shares for cash or freely tradable securities.

 

1,543,750 ordinary shares and 3,660,000 warrants held by certain securityholders who are pre-merger EdtechX securityholders and received ordinary shares and/or warrants in connection with the consummation of the Mergers are subject to an amended and restated stock escrow agreement (the “Amended Stock Escrow Agreement”) and a lock-up agreement (the “Warrant Lock-up Agreement), pursuant to which they will agree not to transfer such ordinary shares and warrants until, with respect to 50% of such ordinary shares and warrants, the earlier of the date that is six months after the closing of the Mergers and the date on which the closing price of the Holdco Ordinary Shares equals or exceeds $12.50 per share (as adjusted for share splits, share capitalizations, reorganizations and recapitalizations) for any 20 trading days within any 30-trading day period after closing, and with respect to the remaining 50% of such Holdco Ordinary Shares and Holdco Warrants, six months after the closing of the Mergers, subject in each case to earlier release of the shares if certain conditions are met.

   
Use of Proceeds We do not know whether the holders of the warrants or unit purchase options will exercise any of the warrants or options. If all of the outstanding warrants (including the Transferred Warrants) described in this prospectus are exercised in full, we will issue 12,705,000 ordinary shares and we will receive aggregate net proceeds of US$146,107,500. An additional US$3 million potentially could be received from the exercise of the unit purchase options and US$2,875,000 from the exercise of the warrants included in the units issued thereby. We intend to use the proceeds from any exercise of the warrants or unit purchase options for general corporate purposes.

 

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  The selling securityholders will receive all of the proceeds from the sale of any ordinary shares and warrants sold by them pursuant to this prospectus. We will not receive any proceeds from these sales. See “Use of Proceeds” in this prospectus.
   
Voting Rights Holders of our ordinary shares are entitled to one vote per ordinary share at all shareholder meetings. See “Description of Share Capital.”
   
Dividend Policy Other than as disclosed elsewhere in this prospectus, we currently expect to retain all future earnings for use in the operation and expansion of our business and do not plan to pay any dividends on our ordinary shares in the near future. The declaration and payment of any dividends in the future will be determined by our board of directors in its discretion, and will depend on a number of factors, including our earnings, capital requirements, overall financial condition, applicable law and contractual restrictions. See “Description of Share Capital — Ordinary Shares — Dividends.”
   
Market for our Ordinary Shares and Warrants Our ordinary shares are currently listed on the Nasdaq Capital Market under the symbol “METX.”
   
  Our warrants are currently quoted on the Nasdaq Capital Market under the symbol “METXW.”
   
Risk Factors Investing in our ordinary shares involves substantial risks. See “Risk Factors” for a description of certain of the risks you should consider before investing in our ordinary shares.

 

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RISK FACTORS

 

Risks Related to Our Business and Operations

 

Failure to attract and retain students to enroll in our courses would have a material adverse impact on our business and prospects.

 

The success of our business depends primarily on the number of student enrollments in the offline courses we offer at our learning centers, the number of paying users on our “Likeshuo” online platform, and the amount of our course fees. As a result, our ability to attract students to enroll in our courses is critical to the continued success and growth of our business. This, in turn, will depend on several factors, including, among others, our ability to develop new educational programs and enhance existing educational programs to respond to the changes in market trends, student demands and government policies, to maintain our consistent and high teaching quality, to market our programs to a broader prospective student base, to develop additional high-quality educational content, sites and availability of our learning centers and to respond effectively to competitive market pressures.

 

If our students perceive that our education quality deteriorated due to unsatisfying learning experiences, which may be subject to a number of subjective judgments that we have limited or no influence over, our overall market reputation may diminish, which in turn may affect our word-of-mouth referrals and ultimately our student enrollment. In addition, the expansion of our offering of courses and services may not succeed due to competition, our failure to effectively market our new courses and services, maintain the quality of our courses and services, or other factors. We may be unable to develop and offer additional educational content on commercially reasonable terms and in a timely manner, or at all, to keep pace with changes in market trends and student demands. Moreover, we cannot assure you that we will always be able to maintain or increase our course fee levels without compromising our student enrollment, which may materially and adversely affect our revenues and profitability. In addition, international relations and policies related to overseas study of Chinese students may become volatile or unfavorable to our existing and prospective students who plan to study abroad due to various factors that are beyond our control, which could materially and adversely affect our business, results of operations, financial condition and prospects.

 

If we are unable to continue to attract students to enroll in our courses, our revenue may decline, which would have a material adverse effect on our business, financial condition and results of operations.

 

Our business depends on the market recognition of our brands and if we are not able to maintain our reputation and enhance our brand recognition, our business and operating results would be harmed.

 

We believe that our success is heavily dependent on the market recognition of our brand names, including our “Meten” and “Likeshuo” brands, as well as the “ABC” brand associated with ABC Education Group, which we acquired in June 2018. Our ability to maintain our brand recognition and reputation depends on a number of factors, some of which are beyond our control. It may become difficult to maintain the quality and consistency of the services we offer while we continue to grow in size and expand our business and services, which in turn may lead to diminishing confidence in our brand names.

 

Our ability to maintain and enhance our brand recognition and reputation depends primarily on the following factors:

 

  the perceived effectiveness and quality of our courses, services and teaching staff;

 

  the quality and coverage of our course portfolio, value of courses, services and functions and the quality, variety and appeal of content available of the courses and services offered at our learning centers and on our “Likeshuo” platform;

 

  the reliability of the courses offered at our learning centers and through our “Likeshuo” platform, as well as the commitment to high levels of service, reliability, security and data protection by the merchants, our franchised learning centers and other participants in our ecosystem; and

 

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  the effectiveness of our operational system governing the courses and services offered at our learning centers and on our “Likeshuo” platform.

 

We have developed our student base primarily through word-of-mouth referrals. We have also invested significantly in brand promotion initiatives by conducting certain marketing activities, including, but not limited to, advertisement through our cost per sale merchants, which are generally publishers and website owners that are paid by us on the basis of the number of sales that are directly generated by an advertisement, and major search engines, as well as on social media platforms. However, we cannot assure you that these or our other marketing efforts will be successful in promoting our brands to remain competitive. If we are unable to further enhance our brand recognition and increase awareness of our services, or if we incur excessive sales and marketing expenses or if we are required to incur excessive sales and marketing expenses in order to remain competitive, our business and results of operations would be materially and adversely affected. The sales and marketing expense may also increase as we further develop and expand our business. In addition, any negative publicity relating to the general ELT market in China, our Company or services, regardless of its veracity, could damage our reputation and in turn cause material and adverse harm to our business and results of operations. Furthermore, certain enterprises in various industries in China have brand names that are similar to ours and may result in name confusion to our existing and prospective customers. Any negative publicity associated with these enterprises may have an adverse impact on our reputation and brand recognition, which is beyond our control, and could cause harm to our business, results of operations, financial condition and prospects.

 

We are subject to uncertainties brought by the Amended Private Education Promotion Law and other rules, regulations and opinions promulgated by the PRC government from time to time.

 

Our business is regulated by certain rules and regulations, including the Amended Private Education Promotion Law, which became effective on September 1, 2017. The Amended Private Education Promotion Law classifies private schools into non-profit schools and for-profit schools by whether they are established and operated for profit-making purposes. The sponsors of private schools may at their own discretion choose to establish non-profit or for-profit private schools, but the Amended Private Education Promotion Law does not allow sponsors to establish for-profit private schools that engage in compulsory education. According to the Amended Private Education Promotion Law, for-profit private training institutions, such as our learning centers, are classified as private schools and are required to obtain private school operating permits.

 

According to the Several Opinions of the State Council on Encouraging Social Resources to Invest in Education and Promote Sound Development of Private Education, after the Amended Private Education Promotion Law came into force, the provincial government authorities must issue their own implementation opinions and licensing measures in relation to the specific implementation methods and operative approaches of the amended law based on local conditions. However, whether and how educational authorities regulate private training institutions vary from region to region, especially after the Ministry of Education, or the MOE, issued the Draft Implementation Rules of the Private Education Promotion Law on April 20, 2018, and requested public comment. On August 10, 2018, the Ministry of Justice of the PRC published the committee draft of the Regulations on the Implementation of the Law on Promoting Private Education in the PRC (Revised Draft), or the Committee Draft Implementation Rules of the Private Education Promotion Law, and requested public comment. According to the Committee Draft Implementation Rules of the Private Education Promotion Law, which further classifies private training institutions, a private training institution for language, art, sports, science and technology teaching and a private training institution for cultural education or non-academic continuing education for adults can directly apply for the registration to the local administrative departments for industry and commerce. As advised by Commerce & Finance Law Offices, or our PRC counsel, if the abovementioned Committee Draft Implementation Rules of the Private Education Promotion Law is enacted as proposed and our learning centers are deemed to be private training institutions for language teaching by the relevant authorities under clause 15 of the Committee Draft Implementation Rules of the Private Education Promotion Law, our learning centers will not be required to obtain private school operating permits from the PRC education authorities. However, as the Committee Draft Implementation Rules of the Private Education Promotion Law is still in its draft form, there can be no assurance that it will be enacted as proposed or at all, and there are also uncertainties as to the interpretation and implementation of the regulations by the relevant authorities. We cannot assure you that we will be successful in complying with the newly promulgated regulations. If we cannot fully comply with such regulations, our business, results of operations and reputation could be materially and adversely affected.

 

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On November 20, 2018, the General Office of MOE, the General Office of the State Administration for Market Regulation and the General Office of Ministry of Emergency Management jointly issued the Notice on Improving Several Working Mechanisms for Special Governance and Rectification of After-School Training Institutions, or Circular 10, which became effective on the same date. For details of the requirements of Circular 10, see “Business — Regulations — Regulations on Private Education in the PRC.” According to Circular 10, for institutions that carry out academic training activities without permits, non-academic training institutions that carry out academic training activities and other institutions that carry out illegal training activities, the education authorities, in collaboration with other relevant government departments, shall order them to cease their business, restrict their legal representatives to engage in training activities for primary and secondary school students and refer to the market supervision authority to revoke their business licenses. By the end of 2018, there should be no training institutions that are still carrying out training activities without permits or licenses. The local government authorities may propose a practical rectification plan to ensure that the rectification could be completed by the end of the year. As of the date of this prospectus, a majority of our self-operated learning centers did not have the relevant private school operating permits. As of March 31, 2020, except for four of our learning centers in Xi’an, Guangzhou, Shenzhen and Hefei, no other learning centers of our Group that did not have the relevant private school operating permits have been ordered by the government authorities to suspend their operations for rectification, cease business operations or revoke their business licenses. However, we cannot assure you that the PRC government authorities will not extend the rectification period. In addition, we cannot assure you that the training services we offer, including general adult ELT (which is designed for students aged 15 and above) and junior ELT (which is designed for students aged six to 18), will be deemed “non-academic” in nature by the relevant PRC education authorities. If such training services are deemed “academic,” the government authorities could order the learning centers which are deemed to be “non-academic” providing such training services to cease their business operations and revoke their business licenses. If any of the above occurs, our business, results of operations, business prospects and reputation could be materially and adversely affected.

 

Uncertainties exist with respect to the interpretation and enforcement of the new and existing laws and regulations that may be applicable to us. While we intend to comply with all new and existing laws and regulations, we cannot assure you that we will always be deemed to be in compliance with such laws and regulations, nor can we assure you that we will always be able to change our business practice successfully to adapt to the changing regulatory environment. Any such failure could materially and adversely affect our business, results of operations, financial condition and prospects. 

 

Uncertainties exist in relation to the Opinions of the General Office of the State Council on Regulating the Development of After-school Training Institutions, which may materially and adversely affect our business, results of operations, financial condition and prospects.

 

On August 22, 2018, the General Office of the State Council issued the Opinions of the General Office of the State Council on Regulating the Development of After-school Training Institutions, or Circular 80, which came into effect on the same date. Pursuant to Circular 80, the after-school training institutions for the primary and secondary school students must obtain relevant school operating permits and business licenses (either corporate legal person certificates or private non-enterprise unit registration certificates) for carrying out the training business and shall meet certain standards in respect of tuition fees, sites, teachers and management. Circular 80 provides, among other things, that (i) the average available-for-use area per student must be no less than three square meters within the same training hours; (ii) private school shall purchase safety insurance for training participants; (iii) no in-service primary and secondary teachers may be concurrently employed in an after-school training institution, and any teachers employed by an after-school institution for primary and secondary school subjects shall hold relevant teaching qualifications; (iv) the content, classes and subject enrollment, progress and school hours information in connection with training of traditional disciplines shall be filed with the local education authorities and be made public; (v) no training courses shall be given after 8:30 p.m., and no homework from after-school institutions can be given; and (vi) no advance tuition fees of more than three months may be collected. The approval and registration of after-school training institutions shall be subject to local government authorities. Education departments at the county level are responsible for the issuance of private school operating permits upon examination and approval.

 

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Circular 80 only sets out the general guidance on regulating after-school education institutions targeting primary and secondary school students. Without the approval by the relevant education department, no after-school training institution shall provide training for primary and secondary school students in the name of consulting and cultural transmission, among others. However, detailed rules of implementation of Circular 80 have yet to be introduced by the competent authorities, such as whether Circular 80 should apply to our learning centers providing junior ELT services, which mainly focus on promoting and developing language competence, rather than providing supplementary tutoring services relating to school cultural and educational curriculums, admission into schools of a higher grade or examinations. In 2018, we introduced offline junior ELT services to students aged six through 18 at our existing self-operated learning centers. Our offline junior ELT business may be subject to the requirements of Circular 80, which may potentially increase our compliance costs. For instance, Circular 80 provides that personal safety insurance shall be purchased for students to mitigate risks, but is silent as to the specific type, amount and coverage of such required personal safety insurance. In addition, Circular 80 does not provide any guidance on how online education institutions should comply with the requirements contained in Circular 80, and we cannot assure you whether any further interpretations, new regulations or policies will require online training institutions to conduct self-inspections and rectification procedures under Circular 80 for providing online junior ELT services.

 

Further, there are potential conflicts between Circular 80 and previously published government policies and there is no clear guidance on which regulation shall take precedence, which require further interpretation and clarification. For example, pursuant to Circular 80, opening branches or learning centers by any after-school education institution within the same county level city shall also be subject to approval, whereas the Committee Draft Implementation Rules of the Private Education Promotion Law provides that opening branches or learning centers within the same municipality directly under the central government or the same city with districts where such after-school education institution is located does not need to seek approval but shall file for record with both the authorities granting the operation permit to such after-school education institution and the relevant authorities where the branches or learning centers are located.

 

While we intend to comply with all applicable laws and regulations, due to existing uncertainties, we cannot assure you that we will be able to meet the relevant regulatory requirements in a timely manner, any more specific and stringent requirements in relation to our operations to be established by the relevant local government authorities in particular. Also, additional compliance costs may be incurred. As a result, our business, results of operations, financial condition and prospect may be adversely and materially affected.

 

Our development of new courses, services and technologies or innovation and upgrades made to existing courses, services and technologies may not adequately respond to the expectations of our students, changes in market demands and standards of school admission or standardized tests, may fail to achieve the expected satisfactory results, or may compete with our pre-existing courses, as a result of which, our competitive position, ability to generate revenue and growth prospects would be materially and adversely affected.

 

We constantly update and improve the content of our existing courses and develop new courses or services to meet changing market demands or requirements from related government authorities. Revisions to our existing courses and development of our new courses or services may not be well received by existing or prospective students and online users. We may have limited experience in developing the content of new courses or services and may need to adjust our systems and strategies to incorporate new courses or services into our existing offerings. If we cannot respond timely and cost-effectively to changes in market demands or requirements from related government authorities, our business would be adversely affected. Even if we are able to develop new courses or services that are well received, we may not be able to introduce them in an effective manner. If we do not respond adequately to changes in market demands, our ability to attract and retain students may be impaired and our financial results could suffer. For example, we introduced the new “Explore Curriculum” for our general adult ELT business beginning in 2018. We did not complete the implementation of such new curriculum across our national learning center network until May 2019. This adversely affected the number of course hours delivered and segment revenue recognized during the period of implementation as we focused on providing relevant training to our teaching staff and delivering such new course in a small-class setting during the transition period.

 

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The offline and online English language training services we provide and the technologies we use are subject to continuous development, update and enhancement in terms of content and functionality, driven by the demand for innovative skills, evolving course content and changes in overseas admission and standardized tests. In particular, admission and standardized tests undergo continuous changes, in terms of the focus of the questions tested, test formats and the manner in which the tests are administered. In the past, certain admission and standardized tests overseas have undergone changes in test questions and formats. Authorities in overseas jurisdictions may also promote policies that encourage schools to make admission decisions based less on entrance exam scores and more on a combination of other factors. There is no assurance that overseas colleges, universities and other higher education institutions will not reduce or eliminate their reliance on considering the international standardized test results as important standards to make admission decisions. Furthermore, changes in test standards for professional qualifications, or changes in employers’ preferences to hire staff with select qualifications, may particularly affect sales of our international standardized test preparation courses designed for relevant qualifications.

 

We believe that the internet-based ELT market is characterized by the rapid changes and innovation of technologies, unpredictable product life cycles and online user preferences. We have gained limited experience in generating revenue from our online training services and our investment in research and development may not result in satisfactory outcomes. The flexibility of taking internet-based ELT courses may increase the amount of online training services. We must quickly modify our services to adapt to the change in needs and preferences of our students, technological advances and evolving internet practices. However, ongoing enhancement of our online course offerings and related technologies may entail significant expenses and technical risks. In addition, the technologies used on the internet and value-added telecommunication services and products in general, and in ELT services in particular, may evolve and change over time. We may fail to anticipate and adapt to such technological development, or address any of the risks related to such new courses and services using such technologies, which in turn could have a material and adverse effect on our business development, financial condition and results of operations. If our improvement to our online offerings and the related technologies is delayed, which causes systems interruptions or is not aligned with the prevalent market expectations or preferences, we may lose market share and our business would be adversely affected.

 

We face significant competition in major programs we offer and geographic markets in which we operate, and if we fail to compete effectively, we would lose our market share and our profitability would be adversely affected.

 

The ELT industry in China is rapidly evolving, highly fragmented and competitive, and we expect competition in this industry to continue to persist and intensify. We face competition in the major courses and/or training programs we offer and the geographic markets where we operate. For example, we face nationwide competition for our international standardized test preparation courses from other relevant services provided by some of our competitors. We face competition from several ELT service providers that focus on providing general adult English language training in specific regions in China. We also face competition from companies that focus on providing overseas college application services.

 

Our student enrollment may decrease due to intense competition. Some of our competitors may adopt similar curricula and marketing approaches, with different pricing and service packages that may be deemed more attractive than our offerings. In addition, some of our competitors may have more resources than we do and may be able to devote greater resources than we can to promote and develop their services. These competitors may be able to respond more promptly than we can to the changes in student preferences, new technologies or market demands. In addition, the increasing use of the internet and advances in internet- and computer-related technologies, such as web video conferencing and online testing simulators, are eliminating geographic and entry barriers to providing private education services. As a result, many of our international competitors that offer online test preparation and language training courses may be able to penetrate the China market more effectively.

 

We may need to reduce course fees or increase spending in response to competition in order to retain or attract students or pursue new market opportunities. We cannot assure you that we will be able to compete successfully against existing or future competitors. If we are unable to successfully compete for new students, maintain or increase our fee level, attract and retain competent teachers or other key personnel and enhance our competitiveness in terms of the quality of our education courses and services in a cost-effective manner, our business, financial condition and results of operations would be materially and adversely affected.

 

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We may not be able to continue to recruit, train and retain dedicated and qualified teaching staff, who are critical to the success of our business and the effective delivery of our ELT services to students.

 

We rely heavily on our teaching staff, which generally comprises our teachers and study advisors, to deliver high-quality education services to our students. Our teaching staff is vital for the maintenance of our reputation. We seek to hire qualified and dedicated teaching staff with the necessary experience and language proficiency, who are able to deliver effective and inspirational instructions. There is a limited pool of teaching staff with these attributes and we implement a highly selective hiring process to ensure that the new hires possess the skills commensurate with our knowledge requirements. As a result, we must provide competitive compensation packages to attract and retain such teaching staff. We may not be able to recruit, train and retain a sufficient number of qualified teaching staff in the future to keep pace with our growth while maintaining consistent teaching quality in the different markets we serve. A shortage of qualified teaching staff or decreases in terms of the quality of our teaching staff’s instructions, whether actual or perceived, in one or more of our markets, or a significant increase in compensation needed to attract and retain qualified teaching staff, would have a material adverse effect on our business, financial condition and results of operations.

 

Failure to comply with applicable laws and regulations in relation to the employment of foreign employees may subject us to fines and penalties, and our business and operations may be adversely affected if we are not able to retain foreign teachers due to non-compliance with such laws and regulations.

 

The foreign teachers we employ are required to apply for and obtain work visas and residence permits to be able to work in China. We hired certain foreign teachers without them obtaining the necessary work visas and residence permits. Under the PRC laws, if we hire foreign employees without work visas and residence permits, we may be fined RMB10,000 for each illegally employed foreign employees, with a cap of RMB100,000 in the aggregate and any illegal gains, which are not well-defined under the PRC laws, may be confiscated. We have been fined for an immaterial amount of penalties relating to our hiring of foreign teachers without them obtaining the necessary work visas and residence permits, and we cannot assure you that we will not face additional penalties or fines for any past or future violations. Additionally, in the event we hire foreign employees without work visas or residence permits, we may have to terminate our employment relationship with them. In such event, we may need to hire qualified replacements, which could be difficult and/or time consuming. We may also face the risk of insufficient number of available foreign employees in the ELT market in China due to various factors beyond our control. If we are unable to retain foreign employees, including our foreign teachers, the teaching quality of our courses and services could be negatively impacted, which in turn, could materially and adversely affect our business, results of operations, reputation and prospects.

 

For our online English language training, we match students with foreign teachers who reside in foreign countries. While we are not required to obtain PRC work visas and residence permits for our foreign teachers who conduct online ELT courses on our “Likeshuo” platform under the existing PRC laws and regulations, we cannot assure you that the PRC government will not impose any restriction or other qualification requirement in the future, which we may not be able to comply with on a timely manner or at all, and due to which we may incur substantial compliance costs. In the event this occurs, our business and results of operations may be materially and adversely affected.

 

The continuing efforts of our senior management team and other key personnel are important to our success, and our business may be harmed if we lose their services.

 

Our future success depends heavily upon our senior management for their smooth and efficient operations of our learning centers and online platform as well as their execution of our overall business plans. There is intense competition for hiring experienced management personnel in the ELT industry, and the pool of qualified candidates is very limited. If any member of our senior management team is unable to continue his/her employment with us and we fail to effectively manage a transition to new personnel in the future, or if we fail to attract and retain qualified and experienced professionals on commercially acceptable terms, our business, financial condition and results of operations could be adversely affected.

 

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Our success also depends on having highly trained financial, technical, human resources, sales and marketing staff, management personnel and qualified and dedicated domestic and foreign teachers. We will need to continue to hire additional personnel as our business grows. In the event we lose their services, we may not be able to attract experienced senior management or other key personnel in the future, and we may, in turn, lose our students, teaching staff and other personnel. In addition, a shortage in the supply of personnel with requisite skills or our failure to recruit them could impede our ability to increase revenue from our existing services, launch new course offerings and expand our operations, and could pose an adverse effect on our business and financial results.

 

We derive a majority of our revenue from a limited number of cities. Any event negatively affecting the private education market in these cities, or any increase in the level of competition for the types of services we offer in these cities, could have a material adverse effect on our overall business and results of operations.

 

For the three months ended March 31, 2020, we derived approximately 52.2% of the total student enrollment in our offline ELT courses and services from our self-operated learning centers in Shenzhen, Guangzhou and Dongguan in Guangdong Province, Chengdu in Sichuan Province, and Nanjing and Suzhou in Jiangsu Province, and we expect these cities to continue to be important sources of our student enrollment and revenue. If any of these cities experiences any event that would negatively affect its private education market, such as a serious economic downturn, natural disaster or outbreak of contagious disease, or that the governments of which adopt regulations relating to and affecting the private education market that place additional restrictions or burdens on us, or experiences an increase in the level of competition for the types of services we offer, our overall business and results of operations may be materially and adversely affected. 

 

Failure to effectively and efficiently manage the expansion of our service network may materially and adversely affect our ability to capitalize on new business opportunities.

 

We have recently experienced steady growth and expansion. The number of our self-operated learning centers increased organically from 70 as of January 1, 2016 to 98 as of December 31, 2018, and further to 132 as of December 31, 2019. As of March 31, 2020, we had 128 self-operated learning centers. As of the same date, we had 13 franchised learning centers under our “Meten” brand, which we jointly manage with our franchised partners. We may continue to expand our operations in different regions in China through organic growth and strategic acquisitions. The establishment of new learning centers and acquisitions of existing learning centers pose challenges to us and require us to make investments in management, capital expenditures, marketing expenses and other resources. As part of our expansion, we acquired ABC Education Group in June 2018, which had 21 self-operated learning centers and four franchised learning centers under the “ABC” brand at that time. The expansion has also resulted, and will continue to result, in substantial demands on our management and staff as well as our financial, operational, technological and other resources. Our expansion will also largely require us to maintain teaching quality and consistent standards, controls, policies and our culture to ensure that our brands and reputation do not suffer as a result of any acquisition. To manage and support our growth, we will continue to improve our existing operational, administrative and technological systems and our financial and management controls, and recruit, train and retain additional qualified teaching staff, management personnel and other administrative and sales and marketing personnel.

 

In addition, the geographic dispersion of our operations requires significant management resources. We cannot assure you that our current and planned personnel, systems, procedures and controls will be adequate to support our future operations, or that we will be able to effectively and efficiently manage the growth of our operations or recruit and retain qualified personnel to support our expansion. Our future success will depend in part upon the ability of our senior management to manage our business growth effectively. In particular, our management may face the following challenges:

 

  controlling our costs and expenses and maintaining or increasing our margins and profitability;

 

  acquiring and retaining students;

 

  managing our key relationships with governmental agencies and responding to changes in the regulatory and policy environment;

 

  attracting training and retaining qualified personnel;

 

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  improving our operational, administrative and financial systems and internal controls and maintaining close cooperation between management members and department heads;

 

  increasing the awareness of our brands and protecting our reputation;

 

  keeping up with evolving industry standards technologies and market developments; or

 

  integrating any acquired business into our business operations and realizing the potential benefits of our acquisition.

 

We cannot assure you that we will be able to effectively and efficiently manage the growth of our operations, maintain or accelerate our current growth rate, maintain or increase our gross and operating profit margins, recruit and retain qualified teaching staff and management personnel, successfully integrate new learning centers into our operations and otherwise effectively manage our growth. Any failure to effectively and efficiently manage our expansion may materially and adversely affect our ability to capitalize on new business opportunities, which in turn may have a material adverse impact on our financial condition and results of operations.

 

We are required to obtain various operating permits and licenses for our ELT services in China and failure to comply with these requirements may materially and adversely affect our business operations.

 

Under the PRC laws and regulations, our learning centers are required to obtain a number of licenses, permits and approvals from, and make filings or complete registrations with the relevant government authorities. Certain of our learning centers that are registered with the State Administration for Market Regulation (formerly known as the State Administration for Industry and Commerce, or the SAIC), or the SAMR, are required to obtain business licenses, and our other learning centers registered with the Ministry of Civil Affairs, or the MCA, are required to obtain non-enterprise entity registration certificates.

 

According to the Amended Private Education Promotion Law and Circular 10, our learning centers are required to obtain private school operating permits. However, according to the Committee Draft Implementation Rules of the Private Education Law, which further classifies private training institutions, a private training institution for language, arts, sports, science and technology teaching and a private training institution for adults for cultural education or non-academic continuing education can directly apply for registration with the local administrative departments for industry and commerce. As advised by our PRC counsel, if the abovementioned Committee Draft Implementation Rules of the Private Education Law is enacted as proposed and our learning centers are recognized as private training institutions for language teaching by the relevant authorities under clause 15 of Committee Draft Implementation Rules of the Private Education Promotion Law, our learning centers will not be required to obtain private school operating permits from the PRC education authorities. However, as the Committee Draft Implementation Rules of the Private Education Law is still in draft form, there can be no assurance that it will be enacted as proposed or at all, and there are also uncertainties as to the interpretation and implementation by the relevant authorities. In addition, on July 24, 2019, the General Office of the MOE, the General Office of the MOC and the General Office of the State Administration for Market Regulation jointly issued the Notice on Proper Handling of Approval and Registration of Foreign Invested For-Profit Non-Academic Language Training Institutions, or the Notice 75, which required foreign-invested language training institutions to apply for the private school operating permit. As of the date of this prospectus, no detailed supporting rules and regulations regarding the relevant procedure, approval process and transitional period involving the applications by foreign-invested language training institutions have been promulgated.

 

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The business licenses of certain of our learning centers did not include “English language training” or “language-related training.” We were not able to include “English language training” or “language related training” in the authorized business scope of these learning centers mainly because the industry and commerce administration authorities in the areas where such learning centers are located have a general policy prohibiting the inclusion of “English language training” or “language-related training” in the business scope of any company before such company obtains relevant private school operating permits or before the Committee Draft Implementation Rules of the Private Education Promotion Law is implemented. As of the date of this prospectus, some of our learning centers were operating beyond their authorized business scope. For these learning centers, we have been communicating, and will continue to communicate, with the competent industry and commerce administration authorities to expand the authorized business scope of the relevant learning centers to include “language related training” or similar statements. However, we cannot assure you that our efforts to expand the business scope or include the statements above in the business license of these learning centers will be successful. While we have not been subject to any penalties or disciplinary action in the past relating to the business scope of our learning centers, the relevant PRC government authorities may determine that these learning centers have been or are operating beyond their authorized business scope and may subject these learning centers to warning, fine, confiscation of illegal earnings, suspension of business for rectification, or revoking the business license for current or past non-compliant learning centers, which may materially and adversely affect our business and results of operation.

 

Given the significant amount of discretion held by the local PRC authorities in interpreting, implementing and enforcing the relevant rules and regulations, as well as other factors beyond our control, we may not be able to obtain and maintain all requisite licenses, permits, approvals and filings or pass all requisite assessments.

 

Among our self-operated learning centers in operation as of March 31, 2020, 80 learning centers did not have private school operating permits or business licenses, or were operating beyond their authorized business scope. Based on the interviews we conducted in March 2019 and November 2019 with officials of the local educational authorities in the areas where we have learning centers in operation, excluding certain learning centers that we believe were not required to obtain the relevant private school operating permits, we had 49 learning centers without the requisite private school operating permits or business licenses, or were operating beyond their authorized business scope, which contributed in the aggregate to approximately 9.2% of our total gross billings for the three months ended March 31, 2020. Some of the local education authorities we interviewed informed us that they had imposed, or expect to impose, sanctions against some of these 49 learning centers. In particular, four of our learning centers in Xi’an, Shaanxi Province, Guangzhou, Guangdong Province, Shenzhen, Guangdong Province, and Hefei, Anhui Province, that did not have the relevant private school operating permits have been ordered to suspend their operations for rectification by the relevant education authorities until they obtain the required private school operating permits:

 

  With respect to the learning center in Xi’an, the local education authority issued a public notice in July 2018 ordering the cessation of business operations of 734 local training institutions, which included our learning center. On January 18, 2019, this learning center received a notice from the local education authority ordering it to cease operations due to a lack of the private school operating permit. As of the date of this prospectus, we were in the process of applying for the private school operating permit for this learning center.

 

  On December 28, 2018, one of our learning centers in Guangzhou received a notification to obtain the required private school operating permit. We have obtained the private school operating permit for this learning center on April 4, 2019.

   

  One of our learning centers in Shenzhen received a notification to obtain the required private school operating permit. However, as of the date of this prospectus, the local education authority in Shenzhen has temporarily suspended its acceptance of applications for private school operating permits. We will timely apply for such permit once the education authority begins to accept new applications.

 

  On May 13, 2019, one of our learning centers in Hefei, Anhui Province (which had been one of our franchised learning centers before June 1, 2019) received a notification to cease operation of the business of primary and secondary school academic training at this learning center. However, as of the date of this prospectus the local education authority in Hefei has temporarily suspended its acceptance of applications for private school operating permits of the adult ELT business. We will timely apply for such permit once the education authority begins to accept new applications. We entered into an equity transfer agreement with the third-party owners to acquire this learning center on May 31, 2019. Based on such equity transfer agreement, we could claim the relevant losses from them if this notification and the lack of the private school operating permit have a material and adverse effect on this learning center. In addition, this learning center contributed an insignificant portion of our total gross billings for the three months ended March 31, 2020. As a result of above, we believe this notification will not have any materially and adversely effect on our Group’s business.

 

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The four learning centers discussed above contributed an aggregate of approximately 1.1% of our total gross billings for the three months ended March 31, 2020. We have continued to operate these learning centers and have not received any further notice or sanction from the relevant government authorities as of the date of this prospectus. If we cannot obtain the private school operating permits after submitting the applications, we may be forced to cease operations at this learning center, subject to fines, be ordered to return the course and service fees collected and pay a multiple of the amount of returned course and/or service fees to the regulators as a penalty.

 

We cannot assure you that our other learning centers without requisite permits or licenses will not be subject to similar penalties. In addition, if any of our current or future learning centers fails to receive or renew the requisite licenses, permits and approvals, make the necessary filings, or complete all requisite registrations, such learning center may also be subject to various penalties. These may include fines, orders to promptly rectify the non-compliance, or if the non-compliance is deemed serious by the regulators, the learning center may be ordered to return course and service fees collected and pay a multiple of the amount of returned course and/or service fees to regulators as a penalty or may even be ordered to cease operations. If this occurs, our business, results of operations and financial condition could be materially and adversely affected.

 

Our failure to obtain permits/licenses which may be required for the operation of our online platform could result in fines, confiscation of the gains derived from non-compliant operations, or suspension of non-compliant operations.

 

Under the PRC laws and regulations, we may be required to obtain an Internet Content Provider permit, or ICP license, an audio or video program transmission license, an internet culture permit, an online publishing services permit and a radio or television programs producing and distributing permit for the operation of our online education products. We have obtained the relevant ICP license but we have not obtained the audio or video program transmission license, the internet culture permit, the online publishing services permit or the radio or television programs producing and distributing permit. Although we have not received any material fines or other penalties from the relevant government authorities for such non-compliance in the past, if we are not able to comply with all applicable requirements, we may be subject to fines, confiscation of the gains derived from our non-compliant operations, suspension of our non-compliant operations, any of which may materially and adversely affect our business, financial condition and results of operations.

 

We face risks associated with our franchised learning centers.

 

A relatively small portion of our offline ELT business is operated through franchisees. These franchisees are located in the PRC and have learning centers which are operated under our brands. These franchised learning centers account for a relatively small percentage of our overall business and financial performance. However, we are still subject to risks inherent to the franchise model and we have limited experience in operating the franchise model and dealing with such risks.

 

Our control over the franchised learning centers is based on the contractual agreements we entered with our franchisees, which may not be as effective as direct ownership and potentially makes it difficult for us to manage the franchised learning centers. While we have some control over the operation of our franchised learning centers, nevertheless, we may not be able to fully and successfully monitor, maintain and improve the performance of the management and other staff at the franchised learning centers as these teaching staff carry out the training services and directly interact with students. In the event of any delinquent performance by the franchisees and their employees, we may suffer from business reduction as well as reputational damage. If the franchisees and/or their employees commit any unlawful or unethical conduct, we may suffer financial losses, incur liabilities and suffer reputation damage. We may also face the risk that our prospective franchisees may not want to adopt our stringent centralized management system, which may affect our franchise business development. For details on the expansion of our learning center network, see “Risk Factors — Failure to effectively and efficiently manage the expansion of our service network may materially and adversely affect our ability to capitalize on new business opportunities.” Meanwhile, a franchisee may suspend or terminate its cooperation with us voluntarily or involuntarily due to various reasons, including, but not limited to, disagreement or dispute with us, or failure to maintain requisite approvals, licenses or permits or to comply with governmental regulations. A franchisee might also choose not to continue to cooperate with us after the expiration of the existing cooperation arrangement. We may not be able to find alternative ways to continue to provide the training services formerly covered by such franchisee, and our customer satisfaction, brand reputation and financial performance may be adversely affected.

 

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We are dependent on our information systems, and if we fail to further develop our technologies, or if our systems, software, applications, database or source code contain “bugs” or other undetected errors, or encounter unexpected network interruptions, security breaches or computer virus attacks, our operations may be seriously distracted.

 

The successful development and maintenance of our systems, software, applications and database, such as our management software and systems and student database, is crucial to the attractiveness of our education services and the management of our business operations. In order to achieve our strategic objectives and to remain competitive, we must continue to develop and enhance our technology. However, our efforts may prove to be unsuccessful. The performance and reliability of our online platform infrastructure, including our “Likeshuo” platform and other online systems we use for our business operations, are critical to our reputation and ability to retain students and increase student enrollment. Any system error or failure, or a sudden and significant increase in traffic, could result in the difficulty or unavailability of accessing our websites and/or online courses by our students. In addition, our technology platform upon which our management systems and online programs operate, and our other databases, products, systems and source codes could contain undetected errors or “bugs” that could adversely affect their performance.

 

Our computer networks may also be vulnerable to unauthorized access, hacking, computer viruses and other security breaches. A user who circumvents our security measures could misappropriate proprietary information or cause interruptions or malfunctions in operations. Any interruption to our computer systems or operations could have a material adverse effect on our ability to retain students and increase student enrollment. Moreover, we may be required to expend significant resources to protect against the threat of security breaches or to alleviate problems caused by these breaches.

 

Major risks involving our network infrastructure include:

 

  breakdowns or system failures resulting in a prolonged shutdown of our servers, including those attributable to power shutdowns, or attempts to get an unauthorized access to our systems, which may cause any loss or corruption of data and malfunctions of the software or hardware;

 

  disruption or failure in the national backbone network, which would make it impossible for visitors and students to log onto our websites;

 

  damages from fire, flood, power loss and telecommunications failures; and

 

  any infection by or spread of computer viruses.

 

Any network interruption or inadequacy that causes interruptions in the availability of our websites, applications or other online platforms or deterioration in the quality of access to our websites, applications or other online platforms could reduce customer satisfaction and results in a reduction in the number of students using our services. If sustained or repeated, these performance issues could reduce the attractiveness of our websites, applications, other online platforms and course offerings. In China, almost all access to the internet is maintained through state-controlled telecommunication operators. In many parts of China, the internet infrastructure is relatively underdeveloped, and internet connections are generally slower and less stable than in more developed countries. We cannot assure you that the internet infrastructure in China will remain sufficiently reliable for our needs or ever develop and make available more reliable internet access to our students and teachers.

 

In addition, any security breach caused by hackings, which involve attempts to gain unauthorized access of or to cause intentional malfunctions of the information or systems, or to cause intentional malfunctions or loss or corruption of data, software, hardware or other computer equipment could cause a disruption in our services and leakage of personal data of our teaching staff and students. Inadvertent transmission of computer viruses could expose us to a material risk of loss of our course files or a litigation and possible liability, as well as damage to our reputation.

 

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Furthermore, increases in the volume of traffic on our websites could also strain the capacity of our existing computer systems, which could lead to slow responses or system failures. This would cause a disruption or suspension in our course offerings, which would damage our brands and reputation, and thus negatively affect our revenue growth. We may need to incur additional costs to upgrade our computer systems in order to accommodate increased demand if we anticipate that our systems cannot handle higher volumes of traffic in the future.

 

To date, our information systems have not encountered any material error or technical issue that could have adversely affected or disrupted our operations. If we encounter errors or other service quality or reliability issues, or if we are unable to design, develop, implement and utilize information systems and the data derived from these systems, our ability to realize our strategic objectives and our profitability could be adversely affected, which, in turn may cause us to lose market share, harm our reputation and brand names, and materially adversely affect our business and results of operations. 

 

Our historical financial and operating results are not indicative of our future performance and our financial and operating results may fluctuate.

 

Our past results may not be indicative of future performance mainly due to the new businesses developed or acquired by us. Moreover, the results of operations of our Company may vary from period to period in response to a variety of other factors beyond our control, including general economic conditions and regulations or government actions pertaining to the private education service sector and the ELT sector in China, changes in consumers’ spending on private education as well as non-recurring charges incurred under unexpected circumstances or in connection with acquisitions, equity investments or other extraordinary transactions. Due to these and other factors, our historical financial and operating results, growth rates and profitability as well as quarter-to-quarter comparisons of our operating results may not be indicative of our future performance and you should not rely on them to predict our future performance.

 

Our business and results of operations depend on our ability to maintain and/or raise the level of the course and service fees we charge.

 

One of the most significant factors affecting our profitability is the course and service fees we charge. For the years ended December 31, 2017, 2018 and 2019, course and service fees derived from our business at our headquarters and self-operated learning centers, including revenue from the sale of goods, as well as our online ELT courses delivered on the “Likeshuo” platform, constituted approximately 98.7%, 98.7% and 97.8% of our total revenue, respectively. The amounts of those fees we charge are primarily determined based on the demand of our offline students and online users for our ELT services, our operating costs, our competitors’ pricing level, our pricing strategy to gain market share and the general economic conditions in China. However, there can be no assurance that we will be able to maintain or raise the course fees and/or other fees we charge for our services in the future. Even if we are able to maintain or raise course fees and/or other fees we charge for our services, we cannot assure you that we will be able to attract prospective students to enroll in our courses at such increased fee rates. Our business, financial condition and operation results may be materially and adversely affected if we fail to maintain or raise the fee level or attract sufficient prospective students.

 

If we are unable to conduct our sales and marketing activities in a cost-effective manner, our results of operations and financial condition may be materially and adversely affected.

 

In 2017, 2018 and 2019, our selling and marketing expenses amounted to RMB373.1 million, RMB425.2 million and RMB438.0 million (US$62.9 million), respectively, representing approximately 59.0%, 57.1% and 47.6%, respectively, of our total operating expenses, which consist of selling and marketing expenses, general and administrative expenses and research and development expenses. Our selling and marketing expenses mainly included advertising and promotion expenses and employee benefit expenses for our sales and marketing staff. There is no assurance that our sales and marketing activities will always be well received by students or result in the levels of sales that we anticipate. Furthermore, we cannot guarantee that we will always be able to improve the operational efficiency of our sales and marketing staff or we will be able to retain or recruit experienced sales staff, or efficiently train junior sales staff. In addition, marketing and branding approaches and tools in the ELT market in China are evolving, especially for mobile platforms. This further requires us to enhance our marketing and branding approaches and experiment with new methods to keep pace with industry development and student preferences. Failure to refine our existing marketing and branding approaches in order to introduce new marketing and branding approaches in a cost-effective manner could reduce our market share, cause our revenue to decline and negatively impact our profitability. In addition, we utilize a broad mix of marketing and public relations programs, including social media platforms, to promote our products and services to prospective students. If advertising rates increase or if we become concerned that our customers deem certain marketing activity less appealing, or more intrusive or damaging to our brands, we may limit or discontinue the use or support of certain marketing sources or activities. Further, companies that promote our services may decide that we negatively impact their business or may make business decisions that in turn adversely impact us. For instance, if they decide that they want to compete directly with us, enter a similar business or exclusively support our competitors, we may no longer have access to their marketing channels.

 

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There is no assurance that our branding efforts will be successful or we are not inadvertently negatively impacting our brand recognition and reputation. If we are unable to maintain and further enhance our brand recognition and reputation and promote awareness of our platform and courses, we may not be able to expand or even maintain our current level of student base and fees as well as engage qualified teachers, and our results of operations may be materially and adversely affected. Furthermore, any negative publicity relating to our Company, our management, our courses, teachers and our other staff, regardless of its veracity, could harm our brand image and in turn materially and adversely affect our business and results of operations.

 

If we fail to conduct our marketing activities in compliance with the advertisement regulations in China, our results of operations and financial condition may be materially and adversely affected.

 

Under the Advertisement Law of the PRC, an advertisement for education or training shall not contain any of the following items: (i) any promise relating to progression, passing examinations, or obtaining a degree or qualification certificate, or any express or implied guaranteed promise relating to education or training results; (ii) express or implied statement that the relevant examination agency or its personnel or any examination test designer will be involved in the education or training; and (iii) the use of the names or images of research institutes, academic institutions, education institutions, industry associations, professionals or beneficiaries for recommendation or as proof. Publishing advertisements for education and training in violation of the provisions may be subject to order to cessation of the publishing of advertisements, eliminate the ill-effects within the corresponding and a fine of one to five times of the advertising fees, or may revoke the business licenses and approval documents for advertisement review.

 

The PRC government has turned its attention toward greater regulation of advertising, and more recently of online advertising and issued the SAIC Interim Measures for the Administration of Internet Advertising, which came into effect on September 1, 2016. The new regulation clarifies what content is considered “internet advertising,” lays down rules for “publishers” of online advertisements, and outlines investigation measures and penalties for violators. In practice, any digital content placed on any online platform with the intent of promoting a product or service could be subject to the regulation. Given the ubiquity of online advertising in China, the regulations may have a widespread impact on the actions of advertisers and platform operators. The regulation identifies individual or corporate publishers who hold the responsibility of complying with the online advertising rules and are subject to penalties when in violation.

 

The market recognition of our “Meten” brand has significantly contributed to our success. Maintaining and enhancing the reputation of our brands is critical to sustaining our competitive advantage. Our ability to maintain and enhance our brand recognition primarily depends on the perceived effectiveness and quality of our course offerings as well as the success of our marketing efforts. We have devoted significant resources to promoting our courses and brands in recent years, including marketing and advertising in both offline and online media channels. On April 23, 2018, Nanjing Meten Foreign Language Training Co., Ltd., or Nanjing Meten, received a Decision on Administrative Penalty issued by the Jiangsu Market Supervision and Administration, according to which Nanjing Meten has been given a fine of RMB200,000 and an order to cease publishing the advertisements and eliminate impact for publishing of false advertisements. Considering that we had actively cooperated in the law enforcement and had rectified in a timely manner, the Jiangsu Market Supervision and Administration confirmed in writing that this penalty was a lighter administrative penalty. However, we cannot assure you we will not be subject to any other penalties or legal sanctions in the future for our advertisements. Our marketing efforts may not be successful or may negatively impact our brand recognition and reputation inadvertently if any government authority or competitor publicly alleges that any of our advertisements are misleading.

 

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Our brand image, reputations, business and results of operations may be adversely impacted by our students’ and teaching staff’s misuse of our websites, applications and other online platforms, and in misconducts or other illegal or improper activities of our students, teachers, franchise partners, management personnel and other employees.

 

Our websites, applications and other online platforms allow our teaching staff and students to engage in real-time communication. Because we do not have full control over how our teaching staff and students will use these platforms to communicate, our online platforms may from time to time be misused by individuals or groups of individuals to engage in immoral, disrespectful, fraudulent or illegal activities. Although we are not aware of any material incidents on our platform and such incidents have not been covered by media reports or internet forums, any such exposure or coverage could generate negative publicity about our brands and platform. We have implemented control procedures, such as training and sample auditing, and require our teaching staff not to distribute any illegal or inappropriate content and conduct any illegal or fraudulent activities on our platforms, but such procedures may not prevent all such content or activities from being posted or carried out. Moreover, as we have limited control over the real-time and offline behavior of our students and teaching staff, to the extent such behavior is associated with our platforms, our ability to protect our brand image and reputation may be limited. Our business and the public perception of our brands may be materially and adversely affected by misuse of our platform. In addition, if any of our students or teaching staff suffers or alleges to have suffered physical, financial or emotional harm following contact initiated on our platform, we may face civil lawsuits or other liabilities initiated by the affected student or teaching staff, or governmental or regulatory actions against us. In response to allegations of illegal or inappropriate activities conducted on our platform or any negative media coverage about us, the PRC government authorities may intervene and hold us liable for non-compliance with the applicable PRC laws and regulations concerning the dissemination of information on the internet and subject us to administrative penalties or other sanctions, such as requiring us to restrict or discontinue some of the features and services provided on our platform. As a result, our business may suffer and our brand image, student base, results of operations and financial condition may be materially and adversely affected.

 

Our brand image, reputation, business and results of operations may also be adversely affected by various misconducts and other illegal or improper activities of our franchisees, management personnel and other employees, such as intentionally failing to comply with government regulations, engaging in unauthorized activities and misrepresentation to our potential students during marketing activities, improper use of our students’ and teaching staff’s sensitive or classified information, making payments to government officials or third parties that would expose us to being in violation of laws. We cannot assure you that we will always be able to deter such misconducts, and the precautions we take to prevent and detect such activities may not be effective in preventing these activities or controlling the relevant risks or losses. Moreover, even if some of these misconducts and illegal or improper activities are not related to our business or the services provided by our franchisees, management personnel or other employees to us, they may nevertheless cause negative publicity about us and thereby, harm our brands and reputation.

 

We may not be able to achieve the benefits we expect from recent and future acquisitions, and recent and future acquisitions may have an adverse effect on our ability to manage our business.

 

As part of our business strategy, we have pursued and intend to continue to pursue selective strategic acquisitions of businesses that complement our existing businesses. For example, in June 2018, we acquired 80% equity interest in ABC Education Group, an English language training service provider. Acquisitions expose us to potential risks, including risks associated with the diversion of resources from our existing businesses, difficulties in successfully integrating the acquired businesses, failure to achieve expected growth by the acquired businesses and an inability to generate sufficient revenue to offset the costs and expenses of acquisitions. If the revenue and cost synergies that we expect to achieve from our acquisitions do not materialize, we may have to recognize impairment charges.

 

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In addition, we may be unable to identify appropriate acquisition or strategic investment targets when it is necessary or desirable to make such acquisition or investment to remain competitive or to expand our business. Even if we identify an appropriate acquisition or investment target, we may not be able to negotiate the terms of the acquisition or investment successfully, finance the proposed transaction or integrate the relevant businesses into our existing business and operations. Furthermore, as we often do not have control over the companies in which we only have minority stake, we cannot ensure that these companies always will comply with the applicable laws and regulations in their business operations. Material non-compliance by our investees may cause substantial harm to our reputation and the value of our investments.

 

If any one or more of the aforementioned risks associated with acquisitions or investments materialize, our acquisitions or investments may not be beneficial to us and may have a material adverse effect on our business, financial condition and results of operations.

 

Failure to control rental costs, obtain leases at desired locations at reasonable prices or failure to comply with the applicable PRC property laws and regulations regarding certain of our leased and owned premises could materially and adversely affect our business.

 

We lease a significant number of properties from third parties. As of the date of this prospectus, we entered into 178 leases for our premises with a total gross floor area of approximately 121,855 square meters, which were or will be primarily used by our self-operated learning centers, and owned 18 properties with a total gross floor area of approximately 1,537.1 square meters, which were primarily used as one of our self-operated learning centers. The leased properties were maintained by our landlords. Accordingly, we are not in a position to effectively control the quality, maintenance and management of these buildings. In the event the quality of the buildings deteriorates, or if any or all of our landlords fail to properly maintain and renovate such buildings in a timely manner or at all, our business operations could be materially and adversely affected. In addition, if any of our landlords terminates the existing lease agreements, refuses to renew the lease agreements when such lease agreements expire, or increase the rent to a level that is unacceptable to us, we will be forced to look for alternative locations for our self-operated learning centers. We may not be able to find suitable premises for such relocation without incurring significant time and costs, and there is no guarantee that we may be able to find suitable premises for relocation or at all. If we fail to find suitable replacement sites in a timely manner or on terms acceptable to us, our business and results of operations could be materially and adversely affected. Moreover, if our use of the leased premise is challenged by the relevant government authorities for lack of fire inspection, we may be further subject to fines and also be forced to relocate the affected learning centers and incur additional expenses. If any of the above events occurs, our business, results of operations and financial condition could be materially and adversely affected.

 

We have not been able to receive from the lessors of some of our leased properties copies of the title certificates or proof of authorization to lease the properties to us. As of the date of this prospectus, we were not aware of any actions, claims or investigations threatened against us or our lessors with respect to the defects in our leasehold interests. However, if any of our leases is terminated as a result of challenges by third parties or government authorities for lack of title certificates or proof of authorization to lease, while we do not expect to be subject to any fines or penalties, we may be forced to relocate the affected learning centers and incur additional expenses relating to such relocation, or we may not be able to find suitable premises for relocation at all.

 

Under the applicable PRC laws and regulations, the parties to a lease agreement are required to register and file the executed lease agreement with the relevant government authorities. As of the date of this prospectus, most of the lease agreements for the leased properties that we occupy had not been registered or filed. While the failure to complete the lease registration will not affect the legal effectiveness of the lease agreements according to PRC law, the relevant real estate administrative authorities may require the parties to the lease agreements to complete lease registration within a prescribed period of time and the failure to do so may subject the parties to fines from RMB1,000 to RMB10,000. While we have not been subject to any penalties or disciplinary action related to the failure to register our lease agreements, we cannot assure you that we will not be subjected to penalties or other disciplinary actions for our past and future non-compliance.

 

We currently and may in the future occupy premises for which we have paid the purchase price but have not obtained titles. If we are unable to obtain titles to the properties, we may not be able to get a full refund on our purchase price and may have to relocate and incur additional expenses relating to such relocation, or we may not be able to find suitable premises for relocation at all.

 

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Therefore, the failure to comply with the applicable PRC property laws and regulations regarding certain of our leased and owned premises may cause us to make relocations and be subject to fines and suspension of business, which may materially and adversely affect our business, financial condition and results of operations.

 

Higher labor costs may adversely affect our business and our profitability.

 

Labor costs in China have risen in recent years as a result of social development, and increasing inflation in China. As of March 31, 2020, we employed 5,141 full-time staff. Staff costs constituted a major portion of our total cost of revenues, reaching 62.9%, 63.1%, 62.5% and 64.4% of our total cost of revenues for the years ended December 31 2017, 2018 2019 and three months ended March 31, 2020, respectively. The increase in labor cost may erode our profitability and materially harm our business, financial condition and results of operations. As our businesses have been continuing to expand in recent years, the absolute amounts of our labor costs in the regions where we operate have also been increasing and could continue to increase. If labor costs in these regions continue to increase, our operating costs will increase. We may not be able to pass on these increased costs to our customers by increasing the fees of our courses in light of competitive pressure in the market. In such circumstances, our profit margin may decrease, which could have an adverse effect on our business, financial condition and results of operations.

 

The outbreak of COVID-19 may have a material adverse impact on the general economic outlook, economic growth and business sentiment (see “— Any natural catastrophes, severe weather conditions, health epidemics, including COVID-19, and other extraordinary events could severely disrupt our business operations” in this prospectus), and may in turn influence the labor cost. Additionally, certain restrictive measures, including quarantining policies and travel restrictions, implemented by China and other countries in response to the outbreak of COVID-19 may impose obstacles for us to recruit teachers and operational staff suitable for our business, and may in turn influence our labor cost. Such influence, if any, however, remains unclear at of the date of this prospectus.

 

We have limited experience in operating some of our newer service offerings.

 

We currently offer a comprehensive service portfolio, including our offline general adult ELT, junior ELT, overseas training services and online ELT. We are constantly upgrading and plan to develop new services to expand our business and student base. For example, we have started to offer our offline junior ELT in 2018. We have expanded our offerings through internal development and external investments. However, some of our new service offerings have not generated significant or any profit to date, as we have limited experience responding quickly to changes and competing successfully for certain of these new areas. In addition, newer offerings may require more financial and managerial resources than what is available. Furthermore, there is limited operating history on which you can base your evaluation of the business and prospects of these relatively more recent offerings. The operation results of new services may also vary from period to period in response to a variety of factors beyond our control, and we may not be able to achieve our expected profitability and performance of these new service offerings.

 

Course and service fee refunds or potential refund disputes may negatively affect our cash flow, financial condition, and reputation.

 

We have different course and service fee refund policies for our students depending on the time of their enrollment and we are subject to certain conditions and restrictions in the service contract between us and each of our students. For details of our refund policies, see “Business — Pricing and Refund Policies.” When calculating gross billings for a specific period, we deduct the total amount of refunds from the total amount of cash received for the sale of course packages for such period.

 

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For the years ended December 31, 2017, 2018 and 2019 and three months ended March 31, 2020, we had made RMB131.2 million, RMB154.1 million, RMB184.8 million (US$26.5 million) and RMB16.1 million of refund payments, respectively. For the same periods, our course withdrawal rate, which is determined as the amount of refunds we issued as a percentage of the total amount of gross billings for the relevant period, was 9.1%, 10.2%, 10.9% and 11.5%, respectively. Our course withdrawal rate increased in 2017 and 2018, mainly due to our implementation of a new refund policy that allowed students to request refunds unconditionally during the first 20 days of enrolling in an offline general adult ELT program (such unconditional refund period had been changed to 10 days since September 2019), and partially because we introduced new curriculums at certain of our learning centers in 2018, which led to an initially adverse student reception. We believe the implementation of the unconditional refund period for the general adult ELT business will improve our students’ overall experience with our services. Additionally, the number of refund requests and the amount of refunds could be affected by a number of factors, many of which are beyond our control. These factors include, without limitation, student dissatisfaction with our teaching quality and our course and educational content offerings, privacy concerns relating to our online platforms, negative publicity regarding us or online ELT in general, and any change or development in the PRC laws and regulations with respect to course fees charged by online education providers like us. Any refund payments that we may be required to make to our students, as well as the expenses we could incur for processing refunds and resolving refund disputes, could be substantial and could adversely affect our gross billings, net revenue, liquidity and financial condition. A high volume of refund applications and refund disputes may also generate negative publicity that could harm our reputation. We have experienced in the past, and may experience in the future, negative publicity in relation to refund disputes between us and our students, which may significantly harm our brand names and divert our attention from operating our business.

 

We offer an installment payment arrangement to our students, which may adversely affect our business, results of operations and operating cash flow if students participating in such scheme decide not to complete the course(s) they have registered and request refund from us, or if such arrangement is found to be in violation of any existing or future laws and regulations in China or otherwise subject to negative publicity.

 

In order to provide a more convenient and flexible payment method for students, we have cooperated with accredited third-party financial institutions in China to set up an installment payment arrangement through which students can pay for the courses and/or services we offer in several pre-determined installments during the course of the contract period. Under such arrangement, a third-party financial institution provides an interest-free loan to a student and remits the course/service fee to us on behalf of the borrowing student to complete his/her purchase of the relevant course. The borrowing student is obligated to repay the loan in pre-agreed installments over a period ranging from six months to 24 months to the financial institution. A transaction fee associated with the installment payment arrangement typically ranges from 4.4% to 10.8% of the total amount of such loan, depending on the length of the installment period, which was generally withheld by such financial institution prior to remitting the course/service fee to us. For the three months ended March 31, 2020, approximately 25.7% of our total gross billings have been paid through such installment payment arrangement. There is an inherent uncertainty relating to such arrangement compared to a lump sum upfront payment scheme as students under the installment payment arrangement are more prone to cease to continue to take classes during the contract period that they had initially registered. For the three months ended March 31, 2020, the course withdrawal rate, which is equal to the amount of refunds we issued in a specific period of time as a percentage of the sum of the amount of gross billings and the amount of refunds for such period, of the students who participated in such installment arrangement was approximately 24.4% and the course withdrawal rate of the students who provided lump sum upfront payments was approximately 7.4%. When we receive refund requests from our students, we typically determine the eligibility of and amounts of refund entitled by such students in accordance with our existing refund policies. Once we determine a student to be eligible for refund, we generally provide the entire amount of refund to him/her directly. For details of our refund policies, please see “Business — Pricing and Refund Policies.” In the event more students who participate in the installment payment arrangement decide not to complete their registered course(s) for any reason, we may be required to provide large sums of refund to these students, which may materially and adversely impact our business, results of operations and operating cash flow. Thus, our business and results of operations could be materially and adversely affected.

 

In addition, the PRC government has tightened the regulation of consumer credit transactions in recent years. For example, the PRC government has prohibited any entity that is not a licensed commercial bank or policy bank in China to provide any loan to students registered in universities in China. The Notice on Regulating and Rectifying “Cash Loan” Business, or Circular 141, also prohibits online lending information intermediaries from facilitating loans with no designated purpose. While we did not provide any loan to our students directly, we cannot assure you that the relevant PRC government authorities will not impose additional restrictions on consumer credit transactions in the future that will render our existing installment payment arrangement illegal. In such case, we may have to cease such arrangement, which could adversely affect our student recruitment efforts, and we may be subject to penalties. In addition, there has been negative publicity about similar arrangement offered by other ELT service providers in China, and we cannot assure you that we will not be subject to similar negative publicity regarding our installment payment arrangement in the future, which may materially and adversely affect our brands, reputation and business.

 

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In addition, since students who participate in the installment payment arrangement generally enter into separate financing arrangements with certain third-party financial institutions whom we have no control over, we may not be able to ensure that these students will have a pleasant or satisfactory experience dealing with such financial institutions. In the event the students are dissatisfied with any aspect of the services provided by such financial institutions, our reputation and business prospects could be adversely affected.

 

Our results of operations are subject to seasonal fluctuations.

 

The PRC offline ELT industry generally experiences seasonality, reflecting a combination of traditional education industry patterns and new patterns associated with the online platform in particular. Seasonal fluctuations have affected, and are likely to continue to affect, our business. In general, the offline ELT industry experiences lower growth of gross billings in the first quarter of each calendar year due to the Chinese New Year holiday, and our industry enjoys higher growth of gross billings in the third quarter during the summer months as some of our students are generally on summer holiday and have more time to take English language training courses. Overall, the historical seasonality of our business has been relatively mild due to our rapid growth. Our financial condition and results of operations for future periods may continue to fluctuate due to seasonality of our business.

 

Failure to protect confidential information of our students and teaching staff against security breaches could damage our reputation and brands and substantially harm our business and results of operations.

 

A significant challenge to the offline and online ELT industry is the secure storage of confidential information and its secure transmission over public networks. All purchases of our course packages are made by our students and/or their parents through our learning centers, websites and mobile applications. In addition, online payments for our course packages are settled through third-party online payment services. Maintaining complete security for the storage and transmission of confidential information on our technology platform, such as student names, personal information and billing addresses, is essential to maintaining student confidence.

 

We have adopted security policies and measures to protect our proprietary data and student information. However, advances in technology, the expertise of hackers, new discoveries in the field of cryptography or other events or developments could result in a compromise or breach of the technology that we use to protect confidential information. We may not be able to prevent third parties, especially hackers or other individuals or entities engaging in similar activities, from illegally obtaining such confidential or private information we hold as a result of our students’ visits to our website and use of our mobile applications. Such individuals or entities obtaining our students’ confidential or private information may further engage in various other illegal activities using such information. Any negative publicity on our website’s or mobile applications’ safety or privacy protection mechanisms and policies, and any claim asserted against us or fine imposed upon us as a result of actual or perceived failures, could have a material and adverse effect on our public image, reputation, financial condition and results of operations.

 

Practices regarding the collection, use, storage, transmission and security of personal information by companies operating over the internet and mobile platforms have recently come under increased public scrutiny. Increased regulation by the PRC government of data privacy on the internet is likely and we may become subject to new laws and regulations applying to the solicitation, collection, processing or use of personal or consumer information that could affect how we store and process the data of our teaching staff and students. We generally comply with industry standards and are subject to the terms of our own privacy policies. Compliance with any additional laws could be expensive, and may place restrictions on the conduct of our business and the manner in which we interact with our students. Any failure to comply with applicable regulations could also result in regulatory enforcement actions against us.

 

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Significant capital and other resources may be required to protect against information security breaches or to alleviate problems caused by such breaches or to comply with our privacy policies or privacy-related legal obligations. The resources required may increase over time as the methods used by hackers and others engaged in online criminal activities are increasingly sophisticated and constantly evolving. Any failure or perceived failure by us to prevent information security breaches or to comply with privacy policies or privacy-related legal obligations, or any compromise of security that results in the unauthorized release or transfer of personally identifiable information or other student data, could cause our students to lose trust in us and could expose us to legal claims and liabilities. Any perception by the public that online transactions or the privacy of user information are becoming increasingly unsafe or vulnerable to attacks could inhibit the growth of online education services generally, which may negatively impact our business prospects.

 

If we fail to develop or adopt new technologies to effectively meet challenges from changing consumer requirements, emerging standards in the industry or mobile operating systems, or if our efforts to invest in the development of new technologies are unsuccessful our business may be materially and adversely affected.

 

The ELT industry is characterized by rapid technological changes in the teachers’ and students’ requirements and preferences, frequent introduction of new courses or services utilizing new technologies and the emergence of new standards and practices, any of which could render our existing technologies and systems obsolete. Our success will depend in part on our ability to identify, develop, acquire or license leading technologies useful to our business, and respond to technological advances and emerging industry standards and practices, such as mobile internet, in a cost-effective and timely way. The development of websites, mobile applications and other proprietary technologies entails significant technical and business risks. We cannot assure you that our existing technologies will remain competitive or that we will be able to successfully develop or effectively use new technologies, recoup the costs of developing new technologies or adapt our websites, mobile applications, proprietary technologies and systems to meet customer requirements or emerging industry standards. If we are unable to develop technologies successfully or adapt in a cost-effective and timely manner in response to changing technological standards, market conditions or customer requirements, whether for technical, financial or other reasons, our business, prospects, financial condition and results of operations may be materially and adversely affected.

 

In addition, purchases using mobile devices by consumers generally, and by our customers specifically, have increased, and we expect this trend to continue. To optimize the mobile shopping experience, we are somewhat dependent on our customers downloading our specific mobile applications for their particular devices as opposed to accessing our websites from an internet browser on their mobile devices. As new mobile devices and platforms are released, it is difficult to predict the problems we may encounter in developing applications for their alternative devices and platforms, and we may need to devote significant resources to the development, support and maintenance of such applications. In addition, our future growth and results of operations could suffer if we experience difficulties in integrating our mobile applications into mobile devices in the future, if problems arise with our relationships with providers of mobile operating systems or mobile applications download stores, if our applications receive unfavorable treatment compared to competing applications on the download stores, or if we face increased costs to distribute or have customers using our mobile applications. We are further dependent on the interoperability of our websites with popular mobile operating systems that we do not control, such as iOS and Android operating systems, and any changes in search systems that degrade the functionality of our websites or give preferential treatment to competitive products could adversely affect the usage of our websites on mobile devices. In the event that this is more difficult for our customers to access and use our website on their mobile devices, or if our customers choose not to access or to use our websites on their mobile devices or to use mobile products that do not offer access to our websites or mobile applications, our business, financial condition and results of operations may be adversely affected.

 

Accidents or injuries suffered by our students and other people on our premises may adversely affect our reputation, business operation and financial performance.

 

We do not have any insurance for our students or other people at our learning centers. In the event of accidents, injuries or other harm to students or other people on our premises, including those caused by and arising from the actions of our employees at our learning centers and/or our other premises, our facilities may be perceived to be unsafe, which may discourage prospective students from attending our courses and we may face lawsuits. Our students may also hurt themselves or other persons due to psychological pressure. We could also face claims alleging that we were negligent or provided inadequate supervision to our employees and therefore should be held jointly liable for harm caused by then or are otherwise liable for injuries suffered by our students or other people on our premises. A liability claim, even if unsuccessful, against us or any of our employees could adversely affect our reputation, enrollment and revenue, causing us to incur substantial expenses and divert the time and attention of our management.

 

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We may not maintain adequate insurance, which could expose us to significant costs and business disruption.

 

The insurance industry in China is still at an early stage of development. In particular, PRC insurance companies offer limited business insurance products to education service providers. We do not have key employee insurance, business liability insurance or business disruption insurance to cover our operations, which we believe is consistent with customary industry practice in China. We have determined that the costs of insuring for these risks and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance. In addition, we do not maintain any insurance policies covering risks including loss and theft of and damages to our servers or other technology infrastructure. Any uninsured occurrence of business disruption, litigation or natural disaster, or significant damages to our uninsured equipment or technology infrastructure could result in substantial costs and diversion of resources for us and could adversely affect our financial condition and results of operations.

 

If we fail to prevent the loss or misappropriation of, or disputes over, our intellectual property rights, our brands and business may suffer.

 

We consider our copyrights, trademarks, trade names, internet domain names, patents and other intellectual property rights invaluable to our ability to continue to develop and enhance our brand recognition. Unauthorized use of our intellectual property rights may damage our reputation and brands. We rely on a combination of copyright, trademark and trade secrets laws to protect our intellectual property rights. Nevertheless, the measures we take to protect our intellectual property rights may not be adequate to prevent unauthorized uses. In addition, preventing infringement on or misuse of intellectual property rights could be difficult, costly and time-consuming in China. The practice of intellectual property rights enforcement action by the PRC regulatory authorities is in its early stage of development and is subject to significant uncertainty. For example, third parties may obtain and use our intellectual property without due authorization, particularly in China. We may also need to resort to litigation and other legal proceedings to enforce our intellectual property rights. Any such action, litigation or other legal proceedings could result in substantial costs and diversion of our management’s attention and resources and could disrupt our business. There is no assurance that we will be able to enforce our intellectual property rights effectively or otherwise prevent others from the unauthorized use of our intellectual property. Failure to adequately protect our intellectual property could materially and adversely affect our brand names and reputation, and our business, financial condition and results of operations.

 

We may encounter infringement disputes from time to time relating to our use of intellectual properties of third parties.

 

We cannot assure you that our offline ELT courses and marketing materials, online ELT courses, products, platforms and applications or other intellectual property developed or used by us do not or will not infringe upon valid copyrights or other intellectual property rights held by third parties. We may encounter disputes from time to time over rights and obligations concerning intellectual property, and we may not prevail in those disputes. We have adopted policies and procedures to prohibit our employees and contractors from infringing upon third-party copyright or intellectual property rights. However, we cannot assure you that our teachers or other personnel will not, against our policies, use third-party copyrighted materials or intellectual property without proper authorization in our classes, on our websites, at any of our locations or via any medium through which we provide our programs. Our users may also post unauthorized third-party content on our websites. We may incur liability for unauthorized duplication or distribution of the materials posted on our websites or used in our classes. We have been involved in claims against us alleging our infringement of third-party intellectual property rights and we may be subject to such claims in the future. Any such intellectual property infringement claim could result in costly litigation, harm our reputation, divert our management attention and resources and subject us to substantial financial harm.

 

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A certain number of our self-operated learning centers and our owned properties are not in compliance with fire safety regulations.

 

Our self-operated learning centers are mainly located on properties leased by us from third parties. We generally make decoration work to the leased properties to meet our business operational needs. According to the relevant PRC laws and regulations, our decoration work falls within the scope of construction work. If the investment amount of such construction work exceeds RMB300,000 and the gross floor area is more than 300 square meters, the records of the fire safety design and the completion inspection must be filed with the competent fire safety authorities after the decoration work obtains the relevant construction permit and passes the completion inspection. See “Business —Regulations— Regulations on Fire Safety” for further details on the fire safety regulations applicable to our business. As of the date of this prospectus, we entered into 145 leases for our premises, all of which have been put into use for our self-operated learning centers, and we have complied with the foregoing fire safety design and filing requirements with respect to 124 of these premises. As of March 31, 2020, 21 leased properties comprised of 20 of our self-operated learning centers currently in use had not completed the filing of fire protection design and completion inspection record. Additionally, we owned premises that were used as space for one of our self-operated learning centers with a total gross floor area of approximately 1,289.98 square meters, and we have not completed the filing of fire protection design and completion inspection record for such properties as of the date of this prospectus. The 21 self-operated learning centers contributed to approximately 5.0% to our gross billings for the three months ended March 31, 2020.

 

In case of failure to complete the foregoing procedures, the competent fire safety authorities in the PRC can order rectifications within a specified period of time, impose a fine of less than RMB5,000 per property, and order the stoppage of use. We have been fined for such violations in the past for an immaterial amount, and we cannot assure you that we will not be fined in the future for past and future violations. In the case of failure to rectify, such authorities can order stoppage of construction and use and suspension of business, and impose a fine of more than RMB30,000 and less than RMB300,000. If we cannot complete the filing of fire protection design and completion inspection according to the relevant requirements, we may be subject to a fine or may be ordered to make rectification within a specified period of time or suspend our operation on the affected properties. In addition, according to Circular 10, if we cannot meet the requirements of the fire safety standards, the relevant training qualifications could be revoked by the government authorities. If complying with fire safety regulations would require us to terminate or break our existing leases, we may be liable for any associated termination or breakage costs in addition to the costs of relocation, renovation and decoration. It may also disrupt our scheduled courses and force us to postpone or cancel some courses and refund the related course fees, all of which could materially and adversely affect our business, financial condition and results of operations.

 

Failure to make adequate contributions to various employee benefits plans as required by PRC regulations may subject us to penalties.

 

Pursuant to the PRC laws and regulations, we are required to participate in various social insurance benefit plans for our employees, whether PRC nationals or foreign citizens, including pension insurance, unemployment insurance, medical insurance, work-related injury insurance and maternity insurance. We are also required to participate in housing provident fund plan for our PRC national employees. We are required to contribute to the plans in amounts equal to certain percentages of the salaries, including bonuses and allowances, of our employees up to a maximum amount specified by the local government from time to time at locations where we operate our business. The requirement of employee benefit plans has not been implemented consistently by the local governments in China given the different levels of economic development in various locations. In some locations where we operate, consistent with local practices, we did not strictly follow the laws and regulations relating to participating in various social insurance benefit plans for our PRC national employees, including housing provident fund. We also did not make full contribution of our foreign employees’ social insurance, which was mainly due to an administrative oversight and unfamiliarity with the relevant laws and regulations of our staff in charge. While we have not faced any penalty or disciplinary action in the past, our failure in making contributions to various employee benefit plans and in complying with the applicable PRC labor-related laws may subject us to late payment penalties. We may be required to make up the contributions for these plans as well as to pay late fees and fines. If we are subject to late fees or fines in relation to the underpaid employee benefits, our financial condition and results of operations may be adversely affected.

 

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We cannot assure you that our employees will not complain to the relevant authorities by reporting our failure to make contributions to the social insurance plans. Moreover, we cannot assure you that the relevant local government authorities will not require us to pay the outstanding amount within a prescribed time or impose penalties or overdue fines on us, which may in turn adversely affect our financial condition and results of operations.

 

Certain of our teachers do not possess teaching qualifications, which may be subject to penalty under the relevant PRC laws and regulations. Our failure to comply with these requirements may result in material and adverse effect on our business, results of operations and prospects.

 

Under the relevant PRC laws and regulations, teachers of all types of schools and other education institutions are required to obtain teacher qualification certificates or other relevant professional skill qualifications, although the definition or scope of the relevant professional skill qualifications is not explicitly stated in the relevant PRC laws and regulations. If teachers are employed in violation of such regulations, the examination and approval authorities or other relevant government departments will order the schools and other education institutions to make corrections within a specified period of time and give a warning in accordance with the applicable laws and regulations. If there is income generated from teachers without teaching qualifications, the illegal income will be confiscated. In the event the circumstances are deemed serious by the relevant government authorities, student enrollment will be ordered to stop and the school license will be revoked. As of the date of this prospectus, a substantial majority of our teachers did not possess any teaching qualifications or relevant professional skill qualifications. As of the date of this prospectus, we have not received any notice or warning or been subject to any penalties or disciplinary action from government authorities due to the lack of teaching licenses of our teachers. As advised by our PRC counsel, the current PRC laws and regulations remain unclear as to whether our teachers are required to obtain and hold teaching qualifications. However, we cannot assure you that the relevant PRC government authorities will not take a contrary view and impose penalties, fines or other disciplinary action for our past or future non-compliance.

 

We cannot assure you that we will not be subject to liability claims for any inaccurate or inappropriate content in our training programs, which could cause us to incur legal costs and damage our reputation.

 

We develop the content for our ELT programs ourselves or through partnerships with third parties. We cannot assure you that there will be no inaccurate or inappropriate materials included in our training programs or the materials we obtain from our third-party partners. In addition, our mock examination questions designed internally based on our understanding of the relevant examination requirements may be investigated by the regulatory authorities. Therefore, we may face civil, administrative or criminal liability if an individual or corporate, governmental or other entity believes that the content of any of our training programs violets any laws, regulations or governmental policies or infringes upon its legal rights. Even if such claim were not successful, defending it may cause us to incur substantial costs including the time and attention of our management. Moreover, any accusation of an accurate so inappropriate conduct could lift to significant negative publicity, which could harm our reputation and future business prospects.

 

We may be involved in legal and other disputes and claims arising out of our operations from time to time.

 

We may, from time to time, be involved in disputes with and subject to claims by parents and students, teachers and other school personnel, and other parties involved in our business. We cannot assure you that when legal actions arise in the ordinary course of our business, any of the legal actions will be resolved in our favor. We are subject to uncertainties as to the outcome of such legal proceedings and our business operations may be disrupted. Legal or other proceedings involving us may, among others, result in us incurring significant costs, divert management’s attention and other resources, negatively affect our business operations, cause negative publicity against us or damage our reputation, regardless whether we are successful in defending such claims or proceedings. Our business, financial condition and results of operations may be materially and adversely affected as a result.

 

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We may be adversely affected by any negative publicity concerning us, our business, founders, shareholders, affiliates, directors, senior management and employees, as well as our third-party commercial partners and the industry in which we operate, regardless of its accuracy, which could harm our reputation and business.

 

Negative publicity about us, our business, founders, shareholders, affiliates, directors, senior management, teachers and other employees, as well as our third-party commercial partners and the industry in which we operate, can harm our operations. We have been exposed to negative publicity concerning, among other things, miscalculation involving and delays in the payments of staff salaries and/or bonuses, student refund disputes, administrative penalties, alleged improper or misleading statements made in our sales and marketing activities in the past and actions of our founders and directors and members of our senior management. Negative publicity concerning these parties could be related to a wide variety of matters, including, but are not limited to:

 

  misconduct, alleged or otherwise, or other improper activities committed by our founders, students or our directors, shareholders, senior management, affiliates, teaching staff and other employees, including misrepresentation made by our employees to prospective students during sales and marketing activities;

 

  false or malicious allegations or rumors about us or our founders, directors, shareholders, senior management, affiliates, teaching staff and other employees, as well as our students;

 

  complaints by our students about our education services and sales and marketing activities;

 

  course fee refund disputes between us and our students or administrative penalties;

 

  security breaches of our student’s or employee’s confidential information;

 

  employment-related complaints and claims relating to alleged employment discrimination, wage and hour violations, miscalculations involving and delays in the payments of staff salaries and/or bonuses; and

 

  governmental and regulatory investigations or penalties resulting from our failure to comply with applicable laws and regulations.

 

We may also be exposed the risk of any misconduct of our third party commercial partners that any negative publicity and claims asserted against our third party commercial partners or fines imposed upon them as a result of actual or perceived failures, could have a material and adverse effect on our public image, reputation, financial condition and results of operations. In addition, negative publicity of the industry in which we operate, including, but not limited to, bankruptcy and cessation of business operations of any of our major competitors, may materially and adversely affect our business prospects and results of operations.

 

In addition to traditional media, there has been an increasing use of social media and similar platforms in China, including instant messaging applications, such as WeChat, social media websites and other forms of internet-based communications that provide individuals with access to a broad audience of consumers and other interested persons. The availability of information on instant messaging applications and social media platforms is virtually immediate as is its impact without affording us an opportunity for redress or correction. The opportunity for dissemination of information, including inaccurate information, is seemingly limitless and readily available.

 

Information concerning our company, shareholders, directors, officers and employees may be posted on such platforms at any time. The risks associated with any such negative publicity or incorrect information cannot be completely eliminated or mitigated and may materially harm our reputation, business, financial condition and results of operations.

 

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We are subject to regulatory inspections, examinations, inquiries and audits, and future sanctions, fines and other administrative penalties resulting from such inspections and audits could materially and adversely affect our business, financial condition and results of operations.

 

We are subject to certain regulation and supervision from the PRC government authorities. These relevant regulatory authorities have broad powers to adopt regulations and other requirements affecting or restricting our operations, including tax policies. Moreover, these relevant regulatory authorities possess significant powers to enforce applicable regulatory requirements in the event of our non-compliance, including the imposition of fines, sanctions or the revocation of licenses or permits to operate our business. We have in the past been subject to tax penalties concerning certain of our subsidiaries, and we cannot assure you that we will not face similar or other administrative fines or penalties concerning our operations or our subsidiaries.

 

Any natural catastrophes, severe weather conditions, health epidemics, including COVID-19, and other extraordinary events could severely disrupt our business operations.

 

The occurrence of natural catastrophes such as earthquakes, floods, typhoons, tsunamis or any acts of terrorism may result in significant property damages as well as loss of revenue due to interactions in our business operations. As we store books and course materials at our premises, there is a risk that these products and our promises may be damaged or destroyed by fire and other natural calamities. Any disruption of electricity supply or any outbreaks of fire or similar calamities at our premises may result in the breakdown of our facilities and the disruption to our business. Health epidemics such as outbreaks of avian influenza, severe acute respiratory syndrome (SARS), COVID-19, swine flu (H1N1) or the Influenza A virus, and severe weather conditions such as snowstorm and hazardous air pollution, as well as the government measures adopted in response to these events, could significantly impact our operations. For example, the recent outbreak of the COVID-19 epidemic has endangered the health of many people residing in China and significantly disrupted travel and the local economy across the country. These events may also materially impact our industry and cause a temporary closure of our learning centers, which would severely disrupt our operations and have a material and adverse effect on our business, financial condition and results of operations. Since the beginning of the outbreak in January 2020 and as directed by the MOE, we have temporarily closed our learning centers in the PRC until further notice. Our students, teachers and staff may also be negatively affected by such events. For instance, our operations could be further disrupted if any of our students, teachers and staff were suspected of contracting a contagious disease, since this could require us to quarantine some or all of our employees or students and disinfect the learning centers used in our business operations. In addition, any occurrences of such natural catastrophes, severe weather conditions, health epidemics and other extraordinary events may result in the postponement or rescheduling of examinations for which we provide courses, which may in turn have an adverse impact on our revenue and performance.

 

Given the gradual decline in the number of newly confirmed COVID-19 cases in China in recent weeks, the business activities in China’s major cities have started to resume. As such, we have begun to reopen a select number of our learning centers in April 2020 and gradually reopened the remaining learning centers in May and June 2020 as permitted to do so by the MOE and provincial education bureaus. However, as the COVID-19 outbreak continues to expand globally, and has posed a serious public health threat to numerous countries and territories as of the date of this prospectus, a number of countries and territories have implemented quarantining policies and travel restrictions from and to seriously affected cities or regions. These restrictive measures, though temporary in nature, may continue in the foreseeable future and even increase depending on developments in the outbreak. As a result, our ability to deliver our services, particularly our offline ELT services, may be adversely impacted and the costs for us to deliver our services may also increase. Some students may change their study plans due to these restrictive measures or safety considerations, and thus, the demand for our services, especially demand for our overseas training services, may decrease. The COVID-19 outbreak had a material adverse impact on our business operations for the three months ended March 31, 2020, and may have material adverse impacts on our business operations for the six months ended June 30, 2020.

 

We are uncertain as to when the outbreak of COVID-19 will be completely controlled in China and globally, and the prolonged adverse effects of COVID-19 and any other adverse public health developments may result in the prolonged closure of our learning centers or our offices while we remain obligated to pay rent and other expenses for these facilities, the quarantining of infected or potentially infected students, teachers, or employees and the disinfection of the affected properties along with the temporary suspension of our operations, or the cancellation or deferments of student enrollment to avoid the spread or recurrence of contagion. If such occurrences continue without being effectively controlled in the future, our business operations and financial performance may be materially and adversely affected as a result of various factors, such as changes in general economic outlook, slowdowns in economic growth and negative business sentiment, and measures taken by government authorities which may restrict or limit our operations in China.

 

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While we have migrated our offline general adult ELT, overseas training and junior ELT courses online during the COVID-19 outbreak to provide continued training services to our students, our ability to conduct live-streaming lectures and provide other online education services depends on the continuing operation of our technology systems, which is vulnerable to damage or interruption from natural catastrophes and other extraordinary events. In addition, any fire or other calamity at the facilities of our third-party service providers that host our servers could severely disrupt our ability to deliver our online courses. Our disaster recovery planning cannot account for every conceivable possibility. Any damage or failure of our technology system could result in interruptions in our services, and our brands could be damaged if students believe our systems are unreliable. Such disruptions could severely interfere with our business operation and adversely affect our results of operations.

 

If we fail to implement and maintain an effective system of internal controls, we may be unable to accurately or timely report our results of operations or prevent fraud, and investor confidence and the market price of our securities may be materially and adversely affected.

 

Prior to the consummation of the Mergers, Meten was a private company with limited accounting personnel and other resources with which to address its internal controls and procedures. Our management has not completed an assessment of the effectiveness of its internal control over financial reporting, and our independent registered public accounting firm has not conducted an audit of our internal control over financial reporting. In the course of auditing Meten’s consolidated financial statements included elsewhere in this prospectus, Meten and its independent registered public accounting firm identified two material weaknesses and other control deficiencies in our internal control over financial reporting.

 

The material weaknesses identified relate to (i) our lack of a sufficient number of finance and accounting personnel or sufficiently trained finance and accounting personnel, as well as comprehensive accounting policies in accordance with U.S. GAAP financial reporting; and (ii) our internal control policy does not have a proper approval mechanism, and our lack of internal controls on performing periodic reviews of user accounts and their level of authorization in the financial systems. We plan to implement a number of measures to remedy these material weaknesses. To remedy the identified material weakness and the other control deficiencies, we have implemented and will continue to implement initiatives to improve our internal control over financial reporting to address the material weaknesses that have been identified, including: (i) obtain additional resources, including experienced staff with U.S. GAAP and SEC reporting knowledge, to strengthen the financial reporting function and to set up financial and system control framework; (ii) conducting regular and continuous U.S. GAAP accounting and financial reporting training programs for our accounting and financial reporting personnel, including sending our financial staff to attend external U.S. GAAP training courses; and (iii) optimizing our financial systems by establishing a proper approval mechanism and performing periodic reviews of users accounts and their level of authorization. . We cannot assure you, however, that these measures may fully address these material weaknesses and other deficiencies in our internal control over financial reporting or that we may conclude that they have been fully remedied.

 

If we fail to establish and maintain adequate internal controls, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information. This could limit our access to capital markets, adversely affect our results of operations and lead to a decline in the trading price of our securities. Additionally, ineffective internal controls could expose us to an increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we list or to other regulatory investigations and civil or criminal sanctions.

 

As a public company, we will be subject to Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley Act. Since we qualify as an “emerging growth company” pursuant to the JOBS Act with less than US$1.07 billion in revenue for our last fiscal year. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, in the assessment of the emerging growth company’s internal control over financial reporting. Section 404 will require that we include a report of management on our internal control over financial reporting in our annual report on Form 20-F beginning with the annual report for the year ending December 31, 2020. Management may conclude that our internal control over financial reporting is not effective. Moreover, even if management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm, after conducting its own independent testing, may issue a report that is qualified if it is not satisfied with our internal controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. In addition, after we become a public company, our reporting obligations may place a significant strain on its management, operational and financial resources and systems for the foreseeable future. We may be unable to timely complete our evaluation testing and any required remediation of our prior deficiencies in its internal control over financial reporting.

 

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During the course of documenting and testing our internal control procedures, we may identify other weaknesses and deficiencies in its internal control over financial reporting. In addition, if we fail to maintain the adequacy of our internal control over financial reporting, as these standards are modified, supplemented or amended from time to time, we may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404. Generally speaking, if we fail to achieve and maintain an effective internal control environment, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information. This could in turn limit our access to capital markets, harm our results of operations, and lead to a decline in the trading price of our securities. Additionally, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we list, regulatory investigations and civil or criminal sanctions.

 

Beginning in 2011, “big four” PRC-based accounting firms, including affiliates of our independent registered public accounting firm, were affected by a conflict between U.S. and Chinese law, and an administrative law judge in the U.S. imposed penalties on the firms and the firms were temporarily suspended from practicing before the SEC. If additional remedial measures are imposed, we could be unable to timely file future financial statements in compliance with the requirements of the Exchange Act.

 

Beginning in 2011, the Chinese affiliates of the “big four” accounting firms (including our independent registered public accounting firm) were affected by a conflict between the U.S. and Chinese law. Specifically, for certain U.S.-listed companies operating and audited in China, the SEC and PCAOB sought to obtain access to the audit work papers and related documents of the Chinese affiliates of the “big four” accounting firms. The accounting firms were, however, advised and directed that, under Chinese law, they could not respond directly to the requests of the SEC and PCAOB and that such requests, and similar requests by foreign regulators for access to such papers in China, had to be channeled through the China Securities Regulatory Commission, or CSRC.

 

In late 2012, this impasse led the SEC commencing administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley Act against the Chinese accounting firms, including our independent registered public accounting firm. In January 2014, the administrative law judge made an initial decision to impose penalties on the firms, including a temporary suspension of their right to practice before the SEC. The accounting firms filed a petition for review of the initial decision. On February 6, 2015, before a review by the commissioners of the SEC took place, the firms reached a settlement with the SEC. Under the settlement, the SEC accepts that future requests by the SEC for the production of documents will normally be made to the CSRC. The firms will receive matching Section 106 requests, and are required to follow a detailed set of procedures with respect to such requests, which in substance require them to facilitate production via the CSRC. If they fail to meet specified criteria, the SEC has authority to impose a variety of additional remedial measures on the firms depending on the nature of the failure. Remedies for any future noncompliance could include, as appropriate, an automatic six-month bar on a single firm’s performance of certain audit work, commencement of a new proceeding against a firm, or in extreme cases the resumption of the current proceeding against all four firms.

 

In the event that the SEC restarts the administrative proceedings, depending upon the final outcome, listed companies in the U.S. with major PRC operations may find it difficult or impossible to retain auditors in respect of their operations in China, which could result in their financial statements being determined to not be in compliance with the requirements of the Exchange Act, including possible delisting. Moreover, any negative news about any such future proceedings against the firms may cause investor uncertainty regarding China-based, U.S.-listed companies, including us, and the market price of our securities may be adversely affected.

 

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If our independent registered public accounting firm was denied, even temporarily, the ability to practice before the SEC and we were unable to timely find another registered public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be determined not to be in compliance with the requirements of the Exchange Act. Such a determination could ultimately lead to the delisting of our securities from Nasdaq or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of our securities in the United States.

 

Our auditor is located in China, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the PRC authorities, and as such, investors may be deprived of the benefits of such inspection.

 

Our independent registered public accounting firm that issues the audit reports included in our annual reports filed with the SEC, as an auditor of the companies that are traded publicly in the United States and a firm registered with the Public Company Accounting Oversight Board (United States), or the PCAOB, is required by the laws of the United States to undergo regular inspections by the PCAOB to assess its compliance with the laws of the United States and professional standards. Our auditor is located in China, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the PRC authorities. In May 2013, the PCAOB announced that it had entered into a Memorandum of Understanding on Enforcement Cooperation with the China Securities Regulation Commission, or the CSRC, and the Ministry of Finance, which establishes a cooperative framework between the parties for the production and exchange of audit documents relevant to investigations undertaken by the PCAOB, the CSRC or the Ministry of Finance in the United States and the PRC, respectively. The PCAOB continues to be in discussions with the CSRC and the Ministry of Finance to permit joint inspections in the PRC of audit firms that are registered with the PCAOB and audit Chinese companies that trade on U.S. exchanges. On December 7, 2018, the SEC and the PCAOB issued a joint statement highlighting continued challenges faced by the U.S. regulators in their oversight of financial statement audits of U.S.-listed companies with significant operations in China. In June 2019, a bill entitled the “Ensuring Quality Information and Transparency for Abroad-Based Listings on our Exchanges (EQUITABLE) Act” was introduced in the U.S. Congress. This bill requires U.S. stock exchanges, such as Nasdaq, to amend their rules to prohibit foreign issuers from listing shares in the U.S. if their financial statements are audited by public accounting firms that the PCAOB is unable to inspect. Additionally, on May 20, 2020, the U.S. Senate passed S. 945, the Holding Foreign Companies Accountable Act (the “Kennedy Bill”).  If passed by the U.S. House of Representatives and signed by the U.S. President, the Kennedy Bill would amend the Sarbanes-Oxley Act to direct the SEC to prohibit the securities of any registrant from being listed on any of the U.S. securities exchanges or traded “over-the-counter” if the auditor of the registrant’s financial statements is not subject to PCAOB inspection for three consecutive years after the law becomes effective, and require certain disclosures in the registrant’s annual reports covering years when the auditor of the registrant’s financial statements is not subject to PCAOB inspection. Furthermore, Nasdaq has proposed changes to its rules to allow it to consider whether the auditor of a company has been inspected by the PCAOB in considering whether to allow the new or continued listing of that company. The proposed Nasdaq rule changes are subject to approval by the SEC. The joint statement, the bills and the proposed Nasdaq rule changes reflect a heightened interest in an issue that has vexed U.S. regulators in recent years. However, it remains unclear what further actions the U.S. Congress, SEC and/or the PCAOB will take to address the problem, or whether the proposed Nasdaq rule changes will be put into place.

 

Inspections of other firms that the PCAOB has conducted outside of China have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. The inability of the PCAOB to conduct inspections of independent registered public accounting firms operating in China makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures or quality control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections.

 

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Risks Related to Our Corporate Structure

 

If the PRC government finds that the contractual arrangements that establish the structure for operating our business do not comply with applicable PRC laws and regulations, we could be subject to severe penalties or be forced to relinquish our interests in those operations.

 

Currently, the PRC laws and regulations do not explicitly impose restrictions on foreign investment in ELT services in the PRC. However, some local government authorities in the PRC have adopted different approaches in granting licenses and permits (particularly, imposing more stringent restrictions on foreign-invested entities) for entities providing ELT services. In the areas where we operate our ELT service business, most local government authorities do not allow foreign-invested entities to establish private schools to engage in the ELT services, other than in the forms of Sino-foreign cooperative schools, and the domestic party shall play a dominant role in such cooperation. According to the relevant regulations, foreign investors of Sino-foreign cooperative institutions must be foreign educational institutions with relevant qualifications and experiences. As a foreign company, we are not qualified to run Sino-foreign cooperative schools in the PRC. In addition, according to Notice 75, foreign-invested language training institutions are required to apply for the private school operating permit. However, based on the interviews we conducted in November 2019 with the officials of the local educational authorities in the areas where we have learning centers in operation, most of the local educational authorities provided oral confirmations that due to the fact that the Notice 75 has just been issued for a short period of time and that no detailed supporting rules and regulations have been promulgated, the relevant procedure, approval process and transitional period regarding the application by the foreign-invested language training institutions for the private school operating permit are not yet clear and the relevant government authorities have not yet begun to accept applications. In addition, the PRC laws and regulations restrict foreign ownership in value-added telecommunication services and require that a foreign investor who invests in a value-added telecommunications business in the PRC must possess prior experience in operating value-added telecommunications businesses and a proven track record of business operations overseas. Due to these restrictions, we operate our offline and online ELT business in the PRC primarily through our affiliated entities. We entered into a series of contractual arrangements with Shenzhen Meten and Shenzhen Likeshuo and their shareholders, respectively. Our affiliated entities are the entities that hold certain licenses and permits relating to the offline and online ELT business in the PRC. We have been and expect to continue to be dependent on our affiliated entities to operate our business. See “Organizational Structure” for more information.

 

As advised by our PRC counsel, there are substantial uncertainties regarding the interpretation and application of the PRC laws and regulations, and we cannot assure you that the PRC government would agree that our corporate structure or any of the above-mentioned contractual arrangements comply with the current or future PRC laws or regulations. The PRC laws and regulations governing the validity of these contractual arrangements are uncertain and the relevant government authorities may have broad discretion in interpreting these laws and regulations. If our ownership structure and contractual arrangements are found to be in violation of any existing or future PRC laws or regulations, or we fail to obtain any of the required licenses and permits, the relevant PRC regulatory authorities including the MOE, which regulates the education industry in the PRC, the Ministry of Commerce, or the MOFCOM, which regulate the foreign investments in the PRC, the MCA, which regulates the registration of non-profit private schools in the PRC after the Amended Private Education Promotion Law became effective, and the SAIC, which regulates the registration and operation of for-profit private schools in the PRC after the Amended Private Education Promotion Law became effective, would have broad discretion in dealing with such violations, including:

 

  revoking the business licenses and operating permits held by Zhuhai Meten and Zhuhai Likeshuo and their respective subsidiaries, or our other PRC subsidiaries, and/or our affiliated entities;

 

  discontinuing or restricting the operations of any related-party transactions among our PRC subsidiaries and our affiliated entities;

 

  limiting our business expansion in the PRC by way of entering into contractual arrangements;

 

  confiscating the income of our affiliated entities;

 

  imposing fines, penalties or other requirements with which we, our PRC subsidiaries, or affiliated entities may not be able to comply;

 

  requiring us to restructure the relevant ownership structure or operations, terminate the contractual arrangements with our VIEs or deregister the pledges on the equity interest in our VIEs, which in turn would affect our ability to consolidate, derive economic interest from or exert effective control over our VIEs; or

 

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  restricting the use of financing sources by us or our affiliated entities, or otherwise restricting our or their ability to conduct business.

 

As of the date of this prospectus, similar ownership structure and contractual arrangements have been used by many China-based companies listed overseas, including in the United States. However, we cannot assure you that penalties will not be imposed on any other companies or us in the future. If any of the above fines or punishments is imposed on us, our business, financial condition and results of operations could be materially and adversely affected. If any of these penalties results in our inability to direct the activities of our affiliated entities or results in our failure to receive the economic benefits from our affiliated entities, we may not be able to consolidate our affiliated entities in our financial statements in accordance with U.S. GAAP. However, we do not believe that such actions would result in the liquidation or dissolution of our Company, our wholly-owned subsidiaries in the PRC.

 

Substantial uncertainties exist with respect to the interpretation and implementation of any new PRC laws, rules and regulations relating to foreign investment and how it may impact the viability of our current corporate structure, corporate governance and business operations.

 

On March 15, 2019, the National People’s Congress promulgated the Foreign Investment Law, which came into effect on January 1, 2020 and replaced the three existing laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation rules and ancillary regulations. The existing foreign-invested enterprises, or FIEs, established prior to the effectiveness of the Foreign Investment Law may keep their corporate forms within five years. The Foreign Investment Law stipulates that China implements the management system of pre-establishment national treatment plus a negative list to foreign investment, and the government generally will not expropriate foreign investment, except under certain special circumstances, in which case it will provide fair and reasonable compensation to foreign investors. Foreign investors are barred from investing in prohibited industries on the negative list and must comply with the specified requirements when investing in restricted industries on such list. On December 26, 2019, the State Council promulgated the Implementing Regulations of the Foreign Investment Law, which came into effect on January 1, 2020 and further requires that FIEs and domestic enterprises be treated equally with respect to policy making and implementation.

 

Pursuant to the Foreign Investment Law, “foreign investment” means any foreign investor’s direct or indirect investment in the PRC, including: (i) establishing FIEs in the PRC either individually or jointly with other investors; (ii) obtaining stock shares, stock equity, property shares, other similar interests in Chinese domestic enterprises; (iii) investing in new project in the PRC either individually or jointly with other investors; and (iv) making investment through other means provided by laws, administrative regulations or State Council provisions. Although the Foreign Investment Law does not explicitly classify the contractual arrangements, such as our contractual arrangement described in “Business — Organizational Structure,” as a form of foreign investment, it contains a catch-all provision under the definition of “foreign investment,” which includes investments made by foreign investors in China through other means stipulated by laws or administrative regulations or other methods prescribed by the State Council without elaboration on the meaning of “other means.” However, the Implementing Regulations of the Foreign Investment Law still does not specify whether foreign investment includes contractual arrangements.

 

It is possible that future laws, administrative regulations or provisions prescribed by the State Council may regard contractual arrangements as a form of foreign investment, at which time it will be uncertain whether the contractual arrangements will be deemed to be in violation of the foreign investment access requirements and how the above-mentioned contractual arrangements will be handled. Therefore, there is no guarantee that the contractual arrangements and the business of our affiliated entities will not be materially and adversely affected in the future due to changes in the PRC laws and regulations. Furthermore, if future laws, administrative regulations or provisions prescribed by the State Council mandate further actions to be completed by companies with existing contractual arrangements, we may face substantial uncertainties as to the timely completion of such actions. In the extreme case scenario, we may be required to unwind the contractual arrangements and/or dispose of our VIEs and affiliated, which could have a material and adverse effect on our business, financial conditions and results of operations.

 

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We rely on contractual arrangements with our VIEs and their shareholders for our operations in China, which may not be as effective in providing operational control as direct ownership.

 

We have relied and expect to continue to rely on the contractual arrangements with our ELT businesses in China. For a description of these contractual arrangements, see “Business — Organizational Structure — Contractual Arrangements with Our VIEs and Their Respective Shareholders.” However, these contractual arrangements may not be as effective as direct equity ownership in providing us with control over our affiliated entities. Any failure by our VIEs and their shareholders to perform their obligations under the contractual arrangements would have a material adverse effect on the financial position and performance of our Company. For example, the contractual arrangements are governed by the PRC law and provide for the resolution of disputes through arbitration in the PRC. Accordingly, these contracts would be interpreted in accordance with the PRC law and any disputes would be resolved in accordance with arbitral procedures as contractually stipulated. The commercial arbitration system in the PRC is not as developed as in some other jurisdictions, such as the United States.

 

As a result, uncertainties in the commercial arbitration system or legal system in the PRC could limit our ability to enforce these contractual arrangements. In addition, if the legal structure and the contractual arrangements were found to violate any existing or future PRC laws and regulations, we may be subject to fines or other legal or administrative sanctions.

 

If any government action causes us to lose our right to direct the activities of our affiliated entities or lose our right to receive substantially all the economic benefits and residual returns from our affiliated entities and we are not able to restructure our ownership structure and operations in a satisfactory manner, we would no longer be able to consolidate the financial results of our affiliated entities.

 

Our VIEs or their shareholders may fail to perform their obligations under the contractual arrangements.

 

If Shenzhen Meten, Shenzhen Likeshuo or any of their respective shareholders fails to perform their obligations under the contractual arrangements, we may have to incur substantial costs and resources to enforce our rights under the contracts, and rely on legal remedies under the PRC law, including seeking specific performance or injunctive relief and claiming damages, which may not be effective. For example, if the shareholders of Shenzhen Meten or Shenzhen Likeshuo were to refuse to transfer their equity interest in Shenzhen Meten or Shenzhen Likeshuo to us or our designee when we exercise the call option pursuant to these contractual arrangements, or if they were otherwise to act in bad faith toward us, then we may have to take legal actions to compel them to perform their contractual obligations.

 

All the material agreements under our contractual arrangements are governed by the PRC law and provide for the resolution of disputes under the agreements through arbitration in the Shenzhen Court of International Arbitration. Accordingly, these contracts would be interpreted in accordance with the PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal system in the PRC is not as developed as some other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. Under the PRC law, rulings by arbitrators are final, parties cannot appeal the arbitration results in courts, and the prevailing parties may only enforce the arbitration awards in the PRC courts through arbitration award recognition proceedings, which would incur additional expenses and delay. In the event that we are unable to enforce these contractual arrangements, we may not be able to exert effective control over our affiliated entities, and our ability to conduct our business may be negatively affected.

 

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The shareholders of our VIEs may have actual or potential conflicts of interest with us and not act in the best interests of our Company.

 

Our control over affiliated entities is based upon the contractual arrangements with our affiliated entities, the VIEs and their shareholders and the directors of our affiliated entities. The shareholders of the VIEs may potentially have conflicts of interest with us and breach their contracts or undertaking with if it would further their own interest or if they otherwise act in bad faith. These shareholders may refuse to sign or breach, or cause our VIEs to breach or refuse to renew the existing contractual arrangements, which would have a material and adverse effect on our ability to effectively control our affiliated entities and receive economic benefits from them. For example, these shareholders may be able to cause our agreements with our VIEs to be performed in a manner adverse to us by, among other things, failing to remit payments due under the contractual arrangements to us on a timely basis. When conflicts of interest arise any or all of these shareholders will act in the best interests of our Company or such conflicts will be resolved in our favor. Currently, we do not have any arrangements to address potential conflicts of interest between these shareholders and our Company. If we cannot resolve any conflict of interest or dispute between us and these shareholders, we would have to rely on legal proceedings, which could result in disruption of our business and subject us to substantial uncertainty as to the outcome of any such legal proceedings. If we are unable to resolve such conflicts, including where the shareholders of our VIEs breached their contracts or undertakings with us and as a result or otherwise subject us to claims from third parties, our business, financial condition and operations could be materially and adversely affected.

 

The contractual arrangements may be subject to the scrutiny of the PRC tax authorities and additional tax may be imposed, which may materially and adversely affect our results of operation and value of your investment.

 

Under the PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities. We could face material and adverse tax consequences if the PRC tax authorities determine that the Exclusive Management Cooperation Agreement we have with our affiliated entities does not represent an arm’s length price and determines to adjust any of those entities’ income in the form of a transfer pricing adjustment. A transfer pricing adjustment could increase our tax liabilities. In addition, the PRC tax authorities may have reason to believe that our subsidiaries or our affiliated entities are dodging their tax obligations, and we may not be able to rectify such incident within the limited timeline required by the PRC tax authorities. As a result, the PRC tax authorities may impose late payment fees and other penalties on us for underpaid taxes, which could materially and adversely affect our business, financial condition and results of operations.

 

If any of our affiliated entities becomes subject to winding up or liquidation proceedings, we may lose the ability to make use of certain important assets, which could negatively impact our business and materially and adversely affect our ability to generate revenue.

 

We currently conduct our operations in China through contractual arrangements. As part of these arrangements, substantially all of our education-related assets, permits and licenses that are important to the operation of our business are held by our affiliated entities. If any of these affiliated entities is wound up, and all or part of their assets become subject to liens or rights of third-party creditors, we may be unable to continue some or all of our business activities, which would materially and adversely affect our business, financial condition and results of operations. If any of our affiliated entities undergoes a voluntary or involuntary liquidation proceeding, its equity owner or unrelated third-party creditors may claim rights relating to some or all of these assets, which would hinder our ability to operate our business and could materially and adversely affect our business and our ability to generate revenue. As a result, we may not be able to exercise our rights in a timely manner and our business, financial condition and operations may be materially and adversely affected.

 

The custodians or authorized users of our controlling non-tangible assets, including chops and seals, may fail to fulfill their responsibilities, or misappropriate or misuse these assets.

 

Under the PRC law, legal documents for corporate transactions, including agreements and contracts that our business relies on, are executed using the chop or seal of the signing entity or with the signature of a legal representative whose designation is registered and filed with the relevant PRC industry and commerce authorities.

 

In order to maintain the physical security of our chops, we generally have them stored in secured locations accessible only to certain authorized employees. Although we monitor such authorized employees, the procedures may not be sufficient to prevent all instances of abuse or negligence. There is a risk that our employees could abuse their authority, for example, by entering into a contract not approved by us or by seeking to gain control of our subsidiaries, our VIEs or any of their subsidiaries. If any employee obtains, misuses or misappropriates our chops and seals or other controlling intangible assets for whatever reason, we could experience disruption to our normal business operations. We may have to take corporate or legal action, which could involve significant time and resources to resolve and divert management from our operations.

 

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The PRC regulation of loans and direct investments in PRC subsidiaries by offshore holding companies and governmental control of currency conversion may delay us from using working capital to make loan or additional capital contributions to our PRC subsidiaries, our affiliated entities, which could harm our liquidity and our ability to fund and expand our business.

 

From time to time in the ordinary course of our business, we may (i) make loans to our PRC subsidiaries; (ii) make additional capital contributions to our PRC subsidiaries; (iii) establish new PRC subsidiaries and make capital contributions to them; and (iv) acquire offshore entities with business operations in the PRC in an offshore transaction. However, most of these uses are subject to PRC regulations and approvals. For example:

 

  loans by us to our PRC subsidiaries cannot exceed a statutory limit and shall be filed with the State Administration of Foreign Exchange of the PRC, or the SAFE, after the loan agreement is signed and at least three business days before the borrower makes any drawdown under the loan; and

 

  capital contributions to our PRC subsidiaries shall be filed with the MOFCOM and SAMR or their local counterparts and also be registered with the local banks authorized by the SAFE.

 

Currently, there is no statutory limit to the amount of funding we can provide to our PRC subsidiaries through capital contributions. However, the maximum amount we can loan to our PRC subsidiaries is subject to statutory limits. According to the current PRC laws and regulations, we can provide funding to our PRC subsidiaries through loans of up to either (i) the amount of the difference between the respective registered total investment amount and the registered capital of each of our PRC subsidiaries, or the Total Investment and Registered Capital Balance; or (ii) two and a half times, or the then applicable statutory multiple, of the amount of their respective net assets, calculated in accordance with PRC GAAP, or the Net Assets Limit, at our election. If we choose to make a loan to a PRC subsidiary based on the Total Investment and Registered Capital Balance as of the date of this prospectus, subject to the completion of statutory procedures with the relevant government authorities and banks, we may extend a loan with an estimated aggregate maximum amount of approximately RMB160.0 million to our PRC subsidiaries. We may increase the Total Investment and Registered Capital Balance of our PRC subsidiaries, which is subject to governmental procedures and may require a PRC subsidiary to increase its registered capital at the same time. If we choose to make a loan to a PRC entity based on its Net Assets Limit, the maximum amount we would be able to loan to the relevant PRC entity would depend on the relevant entity’s net assets and the applicable statutory multiple at the time of calculation. As of the date of this prospectus, our PRC subsidiaries have negative net assets, and we cannot provide loans to them using the Net Assets Limit method.

 

In addition, on March 30, 2015, the SAFE promulgated the Circular on Reforming Management of the Settlement of Foreign Exchange Capital of Foreign-Invested Enterprises, or Circular 19, a regulation regarding the conversion by a foreign-invested company of its capital contribution in foreign currency into Renminbi. Circular 19 launched a nationwide reform of the administration of the settlement of the foreign exchange capital of foreign-invested enterprises and allows foreign-invested enterprises to settle their foreign exchange capital at their discretion, but continues to prohibit foreign-invested enterprises from using the Renminbi fund converted from their foreign exchange capital for expenditures beyond their business scopes. In June 2016, the SAFE promulgated the Notice on Reforming and Standardizing the Administrative Provisions on Capital Account Foreign Exchange Settlement, or Circular 16. Circular 19 and Circular 16 continue to prohibit foreign-invested enterprises from, among other things, using the Renminbi fund converted from its foreign exchange capital for expenditure beyond its business scope, investment and financing (except for security investment or guarantee products issued by bank), providing loans to non-affiliated enterprises or constructing or purchasing real estate not for self-use. On October 23, 2019, the SAFE issued the Notice of the State Administration of Foreign Exchange on Further Facilitating Cross-border Trade and Investment, which, among other things, expanded the use of foreign exchange capital to domestic equity investment area. Non-investment foreign-funded enterprises are allowed to lawfully make domestic equity investments by using their capital on the premise of no violation of prevailing special administrative measures for access of foreign investments (negative list) and the authenticity and compliance with the regulations of domestic investment projects.

 

We expect that the PRC laws and regulations may continue to limit our use of our working capital. We cannot assure you that we will be able to obtain these government registrations or approvals on a timely basis, if at all, with respect to future loans or capital contributions by us to our entities in the PRC. If we fail to receive such registrations or approvals, our ability to capitalize our PRC operations may be negatively affected, which could adversely affect our liquidity and our ability to fund and expand our business.

 

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Risks Related to Doing Business in China

 

Adverse changes in the PRC economic, political and social conditions as well as laws and government policies, may materially and adversely affect our business, financial condition, results of operations and growth prospects.

 

Substantially all of our operations are conducted in China, and substantially all of our revenue is derived from China. Accordingly, our business, prospects, financial condition and results of operations are subject, to a significant extent, to economic, political and legal developments in China.

 

The economic, political and social conditions in the PRC differ from those in more developed countries in many respects, including structure, government involvement, level of development, growth rate, control of foreign exchange, capital reinvestment, allocation of resources, rate of inflation and trade balance position. Before the adoption of its reform and opening up policies in 1978, the PRC was primarily a planned economy. In recent years, the PRC government has been reforming the PRC economic system and government structure. For example, the PRC government has implemented economic reforms and measures emphasizing the utilization of market forces in the development of the PRC economy in the past three decades. These reforms have resulted in significant economic growth and social prospects. Economic reform measures, however, may be adjusted, modified or applied inconsistently from industry to industry or across different regions of the country.

 

We cannot predict whether the resulting changes will have any adverse effect on our current or future business, financial condition or results of operations. Despite these economic reforms and measures, the PRC government continues to play a significant role in regulating industrial development, allocation of natural and other resources, production, pricing and management of currency, and there can be no assurance that the PRC government will continue to pursue a policy of economic reform or that the direction of reform will continue to be market friendly.

 

Our ability to successfully expand our business operations in the PRC depends on a number of factors, including macro-economic and other market conditions, and credit availability from lending institutions. Stricter credit or lending policies in the PRC may affect our customers’ consumer credit or consumer banking business, and may also affect our ability to obtain external financing, which may reduce our ability to implement our expansion strategies. We cannot assure you that the PRC government will not implement any additional measures to tighten credit or lending standards, or that, if any such measure is implemented, it will not adversely affect our future results of operations or profitability.

 

Demand for our services and our business, financial condition and results of operations may be materially and adversely affected by the following factors:

 

  political instability or changes in social conditions of the PRC;

 

  changes in laws, regulations, and administrative directives or the interpretation thereof;

 

  measures which may be introduced to control inflation or deflation; and

 

  measures changes in the rate or method of taxation.

 

These factors are affected by a number of variables, which are beyond our control.

 

Additionally, the outbreak of COVID-19 may have a material adverse impact on the overall economic outlook, economic growth and business sentiment in China (see “— Risks Related to Our Business and Operations — Any natural catastrophes, severe weather conditions, health epidemics, including COVID-19, and other extraordinary events could severely disrupt our business operations” and “Recent Developments” in this prospectus), and may in turn influence the operation of our business.

 

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The legal system of the PRC is not fully developed and there are inherent uncertainties that may affect the protection afforded to our business and our shareholders.

 

Our business and operations in the PRC are governed by the PRC legal system that is based on written statutes. Prior court decisions may be cited for reference but have limited precedential value. Since the late 1970s, the PRC government has promulgated laws and regulations dealing with economic matters such as foreign investment, corporate organization and governance, commerce, taxation and trade. However, as these laws and regulations are relatively new and continue to evolve, interpretation and enforcement of these laws and regulations involve significant uncertainties and different degrees of inconsistency. Some of the laws and regulations are still in the developmental stage and are therefore subject to policy changes. Many laws, regulations, policies and legal requirements have only been recently adopted by PRC central or local government agencies, and their implementation, interpretation and enforcement may involve uncertainty due to the lack of established practice available for reference. We cannot predict the effect of future legal developments in the PRC, including the promulgation of new laws, changes in existing laws or their interpretation or enforcement, or the pre-emption of local regulations by national laws. As a result, there is substantial uncertainty as to the legal protection available to us and our shareholders. Moreover, due to the limited volume of published cases and the non-binding nature of prior court decisions, the outcome of dispute resolution may not be as consistent or predictable as in other more developed jurisdictions, which may limit the legal protection available to us. In addition, any litigation in the PRC may be protracted and result in substantial costs and the diversion of resources and management attention.

 

PRC governmental control and restrictions on the convertibility of Renminbi may materially and adversely affect the value of your investments.

 

The PRC government imposes controls and restrictions on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of currency out of the PRC. The majority of our income is received in Renminbi and shortages in the availability of foreign currencies may restrict our ability to pay dividends or other payments, or otherwise satisfy their foreign currency denominated obligations, if any. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related transactions, can be made in foreign currencies without prior approval from SAFE, by complying with certain procedural requirements. Approval from appropriate government authorities is required where Renminbi is to be converted into foreign currency and remitted out of the PRC to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may, at its discretion, impose restrictions on access to foreign currencies for current account transactions and if this occurs in the future, we may not be able to pay dividends in foreign currencies to our shareholders.

 

The enforcement of the PRC Labor Contract Law and other labor-related regulations in the PRC may adversely affect our business and our results of operations.

 

The PRC Labor Contract Law became effective and was implemented on January 1, 2008, which was amended on December 28, 2012. It has reinforced the protection of employees who, under the PRC Labor Contract Law, have the right, among others, to have written labor contracts, to enter into labor contracts with no fixed terms under certain circumstances, to receive overtime wages and to terminate or alter terms in labor contracts. According to the PRC Social Insurance Law, which became effective on July 1, 2011 and was amended on December 29, 2018, and the Administrative Regulations on the Housing Funds, which became effective on April 3, 1999 and was amended on March 24, 2002 and March 24, 2019, companies operating in China are required to participate in pension insurance, work-related injury insurance, medical insurance, unemployment insurance, maternity insurance and housing funds plans, and the employers must pay all or a portion of the social insurance premiums and housing funds for their employees.

 

As these laws and regulations designed to enhance labor protection, we expect our labor costs will continue to increase. In addition, since the interpretation and implementation of these laws and regulations are still evolving, our employment practice may not at all times be deemed in compliance with the new laws and regulations. If we are subject to severe penalties or incur significant liabilities in connection with labor disputes or investigations, our business and results of operations may be adversely affected.

 

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Regulation and censorship of information disseminated over the internet in China may adversely affect our business and reputation and subject us to liability for information displayed on our website.

 

The PRC government has adopted regulations governing internet access and the distribution of news and other information over the internet. Under these regulations, internet content providers are prohibited from posting or displaying over the internet content that, among other things, violates PRC laws and regulations, impairs the national dignity of China, or is reactionary, obscene, superstitious, fraudulent or defamatory. Failure to comply with these requirements may result in the revocation of licenses to provide Internet content and other licenses, and the closure of the concerned websites. The website operator may also be held liable for such censored information displayed on or linked to the websites. If our websites are found to be in violation of any such requirements, we may be penalized by relevant authorities, and our operations or reputation could be adversely affected.

 

PRC regulations relating to foreign exchange registration of overseas investment by PRC residents may subject our PRC resident beneficial owners or our PRC subsidiaries to liability or penalties, limit our ability to inject capital into the PRC subsidiaries, limit PRC subsidiaries’ ability to increase their registered capital or distribute profits to us, or may otherwise adversely affect us.

 

The SAFE has promulgated certain regulations, including the Notice on Relevant Issues Relating to Foreign Exchange Control on Domestic Residents’ Investment and Financing and Round-Trip Investment through Special Purpose Vehicles, or Circular 37, effective on July 4, 2014, and its appendices, that require PRC residents, including PRC institutions and individuals, to register with local branches of the SAFE in connection with their direct establishment or indirect control of an offshore entity for the purpose of overseas investment and financing with such PRC residents’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests, referred to in Circular 37 as a “special purpose vehicle.” The term “control” under Circular 37 is broadly defined as the operation rights, beneficiary rights or decision-making rights acquired by the PRC residents in the offshore special purpose vehicles by such means as acquisition, trust, proxy, voting rights, repurchase, convertible bonds or other arrangements. Circular 37 further requires amendment to the registration in the event of any significant changes with respect to the special purpose vehicle, such as decrease of capital contributed by PRC individuals, share transfer or exchange, merger, division or other material event. In the event that a PRC shareholder holding interests in a special purpose vehicle fails to fulfill the required registration with the SAFE, the PRC subsidiaries of that special purpose vehicle may be prohibited from making profit distributions to the offshore parent and from carrying out subsequent cross-border foreign exchange activities. Further, failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for foreign exchange evasion.

 

On February 13, 2015, the SAFE promulgated a Notice on Further Simplifying and Improving Foreign Exchange Administration Policy on Direct Investment, or Notice 13, which became effective on June 1, 2015. Under Notice 13, applications for foreign exchange registration of inbound foreign direct investments and outbound overseas direct investments, including those required under Circular 37 will be directly reviewed and handled by banks, and the SAFE and its branches shall perform indirect regulation over the direct investment-related foreign exchange registration via banks.

 

These regulations apply to our direct and indirect shareholders who are PRC residents and may apply to any offshore acquisitions or share transfers that we make in the future if our shares are issued to PRC residents. However, in practice, different local SAFE branches may have different views and procedures on the application and implementation of SAFE regulations, and since Circular 37 was recently issued, there remains uncertainty with respect to its implementation.

 

As of the date of this prospectus, all PRC residents known to us that currently hold direct or indirect interests in our company have completed the necessary registrations as required by Circular 37. We cannot assure you that any shareholders or beneficial owners of our company who are PRC residents will be able to successfully complete the registration or update the registration of their direct and indirect equity interest as required in the future. If any of them fail to make or update the registration, our PRC subsidiaries could be subject to fines and legal penalties, and the SAFE could restrict our cross-border investment activities and our foreign exchange activities, including restricting our PRC subsidiaries’ ability to distribute dividends to, or obtain loans denominated in foreign currencies from, our company, or prevent us from contributing additional capital into our PRC subsidiaries. As a result, our business operations and our ability to make distributions to you could be materially and adversely affected.

 

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If we are classified as a PRC “resident enterprise,” we could be subject to PRC income tax at the rate of 25% on our worldwide income, and holders of our ordinary shares may be subject to a PRC withholding tax upon the dividends payable and upon gain from the sale of our ordinary shares.

 

Under the Enterprise Income Tax Law, or EIT Law, and its implementation rules, if an enterprise incorporated outside the PRC has its “de facto management body” located within the PRC, such enterprise may be recognized as a PRC tax resident enterprise and be subject to the unified enterprise income tax rate of 25% on its worldwide income. Under the implementation rules for the EIT Law, “de facto management body” is defined as the body that has material and overall management control over the business, personnel, accounts and properties of an enterprise. The SAT issued the Notice regarding the Determination of Chinese-Controlled Overseas Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, or SAT Circular 82, on April 22, 2009. SAT Circular 82 provides certain specific criteria for determining whether the “de facto management body” of a Chinese-controlled offshore incorporated enterprise is located inside China, stating that only a company meeting all the criteria would be deemed having its de facto management body within China. One of the criteria is that a company’s major assets, accounting books and minutes and files of its board and shareholders’ meetings are located or kept in the PRC. In addition, the SAT issued a bulletin on July 27, 2011, effective from September 1, 2011, providing further guidance on the implementation of SAT Circular 82. This bulletin clarifies matters including residence status determination, post-determination administration and competent tax authorities. Although both SAT Circular 82 and the bulletin only apply to offshore enterprises controlled by PRC enterprises and there are currently no further detailed rules or precedents governing the procedures and specific criteria for determining “de facto management body” for companies like us controlled by PRC individuals, the determination criteria set forth in SAT Circular 82 and the bulletin may reflect the SAT’s general position on how the “de facto management body” test should be applied in determining the tax residency status of offshore enterprises and how the administration measures should be implemented with respect to such enterprises, regardless of whether they are controlled by PRC enterprises or PRC individuals.

 

Since all of our senior management members reside in the PRC, we may be recognized as a PRC tax resident enterprise for the purpose of the EIT Law and therefore would be subject to PRC income tax at the rate of 25% on our worldwide income. In such event, our income tax expenses may increase significantly and its net profit and profit margin could be materially and adversely affected.

 

Under the EIT Law, foreign enterprise shareholders of a PRC resident enterprise will be subject to a 10% (or 20% for an individual) withholding tax upon dividends received from the PRC resident enterprise and on gain recognized with respect to the sale of shares of the resident enterprise, if such amounts are deemed to be derived from sources within the PRC. Accordingly, if we are treated as a PRC resident enterprise, holders of our ordinary shares may be subject to a 10% (or 20% for an individual) withholding tax upon dividends received from us and on gain recognized with respect to the sale of our ordinary shares, unless such withholding tax is reduced by an applicable income tax treaty between China and the jurisdiction of the holder. Any such tax may reduce the returns on your investment in our ordinary shares.

 

We and our shareholders face uncertainties with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.

 

On February 3, 2015, the SAT issued the Announcement on Several Issues Concerning the Enterprise Income Tax on Indirect Transfer of Assets by Non-Resident Enterprises, or the SAT Bulletin 7. The SAT Bulletin 7 extends its tax jurisdiction to transactions involving the transfer of taxable assets through offshore transfer of a foreign intermediate holding company. In addition, SAT Bulletin 7 has introduced safe harbors for internal group restructurings and the purchase and sale of equity through a public securities market. SAT Bulletin 7 also brings challenges to both foreign transferor and transferee (or other person who is obligated to pay for the transfer) of taxable assets. On October 17, 2017, the SAT issued the Announcement on Issues Relating to Withholding at Source of Income Tax of Non-resident Enterprises, or the SAT Bulletin 37, which came into effect on December 1, 2017. The SAT Bulletin 37 further clarifies the practice and procedure of the withholding of non-resident enterprise income tax.

 

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Where a non-resident enterprise transfers taxable assets indirectly by disposing of the equity interests of an overseas holding company, which is an Indirect Transfer, the non-resident enterprise as either transferor or transferee, or the PRC entity that directly owns the taxable assets, may report such Indirect Transfer to the relevant tax authority. Using a “substance over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such Indirect Transfer may be subject to PRC enterprise income tax, and the transferee or other person who is obligated to pay for the transfer is obligated to withhold the applicable taxes, currently at a rate of 10% for the transfer of equity interests in a PRC resident enterprise. Both the transferor and the transferee may be subject to penalties under PRC tax laws if the transferee fails to withhold the taxes and the transferor fails to pay the taxes.

 

We face uncertainties as to the reporting and other implications of certain past and future transactions where PRC taxable assets are involved, such as offshore restructuring, sale of the shares in our offshore subsidiaries and investments. We may be subject to filing obligations or taxed if we are the transferor in such transactions, and may be subject to withholding obligations if we are the transferee in such transactions, under SAT Bulletin 7 and/or SAT Bulletin 37. For transfer of shares in us that do not qualify for the public securities market safe harbor by investors who are non-PRC resident enterprises, our PRC subsidiaries may be requested to assist in the filing under SAT Bulletin 7 and/or SAT Bulletin 37. As a result, we, our non-resident enterprises and PRC subsidiaries may be required to expend valuable resources to comply with SAT Bulletin 7 and/or SAT Bulletin 37 or to request the relevant transferors from whom we purchase taxable assets to comply with these circulars, or to establish that we and our non-resident enterprises should not be taxed under these circulars, which may have a material adverse effect on our financial condition and results of operations.

 

Employee participants in our share incentive plans who are PRC citizens may be required to register with the SAFE. We also face regulatory uncertainties in the PRC that could restrict our ability to grant share incentive awards to our employees who are PRC citizens.

 

Pursuant to the Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in a Stock Incentive Plan of an Overseas Publicly-Listed Company issued by the SAFE on February 15, 2012, or Circular 7, the PRC citizens and non-PRC citizens who reside in China for a continuous period of not less than one year who participate in any stock incentive plan of an overseas publicly listed company, subject to a few exceptions, are required to register with the SAFE through a domestic qualified agent, which could be the PRC subsidiaries of such overseas listed company, and complete certain other procedures. Such PRC individuals’ foreign exchange income received from the sale of shares and dividends distributed by the overseas listed company and any other income shall be fully remitted into a collective foreign currency account in the PRC opened and managed by the PRC domestic agent before distribution to such individuals. In addition, such domestic individuals must also retain an overseas entrusted institution to handle matters in connection with their exercise of share options and their purchase and sale of shares. The PRC domestic agent also needs to update registration with the SAFE within three months after the overseas-listed company materially changes its share incentive plan or make any new share incentive plans.

 

From time to time, we will need to apply for or update its registration with the SAFE or its local branches on behalf of employees who receive options or other equity-based incentive grants under our share incentive plans or material changes in our share incentive plans. However, we may not always be able to make applications or update its registration on behalf of employees in compliance with Circular 7, nor can we ensure you that such applications or update of registration will be successful. If we or the participants of its share incentive plans who are PRC citizens fail to comply with Circular 7, we and/or such participants of our share incentive plans may be subject to fines and legal sanctions, there may be additional restrictions on the ability of such participants to exercise their share options or remit proceeds gained from sale of their shares into the PRC, and we may be prevented from further granting share incentive awards under its share incentive plans to employees who are PRC citizens.

 

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You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing actions in the PRC against us or our management named in the prospectus based on foreign laws.

 

We are a company incorporated under the laws of the Cayman Islands. We conduct substantially all of our operations in the PRC and substantially all of our assets are located in PRC. In addition, all our senior executive officers reside within the PRC for a significant portion of the time and most are PRC nationals. As a result, it may be difficult for our shareholders to effect service of process upon us or those persons inside the PRC. In addition, the PRC does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts with the Cayman Islands and many other countries and regions. Therefore, recognition and enforcement in the PRC of judgments of a court in any of these non-PRC jurisdictions in relation to any matter not subject to a binding arbitration provision may be difficult or impossible.

 

Fluctuations in the value of the Renminbi could have a material and adverse effect on your investment.

 

The change in value of the Renminbi against the U.S. dollar and other currencies is affected by various factors such as changes in political and economic conditions in the PRC. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to the U.S. dollar, and the Renminbi appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010, this appreciation was halted and the exchange rate between the Renminbi and the U.S. dollar remained within a narrow band. Since June 2010, the Renminbi has fluctuated against the U.S. dollar, at times significantly and unpredictably. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and the U.S. dollar in the future.

 

Any significant appreciation or revaluation of the Renminbi may have a material adverse effect on the value of, and any dividends payable on, our securities in foreign currency terms. More specifically, if we decide to convert our Renminbi into U.S. dollars, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount available to us. To the extent that we need to convert U.S. dollars we receive from our initial public offering into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive from the conversion. In addition, appreciation or depreciation in the exchange rate of the Renminbi to the U.S. dollar could materially and adversely affect the price of our securities in U.S. dollars without giving effect to any underlying change in our business or results of operations.

 

Risks Related to Our Ordinary Shares

 

Resales of our ordinary shares could depress the market price of our ordinary shares.

 

There may be a large number of shares of ordinary shares sold in the market in the near future. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our ordinary shares. We are registering the offer and resale by the several selling securityholders of 44,330,947 ordinary shares, including ordinary shares issuable upon the exercise of outstanding warrants and units (including warrants issuable upon the exercise of outstanding unit purchase options). We had 53,292,842 ordinary shares outstanding as of July 10, 2020. Such sales of ordinary shares or the perception of such sales may depress the market price of our ordinary shares.

 

Our share price may be volatile and could decline substantially.

 

The market price of our ordinary shares may be volatile, both because of actual and perceived changes in the Company’s financial results and prospects, and because of general volatility in the stock market. The factors that could cause fluctuations in our share price may include, among other factors discussed in this section, the following:

 

  actual or anticipated variations in the financial results and prospects of the Company or other companies in the retail business;

 

  changes in financial estimates by research analysts;

 

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  changes in the market valuations of other education technology companies;

 

  announcements by us or our competitors of new education services, expansions, investments, acquisitions, strategic partnerships or joint ventures;

 

  mergers or other business combinations involving us;

 

  additions and departures of key personnel and senior management;

 

  changes in accounting principles;

 

  the passage of legislation or other developments affecting us or our industry;

 

  the trading volume of our ordinary shares in the public market;

 

  the release of lockup, escrow or other transfer restrictions on our outstanding equity securities or sales of additional equity securities;

 

  potential litigation or regulatory investigations;

 

  changes in economic conditions, including fluctuations in global and Chinese economies;

 

  financial market conditions;

 

  natural disasters, terrorist acts, acts of war or periods of civil unrest; and

 

  the realization of some or all of the risks described in this section.

 

In addition, the stock markets have experienced significant price and trading volume fluctuations from time to time, and the market prices of the equity securities of retailers have been extremely volatile and are sometimes subject to sharp price and trading volume changes. These broad market fluctuations may materially and adversely affect the market price of our ordinary shares.

 

We may issue additional ordinary shares or other equity securities without your approval, which would dilute your ownership interests and may depress the market price of our ordinary shares.

 

Currently, we will have warrants outstanding to purchase up to an aggregate of 12,705,000 ordinary shares and may issue an aggregate of up to an additional 11,000,000 ordinary shares to the former Meten shareholders upon achievement of milestone targets as described in this prospectus. We may also issue units or our other securities in connection with the Financing (as defined below) and the Azimut Investment (as defined below). We will also have the ability to issue additional shares under the ESOP Plan. We may also issue additional ordinary shares or other equity securities of equal or senior rank in the future for any reason or in connection with, among other things, future acquisitions or repayment of outstanding indebtedness, without shareholder approval, in a number of circumstances.

 

Our issuance of additional ordinary shares or other equity securities of equal or senior rank would have the following effects:

 

  our existing shareholders’ proportionate ownership interest in us will decrease;

 

  the amount of cash available per share, including for payment of dividends in the future, may decrease;

 

  the relative voting strength of each previously outstanding share may be diminished; and

 

  the market price of our ordinary shares may decline.

 

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We are not expected to pay dividends on its shares of ordinary shares in the foreseeable future.

 

We are not expected to pay dividends on its shares of ordinary shares in the foreseeable future. Instead, for the foreseeable future, it is expected that we will continue to retain any earnings to finance the development and expansion of its business, and not to pay any cash dividends on its ordinary shares. Consequently, you should not rely on an investment in the Company as a source for any future dividend income.

 

Our board of directors has complete discretion as to whether to distribute dividends, subject to applicable laws. Even if our board of directors decides to declare and pay dividends, the timing, amount and form of future dividends, if any, will depend on, among other things, our future results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries, our financial condition, contractual restrictions and other factors deemed relevant by our board of directors. Accordingly, the return on your investment in our ordinary shares will likely depend entirely upon any future price appreciation of our ordinary shares. We cannot guarantee that our ordinary shares will appreciate in value or even maintain the price at which you purchased the ordinary shares. You may not realize a return on your investment in our ordinary shares and you may even lose your entire investment in our ordinary shares.

 

We may become a passive foreign investment company, which could result in adverse United States federal income tax consequences to United States investors.

 

Based on the projected composition of our income and valuation of our assets, including goodwill, we are not expected to be a passive foreign investment company (“PFIC”) for its current taxable year, and we do not expect to become one in the future, although there can be no assurance in this regard. Although we do not expect to be a PFIC, it is not entirely clear how the contractual arrangements between our Company and the VIEs will be treated for purposes of the PFIC rules. If it were determined that we do not own the stock of the VIEs for U.S. federal income tax purposes (for instance, because the relevant PRC authorities do not respect these arrangements), we may be treated as a PFIC. See “Taxation — U.S. Holders — Passive Foreign Investment Company.” If we are or were to become a PFIC, such characterization could result in adverse United States federal income tax consequences to you if you are a U.S. investor. For example, if we are a PFIC, its U.S. investors will become subject to increased tax liabilities under U.S. federal income tax laws and regulations and will become subject to burdensome reporting requirements. We cannot assure you that we will not be a PFIC for our current taxable year or any future taxable year.

 

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about us or our business, our ordinary share price and trading volume could decline.

 

The trading market for our ordinary shares will depend in part on the research and reports that securities or industry analysts publish about us or our business. Securities and industry analysts do not currently, and may never, publish research on us If no securities or industry analysts commence coverage of our Company, the trading price for its ordinary shares would likely be negatively impacted. In the event securities or industry analysts initiate coverage, if one or more of the analysts who cover us downgrade its securities or publish inaccurate or unfavorable research about its business, its stock price would likely decline. If one or more of these analysts cease coverage of our Company or fail to publish reports on our Company, demand for its ordinary shares could decrease, which might cause its ordinary share price and trading volume to decline.

 

Our amended and restated memorandum and articles of association contains anti-takeover provisions that could have a material adverse effect on the rights of holders of our ordinary shares.

 

Our amended and restated memorandum and articles of association include provisions to limit the ability of others to acquire control of us or cause us to engage in change-of-control transactions. These provisions could have the effect of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of us in a tender offer or similar transaction. For example, our board of directors has the authority, subject to any resolution of the shareholders to the contrary, to issue preference shares in one or more series and to fix their designations, powers, preferences, privileges, and relative participating, optional or special rights and the qualifications, limitations or restrictions, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights associated with our ordinary shares. Preference shares could be issued quickly with terms calculated to delay or prevent a change in control of the Company or make removal of management more difficult. If our board of directors decides to issue preference shares, the price of our ordinary shares may fall and the voting and other rights of the holders of our ordinary shares may be materially and adversely affected.

 

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You may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited, because we were formed under Cayman Islands law.

 

We are an exempted company incorporated under the laws of the Cayman Islands. Our corporate affairs are governed by our memorandum and articles of association, the Companies Law of the Cayman Islands and the common law of the Cayman Islands. The rights of our shareholders to take action against our directors, actions by our minority shareholders and the fiduciary duties of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedents in the Cayman Islands as well as from the common law of England, the decisions of whose courts are of persuasive authority, but are not binding, on a court in the Cayman Islands. The rights of our shareholders and the fiduciary duties of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedents in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States. Some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States.

 

Shareholders of Cayman Islands exempted companies have no general rights under the Cayman Islands law to inspect corporate records or to obtain copies of lists of shareholders of these companies. Our directors have the discretion under our amended and restated memorandum and articles of association to determine whether or not, and under what conditions, our corporate records may be inspected by shareholders, but are not obliged to make them available to shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.

 

Certain corporate governance practices in the Cayman Islands differ significantly from requirements for companies incorporated in other jurisdictions such as the U.S. To the extent we choose to follow home country practice, shareholders may be afforded less protection than they otherwise would have under rules and regulations applicable to U.S. domestic issuers.

 

The Cayman Islands courts are also unlikely (i) to recognize or enforce against us judgments of courts of the United States based on certain civil liability provisions of U.S. securities laws, or (ii) to impose liabilities against us, in original actions brought in the Cayman Islands, based on certain civil liability provisions of U.S. securities laws that are penal in nature.

 

There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the courts of the Cayman Islands will in certain circumstances recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits.

 

As a result of all of the above, our shareholders may have more difficulty in protecting their interests in the face of actions taken by our management, members of our board of directors or shareholders than they would as shareholders of a company incorporated in the United States.

 

Certain judgments obtained against us by our shareholders may not be enforceable.

 

We are a Cayman Islands company and all of its assets are located outside of the United States. All of our current operations are conducted in the PRC. In addition, the majority of our officers and directors are nationals and residents of countries other than the United States and all of their assets are located outside the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the United States in the event that you believe that your rights have been infringed under the U.S. federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of the PRC may render you unable to enforce a judgment against our assets or the assets of our directors and officers. For more information regarding the relevant laws of the Cayman Islands and the PRC.

 

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We are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions applicable to United States domestic public companies.

 

Because we are a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the securities rules and regulations in the United States that are applicable to U.S. domestic issuers, including:

 

  the rules under the Exchange Act requiring the filing of quarterly reports on Form 10-Q or current reports on Form 8-K with the SEC;

 

  the sections of the Exchange Act regulating the solicitation of proxies, consents, or authorizations in respect of a security registered under the Exchange Act;

 

  the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time; and

 

  the selective disclosure rules by issuers of material nonpublic information under Regulation FD.

 

We are required to file an annual report on Form 20-F within four months of the end of each fiscal year. In addition, we intend to publish our results on a quarterly basis through press releases, distributed pursuant to the rules and regulations of the Nasdaq. Press releases relating to financial results and material events will also be furnished to the SEC on Form 6-K. However, the information we are required to file with or furnish to the SEC will be less extensive and less timely compared to that required to be filed with the SEC by U.S. domestic issuers. As a result, you may not be afforded the same protections or information, which would be made available to you, were you investing in a U.S. domestic issuer.

 

As a company incorporated in the Cayman Islands, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from Nasdaq corporate governance listing standards; these practices may afford less protection to shareholders than they would enjoy if we complied fully with Nasdaq corporate governance listing standards.

 

As a Cayman Islands company listed on the Nasdaq, we are subject to Nasdaq corporate governance listing standards. However, the Nasdaq rules permit a foreign private issuer like us to follow the corporate governance practices of its home country. Certain corporate governance practices in the Cayman Islands, which is our home country, may differ significantly from Nasdaq corporate governance listing standards. A Cayman Islands company is not required to have annual general meetings. Shareholders of Cayman Islands exempted companies like us have no general rights under Cayman Islands law to inspect corporate records or to obtain copies of lists of shareholders of these companies. Our directors have discretion under our articles of association to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest. To the extent we choose to follow home country practice with respect to corporate governance matters such as the exemption from holding an annual general meeting pursuant to Nasdaq Rule 5620(a), our shareholders may be afforded less protection than they otherwise would under rules and regulations applicable to U.S. domestic issuers.

 

We will incur increased costs as a result of being a public company.

 

Since becoming a public company in March 2020, we have incurred, and expect to continue to incur, significant accounting, legal and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act, as well as rules subsequently implemented by the SEC and the Nasdaq, have detailed requirements concerning corporate governance practices of public companies, including Section 404 of the Sarbanes-Oxley Act of 2002 relating to internal controls over financial reporting. We expect these rules and regulations applicable to public companies to increase our accounting, legal and financial compliance costs and to make certain corporate activities more time-consuming and costly. Our management will be required to devote substantial time and attention to our public company reporting obligations and other compliance matters. We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. Our reporting and other compliance obligations as a public company may place a strain on our management, operational and financial resources and systems for the foreseeable future.

 

In the past, shareholders of a public company often brought securities class action suits against the company following periods of instability in the market price of that company’s securities. If we were involved in a class action suit, it could divert a significant amount of our management’s attention and other resources from our business and operations, which could harm our results of operations and require us to incur significant expenses to defend the suit. Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could have a material adverse effect on our financial condition and results of operations.

 

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USE OF PROCEEDS

 

We do not know whether the holders of the warrants or unit purchase options will exercise any of the warrants or options. If all of the outstanding warrants (including the Transferred Warrants) described in this prospectus are exercised in full, we will issue 12,705,000 ordinary shares and we will receive aggregate net proceeds of US$146,107,500. An additional US$3,000,000 potentially could be received from the exercise of the unit purchase options and US$2,875,000 from the exercise of the warrants included in the units issued thereby. We intend to use the proceeds from any exercise of the warrants for general corporate purposes.

 

The selling securityholders will receive all of the proceeds from the sale of any ordinary shares and warrants sold by them pursuant to this prospectus. We will not receive any proceeds from these sales. However, we will receive up to an aggregate of approximately $29.90 million from the exercise of Transferred Warrants, assuming the exercise in full of all of the Transferred Warrants for cash. There is no assurance that any of the Transferred Warrants will be exercised. We expect to use the net proceeds from the exercise of the Transferred Warrants for general corporate purposes.

 

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BUSINESS

 

History and Development of the Company

 

We were formed to serve as a holding company for Meten and EdtechX after consummation of the Mergers contemplated by the Merger Agreement. We, a Cayman Islands exempted company, were formed on September 27, 2019. Prior to the Mergers, we owned no material assets and did not operate any business. Meten’s principal executive office is located at 3rd Floor, Tower A, Tagen Knowledge & Innovation Center, 2nd Shenyun West Road, Nanshan District, Shenzhen, Guangdong Province 518000, The People’s Republic of China and our telephone number is +86 755 8294 5250.

 

On March 30, 2020, the parties consummated the Mergers. Immediately prior to the Mergers, the Azimut Investor invested US$20 million in EdtechX to purchase 2,000,000 units of EdtechX (with each unit consisting of one ordinary share and one warrant to purchase one ordinary share of EdtechX at a price of US$11.50 per share), which units converted into the same number of our units upon closing of the Mergers. Concurrently with the closing of the Mergers, our PIPE financing with two unaffiliated third-party investors, one of which is ITG Education, in an aggregate investment of US$12 million was completed on March 30, 2020.

 

Business Overview

 

We are a leading ELT service provider in China. China’s ELT market is segmented into general ELT, test-oriented ELT and after-school language training sectors. General ELT refers to services that help students improve their English language skills, particularly their English communication skills. Test-oriented ELT refers to services that help students achieve higher scores in specific standardized tests, including TOEFL, IELTS, GRE, SAT and other international standardized examinations. After-school language training refers to academic English language training services provided to K-12 students.

 

We offer a comprehensive ELT service portfolio comprising general adult ELT, junior ELT, overseas training services, online ELT and other English language-related services to students from a wide range of age groups. We conduct our business through our synergetic offline-online business model, which maximizes the compatibility within our business segments to scale up at relatively low costs. As of March 31, 2020, we had a nationwide offline learning center network of 128 self-operated learning centers (including 21 learning centers under the “ABC” brand of ABC Education Group, which we acquired in June 2018) covering 28 cities in 15 provinces, autonomous regions and municipalities in China, and 17 franchised learning centers (including four franchised learning centers under the “ABC” brand) covering 15 cities in 13 provinces and municipalities in China. Leveraging our experience gained from operating offline learning centers, we launched our online English learning platform “Likeshuo” in 2014 to further expand our service reach to a larger student base. As of March 31, 2020, we had approximately 1.4 million registered users on our “Likeshuo” platform and cumulatively over 257,000 paying users who purchased our online ELT courses or trial lessons. As of the same date, the cumulative number of student enrollments for our online ELT courses since 2014 was approximately 157,000 and we had delivered over 4.8 million accumulated course hours to our students online. We also have opened five experiential marketing stores in China to enable our prospective students to obtain in-person experience of live streaming online ELT courses delivered on our “Likeshuo” platform. We take advantage of our business model of combining our offline learning center network and online platform to deepen our market penetration and further develop our business.

 

Our qualified personnel, centralized management system driven by artificial intelligence, and technical expertise enable us to create a learning environment that caters to the specific learning demands of our students. We have a high-caliber teaching staff and an experienced content development team, who are supported by our centralized teaching and management systems to optimize our students’ learning experiences. As of March 31, 2020, we had a team of 2,257 full-time teachers, study advisors and teaching service staff, of which 1,059 were study advisors and teaching service staff for our offline and online businesses. As of the same date, we also had 246 full-time and part-time foreign teachers from English-speaking countries for our offline ELT services. We have a dedicated content development team focusing on developing practical and innovative education materials independently and in collaboration with our strategic partners. We have built highly centralized and scalable management systems to manage our teaching, marketing, finance and human resources activities across our offline and online businesses. In addition to our management systems, we have made significant investments in developing platforms and systems to support our teaching activities. For example, we utilize the intelligent tracking and learning coaching function of our artificial intelligence-driven teaching management systems to record and analyze our students’ real-time learning process and personalize the course content to address their learning needs.

 

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Our Education Services

 

We offer a comprehensive portfolio of English language learning and training services covering a full spectrum of student age groups, including general adult ELT, junior ELT, overseas training services, online ELT and other English language-related services. Our offline strong track record of helping students improve English language skills through high-quality courses has made our programs popular in China. From 2017 to 2019, we generated all our revenue from our operations in the PRC. The following table sets forth the breakdown of student enrollment at our self-operated learning centers by service type for the periods indicated.

 

   Student Enrollment(1)(2) 
   For the Year Ended 
December 31,
   For the Three Months Ended March 31, 
   2017   2018   2019   2020 
General adult ELT   49,784    56,060    49,974    1,883 
Junior ELT(3)       8,746(3)   15,057    1,426 
Overseas training services   8,645    8,885    8,775    674 
Online ELT(4)   24,299    44,586    49,639    8,198 
Total   82,728    118,277    123,445    12,181 

  

(1)The number of student enrollments represents the number of actual new sales contracts entered into between us and our students, excluding the number of refunded contracts and contracts with no revenue generated during a specified period of time.

 

(2)The number of student enrollments does not include the number of paying users of our “Shuangge English” App under our other English language-related services.

 

(3)We started to offer junior ELT in January 2018 and acquired ABC Education Group in June 2018. The number of student enrollments for the year ended December 31, 2018 also included the students enrolled with ABC Education Group.

 

(4)Student enrollment in our online ELT represents the total number of student enrollments on our online “Likeshuo” platform.

 

The following table sets forth the breakdown of our revenue and percentage by service type at our self-operated learning centers for the periods indicated.

 

   For the Year Ended December 31,   For the Three Months Ended March 31, 
   2017   2018   2019   2019   2020 
   RMB   %   RMB   %   RMB    %   RMB   %   RMB    % 
   (in thousands, except for percentages) 
General adult ELT(1)   785,480    68.3    903,756    63.5    783,988     54.1    171,220    54.4    55,819     30.7 
Overseas training services   228,294    19.9    223,601    15.7    203,677     14.1    46,703    14.8    22,290     12.3 
Online ELT                                                    
For adults   107,865    9.4    172,825    12.1    203,982     14.1    39,496    12.5    56,628     31.2 
For juniors           25,586    1.8    37,215     2.6    4,043    1.3    14,969     8.2 
For international test preparation   13,331    1.1    13,891    1.0    19,066     1.3    8,267    2.7    5,415     3.0 
Japanese                                    28     * 
Subtotal   121,196    10.5    212,302    14.9    260,263     18.0    51,806    16.5    77,040     42.4 
Junior ELT           65,490    4.6    167,924     11.6    39,432    12.5    23,512     13.0 
Other English language-related services(2)   14,751    1.3    19,085    1.3    32,047     2.2    5,642    1.8    2,920     1.6 
Total   1,149,721    100.0    1,424,234    100.0    1,447,899     100.0    314,803    100.0    181,581     100.0 

 

*Denotes percentages between (0.1%) and 0.1%.

 

(1)Includes revenue from international standardized test preparation, overseas study application services and short-term study abroad programs.

 

(2)Comprise primarily of (i) revenue from our “Shuangge English” App, which had over 26,787, 9,859 and 814 paying users for the year ended December 31, 2017, 2018, and 2019, respectively; and (ii) the franchise fees we received from our franchised learning centers under the “Meten” brand.

 

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General Adult ELT

 

Our general adult ELT is primarily designed for students aged over 15, which are offered at our learning centers across the PRC. For details on our learning centers, see “— Our Offline Network.” The courses mainly focus on helping students learn to use English for personal improvement or professional use through close and frequent interaction with our teachers in an engaging environment. General adult ELT is a major component of our business in terms of student enrollment and revenue. In 2017 and 2018, our general adult ELT segment had 49,784 and 56,060 students enrolled, respectively, and generated revenue of RMB785.5 million and RMB903.8 million, respectively. For the three months ended March 31, 2020, our general adult ELT had a total student enrollment of 1,883 and generated revenue of RMB55.8 million.

 

We primarily deliver courses in small class sizes, including one-on-one, one-on-four and one-on-ten classes. Since 2006, we have mainly offered (i) the practical spoken English curriculum, to help students master spoken English for personal improvement or professional use with a focus on practicing pronunciation, expanding vocabulary and improving communication skills; and (ii) the practical business English curriculum, which caters to young professionals by focusing on practicing English in numerous practical business settings. A general adult ELT session typically lasts for 55 minutes.

 

Starting in 2018, we have upgraded our general adult ELT by introducing the “Explore Curriculum,” which was built on our practical spoken English curriculum and expanded to cover more comprehensive ability training. The curriculum consists of our featured “4P courses,” which are language proficiency, presentation, pronunciation and project-based learning, to address the training of our students’ “4C” abilities, namely, communication ability, critical thinking ability, creativity and collaborative skills. The curriculum uses our effective teaching methodology and learning assessment technologies which are a hallmark of all of our courses. The “Explore Curriculum” was developed through our strategic collaboration with the NGL, a renowned global platform for English language teaching and learning. Beginning in 2018, we began gradually replacing the practical business English curriculum with our “Explore Curriculum” as part of our ongoing curriculum updates. As of May 2019, we had implemented the “Explore Curriculum” for our general adult ELT business at all of our self-operated learning centers and franchised learning centers.

 

Beginning in 2017, we began to offer dedicated English language training boot camps to newly enrolled or existing students under the general adult ELT program. These boot camps are typically two-day add-on courses to our traditional general adult English curricula, which provide students with the opportunities to concentrate on English language training and to socialize and communicate with each other about their personal English language learning experiences in a dedicated and centralized environment. Each boot camp generally enrolls 16 to 22 students and we charge students a training fee. As of March 31, 2020, we have established a boot camp in each of Guangdong Province, Sichuan Province and Jiangsu Province.

 

We rely on advanced technologies to effectively offer training services to our students. For general adult ELT, we combine our offline courses with online materials and customized assessments available in our self-developed PIES App to optimize students’ learning experiences. Our PIES App relies on artificial intelligence to provide online personalized learning and combines online learning with offline course offerings to improve students’ overall English language ability. In addition, we apply an intelligent tracking and learning assessment system to record and analyze the real-time learning dynamics of our students in order to improve our course arrangements for better learning experiences of our students.

 

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Overseas Training Services

 

We provide comprehensive overseas training services for students planning to take international standardized tests and/or study abroad. Such services comprise international standardized test preparation courses and overseas study application and study abroad services. In 2017 and 2018, the number of student enrollments in our overseas training services was approximately 8,645 and 8,885, respectively, which generated revenue of RMB228.3 million and RMB223.6 million, for the respective period. The number of student enrollments in our overseas training services was approximately 8,775 for the year ended on December 31, 2019, and we generated revenues of RMB203.7 million (US$29.3 million) for this business segment for the same period. For the three months ended March 31, 2020, we had approximately 674 students enrolled in our overseas training services, and we generated revenues or RMB22.3 million for the period.

 

International Standardized Test Preparation. We primarily focus on providing training services to students aged 12 and above who are preparing for TOEFL, IELTS, SAT and ACT, among other international standardized tests. We had an aggregate of more than 20,000 students enrolled since we introduced such services in 2011. Courses are offered in a one-on-one setting to address students’ individualized learning needs and achieve the optimal learning outcomes for each of our students. A test preparation course is typically two hours. We also utilize our self-developed iManager system, an intelligent analysis and evaluation system, to analyze students’ learning progress and collect student feedback to enhance the quality of our teaching services.

 

Overseas Study Services. We offer overseas study application services and short-term study abroad programs for students interested in obtaining overseas education. For students planning to obtain overseas education, we provide step-by-step overseas study application services, which cover consultation and planning, college major selection, preparation of application documents and visas, as well as campus tours. As of March 31, 2020, we had provided customized overseas study application services to approximately 3,801 students. We also leverage our self-developed iFuture system to help our students access our teachers for study consultation and keep track of their application process. We offer our short-term study abroad programs to expose students to the culture and language environment in various native English-speaking countries.

 

Online ELT

 

Leveraging our experience in providing offline ELT we initiated our online ELT platform, “Likeshuo,” in 2014 to further diversify and expand our ELT service lines and market coverage.

 

Through the “Likeshuo” platform, we offer online live streaming English courses on our websites or in our “Likeshuo” App accessible on mobile devices and tablets. We utilize the intelligent course scheduling function on our self-developed “Likeshuo” platform to give our online users the flexibility to design their own studying plans. An online ELT course hour is typically 45 minutes. As of March 31, 2020, we had approximately 1.4 million registered users on our “Likeshuo” platform. Since the launch of “Likeshuo” and up to March 31, 2020, we had cumulatively over 257,000 paying users who purchased our online ELT courses or trial lessons. In 2017, 2018 and 2019, the student enrollment on the “Likeshuo” platform reached 24,299, 44,586 and 49,639, respectively. In the first three months of 2020, we had 9,555 students enrolled on the “Likeshuo” platform. As of March 31, 2020, the cumulative number of student enrollments in our online ELT since 2014 was approximately 146,000 and we had delivered over 4.8 million accumulated course hours to our students online. For the paying users of our online English language business, the average course fee per student (also known as average spending) for the three months ended March 31, 2020 was approximately RMB2,210. Our revenue generated from online ELT was RMB121.2 million, RMB212.3 million, RMB260.3 million (US$37.4 million) and RMB77.0 million for the years ended December 31, 2017, 2018 and 2019 and the three months ended March 31, 2020, respectively. Certain refund policies are applicable to our online ELT. See “— Pricing and Refund Policies” for details.

 

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We currently offer four types of live streaming English language courses on our “Likeshuo” platform, including:

 

  English for Adults. We have developed a comprehensive lessons database covering more than 18 topics in over 5,000 real-life English-speaking scenarios to train students’ practical English language abilities. The curriculums are primarily designed for students aged over 15, which include basic English grammar, basic spelling skills, English speaking, English for travel and English for interviews. We primarily offer small classes with up to 15 students per class. Our high-caliber teaching staff for the online adult English language courses consists of local teachers and foreign teachers from native English-speaking countries, including the United States, the United Kingdom, Australia and Canada. We have established a deep pool of approximately 26,000 teachers who have registered with our “Likeshuo” platform and are accessible by our students online, including approximately 11,000 foreign teachers.

 

  Junior English. We have developed an online ELT program primarily designed for young learners aged five to 12, which allows them to learn English anytime anywhere via our website or in our “Likeshuo” App. We primarily offer small classes with up to four students per class. We engage foreign teachers from native English-speaking countries to deliver customized courses to help stimulate students’ interest in speaking and learning English. We generally use teaching materials from native English-speaking countries to improve young learners’ English proficiency by offering them the most relevant courses based on their ages and proficiencies;

 

  International Test Preparation. We provide online international test preparation training services for students who plan to take the SAT, ACT, TOEFL and IELTS, among other standardized tests. We primarily offer one-on-one online courses that are taught by our highly experienced teachers, although students can also choose to have courses taught in small classes of usually two to four students per class; and

  

  English for Professionals. We tailor this curriculum for people who want to improve their business-related English language skills. We typically offer one-on-one private lessons and incorporate up-to-date and practical real life English content, such as pop culture and various business activities to ensure students enjoy the lessons while increasing their competitiveness in their respective workplaces.

 

Junior ELT

 

In June 2018, we acquired ABC Education Group, a junior ELT service provider, which acquisition contributed 21 self-operated and four franchised learning centers to our national learning center network. Our junior ELT courses are mainly designed for students aged six to 18, with the goal of improving their communication ability, critical thinking and creativity by offering an integrated curriculum to cater to their different learning demands. For the three months ended March 31, 2020, we had a student enrollment of 1,426 in our junior ELT (including the student enrollment of ABC Education Group, which we acquired in June 2018). As of the date of this prospectus, we had 29 self-operated junior English language learning centers (including 21 learning centers we operated under the “ABC” brand) located in Beijing, Foshan, Zhongshan and Nanchang, among other cities in the PRC. For the year ended December 31, 2018 and 2019 and three months ended March 31, 2020, our revenue generated from junior ELT was RMB65.5 million, RMB167.9 million (US$24.1 million) and RMB23.5 million, respectively.

 

We offer various fundamental and value-added courses to improve our junior students’ English language skills, creative and critical thinking as well as appreciation of culture and values. We strategically limit the class size to ten to 15 students per class to ensure the quality of our course offerings and effectively engage our students in group discussion. A junior ELT course hour under the “Meten” brand typically is 55 minutes. An ELT course hour under the “ABC” brand is typically one hour.

 

Our fundamental courses under the “Meten” brand include Art of Language, Presentation and Project Management courses. In Art of Language courses, we aim to stimulate our students’ lasting curiosity and passion for English language learning by actively engaging them in various English speaking, listening and reading activities. In our Presentation courses and Project Management courses, we focus on practical training and improving our junior students’ problem-solving abilities, leadership skills and team working abilities in presentations and project-based discussions. We also provide complementary Pronunciation and Master Learner courses as value-added services for students who attend the fundamental courses to improve their English pronunciation skills and teach effective English learning technics. Our courses under the “ABC” brand aim to improve our students’ English listening, speaking, reading and writing abilities through various phonetic alphabet, pronunciation and presentation trainings in an engaging and interactive environment.

 

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In connection with our junior ELT business, we apply our self-developed MTS system to assess the results of course offerings for junior students. We have designed two user interfaces in our MTS App for students and parents for their respective access to the course content and information. Our MTS App is a student service portal through which students can access their files, online homework, collection of questions and communication between home and school to improve their learning experience. On our MTS App, students can access online English practice and tests assigned to them on the student interface and parents can view the course schedules and keep track of their children’s learning progress on the parent interface. Our MTS system also records students’ learning progress and incorporates comprehensive assessments to evaluate students’ improvement from the entry level to more advanced levels.

 

Japanese Language Training Services

 

To further broaden our service offering, in the first quarter of 2020, we launched online Japanese language training services through a subsidiary formed in partnership with a leading Japanese education brand in China, which caters predominantly to corporate customers. We delivered approximately 300 course hours to 60 corporate customers during the first quarter of 2020.

 

Other English Language-Related Services

 

In addition to the major ELT services we provide, we also offer English language-related services. We launched our “Shuangge English” App in 2014 to offer other English language-related services, which applies cutting-edge voice evaluation technology to improve students’ listening, speaking and reading abilities. Our “Shuangge English” App had reached over 2.45 million downloads as of March 31, 2020. We also receive franchise fees for our franchised learning centers. For details, please see “— Our Offline Network.”

 

Our Offline Network

 

We have established an extensive network of our self-operated and franchised learning centers to provide students with comprehensive education services.

 

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As of March 31, 2020, we have established a nationwide network of 145 learning centers covering 35 cities in 18 provinces, autonomous regions and municipalities in China. We directly operate 128 learning centers covering 28 cities in 15 provinces, autonomous regions and municipalities in China (including 21 learning centers under the “ABC” brand of ABC Education Group, which we acquired in June 2018), and have 17 franchised learning centers covering 15 cities in 13 provinces and municipalities in China (including four learning centers under the “ABC” brand). The following table sets forth the total number of our learning centers in each province, autonomous region and municipality we operate as of March 31, 2020.

 

Province, Autonomous Region and Municipality  Number of
Learning
Center
 
Self-operated learning centers under the “Meten” brand     
Guangdong(1)   44 
Jiangsu(1)   12 
Sichuan(1)   10 
Chongqing   7 
Hubei   4 
Beijing   6 
Zhejiang   4 
Anhui   3 
Yunnan   3 
Shaanxi   3 
Fujian   3 
Liaoning   3 
Jiangxi   2 
Hunan   3 
Subtotal   107 
Self-operated learning centers under the “ABC” brand     
Beijing   18 
Heilongjiang   3 
Sub-total   21 
Franchised learning centers under the “Meten” brand     
Beijing   1 
Hunan   2 
Fujian   2 
Zhejiang   1 
Jiangsu   2 
Liaoning   1 
Guangdong   2 
Heilongjiang   1 
Yunnan   1 
Subtotal   13 
Franchised learning centers under the “ABC” brand     
Hebei   1 
Hubei   1 
Ningxia   1 
Inner Mongolia   1 
Subtotal   4 
Total   145 

  

(1)Include a boot camp established under our general adult ELT business.

 

Our network has expanded from 94 self-operated learning centers as of January 1, 2017 to 132 self-operated learning centers as of December 31, 2019. However, due to the COVID-19 outbreak, we had 128 self-operated learning centers as of March 31, 2020. Our extensive network currently covers a majority of the major cities in the PRC and we plan to expand our coverage to other provincial and regional central cities with relatively high income per capita, developed local economy and high demand for English usage, and to tier two and tier three cities surrounding tier one cities where we have already established our learning centers.

 

We provide offline ELT at our learning centers. Each of our self-operated learning centers is managed by a principal, who is responsible for the daily operations, customer service and marketing activities of the learning center.

 

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Our self-operated learning centers are generally located in shopping centers and office buildings where there is frequent customer traffic. Each learning center generally occupies between 200 to 3,000 square meters in gross floor area, with functional areas including classrooms, office space, cafes, studios and student activity areas. We lease substantially all of our learning centers as of the date of this prospectus.

 

In addition to our self-operated learning centers, we utilize a franchise business model to increase our market penetration. We apply stringent standards in the selection of franchisees and require our franchisees to adopt our centralized management systems to monitor the daily operations at each of our franchised learning centers under our “Meten” brand in order to ensure the consistent delivery of high-quality services to our students. As of March 31, 2020, we had 13 franchised learning centers in operation under our “Meten” brand in nine provinces and municipalities in China.

 

We expect all of our “Meten” franchisees to be committed to striving for excellence in providing high-quality ELT services to students and to share our mission and vision. “Meten” franchised centers under our “Meten” brand are required to operate the franchise in strict accordance with our management rules and guidelines on course offerings, standardized recruitment, training and performance evaluation of teaching staff, as well as any other aspects of operation as we may request. We also provide our franchised centers with comprehensive training, marketing and technology support, assisting in formulating business strategies, as well as supervising staff performance on a regular basis to facilitate their operation. We believe our highly centralized management system greatly contributes to maintaining our well-established reputation and the quality of our services.

 

The “Meten” franchise agreements generally have a term of three years and we charge each of the “Meten” franchisees a one-time initial fee, a one-time design consulting fee, which varies based on actual site areas, and a certain percentage of the gross billings of the franchised learning centers under our “Meten” brand as royalty to be paid on a quarterly basis.

 

In addition, we acquired ABC Education Group in June 2018, which had four franchised learning centers that are operated under the “ABC” brand. These franchised learning centers are located in Ningxia, Hebei, Hubei and Inner Mongolia. We entered into franchise agreements with two of such franchisees in July and August 2018, and ABC Education Group entered into franchise agreements with the other two franchisees in January and May 2018. The term of the franchise agreement with our “ABC” branded franchisees is generally three years. These franchisees typically pay a fixed one-time royalty fee and brand deposit, and a one-time franchise fee.

 

Pricing and Refund Policies

 

For both our offline and online ELT businesses, the course fees vary based on the types, levels and lengths of the courses. We generally require our students to pay the full amount of the course fees after signing the relevant service contracts but prior to the commencement of the first training session. The course fees generally cover the courses to be delivered as stipulated in the relevant contracts. We offer certain discounts for students who enroll in multiple courses or multiple levels of the same course. We consider various factors when determining the applicable fees of both of our offline and online English course offerings, including, among other things, our course development and sales costs, the intensity of involvement of our teaching staff in connection with the delivery of the relevant courses, market competition, prospective increase of students in specific courses and expected development of customer preferences.

 

Students can use installment payment methods provided by accredited third-party financial institutions to pay for the relevant course and/or service fees. For the three months ended March 31, 2020, approximately 25.7% of our students have participated in such installment payment arrangement. Under such arrangement, a third-party financial institution provides an interest-free loan to a student and remits the course or service fee to us on behalf of the borrowing student to complete his/her purchase of the relevant course. The borrowing student is obligated to repay the loan to the financial institution in pre-agreed installments a period ranging from six months to 24 months. A transaction fee associated with such installment payment arrangement typically ranges from 4.4% to 10.8% of the total amount of such loan, depending on the length of the installment period, which is generally withheld by such financial institution prior to remitting the course/service fee to us.

 

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We have refund policies in place with respect to various aspects of our business. The refund policies applicable to our major offline and online ELT services are set forth as below:

 

  For our general adult ELT, we implemented in October 2016 a 20-day period of unconditional full refund to improve students’ experience and satisfaction with our services. Beginning in September 2019, we changed such unconditional refund period to 10 days. We typically allow (i) a full refund of the course fees within 20 days (10 days since September 2019) of the commencement of the course; and (ii) a refund of 70% of the course fees for uncompleted course hours if a student fails to complete more than 30% of the course hours after the first 20-day refund period (10 days since September 2019). Beginning in September 2019, if a student fails to complete more than 30% of the course hours after the first 10 days, we will refund the course fees for the uncompleted course hours, but will deduct from the refund a teaching service fee of RMB1,500 for each course level currently attended by such student (however, if the student has attended less than three hours of class at the current course level, no deduction shall be made). No refund is permitted if a student has completed over 30% of the course hours.

 

  For our junior ELT under the “Meten” brand, the first three classes are considered trial classes. We typically allow (i) a full refund of course fees if a student applies for a refund before completing the first three trial classes; (ii) a refund of the course fees for uncompleted course hours within the period after a student has completed three trial classes and before he or she fails to complete more than 30% of the course hours (less the cost of teaching materials); and (iii) no refund if a student has completed more 30% of the course hours.

 

  For our junior ELT under the “ABC” brand, we typically allow (i) a full refund of course fees for uncompleted course hours, after deducting RMB2,000 as an early contract termination fee, if a student requests a refund within 30 days of the commencement of the course; and (ii) no refund if a student requests a refund more than 30 days after the commencement of the course.

 

  For our international standardized test preparation courses, the first four classes are considered trial classes, and the two-month period following the date of the contract is considered the refund period. We typically allow (i) a full refund of course fees if a student requests a refund before completing the first four trial classes or within seven days from the date of the contract; (ii) a refund of the course fees for uncompleted course hours within the period after a student has completed four trial classes within the two-month refund period (less the cost of teaching materials); and (iii) no refund after the expiration of the two-month refund period.

 

  For courses offered on our “Likeshuo” platform, we typically allow a refund of the course fees for any undelivered course/service hours after deducting a platform operation charge associated with the delivering such courses/services online if a student requests a refund during the contract period. The refund policy on our “Likeshuo” platform also applies to online courses which have been transferred to courses to be taught live at our learning centers. We will review the refund requests based on our refund policy and accuracy of the student’s information and settle the certain refund within seven days upon the commencement of the refund request procedure.

 

Course Content Development

 

We emphasize the quality of our course materials, which we believe is crucial to the effectiveness of our teaching methods and to our students’ satisfaction with their learning experience. We have established an advanced education model which enables us to efficiently record and analyze the users’ learning process and improve our course offerings by adjusting the learning strategies applied to our students. We have a robust and centralized course development process, which is achieved by engaging our research and development staff as well as seeking strategic cooperation with experts in the English language education industry. We continually devote substantial resources to develop our curricula and course materials to ensure that our course offerings are attractive and up-to-date and address evolving market demands. We adhere to the principle of “learning is for using” to develop not only the language ability of our students, but also their problem-solving skills, information processing capabilities, creative thinking and writing skills. From time to time we also update our course materials to keep up with the evolving changes in international standardized tests. We also systematically maintain a comprehensive and growing database for standardized examination questions.

 

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We develop courses at our headquarters and our learning centers across the PRC adopt the curricula and course materials with certain customization to local requirements and demands. We have a dedicated content development team of approximately 165 staff as of March 31, 2020, which team actively participates in the research and development and updates of our products, course content and IT systems. All of the research and development team members have solid education background and extensive teaching and research experience in the English language education field. As of March 31, 2020, approximately 55.8% of our research and development staff had a bachelor’s degree or above, and approximately 6.1% obtained a master’s degree or above.

 

Centralized Management

 

We utilize a centralized management system to consistently manage and supervise various aspects of our day-to-day operations covering our nationwide learning centers and “Likeshuo” platform. It enables us to have a holistic view of various aspects of our business operations, including, among others, course offerings, management of franchised learning centers, teacher recruitment and training, human resources, sales and marketing as well as accounting and finance.

 

Teaching service management. We have effectively adopted a technology-based management strategy to record and assess course offerings, teachers’ performance and students’ learning experiences. We have developed our CRM system and EME system to provide real-time support and precise analysis of our teachers’ performance in course offerings and the quality of follow-up services for our students throughout our network. For example, we have established a set of standardized evaluation procedures in the EME system to record and assess the performance of our teaching staff.

 

Management of franchised learning centers. We primarily focus on implementing our centralized management system consistently among all of our franchised learning centers in various stages to maintain our overall high-quality education service standards. We directly appoint senior management and supervise the recruitment of teaching staff at such franchised learning centers to maintain the consistency of our teaching quality at these learning centers. We also adopt strictly standardized course materials and curriculums at both our self-operated and franchised learning centers and regularly assess the operation at our franchised learning centers to maintain our well-recognized brand names and sustainable business development. We also set heightened standards and recruitment policies involving our teaching staff, and our franchise partners strictly implement such policies and provide comprehensive training to newly hired teaching staff.

 

Teacher recruitment and training. We benefit from our standardized teaching staff recruitment and training system, which allows us to apply the best practices in terms of allocation of high-quality teaching resources. We have established a number of stringent recruitment standards for different teaching positions among our learning centers and “Likeshuo” platform to cater to the varying needs of our students. We have devoted significant efforts to recruiting, training and evaluating our teachers and study advisors as part of the centralized management of our operations, which provides a solid foundation for our long-term business growth development. For details on recruiting, training and evaluating our teaching staff, see “— Our Teaching Staff.”

 

Sales and marketing. We have also adopted a standardized online and offline marketing strategies to recruit prospective students and enhance our reputation. For details, see “— Marketing and Sales.” We have also established approximately 251 offline sales points and four “Likeshuo” experiential marketing stores in China to form an integrated marketing network to assist the recruitment of prospective students as of March 31, 2020. These experiential marketing stores are all located in Guangdong Province. They enable our prospective students to obtain in-person experience of live streaming online ELT courses delivered on our “Likeshuo” platform.

 

Human resources. Our senior management at our headquarters is responsible for the appointment of key management positions in each of our regional hubs to strengthen our centralized management system. We are also responsible for appointing the regional principal, business manager and finance manager who act as regional supervisors to oversee the research and development of our products and technologies, professional recruitment, branding and various other aspects of our customer services.

 

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Accounting and finance. We have also implemented a standardized accounting and financial management system to monitor the operations of our learning centers. We manage and record income and expenditure separately at all of our self-operated learning centers, which is applied uniformly across all our learning centers. The total course and service fee income is required to be transferred from the local learning centers to our company account on a daily basis. We are also in charge of reviewing and allocating operation expenditures in each of our learning centers upon approval from our management and are thus able to manage our finances efficiently.

 

Marketing and Sales

 

We engage in a broad range of marketing approaches to strengthen our brand recognition and enhance the understanding of different course offerings by prospective students and users, which we believe can help generate prospective students’ and users’ interests in our services. From 2017 to 2019, our student enrollment grew approximately 49.2%, while the percentage of selling and marketing expenses in our revenue increased by approximately 17.4%.

 

We actively promote our brands and services through a wide range of offline sales activities. We have employed over 800 professional marketing personnel to conduct effective marketing activities, including advertisement distribution and tele-marketing with customized content to advertise our brands and services to the prospective customers from specific target age groups and regions. As part of our expanded sales efforts, we had approximately 251 offline sales points nationwide as of March 31, 2020, which are generally small marketing booths set up in locations with high traffic and exposure, such as shopping malls, to attract potential customers and educate them about the diverse programs and services we offer.

 

In terms of our online marketing efforts, we leverage various online marketing channels and our online technologies to selectively provide promotional content on the internet. We have a professional team of approximately 39 online marketing staff in our Beijing headquarter, who are responsible for designing and distributing promotional materials through diversified online channels to facilitate our online marketing activities. We utilize the big data technology to effectively target our prospective customers with high demands to learn English from certain age groups and regions. We customize the marketing content regularly to cater for our target student groups by widely using search engine keywords and distributing in-feed advertisements on various types of leading search engines and social media platforms. In addition to advertising on social platforms, we also strive to promote our services efficiently by engaging third-party merchants to conduct digital marketing activities.

 

Our Teaching Staff

 

Our teaching staff generally comprises teachers and study advisors, who are critical to maintaining the quality of the education services and promoting our brand recognition for future growth. We have assembled a high-caliber team of teaching professionals with outstanding abilities and passion for teaching, consisting of dedicated local teachers and foreign teachers for our offline courses as well as online teachers for courses on the “Likeshuo” platform. Our total number of full-time teachers increased from 818 as of December 31, 2017 to 1,467 as of December 31, 2019. Our total number of full-time teachers was 1,198 as of March 31, 2020. We had in total 1,161 full-time teachers offering ELT courses at our offline learning centers and the remaining 37 teachers for our online courses. In addition, we have employed a number of part-time teachers for our offline and online ELT businesses. As of March 31, 2020, we employed 4,217 part-time teachers, among whom 2,323 were foreign teachers from English-speaking countries.

 

Personalized Support Provided by Study Advisors

 

We adopt a collaborative working practice among our teachers and study advisors in our daily education services. Each student is assigned a study advisor who supports the teacher’s offline teaching activities by providing personalized support and guidance to students. Study advisors provide professional advice to students regarding learning methods, follow up and check students’ learning schedules, offer supplementary materials to improve students’ understanding of the content taught in class, collect feedback on teaching quality and provide general counselling services. Study advisors also act as the liaison between the students and our sales staff to facilitate course renewals. As of March 31, 2020, we employed 569 full-time study advisors. As of the same date, we also had 490 full-time teaching service staff to provide all-round management and consultancy services for our students.

 

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Teaching Staff Recruitment

 

We seek to engage teachers who possess strong academic credentials, excellent communication skills and practical knowledge to employ effective teaching methods to optimize the learning experiences of our students. Our human resources staff examines candidates’ language proficiency, work experience, education background and teaching qualifications, such as TESOL, TEFL and CELTA. As of March 31, 2020, approximately 97.0% of our full-time teachers had a bachelor’s degree or above, and approximately 24.4% have a master’s degree or above. For study advisors, we seek to engage candidates with excellent English language ability and preferably related work experience. Study advisors are required to have strong teamwork skills and are required to be detail-oriented when assisting our teachers in course preparation, event organization and daily classroom operations.

 

We engage prospective candidates for our teaching positions through various channels. For domestic teachers and study advisors, we engage applicants through advertising on social media platforms and at job fairs organized by numerous universities in China. For foreign teachers, we mainly recruit candidates through specialized agencies, who are independent third parties. For online teachers who deliver courses on our “Likeshuo” platform, we approach prospective candidates through advertising on social media platforms and career websites in the PRC and abroad. We recruit new teachers from time to time to ensure sufficient resources of teaching staff to support our business growth.

 

We implement a highly selective recruitment process. For the teacher’s recruitment, after the initial review of candidates’ credentials, we conduct several rounds of interviews and written tests with qualified candidates according to the specific course(s) he or she applies to teach. Online teachers are invited to deliver a trial lesson, where we evaluate his or her abilities in pre-class preparation, teaching methods, time management and interaction with the students and after-class review. For prospective teachers of international standardized test preparation courses, we check their examination results or experience as former participants in the examinations. We will invite teachers at our learning centers and online teachers to give trial lessons as our final assessment at the end of his/her three-month probation period. We will only make job offers to candidates who have successfully fulfilled recruitment requirements and have passed our comprehensive quality assessment during the probation period.

 

Training and Performance Evaluation

 

We devote significant resources to training and retaining our teachers and study advisors. In order to ensure the high quality of our services, we have put in place a series of training programs and performance evaluation standards for our teachers and study advisors.

 

Our teachers and study advisors are required to undergo various training programs specially designed for those who are in charge of different curriculums. We offer a series of comprehensive and systematic training programs for teaching skills, communication skills and content development capability, through which our teachers are able to keep abreast of the changing student needs and evolving industry development trends to enhance their teaching efficiency and efficacy.

 

For new recruits who will join our teaching team at each learning center, we generally organize a five-day orientation camp to provide comprehensive training to assist them to learn about our Company, our education philosophy and basic teaching skills. In addition, we also provide monthly training programs to our teaching staff, which cover more detailed teaching guidance for teachers, including, among others, classroom activity planning, course content preparation, application of collaborative learning strategies and self-development through performance reviews.

 

For the teachers in charge of our general adult ELT, we assign our regional education managers and professional teacher trainers to host training sessions specially designed for such curriculum. For teachers in charge of our junior ELT, we generally recruit teachers with professional experience and expertise in providing training to students aged under 18. For teachers in charge of our overseas training services, we actively engage prospective teachers who have experience of taking international standardized language tests and/or have participated in overseas studies. For online teachers on the “Likeshuo” platform, we provide thorough teaching guidance covering both teaching skills and technical support. We introduce them to our main service sectors and address the different needs of our students and users so that the online teachers can develop the awareness to customize the course content to satisfy the diversified needs of our students and users. We conduct interviews for all job applicants and provide continuing professional training to candidates who are successfully hired by us.

 

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We have developed a comprehensive evaluation system with a focus on assessing our teachers’ abilities of effective teaching and self-development to stay constantly updated in order to deliver quality teaching to our students and users. We conduct teacher performance reviews periodically in order to support our teachers for continuous refinement and improvement of their teaching methods. We also evaluate teachers’ performance by collecting student feedback on a regular basis, which will factor in the retention and compensation considerations for our teachers. For teachers with excellent performance, we may reward them with discretionary bonus compensation and other incentives.

 

Competition

 

The ELT market in the PRC is rapidly evolving and highly competitive and we expect the competition in this sector to persist and intensify. We face direct competition in general adult ELT, junior ELT, overseas training services, online ELT and other English language-related and services, primarily from existing online and offline English language education service providers in our geographic markets.

 

We believe our principal competitive factors include the following:

 

  scope and quality of our course offerings and services;

 

  extensive operating experience;

 

  quality and performance of the teaching staff;

 

  overall student experience and satisfaction;

 

  brand recognition;

 

  ability to align courses and services to specific needs of the students;

 

  ability to market course offerings to a broad base of prospective students;

 

  utilization of technologies to optimize students’ learning experiences; and

 

  ability to attract and retain highly qualified teachers.

 

We believe that we are well-positioned to effectively compete in the markets in which we operate on the basis of strong reputation, high-quality portfolio of courses, convenient and useful technologies, scalable and efficient business model, extensive and qualified teacher network, strong course content development capabilities and experienced management team. However, some of our current or future competitors may have longer operating histories, greater brand recognition, or greater financial, technical or marketing resources than we do. For a discussion of risks related to competition, see “Risk Factors — Risks Related to Our Business and Operations — We face significant competition in major programs we offer and geographic markets in which we operate, and if we fail to compete effectively, we would lose our market share and our profitability would be adversely affected.”

 

Technologies

 

We currently use a combination of commercially available software and hardware and proprietary technology. To closely cope with evolving market conditions and student needs, we also rely on our in-house research and development for new technology initiatives. We have established a scalable infrastructure of information technologies by launching and upgrading a series of intelligent learning systems and platforms. Some of the technologies we use are driven by artificial intelligence, which are different from the typical algorithmic computing in the following manner: (i) our artificial intelligence-driven teaching management system provides pertinent course information that is customized for each student and user, which avoids the parameter-invariant defect of the typical algorithmic computing method; (ii) it offers a greater flexibility to our students by utilizing the computerized adaptive testing method, as compared with the typical algorithmic computing method; and (iii) comparing to the typical algorithmic computing method, our artificial intelligence-driven system uses the project response model to determine our students’ English language ability and formulate customized practice questions, which uses adaptive algorithm and enables us to evaluate a large number of students’ language ability in a short period of time.

 

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CRM system. We have developed a comprehensive customer relationship management system to store and manage daily operations and the information related to our students and users. Through years of system development based on big data analytic technology, we have formulated a complete customer service cycle from customer acquisition to teaching service evaluation. We keep records of each customer acquisition record and effectively evaluate and stimulate our marketing staff to engage prospective customers. The CRM system also enables us to conduct strategic research of customer data in order to improve our service quality and increase our operating efficiency.

 

EME system. We have developed our EME system, an artificial intelligence-driven integrated teaching management system, to manage and facilitate our teaching activities at our headquarters and each of our self-operated learning centers. We effectively integrate our teaching resources in our EME system to conduct an accurate analysis of student data and allocate suitable training resources to address our students’ individualized learning needs, which largely increased our efficiency in scheduling classes and customizing course content for our students. Our students can also review their learning process, class schedules and give feedbacks to their teachers. We implement EME system across all of our self-operated and franchise learning center network to supervise our teaching activities and enhance our decision-making capabilities by analyzing our operation database. We upgraded the class-scheduling function of our EME system in 2019 and began to gradually implement this new function in our operations. Leveraging on our self-developed AI algorithm, the new class-scheduling function is able to significantly reduce processing time and improve our operating efficiency despite having limited classroom availability at our learning centers.

 

ISFS. We use this intelligent tracking service system for our general adult ELT, overseas training services and online ELT, which generally comprises student service system, teacher service system and service monitoring system. The student service system mainly sets up the service tracking in advance for the entire course learning cycle of a student. Based on a set of intelligent task scheduling services, it automatically generates an individual service tracking task list for such student, and sends the list directly to his/her teacher for reference. Similarly, the teacher service system, based on a set of intelligent task scheduling services, automatically generates the personal service tracking task list in the teaching process for the course such teacher teaches, and timely sends the relevant list to the working panel of the course teaching service staff for execution. Service monitoring system is mainly used to monitor the functioning of the student service system and the teacher service system. In the event it discovers any anomaly in these systems, it will timely alert our management.

 

“Likeshuo” App and platform. We started to offer online live streaming English courses on our “Likeshuo” App and platform in 2014. Our platform is equipped with a number of innovative features to provide direct guidance to our students including introductions to various course offerings, course scheduling and evaluation of their learning process. In order to optimize the user experience on our “Likeshuo” platform, we have deployed a number of features to enhance our abilities of service customization. For example, our intelligent online course scheduling system on the “Likeshuo” platform efficiently facilitates the allocation of teaching resources based on the needs of users and the availability of our online teachers, which largely enhances our ability to provide flexible course offerings to different users. Users of our online services can access our course offerings through our platform and our application on their mobile devices, tablets and computers.

 

ICAS. We primarily utilize this intelligent class scheduling system for our online ELT services. It was built based on a three-dimension model encompassing teachers’ teaching demand, students’ learning demand and our available curriculums, and utilizes an intelligent matching algorithm to optimize the course arrangement and scheduling results for our teachers, students and management. ICAS greatly improves the course matching efficiency and accuracy comparing to manual and subjective course scheduling.

 

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Leveraging our experience in developing and upgrading our EME and CRM systems, we have also developed other systems to facilitate our teaching activities and daily operation. For example, we have developed our iManager system for students enrolled in our international test preparation courses, which utilizes artificial intelligence to serve as a platform for our students to record course notes, have writing practice and mock tests which can effectively prepare them for achieving satisfactory learning results. For our overseas study application services, our iFuture system can help our students access our teachers for study consultation and keep track of their application process in a timely manner. Moreover, in order to accurately evaluate a student’s English language ability, we utilize an adaptive evaluation system, which analyzes the student’s listening, vocabulary, grammar and reading comprehension abilities and diagnoses his or her English language proficiency, in order to more accurately determine applicable course targets and key learning steps. We also use the same evaluation system when the students have completed their courses to evaluate the progress they have made, which allows us to judge and compare the quality of our teaching in various regions and to provide a useful basis for improvement.

 

Our system infrastructure is designed to meet the requirements of our business operations, to support the growth and expansion of our learning center network and to ensure the reliability of our operations. Our data is currently maintained at our headquarters and an offsite IT facility in Shenzhen. For details of the risks associated with the technologies we use, see “Risk Factors — Risk Related to Our Business and Operations — Failure to protect confidential information of our students and teaching staff against security breaches could damage our reputation and brands and substantially harm our business and results of operations.”

 

Intellectual Property

 

Our trademarks, copyrights, domain names, trade secrets and other intellectual property rights distinguish our program from those of our competitors and contribute to our competitive advantages in our target markets. We believe the protection of our intellectual property rights is critical to our business, and we protect our intellectual property rights by relying on local laws and contractual restrictions. We specifically rely on a combination of copyright and trademark law, trade secret protection and confidentiality agreements with our management and research and development staff to protect our intellectual property rights. We also regularly monitor any infringement or misappropriation of our intellectual property rights.

 

As of the date of this prospectus, we had registered five patents and 102 trademarks which bolstered our strong brand recognition in the PRC. We also held 80 domain names relating to our business, including www.meten.com, www.likeshuo.com and www.investor.metenedu-edtechx.com, 21 copyrights to certain course content and technologies we developed in-house and 37 copyrights registration certificates for software programs developed by us relating to various aspects of our operations.

 

We had not been subject to any intellectual property infringement claims which had any material impact on us up to the date of this prospectus. While we actively take steps to protect our intellectual property rights, these steps may not be adequate to prevent the infringement or misappropriation of the intellectual property created by or licensed to us. Further, we cannot be certain that the course materials that we license, and our redesign of these materials, do not or will not infringe on the valid patents, copyrights or other intellectual property rights held by third parties. We may be subject to legal proceedings and claims from time to time relating to the intellectual property of others, as discussed in “Risk Factors — Risks Related to Our Business and Operations — We may encounter infringement disputes from time to time relating to our use of intellectual properties of third parties.”

 

Seasonality

 

Seasonal fluctuations have affected, and are likely to affect our business in the future. Historically, the PRC offline ELT industry experiences lower gross billings growth rate in the first quarter of each year due to the Chinese New Year holiday, and our industry enjoys increases in gross billings growth during the summer months as certain students are generally on summer holiday and have more time to take ELT courses. Overall, the historical seasonality of our business has been relatively mild due to our rapid growth and our focus on the general ELT business. However, the seasonal trends that we have experienced in the past may not be indicative of our future operating results. See “Risk Factors — Risks Related to Our Business and Operations — Our results of operations are subject to seasonal fluctuations.”

 

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Insurance

 

We maintain various insurance policies to safeguard against risks and unexpected events. We maintain insurance to cover our liability should any injuries occur at our learning centers. We maintain medical insurance for our employees and management. We also maintain company property insurance, decoration protection insurance and accident insurance which cover property damage and casualty damage in accidents. We do not have business interruption, general third-party liability, product liability or key-man insurance. See “Risk Factors — Risks Related to Our Business and Operations — We may not maintain adequate insurance, which could expose us to significant costs and business disruption.” We consider our insurance coverage to be in line with that of other ELT service providers of similar scale in the PRC.

 

Regulations

 

This section summarizes the principal PRC regulations relating to our businesses.

 

We operate our business in China under a legal regime created and made by PRC lawmakers consisting of the National People’s Congress, or the NPC, which is the country’s highest legislative body, the State Council, which is the highest authority of the executive branch of the PRC central government, and several ministries and agencies under its authority, including the MOE, the Ministry of Industry and Information Technology, or the MIIT, the SAMR, the MCA, and their respective local offices. This section summarizes the principal PRC regulations related to our business.

 

PRC Laws and Regulations Relating to Foreign Investment in Education and Telecommunications

 

Foreign Investment Industries Guidance Catalog (Amended in 2017) and Special Administrative Measures for Access of Foreign Investments (Negative List for Access of Foreign Investments)

 

Pursuant to the Foreign Investment Industries Guidance Catalogue (Amended in 2017) which was amended and promulgated jointly by the National Development and Reform Commission and the Ministry of Commerce on June 28, 2017 and became effective on July 28, 2017, and the Special Administrative Measures for Access of Foreign Investments (Negative List for Access of Foreign Investments) in which has been replaced by the Special Administrative Measures for Access of Foreign Investments (Negative List for Access of Foreign Investments) (2018 version), or the 2018 Negative List, foreign investment industries are classified into two categories, (1) industries in which foreign investments are encouraged; and (2) industries in which foreign investments are regulated by the Negative List. The Negative List has further classified regulated foreign investment industries as industries in which foreign investments are restricted and industries in which foreign investments are prohibited. On June 30, 2019, the MOFCOM and the NDRC jointly promulgated the Catalog of Industries Encouraging Foreign Investment (2019 Version), or the 2019 Encouraged Catalog, which became effective on July 30, 2019 and replaced the previous list of the industries where foreign investment is encouraged under the 2017 Catalog, and the Special Administrative Measures for Access of Foreign Investment (Negative List) (2019 Version), or the 2019 Negative List, which became effective on July 30, 2019 and replaced the 2018 Negative List. Industries which are not included in the 2019 Negative List are industries in which foreign investments are allowed, unless otherwise prescribed by PRC laws. The Special Administrative Measures for Access of Foreign Investment (Negative List) (2020 version) was recently promulgated on June 23, 2020 and will become effective on July 23, 2020.

 

Pursuant to the 2019 Negative List, our offline ELT services do not fall in the restricted category, while the online ELT services fall within the scope of value-added telecommunications, which is considered “restricted” and, with a few exceptions, the percentage of foreign ownership cannot exceed 50%.

 

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Foreign Investment Law and Implementing Regulations of the Foreign Investment Law

 

On March 15, 2019, the NPC promulgated the Foreign Investment Law, which came into effect on January 1, 2020 and replaced the three existing laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation rules and ancillary regulations. The existing foreign-invested enterprises, or FIEs, established prior to the effectiveness of the Foreign Investment Law may keep their corporate forms within five years. The Foreign Investment Law stipulates that China implements the management system of pre-establishment national treatment plus a negative list to foreign investment. The negative list, which will be issued by or upon approval by the State Council, refers to special administrative measures for access of foreign investment in specific fields in China. A foreign investor shall not invest in any field prohibited from foreign investment under the negative list. A foreign investor shall meet the investment conditions stipulated under the negative list for any restricted fields. For fields not mentioned in the negative list, domestic and foreign investments shall be treated equally. Additionally, the Foreign Investment Law stipulates that the government will not expropriate foreign investment, except under certain special circumstances, in which case it will provide fair and reasonable compensation to foreign investors.

 

Moreover, the Foreign Investment Law does not stipulate whether “foreign investment” as defined thereunder includes contractual arrangements. Instead, it adds a catch-all provision to the definition of foreign investment so that foreign investment, by its definition, includes “investments through other means stipulated by laws or administrative regulations or by the State Council” without elaboration on the meaning of “other means.”

 

On December 26, 2019, the State Council promulgated the Implementing Regulations of the Foreign Investment Law, which came into effect on January 1, 2020, pursuant to which, the existing FIEs established prior to the effectiveness of the Foreign Investment Law may choose to keep or change corporate forms in accordance with the Company Law, Partnership Enterprise Law or other laws applicable within five years. Where any existing FIEs fails to change corporate forms as of the date of January 1, 2025, the administrative departments for market regulation will not process other registration matters for the enterprise, and may disclose the relevant information in the enterprise information publicity system. Additionally, the regulations further require that FIEs and domestic enterprises be treated equally with respect to policy making and implementation. However, the Implementing Regulations of the Foreign Investment Law still does not specify whether foreign investment includes contractual arrangements.

 

Regulations on Sino-Foreign Cooperation in Operating Schools

 

Sino-foreign cooperation in operating schools is specifically governed by the Regulation on Sino-Foreign Cooperation in Operating Schools of the PRC, which was promulgated by the State Council on March 1, 2003, became effective on September 1, 2003 and was amended on July 18, 2013 and March 2, 2019, and the Implementing Rules for the Regulations on Operating Sino-foreign Schools, which were issued by the MOE on June 2, 2004 and became effective on July 1, 2004. Pursuant to these regulations, any foreign entity that invests in the education business in China through Sino-foreign cooperation must be an education institution with relevant qualifications and experiences.

 

Additionally, on June 18, 2012, the MOE issued the Implementation Opinions of the MOE on Encouraging and Guiding the Entry of Private Capital in the Fields of Education and Promoting the Healthy Development of Private Education to encourage private investment and foreign investment in the field of education. According to these opinions, the proportion of foreign capital in a Sino-foreign educational institution shall be less than 50%.

 

In the areas where we operate our ELT service business, local government authorities do not allow foreign-invested entities to establish private institutions to engage in the ELT services, other than in the forms of Sino-foreign cooperative institutions, and the domestic party shall play a dominant role in such cooperation. Meanwhile, foreign investors of Sino-foreign cooperative institutions must be foreign educational institutions with relevant qualifications and experience.

 

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Notice on Proper Handling of Approval and Registration of Foreign Invested For-Profit Non-Academic Language Training Institutions

 

On July 24, 2019, the General Office of the MOE, the General Office of the MOC and the General Office of the State Administration for Market Regulation jointly issued the Notice 75, which came into effect on the same date. Pursuant to the Notice 75, foreign invested for-profit non-academic language training institutions, or the Foreign-invested Language Training Institutions, shall mean foreign investment enterprises which are established and registered in the PRC pursuant to the PRC laws and have obtained the enterprise legal person qualification pursuant to the law to engage in for-profit non-academic language training activities, and Foreign-invested Language Training Institutions conducting training activities shall comply with the relevant State provisions on non-academic training institutions, apply for a private school operating permit in accordance with the standards, complete legal person registration formalities with the market regulatory authorities upon obtaining a private school operating permits issued by the education authorities, and comply with the relevant State provisions on foreign investments.

 

Regulations on Foreign Investment in Telecommunications Enterprises

 

The Regulations on Administration of Foreign-Invested Telecommunications Enterprises, or the FITE Regulations, which took effect on January 1, 2002, and was most recently amended on February 6, 2016, are the key regulations that regulate foreign direct investment in telecommunications enterprises in China. According to the FITE Regulations, foreign investors are prohibited from holding more than 50% of the equity interests in a company providing value-added telecommunications services.

 

In addition, a foreign investor who invests in a value-added telecommunications business in the PRC must possess prior experience in operating value-added telecommunications businesses and a proven track record of business operations overseas. Currently, none of the applicable PRC laws, regulations or rules provides clear guidance or interpretation on such qualification requirements. In light of the above restrictions and requirements, we conduct our online ELT and offline ELT service business through a variable interest entity structure.

 

Regulations on Private Education in the PRC

 

Education Law of the PRC

 

On March 18, 1995, the NPC enacted the Education Law of the PRC, or the Education Law, which was amended on August 27, 2009. The Education Law sets forth provisions relating to the fundamental education systems of the PRC, including a school education system comprising preschool education, elementary education, middle education and higher education, a system of nine-year compulsory education, a national education examination system, and a system of education certificates. The Education Law stipulates that the government formulates plans for the development of education, establishes and operates schools and other training institutions. Furthermore, it provides that in principle, enterprises, social organizations and individuals are encouraged to establish and operate schools and other types of education institutions. It also provides that no organization or individual is allowed to establish or operate a school or any other education institution for profit-making purposes. Under the amendment enacted on December 27, 2015 and becoming effective on June 1, 2016, the amended Education Law allows organizations and individuals to establish and operate schools or other education institutions for profit-making purposes. Nevertheless, schools and other education institutions sponsored wholly or partially by government financial funds and donated assets remain prohibited from being established as for-profit organizations.

 

Law on the Promotion of Private Education of the PRC and Implementation Rules for the Law on the Promotion of Private Education of the PRC

 

The Law on the Promotion of Private Education of the PRC became effective on September 1, 2003 and was amended on June 29, 2013, and the Implementation Rules for the Law on the Promotion of Private Education of the PRC became effective on April 1, 2004. Under these law and rules, “private schools” are defined as schools established by social organizations or individuals using non-government funds. Private schools that provide diploma- and degree-oriented education, preschool education, self-taught higher education examination and other categories of education services shall be subject to approval by the education authorities at or above the county level, while private schools engaging in occupational qualification training and occupational skill training shall be subject to approvals from the authorities in charge of labor and social welfare at or above the county level. A duly approved private school will be granted a private school operating permit, and shall be registered with the MCA or its local counterparts as a private non-enterprise entity and obtain a private non-enterprise entity certificate.

 

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According to the PRC laws and regulations, entities and individuals who establish private schools are commonly referred to as “sponsors” rather than “owners” or “shareholders.” The economic substance of “sponsorship” with respect to private schools is substantially similar to that of shareholder’s ownership with respect to companies in terms of legal, regulatory and tax matters. For example, the name of a sponsor is required to be stated in the private school’s articles of association and the private school operating permit, similar to that of shareholders, whose names are stated in the Company’s articles of association and corporate records filed with relevant authorities. From the perspective of control, the sponsor of a private school also has the right to exercise ultimate control over the school by means such as adopting the private school’s constitutional documents and electing the school’s decision-making bodies, including the school’s board of directors and principals. The sponsor can also profit from the private schools by receiving “reasonable returns,” as explained in detail below, or disposing of its sponsorship interests in the schools for economic gains. However, the rights of sponsors vis-à-vis private schools differ from the rights of shareholders vis-à-vis companies. For example, under the PRC laws, a company’s ultimate decision-making body is its shareholders meeting, while for private schools, it is the board of directors, though the members of which are substantially appointed by the sponsor. The sponsorship interests also differ from the ownership interests with regard to the right to the distribution of residual properties upon liquidation of a private school, mainly because private education is treated as a public welfare undertaking under the current regulations. While private education is treated as a public welfare undertaking under the current regulations, sponsors of a private school may choose to require “reasonable returns” from the annual net balance of the school after deduction of costs for school operations, donations received, government subsidies (if any), the reserved development fund and other expenses as required by the regulations. Private schools whose sponsors do not require reasonable returns shall be entitled to the same preferential tax treatment as public schools, while the preferential tax treatment policies applicable to private schools whose sponsors require reasonable returns shall be formulated by the finance authority, taxation authority and other authorities under the State Council.

 

On November 7, 2016, the Standing Committee of the National People’s Congress promulgated the Decision on Amending the Law on the Promotion of Private Education of the PRC, or the Amended Private Education Promotion Law, which came into force on September 1, 2017.

 

Under the Amended Private Education Promotion Law, the term “reasonable return” is no longer used and a new classification system for private schools is established based on whether they are established and operated for the purpose of making profits. Sponsors of private schools may choose to establish non-profit or for-profit private schools at their own discretion, while before the Amended Private Education Promotion Law, all private schools shall not be established for for-profit purposes. Nonetheless, school sponsors are not allowed to establish for-profit private schools that are engaged in compulsory education. In other words, the private schools engaged in compulsory education should retain their non-profit status even after the Amended Private Education Promotion Law comes into force. We currently intend to register all of our private schools as for-profit schools according to the Amended Private Education Promotion Law when it is practically allowed. However, as a matter of practice, most local authorities have not started to accept or approve applications for for-profit schools because the local implementing regulations have not been promulgated and well enforced.

 

According to the Amended Private Education Promotion Law, the key features of the aforesaid new classification system for private schools include the following:

 

  Sponsors of for-profit private schools are entitled to retain the profits and proceeds from the private schools and the operation surplus may be distributed to the sponsors pursuant to the PRC Company Law and other relevant laws and regulations;

 

  Sponsors of non-profit private schools are not entitled to the distribution of profits or proceed from the non-profit schools and all operation surplus of non-profit schools shall be used for the operation of the private schools;

 

  For-profit private schools are entitled to set their own tuition and other miscellaneous fees without the obligation to seek prior approvals from or to report to the relevant government authorities. The collection of fees by non-profit private schools, on the other hand, shall be regulated by the provincial, autonomous regional or municipal governments;

 

  Both for-profit and non-profit private schools may enjoy preferential tax treatment. Non-profit private schools will be entitled to the same tax benefits as public schools. Taxation policies for for-profit private schools after the Amended Private Education Promotion Law takes effect are still unclear as more specific provisions are yet to be introduced;

 

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  Where there is construction or expansion of a non-profit private school, the private school may acquire the land use rights through allocation by the government as a preferential treatment. Where there is construction or expansion of a for-profit private school, the private school may acquire the land use rights by purchasing them from the government;

 

  The remaining assets of non-profit private schools after liquidation shall continue to be used for the operation of non-profit schools. The remaining assets of for-profit private schools shall be distributed to the sponsors in accordance with the PRC Company Law; and

 

  The People’s governments at or above the county level may support private schools by subscribing to their services, providing student loans and scholarships, and leasing or transferring unused state assets. The governments may further take such measures as providing government subsidies, bonus funds and donation incentives to support non-profit private schools.

 

Several Opinions on Encouraging the Operation of Education by Social Forces and Promoting the Healthy Development of Private Education

 

On December 29, 2016, the State Council issued the Several Opinions of the State Council on Encouraging the Operation of Education by Social Forces and Promoting the Healthy Development of Private Education, or the State Council Opinions, which lowers the barriers to entry into the business of private schools and encourages social forces to enter the education industry. The State Council Opinions also provides that each level of the People’s governments shall increase their support to the private schools in terms of, among others, financial investment, financial support, autonomy policies, preferential tax treatments, land policies, fee policies, autonomy operation, protection of the rights of teachers and students. Further, the State Council Opinions requires each level of the people’s governments to improve its local policies on government support to for-profit and non-profit private schools by means of preferential tax treatments.

 

Implementation Regulations for Classification Registration of Private Schools

 

On December 30, 2016, the MOE, the MCA, the SAIC, the Ministry of Human Resources and Social Welfare and the State Commission Office of Public Sectors Reform jointly issued the Implementation Regulations for Classification Registration of Private Schools to reflect the new classification system for private schools as set out in the Amended Private Education Promotion Law. Generally, if a private school established before the promulgation of the Amended Private Education Promotion Law chooses to register as a non-profit school, it shall amend its articles of association, continue its operation and complete the new registration process. If such private school chooses to register as a for-profit school, it shall conduct financial liquidation process, have the property rights of its assets such as lands, school buildings and net balance authenticated by relevant government authorities, pay up relevant taxes, reapply for a new private school operating permit, reregister as a for-profit school and continue its operation. Specific provisions regarding the above registrations are yet to be introduced by the people’s governments at the provincial level.

 

Implementing Rules on the Supervision and Administration of For-Profit Private Schools

 

On December 30, 2016, the MOE, the SAIC and the Ministry of Human Resources and Social Welfare jointly issued the Implementing Rules on the Supervision and Administration of For-Profit Private Schools, pursuant to which the establishment, division, merger and other material changes of a for-profit private school shall first be reported by the board of directors of the school to and get approvals from the relevant authorities, and then be registered with the competent branch of the SAIC.

 

For a detailed discussion on how the Amended Private Education Promotion Law and the above rules will affect our training institutions, see “Risk Factors — Risks Related to Our Business and Operations — We are subject to uncertainties brought by the Amended Private Education Promotion Law and other rules, regulations and opinions promulgated by the PRC government from time to time.”

 

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In addition to the Amended Private Education Promotion Law and the rules above mentioned, more implementing regulations will be introduced to further provide detailed requirements for the operation of non-profit and for-profit private schools:

 

  the amendment to the Implementation Rules for the Law on the Promotion of Private Education of the PRC;

 

  the local regulations relating to legal entity registration of for-profit and non-profit private schools; and

 

  the specific measures to be formulated and promulgated by the competent authorities responsible for the administration of private schools in the provinces in which our schools are located, including but not limited to the specific measures for registration of pre-existing private schools, the specific requirements for authenticating various parties’ property rights and payment of taxes and fees of for-profit private schools, taxation policies for for-profit private schools and measures for collection of non-profit private schools’ fees.

 

Circular on Alleviating After-school Burden on Elementary and Middle School Students and Implementing Inspections on After-school Training Institutions

 

On February 13, 2018, the MOE, the MCA, the Ministry of Human Resources and Social Security and SAIC jointly promulgated the Circular on Alleviating After-school Burden on Elementary and Middle School Students and Implementing Inspections on After-school Training Institutions, or Circular 3, which came into effect on the same date. Pursuant to Circular 3, the aforesaid government authorities will carry out a series of inspections on after-school training institutions and order those with material potential safety risks to suspend business for self-inspection and rectification and those without proper establishment licenses or school operating permits to apply for relevant qualifications and certificates under the guidance of competent government authorities. Circular 3 mandates that the foregoing rectification be completed by the end of 2018. Moreover, after-school training institutions must file with the local education authorities and make public the classes, courses, target students, class hours and other information relating to their academic training courses (including primarily courses on Chinese, English and mathematics). After-school training institutions are prohibited from providing academic training services beyond the scope or above the level of school textbooks, or organizing any academic competitions (such as Olympiad competitions) or level tests for students of elementary or secondary schools. In addition, elementary or secondary schools may not reference a student’s performance in the after-school training institutions as one of admission criteria.

 

Opinions of the General Office of the State Council on Regulating the Development of After-School Training Institutions

 

On August 6, 2018, the General Office of the State Council promulgated Circular 80, which came into effect on the same date. Pursuant to Circular 80, the after-school training institutions must obtain the business license (or corporate legal person certificate or private non-enterprise unit registration certificate) for carrying out the training business. The county-level education authority is responsible for approving the education permit. Without the approval of the education authority, the after-school training institution may not conduct training services for elementary and secondary school students in the name of training, counseling, and cultural communication. If an after-school training institution establishes a branch or training point in the same county, it must be approved; if a branch or training point is established across the county, it must be approved by the county-level education department where the branch or training point is located. Teachers engaged in language, mathematics, English and physics, chemistry, biology and other subject training should have corresponding teacher qualifications.

 

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Notice on Improving Several Working Mechanisms for Special Governance and Rectification of After-School Training Institutions

 

On November 20, 2018, the General Office of the MOE, the General Office of the State Administration for Market Regulation and the General Office of Ministry of Emergency Management jointly issued Circular 10, which came into effect on the same date. Pursuant to Circular 10, (i) for institutions that carry out academic training activities without permits, non-academic training institutions that carry out academic training activities and other institutions that carry out illegal training activities, the education authorities, in collaboration with other relevant departments, shall cease their business, restrict their legal representatives to engage in training activities for primary and secondary school students and refer to the market supervision authority to revoke their business licenses; (ii) the local education authority shall further accelerate the progress of approving school operating permits, especially for academic training institutions, the school operating permits can be issued as soon as possible by means of document approval or issuing private school operating permits if the standards are met. For those institutions that do not meet the applicable standards, they shall be suspended for rectification according to the law. By the end of 2018, there should be no training institutions that are still carrying out training activities without permits or licenses; (iii) for provinces (regions and municipalities) with a large number of non-academic training institutions, under the premise of ensuring effective supervision, the provincial education authorities may, in conjunction with the market supervision authorities may propose a practical rectification plan to ensure the rectification could be completed by the end of the year. After the promulgation and implementation of Regulations on the Implementation Rules of the Law on Promoting Private Education in PRC, the after-school training institutions shall be classified and regulated accordingly; (iv) the county-level education authority shall complete the filing and assessment of academic training courses offered by the training institutions in its administrative area as soon as possible, which includes the name, training content, enrollment targets, schedule and class hours of the academic training courses. The training institutions that fail to make the filing and pass the assessment are prohibited from recruiting students; (v) the local fire authorities shall provide the education authority with relevant information on fire safety standards. The education authority shall approve training qualifications in accordance with fire safety standards. For existing institutions that have not met the relevant fire safety standards, their training qualifications shall be revoked; and (vi) the provincial education authorities shall be responsible for the filing of the online education institutions providing training for elementary and secondary school students and standardize online training institutions according to the policies for offline training institutions. The name, training content, enrollment target, schedule and class hours of the online academic training courses offered by the online training institutions shall be filed with the provincial education authorities. The name, photos, shifts and certification numbers of the teachers shall be posted prominently on their websites of such training institutions.

 

Potential Impact of the Regulatory Uncertainty on Our Business and Financial Performance

 

Regulatory Background and Development

 

The Private Education Promotion Law became effective on September 1, 2003. Article 18 of the Private Education Promotion Law requires private schools to obtain requisite school operating permits and register with the relevant authorities, while Article 66 of the Private Education Promotion Law stipulates that separate rules promulgated by the State Council will govern private training institutions that are registered with the competent administration of commerce and industry. However, as of the date of this prospectus, the State Council has not yet promulgated any rules in this regard. Therefore, all private training institutions in the PRC that are established in the form of corporations are not required explicitly by regulations to obtain the private school operating permits. The Amended Private Education Promotion Law that became effective on September 1, 2017 removed Article 66 of the Private Education Promotion Law and treated all for-profit private training institution as private schools, which are required to obtain private school permits, but it did not provide any further guidance on the registration requirement for private training institutions. The Implementing Rules on the Supervision and Administration of For-Profit Private Schools requires private training institutions to obtain the private school operating permits prior to the completion of registration with the competent administration of commerce and industry. According to the Several Opinions of the State Council on Encouraging Social Resources to Invest in Education and Promote Sound Development of Private Education, after the Amended Private Education Promotion Law became effective, the provincial government authorities must issue their own implementation opinions and licensing measures in relation to the specific implementation methods and operative approaches of the amended law based on local conditions. However, whether and how educational authorities regulate private training institutions vary from region to region, especially after the MOE issued the Draft Implementation Rules of the Private Education Promotion Law on April 20, 2018, and requested public comment. On August 10, 2018, the Ministry of Justice published the Committee Draft Implementation Rules of the Private Education Promotion Law, which stipulates that private training institutions that enroll students of K-12 education and carry out activities relating to (i) the cultural and educational courses at such students’ regular schools; (ii) examination-related and academic tutoring; and (iii) other cultural and educational activities would be required to obtain the private school operating permits. However, private training institutions that only carry out activities aiming at the quality promotion and personality development in the areas of linguistic competence, arts, sports, science and technology teaching, and activities targeting cultural education and non-academic continuing education for adults are not subject to such requirement.

 

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As of the date of this prospectus, there has been no indication when the Committee Draft Implementation Rules of the Private Education Promotion Law would become law. We believe that if the Committee Draft Implementation Rules of the Private Education Promotion Law comes into effect in its current form, based on the nature of our business, our self-operated learning centers would likely to be categorized as private training institutions that implement activities aiming at quality promotion and personality development in the areas of linguistic competence, and therefore, they should not be required to obtain the private school operating permits. We also noticed that since the promulgation of the Private Education Promotion Law in 2003, only the Implementing Rules on the Supervision and Administration of For-Profit Private Schools promulgated in December 2016 clearly required private training institutions that were registered as corporations to obtain the private school operating permits, and the Committee Draft Implementation Rules of the Private Education Promotion Law subsequently by implementing different requirements for training institutions based on the nature of their business. We believe that these regulatory changes demonstrated that the PRC regulatory authorities generally intended to improve the category-based administration of private training institutions and encourage the development of training institutions that are focused on providing training activities relating to quality promotion and personality development and cultural education and non-academic continuing education for adults.

 

Enforcement Actions on Private Training Institutions

 

Since 2018, the local governments in the PRC began to tighten the regulations on after-school training institutions. Pursuant to Circular 3, which came into effect on February 13, 2018, the relevant government authorities will carry out a series of inspections on after-school training institutions and order those with material potential safety risks to suspend business for self-inspection and rectification, which specified that the nationwide rectification work by the local authorities shall be completed by December 31, 2018, and those without proper establishment licenses or school operating permits to apply for the relevant qualifications and certificates under the guidance of competent government authorities. Pursuant to Circular 80, which came into effect on August 6, 2018, the after-school training institutions must obtain the business license (or corporate legal person certificate or private non-enterprise unit registration certificate) for carrying out the training business. In addition, pursuant to Circular 10, for institutions that carry out academic training activities without permits, non-academic training institutions that carry out academic training activities and other institutions that carry out illegal training activities, the education authorities, in collaboration with other relevant government departments, shall cease their business, restrict their legal representatives to engage in training activities for primary and secondary school students and refer to the market supervision authority to revoke their business licenses. We believe that the abovementioned enforcement actions were aimed to regulate the private after-school training institutions that primarily provide academic training activities and services targeting K-12 students. Additionally, according to Circular 10, private training institutions should implement classified management, be categorized by the nature of the services they provide and be regulated after the Committee Draft Implementation Rules of the Private Education Promotion Law is officially promulgated and implemented.

 

In terms of enforcement of the abovementioned rules and regulations on after-school training institutions, local government authorities have approached it differently: (i) certain local authorities provided seminars to the public to explain their proposed enforcement measures but did not take any further action; (ii) certain other local authorities treated all English-related training as further education-related tutoring without differentiating the nature, content and enrollment target of the English-related services they provide and required all those English-related training service providers to obtain the private school operating permits; and (iii) some local authorities have yet to begin accepting private school operating permit applications.

 

As of the date of this prospectus, other than our four learning centers located in Xi’an, Guangzhou, Shenzhen and Hefei that were ordered by the relevant local authorities to suspend their business operations for rectification, no other self-operated learning centers has been ordered to suspend their business operations for rectification by the local authorities. Of these four learning centers, we have applied for the private school operating permits and the learning center in Guangzhou has obtained the private school operating permit, while the competent local authorities are in the process of reviewing their applications with respect to the learning center in Xi’an as of the date of prospectus. However, the remaining learning centers in Shenzhen and Hefei were unable to apply for the private school operating permit because the local government authority in Shenzhen has temporarily suspended its acceptance of private school operating permit applications as a result a lack of clear local implementation policy for private training institutions and the local government authority in Hefei has temporarily suspended its acceptance of private school operating permit applications of the adult ELT business. We intend to proactively apply for the private school operating permit for such learning centers once the relevant implementation policy is in place.

 

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Measures of Punishment for Violation of Professional Ethics of Elementary and Secondary School Teachers

 

The MOE promulgated the Measures for Punishment for Violation of Professional Ethics of Elementary and Secondary School Teachers on January 11, 2014 and amended such measures on November 8, 2018, which prohibits teachers of elementary and secondary schools from providing paid training in schools or in out-of-school training institutions. Some provinces and cities where our schools are located have adopted more stringent regulations which prohibit public school teachers from teaching, on a part-time basis, at private schools or learning centers. For a detailed description of the risk associated with these matters, see “Risk Factors — Risks Related to Our Business and Operations — We may not be able to continue to recruit, train and retain dedicated and qualified teaching staff, who are critical to the success of our business and the effective delivery of our ELT services to students.”

 

Regulations Related to Online Business

 

Value-Added Telecommunications Services

 

The Telecommunications Regulations of the PRC, or the Telecommunications Regulations, which was promulgated by the State Council on PRC. The Telecommunications Regulations categorize telecommunications services into basic telecommunications services and value-added telecommunications services. Operators of value-added telecommunications services must first obtain a Value-added Telecommunications Business Operating License, or the VAT License, from the MIIT or its provincial level counterparts.

 

According to the Catalog of Telecommunications Business (2015 version), attached to the Telecommunications Regulations, which was promulgated by the MIIT on February 21, 2003 and amended on December 28, 2015. Information services provided via fixed network, mobile network and internet fall within value-added telecommunications services.

 

Internet Information Services

 

The State Council promulgated the Internet Information Services Administrative Measures, or the Internet Information Measures, on September 25, 2000, and amended on January 8, 2011. According to the Internet Information Measures, Internet information services refers to service activities which provide information to online users through the internet, which are divided into services of a commercial nature and services of a non-commercial nature. Commercial internet information services refer to paid services of providing information or creating webpages offered to online users through the internet, while non-commercial internet information services refer to services free of charge of providing public information to online users through the internet. Entities engaging in commercial internet information services shall obtain a license for internet information services, or ICP license, from the appropriate telecommunications authorities. Entities engaging in non-commercial internet information services shall complete filings with the telecommunications authorities.

 

Broadcasting Audio-Visual Programs through the Internet or Other Information Network

 

The Administrative Measures Regarding Internet Audio-Visual Program Services, or the Audio-Visual Measures, promulgated by the State Administration of Press, Publication, Radio, Film and Television, or the SAPPRFT (formerly known as the State Administration of Radio, Film and Television, or the SARFT), on July 6, 2004 and came into effect on October 11, 2004, applies to the activities relating to the opening, broadcasting, integration, transmission or downloading of audio-visual programs using the internet or other information networks. Under the Audio-Visual Measures, in order to engage in the business of transmitting audio-visual programs, a license issued by the SAPPRFT is required, and “audio-visual programs (including the audio-visual products of film and televisions)” is defined as audio-visual programs consisting of movable pictures or sounds that can be listened to continuously, which are shot and recorded using video cameras, vidicons, recorders and other audio-visual equipment for producing programs. Foreign-invested enterprises are not allowed to carry out such business. On April 13, 2005, the State Council promulgated Certain Decisions on the Entry of Non-state-owned Capital into the Cultural Industry. On July 6, 2005, five PRC governmental authorities, including the SAPPRFT, jointly adopted the Several Opinions on Canvassing Foreign Investment into the Cultural Sector. According to these regulations, non-state-owned capital or foreign investors are not allowed to engage in the business of transmitting audio-visual programs through information networks. However, the Audio-Visual Measures have been repealed according to the Administrative Provisions on Audio-Visual Program Service through Special Network and Directed Transmission that was promulgated by the SAPPRFT on May 4, 2016, and became effective as of June 1, 2016.

 

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To further regulate the provision of audio-visual program services to the public via the internet, including through mobile networks, within the territory of the PRC, the SAPPRFT and the MIIT jointly promulgated the Administrative Provisions on Internet Audio-Visual Program Service, or the Audio-Visual Program Provisions, on December 20, 2007, which came into effect on January 31, 2008. Under the Audio-Visual Program Provisions, “Internet audio-visual program services” is defined as the activity of producing, redacting and integrating audio-visual programs, providing them to the general public via internet, and providing services for other people to upload and transmit audio-visual programs; providers of internet audio-visual program services are required to obtain a License for Online Transmission of Audio-Visual Programs issued by the SAPPRFT or to complete certain registration procedures with the SAPPRFT. In general, providers of internet audio-visual program services must be either state-owned or state-controlled entities, and the business to be carried out by such providers must satisfy the overall planning and guidance catalog for internet audio-visual program service determined by the SAPPRFT. In a press conference jointly held by the SAPPRFT and the MIIT to answer questions relating to the Audio-Visual Program Provisions in February 2008, the SAPPRFT and the MIIT clarified that providers of internet audio-visual program services who are engaged in such services prior to the promulgation of the Audio-Visual Program Provisions are eligible to re-register with the relevant authorities and continue their operation of internet audio-visual program services so long as those providers had not violated relevant laws and regulations in the past. On May 21, 2008, the SAPPRFT issued a Notice on Relevant Issues Concerning Application and Approval of License for the Online Transmission of Audio-Visual Programs, which further sets out detailed provisions concerning the application and approval process regarding the License for Online Transmission of Audio-Visual Programs. The notice also states that providers of internet audio-visual program services that are engaged in such services prior to the promulgation of the Audio-Visual Program Provisions are eligible to apply for the license so long as their violation of the laws and regulations is minor in scope and can be rectified in a timely manner and they have no records of violation during the last three months prior to the promulgation of the Audio-Visual Program Provisions. Further, on March 30, 2009, SAPPRFT promulgated the Notice on Strengthening the Administration of the Content of Internet Audio-Visual Programs, which reiterates the pre-approval requirements for the audio-visual programs transmitted via the internet, including through mobile networks, where applicable, and prohibits certain types of internet audio-visual programs containing violence, pornography, gambling, terrorism, superstition or other similarly prohibited elements.

 

On April 1, 2010, the SAPPRFT promulgated the Provisional Implementation of the Tentative Categories of Internet Audio-Visual Program Services, or the Categories, which clarifies the scope of internet audio-visual program services. According to the Categories, there are four categories of internet audio-visual program services which are further divided into seventeen sub-categories. The third sub-category under the second category covers the making and editing of certain specialized audio-visual programs concerning, among other things, educational content and broadcasting such content to the general public online. However, there are still significant uncertainties relating to the interpretation and implementation of the Audio-Visual Program Provisions, in particular, the scope of the term “internet audio-visual programs.”

 

Internet Cultural Activities

 

On February 17, 2011, the MOC promulgated the Interim Administrative Provisions on Internet Culture, or the Internet Culture Provisions, which became effective on April 1, 2011. The Internet Culture Provisions require ICP service providers engaging in commercial internet cultural activities to obtain a permit from the appropriate culture authority. Internet cultural activities include (i) the production, duplication, importation, and broadcasting of internet cultural products; (ii) the online dissemination whereby cultural products are posted on the internet or transmitted via the internet to end users, such as computers, fixed-line telephones, mobile phones, television sets and games machines, for online users’ browsing, use or downloading; and (iii) the exhibition and comparison of internet cultural products. “Internet cultural products” is defined in the Internet Culture Provisions as cultural products produced, broadcasted and disseminated via the internet, which mainly include internet cultural products produced specifically for the internet, such as online music entertainment, online games, online shows and plays, online performances, online works of art and online cartoons, and internet cultural products produced from cultural products such as music entertainment, games, shows and plays, performances, works of art and cartoons and duplicated for dissemination on the internet.

 

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Internet Publishing

 

On February 4, 2016, the SAPPRFT and the MIIT jointly issued the Administrative Measures of Internet Publishing Services, or the Internet Publishing Measures. According to the Internet Publishing Measures, an entity shall obtain an online publishing services permit to provide online publishing services. Online publishing services refers to the provision of online publications to the public through information networks. Online publications refer to digital works with publishing features such as having been edited, produced or processed and are made available to the public through information networks, including: (i) written works, pictures, maps, games, cartoons, audio/video reading materials and other original digital works containing useful knowledge or ideas in the field of literature, art, science or other fields; (ii) digital works of which the content is identical to that of any published book, newspaper, periodical, audio/video product, electronic publication or the like; (iii) network literature databases or other digital works, derived from any of the aforesaid works by selection, arrangement, collection or other means; and (iv) other types of digital works as may be determined by the SAPPRFT.

 

We have obtained the relevant ICP licenses and may also be required to obtain a license for the online transmission of audio-visual programs, an internet culture permit and an online publishing services permit for the operation of our online education products.

 

Regulation Relating to Publication Distribution

 

The State Council promulgated the Administrative Regulations on Publishing, or the Publishing Regulations, on December 25, 2001, and amended them on February 2, 2016. In accordance with the Publishing Regulations, publishing activities refer to the publishing, printing, copying, importation or distribution of publications, such as books, newspapers, periodicals, audio and video products and electronic publications, and an entity engaging in publishing activities is required to obtain an approval from the relevant publication administrative authorities. Under the Administrative Measures for the Publication Market, or the Publication Market Measures, which was jointly promulgated by the SAPPRFT and the MOFCOM and became effective on March 25, 2011, as amended on May 31, 2016, any enterprise or individual who engages in publication distribution activities shall obtain permission from SAPPRFT or its local counterpart. “Publication” is defined as “books, newspapers, periodicals, audio-visual products, and electronic publications,” and “distributing” is defined as “general distribution, wholesale, retail, rental, exhibition and other activities,” respectively, in the Publication Market Measures. Any enterprise or individual that engages in retail of publications shall obtain a Publication Business Operating License issued by the local counterpart of the SAPPRFT at the county level. In addition, any enterprise or individual that holds a Publication Business Operating License shall file with the relevant local counterpart of the SAPPRFT that granted such license to it within 15 days since it begins to carry out any online publication distribution business.

 

Provisions on Intermediary Service for Self-Funded Overseas Studies

 

On June 17, 1999, the MOE, the Ministry of Public Security and the SAIC jointly promulgated the Provisions on Intermediary Service for Self-Funded Overseas Studies, which became effective on the same date. Pursuant to the regulations, the institutions which intend to carry out intermediary service business shall apply for the Recognition on the Intermediate Service Organization for Self-Funded Overseas Studies with the provincial education authorities. On January 12, 2017, the State Council promulgated the Decision of the State Council on the Third Installment of the Cancelation of the Administrative Licensing Matters Delegated to Local Governments, which, among other things, canceled the Recognition on the Intermediate Service Organization for Self-Funded Overseas Studies, which means that the requirement for intermediate service organizations to obtain Recognition on the Intermediate Service Organization for Self-Funded Overseas Studies from the provincial government for their engaging in intermediate and consulting business activities relating to self-funded overseas studies is canceled. This decision provides that after the cancelation of such requirements, the MOE and the SAIC shall study and develop a contract template for reference, and strengthen their guidance for, regulation on and service to intermediate service organizations and that the relevant industrial association shall take on a self-disciplinary role.

 

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Provisions on Travel Agency

 

The State Council promulgated the Regulations on Travel Agencies on February 20, 2009, which took into effect on May 1, 2009 and were amended on February 6, 2016 and March 1, 2017. On April 25, 2013, the SCNPC promulgated the Tourism Law of the PRC, which took into effect on October 1, 2013 and was amended on November 7, 2016. Pursuant to the Tourism Law of the PRC, travel agencies may engage in domestic tourism, outbound tourism, border tourism and inbound tourism. According to the Implementing Rules of the Regulations on Travel Agencies promulgated by Ministry of Culture and Tourism of the PRC and took into effect on December 12, 2016, outbound tourism business means the travel agencies’ businesses of soliciting, organizing, and receiving residents of the mainland of China to travel abroad, and to Hong Kong Special Administrative Region, Macao Special Administrative Region and Taiwan region, and their businesses of soliciting, organizing, and hosting foreigners in the mainland of China, and residents of Hong Kong Special Administrative Region, Macao Special Administrative Region and Taiwan region in the mainland of China to travel outside the mainland of China. Pursuant to such regulations and laws, the travel agency engaging in domestic tourism business and inbound tourism business shall apply for business operation permit for travel agency. After obtaining such business operation permit for travel agency for two years without fines and severe punishment by administrative organs for infringing tourists’ legal rights and interests, the travel agency may then apply for outbound tourism business. Further, pursuant to the Measures for Administration of Outbound Tours by Chinese Citizens promulgated by the State Council on May 27, 2002, took into effect on July 1, 2002 and amended on March 1, 2017, the travel agency applying for operating the outbound tour business shall have obtained the qualification as an international travel agency over one year, have prominent performance of inbound tour business and have no material unlawful acts and major service problems.

 

Regulations on Fire Safety

 

The Fire Safety Law, promulgated by the Standing Committee of the NPC on April 29, 1998, amended by the Standing Committee of the NPC on October 28, 2008 and April 23, 2019, as well as other relevant detailed fire prevention regulations such as the Provisions on Administration of Construction Permit of Construction Projects, require that premises of training institutions and their training branches with an investment amount of more than RMB300,000 and a construction area of more than 300 square meters shall (i) pass the relevant fire control design examination; and (ii) complete the relevant fire control acceptance inspection.

 

In accordance with the Interim Provisions on the Management of Fire Control Design Examination and Acceptance of Construction Projects, or the Fire Control Management Provisions, which came into effect on June 1, 2020, the housing and urban-rural development bureaus at or above county level are responsible for the matters related to fire safety requirements. Pursuant to the Fire Control Management Provisions, the construction projects are classified under two categories, namely, special projects and other projects. For special projects, the fire control design examination and fire control acceptance inspection procedure applies, according to which the construction entity undertaking special projects shall submit the application for fire control design examination to the competent authority, who will take responsibility for the review results according to the laws and regulations. Following the inspection and acceptance procedures carried out over the completed special projects, the construction entity shall submit an application for fire control acceptance inspection with the competent authorities. For other projects, documentation filing procedures applies. The construction entities are only required to file with the competent authorities by submitting relevant documents and the competent authorities will issue the acknowledgment for completing the fire safety filing

 

Pursuant to these regulations, failure to pass the relevant fire control design examination or complete the relevant fire control acceptance inspection shall subject a company to: (i) orders to suspend the construction of projects, use of such projects or operation of relevant business; and (ii) a fine of between RMB30,000 and RMB300,000. Failure to complete a fire safety filing shall subject a company to: (i) orders to make rectifications within a specified time limit; and (ii) a fine of not more than RMB5,000. See “Risk Factors — Risks Related to Our Business and Operations — A certain number of our self-operated learning centers and our owned properties are not in compliance with fire safety regulations.”

 

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In addition, fire departments conduct spot inspections irregularly. The training institutions and their training branches that fail to pass such inspections are also subject to monetary penalties and suspension of business operations.

 

Regulations Relating to Employment, Social Insurance and Housing Provident Fund

 

Employment

 

According to the PRC Labor Law, or the Labor Law, which was promulgated by the Standing Committee of the National People’s Congress, or the SCNPC, on July 5, 1994, came into effect on January 1, 1995, and was amended on August 27, 2009 and December 29, 2018, an employer shall develop and improve its rules and regulations to safeguard the rights of its employees. An employer shall establish and develop labor safety and health systems, stringently implement national protocols and standards on labor safety and health, get employees to receive labor safety and health education, guard against labor accidents and reduce occupational hazards. Labor safety and health facilities must comply with the relevant national standards. An employer must provide employees with the necessary labor protection gear that complies with labor safety and health conditions stipulated under national regulations, and provide regular health examinations for employees that are engaged in work with occupational hazards. Employees engaged in special operations must receive specialized training and obtain pertinent qualifications. An employer shall develop a vocational training system. Vocational training funds shall be set aside and used in accordance with national regulations, and vocational training for employees shall be carried out systematically based on the actual conditions of the Company.

 

The Labor Contract Law of the PRC, which was promulgated by the SCNPC on June 29, 2007, amended on December 28, 2012, and came into effect on July 1, 2013, combined with the Implementation Regulations on Labor Contract Law, which was promulgated and became effective September 18, 2008, regulate the parties to labor contracts, namely employers and employees, and contain specific provisions relating to the terms of labor contracts. Under the Labor Contract Law and the Implementation Regulations on Labor Contract Law, a labor contract must be made in writing. An employer and an employee may enter into a fixed-term labor contract, an un-fixed term labor contract, or a labor contract that concludes upon the completion of certain work assignments, after reaching agreement upon due negotiations. An employer may legally terminate a labor contract and dismiss its employees after reaching agreement upon due negotiations with its employees or by fulfilling the statutory conditions. Where a labor relationship has already been established without a written labor contract, the written labor contracts shall be entered into within one month from the date on which the employee commences working.

 

Social Insurance

 

The Law on Social Insurance of the PRC, which was promulgated on October 28, 2010, and became effective on July 1, 2011 and was amended on December 29, 2018, has established social insurance systems of basic pension insurance, unemployment insurance, maternity insurance, work injury insurance and basic medical insurance, and has elaborated in detail the legal obligations and liabilities of employers who do not comply with relevant laws and regulations on social insurance.

 

According to the Interim Regulations on the Collection and Payment of Social Insurance Premiums, the Regulations on Work Injury Insurance, the Regulations on Unemployment Insurance and the Trial Measures on Employee Maternity Insurance of Enterprises, enterprises in the PRC shall provide benefit plans for their employees, which include basic pension insurance, unemployment insurance, maternity insurance, work injury insurance and basic medical insurance. An enterprise must provide social insurance by going through social insurance registration with local social insurance authorities or agencies, and shall pay or withhold relevant social insurance premiums for or on behalf of employees.

 

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Housing Provident Fund

 

According to the Administrative Regulations on the Administration of the Housing Provident Fund, which was promulgated and became effective on April 3, 1999, and was amended on March 24, 2002 and March 24, 2019, housing provident fund contributions paid and deposited both by employees and their unit employer shall be owned by the employees.

 

A unit employer shall undertake registration of payment and deposit of the housing provident fund in the housing provident fund management center and, upon verification by the housing provident fund management center, open a housing provident fund account on behalf of its employees in a commissioned bank. Employers shall timely pay and deposit housing provident fund contributions in the full amount and late or insufficient payments shall be prohibited. With respect to unit employers who violate the regulations hereinabove and fail to complete housing provident fund payment and deposit registrations or open housing provident fund accounts for their employees, such unit employers shall be ordered by the housing provident fund administration center to complete such procedures within a designated period. Those who fail to complete their registrations within the designated period shall be subject to a fine of between RMB10,000 and RMB50,000. When unit employers are in breach of these regulations and fail to pay deposit housing provident fund contributions in the full amount as they fall due, the housing provident fund administration center shall order such unit employers to pay within a prescribed time limit, failing which an application may be made to a people’s court for compulsory enforcement.

 

PRC Laws and Regulations Relating to Trademark, Domain Name and Copyright

 

Trademark

 

Pursuant to the Trademark Law of the PRC, or the Trademark Law, which was revised on April 23, 2019, and came into effect from November 1, 2019, the term “registered trademarks” refers to trademarks that have been approved by and registered with the Trademark Office of the National Intellectual Property Administration, and includes commodity trademarks, service trademarks, collective marks and certification marks. The trademark registrant shall enjoy an exclusive right to use the trademark registered under its name, which shall be protected by laws.

 

Domain Name

 

Pursuant to the Administrative Measures for Internet Domain Names, which was promulgated by the MIIT on August 24, 2017 and became effective on November 1, 2017, domain name registration is subject to the principle of “first come, first served.” The domain names registered or used by an organization or individual may not contain any contents prohibited by laws and administrative regulations. A domain name registration applicant is required to provide the domain name registration service agency with true, accurate and complete identity information on the domain name holder.

 

Copyright and Software Registration

 

The Standing Committee of the NPC adopted the Copyright Law in 1990 and amended it in 2001 and 2010, respectively. The amended Copyright Law extends copyright protection to internet activities, products disseminated over the internet and software products. In addition, there is a voluntary registration system administered by the China Copyright Protection Center. The amended Copyright Law also requires registration of a copyright pledge. To address the problem of copyright infringement related to the content posted or transmitted over the internet, the National Copyright Administration and the MIIT jointly promulgated the Measures for Administrative Protection of Copyright Related to Internet on April 29, 2005. This measure became effective on May 30, 2005.

 

Pursuant to the Computer Software Protection Regulations promulgated by the State Council on December 20, 2001, and amended on November 8, 2011 and January 30, 2013, respectively, the software copyright owner may go through the registration formalities with a software registration authority recognized by the State Council’s copyright administrative department. The owner of a software copyright may authorize others to exercise that copyright, and shall have the right to receive remuneration. In order to further implement the Computer Software Protection Regulations, the State Copyright Bureau issued the Computer Software Copyright Registration Procedures on February 20, 2002, which applies to software copyright registration, license contract registration and transfer contract registration.

 

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Regulations on Companies

 

The establishment, operation and management of corporate entities in the PRC are governed by the Company Law of the PRC, or the PRC Company Law, which was promulgated on December 29, 1993 and amended on December 25, 1999, August 28, 2004, October 27, 2005, December 28, 2013 and October 26, 2018. Under the PRC Company Law, companies are generally classified into two categories: limited liability companies and limited companies by shares. The PRC Company Law also applies to foreign-invested limited liability companies but where other relevant laws regarding foreign investment have provided otherwise, such other laws shall prevail. The latest amendment to the PRC Company Law took effect from March 1, 2014, pursuant to which there is no longer a prescribed timeframe for the shareholders to make full capital contribution to a company, except otherwise provided in other relevant laws, administrative regulations and State Council decisions. Instead, shareholders are only required to state the capital amount that they commit to subscribe in the articles of association of the company. Further, the initial payment of a company’s registered capital is no longer subject to a minimum amount requirement and the business license of a company will not show its paid-up capital. In addition, shareholders’ contribution of the registered capital is no longer required to be verified by capital verification agencies.

 

Regulations on Tax

 

PRC Enterprise Income Tax Law

 

The EIT Law took effect in January 1, 2008 and was amended on February 24, 2017 and December 29, 2018. The EIT Law applies a uniform 25% enterprise income tax rate to both foreign-invested enterprises and domestic enterprises, except where tax incentives are granted to special industries and projects. Small and micro enterprises meeting certain conditions are entitled to a preferential enterprise income tax rate of 20%. Under the EIT Law and its implementation regulations, dividends generated from the business of a PRC subsidiary after January 1, 2008 and payable to its foreign investor may be subject to a withholding tax rate of 10% if the PRC tax authorities determine that the foreign investor is a nonresident enterprise, unless there is a tax treaty with China that provides for a preferential withholding tax rate. Distributions of earnings generated before January 1, 2008 are exempt from PRC withholding tax.

 

Under the EIT Law, an enterprise established outside China with a “de facto management body” within China is considered a “resident enterprise” for PRC enterprise income tax purposes and is generally subject to a uniform 25% enterprise income tax rate on its worldwide income. A circular issued by the State Administration of Taxation, or the SAT, in April 2009 regarding the standards used to classify certain Chinese-invested enterprises controlled by Chinese enterprises or Chinese enterprise groups and established outside of China as “resident enterprises” clarified that dividends and other income paid by such PRC “resident enterprises” will be considered PRC-source income and subject to PRC withholding tax, currently at a rate of 10%, when paid to non-PRC enterprise shareholders. This circular also subjects such PRC “resident enterprises” to various reporting requirements with the PRC tax authorities. Under the implementation regulations to the EIT Law, a “de facto management body” is defined as the management body that exercises substantial and overall management and control over the business, personnel, accounts and properties of an enterprise. In addition, the tax circular mentioned above specifies that certain PRC-invested overseas enterprises controlled by a Chinese enterprise or a Chinese enterprise group in the PRC will be classified as PRC resident enterprises if the following are located or resident in the PRC: (i) senior management personnel and departments responsible for daily production, operation and management; (ii) financial and personnel decision-making bodies; (iii) key properties, accounting books, the company seal, and minutes of board meetings and shareholders’ meetings; and (iv) half or more of the senior management or directors who have voting rights.

 

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Pursuant to the Arrangement between the PRC and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income, the withholding tax rate with respect to the payment of dividends by a PRC enterprise to a Hong Kong enterprise may be reduced to 5% from a standard rate of 10% if the Hong Kong enterprise directly holds at least 25% of the PRC enterprise. Pursuant to the Notice of the State Administration of Taxation on the Issues concerning the Application of the Dividend Clauses of Tax Agreements, or SAT Circular 81, a Hong Kong resident enterprise must meet the following conditions, among others, in order to apply the reduced withholding tax rate: (i) it must be a company; (ii) it must directly own the required percentage of equity interests and voting rights in the PRC resident enterprise; and (iii) it must have directly owned such required percentage in the PRC resident enterprise throughout the 12 months prior to receiving the dividends. In August 2015, the State Administration of Taxation promulgated the Administrative Measures for Nonresident Taxpayers to Enjoy Treatment under Tax Treaties, or SAT Circular 60, which became effective on November 1, 2015. SAT Circular 60 provides that nonresident enterprises are not required to obtain pre-approval from the relevant tax authority in order to enjoy the reduced withholding tax. Instead, nonresident enterprises and their withholding agents may, by self-assessment and on confirmation that the prescribed criteria to enjoy the tax treaty benefits are met, directly apply the reduced withholding tax rate, and file necessary forms and supporting documents when performing tax filings, which will be subject to post-tax filing examinations by the relevant tax authorities. 

 

In January 2009, the SAT promulgated the Provisional Measures for the Administration of Withholding of Enterprise Income Tax for Nonresident Enterprises, or the Nonresident Enterprises Measures, pursuant to which entities that have the direct obligation to make certain payments to a nonresident enterprise shall be the relevant tax withholders for such nonresident enterprise. Further, the Nonresident Enterprises Measures provide that, in case of an equity transfer between two nonresident enterprises which occurs outside China, the nonresident enterprise which receives the equity transfer payment shall, by itself or engage an agent to, file a tax declaration with the PRC tax authority located at the place of the PRC company whose equity has been transferred, and the PRC company whose equity has been transferred shall assist the tax authorities to collect taxes from the relevant nonresident enterprise. On April 30, 2009, the Ministry of Finance and the SAT jointly issued the Notice on Issues Concerning Process of Enterprise Income Tax in Enterprise Restructuring Business, or Circular 59. On December 10, 2009, the SAT issued the Notice on Strengthening the Administration of the Enterprise Income Tax concerning Proceeds from Equity Transfers by Nonresident Enterprises, or Circular 698. Both Circular 59 and Circular 698 became effective retroactively as of January 1, 2008. By promulgating and implementing these two circulars, the PRC tax authorities have enhanced their scrutiny over the direct or indirect transfer of equity interests in a PRC resident enterprise by a nonresident enterprise.

 

On February 3, 2015, the SAT issued the Announcement of the State Administration of Taxation on Several Issues Concerning the Enterprise Income Tax on Indirect Property Transfer by Nonresident Enterprises, or SAT Bulletin 7, to supersede the provisions in relation to the indirect transfer as set forth in Circular 698. SAT Bulletin 7 introduces a new tax regime that is significantly different from that under Circular 698. SAT Bulletin 7 extends its tax jurisdiction to capture not only indirect transfers as set forth under Circular 698 but also transactions involving transfer of immovable property in China and assets held under the establishment and place in China of a foreign company through the offshore transfer of a foreign intermediate holding company. SAT Bulletin 7 also addresses transfer of the equity interest in a foreign intermediate holding company. In addition, SAT Bulletin 7 provides clearer criteria than Circular 698 on how to assess reasonable commercial purposes and introduces safe harbor scenarios applicable to internal group restructurings. However, it also brings challenges to both the foreign transferor and transferee of the indirect transfer as they have to make self-assessment on whether the transaction should be subject to PRC tax and to file or withhold the PRC tax accordingly.

 

On October 17, 2017, the SAT issued the Announcement of the State Administration of Taxation on Issues Concerning the Withholding of Nonresident Enterprise Income Tax at Source, or SAT Bulletin 37, which came into effect and superseded Circular 698 and the Nonresident Enterprises Measures on December 1, 2017. SAT Bulletin 37 further clarifies the practice and procedure for the withholding of nonresident enterprise income tax. Among other things, SAT Bulletin 37 provides that:

 

  for the income from equity investment assets, the competent tax authority for the income tax of the invested enterprise shall be the competent tax authority, while for the income from the dividends, extra dividends and other equity investment, the competent tax authority for the income tax of the enterprise distributing the income shall be the competent tax authority;

 

  the withholding obligator shall declare and pay the withheld tax to the competent tax authority in the place where such withholding obligator is located with seven days from the date of occurrence of the withholding obligation;

 

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  where the income obtained by the withholding obligator and required to be withheld at source is in the form of dividends, extra dividends or any other equity investment gains, the date of occurrence of the obligation for withholding relevant payable tax is the date of actual payment of the dividends, extra dividends or other equity investment gains;

  

  for the income tax required to be withheld under Article 37 of the EIT Law, if the withholding obligator fails to withhold in accordance with the law or is unable to perform its withholding obligation, the nonresident enterprise obtaining the income shall declare and pay the tax not withheld to the competent tax authority of the place of the occurrence of the income in accordance with Article 39 of the EIT Law and complete the Form of Report on Withholding of Enterprise Income Tax of the People’s Republic of China; where the nonresident enterprise fails to declare and pay tax in accordance with Article 39 of the EIT Law, the tax authority may order it to pay the tax within a specified time limit and the nonresident enterprise shall declare and pay the tax within the time limit determined by the tax authority; the nonresident enterprise that declares and pays the tax voluntarily before the tax authority orders it to pay tax within a specified time limit shall be deemed as having paid tax as scheduled;

 

  the competent tax authority may require the taxpayer, withholding obligator and relevant parties with knowledge of relevant information to provide the contracts and other relevant materials relating to the withholding of tax. The withholding obligator shall set up the account books for withholding and payment of tax and file of contracts and materials to accurately record the withholding and payment of nonresident enterprise income tax; and

 

  where the withholding obligator fails to withhold the tax required to be withheld under Article 37 of the EIT Law, the competent tax authority of the place where the withholding obligator is located shall order the withholding obligator to make up for the withholding of tax in accordance with Article 23 of the Administrative Punishment Law of the People’s Republic of China and hold the withholding obligator liable in accordance with the law; if recovery of tax payment from the taxpayer is necessary, the competent tax authority of the place where the income occurs shall implement the recovery in accordance with the law. If the place where the withholding obligator is located is different from the place where the income occurs, the competent tax authority of the place of occurrence of the income that is responsible for recovering the tax payment shall give notice to the competent tax authority of the place where the withholding obligator is located for verifying relevant information. The competent tax authority of the place where the withholding obligator is located shall, within five working days from the date where it is determined that the payable tax is not withheld in accordance with the law, send the Contact Letter for Nonresident Enterprise Tax Matters to the competent tax authority of the place of occurrence of income and notify the latter of the tax-related matters of the nonresident enterprise.

 

Where nonresident investors were involved in our private equity financing, if such transactions were determined by the tax authorities to lack reasonable commercial purpose, we and our nonresident investors may become at risk of being required to file a return and taxed under SAT Bulletin 7 and/or SAT Bulletin 37 and we may be required to expend valuable resources to comply with SAT Bulletin 7 and/or SAT Bulletin 37 or to establish that we should not be held liable for any obligations under SAT Bulletin 7 and/or SAT Bulletin 37.

 

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PRC Value-added Tax in Lieu of Business Tax

 

On January 1, 2012, the Chinese State Council officially launched a pilot value-added tax reform program, or Pilot Program, applicable to businesses in selected industries. Businesses in the Pilot Program would pay value-added tax, or VAT, instead of business tax. Pilot industries in Shanghai include industries involving the leasing of tangible movable property, transportation services, product development and technical services, information technology services, cultural and creative services, logistics and ancillary services, certification and consulting services. According to official announcements made by competent authorities in Beijing and Guangdong Province, Beijing launched the same Pilot Program on September 1, 2012, and Guangdong Province launched its pilot program on November 1, 2012. On May 24, 2013, the Ministry of Finance and the State Administration of Taxation issued the Circular on Tax Policies in the Nationwide Pilot Collection of Value Added Tax in Lieu of Business Tax in the Transportation Industry and Certain Modern Services Industries, or the Pilot Collection Circular. The scope of certain modern services industries under the Pilot Collection Circular extends to the inclusion of radio and television services. On August 1, 2013, the Pilot Program was implemented throughout China. On December 12, 2013, the Ministry of Finance and the SAT issued the Circular on the Inclusion of the Railway Transport Industry and Postal Service Industry in the Pilot Collection of Value-added Tax in Lieu of Business Tax, or the 2013 VAT Circular. Among the other things, the 2013 VAT Circular abolished the Pilot Collection Circular, and refined the policies for the Pilot Program. On April 29, 2014, the Ministry of Finance and the SAT issued the Circular on the Inclusion of Telecommunications Industry in the Pilot Collection of Value-added Tax in Lieu of Business Tax. On March 23, 2016, the Ministry of Finance and the SAT issued the Circular on the Comprehensive Promotion of the Pilot Program of the Collection of Value-added Tax in Lieu of Business Tax. Effective from May 1, 2016, the PRC tax authorities collect VAT in lieu of business tax on a trial basis within the territory of China, and in industries such as construction industries, real estate industries, financial industries and living service industries. Some of our subsidiaries as a small-scale taxpayer will be required to pay VAT at a tax rate of 3% for the services. On March 20, 2019, the Ministry of Finance, the SAT and the General Administration of Customs announced the VAT rate of 16% for sales of goods is reduced to 13% effective from April 1, 2019.

 

PRC Laws and Regulations Relating to Foreign Exchange

 

Regulations on Loans to and Direct Investment in the PRC Entities by Offshore Holding Companies

 

According to the Implementation Rules for the Provisional Regulations on Statistics and Supervision of Foreign Debt promulgated by the SAFE on September 24, 1997 and the Interim Provisions on the Management of Foreign Debts promulgated by the SAFE, the NDRC and the MOF that became effective from March 1, 2003, loans by foreign companies to their subsidiaries in China, which accordingly are foreign-invested enterprises, are considered foreign debts. Pursuant to the Measures for the Administration of Foreign Debt Registration issued by the SAFE on April 28, 2013 and the Notice on Matters concerning the Macro-Prudential Administration of Full-Covered Cross-Border Financing issued by the PBOC on January 11, 2017, the total amount of accumulated foreign debt borrowed by a foreign-invested enterprise is subject to a upper limit calculated based on a statutory formula, and the foreign-invested enterprise is required to file with the SAFE after entering into relevant foreign debt contract and within at least three business days before drawing any money from the foreign debts.

 

According to applicable PRC regulations on foreign-invested enterprises, if a foreign holding company makes capital contributions to its PRC subsidiaries, which are considered foreign-invested enterprises, the PRC subsidiaries must file with the MOFCOM or its local counterpart in connection with the increase of its registered capital.

 

Foreign Currency Exchange

 

Pursuant to the Foreign Exchange Administration Rules, as amended from time to time up until the date of this prospectus, and various regulations issued by SAFE and other relevant PRC government authorities, Renminbi is freely convertible to the extent of current account items, such as trade and service-related receipts and payments, interest and dividends. Capital account items, such as direct equity investments, loans and repatriation of investment, unless expressly exempted by laws and regulations, still require prior approval from the SAFE or its provincial branch for conversion of Renminbi into a foreign currency, such as U.S. dollars, and remittance of the foreign currency outside of China. Payments for transactions that take place within China shall be made in Renminbi. Foreign currency revenue received by PRC companies may be repatriated into China or retained outside of China in accordance with requirements and terms specified by the SAFE.

 

Under the Foreign Exchange Administration Rules, foreign-invested enterprises in China may, without the approval of the SAFE, make a payment from their foreign exchange accounts at designated foreign exchange banks for paying dividends with certain evidencing documents (e.g., board resolutions and tax certificates), or for trade and services-related foreign exchange transactions by providing commercial documents evidencing such transactions. They are also allowed to retain foreign currency (subject to a cap approved by the SAFE) to satisfy foreign exchange liabilities. In addition, foreign exchange transactions involving overseas direct investment or investment and trading in securities and derivative products abroad are subject to registration with the SAFE or its local counterparts and approval from or filling with other relevant PRC government authorities, if necessary.

 

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Regulations Relating to Foreign Exchange Registration of Overseas Investment by PRC Residents

 

SAFE Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, issued by the SAFE and becoming effective on July 4, 2014, regulates foreign exchange matters in relation to the use of special purpose vehicles, or SPVs, by PRC residents or entities to seek offshore investment and financing and conduct round trip investment in China. Under SAFE Circular 37, an SPV refers to an offshore entity established or controlled, directly or indirectly, by PRC residents or entities for the purpose of seeking offshore financing or making offshore investment, using legitimate domestic or offshore assets or interests, while “round trip investment” refers to the direct investment in China by PRC residents or entities through SPVs, namely, establishing foreign-invested enterprises within the PRC through a new entity, merger or acquisition and other ways to obtain the ownership, control rights and management rights. SAFE Circular 37 requires that, before making contribution into an SPV, PRC residents or entities are required to complete foreign exchange registration with SAFE or its local branch. In the event of any change in the basic information such as the domestic individual shareholder, name, operation term, etc. in connection with such SPV, or if there is a capital increase, decrease, equity transfer or swap, merge, spinoff or other material changes in connection with such SPV, the PRC residents or entities shall complete foreign exchange alteration registration formality for offshore investment. SAFE Circular 37 further provides that option or share-based incentive tool holders of a non-listed SPV can exercise the options or share incentive tools to become a shareholder of such non-listed SPV, subject to registration with SAFE or its local branch. In addition, according to the procedural guidelines as attached to SAFE Circular 37, PRC residents or entities are only required to register the SPV directly established or controlled (first level).

 

On February 13, 2015, the SAFE further promulgated the Circular on Further Simplifying and Improving the Administration of the Foreign Exchange Concerning Direct Investment, or SAFE Circular 13, which took effect on June 1, 2015. SAFE Circular 13 has amended SAFE Circular 37 by requiring PRC residents or entities to register with qualified banks rather than SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing.

 

Regulations on Share Incentive Plans

 

Pursuant to the Notice on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Share Incentive Plan of an Overseas Publicly Listed Company, or SAFE Circular 7, which was issued by the SAFE in February 2012, the domestic individuals, including PRC citizens and non-PRC citizens residing in China for a continuous period of not less than one year (but excluding the foreign diplomatic personnel and representatives of international organizations), who participate in any share incentive plan of an overseas publicly listed company, such as its employees, directors, supervisors and other senior management, are required to register with SAFE through a domestic qualified agent, which could be a PRC subsidiary of such overseas listed company, and certain other procedures are also required to be completed. Failure to complete the SAFE registrations may result in fines and legal sanctions on such domestic individuals and may also limit their capability to contribute additional capital into the wholly foreign-owned subsidiary in China and further limit such subsidiary’s capability to distribute dividends.

 

In addition, the State Administration of Taxation has issued certain circulars concerning employee share options or restricted shares. Under these circulars, the employees working in the PRC will be subject to PRC individual income tax when they exercise share options or are granted restricted shares. The PRC subsidiaries of such overseas listed company have the obligations to file documents related to employee share options or restricted shares with relevant tax authorities and to withhold individual income taxes levied on those employees exercising their share options. If the employees fail to pay or the PRC subsidiaries fail to withhold their income taxes according to relevant laws and regulations, the PRC subsidiaries may face sanctions imposed by the tax authorities or other PRC government authorities.

 

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Organizational Structure 

 

We are an exempted company with limited liability incorporated in the Cayman Islands. We began our operations in April 2006, when Mr. Jishuang Zhao, Mr. Siguang Peng and Mr. Yupeng Guo founded Shenzhen Meten. Since our incorporation and as of March 31, 2020, we have established a network of 145 learning centers in China, including 128 self-operated learning centers and 17 franchised learning centers, and also acquired a number of complementary businesses in China.

 

In order to facilitate international capital investment in us, in July 2018, we incorporated Meten to become our offshore holding company under the laws of Cayman Islands and reorganized our group companies into a reorganization structure typical for China-based education businesses. In October 2018, we established Shenzhen Likeshuo as part of our onshore reorganization. Due to restrictions imposed by PRC laws and regulations on foreign ownership of companies that engage in education services, we currently do not hold any equity interest in Shenzhen Meten and Shenzhen Likeshuo. Instead, we entered into a series of contractual arrangements with, among others, Shenzhen Meten, Shenzhen Likeshuo and their respective shareholders in November 2018 to obtain effective control of these two companies and their respective subsidiaries.

 

On December 12, 2019, we entered into the Merger Agreement with EdtechX, EdtechX Merger Sub, Meten Merger Sub and Meten. On March 30, 2020, the parties to the Merger Agreement consummated the Mergers. After the consummation of the Mergers, Meten becomes a wholly owned subsidiary of our Company. The chart below illustrates our corporate and shareholding structure:

 

  

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(1)Shenzhen Meten is owned as to 27.3250% by Mr. Jishuang Zhao, 13.8080% by Mr. Siguang Peng, 13.0829% by Mr. Yupeng Guo, 10.3918% by Xinyu Meilianzhong Investment Management Centre (Limited Partnership), or Xinyu Meilianzhong, 4.9146% by Mr. Yun Feng, 3.9957% by Xinyu Meilianxing Investment Management Centre (Limited Partnership), or Xinyu Meilianxing, 3.6719% by Mr. Jun Yao, 3.1719% by Ms. Tong Zeng, 3.5431% by Xinyu Meilianchou Investment Management Centre (Limited Partnership), or Xinyu Meilianchou, 3.0000% by Shenzhen Daoge No.11 Education Investment Partnership (Limited Partnership), or No. 11 Daoge, 1.5781% by Shenzhen Daoge Growth No.3 Investment Fund Partnership (Limited Partnership), or No. 3 Daoge, 1.5090% by Shenzhen Daoge Growth No.6 Investment Fund Partnership (Limited Partnership), or No. 6 Daoge, 0.8722% by Shenzhen Daoge Growth No.5 Investment Fund Partnership (Limited Partnership), or No. 5 Daoge, 0.5000% by Mr. Yongchao Chen, 4.0000% by Zhihan (Shanghai) Investment Center (Limited Partnership), or Shanghai Zhihan, 3.6358% by Shenzhen Daoge No.21 Investment Partnership (Limited Partnership), or No. 21 Daoge and 1.0000% by Hangzhou Muhua Equity Investment Fund Partnership (Limited Partnership), or Hangzhou Muhua.

 

(2)Shenzhen Likeshuo is owned as to 27.3250% by Mr. Jishuang Zhao, 13.8080% by Mr. Siguang Peng, 13.0829% by Mr. Yupeng Guo, 10.3918% by Xinyu Meilianzhong, 4.9146% by Mr. Yun Feng, 3.9957% by Xinyu Meilianxing, 3.6719% by Mr. Jun Yao, 3.1719% by Ms. Tong Zeng, 3.5431% by Xinyu Meilianchou, 3.0000% by No. 11 Daoge, 1.5781% by No. 3 Daoge, 1.5090% by No. 6 Daoge, 0.8722% by No. 5 Daoge, 0.5000% by Mr. Yongchao Chen, 4.0000% by Shanghai Zhihan, 3.6358% by No. 21 Daoge and 1.0000% by Hangzhou Muhua.

 

(3)Primarily involved in operating our “Shuangge English” App.

 

(4)Primarily involved in providing our general adult ELT, overseas training services and junior ELT.

 

(5)Primarily involved in providing our online ELT.

 

Contractual Arrangements with Our VIEs and Their Respective Shareholders

 

Currently, the PRC laws and regulations do not explicitly impose restrictions on foreign investment in the ELT services in the PRC. However, some local government authorities in the PRC have adopted different approaches to granting licenses and permits (particularly, imposing more stringent restrictions on foreign-invested entities) for entities providing ELT services. In the areas where we operate our ELT service business, most local government authorities do not allow foreign-invested entities to establish private institutions to engage in the ELT services, other than in the forms of Sino-foreign cooperative institutions, and the domestic party shall play a dominant role in such cooperation. According to the relevant regulations, foreign investors of Sino-foreign cooperative institutions must be foreign educational institutions with relevant qualifications and experiences. As a foreign company, we are not qualified to run Sino-foreign cooperative institutions in the PRC. In addition, according to Notice 75, foreign invested language training institutions are required to apply for the private school operating permit. However, based on the interviews we conducted in November 2019 with the officials of the local educational authorities in the areas where we have learning centers in operation, most of the local educational authorities provided oral confirmations that due to the fact that the Notice 75 has just been issued for a short period of time and that no detailed supporting rules and regulations have been promulgated, the relevant procedure, approval process and transitional period regarding the application by the foreign invested language training institutions for the private school operating permit are not yet clear and the relevant government authorities have not yet begun to accept applications. In addition, the PRC laws and regulations restrict foreign ownership in value-added telecommunication services and require that a foreign investor who invests in a value-added telecommunications business in the PRC must possess prior experience in operating value-added telecommunications businesses and a proven track record of business operations overseas.

 

Due to the restrictions on foreign ownership in the ELT and value-added telecommunications services described above, we carry out our offline and online ELT business in the PRC through a variable interest entity structure. We currently have two wholly-owned subsidiaries, namely, Zhuhai Meten and Zhuhai Likeshuo, in China. Zhuhai Meten entered into a series of contractual arrangements with, among others, the shareholders of Shenzhen Meten, Shenzhen Meten and its affiliated entities on November 23, 2018 and April 2, 2019, to obtain effective control of Shenzhen Meten and its subsidiaries.

 

The following is a summary of the currently effective contractual arrangements entered into by and among others, Zhuhai Meten, Shenzhen Meten and their respective shareholders and affiliated entities.

 

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Business Cooperation Agreement

 

Pursuant to the business cooperation agreement, Zhuhai Meten shall provide management support, consulting services and technical services necessary for the English training and relevant services, and in return, Shenzhen Meten shall pay services fees to Zhuhai Meten accordingly as described under the exclusive technical service and management consultancy agreement. Without the prior written consent of Zhuhai Meten, Shenzhen Meten and its affiliated entities cannot accept services provided by or establishing similar corporation relationship with any third party. The agreement was entered into on November 23, 2018 and became effective on November 23, 2018 and will remain effective unless terminated upon the full exercise of call option in accordance with the exclusive call option agreement or unilaterally terminated by Zhuhai Meten with a notice of 30 days in advance. Unless otherwise required by applicable PRC laws, Shenzhen Meten and its affiliated entities and shareholders do not have any right to terminate the business corporation agreement.

 

Exclusive Technical Service and Management Consultancy Agreement

 

Pursuant to the exclusive technical service and management consultancy agreement, Zhuhai Meten agreed to provide exclusive technical services to Shenzhen Meten and its affiliated entities, including, but not limited to, (i) design, development, update and maintenance of education software for computer and mobile devices; (ii) design, development, update and maintenance of webpages and websites necessary for the English training and relevant activities; (iii) design, development, update and maintenance of management information systems and other internal management systems necessary for the English training and relevant activities; (iv) provision of other technical support necessary for the education activities; (v) provision of technical consulting services; (vi) provision of technical training; (vii) engaging technical staff to provide on-site technical support; and (viii) providing other technical services reasonably requested by Shenzhen Meten and its affiliated entities.

 

Without the prior written consent of Zhuhai Meten, Shenzhen Meten and their respective affiliated entities cannot accept services provided by or establishing similar corporation relationship with any third party. Zhuhai Meten owns the exclusive intellectual property rights created as a result of the performance of this agreement unless otherwise provided by the PRC laws or regulations. In consideration of the technical and management consultancy services provided by Zhuhai Meten, Shenzhen Meten and their respective affiliated entities agreed to pay annual service fees to Zhuhai Meten in an amount at Zhuhai Meten’s discretion. The agreement was entered into on November 23, 2018 and became effective on November 23, 2018 and will remain effective unless terminated upon the full exercise of call option in accordance with the exclusive call option agreement or unilaterally terminated by Zhuhai Meten with a 30-day notice in advance. Unless otherwise required by applicable PRC laws, Shenzhen Meten and its affiliated entities do not have any right to terminate the exclusive technical service and management consultancy agreement.

 

Exclusive Call Option Agreement

 

Under the exclusive call option agreement, the shareholders of Shenzhen Meten have irrevocably granted Zhuhai Meten or its designated purchaser the right to purchase all or part of the equity interest and all or part of the school sponsor’s interest owned by them in Shenzhen Meten and its affiliated entities at a purchase price equal to the lowest price permitted under the PRC laws and regulations. Zhuhai Meten or its designated purchaser shall have the right to purchase such proportion of equity interests or school sponsor’s interest in Shenzhen Meten and its affiliated entities as it decides at any time.

 

In the event that PRC laws and regulations allow Zhuhai Meten or us to directly hold all or part of the equity interest and/or all or part of the school sponsor’s interest in Shenzhen Meten and its affiliated entities and operate English training and relevant businesses in the PRC, Zhuhai Meten shall issue the notice of exercise of the equity call option as soon as practicable, and the percentage of equity interest and/or school sponsor’s interest purchased upon exercise of the equity call option shall not be lower than the maximum percentage then allowed to be held by Zhuhai Meten or us under PRC laws and regulations. This agreement was entered into on November 23, 2018 and became effective on November 23, 2018 and will remain effective unless terminated upon the full exercise of call option in accordance with this agreement or unilaterally terminated by Zhuhai Meten with a 30-day notice in advance. Unless otherwise required by applicable PRC laws, Shenzhen Meten and its affiliated entities and shareholders do not have any right to terminate the exclusive call option agreement.

 

Equity Pledge Agreement

 

Pursuant to the equity pledge agreement, each of the shareholders of Shenzhen Meten unconditionally and irrevocably pledged and granted first priority security interests over all of his/her/its equity interest in Shenzhen Meten together with all related rights thereto to Zhuhai Meten as security for performance of the contractual arrangements and all direct, indirect or consequential damages and foreseeable loss of interest incurred by Zhuhai Meten as a result of any event of default on the part of the shareholders or Shenzhen Meten and its affiliated entities and all expenses incurred by Zhuhai Meten as a result of enforcement of the obligations of the shareholders and/or Shenzhen Meten under the contractual arrangements. If any of the specified events of default occurs, Zhuhai Meten may exercise the right to enforce the pledge by written notice to the shareholders of Meten Education in one or more of the following ways: (i) to the extent permitted under PRC laws and regulations, Zhuhai Meten may request the shareholders of Shenzhen Meten to transfer all or part of his/her/its equity interest in Shenzhen Meten to any entity or individual designated by Zhuhai Meten at the lowest consideration permissible under the PRC laws and regulations; (ii) sell the pledged equity interest by way of auction or at a discount and have priority in the entitlement to the sales proceeds; or (iii) dispose of the pledged equity interest in other manner subject to applicable laws and regulations. This agreement was entered into on November 23, 2018 and became effective on November 23, 2018 and will remain effective unless terminated upon the full exercise of all obligations under the contractual arrangements or unilaterally terminated by Zhuhai Meten with a 30-day notice in advance. Unless otherwise required by applicable PRC laws, Shenzhen Meten and its affiliated entities and shareholders do not have any right to terminate the equity pledge agreement.

 

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Shareholders’ Rights Entrustment Agreement

 

Pursuant to the shareholders’ rights entrustment agreement, each of the shareholders of Shenzhen Meten has irrevocably authorized and entrusted Zhuhai Meten to exercise of all his/her/its respective rights as shareholders of Shenzhen Meten to the extent permitted by the PRC laws. These rights include, but not limited to: (i) the right to attend shareholders’ meetings of Shenzhen Meten, as the case may be; (ii) the right to exercise voting rights in respect of all matters discussed and resolved at the shareholders’ meeting of Shenzhen Meten; (iii) the right to propose to convene interim shareholders’ meetings of Shenzhen Meten, as the case may be; (iv) the right to sign all shareholders’ resolutions and other legal documents which the shareholders have authority to sign in its capacity as shareholders of Shenzhen Meten, as the case may be; (v) the right to instruct the directors and legal representative of Shenzhen Meten, as the case may be to act in accordance with the instruction of Shenzhen Meten; (vi) the right to exercise all other rights and voting rights of shareholders as prescribed under the articles of association of Shenzhen Meten and its affiliated entities, as the case may be; (vii) the right to handle the legal procedures of registration, approval and licensing of Shenzhen Meten, as the case may be, at business administration department or other government regulatory departments; (viii) the right to transfer or dispose his/her/its equity interest in Shenzhen Meten; and (ix) other shareholders’ rights pursuant to applicable PRC laws and regulations and the articles of association of Shenzhen Meten as amended from time to time. This agreement was entered into on November 23, 2018 and became effective on November 23, 2018 and will remain effective unless terminated upon the full exercise of call option in accordance with the exclusive call option agreement or unilaterally terminated by Zhuhai Meten with a 30-day notice in advance. Unless otherwise required by applicable PRC laws, Shenzhen Meten and its affiliated entities and shareholders do not have any right to terminate the shareholders’ rights entrustment agreement.

 

Spouse Undertakings

 

Pursuant to the spouse undertakings, the respective spouse of the individual shareholders of Shenzhen Meten has irrevocably agreed to the execution of business cooperation agreement, exclusive technical service and management consultancy agreement, exclusive call option agreement, equity pledge agreement and shareholders’ rights entrustment agreement. The respective spouse of the individual shareholders of Shenzhen Meten further undertakes that he or she has not participated, is not participating and shall not in the future participate in the operation, management, liquidation, dissolution and other matters in relation to Shenzhen Meten and its affiliated entities, and confirms that the respective shareholder or its designated person can execute all necessary documents and perform all necessary procedures and give effect to the fundamental purposes under the contractual arrangements mentioned above, and further confirms and agrees to all such documents and procedures in relation to the spouse’s equity interest in Shenzhen Meten. The spouse undertaking shall not be revoked, prejudiced, invalidated or otherwise adversely affected by any increase, decrease, consolidation or other similar events relating to the direct or indirect equity interest in Shenzhen Meten or affected by the death, loss of or restriction on capacity of the spouse, divorce or other similar events. The valid term of the spouse undertakings is same as the term of the business cooperation agreement and shall continue to be valid and binding until otherwise terminated by both Zhuhai Meten and the spouses of the respective individual shareholders in writing.

 

On November 23, 2018, our wholly-owned subsidiary, Zhuhai Likeshuo entered into a series of contractual arrangements which are substantially the same as the contractual arrangements discussed above with the shareholders of Shenzhen Likeshuo, Shenzhen Likeshuo, and its affiliated entities to obtain effective control of Shenzhen Likeshuo and its subsidiaries.

 

In the opinion of our PRC counsel these contractual arrangements are valid, binding, and do not and will not violate applicable PRC laws currently in effect, except that the pledges on the equity interests in our VIEs would not be deemed validly created until they are registered with the competent administration of industry and commerce. However, these contractual arrangements may not be as effective in providing control as direct ownership. There are substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations. For a description of the risks related to our contractual arrangements, please see “Risk Factors — Risks Related to Our Corporate Structure.” 

 

Property, Plants and Equipment   

 

We currently lease substantially all of the properties we use to operate our business. We are headquartered in Shenzhen and Beijing, and the business premises of our offices and self-operated learning centers are located in 28 cities in China as of March 31, 2020. The majority of lease agreements for our learning centers have terms of three to five years. For most of our learning centers, we pay monthly and quarterly rental charges. The rental payments for our learning centers are either set at a fixed rate during the entire rental period or increased every five years based on a preset rate. For details on locations of our facilities, see “— Our Offline Network.

  

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SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA

 

The following tables present the selected consolidated financial data of Meten. The selected consolidated statements of operations data for the fiscal years ended December 31, 2017, 2018 and 2019 and the consolidated balance sheets data as of December 31, 2018 and 2019 have been derived from the audited consolidated financial statements of Meten, which are included in this prospectus beginning on page F-1. The selected consolidated statement of operations data for the fiscal year ended December 31, 2016 and the selected consolidated balance sheets data as of December 31, 2016 and 2017 have been derived from the audited consolidated financial statements of Meten that are not included in this prospectus. The historical results of Meten do not necessarily indicate results expected for any future periods. The selected consolidated financial data of Meten should be read in conjunction with, and are qualified in their entirety by reference to, the consolidated financial statements of Meten and related notes included elsewhere in this prospectus and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Operating Results.” The consolidated financial statements of Meten are prepared and presented in accordance with generally accepted accounting principles in the United States, or U.S. GAAP.

 

   For the Year Ended December 31, 
   2016   2017   2018   2019 
   RMB   RMB   RMB   RMB   US$ 
                     
Summary Consolidated Statements of Comprehensive (Loss)/Income Data:                         
Revenues   801,545    1,149,721    1,424,234    1,447,899    207,978 
General adult ELT(1)   572,135    785,480    903,756    783,988    112,613 
Junior ELT           65,490    167,924    24,121 
Overseas training services   180,606    228,294    223,601    203,677    29,256 
Online ELT   46,915    121,196    212,302    260,263    37,385 
Other English language-related services(2)   1,889    14,751    19,085    32,047    4,603 
Cost of revenues   (344,810)   (467,967)   (627,996)   (755,356)   (108,500)
Gross profit   456,735    681,754    796,238    692,543    99,478 
Operating expenses                         
Selling and marketing expenses   (268,643)   (373,065)   (425,217)   (437,986)   (62,913)
General and administrative expenses   (198,431)   (237,509)   (293,157)   (449,903)   (64,625)
Research and development expenses   (18,187)   (21,217)   (26,178)   (32,333)   (4,644)
(Loss)/income from operations   (28,526)   49,963    51,686    (227,679)   (32,704)
Other income (expenses):                         
Interest income   2,578    4,103    1,150    1,633    235 
Interest expenses   (769)   (9)   (8)   (2,453)   (352)
Foreign exchange gain/(loss), net   67    (184)   21    (19)   (3)
Gains on disposal of subsidiaries               583    84 
Gains on available-for-sale investments   890    2,485    3,916         
Government grants   4,434    4,046    7,817    5,773    829 
Equity in income /(loss) on equity method investments   (842)   (150)   1,668    2,658    382 
Others, net   2,890    (373)   1,649    4,044    579 
(Loss)/income before income tax   (19,278)   59,881    67,899    (215,460)   (30,950)
Income tax expense   (7,869)   (19,539)   (14,454)   (9,608)   (1,380)
Net (loss)/income   (27,147)   40,342    53,445    (225,068)   (32,330)
Less: Net loss attributable to non-controlling interests   (2,862)   (218)   (3,809)   (5,664)   (814)
Net (loss)/income attributable to shareholders of the Company   (24,285)   40,560    57,254    (219,404)   (31,516)
Less: Accretion of redeemable owners’ investment   10,577    19,000    9,814         
Net (loss)/income available to shareholders of the Company   (34,862)   21,560    47,440    (219,404)   (31,516)
Comprehensive (loss)/income   (27,147)   40,482    53,305    (225,068)   (32,330)
Net (loss)/income per share                         
- Basic   (0.12)   0.08    0.16    (0.69)   (0.10)
- Diluted   (0.12)   0.07    0.15    (0.69)   (0.10)
Weighted average shares used in calculating net (loss)/income per share                         
- Basic   282,185,102    282,185,102    300,393,162    318,601,222    318,601,222 
- Diluted   282,185,102    289,666,315    307,843,576    318,601,222    318,601,222 
Unaudited Non-GAAP Financial Measures:                         
Adjusted net (loss)/income(3)   (20,590)   48,228    75,859    (100,284)   (14,406)
Adjusted net (loss)/income margin(4)   (2.6)%   4.2%   5.3%   (6.9)%   (6.9)%
Adjusted EBITDA(3)   17,129    100,441    144,115    (31,403)   (4,513)
Adjusted EBITDA margin(5)   2.1%   8.7%   10.1%   (2.2)%   (2.2)%

 

(1) Includes revenue from the sales of goods, such as education materials and food and beverages sold at our self-operated learning centers.

 

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(2) Comprise primarily of (i) franchise fees Meten received from its franchised learning centers under the “Meten” brand and the “ABC” brand ; and (ii) revenue from our “Shuangge English” App, which had over 24,600, 26,787, 9,859 and 814 paying users for the year ended December 31, 2016, 2017, 2018 and 2019, respectively.

 

(3) To supplement Meten’s consolidated financial statements which are presented in accordance with U.S. GAAP, Meten also uses adjusted net income/(loss) and adjusted EBITDA as additional non-GAAP financial measures. Meten presents these non-GAAP financial measures because they are used by its management to evaluate its operating performance. Meten also believes that such non-GAAP financial measures provide useful information to investors and others in understanding and evaluating its consolidated results of operations in the same manner as its management and in comparing financial results across accounting periods and to those of its peer companies.

 

Adjusted net income/(loss) and adjusted EBITDA should not be considered in isolation or construed as alternatives to net income/(loss) or any other measure of performance or as indicators of our operating performance. Investors are encouraged to compare the historical non-GAAP financial measures with the most directly comparable GAAP measures. Adjusted net income/(loss) and adjusted EBITDA presented herein may not be comparable to similarly titled measures presented by other companies. Other companies may calculate similarly titled measures differently, limiting their usefulness as comparative measures to our data. We encourage investors and others to review our financial information in its entirety and not rely on a single financial measure.

 

Adjusted net income/(loss) represents net income/(loss) before share-based compensation and offering expenses. The table below sets forth a reconciliation of Meten’s adjusted net income/(loss) for the periods indicated:

 

    For the Year Ended
December 31,
 
    2016     2017     2018     2019  
    RMB     RMB     RMB     RMB     US$  
    (in thousands)  
Net (loss)/income     (27,147 )     40,342       53,445       (225,068 )     (32,330 )
Add:                                        
Share-based compensation expenses     6,557       7,886       7,648       96,661       13,884  
Offering expenses                 14,766       28,123       4,040  
Adjusted net (loss)/income     (20,590 )     48,228       75,859       (100,284 )     (14,406 )

 

In addition, adjusted EBITDA represents the net income/(loss) before interest expenses, income tax expenses, depreciation and amortization, and excluding share-based compensation expenses and offering expenses. The table below sets forth a reconciliation of our adjusted EBITDA for the periods indicated:

 

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    For the Year Ended
December 31,
 
    2016     2017     2018     2019  
    RMB     RMB     RMB     RMB     US$  
    (in thousands)  
Net (loss)/income     (27,147 )     40,342       53,445       (225,068 )     (32,330 )
Subtract:                                        
Net interest income/(loss)     1,809       4,094       1,142       (820 )     (117 )
Add:                                        
Income tax expense     7,869       19,539       14,454       9,608       1,380  
Depreciation and amortization     31,659       36,768       54,944       58,453       8,396  
EBITDA     10,572       92,555       121,701       (156,187 )     (22,437 )
Add:                                        
Share-based compensation expenses     6,557       7,886       7,648       96,661       13,884  
Offering expenses                 14,766       28,123       4,040  
Adjusted EBITDA     17,129       100,441       144,115       (31,403 )     (4,513 )

 

(4) Adjusted net (loss)/income margin is calculated by dividing adjusted net (loss)/income by revenues.

 

(5) Adjusted EBITDA margin is calculated by dividing adjusted EBITDA by revenues.

 

The following table presents our selected consolidated balance sheets data as of December 31, 2016, 2017, 2018 and 2019:

 

    As of December 31,  
    2016     2017     2018     2019  
    RMB     RMB     RMB     RMB     US$  
    (in thousands)
Summary Consolidated Balance Sheets Data:                              
Cash and cash equivalents     187,454       321,776       174,679       140,132       20,129  
Operating lease right-of-use assets(1)                       484,225       69,555  
Total assets     654,273       905,514       1,006,746       1,463,565       210,228  
Deferred revenue (current)     284,937       341,328       432,083       408,287       58,647  
Deferred revenue (non-current)     39,845       42,707       52,169       60,528       8,694  
Financial liabilities from contract with customers     336,837       437,027       423,163       490,095       70,398  
Operating lease liabilities (current) (1)                       142,155       20,419  
Operating lease liabilities (non-current) (1)                       333,613       47,922  
Total liabilities     756,997       958,870       1,121,349       1,706,504       245,124  
Total mezzanine equity     200,619       219,619                    
Total shareholders’ deficit     (303,343 )     (272,975 )     (114,603 )     (242,939 )     (34,896 )
Total liabilities, mezzanine equity and shareholders’ deficit     654,273       905,514       1,006,746       1,463,565       210,228  

 

(1) In February 2016, the FASB issued ASU No. 2016-02, “Leases” (“ASU 2016-02”). The guidance requires a lessee to recognize right-of-use (“ROU”) assets and lease liabilities on the balance sheet for all lease obligations and disclose key information about leasing arrangements, such as the amount, timing, and uncertainty of cash flows arising from leases. The guidance requires modified retrospective application and is effective for fiscal years beginning after December 15, 2018 for public companies; however, early adoption is permitted. Meten adopted this standard as of January 1, 2019.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

 

The following discussion and analysis should be read in conjunction with the “Selected Historical Financial Information” section and the accompanying financial statements and related notes included elsewhere in this prospectus. The following discussion contains forward-looking statements that reflect our future plans, estimates, beliefs and expected performance. The forward-looking statements are dependent upon events, risks and uncertainties that may be outside our control. Our actual results could differ materially from those discussed in these forward-looking statements. Please read the sections under “Risk Factors” and “Forward-Looking Statements.” In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur.

 

Overview

 

We are a leading general ELT service provider in China. We are committed to improving the overall English competence and practical English language skills of the general Chinese population. We offer a comprehensive ELT service portfolio comprising general adult ELT, junior ELT, overseas training services, online ELT and other English language-related services to students from a wide range of age groups.

 

We have established a highly scalable offline-online business model. We have a nationwide offline network of both self-operated learning centers and franchised learning centers. As of March 31, 2020, we had established a nationwide offline learning center network of 128 self-operated learning centers covering 28 cities in 15 provinces, autonomous regions and municipalities in China, and 17 franchised learning centers across 15 cities in 13 provinces and municipalities in China. As of March 31, 2020, we had approximately 1.4 million registered users on our “Likeshuo” platform and cumulatively over 257,000 paying users, who purchased our online ELT courses or trial lessons. As of the same date, the cumulative number of student enrollments in our online ELT courses since 2014 was approximately 157,000 and we had delivered over 4.8 million accumulated course hours to our students online.

 

Major Factors Affecting Our Results of Operations

 

We operate in China’s ELT market, and our results of operations and financial condition are significantly affected by the general factors driving this market. China’s rapid economic growth over the past two decades and the increasing per capita disposable income have led to both increased spending on English language education services and intensified competition for high-quality education resources.

 

We have benefited from a number of factors, including, but not limited to, China’s rising birth rate, which largely results from the rising population in large urban centers, increases in average household income, increasing number of high-income families, limited penetration of ELT services across China, favorable government policies that support the growth of private education enterprises and permits that increase operational and pricing flexibility, and the continued focus on study-abroad opportunities by parents.

 

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At the same time, our results are subject to changes in the regulatory regime governing the education industry in China. The PRC government regulates various aspects of our business and operations, including the qualification and licensing requirements for entities that provide education services, standards for operating facilities and limitations on foreign investments in the education industry. In addition, the PRC laws and regulations on private education and training services and related regulatory practices are constantly evolving, involve substantial uncertainties, and their implementation differs from region to region. For example, among our self-operated learning centers in operation as of March 31, 2020, 80 of them did not have the private school operating permits or business licenses, or were operating beyond the authorized business scope. While we believe some of these learnings centers were not required to obtain such private school operating permits based on local regulations, 49 of them were probably operating without the requisite private school operating permits or business licenses, or were operating beyond their authorized business scope, and they contributed to an aggregate of approximately 9.2% of our total gross billings for the three months ended March 31, 2020. In particular, four of these 49 learning centers located in Xi’an, Guangzhou, Shenzhen and Hefei have been ordered to suspend their operations for rectification by the relevant local education authorities until they obtain the required private school operating permits, and they contributed to an aggregate of approximately 1.1% of our total gross billings for the three months ended March 31, 2020. Notwithstanding the above, we have continued to operate all of these 49 learning centers and have not received any further notice or sanction from the relevant government authorities as of the date of this prospectus. Based on our understanding of the current PRC regulatory framework and discussion with our PRC counsel and the relevant local regulatory authorities, we currently believe that we will not be required to actually suspend the operation of any substantial number of our learning centers notwithstanding the regulatory uncertainties. However, we cannot assure you that PRC regulatory authorities will not take any action contrary to our belief in the future, in which case our revenues, gross profit, income from operations and net income may decrease significantly and our liquidity and capital resources may also be materially and adversely affected. See “Risk Factors — Risks Related to Our Business and Operations — We are required to obtain various operating permits and licenses for our ELT services in China and failure to comply with these requirements may materially and adversely affect our business operations.” For description of the evolving regulatory landscape in China, see “Business — Regulations— Regulations on Private Education in the PRC.”

 

While our business is influenced by factors affecting the offline and online ELT market in China generally, we believe our results of operations are more directly affected by company-specific factors, including the major factors highlighted below.

 

Student Enrollment

 

Our revenue primarily consists of course and service fees from students enrolled in our offline ELT and online ELT services, which is directly driven by the number of our student enrollments, which represents the number of actual new sales contracts entered into between us and our student