UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 UNDER
THE SECURITIES EXCHANGE ACT OF 1934
For the month of November 2021
Commission File Number: 001- 39258
METEN HOLDING GROUP LTD.
(Translation of registrant’s name into English)
3rd Floor, Tower A
Tagen Knowledge & Innovation Center
2nd Shenyun West Road, Nanshan District
Shenzhen, Guangdong Province 518000
People’s Republic of China
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.
Form 20-F ☒ Form 40-F ☐
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ☐
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ☐
Explanatory Note
Meten Holding Group Limited (the “Company”) is filing this amendment No. 1 (the “Form 6-K/A”) to the current report on Form 6-K, originally filed with the U.S. Securities and Exchange Commission (the “SEC”) on October 29, 2021 (the “Form 6-K”), solely for the purposes of furnishing Interactive Data File (as defined in Rule 11 of Regulation S-T) in accordance with Rule 405 of Regulation S-T.
Other than as expressly set forth above, this Form 6-K/A does not, and does not purport to, amend, update or restate the information in any other item of the Form 6-K, or reflect any events that have occurred after the Form 6-K was originally filed.
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Exhibits
| Exhibit No. | Description | |
| 99.1 | Management’s Discussion and Analysis of Financial Condition and Results of Operation | |
| 99.2 | Unaudited Consolidated Financial Statements as of June 30, 2021 and for the Six Months Ended June 30, 2021 and 2020 | |
| 101.INS | Inline XBRL Instance Document | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Linkbase | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: November 1, 2021
| Meten Holding Group Ltd. | ||
| By: | /s/ Siguang Peng | |
| Name: | Siguang Peng | |
| Title: | Chief Executive Officer | |
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Exhibit 99.1
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that appear in this report. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report, particularly in “Risk Factors.”
Overview
The government of the People’s Republic of China, or the PRC, has significant authority to exert influence on the ability of a China-based company, such as us, to conduct its business. Therefore, investors of our company and our business face potential uncertainty from the PRC government. Changes in China’s economic, political or social conditions or government policies could materially adversely affect our business and results of operations. These risks could result in a material change in our operations and/or the value of our securities or could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of such securities to significantly decline or be worthless. In particular, recent statements and regulatory actions by China’s government, such as those related to the use of variable interest entities and data security or anti-monopoly concerns, may impact our ability to conduct our business, accept foreign investments, or continued to be listed on a U.S. or other foreign stock exchange.
We provide general English language training (“ELT”) services 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 June 30, 2021, we had established a nationwide offline learning center network of 92 self-operated learning centers covering 25 cities in 15 provinces, autonomous regions and municipalities in China, and 10 franchised learning centers across 9 cities in 9 provinces and municipalities in China. As of June 30, 2021, we had approximately 1.9 million registered users on our “Likeshuo” platform and cumulatively over 340,000 paying users, who purchased our online ELT courses or trial lessons. As of such date, the cumulative number of student enrollments in our online ELT courses since 2014 was approximately 200,000 and we had delivered over 6.05 million accumulated course hours to our students online.
| Operating Results |
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 of its population 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.
At the same time, our results are subject to changes in the regulatory regime governing the education industry in the PRC. 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. On July 24, 2021, the Double Reduction Opinions on Further Alleviating the Burden of Homework and After-School Training for Students in Compulsory Education was issued by the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council of the PRC, or the Double Reduction Opinions, which regulate institutions offering after-school training services on academic subjects. Uncertainties exist in relation to the Double Reduction Opinions of After-school Training Institutions in the PRC, which may materially and adversely affect us, our results of operations, financial condition and prospects. In addition, among our 92 self-operated learning centers in operation as of June 30, 2021, 37 did not have the private school operating permits or business licenses, or were operating beyond the authorized business scope. While we believe that some of these learning centers were not required to obtain such private school operating permits, based on local regulations, they contributed to an aggregate of approximately 9% of our total gross billings for the six months ended June 30, 2021. Based on our understanding of the current PRC regulatory framework and discussions with our PRC counsel and the relevant local regulatory authorities, we currently believe that we will not be required to suspend the operation of a 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.
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 revenue is directly driven by the number of our student enrollments, which is derived from 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. Our total student enrollment increased by 38.8%, from 26,230 student enrollments in the six months ended June 30, 2020 to 36,406 student enrollments in the six months ended June 30, 2021. Growth in our student enrollment is dependent on our ability to retain our current students and to recruit new students.
Our ability to retain existing students is largely dependent on the variety and quality of our course offerings, the quality of our teachers, and students’ overall satisfaction with the education services we offer. A substantial number of the students are enrolled in our courses through word-of-mouth referrals. Consequently, our ability to recruit new students also depends on our reputation and brand recognition, which are also affected by our branding activities and other selling and marketing efforts. Our reputation and brand recognition are primarily driven by the satisfaction of our students and the high quality of our teaching staff. We have expanded our service offerings to a full spectrum of offline and online ELT services, including general adult ELT and overseas training services to students of a wide range of age groups, since the inception of our first self-operated learning center. In 2014, we launched our online English learning platform “Likeshuo”, to offer online live streaming ELT courses to a wider student base. In 2018, we began offering junior ELT, which is mainly designed for students aged between six to eighteen, and introduced a new curriculum, the “Explore Curriculum,” for our general adult ELT.
Number and Maturity of Learning Centers
Our revenue growth is mainly driven by the number of our self-operated and franchised learning centers, which directly affects our overall student enrollment, as well as the maturity of our existing learning centers. Our ability to increase the number of self-operated and franchised learning centers depends on a variety of factors, including, but not limited to, identifying suitable locations and franchisees, hiring high-caliber teaching staff and other necessary personnel for the new learning centers, and other investment in implementing our centralized management across our offline learning center network. As of June 30, 2021, we had 92 self-operated learning centers covering 25 cities and 15 provinces, autonomous regions and municipalities in China, and 10 franchised learning centers across 9 cities in 9 provinces and municipalities in China. In addition, the maturity of our learning centers affects our revenue growth and profitability. Newly established learning centers normally start contributing to our revenue growth and profitability after an initial ramp-up period, which typically lasts between one to two years. For the six months ended June 30, 2020 and 2021, most of our newly established learning centers were able to generate sufficient gross billings to cover their operating costs during the ramp-up period. However, due to the impact of the COVID-19 pandemic, the number of our self-operated learning centers decreased from 112, as of June 30, 2020, to 92, as of June 30, 2021. We intend to continue to expand our learning center network. We believe that our large business scale strengthens our brands and enhances our reputation, which in turn supports further growth of our business. The number of our learning centers in operation may also be affected by changes in the PRC regulatory framework and practices. According to our PRC counsel, among the 92 self-operated learning centers as of June 30, 2021, 37 of them may have been operating without the requisite private school operating permits or business licenses, or were operating beyond their authorized business scope. If we are required to suspend the business operation of any of our learning centers, our reputation, results of operation and financial conditions could be materially and adversely affected.
2
Pricing
Our revenue is directly affected by the pricing of our courses and the type of services we offer. We typically charge students course and service fees based on the total number of course hours, the class sizes and the types of courses the students enroll in, or the types of services we provide to students. When we establish fees for our courses and services, we also consider the general economic condition and the income level of the residents of the relevant locations of our learning centers, the local demand for our services and our competitors’ fees for similar services.
We implement our effective centralized management systems at a majority of our franchised learning centers and require them to adhere to our standardized pricing and refund policies we apply at our self-operated learning centers in order to maintain stable student retention rates and efficient operations at our franchise learning centers. We may adjust the course and service fees for new contracts when we have upgraded our existing courses or developed new courses and services. The course and service fee levels of our learning centers remained relatively stable for the six months ended June 30, 2020 and 2021. In the long run, we seek to gradually increase our course and service fee levels without compromising our student enrollment.
Cost Control and Operating Efficiency
Our profitability depends significantly on our ability to improve our operating efficiency through effective cost controls. Our cost of revenues consists primarily of teaching staff costs and property expenses for our self-operated learning centers. Teaching staff costs depend on the number of our teachers we employ and their levels of compensation. We structure the compensation offered to our teachers to attract and retain the best teaching talent. The number of our full-time teachers, study advisors and teaching service staff decreased from 1,824, as of December 31, 2020, to 1,544, as of June 30, 2021, which decreases were commensurate with our adjustment of the number of learning centers.
Other operating expenses consist of sales and marketing expenses, general and administrative expenses and research and development expenses. Historically, we have incurred significant sales and marketing expenses primarily because we utilize a variety of sales and marketing approaches to increase our student enrollment and strengthen our brand recognition, including, but not limited to, various offline sales activities.
Upgrade and Diversification of Course and Service Offerings
We currently have a wide spectrum of offline and online ELT course offerings. Our extensive portfolio of diversified courses and services allows us to extend our operations to a wider group of customers and conduct cross-selling between our offline and online ELT businesses. This has fostered student retention and loyalty across various business lines. Historically, we have witnessed significant growth in our online ELT business since the launch of our “Likeshuo” platform in 2014. The synergy created by our offline-online business model has helped us to increase customer conversion rate at reasonable costs. We expect to continue to expand our online ELT business in an economical and effective manner with the support from our extensive offline learning center network. Nevertheless, we may experience a reduction in our revenue recognition and results of operations during any transition period as we gradually roll out new courses and services across our nationwide learning center network.
In addition, in early 2018, driven by the increasing English learning demand from younger students, we decided to further expand our business segments to include junior ELT in selected regions where we have extensive network coverage and brand recognition. In line with this strategy, we acquired ABC Education Group in June 2018. As part of the integration of this acquisition, we undertook a management restructuring and upgrade that led to increased administrative expenses. We also introduced the new “Explore Curriculum” for our general adult ELT beginning in 2018, the implementation of which was completed in May 2019 at all of our learning centers in the PRC. While we believe such new curriculum will have a positive long-term impact on improving our students’ comprehensive and practical English language abilities, the implementation of the new curriculum across our nationwide network of self-operated learning centers nevertheless caused a reduction in the course hours delivered and segment revenue recognized during the transition period.
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The Impact of the COVID-19 Pandemic
For the six months ended June 30, 2021, our results of operations and financial condition were gradually recovering from the negative impact of the COVID-19 pandemic. However, as new COVID-19 variants have emerged, the period during which COVID-19 will negatively impact the global economy may be extended, and we may continue to be affected by the COVID-19 pandemic for the rest of 2021 and potentially beyond. In early February 2020, we temporarily closed all of our learning centers in the PRC in response to government mandates. In response, in early February 2020, we temporarily 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 were utilized to facilitate the migration included our “Likeshuo” platform and our proprietary and third-party online platforms.
Since the second quarter of 2020, the number of newly confirmed COVID-19 cases in China declined, and the business activities in China’s major cities started to resume. As such, we re-opened 95 of our learning centers (including 84 self-operated learning centers and 11 franchised learning centers) by the end of June 2020. By September, 2020, we re-opened all of our learning centers. By October 2020, the operation of both our offline ELT and online ELT services returned to normal.
We have been gradually recovering from the negative impact of the COVID-19 pandemic on our business and results of operations. We had recognized an aggregate RMB411.3 million (US$ 63.7 million) in revenue in the six months ended June 30, 2021, a 10.9% increase compared to RMB370.9 million in the six months ended June 30, 2020. As of June 30, 2021, we had RMB144.2 million (US$22.3 million) in cash and cash equivalents. We believe this level of liquidity is sufficient to successfully navigate an extended period of uncertainty. We continue to pay close attention to the development of the COVID-19 pandemic, and expect to perform ongoing assessments of its development and take necessary measures to minimize the impact on our operations.
Key Components of our Results of Operations
Revenues
For the six months ended June 30, 2020 and 2021, we primarily offered general adult ELT, overseas training services, online ELT, junior ELT and other English language-related services. The table below sets forth a breakdown of our revenue for the periods indicated:
| For the Six Months Ended June 30, | ||||||||||||||||||||
| 2020 | 2021 | |||||||||||||||||||
| RMB | % | RMB | US$ | % | ||||||||||||||||
| General adult ELT | 113,120 | 30.5 | 146,272 | 22,655 | 35.6 | |||||||||||||||
| Overseas training services | 41,015 | 11.1 | 76,916 | 11,913 | 18.7 | |||||||||||||||
| Online ELT | ||||||||||||||||||||
| For adults | 115,831 | 31.1 | 93,935 | 14,549 | 22.8 | |||||||||||||||
| For juniors | 29,916 | 8.1 | 27,179 | 4,209 | 6.6 | |||||||||||||||
| For international test preparation | 10,253 | 2.8 | 8,125 | 1,258 | 2 | |||||||||||||||
| Japanese | 264 | 0.1 | 2,928 | 453 | 0.7 | |||||||||||||||
| Subtotal | 156,264 | 42.1 | 132,167 | 20,469 | 32.1 | |||||||||||||||
| Junior ELT | 55,156 | 14.9 | 48,334 | 7,486 | 11.8 | |||||||||||||||
| Other English language-related services(2) | 5,354 | 1.4 | 7,630 | 1,182 | 1.8 | |||||||||||||||
| Total | 370,909 | 100.0 | 411,319 | 63,705 | 100.0 | |||||||||||||||
4
Revenue generated from general adult ELT was RMB113.1 million and RMB146.3 million (US$22.7 million), representing 30.5% and 35.6% of our total revenue for the six months ended June 30, 2020 and 2021, respectively. Revenue generated from overseas training services was RMB41.0 million and RMB76.9 million (US$11.9 million), representing 11.1% and 18.7% of our total revenue for the six months ended June 30, 2020 and 2021, respectively. Revenue generated from junior ELT was RMB55.2 million and RMB48.3 million (US$7.5 million), representing 14.9% and 11.8% of our total revenue for the six months ended June 30, 2020 and 2021, respectively. With respect to our general adult ELT, overseas training services and junior ELT, we generally collect course/service fees upfront from our students or in installments. We have refund policies in place for these businesses, and may refund the relevant course/service fees partially or fully, depending on when the request is made by the students in the applicable refund period. For our general adult ELT, overseas training services and junior ELT, we record the course/service fees initially as financial liabilities from contracts with customers, and then as deferred revenue, depending on whether the course/service fees under the relevant contracts are refundable.
Revenue generated from our online ELT was RMB156.3 million and RMB132.2 million (US$20.5 million), representing 42.1% and 32.1% of our total revenue for the six months ended June 30, 2020 and 2021, respectively. For the six months ended June 30, 2020 and 2021, revenue generated from online ELT for adults was RMB115.8 million and RMB93.9 million (US$14.5 million), respectively, representing 31.1% and 22.8%, respectively, of our revenue generated from the online ELT business. For the six months ended June 30, 2020 and 2021, revenue generated from online ELT for juniors was RMB29.9 million and RMB27.2 million (US$4.2 million) respectively, representing 8.1% and 6.6%, respectively, of our revenue generated from the online ELT business. Students of our online ELT services purchase prepaid study cards to enroll in the courses. We typically allow a refund of the course fees for any undelivered course/service hours after deducting a platform operation charge associated with delivering such courses/services online, if a student requests a refund during the contract period. We record the proceeds collected from online ELT initially as financial liabilities from contracts with customers, and revenue is generally recognized proportionately as the course hours are delivered. In addition, for further details of our revenue recognition policies, please see “—Revenue Recognition.”
We generate other revenue primarily from the franchised learning centers under the “Meten” brand, through which our franchisees are authorized to use our brand and are required to adopt our centralized management system. Under these contracts, we receive an initial or renewal franchise fee when we enter into or renew a franchise agreement, as applicable, and we charge a one-time design consulting fee. During the term of the franchise, we charge each franchisee recurring franchise fees (in addition to the initial or renewal franchise fees), based on an agreed percentage of its collected course and service fees and related individual course materials fees. Our other revenue also includes charges generated from our self-developed “Shuangge English” App, which applies a voice evaluation technology to improve students’ listening, speaking and reading abilities.
Cost of Revenues
Our cost of revenues consists primarily of (i) staff costs, including teaching staff salaries and, to a lesser extent, costs relating to our research and curriculum development team; (ii) property expenses, including rental, utilities and maintenance expenses of our learning centers; (iii) depreciation and amortization, which represents the depreciation of real properties and equipment for learning centers, amortization of operating leased right-of-use assets and amortization of our training services related intangible assets; and (iv) other costs, which primarily include consulting fees, foreign teacher-related administrative expenses and teaching materials. Our cost of revenues accounted for 75.7% and 66.7% of our revenues for the six months ended June 30, 2020 and 2021, respectively. The following table sets forth the components of cost of revenues both in absolute amount and as a percentage of our total cost of revenues for the periods indicated.
| For the Six Months Ended June 30, | ||||||||||||||||||||
| 2020 | 2021 | |||||||||||||||||||
| RMB | % | RMB | US$ | % | ||||||||||||||||
| Staff costs | 179,419 | 63.9 | 171,872 | 26,620 | 62.6 | |||||||||||||||
| Property expenses | 78,151 | 27.8 | 72,363 | 11,208 | 26.4 | |||||||||||||||
| Depreciation and amortization for learning centers | 17,505 | 6.2 | 13,989 | 2,167 | 5.1 | |||||||||||||||
| Others | 5,700 | 2.1 | 16,133 | 2,497 | 5.9 | |||||||||||||||
| Total | 280,775 | 100.0 | 274,357 | 42,492 | 100.0 | |||||||||||||||
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The following tables set forth a breakdown of our cost of revenues by major business segment for the periods indicated.
General adult ELT
| For the Six Months Ended June 30, | ||||||||||||||||||||
| 2020 | 2021 | |||||||||||||||||||
| RMB | % | RMB | US$ | % | ||||||||||||||||
| Staff costs | 57,898 | 50.4 | 56,442 | 8,742 | 60.4 | |||||||||||||||
| Property expenses, depreciation and amortization | 54,532 | 47.5 | 34,007 | 5,267 | 36.4 | |||||||||||||||
| Others | 2,451 | 2.1 | 2,940 | 455 | 3.2 | |||||||||||||||
| Total | 114,881 | 100.0 | 93,389 | 14,464 | 100.0 | |||||||||||||||
Overseas training services
| For the Six Months Ended June 30, | ||||||||||||||||||||
| 2020 | 2021 | |||||||||||||||||||
| RMB | % | RMB | US$ | % | ||||||||||||||||
| (in thousands, except for percentages) | ||||||||||||||||||||
| Staff costs | 17,907 | 43.6 | 21,590 | 3,344 | 41.8 | |||||||||||||||
| Property expenses, depreciation and amortization | 21,892 | 53.3 | 25,687 | 3,978 | 49.7 | |||||||||||||||
| Others | 1,302 | 3.1 | 4,405 | 682 | 8.5 | |||||||||||||||
| Total | 41,101 | 100.0 | 51,682 | 8,004 | 100.0 | |||||||||||||||
Online ELT
| For the Six Months Ended June 30, | ||||||||||||||||||||
| 2020 | 2021 | |||||||||||||||||||
| RMB | % | RMB | US$ | % | ||||||||||||||||
| (in thousands, except for percentages) | ||||||||||||||||||||
| Staff costs | 86,010 | 99.1 | 67,575 | 10,466 | 98.6 | |||||||||||||||
| Property expenses, depreciation and amortization | 421 | 0.5 | 275 | 43 | 0.4 | |||||||||||||||
| Others | 396 | 0.4 | 663 | 103 | 1.0 | |||||||||||||||
| Total | 86,827 | 100.0 | 68,513 | 10,612 | 100.0 | |||||||||||||||
Junior ELT
| For the Six Months Ended June 30, | ||||||||||||||||||||
| 2020 | 2021 | |||||||||||||||||||
| RMB | % | RMB | US$ | % | ||||||||||||||||
| (in thousands, except for percentages) | ||||||||||||||||||||
| Staff costs | 16,104 | 45.8 | 23,382 | 3,621 | 44.9 | |||||||||||||||
| Property expenses, depreciation and amortization | 18,810 | 53.5 | 25,479 | 3,946 | 48.9 | |||||||||||||||
| Others | 267 | 0.7 | 3,264 | 506 | 6.2 | |||||||||||||||
| Total | 35,181 | 100.0 | 52,125 | 8,073 | 100.0 | |||||||||||||||
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Gross Profit and Gross Profit Margin
The following table sets forth our gross profit and gross profit margin by major business segment for the periods indicated.
| For the Six Months Ended June 30, | ||||||||||||||||||||
| 2020 | 2021 | |||||||||||||||||||
| Gross Profit | Gross Profit Margin | Gross Profit | Gross Profit Margin | |||||||||||||||||
| RMB | % | RMB | US$ | % | ||||||||||||||||
| (in thousands, except percentages) | ||||||||||||||||||||
| General adult ELT | (1,761 | ) | (1.6 | ) | 52,883 | 8,191 | 36.2 | |||||||||||||
| Overseas training services | (86 | ) | (0.2 | ) | 25,234 | 3,908 | 32.8 | |||||||||||||
| Online ELT | 69,437 | 44.4 | 63,654 | 9,859 | 48.2 | |||||||||||||||
| Junior ELT | 19,975 | 36.2 | (3,791 | ) | (587 | ) | (7.8 | ) | ||||||||||||
| Total | 87,565 | 24.0 | 137,980 | 21,371 | 34.2 | |||||||||||||||
Operating Expenses
Our operating expenses consist of selling and marketing expenses, general and administrative expenses, as well as research and development expenses. The table below sets forth our operating expenses, both in absolute amount and as a percentage of our total operating expenses for the periods indicated.
| For the Six Months Ended June 30, | ||||||||||||||||||||
| 2020 | 2021 | |||||||||||||||||||
| RMB | % | RMB | US$ | % | ||||||||||||||||
| (in thousands, except for percentages) | ||||||||||||||||||||
| Selling and marketing expenses | 139,466 | 48.9 | 147,543 | 22,852 | 49.2 | |||||||||||||||
| General and administrative expenses | 130,415 | 45.7 | 144,511 | 22,382 | 48.2 | |||||||||||||||
| Research and development expenses | 15,182 | 5.4 | 7,526 | 1,166 | 2.6 | |||||||||||||||
| Total | 285,063 | 100.0 | 299,580 | 46,400 | 100.0 | |||||||||||||||
Selling and Marketing Expenses
Our selling and marketing expenses primarily consist of (i) salaries and benefits of our sales and marketing personnel, which amounted to RMB79.7 million and RMB83.1 million (US$12.9 million) for the six months ended June 30, 2020 and 2021, respectively; and (ii) marketing expenses, which amounted to RMB55.1 million and RMB53.3 million (US$8.3 million) for the six months ended June 30, 2020 and 2021, respectively. Our marketing expenses primarily consist of promotional activity expenses, including rental cost and personnel expenses for our offline sales points, online marketing expenses, media advertisement expenses and other marketing expenses; (iii) promotional expenses relating to the recruitment of prospective student; (iv) tele-marketing expenses; (v) consulting service fees for sales and marketing purposes; and (vi) other expenses, which primarily consist of the transaction fees withheld by certain third-party financial institutions in relation to the installment payment arrangements we help set up between certain of our students and such financial institutions, to facilitate the deferred payments of the course/service fees by such students, which amounts are recorded as sales and marketing expenses.
General and Administrative Expenses
Our general and administrative expenses mainly consist of (i) salaries and benefits of our administrative personnel; (ii) depreciation and amortization of the properties and facilities used for administrative purposes; and (iii) office expenses. We expect that our general and administrative expenses will increase in absolute amounts in the foreseeable future as we incur additional costs for becoming and being a public company. However, we expect this increase to be partially offset by our increasing economies of scale and anticipated improvement in our operating efficiency.
7
Research and Development Expenses
Our research and development expenses are primarily expenses incurred in relation to the development of our products, course content and IT systems. We expect to continue to increase our investment in research and development activities, as we believe the continuous development of our products and services may improve our teaching outcome and enhance students’ learning experience, which will be crucial to our success.
Results of Operations
The following table sets forth a summary of our consolidated results of operations, both in absolute amounts and as a percentage of total net revenue, for the period indicated. The operating results in any period are not necessarily indicative of the results that may be expected for any future period.
| For the Six Months Ended June 30, | ||||||||||||||||||||
| 2020 | 2021 | |||||||||||||||||||
| RMB | % | RMB | US$ | % | ||||||||||||||||
| (in thousands, except for percentages) | ||||||||||||||||||||
| Summary Consolidated Statements of Operations: | ||||||||||||||||||||
| Revenues | 370,909 | 100.0 | 411,319 | 63,705 | 100.0 | |||||||||||||||
| Cost of revenues | (280,775 | ) | (75.7 | ) | (274,357 | ) | (42,492 | ) | (66.7 | ) | ||||||||||
| Gross profit | 90,134 | 24.3 | 136,962 | 21,213 | 33.3 | |||||||||||||||
| Operating expenses: | ||||||||||||||||||||
| Selling and marketing expenses | (139,466 | ) | (37.6 | ) | (147,543 | ) | (22,852 | ) | (35.9 | ) | ||||||||||
| General and administrative expenses | (130,415 | ) | (35.2 | ) | (144,511 | ) | (22,382 | ) | (35.1 | ) | ||||||||||
| Research and development expenses | (15,182 | ) | (4.1 | ) | (7,526 | ) | (1,166 | ) | (1.8 | ) | ||||||||||
| (Loss)/income from operations | (194,929 | ) | (52.6 | ) | (162,618 | ) | (25,187 | ) | (39.5 | ) | ||||||||||
| Interest income | 282 | 0.1 | 173 | 27 | — | |||||||||||||||
| Interest expenses | (2,284 | ) | (0.6 | ) | (3,475 | ) | (538 | ) | (0.8 | ) | ||||||||||
| Foreign exchange gain/(loss), net | 258 | 0.1 | (1,054 | ) | (163 | ) | (0.3 | ) | ||||||||||||
| Gains/(losses) on disposal and closure of subsidiaries and branches | (10,163 | ) | (2.7 | ) | (5,495 | ) | (851 | ) | (1.3 | ) | ||||||||||
| Gains on Short-term investments | — | — | — | — | — | |||||||||||||||
| Government grants | 12,879 | 3.5 | 6,369 | 986 | 1.5 | |||||||||||||||
| Equity in income/(loss) on equity method investments | 107 | * | 1,449 | 224 | 0.4 | |||||||||||||||
| Others, net | (932 | ) | (0.3 | ) | (1,735 | ) | (269 | ) | (0.4 | ) | ||||||||||
| (Loss)/income before income tax | (194,782 | ) | (52.5 | ) | (166,386 | ) | (25,771 | ) | (40.5 | ) | ||||||||||
| Income tax (expense)/benefit | (308 | ) | (0.1 | ) | (3,267 | ) | (506 | ) | (0.8 | ) | ||||||||||
| Net (loss)/income | (195,090 | ) | (52.6 | ) | (169,653 | ) | (26,277 | ) | (41.2 | ) | ||||||||||
| * | Denotes percentages between (0.1%) and 0.1%. |
Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020
Revenues
Our total revenue increased by 10.9% from RMB370.9 million in the six months ended June 30, 2020 to RMB411.3 million (US$63.7 million) in the six months ended June 30, 2021, primarily as a result of the strong rebound in gross billing after the impact of COVID-19 receded.
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For our general adult ELT, revenues increased from RMB113.1 million in the six months ended June 30, 2020 to RMB146.3 million (US$22.7 million) in the six months ended June 30, 2021, for our overseas training services, revenues increased from RMB41.0 million in the six months ended June 30, 2020 to RMB76.9 million (US$11.9 million) in the six months ended June 30, 2021, and for our Junior ELT, revenues decreased from RMB55.2 million in the six months ended June 30, 2020 to RMB48.3 million (US$7.5 million) in the six months ended June 30, 2021, among which, revenue for Junior ELT under “Meten” brand increased by 269.3% year-on-year in the six months ended June 30, 2021 to RMB39.2 million (US$6.1 million). In the six months ended June 30, 2021, Junior ELT under the “ABC” brand operated only for a limited period, and as a result, revenue for Junior ELT under the “ABC” brand decreased by 79.4% year-on-year.
For our online ELT, revenues decreased from RMB156.3 million in the six months ended June 30, 2020 to RMB132.2 million (US$20.5 million) in the six months ended June 30, 2021. This slight decrease was mainly due to the Company’s online ELT business having reached a peak as a result of the COVID-19 pandemic in the same period last year.
Cost of Revenues
Our total cost of revenues decreased by 2.3% from RMB280.8 million in the six months ended June 30, 2020 to RMB274.4 million (US$42.5 million) in the six months ended June 30, 2021.
Gross Profit and Gross Profit Margin
As a result of the foregoing, our gross profit increased by 52.0%, from RMB90.1 million in the six months ended June 30, 2020 to RMB137.0 million (US$21.2 million) in the six months ended June 30, 2021. Our gross profit margin increased from 24.3% in the six months ended June 30, 2020 to 33.3% in the six months ended June 30, 2021, due to the improvement of gross billings and operational efficiency.
Selling and Marketing Expenses
Our selling and marketing expenses increased by 5.8% from RMB139.5 million in the six months ended June 30, 2020 to RMB147.5 million (US$22.9 million) in the six months ended June 30, 2021.
General and Administrative Expenses
Our general and administrative expenses increased by 10.8% from RMB130.4 million in the six months ended June 30, 2020 to RMB144.5 million (US$22.4 million) in the six months ended June 30, 2021. This increase was primarily due to an increase in share-based compensation expenses.
Research and Development Expenses
Our research and development expenses decreased by 50.4% from RMB15.2 million in the six months ended June 30, 2020 to RMB7.5 million (US$1.2 million) in the six months ended June 30, 2021.
Interest Income
Our interest income decreased by 38.7% from RMB282 thousand in the six months ended June 30, 2020 to RMB173,000 (US$27,000) in the six months ended June 30, 2021.
Interest Expenses
Our interest expenses increased by 52.1% from RMB2.3 million in the six months ended June 30, 2020 to RMB3.5 million (US$0.5 million) in the six months ended June 30, 2021. The increase was mainly due to an increase in bank loans.
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Foreign Exchange Gain/(Loss), net
We had a net total of RMB0.3 million foreign exchange gain in the six months ended June 30, 2020, as compared to a net total of RMB1.1 million (US$0.2 million) foreign exchange loss in the six months ended June 30, 2021.
Gains/(losses) on disposal and closure of subsidiaries and branches
Our losses on disposal and closure of subsidiaries and branches decreased from RMB10.2 million in the six months ended June 30, 2020 to RMB5.5 million (US$0.9 million) in the six months ended June 30, 2021.
Government Grants
We had a total of RMB12.9 million government grants in the six months ended June 30, 2020, as compared to RMB6.4 million (US$1.0 million) in the six months ended June 30, 2021. Such decrease was mainly due to the fact that more government subsidies were given in the first half of 2020 as part of the governmental measures to reduce negative impacts of the COVID-19 pandemic on enterprises.
Equity in Income/(loss) on Equity Method Investments
Our gain on equity method investments was RMB0.1 million in the six months ended June 30, 2020, and gain on equity method investments RMB1.4 million (US$0.2 million) in the six months ended June 30, 2021. This increase was mainly due to the improved operating performance of associated companies.
Others, Net
Our net loss from others increased from a loss of RMB0.9 million in the six months ended June 30, 2020 to a loss of RMB1.7 million (US$0.3 million) in the six months ended June 30, 2021.
Income/(Loss) Before Income Tax
As a result of the foregoing, we had a loss before income tax of RMB194.8 million in the six months ended June 30, 2020, as compared to a loss before income tax of RMB166.4 million (US$25.8 million) in the six months ended June 30, 2021.
Income Tax Expense/Benefit
We had income tax expense of RMB0.3 million in the six months ended June 30, 2020, as compared to income tax expense of RMB3.3 million (US$0.5 million) in the six months ended June 30, 2021.
Net Income/(Loss)
As a result of the foregoing, we had a net loss of RMB195.1 million in the six months ended June 30, 2020, as compared to a net loss of RMB169.7 million (US26.3 million) in the six months ended June 30, 2021.
Non-GAAP Financial Measures
To supplement our consolidated financial statements which are presented in accordance with U.S. generally accepted accounting principles , or GAAP, we also use adjusted net income and adjusted EBITDA as additional non-GAAP financial measures. We present these non-GAAP financial measures because they are used by management to evaluate our operating performance. We also believe that such non-GAAP financial measures provide useful information to investors and others in understanding and evaluating our consolidated results of operations in the same manner as management and in comparing financial results across accounting periods and to those of peer companies.
Adjusted net income 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 and adjusted EBITDA presented here 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.
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Adjusted net income represents net income/(loss) before share-based compensation, offering expenses and warrant financing. The table below sets forth a reconciliation of our adjusted net income for the periods indicated:
| For the Six Months Ended June 30, | ||||||||||||
| 2020 | 2021 | |||||||||||
| RMB | RMB | US$ | ||||||||||
| (in thousands, except for percentages) | ||||||||||||
| Net (loss)/income | (195,090 | ) | (169,653 | ) | (26,277 | ) | ||||||
| Add: | ||||||||||||
| Share-based compensation expenses | 4,577 | 38,358 | 5,941 | |||||||||
| Warrant financing | — | 2,404 | 372 | |||||||||
| Adjusted net (loss)/income | (190,513 | ) | (128,891 | ) | (19,964 | ) | ||||||
In addition, adjusted EBITDA represents the net income/(loss) before interest expenses, income tax expenses, depreciation and amortization, and excluding share-based compensation expenses, offering expenses and warrant financing. The table below sets forth a reconciliation of our adjusted EBITDA for the periods indicated:
| For the Six Months Ended June 30, | ||||||||||||
| 2020 | 2021 | |||||||||||
| RMB | RMB | US$ | ||||||||||
| (in thousands, except for percentages) | ||||||||||||
| Net (loss)/income | (195,090 | ) | (169,653 | ) | (26,276 | ) | ||||||
| Subtract: | ||||||||||||
| Net interest income/(loss) | (2,002 | ) | (3,302 | ) | (511 | ) | ||||||
| Add: | ||||||||||||
| Income tax expense/(benefit) | 308 | 3,267 | 506 | |||||||||
| Depreciation and amortization | 28,591 | 21,061 | 3,262 | |||||||||
| EBITDA | (164,189 | ) | (142,023 | ) | (21,997 | ) | ||||||
| Add: | ||||||||||||
| Share-based compensation expenses | 4,577 | 38,358 | 5,941 | |||||||||
| Warrant financing | - | 2,404 | 372 | |||||||||
| Adjusted EBITDA | (159,612 | ) | (101,261 | ) | (15,684 | ) | ||||||
Taxation
Cayman Islands
We are incorporated in the Cayman Islands. Under the current law of the Cayman Islands, we are not subject to income or capital gains tax. In addition, dividend payments are not subject to withholding tax in the Cayman Islands.
Hong Kong
Our two wholly-owned subsidiaries in Hong Kong, Meten Education (Hong Kong) Limited and Likeshuo Education (Hong Kong) Limited, are subject to an income tax rate of 16.5% for taxable income earned in Hong Kong. No Hong Kong profit tax has been levied in our consolidated financial statements, as Meten Education (Hong Kong) Limited and Likeshuo Education (Hong Kong) Limited had no assessable income for the six months ended June 30, 2020 and 2021.
PRC
Our subsidiaries and affiliated entities in China are companies incorporated under the PRC laws and, as such, are subject to PRC enterprise income tax on their taxable income in accordance with the relevant PRC income tax laws. Pursuant to the PRC Enterprise Income Tax Law, which became effective on January 1, 2008, a uniform 25% enterprise income tax rate is generally applicable to both foreign-invested enterprises and domestic enterprises, except where a special preferential rate applies. The enterprise income tax is calculated based on the entity’s global income as determined under PRC tax laws and accounting standards.
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We are subject to value added tax, or VAT, at a rate of 6%, less any deductible VAT we have already paid or borne. We are also subject to surcharges on VAT payments in accordance with PRC law. In addition, most of our subsidiaries in China that participate in the non-diploma education service industry choose the simplified method of taxation where the VAT collection rate is 3%.
As a Cayman Islands holding company, we may receive dividends from our PRC subsidiaries, Zhuhai Meizhilian Education Technology Co., Ltd., or Zhuhai Meten, and Zhuhai Likeshuo Education Technology Co., Ltd., or Zhuhai Likeshuo. The PRC Enterprise Income Tax Law and its implementing rules provide that dividends paid by a PRC entity to a non-resident enterprise for income tax purposes is subject to PRC withholding tax at a rate of 10%, subject to reduction by an applicable tax treaty with China. Pursuant to the Arrangement between the PRC and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Prevention of Fiscal Evasion with Respect to Taxes 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 non-resident enterprises are not required to obtain pre-approval from the relevant tax authority in order to enjoy the reduced withholding tax. Instead, non-resident 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 the necessary forms and supporting documents when providing tax filings, which will be subject to post-tax filing examinations by the relevant tax authorities. Accordingly, we may be able to benefit from the 5% withholding tax rate for the dividends received from Zhuhai Meten and Zhuhai Likeshuo, if they satisfy the conditions prescribed under SAT Circular 81 and other relevant tax rules and regulations. However, according to SAT Circular 81 and SAT Circular 60, if the relevant tax authorities consider the transactions or arrangements we have are for the primary purpose of enjoying a favorable tax treatment, the relevant tax authorities may adjust the favorable withholding tax in the future.
If our holding company in the Cayman Islands or any of our subsidiaries outside of China were deemed to be a “resident enterprise” under the PRC Enterprise Income Tax Law, it would be subject to enterprise income tax on its worldwide income at a rate of 25%, which could result in unfavorable tax consequences to us and our non-PRC shareholders.
Critical Accounting Policies
We prepare our financial statements in accordance with U.S. GAAP, which requires our management to make judgment, estimates and assumptions that affect our reporting of, among other things, assets and liabilities, contingent assets and liabilities and revenue and expenses. We continually evaluate these judgments, estimates and assumptions based on our own historical experience, knowledge and assessment of relevant current business and other conditions, our expectations regarding the future based on available information and various assumptions that we believe to be reasonable, which together form our basis for making judgments about matters that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, our actual results could differ from those estimates. Some of our accounting policies require a higher degree of judgment than others in their application.
The selection of critical accounting policies, the judgments and other uncertainties affecting the application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors that should be considered when reviewing our financial statements. We believe the following accounting policies involve the most significant judgments and estimates used in the preparation of our financial statements. You should read the following description of critical accounting policies, judgments and estimates in conjunction with our consolidated financial statements and other disclosures included herein.
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Revenue Recognition
We adopted ASC 606, “Revenue from Contracts with Customers” for all periods presented. Consistent with the criteria of ASC 606, we follow five steps for revenue recognition: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The primary sources of our revenues are as follows:
General adult ELT and overseas training services
Course and service fees for general adult ELT are generally collected in advance as a package for: (i) course fee of main general adult English courses; (ii) course fee of supplementary general adult English course; (iii) education materials; and (iv) assessment of level of English proficiency.
The overseas training services are provided for customers who plan to take international standardized tests and/or study abroad. Such services mainly comprise international standardized test preparation courses, which is the key component, and overseas study services.
Students can attend general adult ELT courses and international standardized test preparation courses for predetermined course hours in a predetermined period of time. Supplementary general adult ELT courses can be attended without limit in such period of time. Generally, students are entitled to a short-term course trial period/trial courses which commence on the date the course begins or the date the contract is signed. Refunds are provided to students if they decide not to participate in such course within the trial period/trial courses. In addition, we offer refunds in an amount up to 70% of the uncompleted course fees to students who withdraw from such courses, provided attended classes are less than or equal to 30% of total course hours of such course at the time of withdrawal. No refund will be provided to students who have attended more than 30% of the total course hours the underlying course.
Each type of service/product included in the course fee is a separate unit of accounting, as each type has distinct nature with different patterns and measurements of transfer to the students. We estimate stand-alone selling prices of each service/product and recognize them in different revenue recording methods.
For main general adult ELT courses/international standardized test preparation courses, revenues are recognized proportionately as the course hours are consumed. Students may not utilize all of their contracted rights within the service period. Such unutilized service treatments are referred to as “breakage”. An expected breakage amount is determined by historical experience and is recognized as revenue in proportion to the pattern of service utilized by the students.
For supplementary general adult ELT courses, revenues are recognized on a straight-line basis over the entire main general adult ELT course period.
For education materials and assessments of level of English proficiency, revenues are recognized according to the accounting policy for sales of goods. See “— Sales of goods.”
Course fees received are initially recorded as financial liabilities from contracts with customers. During the trial period/trial courses, we recognize contract assets when revenues are recognized. After the completion of trial period/trial courses but before the completion of 30% of total course hours of such course, the contract assets are set off against the financial liabilities from contracts with customers, recognition of revenue is recorded as a reduction of the related financial liabilities from contracts with customers, and nonrefundable amounts of course fee are transferred from financial liabilities from contracts with customers to deferred revenue. After the completion of 30% of total course hours of such course, the remaining financial liabilities from contracts with customers are reclassified as deferred revenue in the consolidated balance sheet and the recognition of revenue is recorded as a reduction of the deferred revenue.
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Online ELT
We operate “Likeshuo” platform to offer online live streaming ELT courses. Students enrolled for online courses by using prepaid study cards. For courses offered on the “Likeshuo” platform, we typically allow refunds of the course fees for any undelivered course hours after deducting a platform operation charge associated with the delivering such courses online, provided that a student can apply for refund at any time during these courses.
The proceeds collected for the study cards are initially recorded as financial liabilities from contracts with customers. Revenues are generally recognized proportionately as the course/service hours are delivered.
Junior ELT
We offer junior ELT services under our “Meten” brand and “ABC” brand. Students attend the classroom-based training for predetermined course hours in a predetermined period of time.
We assess and consider a number of factors when determining the transaction price. In making such assessment, we consider price concessions, discounts, rebates, refunds, credits, incentives, performance bonuses, penalties or other similar items. For courses offered under our “Meten” brand, the refund policy is similar to our general adult ELT service. For courses offered under our “ABC” brand, customers are generally entitled to a refund that is proportionate to incomplete course hours after a deduction of RMB2,000, as an early contract termination fee, if such customer requests a refund within 30 days upon the commencement of the course. No refund will be provided if a customer requests a refund after 30 days upon the commencement of the course. Course fees received are initially recorded as financial liabilities from contracts with customers. Within the 30-day trial period, recognition of revenue is recorded as a reduction of the related financial liabilities from contracts with customers. After 30 days and upon the commencement of the course, the remaining financial liabilities from contracts with customers are reclassified as deferred revenue in the consolidated balance sheet and the recognition of revenue is recorded as a reduction of the deferred revenue. Revenues are generally recognized proportionately as the course hours are delivered.
Sales of goods
Sales of goods are primarily derived from (i) the sales of food and beverages at our self-operated learning centers; and (ii) the delivery of education materials and assessment report of level of English proficiency as included in the package of the general adult ELT. Revenue is recognized when the customer takes possession of and accepts the products.
Other English language-related services
Revenues from other English language-related services are primarily derived from franchised learning centers through which the franchisees are authorized to use our brands and are required to adopt our centralized management system. A one-time initial franchise fee and one-time design consulting fee or a one-time renewal franchise fee is received when we enter into or renew a franchise agreement. During the term of the franchise agreement, which is generally three years, each franchisee is charged recurring monthly franchise fees based on an agreed percentage of its collected course and service fees and related individual course materials fees. The revenue of initial/renewal franchise fee is recognized on a straight-line basis over the franchise period. The revenue of the one-time design consulting fee is recognized when the consulting service is provided. The revenue of a recurring franchise fee is recognized when the franchisee and we confirm and agree as to the calculation of the fee at the end of each month during the franchise term.
Lease
We adopted ASU No. 2016-02, “Leases” on January 1, 2019. We determine if an arrangement is a “lease” at its inception. Operating leases are included in any operating lease right-of-use (“ROU”) assets, current and non-current lease liabilities on our consolidated balance sheets.
ROU lease assets represent our right to use an underlying asset for a specified lease term, and lease obligations represent our obligation to make the corresponding lease payments arising from the lease. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an implicit payment rate, we use our incremental borrowing rate based on the information available at the lease commencement date in determining the present value of future payments. The operating lease ROU assets also include initial direct costs incurred, and any lease payments made to the lessor at or before the commencement date, minus any lease incentives we received. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
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Goodwill
Goodwill represents the excess purchase price over the estimated fair value of net assets acquired in a business combination.
Goodwill is not amortized but is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired. Goodwill is tested for impairment at the reporting unit level on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include a significant change in business climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of a reporting unit. Application of the goodwill impairment test requires judgment, including the identification of the reporting unit, assignment of assets and liabilities to the reporting unit, assignment of goodwill to the reporting unit, and determination of the fair value of each reporting unit. Estimating fair value is performed by utilizing various valuation techniques, with a primary technique being a discounted cash flow which requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, estimation of the useful life over which cash flows will occur, and determination of our weighted average cost of capital.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as operating loss and tax credit carryforwards, if any. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the periods in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates or tax laws is recognized in the consolidated statements of comprehensive income in the period the change in tax rates or tax laws is enacted. We reduce the carrying amounts of deferred tax assets by a valuation allowance, if based on the available evidence, it is “more-likely-than-not” that such assets will not be realized. Accordingly, the need to establish valuation allowances for deferred tax assets is assessed at each reporting period based on a “more-likely-than-not” realization threshold. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of futures profitability, the duration of statutory carryforward periods, and our experience with operating loss and tax credit carryforwards, if any, not expiring.
In the financial statements, we recognize the impact of a tax position if that position is “more likely than not” to prevail based on the facts and technical merits of the position. Tax positions that meet the “more likely than not” recognition threshold are measured at the largest amount of tax benefit that has a greater than fifty percent likelihood of being realized upon settlement. Changes in recognition or measurement are reflected in the period in which the change in judgement occurs. Interest and penalties recognized related to an unrecognized tax benefits are classified as income tax expense in the consolidated statements of comprehensive income.
Share-based compensation
Share-based compensation costs are measured at the grant date. The compensation expense in connection with the shares awarded to employees is recognized using the straight-line method over the requisite service period. Forfeitures are estimated at the time of grant, with such estimate updated periodically and with actual forfeitures recognized currently to the extent they differ from the estimate. In determining the fair value of the shares awarded to employees, the discounted cash flow pricing model has been applied.
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Liquidity and Capital Resources
Our principal sources of liquidity have been from cash generated from operating activities. As of December 31, 2020, and as of June 30, 2021, we had RMB90.1 million and RMB144.2 million (US$22.3 million), respectively, in cash and cash equivalents. Cash and cash equivalents consist of cash on hand placed (i) with banks or other financial institutions and (ii) in highly liquid investments which are unrestricted as to withdrawal and use and have original maturities of three months or less when purchased. Our cash and cash equivalents are primarily denominated in Renminbi.
We intend to finance our future working capital requirements and capital expenditures from cash generated from operating activities, and funds raised from financing activities. As an offshore holding company, we are permitted under PRC laws and regulations to provide funding to our PRC subsidiaries through loans or capital contributions, subject to applicable regulatory approvals. We cannot assure you that we will be able to obtain these regulatory approvals on a timely basis, if at all. We believe that our current available cash and cash equivalents will be sufficient to meet our working capital requirements and capital expenditures in the ordinary course of business for the next twelve months.
However, we may require additional cash resources, due to changing business conditions or other future developments, including any investment or acquisition we may decide to pursue. If our existing cash resources are insufficient to meet our requirements, we may seek to sell equity or equity-linked securities, sell debt securities or borrow from banks. We cannot assure you that financing will be available in the amounts we need or on terms acceptable to us, if at all. The sale of additional equity securities would result in additional dilution to our shareholders. The incurrence of indebtedness and issuance of debt securities would result in debt service obligations and could result in operating and financial covenants that restrict our operations and our ability to pay dividends to our shareholders.
As a holding company with no material operations of our own, we are a corporation separate and apart from our subsidiaries and our variable interest entities, Shenzhen Meten International Education Co., Ltd. and Shenzhen Likeshuo Education Co., Ltd. (collectively, the “VIEs”) and their subsidiaries and, therefore, must provide for our own liquidity. We conduct our operations in China primarily through our affiliated entities. As a result, our ability to pay dividends and to finance any debt we may incur depends upon dividends paid by our subsidiaries, our VIEs and their subsidiaries and learning centers. If our PRC subsidiaries or any newly formed PRC subsidiaries incur debt on their own behalf in the future, the instruments governing their debt may restrict their ability to pay dividends to us. In addition, our PRC subsidiaries are permitted to pay dividends to us only out of their respective retained earnings, if any, as determined in accordance with Chinese accounting standards and regulations.
Under the applicable PRC laws and regulations, each of our PRC subsidiaries and learning centers are required to set aside a portion of its after tax profits each year to fund certain statutory reserves, and funds from such reserves may not be distributed to us as cash dividends except in the event of liquidation of such subsidiaries. These statutory limitations affect, and future covenant debt limitations might affect, our PRC subsidiaries’ ability to pay dividends to us. We currently believe that such limitations will not impact our ability to meet our ongoing short-term cash obligations, although we cannot assure you that such limitations will not affect our ability to meet our short-term cash obligations and to distribute dividends to our shareholders in the future.
The following table sets forth a summary of our cash flows for the periods presented:
| For the Six Months Ended June 30, | ||||||||||||
| 2020 | 2021 | |||||||||||
| RMB | RMB | US$ | ||||||||||
| (in thousands, except for percentages) | ||||||||||||
| Summary Consolidated Cash flow Data: | ||||||||||||
| Net cash flow used in operating activities | (167,159 | ) | (152,993 | ) | (23,695 | ) | ||||||
| Net cash used in investing activities | (24,472 | ) | (335 | ) | (52 | ) | ||||||
| Net cash generated from financing activities | 214,440 | 205,251 | 31,789 | |||||||||
| Net increase in cash and cash equivalents and restricted cash | 22,809 | 51,923 | 8,042 | |||||||||
| Cash and cash equivalents and restricted cash at the beginning of year | 151,731 | 100,473 | 15,561 | |||||||||
| Cash and cash equivalents and restricted cash at the end of year | 174,540 | 152,396 | 23,603 | |||||||||
16
Operating Activities
Net cash used in operating activities amounted to RMB167.2 million for the six months ended June 30, 2020. The difference between our net loss of RMB195.1 million and the net cash used in operating activities was primarily due to (i) depreciation and amortization of RMB28.6 million; (ii) amortization of operating lease right-of-use assets of RMB75.2 million; (iii) impairment loss of goodwill of RMB16.5 million; (iv) gain on disposal and closure of subsidiaries and branches of RMB10.2 million; (v) a decrease in prepayments and other current assets of RMB43.0 million; (vi) an increase in accrued expenses and other payables of RMB43.4 million; and (vii) an increase in accounts payable of RMB13.1 million, partially offset by (i) an increase in accounts receivable of RMB20.9 million; (ii) a decrease in deferred revenue of RMB42.0 million; (iii) a decrease in financial liabilities from contracts with customers of RMB69.1 million; and (iv) a decrease in operating lease liabilities of RMB70.3 million. Operating lease liabilities decreased, mainly due to the closure of some learning centers and the withdrawal of a lease. Our accounts receivable relates to the franchise fees to be received from our franchised learning centers, which increased for the six months ended June 30, 2020, because we received some students who were transferred from the franchise center. The decrease in financial liabilities from contracts with customers for the six months ended June 30, 2020, was mainly as a result of the decrease of gross billings due to the COVID-19 pandemic.
Net cash flow used in operating activities amounted to RMB153.0 million (US$23.7 million) for the six months ended June 30, 2021. The difference between our net loss of RMB169.7 million (US$26.3 million) and the net cash used in operating activities was primarily due to (i) depreciation and amortization of RMB21.1 million (US$3.3 million); (ii) amortization of operating lease right-of-use assets of RMB46.2 million (US$7.1 million); (iii) share-based compensation expenses of RMB38.4 million (US$5.9 million); (iv) impairment loss of goodwill of RMB6.0 million (US$0.9 million); (v) gain on disposal and closure of subsidiaries and branches of RMB5.5 million (US$0.9 million); and (vi) a decrease in prepayments and other current assets of RMB26.5 million (US$4.1 million), partially offset by (i) an increase in accounts receivable of RMB5.3 million (US$0.9 million); (ii) a decrease in deferred revenue of RMB13.8 million (US$2.1 million); (iii) a decrease in financial liabilities from contracts with customers of RMB54.4 million (US$8.4 million), and (iv) a decrease in operating lease liabilities of RMB55.5 million (US$8.6 million); and (v) a decrease in accrued expenses and other payables of RMB13.1 million (US$2.0 million). Operating lease liabilities decreased was mainly due to the closure of some learning centers and the withdrawal of a lease. Our accounts receivable relates to the franchise fees to be received from our franchised learning centers, which increased for the six months ended June 30, 2021, because we received some students who were transferred from the franchise center. The decrease in financial liabilities from contracts with customers for the six months ended June 30, 2021, was mainly as a result of the decrease of gross billings due to the recurrence of COVID-19.
Investing Activities
Net cash used in investing activities amounted to RMB24.5 million for the six months ended June 30, 2020. This was primarily attributable to (i) the purchase of short-term investments of RMB 42.4 million, (ii) the purchase of property and equipment of RMB8.7 million, and (iii) advances to related parties of RMB1.4 million, partially offset by (i) the proceeds from disposal of property and equipment of RMB 22.7 million, and (ii) our repayment of advances to related parties of RMB5.4 million.
Net cash used in investing activities amounted to RMB0.3 million (US$52,000) for the six months ended June 30, 2021. This was primarily attributable to (i) disposal of subsidiaries of RMB2.0 million (US$0.3 million), (ii) purchases of property and equipment of RMB1.5 million (US$0.2 million), and (iii) advances to related parties of RMB0.8 million (US$0.1 million), partially offset by our repayment of advances to related parties of RMB4.0 million (US$0.6 million).
Financing Activities
Net cash generated from financing activities amounted to RMB214.4 million for the six months ended June 30, 2020. This was primarily attributable to (i) proceeds from contributions from equity shareholders of RMB208.6 million, (ii) proceeds from bank loans of RMB64.9 million, and (iii) proceeds of advances from related parties of RMB15.5 million, partially offset by our (i) repayment of bank loans of RMB72.2 million, and (ii) payment for offering expenses of RMB12.5 million.
Net cash generated from financing activities amounted to RMB205.3 million (US$31.8 million) for the six months ended June 30, 2021. This was primarily attributable to (i) proceeds from recapitalization of RMB272.3 million (US$42.2 million), (ii) proceeds from bank loans of RMB27.0 million (US$4.2 million), and (iii) proceeds of advances from related parties of RMB108.0 million (US$16.7 million), partially offset by our (i) repayment of advances from related parties of RMB84.1 million (US$13.0 million), and (ii) repayment of bank loans of RMB117.9 million (US$18.3 million).
17
Capital Expenditures
Our capital expenditures amounted to RMB8.7 million and RMB1.5 million (US$0.2 million) in the six months ended June 30, 2020 and 2021, respectively, for purchases of property and equipment and intangible assets, such as course materials and software. We will continue to make capital expenditures to meet the expected growth of our business and expect that cash generated from our operating activities and financing activities will meet our capital expenditure needs in the foreseeable future.
Holding Company Structure
We are a holding company with no material operations of our own. We conduct our operations primarily through our affiliated entities in China. As a result, our ability to pay dividends depends upon dividends paid by our subsidiaries, which in turn depends on the service and license fees paid to Zhuhai Meten and Zhuhai Likeshuo. As we invest in and expand our PRC operations in the future, each of Meten BVI, Likeshuo BVI, Zhuhai Meten and Zhuhai Likeshuo will continue to rely on service and license fees from our affiliated entities and we will rely on dividends from Meten BVI and Likeshuo BVI, and Zhuhai Meten and Zhuhai Likeshuo for our cash needs. Furthermore, if our subsidiaries or any newly formed subsidiaries incur debt on their own behalf in the future, the instruments governing their debt may restrict their ability to pay dividends to us.
Although we currently do not require any such dividends, loans or advances from our entities for working capital and other funding purposes, we may in the future require additional cash resources from them, due to changes in business conditions, to fund future acquisitions and development, or merely to declare and pay dividends or distributions to our shareholders.
Our revenue contribution primarily comes from our affiliated entities. All of our operations are based in the PRC and our assets are primarily located in the PRC.
Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board, or FASB, issued ASU No. 2016-13, “Financial Instruments—Credit Losses” (“ASU 2016-13”), which introduces new guidance for credit losses on instruments within its scope. The new guidance introduces an approach based on expected losses, in order to estimate credit losses on certain types of financial instruments, including, but not limited to, trade and other receivables, held-to-maturity debt securities, loans and net investments in leases. The new guidance also modifies the impairment model for available-for-sale debt securities and requires the entities to determine whether all or a portion of the unrealized loss on an available-for-sale debt security is a credit loss. The standard also indicates that entities may not use the length of time a security has been in an unrealized loss position as a factor in concluding whether a credit loss exists. ASU 2016-13 is effective for Emerging Growth Companies (“EGCs”) for fiscal years beginning after December 15, 2022 and interim periods within those fiscal years and effective for public companies, excluding EGCs and smaller reporting companies, for fiscal years beginning after December 15, 2019. Early adoption is permitted for all entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are in the process of evaluating the impact of ASU 2016-13 on its consolidated financial statements.
In January 2017, the FASB issued guidance which simplifies the current two-step goodwill impairment test by eliminating step two of the test. The guidance requires a one-step impairment test in which an entity compares the fair value of a reporting unit with its carrying amount and recognizes an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, if any. This guidance is effective for EGCs for fiscal years beginning after December 15, 2022 and interim periods within those fiscal years, and is effective for public companies, excluding EGCs and smaller reporting companies, for fiscal years beginning after December 15, 2019, and should be applied on a prospective basis. Early adoption is permitted for the interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are currently evaluating the impact of the adoption of this guidance on its financial statements and related disclosures.
18
In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement” (“ASU 2018-13”). ASU 2018-13 modifies the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The amendments in ASU 2018-13 will be effective for us beginning after December 15, 2019, including interim periods within the year. Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures upon issuance of ASU No. 2018-13 and delay adoption of the additional disclosures until their effective date. We are not early adopting the standard and it is in the process of evaluation the impact of adoption of this new standard on its consolidated financial statements.
In December 2019, the FASB issued ASU No. 2019-12, “Simplifying the Accounting for Income Taxes” (“ASU 2019-12”). ASU 2019-12 simplifies the accounting for income taxes by removing certain exceptions to the general principles in ASC Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of ASC Topic 740, by clarifying and amending existing guidance. For public business entities, the amendments in ASU No. 2019-12 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early adoption of the amendments is permitted. We are not early adopting the standard and currently is in the process of evaluation the impact of adoption of this new standard on its consolidated financial statements.
In March 2020, the FASB issued ASU No. 2020-03 (“ASU 2020-03”), “Codification Improvements to Financial Instruments”. ASU 2020-03 represents changes to clarify or improve the codification. The amendments make the codification easier to understand and easier to apply by eliminating inconsistencies and providing clarifications. With regard to amendments related to Issue 1, Issue 2, Issue 4, and Issue 5, for public business entities, the amendments are effective upon issuance of this final Update, for all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years beginning after December 15, 2020. Early application is permitted. We are not early adopting the standard and it is in the process of evaluation the impact of adoption of this new standard on its consolidated financial statements.
In August 2020, the FASB issued ASU No. 2020-06, “Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (“ASU 2020-06”), which focuses on amending the legacy guidance on convertible instruments and the derivatives scope exception for contracts in an entity’s own equity. ASU 2020-06 simplifies an issuer’s accounting for convertible instruments by reducing the number of accounting models that require separate accounting for embedded conversion features. ASU 2020-06 also simplifies the settlement assessment that entities are required to perform to determine whether a contract qualifies for equity classification. Further, ASU 2020-06 enhances information transparency by making targeted improvements to the disclosures for convertible instruments and earnings-per-share (EPS) guidance, i.e., aligning the diluted EPS calculation for convertible instruments by requiring that an entity use the if-converted method and that the effect of potential share settlement be included in the diluted EPS calculation when an instrument may be settled in cash or shares, adding information about events or conditions that occur during the reporting period that cause conversion contingencies to be met or conversion terms to be significantly changed. This update will be effective for the Company’s fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Entities can elect to adopt the new guidance through either a modified retrospective method of transition or a fully retrospective method of transition. We are currently in the process of evaluating the impact of adopting ASU 2020-06 on its consolidated financial statements and related disclosure.
Trend Information
Other than as disclosed elsewhere in this report, we are not aware of any trends, uncertainties, demands, commitments or events that are reasonably likely to have a material effect on our net revenues, income, profitability, liquidity or capital resources, or that would cause the disclosed financial information to be not necessarily indicative of future operating results or financial conditions.
19
Off-Balance Sheet Arrangements
We, in cooperation with several third-party financing institutions (the “Loan Institutions”), offer tuition installment payment options to our students. Under this arrangement, the Loan Institutions remit the tuition fees to us for the borrowing students to complete their purchases of the courses. The interest expenses of the installment are born by the borrowing students who are obligated to repay the loans in pre-agreed installments over a period of 6 to 24 months to the Loan Institutions. According to one of the arrangements we had with the Loan Institutions, we are obligated to repay 50% of any overdue amounts to the Loan Institution for any default in repayment by the borrowing students. The maximum amount of undiscounted payments we would have to make in the event of borrower default is nil as of June 30, 2020 and 2021. We consider the fair value of the guarantee not to be significant to our consolidated financial statements and do not recognize this as a liability based on the estimated fair value of the guarantee.
We have not entered into any derivative contracts that are indexed to our shares and classified as shareholders’ equity, or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. Moreover, we do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or product development services with us.
Tabular Disclosure of Contractual Obligations
The following table sets forth our contractual obligations as of June 30, 2021:
| Payment Due by Period | ||||||||||||||||||||
| (In thousands of RMB) | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||||
| Operating lease obligations | 292,734 | 153,455 | 111,037 | 26,839 | 1,403 | |||||||||||||||
| Purchase obligations | 2,488 | 2,488 | - | - | - | |||||||||||||||
| Total | 295,222 | 155,943 | 111,037 | 26,839 | 1,403 | |||||||||||||||
20
Exhibit 99.2
TABLE OF CONTENTS
1
METEN HOLDING GROUP LTD
UNAUDITED CONSOLIDATED BALANCE SHEETS
(In thousands of RMB, except share data and per share data, or otherwise noted)
| Note | December 31, 2020 | June 30, 2021 | ||||||||||||
| RMB’000 | RMB’000 | US$’000 | ||||||||||||
| (Note 3(c)) | ||||||||||||||
| ASSETS | ||||||||||||||
| Current assets | ||||||||||||||
| Cash and cash equivalents | ||||||||||||||
| Contract assets | 6(a) | |||||||||||||
| Accounts receivable, net | 6 | |||||||||||||
| Other contract costs | ||||||||||||||
| Prepayments and other current assets | 7 | |||||||||||||
| Amounts due from related parties | 21(b) | |||||||||||||
| Prepaid income tax | ||||||||||||||
| Total current assets | ||||||||||||||
| Non-current assets | ||||||||||||||
| Restricted cash | ||||||||||||||
| Other contract costs | ||||||||||||||
| Equity method investments | 8 | |||||||||||||
| Property and equipment, net | 9 | |||||||||||||
| Operating lease right-of-use assets | 15 | |||||||||||||
| Intangible assets, net | 10 | |||||||||||||
| Deferred tax assets | ||||||||||||||
| Goodwill | 12 | |||||||||||||
| Long-term prepayments and other non-current assets | 7 | |||||||||||||
| Total non-current assets | ||||||||||||||
| Total assets | ||||||||||||||
2
METEN HOLDING GROUP LTD
UNAUDITED CONSOLIDATED BALANCE SHEETS (Continued)
(In thousands of RMB, except share data and per share data, or otherwise noted)
| Note | December 31, 2020 | June 30, 2021 | ||||||||||||
| RMB’000 | RMB’000 | US$’000 | ||||||||||||
| (Note 3(c)) | ||||||||||||||
| Current liabilities | ||||||||||||||
| Accounts payable (including amounts of VIEs (as defined herein) without
recourse to the Company of RMB | ||||||||||||||
| Bank loans (including amounts of VIEs without recourse to the Company of RMB | 14 | |||||||||||||
| Deferred revenue (including amounts of VIEs without recourse to the Company of RMB | 6(b) | |||||||||||||
| Salary and welfare payable (including amounts of VIEs without recourse to the Company of RMB | ||||||||||||||
| Financial liabilities from contracts with customers (including amounts of VIEs without recourse to the Company of RMB | 6(b) | |||||||||||||
| Accrued expenses and other payables (including amounts of VIEs without recourse to the Company of RMB | 13 | |||||||||||||
| Amounts due to related parties (including amounts of VIEs without recourse to the Company of RMB | 21(b) | |||||||||||||
| Current operating lease liabilities (including amounts of VIEs without recourse to the Company of RMB | 15 | |||||||||||||
| Total current liabilities | ||||||||||||||
3
METEN HOLDING GROUP LTD
UNAUDITED CONSOLIDATED BALANCE SHEETS (Continued)
(In thousands of RMB, except share data and per share data, or otherwise noted)
| Note | December 31, 2020 | June 30, 2021 | ||||||||||||
| RMB’000 | RMB’000 | US$’000 | ||||||||||||
| (Note 3(c)) | ||||||||||||||
| Non-current liabilities | ||||||||||||||
| Deferred revenue (including amounts of VIEs without recourse to the Company of RMB | 6(b) | |||||||||||||
| Deferred tax liabilities (including amounts of VIEs without recourse to the Company of RMB | 11 | |||||||||||||
| Operating lease liabilities (including amounts of VIEs without recourse to the Company of RMB | 15 | |||||||||||||
| Non-current tax payable (including amounts of VIEs without recourse to the Company of RMB | ||||||||||||||
| Total non-current liabilities | ||||||||||||||
| Total liabilities | ||||||||||||||
4
METEN HOLDING GROUP LTD
UNAUDITED CONSOLIDATED BALANCE SHEETS (Continued)
(In thousands of RMB, except share data and per share data, or otherwise noted)
| Note | December 31, 2020 | June 30, 2021 | ||||||||||||
| RMB’000 | RMB’000 | US$’000 | ||||||||||||
| (Note 3(c)) | ||||||||||||||
| Shareholders’ deficit | ||||||||||||||
| Ordinary shares (US$ | 20 | |||||||||||||
| Additional paid-in capital | ||||||||||||||
| Accumulated deficit | ( | ) | ( | ) | ( | ) | ||||||||
| Total deficit attributable to shareholders of the Company | ( | ) | ( | ) | ( | ) | ||||||||
| Non-controlling interests | ||||||||||||||
| Total deficit | ( | ) | ( | ) | ( | ) | ||||||||
| Commitments and contingencies | 22 | |||||||||||||
| Total liabilities and shareholders’ deficit | ||||||||||||||
5
METEN HOLDING GROUP LTD
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
(In thousands of RMB, except share data and per share data, or otherwise noted)
| For the Six Months Ended June 30, | ||||||||||||||
| Note | 2020 | 2021 | ||||||||||||
| RMB’000 | RMB’000 | US$’000 | ||||||||||||
| Unaudited | ||||||||||||||
| (Note 3(c)) | ||||||||||||||
| Revenues | 17 | |||||||||||||
| Cost of revenues | ( | ) | ( | ) | ( | ) | ||||||||
| Gross profit | ||||||||||||||
| Operating expenses: | ||||||||||||||
| Selling and marketing expenses | ( | ) | ( | ) | ( | ) | ||||||||
| General and administrative expenses | ( | ) | ( | ) | ( | ) | ||||||||
| Research and development expenses | ( | ) | ( | ) | ( | ) | ||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expenses): | ||||||||||||||
| Interest income | ||||||||||||||
| Interest expenses | ( | ) | ( | ) | ( | ) | ||||||||
| Foreign currency exchange gain/(loss), net | ( | ) | ( | ) | ||||||||||
| Losses on disposal and closure of subsidiaries and branches | ( | ) | ( | ) | ( | ) | ||||||||
| Government grants | 3(w) | |||||||||||||
| Equity in income on equity method investments | ||||||||||||||
| Others, net | ( | ) | ( | ) | ( | ) | ||||||||
| Loss before income tax | ( | ) | ( | ) | ( | ) | ||||||||
| Income tax expense | 11 | ( | ) | ( | ) | ( | ) | |||||||
| Net Loss | ( | ) | ( | ) | ( | ) | ||||||||
| Less: Net loss attributable to non-controlling interests | ( | ) | ( | ) | ||||||||||
| Net loss attributable to shareholders of the Company | ( | ) | ( | ) | ( | ) | ||||||||
| Comprehensive loss | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss per share | 18 | |||||||||||||
| - Basic | ( | ) | ( | ) | ( | ) | ||||||||
| - Diluted | ( | ) | ( | ) | ( | ) | ||||||||
| Weighted average shares used in calculating net loss per share | ||||||||||||||
| - Basic | ||||||||||||||
| - Diluted | ||||||||||||||
6
METEN HOLDING GROUP LTD
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN DEFICIT
(In thousands of RMB, except share data and per share data, or otherwise noted)
Ordinary shares | Additional | Accumulated deficit | Total
deficit | Non-controlling | Total deficit | ||||||||||||||||||||||||
| Note | Number of shares | RMB’000 | RMB’000 | RMB’000 | RMB’000 | RMB’000 | RMB’000 | ||||||||||||||||||||||
| Balances at December 31, 2019 | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||
| Net loss for the year | - | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||
| Reserve recapitalization | |||||||||||||||||||||||||||||
| Warrant financing | |||||||||||||||||||||||||||||
| Share-based compensation | |||||||||||||||||||||||||||||
| Balances at December 31, 2020 | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||
| Net loss for the year | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||
| Issuance of shares | |||||||||||||||||||||||||||||
| Share-based compensation | - | ||||||||||||||||||||||||||||
| Balances at June 30, 2021 | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||
7
METEN HOLDING GROUP LTD
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of RMB, except share data and per share data, or otherwise noted)
| Note | For the Six Months Ended June 30 | |||||||||||||
| 2020 | 2021 | |||||||||||||
| RMB’000 | RMB’000 | US$’000 | ||||||||||||
| (Note 3(c)) | ||||||||||||||
| Cash flows from operating activities: | ||||||||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ||||||||
| Adjustments to reconcile net income/(loss) to net cash generated from operating activities: | ||||||||||||||
| Depreciation and amortization | ||||||||||||||
| Amortization of operating lease right-of-use assets | ||||||||||||||
| Net gain on disposal of property and equipment | ( | ) | ( | ) | ( | ) | ||||||||
| Impairment loss of goodwill | ||||||||||||||
| Provision for impairment loss of account receivables and other receivables | ||||||||||||||
| Equity in income on equity method investments | ( | ) | ( | ) | ( | ) | ||||||||
| Deferred income tax expense(benefit) | ( | ) | ||||||||||||
| Gain on disposal and closure of subsidiaries and branches | ||||||||||||||
| Warrant financing | - | |||||||||||||
| Share-based compensation expenses | 19 | |||||||||||||
| Changes in operating assets and liabilities, net of effect of acquisitions and disposals of subsidiaries: | ||||||||||||||
| Decrease in contract assets | ||||||||||||||
| Increase in accounts receivable | ( | ) | ( | ) | ( | ) | ||||||||
| Decrease in other contract costs | ||||||||||||||
| Decrease in prepayments and other current assets | ||||||||||||||
| Decrease in other non-current assets | ||||||||||||||
| Increase/(decrease) in accounts payable | ( | ) | ( | ) | ||||||||||
| Decrease in deferred revenue | ( | ) | ( | ) | ( | ) | ||||||||
| Decrease in salary and welfare payable | ( | ) | ( | ) | ( | ) | ||||||||
| Decrease in financial liabilities from contracts with customers | ( | ) | ( | ) | ( | ) | ||||||||
| Increase/(decrease) in accrued expenses and other payables | ( | ) | ( | ) | ||||||||||
| (Increase)/decrease in prepaid tax | ( | ) | ||||||||||||
| Decrease in operating lease liabilities | ( | ) | ( | ) | ( | ) | ||||||||
| Increase in income taxes payable | ||||||||||||||
| Net cash flow used in operating activities | ( | ) | ( | ) | ( | ) | ||||||||
| Cash flows from investing activities: | ||||||||||||||
| Disposal of subsidiaries | - | ( | ) | ( | ) | |||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ( | ) | ||||||||
| Proceeds from disposal of property and equipment | ||||||||||||||
| Advances to related parties | 21(a) | ( | ) | ( | ) | ( | ) | |||||||
| Repayment of advances to related parties | 21(a) | |||||||||||||
| Purchase of short-term investments | ( | ) | - | - | ||||||||||
| Net cash used in investing activities | ( | ) | ( | ) | ( | ) | ||||||||
| Cash flows from financing activities: | ||||||||||||||
| Advances from related parties | 21(a) | |||||||||||||
| Repayment of advances from related parties | 21(a) | ( | ) | ( | ) | ( | ) | |||||||
| Distributions in connection with Reorganization | ||||||||||||||
| Proceeds from bank loans | ||||||||||||||
| Repayment of bank loans | ( | ) | ( | ) | ( | ) | ||||||||
| Payment for offering expenses | ( | ) | - | - | ||||||||||
| Proceeds from contributions from equity shareholders | - | - | ||||||||||||
| Net cash generated from financing activities | ||||||||||||||
| Net decrease in cash and cash equivalents and restricted cash | ||||||||||||||
| Cash and cash equivalents and restricted cash at the beginning of the year | ||||||||||||||
| Cash and cash equivalents and restricted cash at the end of the year | ||||||||||||||
| Supplemental disclosure of cash flow information: | ||||||||||||||
| Interest paid | ||||||||||||||
| Income tax paid | ||||||||||||||
| Supplemental disclosure of cash and cash equivalents and restricted cash: | ||||||||||||||
| Cash and cash equivalents | ||||||||||||||
| Restricted cash | ||||||||||||||
| Total cash, cash equivalents, and restricted cash shown in the statement of cash flows | ||||||||||||||
8
METEN HOLDING GROUP LTD
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of RMB, except share data and per share data, or otherwise noted)
| 1. | Organization and Principal Activities |
| (a) | Principal activities |
Meten EdtechX Education Group Ltd (the “Company”) was incorporated on September 27, 2019 under the law of Cayman Islands as an exempted company with limited liability. The Company, through its subsidiaries and variable interest entities, Shenzhen Meten International Education Co., Ltd. and Shenzhen Likeshuo Education Co., Ltd. (collectively, the “VIEs”) and their subsidiaries (the Company, the VIEs and their subsidiaries being collectively referred to herein as the “Group”), is primarily engaged in providing a wide range of educational programs, services and products, consisting primarily of classroom-based English training services, overseas training services, online English training services and operation of education software. All of the Group’s operations and customers are located in the People’s Republic of China (“PRC”). The Company does not conduct any substantive operations of its own.
Meten EdtechX Education Group Ltd. changed its name to “Meten Holding Group Ltd.,” on August 11, 2021
As of June 30, 2021, the details of the Company’s major subsidiaries, consolidated VIEs and the major subsidiaries of the VIEs are as follows:
| Entity | Date
of incorporation | Place
of incorporation | Percentage
of direct or indirect economic ownership | Principal activities | ||||||
| Major subsidiaries: | ||||||||||
| Meten International Education Group | % | |||||||||
| Meten Education Investment Limited (“Meten BVI”) | % | |||||||||
| Likeshuo Education Investment Limited (“Likeshuo BVI”) | % | |||||||||
| Meten Education (Hong Kong) Limited (“Meten HK”) | % | |||||||||
| Likeshuo Education (Hong Kong) Limited (“Likeshuo HK”) | % | |||||||||
| Zhuhai Meizhilian Education Technology Co., Ltd.(“Zhuhai Meizhilian”) | % | development and education consulting service | ||||||||
| Zhuhai Likeshuo Education Technology Co., Ltd. (“Zhuhai Likeshuo”) | % | development and education consulting service | ||||||||
| VIEs: | ||||||||||
| Shenzhen Meten International Education Co., Limited (“Shenzhen Meten”) | % | |||||||||
| Shenzhen Likeshuo Education Co., Ltd. (“Shenzhen Likeshuo’’) | % | |||||||||
| VIEs’ major subsidiaries and schools: | ||||||||||
| Shenzhen Qianhai Meten Technology Co., Ltd | % | |||||||||
| Meten Education (Shenzhen) Co., Ltd | % | | ||||||||
| Nanjing Meten Foreign Language Training Co., Ltd | % | |||||||||
| Chengdu Meten Education Technology Co., Ltd | % | |||||||||
| Guangzhou Meten Education Technology Co., Ltd | % | |||||||||
| Beijing Jingchengying Education and Culture Development Co., Ltd. | % | |||||||||
| Beijing Jingcheng Education Network Technology Co., Ltd. | % | |||||||||
| Beijing Fengtai District ABC Foreign Language Training School | % | |||||||||
| Beijing Xicheng District ABC Foreign Language Training School | % | |||||||||
| Harbin ABC Foreign Language School | % | |||||||||
| Harbin ABC Culture Training School | % | |||||||||
| Harbin Xiangfang District ABC Foreign Language School | % | |||||||||
9
| (b) | History of the Group and reorganization |
Organization and General
The Company is authorized to issue
Reverse recapitalization
On December 12, 2019, the Company entered into an Agreement and Plan of Reorganization (the “Merger Agreement”) by and among the Company, EdtechX Holdings Acquisition Corp., a Delaware corporation (“EdtechX”), Meten Education Inc., a Delaware corporation and wholly owned subsidiary of the Company (“EdtechX Merger Sub”), Meten Education Group Ltd. (“Meten International”), a Cayman Islands exempted company which incorporated on July 10,2018 and wholly owned subsidiary of the Company (“Meten Merger Sub”, and together with EdtechX Merger Sub, the “Merger Subs”). EdtechX was a blank check company incorporated in Delaware on May 15, 2018 for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses or entities.
On March 30, 2020,
Meten International was determined to be the accounting acquirer, given the controller of Meten International effectively controlled the combined entity, Meten EdtechX Education Group Ltd., after the Business Combination.
The transaction is not a business combination under U.S. GAAP, because EdtechX was not a business. The transaction is accounted for as a reverse recapitalization, which is equivalent to the issuance of shares by Meten International for the net monetary assets of EdtechX, accompanied by a recapitalization. Meten International is determined as the predecessor and the historical financial statements of Meten International became the Company’s historical financial statements, with retrospective adjustments to give effect of the reverse recapitalization. The equity is restated using the exchange ratio of 0.1519 established in the reverse recapitalization transaction, which is 48,391,607 divided by 318,601,222, to reflect the equity structure of the Company. Loss (income) per share is retrospectively restated using the historical weighted-average number of ordinary shares outstanding multiplied by the exchange ratio. The share and per share data are retrospectively restated using the exchange ratio in the share-based compensation footnote, see Note 19.
The par value of ordinary shares was adjusted retrospectively from RMB219 to RMB34, the subscription receivable was adjusted retrospectively from negative RMB2 to RMB nil, and the difference of RMB183 was adjusted retrospectively as in addition paid-in capital as of December 31, 2019. The consolidated statements of changes in equity (deficit) for the years ended December 31, 2018 and 2019 were also adjusted retrospectively to reflect these changes.
The loss per share before and after the retrospective adjustments are as follows.
| 2018 | ||||||||
| Before adjustment | After adjustment | |||||||
| RMB | RMB | |||||||
| Net (loss) income per share attributable to Meten International’s shareholders – per share | ||||||||
| -Basic | ||||||||
| -Diluted | ||||||||
10
| 2019 | ||||||||
| Before adjustment | After adjustment | |||||||
| RMB | RMB | |||||||
| Net (loss) income per share attributable to Meten International’s shareholders – per share | ||||||||
| -Basic | ( | ) | ( | ) | ||||
| -Diluted | ( | ) | ( | ) | ||||
Immediately prior to the Business Combination,
Azimut Enterprises Holdings S.r.l. invested $
In connection with Business Combination,
Reorganization of Meten International
Prior to the Business Combination, Meten International undertook a series of steps to restructure its business.
Meten International’s history began in April
2006 with the commencement of operations of Shenzhen Meten, a limited liability company incorporated in the PRC by Mr. Jishuang Zhao,
Mr. Siguang Peng and Mr. Yupeng Guo. On December 18, 2017, Shenzhen Meten converted into a joint stock limited liability company and
From March 2012 to August 2018, Mr. Yun Feng, Shenzhen Daoge Growth No.3 Investment Fund Partnership (Limited Partnership), Shenzhen Daoge Growth No.5 Investment Fund Partnership (Limited Partnership), Shenzhen Daoge Growth No.6 Investment Fund Partnership (Limited Partnership), Shenzhen Daoge Growth No.11 Investment Fund Partnership (Limited Partnership), Shenzhen Daoge Growth No.21 Investment Fund Partnership (Limited Partnership), Zhihan (Shanghai) Investment Center (Limited Partnership), Hangzhou Muhua Equity Investment Fund Partnership (Limited Partnership) (collectively known as the “Pre-listing Investors”) each acquired certain equity interests in Shenzhen Meten.
In preparation of the Company’s overseas listing, Shenzhen Meten underwent a series of reorganization transactions (“Reorganization”) in 2018. The main purpose of the Reorganization was to establish a Cayman holding company for Shenzhen Meten’s general adult English training, overseas training services, online English training and other English language-related services businesses (the “Business”) in preparation for its overseas listing.
The Reorganization was executed in the following steps:
| 1) | Meten International was incorporated as an exempted company with limited liability in the Cayman Islands on September 27, 2019, and as offshore holding company of the Group. In July and August 2018, the Founder and Pre-listing Investors subscribed for ordinary shares of Meten International at par value, all in the same proportions as the percentage of the then equity interest they held in Shenzhen Meten. Upon the issuance of ordinary shares to the Founder and Pre-listing Investors, the equity structure of the Meten International was identical to that of Shenzhen Meten. |
| 2) | In July 2018, Meten International further established two wholly-owned subsidiaries in the British Virgin Islands, Meten BVI and Likeshuo BVI. |
| 3) | In August 2018, Meten BVI and Likeshuo BVI established two wholly-owned subsidiaries in Hong Kong, Meten HK and Likeshuo HK, respectively. |
| 4) | In September 2018, Meten HK and Likeshuo HK established two wholly-owned subsidiaries in China, named Zhuhai Meten and Zhuhai Likeshuo, respectively. |
| 5) | In October 2018, Shenzhen Meten was split into three separate legal entities, namely Shenzhen Meten, Shenzhen Likeshuo and Shenzhen Yilian Education Investment Co. Ltd. (“Shenzhen Yilian Investment”). |
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| 6) | In November 2018, Zhuhai Meten entered into a series of contractual arrangements, including a business cooperation agreement, exclusive technical service and management consultancy agreement, exclusive call option agreement, equity pledge agreement and shareholders’ rights entrustment agreement (collectively referred to as the “Contractual Arrangements” as further described below) with Shenzhen Meten, and their shareholders. Zhuhai Likeshuo (together with Zhuhai Meten, the “WFOEs”), entered into a similar series of contractual arrangements with Shenzhen Likeshuo and their shareholders. Consequently, Shenzhen Meten and Shenzhen Likeshuo became consolidated VIEs of Meten International upon the completion of the relevant reorganization steps. |
| 7) | As part of the Reorganization, Shenzhen Meten transferred its equity interests in certain operations that
are not a part of the Business to Shenzhen Yilian Investment and made a net cash distribution of approximately RMB |
The Reorganization involved the restructuring of the legal structure of the Business, which was under common control and did not result in any changes in the economic substance of the ownership and the Business. The accompanying consolidated financial statements have been prepared as if the current corporate structure had been in existence throughout the periods presented.
Upon completion of the Reorganization, Meten International’s shares and per share information, including the basic and diluted income/(loss) per share, have been presented retrospectively as if the number of ordinary shares outstanding immediately after the completion of the Reorganization had been outstanding from the beginning of the earliest period presented, except for the ordinary shares issued in connection with the exchange of Redeemable Owner’s Investment (as defined herein) held by the Pre-listing investors during the Reorganization have been weighted for the portion of the period that they were outstanding.
| (c) | VIE arrangements |
Given the uncertainties as to whether applicable PRC laws and regulations prohibit foreign investors from providing English language training and value-added telecommunications services in the PRC, the Company operates substantially all of its business through its VIEs and VIEs’ subsidiaries. To provide the Company the control of the VIEs, Zhuhai Meten and Zhuhai Likeshuo entered into a series of contractual arrangements with the VIEs and their respective equity holders.
Agreements among Zhuhai Meten, Shenzhen Meten and the shareholders of Shenzhen Meten
Business Cooperation Agreement
Pursuant to the business cooperation agreements, 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, 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.
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. Without the prior written consent of Zhuhai Meten, Shenzhen Meten and its affiliated entities cannot accept services provided by, or establish 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 its affiliated entities agreed to pay annual service fees to Zhuhai Meten in an amount to be determined at Zhuhai Meten’s discretion.
12
Exclusive Call Option Agreement
Under the exclusive call option agreement entered into among Shenzhen Meten, Zhuhai Meten and the equity holders of Shenzhen Meten, each of the equity holders of Shenzhen Meten irrevocably granted Zhuhai Meten an exclusive option to purchase, or have its designated representatives to purchase, to the extent permitted under PRC law, all or part of his or its equity interests in Shenzhen Meten. Zhuhai Meten or its designated representatives have sole discretion as to when to exercise such options, either in part or in full. The exercise prices for Shenzhen Meten is equal to the lowest price as permitted under applicable PRC law and regulations. Without Zhuhai Meten’s prior written consent, Shenzhen Meten’s equity holders shall not sell or otherwise dispose of their beneficial interest, increase or decrease the registered capital, amend its articles of association, create or allow any encumbrance on its assets or other beneficial interests and provide any loans or guarantees. The agreements expire upon transfer of all equity interests and assets of Shenzhen Meten to the Zhuhai Meten or its designated representatives.
Equity Pledge Agreement
Pursuant to the equity pledge agreement among Shenzhen Meten and the equity holders of Shenzhen Meten, Shenzhen Meten and its the equity holders of shall pledge all of their equity interests in Shenzhen Meten to Zhuhai Meten, to guarantee the performance by Shenzhen Meten and the equity holders of their respective obligations under the Contractual Arrangements. In enforcing the pledge, if Shenzhen Meten and/or its shareholders breach their contractual obligations under those agreements, Zhuhai Meten, as pledgee, will be entitled to certain rights, including the right to dispose of the pledged equity interests. These agreements may not be terminated until all of Shenzhen Meten’s obligations have been fulfilled under the Contractual Arrangements.
Shareholders’ Rights Entrustment Agreement
Pursuant to the shareholders’ rights entrustment agreement signed between Zhuhai Meten, Shenzhen Meten and the equity holders of Shenzhen Meten, the equity holders of Shenzhen Meten irrevocably appointed Zhuhai Meten as attorney-in-fact to exercise on such shareholder’s behalf any and all rights that such shareholder has in respect of its equity interest in Shenzhen Meten, including, but not limited to, executing the exclusive right to convene and attend shareholders’ meeting, vote on all matters of Shenzhen Meten under its Articles of Association, and nominate and appoint directors and other senior management members of Shenzhen Meten. These agreements remain effective and irrevocable during the contractual periods and can be extended under PRC laws until Zhuhai Meten has purchased all equity of Shenzhen Meten under the exclusive call option agreement.
Spousal Undertaking
Pursuant to the spouse undertakings, the respective spouse of the individual shareholders of Shenzhen Meten has irrevocably agreed to the execution of a business cooperation agreement, exclusive technical service and management consultancy agreement, exclusive call option agreement, equity pledge agreement and shareholder’s 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.
Agreements among Zhuhai Likeshuo, Shenzhen Likeshuo and the shareholders of Shenzhen Likeshuo
Zhuhai Likeshuo entered into a series of contractual arrangements with Shenzhen Likeshuo and the shareholders of Shenzhen Likeshuo, including a business cooperation agreement, an exclusive technical service and management consultancy agreement, an exclusive call option agreement, an equity pledge agreement, a shareholders’ rights entrustment agreement, and spousal undertakings. The terms of these agreements are identical to the contractual arrangements entered into by and among Zhuhai Meten, Shenzhen Meten, and the shareholders of Shenzhen Meten.
Through the aforementioned contractual agreements, the Company has the ability to:
| ● | exercise effective control over the VIEs whereby having the power to direct Shenzhen Meten and Shenzhen Likeshuo’s business activities; |
| ● | receive substantially all of the economic benefits and residual returns, and absorb substantially all the risks and expected losses from Shenzhen Meten and Shenzhen Likeshuo as if the Company was their sole shareholder; and |
| ● | have an exclusive option to purchase all of the equity interests in Shenzhen Meten and Shenzhen Likeshuo. |
Management, therefore, concluded that the Company, through the above Contractual Arrangements, has the power to direct the activities that most significantly impact the VIEs’ economic performance, bears the risks of and enjoys the rewards normally associated with ownership of the VIEs, and therefore the Company is the ultimate primary beneficiary of these VIEs. Consequently, the financial results of the VIEs were included in the Group’s consolidated financial statements.
13
The table sets forth the assets and liabilities of the VIEs included in the Company’s consolidated balance sheets:
| As of December 31, 2020 | As of June 30, 2021 | |||||||
| RMB’000 | RMB’000 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | ||||||||
| Contract assets | ||||||||
| Accounts receivable | ||||||||
| Other contract costs | ||||||||
| Prepayments and other current assets | ||||||||
| Amounts due from related parties | ||||||||
| Prepaid income tax | ||||||||
| Total current assets | ||||||||
| Non-current assets | ||||||||
| Restricted cash | ||||||||
| Other contract costs | ||||||||
| Equity method investments | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Intangible assets, net | ||||||||
| Deferred tax assets | ||||||||
| Goodwill | ||||||||
| Long-term prepayments and other non-current assets | ||||||||
| Total non-current assets | ||||||||
| Total assets | ||||||||
| Current liabilities | ||||||||
| Accounts payable | ||||||||
| Bank loans | ||||||||
| Deferred revenue | ||||||||
| Salary and welfare payable | ||||||||
| Financial liabilities from contracts with customers | ||||||||
| Accrued expenses and other payables | ||||||||
| Current operating lease liabilities | ||||||||
| Income taxes payable | ||||||||
| Amounts due to related parties | ||||||||
| Total current liabilities | ||||||||
| Non-current liabilities | ||||||||
| Deferred revenue | ||||||||
| Deferred tax liabilities | ||||||||
| Operating lease liabilities | ||||||||
| Non-current tax payable | ||||||||
| Total non-current liabilities | ||||||||
| Total liabilities | ||||||||
14
The table sets forth the results of operations of the VIE included in the Company’s consolidated statements of comprehensive income/(loss):
| For the Six Months Ended June 30, | ||||||||
| 2020 | 2021 | |||||||
| RMB’000 | RMB’000 | |||||||
| Net revenues | ||||||||
| Net loss | ( | ) | ( | ) | ||||
The table sets forth the cash flows of the VIE included in the Company’s consolidated statements of cash flows:
| For the Six Months Ended June 30, | ||||||||
| 2020 | 2021 | |||||||
| RMB’000 | RMB’000 | |||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Net cash generated from financing activities | ||||||||
The unrecognized revenue producing assets that are held by the VIEs comprise of assembly workforce and intellectual property and trademarks which were not recorded on the Company’s consolidated balance sheets as they do not meet all the capitalization criteria.
In accordance with the Contractual Arrangements, the Company has the power to direct activities of the VIEs, and can have assets transferred freely out of the VIEs without restrictions. Therefore, the Company considers that there is no asset in the VIEs that can be used only to settle obligations of the respective VIE, except for registered capital and the PRC statutory reserves. Relevant PRC laws and regulations restrict the VIEs from transferring a portion of their net assets, equivalent to the balance of their registered capital and statutory reserves, to the Company in the form of loans and advances or cash dividends. Please refer to Note 23 for disclosure of the restricted net assets.
As the VIEs are incorporated as limited liability companies under The Company Law of the PRC (the “PRC Company Law”), the creditors of the VIEs do not have recourse to the general credit of the Company. There is currently no contractual arrangement that would require the Company to provide additional financial support to the VIEs.
Risks associated with VIE arrangements
There are substantial uncertainties regarding the interpretation and application of the PRC laws and regulations, and the Company cannot assure you that the PRC government would agree that the Group’s corporate structure or any of the above-mentioned Contractual Arrangements comply with 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 the Company and its consolidated VIEs are found to be in violation of any existing or future PRC laws or regulations, or fail to obtain any of the required licenses and permits, the relevant PRC regulatory authorities would have broad discretion in dealing with such violations, including:
| (a) | revoking the business licenses of such entities; |
15
| (b) | discontinuing or restricting the operations of any transactions among the Company’s PRC subsidiaries and the VIEs; |
| (c) | limiting the Company’s business expansion in China by way of entering into contractual arrangements; |
| (d) | confiscating the income of the VIEs or the Company’s PRC subsidiaries; |
| (e) | imposing fines, penalties or other requirements with which the Company, its PRC subsidiaries or consolidated VIEs may not be able to comply; |
| (f) | requiring the Company to restructure its ownership structure or operations, terminate the Contractual Arrangements with the VIEs and deregistering the equity pledges on the equity interest in the VIEs, which in turn would affect its ability to consolidate, derive economic interests from, or exert effective control over the VIEs; |
| (g) | restricting or prohibiting its use of the proceeds of any offering to finance its business and operations in China; or |
| (h) | restricting the use of financing sources by the Company or the VIEs, or otherwise restricting the Company or the VIEs’ ability to conduct business. |
If the imposition of any of these penalties precludes the Company from operating its business, it would no longer be in a position to generate revenue or cash from it. If the imposition of any of these penalties causes the Company to lose its rights to direct the activities of its consolidated VIEs or its rights to receive its economic benefits, the Company would no longer be able to consolidate these entities, and its financial statements would no longer reflect the results of operations from the business conducted by VIEs except to the extent that the Company receives payments from VIEs under the Contractual Arrangements. Either of these results, or any other significant penalties that might be imposed on the Company in this event, would have a material adverse effect on its financial condition and results of operations.
If the PRC government deems that the Company’s contractual arrangements with its consolidated VIEs in China do not comply with PRC regulatory restrictions on foreign investment in the relevant industries, or if these regulations or the interpretation of existing regulations change or are interpreted differently in the future, the Company could be subject to severe penalties or be forced to relinquish our interests in those operations. It is uncertain whether any new PRC laws or regulations relating to variable interest entity structures will be adopted or if adopted, what they would provide. PRC regulatory authorities could disallow this structure, which would materially adversely affect the Company’s operations and the value of its securities, and could cause the value of such securities to significantly decline or become worthless.
| (d) | Basis of presentation |
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP’’).
The consolidated financial statements are presented in Renminbi (“RMB”), rounded to the nearest thousands except share data and per share data, or otherwise noted.
| (e) | Principles of consolidation |
The Group’s consolidated financial statements include the financial statements of the Company, its subsidiaries and its VIEs. All transactions and balances among the Company, its subsidiaries and its VIEs have been eliminated upon consolidation.
Subsidiaries are those entities in which the Company, directly or indirectly, controls more than one half of the voting powers; has the power to appoint or remove the majority of the members of the board of directors; or to cast a majority of votes at the meeting of directors; or has the power to govern the financial and operating policies of the investee under a statute or agreement among the shareholders or equity holders.
A consolidated VIE is an entity in which the Company, or its subsidiary, through contractual agreements, bears the risks of, and enjoys the rewards normally associated with ownership of the entity. In determining whether the Company or its subsidiaries are the primary beneficiary, the Company considered whether it has the power to direct activities that are significant to the VIE’s economic performance, and also the Group’s obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. The Company, through the WFOEs holds all the variable interests of the VIEs, and has been determined to be the primary beneficiary of the VIEs.
16
| 2. | Liquidity and Going Concern |
The accompanying consolidated financial statements have been prepared assuming that the Group will continue as a going concern, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future.
The accompanying consolidated financial statements contemplate the realization of assets and the satisfaction of liabilities in the normal course of business. The realization of assets and the satisfaction of liabilities in the normal course of business are dependent on, among other things, the Group’s ability to operate profitably, to generate cash flows from operations, and to pursue financing arrangements, including obtaining bank borrowings.
Historically, the Group relied on external bank loans and financing from Pre-listing Investors to fund its working capital and capital expenditure requirements and to meet its obligations and commitments when they become due.
On July 24, 2021, the Double Reduction Opinions on Further Alleviating the Burden of Homework and After-School Training for Students in Compulsory Education was issued by the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council of the PRC, or the Double Reduction Opinions, which regulates institutions offering after-school training services on academic subjects. Uncertainties exist in relation to the Double Reduction Opinions of After-school Training Institutions in the PRC, which may materially and adversely affect the Group, results of operations, financial condition and prospects in these certain areas.
As reflected in the accompanying consolidated
financial statements, during the six months ended June 30, 2021, the Group incurred a net loss of RMB
The Group had taken actions to manage its costs and to conserve cash, including reducing operating expenses, negotiating rent concessions for certain leased properties and closing underperforming learning centers.
The Group has carried out a review of its cash flow forecast for the twelve months ending from the date of issuance of the accompanying consolidated financial statements. Based on such forecast, management believes that adequate sources of liquidity exist to fund the Group’s working capital and capital expenditures requirements, and other liabilities and commitments as they become due. In preparing the cash flow forecast, management has considered historical cash requirements, working capital and capital expenditures plans, existing cash on hand, as well as other key factors, including utilization of credit facilities granted by financial institutions.
The Group’s principal liquidity needs are to meet its working capital requirements, operating expenses and capital expenditure obligations. The Group’s ability to fund these needs will depend on its future performance, which will be subject in part to general economic, competitive and other factors beyond its control. These conditions raise substantial doubt as to the Group’s ability to remain a going concern.
| 3. | Summary of significant accounting policies |
| (a) | Use of estimates |
The preparation of the Company’s consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the balance sheet date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include, but are not limited to, estimate of standalone selling prices of each unit of accounting in multiple elements arrangements, estimate of breakage, the fair value of identifiable assets acquired, liabilities assumed and non-controlling interests in business combinations, the useful lives of long-lived assets including intangible assets, the fair value of the reporting unit for the goodwill impairment test, the allowance for doubtful accounts receivable and other receivables, the realization of deferred tax assets, the fair value of share-based compensation awards, lease liabilities, right-of-use assets and the recoverability of long-lived assets. Changes in facts and circumstances may result in revised estimates. Actual results could differ from those estimates, and as such, differences may be material to the consolidated financial statements.
17
| (b) | Functional currency |
The Group uses RMB as its reporting currency. The functional currency of the Company and its subsidiaries incorporated outside of the PRC is United States dollar (“US$”), while the functional currency of the PRC entities in the Group is RMB as determined based on the criteria of Accounting Standards Codification (“ASC”) 830, Foreign Currency Matters.
| (c) | Convenience translation |
Translations of balances in the consolidated balance
sheets, consolidated statements of comprehensive income/(loss) and consolidated statements of cash flows from RMB into US$ as of and for
the six months ended June 30, 2021 are solely for
| (d) | Cash and cash equivalents |
Cash and cash equivalents comprise cash at bank and on hand, and highly liquid investments. The Group considers highly liquid investments that are readily convertible into known amounts of cash and with a maturity of three months or less when purchased to be cash equivalents. All of the Group’s bank deposits is RMB denominated and are placed with financial institutions in the PRC. The Group had no cash equivalents as of June 30, 2021.
| (e) | Short-term investments |
Short-term investments include wealth management products, which are mainly deposits with variable interest rates placed with financial institutions. The Group classifies the wealth management products as available-for-sale securities. Available-for-sale securities are recorded at fair value. Unrealized holding gains and losses, net of the related income tax effect, on available-for-sale securities are excluded from earnings and reported as a separate component of accumulated other comprehensive income until realized. Realized gains and losses from the sale of available-for-sale securities are determined on a specific-identification basis.
| (f) | Contract assets |
A contract asset is recognized when the Group recognizes revenue before being unconditionally entitled to the consideration under the payment terms set out in the contract. Contract assets are set off against financial liabilities with customers when the customers are not entitled to full refund of the tuition fee paid (see note 3(r)).
| (g) | Accounts receivable |
Accounts receivable primarily consists of receivables of franchise fees. Accounts receivable are presented net of allowance for doubtful accounts. The Group uses specific identification in providing for bad debts when facts and circumstances indicate that collection is doubtful and based on factors listed in the following paragraph. If the financial conditions of its franchisee were to deteriorate, resulting in an impairment of their ability to make payments, additional allowance may be required.
18
The Group maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. In establishing the required allowance, management considers historical losses adjusted to take into account current market conditions and customers’ financial condition, the amount of receivables in dispute, and the current receivables aging and current payment patterns. Accounts receivable are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. As of December 31, 2020 and June 30, 2021, the Group did not have any off-balance-sheet credit exposure related to its customers, except for the guarantees given to installment institutions for loans granted to customers of the Group’s English training services in Note 22(b).
| (h) | Contract costs |
Contract costs are the incremental costs of obtaining a contract with a customer. Incremental costs of obtaining a contract are those costs that the Group incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained, e.g., an incremental sales commission. Incremental costs of obtaining a contract are capitalized when incurred if the costs relate to revenue which will be recognised in a future reporting period and the costs are expected to be recovered. Other costs of obtaining a contract are expensed when incurred. Capitalized contract costs are stated at cost less accumulated amortisation and impairment losses.
Contract costs capitalized as of June 30, 2021
relate to the incremental sales commissions paid to third-party sales agents or the Group’s sales personnel whose selling activities
resulted in customers entering into sale and purchase agreements for the Group’s services. Contract costs are recognized as part
of “selling and marketing expenses” in the consolidated statements of comprehensive income/(loss) in the period in which revenue
from the related services is recognized. The amount of capitalized costs recognized in profit or loss for the six months ended June 30,
2021 was RMB
| (i) | Restricted cash |
Restricted cash mainly consists of security deposits for establishments of training schools as requested by local education bureau. Restricted cash is classified as either current or non-current based on when the funds will be released in accordance with the terms of the respective agreement for the establishment. Amounts included in restricted cash represent those required to be set aside by a contractual agreement with education bureau.
| (j) | Equity method investments |
Investee companies over which the Group has the
ability to exercise significant influence, but does not have a controlling interest through investment in common shares or in-substance
common shares, are accounted for using the equity method. Significant influence is generally considered to exist when the Group has an
ownership interest in the voting stock of the investee between
Under the equity method, the Group initially records its investment at cost and subsequently recognizes the Group’s proportionate share of each equity investee’s net income or loss after the date of investment into earnings and accordingly adjusts the carrying amount of the investment. The Group reviews its equity method investments for impairment whenever an event or circumstance indicates that an other-than-temporary impairment has occurred. The Group considers available quantitative and qualitative evidence in evaluating potential impairment of its equity method investments. An impairment charge is recorded when the carrying amount of the investment exceeds its fair value and this condition is determined to be other-than-temporary.
19
| (k) | Property and equipment, net |
Property and equipment are stated at cost less accumulated depreciation and any recorded impairment.
Gains or losses arising from the disposal of an item of property and equipment are determined as the difference between the net disposal proceeds and the carrying amount of the item and are recognized in profit or loss on the date of disposal.
The estimated useful lives are presented below.
| Buildings | |||
| Leasehold improvements | |||
| Motor vehicles | |||
| Equipment, fixture and furniture, and other fixed assets |
Depreciation on property and equipment is calculated on the straight-line method over the estimated useful lives of the assets.
The Group capitalizes costs associated with the
acquisition of major software for internal use in other assets in the consolidated balance sheets and amortizes the assets over the expected
life of the software, generally between
| (l) | Business combinations |
Business combinations are recorded using the acquisition method of accounting. The assets acquired, the liabilities assumed, and any non-controlling interests of the acquiree at the acquisition date, if any, are measured at their fair values as of the acquisition date. Goodwill is recognized and measured as the excess of the total consideration transferred plus the fair value of any non-controlling interest of the acquiree and fair value of previously held equity interest in the acquiree, if any, at the acquisition date over the fair values of the identifiable net assets acquired. Consideration transferred in a business acquisition is measured at the fair value as of the date of acquisition.
| (m) | Acquired intangible assets, net |
Acquired intangible assets other than goodwill mainly consist of trademark, backlog, customer relationship and favorable lease assets, and are carried at cost, less accumulated amortization and impairment. Amortization of finite-lived intangible assets is computed using the straight-line method over the estimated useful lives. The amortization periods by intangible asset classes are as follows:
| Trademark | |||
| Backlog | |||
| Customer relationship | |||
| Reacquired right |
| (n) | Impairment of long-lived assets |
Long-lived assets, such as property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, the Group first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying amount. If the carrying amount of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying amount exceeds its fair value. Fair value is determined through various valuation techniques, including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. No impairment losses were recorded for the six months ended June 30, 2021.
20
| (o) | Operating leases |
The Group determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, current and non-current lease liabilities on the Group’s consolidated balance sheets.
ROU lease assets represent the Group’s right to use an underlying asset for the lease term and lease obligations represent the Group’s obligation to make lease payments arising from the lease. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of the Group’s leases do not provide an implicit rate, the Group use its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The Group’s incremental borrowing rate for a lease is the rate of interest it would have to pay to borrow an amount equal to the lease payments under similar terms. The operating lease ROU assets also include initial direct costs incurred and any lease payments made to the lessor or before the commencement date, minus any lease incentives received. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
| (p) | Goodwill |
Goodwill represents the excess purchase price over the estimated fair value of net assets acquired in a business combination.
Goodwill is not amortized but is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired. Goodwill is tested for impairment at the reporting unit level on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include a significant change in business climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of a reporting unit. Application of the goodwill impairment test requires judgment, including the identification of the reporting unit, assignment of assets and liabilities to the reporting unit, assignment of goodwill to the reporting unit, and determination of the fair value of each reporting unit. Estimating fair value is performed by utilizing various valuation techniques, with a primary technique being a discounted cash flow which requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long term rate of growth for the Group’s business, estimation of the useful life over which cash flows will occur, and determination of the Group’s weighted average cost of capital.
The Group has the option to perform
a qualitative assessment to determine whether it is more-likely-than not that the fair value of a reporting unit is less than its carrying
value prior to performing the two-step goodwill impairment test. If it is more-likely-than-not that the fair value of a reporting unit
is greater than its carrying amount, the two-step goodwill impairment test is not required. If the two-step goodwill impairment test is
required, first, the fair value of the reporting unit is compared with its carrying amount (including goodwill). If the fair value of
the reporting unit is less than its carrying amount, an indication of goodwill impairment exists for the reporting unit and the Group
performs step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying
amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined
by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation and the residual fair value after
this allocation is the implied fair value of the reporting unit goodwill. Fair value of the reporting unit is determined using a discounted
cash flow analysis. The Group performed its impairment review of goodwill, and RMB
| (q) | Deferred Revenue |
Cash proceeds received from customers are recorded as deferred revenue when the Group being unconditionally entitled to the tuition fees/proceeds under the payment terms set out in the contract. Deferred revenue are recognized as revenues when revenue recognition criteria are met.
21
| (r) | Revenue recognition |
The Company adopted ASC 606, “Revenue from Contracts with Customers” for all periods presented. Consistent with the criteria of ASC 606, the Company follows five steps for its revenue recognition: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation.
The primary sources of the Group’s revenues are as follows:
| (1) | General adult English training service and overseas training service |
The general adult English training service primarily consist of English classroom-based training. Course fees are generally collected in advance as a package or paid under installment plans for: (i) service fee of main English classroom-based courses; (ii) service fee of supplementary English classroom-based course; (iii) educational materials; and (iv) assessment of level of English proficiency.
The overseas training services are provided for customers planning to take international standardized tests and/or study abroad. Such services comprise international standardized test preparation courses and overseas study services.
The customers can attend main English classroom-based course/overseas training for predetermined course hours in a predetermined period of time. Supplementary English classroom-based course can be attended without limit in such period of time.
The Group has assessed all variable
considerations identified when determining the transaction price. In making such assessment, the Group has considered various possible
forms that variable considerations may take, including price concessions, discounts, rebates, refunds, credits, incentives, performance
bonuses, penalties or other similar items. Generally, customers are entitled to a short-term course trial period/trial courses which commences
on the date the course begins or the date of contract signed. Course fee refunds are provided to customers if they decide not to participate
in such course within the trial period/trial courses. In addition,
Each type of service/product included in the course fee is a separate unit of accounting, as each type has distinct nature with different patterns and measurements of transfer to the customers. The Group estimates standalone selling prices of each service/product and recognizes them in different revenue recording methods.
For main English classroom-based courses/overseas training services, revenues are recognized proportionately as the course hours are consumed. Customers may not utilize all of their contracted rights within the service period. Such unutilized service treatments are referred to as breakage. An expected breakage amount is determined by historical experience and is recognized as revenue in proportion to the pattern of service utilized by the customers.
For supplementary English classroom-based course, revenues are recognized on a straight-line basis over the entire main English classroom-based course period.
For educational materials and assessments of level of English proficiency, revenues are recognized according to the accounting policy as set out in note 3(r)(4) below.
Course fee received are initially
recorded as financial liabilities from contracts with customers. During the trial period/trial courses, the Group recognizes contract
assets when revenues are recognized. After
22
| (2) | Online English training services |
The Group operates “Likeshuo” platform to offer online live streaming English training services. Customers enroll for online courses by the use of prepaid study cards.
The Group has assessed all variable considerations identified when determining the transaction price. In making such assessment, the Group has considered various possible forms that variable considerations may take, including price concessions, discounts, rebates, refunds, credits, incentives, performance bonuses, penalties or other similar items. For courses offered on the “Likeshuo” platform, the Group typically allows 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, provided that a customer shall apply for refund at any time during these courses. Reversal in the amount of cumulative revenue arising from refunds have been insignificant for the six months ended June 30, 2021.
The proceeds collected for the study cards are initially recorded as financial liabilities from contracts with customers. Revenues are generally recognized proportionately as the course/service hours are delivered.
| (3) | Junior English training |
The Group offers junior English training services under “Meten” brand and “ABC” brand. Customers attend the classroom-based training for predetermined course hours in a predetermined period of time.
The Group has assessed all variable
considerations identified when determining the transaction price. In making such assessment, the Group has considered various possible
forms that variable considerations may take, including price concessions, discounts, rebates, refunds, credits, incentives, performance
bonuses, penalties or other similar items. For courses offered under “Meten” brand, the refund policy is similar to the general
adult English training service. For courses offered under “ABC” brand, customers are generally entitled to full refund regarding
the uncompleted course hours after deduction of RMB
| (4) | Sales of goods |
Sales of goods are primarily derived from 1) sales of food and beverage; and 2) delivery of educational materials and assessment report of level of English proficiency as included in the package of general classroom-based English training services. Revenue is recognized when the customer takes possession of and accepts the products.
| (5) | Revenue from other English language-related services |
Revenue from other English language-related services are primarily derived from franchising learning centers through which the franchisee are authorized to use the Group’s brand and are required to adopt the Group’s centralized management system. An initial franchise fee and one-time design consulting fee or a renewal franchise fee is received when the Group enters into or renew a franchise agreement. During the term of the franchise, each franchised learning center are charged recurring franchise fees monthly based on an agreed percentage of its collected course and service fees and related individual course materials fees. The revenue of initial/renewal franchise fee is recognized on a straight-line basis over the franchise period. The revenue of one-time design consulting fee is recognized when the consulting service is provided. The revenue of recurring franchise fee is recognized when the Group and the franchisee confirm and agree the calculation of the fee at the end of each month during the franchise period.
23
| (s) | Cost of revenue |
Cost of revenue consists of expenditures incurred in the generation of the Group’s revenue, includes but not limited to the course content related costs, service fees paid to contract human teachers in courses, rental expenses, IT service costs and depreciations for property and equipment.
| (t) | Sales and marketing expenses |
Sales and marketing expenses consist primarily of advertising costs, branding and marketing expenses, salary and welfare for sales
and marketing personnel, commission to distribution channels and sales and marketing personnel. The branding and marketing expenses
amounted to RMB
| (u) | General and administrative expenses |
General and administrative expenses consist primarily of salary and welfare for general and administrative personnel, share-based compensation expenses, agency expenses, depreciation expenses for property and equipment, property management fee and general office expenses.
| (v) | Research and development expenses |
Research and development costs are expensed as incurred.
| (w) | Government grants |
Government
grant is recognized when there is reasonable assurance that the Group will comply with the conditions attach to it and the grant will
be received. Government grant for the purpose of giving immediate financial support to the Group with no future related costs or obligation
is recognized in the Company’s consolidated statements of comprehensive income (loss) when the grant becomes receivable. For the
six months ended June 30, 2021, RMB
| (x) | Employee benefits |
Full
time employees of the Group in the PRC participate in a government mandated defined contribution plan, pursuant to which certain pension
benefits, medical care, employee housing fund and other welfare benefits are provided to the employees. Chinese labor regulations require
that the PRC subsidiaries and VIEs of the Group make contributions to the government for these benefits based on certain percentages of
the employees’ salaries, up to a maximum amount specified by the local government. The Group has no legal obligation for the benefits
beyond the contributions made. Total amounts of such employee benefit expenses, which were expensed as incurred, were approximately RMB
| (y) | Income taxes |
Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as operating loss and tax credit carryforwards, if any. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the periods in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates or tax laws is recognized in the consolidated statements of comprehensive income in the period the change in tax rates or tax laws is enacted.
24
The Group reduces the carrying amounts of deferred tax assets by a valuation allowance, if based on the available evidence, it is “more-likely-than-not’’ that such assets will not be realized. Accordingly, the need to establish valuation allowances for deferred tax assets is assessed at each reporting period based on a “more-likely-than-not’’ realization threshold. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carryforward periods, and the Group’s experience with operating loss and tax credit carryforwards, if any, not expiring.
The Group recognizes in its financial statements the impact of a tax position if that position is “more-likely-than-not’’ to prevail based on the facts and technical merits of the position. Tax positions that meet the “more-likely-than-not’’ recognition threshold are measured at the largest amount of tax benefit that has a greater than fifty percent likelihood of being realized upon settlement. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. Interest and penalties recognized related to unrecognized tax benefits are classified as income tax expense in the consolidated statements of comprehensive income.
| (z) | Share based compensation |
Share-based awards granted to the employees in the form of share options are subject to service and non-market performance conditions. They are measured at the grant date fair value of the awards. The compensation expense in connection with the shares awarded to employees is recognized using the straight-line method over the requisite service period. Forfeitures are estimated at the time of grant, with such estimate updated periodically and with actual forfeitures recognized currently to the extent they differ from the estimate.
In determining the fair value of the shares awarded to employees, the discounted cash flow pricing model has been applied.
Estimation of the fair value involves significant assumptions that might not be observable in the market, and a number of complex and subjective variables, including the expected share price volatility (approximated by the volatility of comparable companies), discount rate, risk-free interest rate and subjective judgments regarding the Company’s projected financial and operating results, its unique business risks and its operating history and prospects at the time the grants are made.
| (aa) | Statutory reserve |
In accordance with the Company Laws of the PRC,
the PRC entities registered as PRC domestic companies must make appropriations from its after-tax profit as determined under the PRC GAAP
to non-distributable reserve funds including a statutory surplus fund and a discretionary surplus fund. The appropriation to the statutory
surplus fund must be at least
The use of the statutory reserves are restricted to the off-setting of losses or increasing capital of the respective company. All these reserves are not allowed to be transferred to their investors in terms of cash dividends, loans or advances, nor can they be distributed except under liquidation.
| (ab) | Contingencies |
In the normal course of business, the Group is subject to loss contingencies, such as legal proceedings and claims arising out of its business, that cover a wide range of matters, including, among others, government investigations, shareholder lawsuits, and non-income tax matters. An accrual for a loss contingency is recognized when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. If a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, is disclosed.
25
| (ac) | Fair value measurements |
The Group applies ASC 820, Fair Value measurements and Disclosures, for fair value measurements financial assets and financial liabilities and for fair value measurements of non-financial items that are recognized or disclosed at fair value in the financial statements on a recurring and non-recurring basis. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Group considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability. ASC 820 also establishes a framework for measuring fair value and expands disclosures about fair value measurements.
ASC 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 establishes three levels of inputs that may be used to measure fair value.
The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
| ● | Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Group has the ability to access at the measurement date. | |
| ● | Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. | |
| ● | Level 3 inputs are unobservable inputs for the asset or liability. |
The level in the fair value hierarchy within which a fair value measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety. In situations where there is little, if any, market activity for the asset or liability at the measurement date, the fair value measurement reflects management’s own judgments about the assumptions that market participants would use in pricing the asset or liability. Those judgments are developed by management based on the best information available in the circumstances.
The carrying amounts of cash and cash equivalents, accounts receivable, amounts due from related parties, accounts payable, amounts due to related parties, income taxes payable, accrued expenses and other payables as of December 31, 2020 and June 30, 2021 approximate their fair values because of short maturity of these instruments.
| (ad) | Net income/(loss) per share |
Basic net income/(loss) per share is computed by dividing net income/(loss) attributable to common shareholders of the Company by the weighted average number of common shares outstanding during the year. Diluted net income/(loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common shares were exercised into common shares. Common share equivalents are excluded from the computation of the diluted net income/(loss) per share in years when their effect would be anti-dilutive. The Group has non-vested shares which could potentially dilute basic income/(loss) per share in the future. To calculate the number of shares for diluted net income/(loss) per share, the effect of the non-vested shares is computed using the treasury stock method.
| (ae) | Recently issued accounting pronouncements |
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments—Credit Losses” (“ASU 2016-13”), which introduces new guidance for credit losses on instruments within its scope. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments, including, but not limited to, trade and other receivables, held-to-maturity debt securities, loans and net investments in leases. The new guidance also modifies the impairment model for available-for-sale debt securities and requires the entities to determine whether all or a portion of the unrealized loss on an available-for-sale debt security is a credit loss. The standard also indicates that entities may not use the length of time a security has been in an unrealized loss position as a factor in concluding whether a credit loss exists. The ASU is effective for Emerging Growth Company (“EGC”) for fiscal years beginning after December 15, 2022 and interim periods within those fiscal years and effective for public companies excluding EGC and smaller reporting companies for fiscal years beginning after December 15, 2019. Early adoption is permitted for all entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Group is in the process of evaluating the impact of ASU 2016-13 on its consolidated financial statements.
26
In January 2017, the FASB issued guidance which simplifies the current two-step goodwill impairment test by eliminating Step two of the test. The guidance requires a one-step impairment test in which an entity compares the fair value of a reporting unit with its carrying amount and recognizes an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, if any. This guidance is effective for EGC for fiscal years beginning after December 15, 2022 and interim periods within those fiscal years and effective for public companies excluding EGC and smaller reporting companies for fiscal years beginning after December 15, 2019, and should be applied on a prospective basis. Early adoption is permitted for the interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Group is currently evaluating the impact of the adoption of this guidance on its financial statements and related disclosures.
In December 2019, the FASB issued ASU No. 2019-12 (“ASU 2019-12”), Simplifying the Accounting for Income Taxes. ASU 2019-12 simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. For public business entities, the amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early adoption of the amendments is permitted. The Group is not early adopting the standard and it is in the process of evaluation the impact of adoption of this new standard on its consolidated financial statements.
In March 2020, the FASB issued ASU No. 2020-03 (“ASU 2020-03”), Codification Improvements to Financial Instruments. ASU 2020-03 represents changes to clarify or improve the Codification. The amendments make the Codification easier to understand and easier to apply by eliminating inconsistencies and providing clarifications. With regard to amendments related to Issue 1, Issue 2, Issue 4, and Issue 5, for public business entities, the amendments are effective upon issuance of this final Update, for all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years beginning after December 15, 2020. Early application is permitted. The Group is not early adopting the standard and it is in the process of evaluation the impact of adoption of this new standard on its consolidated financial statements.
In August 2020, the FASB issued ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which focuses on amending the legacy guidance on convertible instruments and the derivatives scope exception for contracts in an entity’s own equity. ASU 2020-06 simplifies an issuer’s accounting for convertible instruments by reducing the number of accounting models that require separate accounting for embedded conversion features. ASU 2020-06 also simplifies the settlement assessment that entities are required to perform to determine whether a contract qualifies for equity classification. Further, ASU 2020-06 enhances information transparency by making targeted improvements to the disclosures for convertible instruments and earnings-per-share (EPS) guidance, i.e., aligning the diluted EPS calculation for convertible instruments by requiring that an entity use the if-converted method and that the effect of potential share settlement be included in the diluted EPS calculation when an instrument may be settled in cash or shares, adding information about events or conditions that occur during the reporting period that cause conversion contingencies to be met or conversion terms to be significantly changed. This update will be effective for the Company’s fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Entities can elect to adopt the new guidance through either a modified retrospective method of transition or a fully retrospective method of transition. The Group is currently in the process of evaluating the impact of adopting ASU 2020-06 on its consolidated financial statements and related disclosure.
27
| 4. | Risks and Concentration |
| (a) | Foreign exchange risk |
As the Group’s principal activities are carried out in the PRC, the Group’s transactions are mainly denominated in RMB, which is not freely convertible into foreign currencies. All foreign exchange transactions involving RMB must take place through the People’s Bank of China or other institutions authorized to buy and sell foreign exchange. The exchange rates adopted for the foreign exchange transactions are the rates of exchange quoted by the People’s Bank of China that are determined largely by supply and demand.
The management does not expect that there will be any significant currency risk for the Group during the reporting periods.
| (b) | Credit and concentration risk |
The Group’s credit risk arises from cash and cash equivalents, short-term investments, prepayments and other current assets, and accounts receivable. The carrying amounts of these financial instruments represent the maximum amount of loss due to credit risk.
The Group expects that there is no significant credit risk associated with the cash and cash equivalents and short-term investments which are held by reputable financial institutions in the jurisdictions where the Company, its subsidiaries and VIEs are located. The Group believes that it is not exposed to unusual risks as these financial institutions have high credit quality.
The Group has no significant concentrations of credit risk with respect to its prepayments.
Accounts receivable is typically unsecured and are derived from revenue earned either from franchisee or from customers under the installment payment arrangement. The risk with respect to accounts receivable is mitigated by credit evaluations performed on them.
The credit risk exposure resulted from guarantee provided for customers under the installment payment arrangement are disclosed in Note 22(b).
| (i) | Concentration of revenues |
No single customer represented
| (ii) | Concentration of accounts receivable |
The Group has not experienced any significant recoverability issues with respect to its accounts receivable. The Group conducts credit evaluations on its franchisees and customers under the installment payment arrangements and generally does not require collateral or other security from such franchisees and customers.
The following table summarized party with greater
than
| December 31, 2020 | June 30, 2021 | |||||||
| Receivables from Franchisee A | % | % | ||||||
| Receivables from Franchisee B | % | % | ||||||
| Receivables from Franchisee C | % | % | ||||||
| Receivables from Franchisee D | % | % | ||||||
| 5. | Disposal and closure of subsidiaries and branches |
During the six months ended June 30, 2021, due
to the impact of COVID-19, the Group closed under-performing learning centers and subsidiaries to reduce operating expense. Loss on disposal
and closing of subsidiaries and branches amounting to RMB
28
| 6. | Contract balances |
The following table provides information about contract assets, accounts receivable, deferred revenue and financial liabilities from contracts with customers.
| December 31, 2020 | June 30, 2021 | |||||||
| RMB’000 | RMB’000 | |||||||
| Accounts receivable | ||||||||
| Less: Allowance for doubtful debts (i) | ( | ) | ( | ) | ||||
| Accounts receivable, net | ||||||||
| Contract assets | ||||||||
| Deferred revenue | ||||||||
| -current | ||||||||
| -non-current | ||||||||
| Financial liabilities from contracts with customers | ||||||||
(i) Changes in the allowance for doubtful accounts were as follows:
| December 31, 2020 | June 30, 2021 | |||||||
| RMB’000 | RMB’000 | |||||||
| At the beginning of the year | ||||||||
| Allowance made during the year | ||||||||
| Write-off | ( | ) | ( | ) | ||||
| At the end of the year | ||||||||
Significant changes in the balances of contract assets, deferred revenue and financial liabilities from contracts with customers are as follows.
(a) Contract assets
| December 31, 2020 | June 30, 2021 | |||||||
| RMB’000 | RMB’000 | |||||||
| At the beginning of the year | ||||||||
| Net off the beginning contract assets with financial liabilities, as the result of rights to consideration becoming unconditional | ( | ) | ( | ) | ||||
| Contract assets recognized with the recognition of revenue during the year | ||||||||
| At the end of the year | ||||||||
(b) Deferred revenue and financial liabilities from contracts with customers
| December 31, 2020 | June 30, 2021 | |||||||
| RMB’000 | RMB’000 | |||||||
| At the beginning of the year | ||||||||
| Net off the beginning contract assets with financial liabilities, as the result of rights to consideration becoming unconditional | ( | ) | ( | ) | ||||
| Revenue recognized that was included in the contract liabilities and financial liabilities at the beginning of the year | ( | ) | ( | ) | ||||
| Increase due to cash received, excluding amount recognized as revenue or refunded | ||||||||
| At the end of the year | ||||||||
29
Reconciliation to the consolidated balance sheets
| December 31, 2020 | June 30, 2021 | |||||||
| RMB’000 | RMB’000 | |||||||
| Deferred revenue | ||||||||
| Financial liabilities | ||||||||
| 7. | Prepayments and other assets |
The prepayments and other assets consist of the following:
| December 31, 2020 | June 30, 2021 | |||||||
| RMB’000 | RMB’000 | |||||||
| Prepayments and other current assets | ||||||||
| Receivables from third-party payment channels (i) | ||||||||
| Cash advanced to employees | ||||||||
| Prepaid advertising and marketing fees | ||||||||
| Prepaid rental and property management fees | ||||||||
| Prepayment for purchase of office supplies | ||||||||
| Books and other related educational materials (ii) | ||||||||
| Prepayment for acquisition of subsidiaries | ||||||||
| Prepaid taxes | ||||||||
| Others | ||||||||
| Total | ||||||||
| Long-term prepayments and other non-current assets | ||||||||
| Prepayment for leasehold improvement | ||||||||
| Long-term rental deposits | ||||||||
| Total | ||||||||
| (i) |
| (ii) |
30
| 8. | Equity method investments |
In May 2006, the Group invested RMB
| 9. | Property and equipment, net |
Property and equipment consist of the following:
| December 31, 2020 | June 30, 2021 | |||||||
| RMB’000 | RMB’000 | |||||||
| Cost: | ||||||||
| Buildings | ||||||||
| Motor vehicles | ||||||||
| Leasehold improvements | ||||||||
| Equipment, fixture and furniture, and other fixed assets | ||||||||
| Total cost | ||||||||
| Less: Accumulated depreciation | ||||||||
| Property and equipment, net | ||||||||
Depreciation expense recognized for the six months
ended June 30, 2021 was RMB
As of December 31, 2020 and June 30, 2021, buildings
with carrying value of RMB
| 10. | Intangible assets, net |
Intangible assets, net, consist of the following:
| December 31, 2020 | June 30, 2021 | |||||||
| RMB’000 | RMB’000 | |||||||
| Trademark | ||||||||
| Backlog | ||||||||
| Customer relationship | ||||||||
| Reacquired right | ||||||||
| Total cost | ||||||||
| Less: accumulated amortization | ||||||||
| Intangible assets, net | ||||||||
Trademark, backlog, customer relationship and favourable lease contracts were recorded as a result of business acquisitions.
The Group recorded amortization expense of RMB
Estimated amortization expense of the existing
intangible assets for the next five years is RMB
31
| 11. | Income tax |
| (a) | Cayman Islands |
Under the current tax laws of Cayman Islands, the Company is not subject to tax on income, corporation or capital gain, and no withholding tax is imposed upon the payment of dividends to shareholders.
| (b) | The British Virgin Islands (“BVI”) |
Under the current tax laws of the BVI, the Company’s BVI subsidiaries are not subject to any income taxes in BVI.
| (c) | Hong Kong Profits Tax |
Under the current Hong Kong Inland Revenue Ordinance,
the Company’s Hong Kong subsidiary is subject to Hong Kong profits tax on its taxable income generated from the operations in Hong
Kong.
| (d) | PRC Enterprise Income Tax (“EIT”) |
On March 16, 2007, the National People’s
Congress of the PRC enacted the Enterprise Income Tax Law (“EIT Law”), under which domestic companies would be subject to
Enterprise Income Tax (“EIT”) at a uniform rate of
In November 30, 2018, Shenzhen Likeshuo
received the High and New Technology Enterprise (“HNTE”) certificate from the Guangdong provincial government.
In September 2018, Zhuhai Meten and Zhuhai Likeshuo
(collectively the “WFOEs”) were set up in Hengqin New Area of Guangdong Province.
All the other PRC subsidiaries, VIEs and VIEs’
subsidiaries of the Group are subject to income tax at
Under the EIT Law and its implementation rules,
an enterprise established outside China with a “place of effective management” within China is considered a China resident
enterprise for Chinese enterprise income tax purposes. A China resident enterprise is generally subject to certain Chinese tax reporting
obligations and a uniform
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If the Company were to be non-resident for PRC
tax purposes, dividends paid to it from profits earned by the PRC subsidiaries after January 1, 2008 would be subject to a withholding
tax. The EIT law and its relevant regulations impose a withholding tax at
Income tax returns of PRC Entities are filed on an individual entity basis. The PRC Entities have calculated their income tax provision using the separate return method in these consolidated financial statements.
Income taxes
Income tax expense consists of the following:
| For the Six Months Ended June 30, | ||||||||
| 2020 | 2021 | |||||||
| RMB’000 | RMB’000 | |||||||
| Current income tax expense | ||||||||
| Deferred income tax benefit | ( | ) | ||||||
| Total | ||||||||
Tax rate reconciliation
The actual income tax expenses reported in the
consolidated statements of comprehensive income(loss) for six months ended June 30, 2020 and 2021 differ from the amount computed by applying
the PRC statutory income tax rate of
| For the Six Months Ended June 30, | ||||||||
| 2020 | 2021 | |||||||
| RMB’000 | RMB’000 | |||||||
| Loss before income taxes | ( | ) | ( | ) | ||||
| Computed expected tax benefit | ( | ) | ( | ) | ||||
| Increase/(decrease) in income taxes resulting from: | ||||||||
| Non-deductible expenses | ||||||||
| Additional deduction for research and development expenses | ( | ) | ( | ) | ||||
| Preferential tax rate | ||||||||
| Change in valuation allowance | ||||||||
| Total | ||||||||
The valuation allowance as of December 31, 2020
and June 30, 2021 was primarily provided for the deferred income tax assets of certain PRC subsidiaries, which were in cumulative loss
positions. In assessing the realization of deferred income tax assets, management considers whether it is more likely than not that some
portion or all of the deferred income tax assets will not be realized. The ultimate realization of deferred income tax assets is dependent
upon the generation of future taxable income during the periods in which those temporary differences become deductible or utilizable.
Management considers projected future taxable income and tax planning strategies in making this assessment.
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Non-current income tax payable
| December 31, 2020 | June 30, 2021 | |||||||
| RMB’000 | RMB’000 | |||||||
| Beginning balance | ||||||||
| Addition | ||||||||
| Ending balance | ||||||||
RMB
According to the PRC Tax Administration and Collection
Law, the statute of limitation is three years if the underpayment of taxes is due to computational errors made by the taxpayer or the
withholding agent.
| 12. | Goodwill |
Changes in the carrying amount of goodwill for the year ended December 31, 2020 and the six months ended June 30, 2021 consisted of the following:
| December 31, 2020 | June 30, 2021 | |||||||
| RMB’000 | RMB’000 | |||||||
| Beginning balance | ||||||||
| Decrease during the year | ( | ) | ( | ) | ||||
| Goodwill | ||||||||
The Group incurred RMB
| 13. | Accrued expenses and other payables |
Accrued expenses and other payables consist of the following:
| December 31, 2020 | June 30, 2021 | |||||||
| RMB’000 | RMB’000 | |||||||
| Accrued expenses and other payables | ||||||||
| Deposits received from customers | ||||||||
| Deposits received from franchisees | ||||||||
| Accrued rental, utility and other expenses | ||||||||
| VAT and other taxes payable | ||||||||
| Payables for refund of tuition fee | ||||||||
| Offering expenses | ||||||||
| Others | ||||||||
| Total | ||||||||
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| 14. | Bank loans |
On June 20, 2019, the Group entered
into a facility agreement with China Merchants Bank with a maturity date of June 20, 2020 (“CMB Facility”). On November 5,
2019, the Group entered into a new facility agreement with China Merchants Bank with total facilities of up to RMB
On June 9, 2020, the Group entered into
a loan agreement with China Construction Bank with a loan principal of RMB
On March 27, 2020, the Group entered
into a loan agreement with Postal Savings Bank of China Co., Ltd. with a maturity date of March 26, 2021. As of December 31, 2020, the
aggregated draw amounted to RMB
On October 19, 2020, the Group entered
into a loan agreement with Industrial Bank Co., Ltd. with a maturity date of October 19, 2021. As of December 31, 2020, the aggregated
draw amounted to RMB
Some of the Group’s loan agreements are subject to covenant clauses, pursuant to which the Group was required to meet certain key financial ratios. The Group has fulfilled all such loan covenants as required in these loan agreements.
| 15. | Lease |
The component of lease cost was as follows:
| For the Six Months Ended June 30, | ||||||||
| 2020 | 2021 | |||||||
| RMB’000 | RMB’000 | |||||||
| Operating lease cost | ||||||||
| Short-term lease cost | ||||||||
| Total | ||||||||
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Supplemental balance sheet information related to leases was as follows:
| December 31, 2020 | June 30, 2021 | |||||||
| RMB’000 | RMB’000 | |||||||
| Operating Leases | ||||||||
| Operating lease right-of-use assets | ||||||||
| Operating lease liabilities, current portion | ||||||||
| Operating lease liabilities, non-current portion | ||||||||
| Weighted-average remaining lease term - operating leases | ||||||||
| Weighted-average discount rate - operating leases | % | % | ||||||
Non-cancellable operating lease rentals as of June 30, 2021 are payable as follows:
| Twelve months ending June 30, | RMB’000 | |||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total lease payment | ||||
| Less: imputed interest | ( | ) | ||
| Total | ||||
| 16. | Redeemable Owners’ Investment |
On September 1, 2015, certain Pre-listing Investors
acquired equity interests in Shenzhen Meten (“First Tranche Redeemable Owners’ Investment”) for a total consideration
of RMB
On June 24, 2016, certain Pre-listing Investors
acquired equity interests in Shenzhen Meten (“Second Tranche Redeemable Owners’ Investment”) for a total consideration
of RMB
After the above investments and as of December
31, 2016 and 2017, the First and Second Tranche Redeemable Owners’ Investment (together, “Redeemable Owners’
Investment’’) represented
The holders of the Redeemable Owner’s Investment are entitled to the same voting rights, dividend rights and liquidation preference as other equity holders of Shenzhen Meten, except for the followings:
Voting rights
Holders of the Redeemable Owners’ Investment are entitled to veto right at the board of directors meeting or shareholders meeting for certain events, including: (1) merger, spin-off, dismissal, acquisition, liquidation which change the legal form of Shenzhen Meten; (2) material change of the principal activities of Shenzhen Meten; (3) provide external guarantee or loans with amounts over RMB5,000; and (4) initiate a litigation or arbitration with the potential claim of over RMB1,000.
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Redemption
At the request of the holders of the Redeemable Owners’ Investment, Shenzhen Meten or the Founder Investors of Shenzhen Meten (as defined in the capital contribution agreements and supplementary agreements) shall buy back all or portion of the Redeemable Owners’ Investment held by such holder upon certain events, including: (i) Shenzhen Meten’s failure to complete a qualified public offering by December 31, 2018 (for certain holders of Second Tranche Redeemable Owners’ Investment) or December 31, 2019 (for holders of First Tranche Redeemable Owners’ Investment and certain holders of Second Tranche Redeemable Owners’ Investment), and (ii) any material breach by Founder Investors or Shenzhen Meten which causes a material adverse effect (as defined in the capital contribution agreements and supplementary agreements) on the business of Shenzhen Meten or any holder of Redeemable Owners’ Investment, or in the event any Founder Investors or Shenzhen Meten gives any material misrepresentation or engages in willful or fraudulent misconduct, which misconduct causes a material adverse effect on the business of Shenzhen Meten or any holder of Redeemable Owners’ Investment.
In addition, certain holders of the Second Tranche Redeemable Owners’ Investment are entitled to exercise the redemption right when Shenzhen Meten or the Founder Investors redeems the Redeemable Owners’ Investment from any other holders.
The redemption price for the First Tranche Redeemable
Owners’ Investment shall be the higher of: (1) original capital contribution amounts plus a ten percent (
The redemption price for the Second Tranche Redeemable
Owners’ Investment shall be the original capital contribution amounts plus a ten percent (
Redeemable Owners’ Investments were classified as the mezzanine equity upon the contribution by the holders, because they were redeemable at the holders’ option any time after a certain date and were contingently redeemable upon the occurrence of certain events that are outside of the Company’s control. The initial carrying value for the First Tranche Redeemable Owners’ Investment are recorded at fair value, net of any costs related to the contribution.
For each reporting period, the Company recorded accretions on the Redeemable Owners’ Investment to the respective redemption value by using the effective interest rate method from the dates of capital contribution to the earliest redemption dates. The failure to complete a qualified public offering by December 31, 2018 or 2019 would be considered the earliest redemption date. The accretion is recorded against retained earnings, or in the absence of retained earnings, by charges against additional paid-in-capital, or in the absence of additional paid-in-capital, by charges to accumulated deficit.
In connection with the Reorganization in 2018,
the holders of Redeemable Owners’ Investment exchanged their investment in Shenzhen Meten for
The movements of Redeemable Owners’ Investment for the years ended December 31, 2017 and 2018 are summarized below:
| First Tranche Redeemable Owners’ Investment | Second Tranche Redeemable Owners’ Investment | Total | ||||||||||
| RMB’000 | RMB’000 | RMB’000 | ||||||||||
| Balances as of January 1, 2017 | ||||||||||||