UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 20-F

 

(Mark One)

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2021

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                  to                 .

 

OR

 

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Date of event requiring this shell company report

 

Commission file number: 001-39258

 

METEN HOLDING GROUP LTD.

(Exact Name of Registrant as Specified in Its Charter)

 

N/A

(Translation of Registrant’s Name Into English)

 

Cayman Islands

(Jurisdiction of Incorporation or Organization)

 

c/o 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)

 

Ronald Tam

5 c/o 3rd Floor, Tower A

Tagen Knowledge & Innovation Center

2nd Shenyun West Road, Nanshan District

Shenzhen, Guangdong Province 518000

People’s Republic of China

Telephone: +86 755 8294 5250

E-mail: info@ascent-ir.com

(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of Each Class   Trading Symbol   Name of Each Exchange On Which Registered
Ordinary shares, par value US$0.003 per share   METX   The Nasdaq Stock Market LLC
Warrants, each exercisable for 1/30 ordinary share   METXW   The Nasdaq Stock Market LLC

 

 

 

 

Securities registered or to be registered pursuant to Section 12(g) of the Act:

 

None

(Title of Class)

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

 

None

(Title of Class)

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

 

As of December 31, 2021, there were 341,142,844 issued and outstanding ordinary shares, par value US$0.0001 per share and 5,316,025 outstanding warrants, each exercisable for one ordinary share (or 11,371,444 ordinary shares, par value US$0.003 per share and 5,316,025 outstanding warrants, each exercisable for 1/30 ordinary share if retroactively adjusted to reflect the 30-to-1 ordinary share consolidation effected on May 4, 2022).

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    ☐  Yes    ☒  No

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    ☐  Yes    ☒  No

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ☒  Yes    ☐  No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    ☒  Yes    ☐  No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ☐ Accelerated filer   ☐ Non-accelerated filer   ☒
        Emerging growth company   

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13 (a) of the Exchange Act.  

 

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

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accountant firm that prepared or issued its audit report.  

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP  

International Financial Reporting Standards as issued

by the International Accounting Standards Board ☐

  Other ☐

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.  ☐  Item 17  ☐  Item 18

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  ☐  Yes    No

 

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.  ☐  Yes  ☐  No

 

 

  

 

 

 

TABLE OF CONTENTS

 

INTRODUCTION ii
   
FORWARD-LOOKING INFORMATION iv
     
Part I.   1
     
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS 1
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE 1
ITEM 3. KEY INFORMATION 1
ITEM 4. INFORMATION ON THE COMPANY 52
ITEM 4A. UNRESOLVED STAFF COMMENTS 97
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS 97
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 119
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 126
ITEM 8. FINANCIAL INFORMATION 128
ITEM 9. THE OFFER AND LISTING 129
ITEM 10. ADDITIONAL INFORMATION 129
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 139
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 140
     
Part II.   141
     
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 141
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS MATERIAL 141
ITEM 15. CONTROLS AND PROCEDURES 142
ITEM 16 [RESERVED] 143
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT 143
ITEM 16B. CODE OF ETHICS 143
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES 144
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES 144
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS 144
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT 144
ITEM 16G. CORPORATE GOVERNANCE 146
ITEM 16H. MINE SAFETY DISCLOSURE 146
ITEM 16I. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS 146
     
Part III.   147
     
ITEM 17. FINANCIAL STATEMENTS 147
ITEM 18. FINANCIAL STATEMENTS 147
ITEM 19. EXHIBITS 147

 

i

 

 

INTRODUCTION

 

In this annual report on Form 20-F, or this annual report, except where the context otherwise requires and for purposes of this annual report only, references to:

 

“after-school language training” are to academic English language training services provided to K-12 students;

 

“we,” “us,” “our Company,” “the Company” and “our” are to Meten Holding Group Ltd.;

 

“China” or the “PRC” are to the People’s Republic of China, excluding, for the purposes of this annual report only, Taiwan and the special administrative regions of Hong Kong and Macau;

 

“Code” are to the U.S. Internal Revenue Code of 1986, as amended;

 

“ELT” are to English language training;

 

“general ELT” are to services that help students improve their English language skills, particularly English communication skills;

 

“gross billings” are to the total amount of cash received for the sales of our products and services during a specific period of time, net of the total amount of refunds for that period, which is not a measure under U.S. GAAP;

 

“learning center” are to the physical establishment of an education facility providing general adult ELT, junior ELT and international standardized test preparation under our overseas training services at a specific geographic location in the PRC, directly operated by the VIEs and their respective subsidiaries or operated by franchise partners;

 

“offline ELT” are to our offline services, which include general adult ELT, junior ELT and overseas training services;

 

“ordinary shares” are to our ordinary shares, par value US$0.003 per share, carrying one vote per share. On May 4, 2022, we effected a 30-to-1 Share Consolidation (as defined below). The par value of ordinary shares then became US$0.003 per share;

 

“the operating entities” are to the Company’s subsidiaries and its consolidated variable interest entities that operate the Company’s business in the PRC;

 

“RMB” and “Renminbi” are to the legal currency of China;

 

“student enrollment” or “student enrollment” are to the number of actual new sales contracts entered into between Meten and its students, excluding the number of refunded contracts and contracts with no revenue generated during a specified period of time;

 

“test-oriented ELT” are to services that help students achieve higher scores in specific standardized tests, including TOEFL, IELTS, GRE, SAT and other international standardized examinations;

 

“tier one cities” are to Beijing, Shanghai, Guangzhou and Shenzhen;

 

“tier two cities” are to provincial capitals, regional centers or economically developed cities in China, including, among others, Chengdu, Hangzhou, Chongqing, Wuhan and Tianjin;

 

“tier three cities” and “tier four cities” are to small- to mid-sized cities in China that are strategically located or have relatively developed or large local economy;

 

“dollars,” “US$” and “U.S. dollars” are to the legal currency of the United States;

 

“U.S. GAAP” are to generally accepted accounting principles in the United States;

 

“variable interest entities” or “VIEs” are to Shenzhen Meten International Education Co., Ltd., or Shenzhen Meten, and Shenzhen Likeshuo Education Co., Ltd., or Shenzhen Likeshuo, which are PRC companies in which Meten does not have equity interests but whose financial results have been consolidated by Meten in accordance with U.S. GAAP due to Meten having effective control over, and being the primary beneficiary of, these companies; and “affiliated entities” refers to VIEs, the VIEs’ direct and indirect subsidiaries, and the VIEs’ affiliated entities that are registered as private non-enterprise institutions under the PRC laws; and

 

years are to the calendar year from January 1 to December 31 and references to our fiscal year or years are to the fiscal year or years ended December 31.

 

ii

 

 

The translations from RMB to U.S. dollars and from U.S. dollars to RMB in this annual report were made at a rate of RMB6.3726 to US$1.00, the exchange rates set forth in the H.10 statistical release of the Federal Reserve Board on December 31, 2021. We make no representation that the RMB or U.S. dollar amounts referred to in this annual report could have been or could be converted into U.S. dollars or RMB, as the case may be, at any particular rate or at all. On May 6, 2022, the noon buying rate as set forth in the H.10 statistical release of the Federal Reserve Board for RMB was RMB6.6651 to US$1.00.

 

On April 14, 2022, we held an extraordinary general meeting of shareholders (the “Meeting”) to effect a share consolidation of 30 ordinary shares with par value of US$0.0001 each in our issued and unissued share capital into one ordinary share with par value of US$0.003 each (the “Share Consolidation” or “Reverse Split”). At the Meeting, our shareholders approved the Share Consolidation by ordinary resolutions. As a result, the Share Consolidation became effective on May 4, 2022, and the ordinary shares began trading on a post-Share Consolidation basis on the Nasdaq Capital Market when the market opened on May 6, 2022 under the same symbol “METX” but under a new CUSIP number of G6055H 148. No fractional shares were issued in connection with the Share Consolidation. All fractional shares were rounded up to the whole number of shares. Each 30 pre-split ordinary shares outstanding automatically combined and converted to one issued and outstanding ordinary share without any action on the part of the shareholders, and the terms of the outstanding warrants, unit purchase options, senior convertible debentures and awards under share incentive plans of the Company were adjusted automatically without any action on the part of the holders of awards under share incentive plans. Immediately following the Share Consolidation, the authorized share capital of the Company became US$50,000.00 divided into 16,666,667 ordinary shares of par value of US$0.003 each.

 

From a Cayman Islands legal perspective, the Share Consolidation does not have any retroactive effect on our shares prior to the effective date on May 4, 2022. However, references to our ordinary shares in this annual report are stated as having been retroactively adjusted and restated to give effect to the Share Consolidation, as if the Share Consolidation had occurred by the relevant earlier date. As a result of the Share Consolidation, our issued and outstanding ordinary shares have been retroactively adjusted, where applicable, in this annual report to give effect to the Share Consolidation of our ordinary shares, as if it had occurred at the beginning of the earlier period presented.

 

iii

 

 

FORWARD-LOOKING INFORMATION

 

This annual report contains forward-looking statements that reflect our current expectations and views of future events. These forward-looking statements are made under the “safe-harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995. Known and unknown risks, uncertainties and other factors, including those listed under “Item 3. Key Information—D. Risk Factors,” “Item 5. Operating and Financial Review and Prospects—A. Operating Results” and “Item 11. Quantitative and Qualitative Disclosures About Market Risk” may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements.

 

You can identify some of these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “is/are likely to,” “potential,” “continue” or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include statements relating to:

 

  our goals and growth strategies;

 

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

 

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

 

  expected changes in our revenue, costs or expenditures;

 

  our ability to retain and increase our student enrollment;

 

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

 

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

 

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

 

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

 

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

 

  growth and competition in the ELT markets;
     
  our ability to succeed with our new plans and strategies related to our cryptocurrency business;
     
  future development and growth in the blockchain and cryptocurrency industries;

 

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

 

  the impact of the COVID-19 pandemic and other pandemic or natural disaster; and

 

  the assumptions underlying or related to any of the foregoing.

 

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

 

The forward-looking statements made in this annual report relate only to events or information as of the date on which the statements are made in this annual report. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this annual report and the documents that we refer to in this annual report and exhibits to this annual report completely and with the understanding that our actual future results may be materially different from what we expect.

 

Market Data and Forecasts

 

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

 

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

 

iv

 

 

PART I.

 

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

Not applicable.

 

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not applicable.

 

ITEM 3. KEY INFORMATION

 

A. [Reserved]

 

B. Capitalization and Indebtedness

 

Not applicable.

 

C. Reasons for the Offer and Use of Proceeds

 

Not applicable.

 

D. Risk Factors

 

Summary of Risk Factors

 

Investing in our ordinary shares involves significant risks. You should carefully consider all of the information in this annual report before making an investment in our ordinary shares. Below please find a summary of the principal risks we face, organized under relevant headings. These risks are discussed more fully in the section titled “Item 3. Key Information—D. Risk Factors” in this annual report.

 

Risks Related to Our Corporate Structure

 

Risks and uncertainties related to our corporate structure include, but are not limited to, the following:

 

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

 

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

 

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

 

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

 

1

 

 

Risks Related to Our Business and Operations in the ELT Markets

 

Risks and uncertainties related to our business and operations in the ELT markets include, but are not limited to, the following:

 

Failure to attract and retain students to enroll in the operating entities’ courses would have a material adverse impact on the operating entities’ business and prospects.

 

The operating entities’ business depends on the market recognition of their brands and if the operating entities are not able to maintain their reputation and enhance their brand recognition, the operating entities’ business and operating results would be harmed.

 

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

 

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

 

Uncertainties exist in relation to the Double Reduction Opinions of After-school Training Institutions in the PRC, which may materially and adversely affect the operating entities’ business, results of operations, financial condition and prospects in these certain areas.

 

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

 

The operating entities face significant competition in major programs they offer and geographic markets in which they operate, and if they fail to compete effectively, they would lose their market share and their profitability would be adversely affected.

 

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

 

The operating entities may be liable for improper use or appropriation of personal information provided by the customers and any failure to comply with PRC laws and regulations over data security could result in materially adverse impact on the operating entities’ business, results of operations, and our continued listing on Nasdaq.

 

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

 

2

 

 

Risks Related to Our Cryptocurrency Business

 

Risks and uncertainties related to our cryptocurrency business include, but are not limited to, the following:

 

The operating entities are transitioning their business focus and their results of operations may be materially and adversely affected.

 

As the operating entities develop their blockchain and cryptocurrency business, their total revenue and cash flow will become materially dependent on the market value of digital assets and the volume of digital assets received from their mining efforts. If such market value or volume declines, the operating entities’ business, operating results and financial condition would be adversely affected.

 

The cost of acquiring new mining machines has historically been capital intensive, and is likely to continue to be very capital intensive, which may have a material and adverse effect on our business and results of operations.

 

To the extent that the profit margins of bitcoin mining operations are not high, operators of bitcoin mining operations are more likely to immediately sell bitcoin rewards earned by mining in the market, thereby constraining growth of the price of bitcoin, which could adversely impact us.

 

We are subject to risks associated with our need for significant electrical power.

 

Risks Related to Doing Business in China

 

Risks and uncertainties related to doing business in China include, but are not limited to, the following:

 

  The approval and/or other requirements of the CSRC, CAC or other PRC governmental authorities may be required in connection with an offering under PRC rules, regulations or policies, and, if required, we cannot predict whether or how soon we will be able to obtain such approval.

 

Our ordinary shares may be delisted and prohibited from being traded under the Holding Foreign Companies Accountable Act if the PCAOB is unable to inspect auditors who are located in China. The delisting and the cessation of trading of our ordinary shares, or the threat of their being delisted and prohibited from being traded, may materially and adversely affect the value of your investment. Additionally, the inability of the PCAOB to conduct inspections deprives our investors with the benefits of such inspections.

 

The PRC government’s significant oversight over the operating entities’ business could result in a material adverse change in their operations and the value of our ordinary shares.

 

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

 

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

 

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

 

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

 

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

 

3

 

 

Risks Related to Our Ordinary Shares

 

Our share price has recently declined substantially, and our ordinary shares could be delisted from the Nasdaq or trading could be suspended.

 

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

 

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

 

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

 

Risks Related to Our Corporate Structure

 

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

 

Currently, PRC laws and regulations do not explicitly impose restrictions on foreign investment in ELT services in the PRC. However, some local government authorities in the PRC have adopted different approaches in granting licenses and permits (particularly, imposing more stringent restrictions on foreign-invested entities) for entities providing ELT services. In the areas where the operating entities operate ELT service business, most local government authorities do not allow foreign-invested entities to establish private schools to engage in the ELT services, other than in the forms of Sino-foreign cooperative schools, and the domestic party shall play a dominant role in such cooperation. According to the relevant regulations, foreign investors of Sino-foreign cooperative institutions must be foreign educational institutions with relevant qualifications and experiences. As a foreign company, we are not qualified to run Sino-foreign cooperative schools in the PRC. In addition, according to Notice 75, foreign-invested language training institutions are required to apply for the private school operating permit. However, based on the interviews we conducted in May 2022 with the officials of the local educational authorities in the areas where we have learning centers in operation, most of the local educational authorities provided oral confirmations that due to the fact that no detailed supporting rules and regulations have been promulgated, the relevant procedure, approval process and transitional period regarding the application by the foreign-invested language training institutions for the private school operating permit are not yet clear and the relevant government authorities have not yet begun to accept applications. In addition, the PRC laws and regulations restrict foreign ownership in value-added telecommunication services and the percentage of foreign ownership cannot exceed 50% with a few exceptions. Due to these restrictions, we operate our offline and online ELT business in the PRC primarily through our affiliated entities. We entered into a series of contractual arrangements with Shenzhen Meten and Shenzhen Likeshuo and their shareholders, respectively. Our affiliated entities are the entities that hold certain licenses and permits relating to the offline and online ELT business in the PRC. We have been and expect to continue to be dependent on our affiliated entities to operate our business. See “Item 4. Information on the Company—C. Organizational Structure” for more information.

 

4

 

 

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

 

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

 

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

 

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

 

confiscating the income of our affiliated entities;

 

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

 

  requiring us to restructure the relevant ownership structure or operations, terminate the contractual arrangements with the VIEs or deregister the pledges on the equity interest in the VIEs, which in turn would affect our ability to consolidate, derive economic interest from or exert effective control over the VIEs; or
     
  restricting the use of financing sources by us or our affiliated entities, or otherwise restricting our or their ability to conduct business.

 

Recently, the PRC government adopted a series of regulatory actions and issued statements to regulate business operations in China, including those related to variable interest entities. There are currently no relevant laws or regulations in the PRC that prohibit companies whose entity interests are within the PRC from listing on overseas stock exchanges. Although we believe that our corporate structure and contractual arrangements comply with current applicable PRC laws and regulations, in the event that PRC government determines that the contractual arrangements constituting part of our VIE structure do not comply with PRC regulations, or if these regulations change or are interpreted differently in the future, we may be unable to asset our contractual rights over the assets of the VIEs and their subsidiaries, and our ordinary shares may decline in value or become worthless.

 

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

 

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

 

Pursuant to the Foreign Investment Law, “foreign investment” means any foreign investor’s direct or indirect investment in the PRC, including: (i) establishing FIEs in the PRC either individually or jointly with other investors; (ii) obtaining stock shares, stock equity, property shares, other similar interests in Chinese domestic enterprises; (iii) investing in new project in the PRC either individually or jointly with other investors; and (iv) making investment through other means provided by laws, administrative regulations or State Council provisions. Although the Foreign Investment Law does not explicitly classify the contractual arrangements, such as our contractual arrangement described in “Item 4. Information on the Company—B. Business OverviewOrganizational Structure,” as a form of foreign investment, it contains a catch-all provision under the definition of “foreign investment,” which includes investments made by foreign investors in China through other means stipulated by laws or administrative regulations or other methods prescribed by the State Council without elaboration on the meaning of “other means.” However, the Implementing Regulations of the Foreign Investment Law still does not specify whether foreign investment includes contractual arrangements.

 

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

 

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

 

We have relied and expect to continue to rely on the contractual arrangements with the ELT businesses in China. For a description of these contractual arrangements, see “Item 4. Information on the Company—B. Business Overview—Organizational Structure—Contractual Arrangements with the VIEs and Their Respective Shareholders.” However, these contractual arrangements may not be as effective as direct equity ownership in providing us with control over our affiliated entities. Any failure by the VIEs and their shareholders to perform their obligations under the contractual arrangements would have a material adverse effect on the financial position and performance of our Company. For example, the contractual arrangements are governed by the PRC law and provide for the resolution of disputes through arbitration in the PRC. Accordingly, these contracts would be interpreted in accordance with the PRC law and any disputes would be resolved in accordance with arbitral procedures as contractually stipulated. The commercial arbitration system in the PRC is not as developed as in some other jurisdictions, such as the United States.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Under the PRC law, legal documents for corporate transactions, including agreements and contracts that the operating entities’ business relies on, are executed using the chop or seal of the signing entity or with the signature of a legal representative whose designation is registered and filed with the relevant PRC market regulation authorities. In order to maintain the physical security of the chops, the operating entities generally have them stored in secured locations accessible only to certain authorized employees. Although the operating entities monitor such authorized employees, the procedures may not be sufficient to prevent all instances of abuse or negligence. There is a risk that the employees could abuse their authority, for example, by entering into a contract not approved by us or by seeking to gain control of our subsidiaries, the VIEs or any of their subsidiaries. If any employee obtains, misuses or misappropriates the chops and seals or other controlling intangible assets for whatever reason, we could experience disruption to the normal business operations. We may have to take corporate or legal action, which could involve significant time and resources to resolve and divert management from our operations.

 

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

 

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

 

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

 

  capital contributions to our PRC subsidiaries shall be subject to the submission of investment information to the competent commerce authority through the enterprise registration system and the enterprise credit information publicity system and also be registered with the local banks authorized by the SAFE.

 

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

 

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

 

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

 

Risks Related to Our Business and Operations in the ELT Markets

 

Failure to attract and retain students to enroll in the operating entities’ courses would have a material adverse impact on the operating entities’ business and prospects.

 

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

 

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

 

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

 

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The operating entities’ business depends on the market recognition of their brands and if the operating entities are not able to maintain their reputation and enhance their brand recognition, the operating entities’ business and operating results would be harmed.

 

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

 

The operating entities’ ability to maintain and enhance brand recognition and reputation depends primarily on the following factors:

 

  the perceived effectiveness and quality of the operating entities’ courses, services and teaching staff;

 

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

 

  the reliability of the courses offered at the operating entities’ learning centers and through the “Likeshuo” platform, as well as the commitment to high levels of service, reliability, security and data protection by the merchants, our franchised learning centers and other participants in the ecosystem; and
     
  the effectiveness of the operating entities’ operational system governing the courses and services offered at the operating entities’ learning centers and on the “Likeshuo” platform.

 

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

 

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

 

The operating entities’ business is regulated by certain rules and regulations, including the Amended Private Education Promotion Law, which was last amended on December 29, 2018. The Amended Private Education Promotion Law classifies private schools into non-profit schools and for-profit schools by whether they are established and operated for profit-making purposes. The sponsors of private schools may at their own discretion choose to establish non-profit or for-profit private schools, but the Amended Private Education Promotion Law does not allow sponsors to establish for-profit private schools that engage in compulsory education. According to the Amended Private Education Promotion Law, for-profit private training institutions, such as the operating entities’ learning centers, are classified as private schools and are required to obtain private school operating permits.

 

The State Council issued the Implementing Rules for the Private Education Promotion Law (Revised in 2021) on 14 May 2021, which became effective on September 1, 2021. The Revised Implementation Rules deletes the classification of a private training institution for language, art, sports, science and technology teaching and a private training institution for cultural education or non-academic continuing education for adults which are defined in the Draft Implementation Rules of the Private Education Promotion Law published by Ministry of Justice on August 10 and requests public comment, or the Committee Draft Implementation Rules of the Private Education Promotion Law.

 

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On November 20, 2018, the General Office of MOE, the General Office of the State Administration for Market Regulation and the General Office of Ministry of Emergency Management jointly issued the Notice on Improving Several Working Mechanisms for Special Governance and Rectification of After-School Training Institutions, or Circular 10, which became effective on the same date. According to Circular 10, for institutions that carry out academic training activities without permits, non-academic training institutions that carry out academic training activities and other institutions that carry out illegal training activities, the education authorities, in collaboration with other relevant government departments, shall order them to cease their business, restrict their legal representatives to engage in training activities for primary and secondary school students and refer to the market supervision authority to revoke their business licenses. As of the date of this annual report, a majority of our self-operated learning centers did not have the relevant private school operating permits. As of December 31, 2021, none of those learning centers of the operating entities that did not have the relevant private school operating permits had been ordered by the government authorities to suspend their operations for rectification, cease business operations or revoke their business licenses. However, we cannot assure you that the PRC government authorities will not extend the rectification period or carry out the similar special governance and rectification of after-school training institutions from time to time. In addition, we cannot assure you that the training services the operating entities offer, including general adult ELT (which is designed for students aged 15 and above) and junior ELT (which is designed for students aged six to 18), will be deemed “non-academic” in nature by the relevant PRC education authorities. If such training services are deemed “academic,” the government authorities could order the learning centers which are deemed to be “non-academic” providing such training services to cease their business operations and revoke their business licenses. If any of the above occurs, the operating entities’ business, results of operations, business prospects and reputation could be materially and adversely affected.

 

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

 

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

 

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

 

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Circular 80 only sets out the general guidance on regulating after-school education institutions targeting primary and secondary school students. Without the approval by the relevant education department, no after-school training institution shall provide training for primary and secondary school students in the name of consulting and cultural transmission, among others. However, detailed rules of implementation of Circular 80 have yet to be introduced by the competent authorities, such as whether Circular 80 should apply to the operating entities’ learning centers providing junior ELT services, which mainly focus on promoting and developing language competence, rather than providing supplementary training services relating to school cultural and educational curriculums, admission into schools of a higher grade or examinations. In 2018, the operating entities introduced offline junior ELT services to students aged six through 18 at existing self-operated learning centers. The operating entities’ offline junior ELT business may be subject to the requirements of Circular 80, which may potentially increase the operating entities’ compliance costs. For instance, Circular 80 provides that personal safety insurance shall be purchased for students to mitigate risks, but is silent as to the specific type, amount and coverage of such required personal safety insurance.

 

On July 12, 2019, the MOE led the promulgation of the Implementing Opinions of Six Departments Including the Ministry of Education on Regulating After-school Online Training, or the Circular 8, which is put forward with regard to further regulating disciplinary after-school online training activities for primary and secondary school students using Internet technology. The Circular 8 clarifies that off-campus online training institutions shall be put on record in provincial education administrative departments and stipulates the daily supervision requirements that such online training institutions shall abide by. Pursuant to the Circular 8, after-school online training institutions shall submit relevant materials to provincial administrative departments of education in the places where they are located and apply for the filing after obtaining Internet Content Provider permits (for those who are involved in the operation of telecommunications business, after applying for a telecommunications operation license), certificates of cyber security class protection grading records and rating reports. Departments of education shall take the lead in organizing comprehensive governance of after-school online training. The after-school online training institutions that meet the relevant regulations shall be white-listed, those that violate the rules shall be grey-listed and corrected within a prescribed period of time, and those that refuse to rectify or fail to complete the rectification within the prescribed period of time shall be black-listed. However, detailed rules of implementation of Circular 8 have yet to be introduced by the competent authorities, such as whether Circular 8 should apply to the operating entities’ online learning centers providing junior ELT services, which mainly focus on promoting and developing language competence, rather than providing supplementary tutoring training services relating to school cultural and educational curriculums, admission into schools of a higher grade or examinations.

 

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

 

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Uncertainties exist in relation to the Double Reduction Opinions of After-school Training Institutions in the PRC, which may materially and adversely affect the operating entities’ business, results of operations, financial condition and prospects in these certain areas.

 

On July 24, 2021, the Opinions on Further Alleviating the Burden of Homework and After-School Training for Students in Compulsory Education were 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. The Double Reduction Opinion contain high-level policy directives about requirements and restrictions related to online and offline after-school training services, including: (i) institutions providing after-school training services on academic subjects in China’s compulsory education system, or academic after-school training services institutions, need to be registered as non-profit, no approval will be granted to new academic after-school training services institutions for students in compulsory education, and an approval mechanism will be adopted for online academic after-school training services institutions; (ii) foreign ownership in academic after-school training services institutions is prohibited, including through contractual arrangements, and companies with existing foreign ownership need to rectify the situation; (iii) listed companies are prohibited from raising capital to invest in businesses that teach academic subjects in compulsory education; (iv) academic after-school training services institutions are prohibited from providing training services on academic subjects in compulsory education during public holidays, weekends and school breaks; and (v) academic after-school training services Institutions must follow the fee standards to be established by relevant authorities. The Double Reduction Opinion also provide that institutions providing after-school training services on academic subjects in high schools (which do not fall within China’s compulsory education system) shall take into consideration the Double Reduction Opinion when conducting activities.

 

According to the Circular of the General Office of the Ministry of Education on Further Clarifying the Scope of Subjects and Non-subjects of After-school Training in the Stage of Compulsory Education, when carrying out after-school training, ethics and the rule of law, language, history, geography, mathematics, foreign languages (English, Japanese and Russian), physics, chemistry and biology are administered as academic subject categories. The after-school training that involve in the studies contents prescribed by the national curriculum standards of the academics mentioned above shall be administered as the academic subjects. However, The Curriculum Standards of English for Compulsory Education promulgated by the Ministry of Education do not contain explicit and specific requirements on English teaching content. As of the date of this annual report, there are no explicit requirements in PRC laws, regulations or local policies for the operating entities’ junior ELT services to be categorized as academic subjects and as of the date of annual report, the operating entities have not received any notifications for rectification or administrative measures which requires them to rectify in accordance with the Double Reduction Opinion. However, we cannot assure you whether the government authorities would further implement or issue regulations or polices to administer the operating entities’ junior ELT services as academic subjects. If the operating entities’ junior ELT training services are deemed academic subjects, we should rectify the operating entities’ junior ELT training services according the Double Reduction Opinion, including register the operating entities’ centers providing junior ELT services as non-profit and obtain the private school operating permits, strictly comply with the time, duration and fee requirements for the junior ELT services, or even spin off or cease our junior ELT services. If any of the above occurs, the operating entities’ business, results of operations, business prospects and reputation could be materially and adversely affected.

 

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

 

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

 

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

 

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

 

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The operating entities face significant competition in major programs they offer and geographic markets in which they operate, and if they fail to compete effectively, they would lose their market share and their profitability would be adversely affected.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

The continuing efforts of the operating entities’ senior management team and other key personnel are important to the operating entities’ success, and the operating entities’ business may be harmed if they lose these people’s services.

 

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

 

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

 

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

 

For the fiscal year ended December 31, 2021, the operating entities derived approximately 63.7% of the total student enrollment in offline ELT courses and services from their self-operated learning centers in Shenzhen, Guangzhou, Foshan and Dongguan in Guangdong Province, Chengdu in Sichuan Province, and Nanjing and Suzhou in Jiangsu Province, and these cities are expected to continue to be important sources of the operating entities’ student enrollment and revenue. If any of these cities experiences any event that would negatively affect its private education market, such as a serious economic downturn, natural disaster or outbreak of contagious disease, or that the governments of which adopt regulations relating to and affecting the private education market that place additional restrictions or burdens on the operating entities, or experiences an increase in the level of competition for the types of services the operating entities offer, the operating entities’ overall business and results of operations may be materially and adversely affected.

 

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

 

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

 

According to the Amended Private Education Promotion Law, Implementation Rules of the Private Education Law, Circular 10, the operating entities’ learning centers are required to obtain private school operating permits.

 

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

 

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

 

Among the operating entities’ self-operated learning centers as of December 31, 2021, seven learning centers did not have private school operating permits or business licenses, or were operating beyond the authorized business scope, which contributed in the aggregate to approximately 10.7% of the operating entities’ total gross billings for fiscal year ended December 31, 2021.

 

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

 

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The operating entities’ failure to obtain permits which may be required for the operation of their online platform could result in fines, confiscation of the gains derived from non-compliant operations, or suspension of non-compliant operations.

 

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

 

The operating entities face risks associated with their franchised learning centers.

 

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

 

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

 

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

 

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

 

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

 

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Major risks involving the operating entities’ network infrastructure include:

 

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

 

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

 

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

 

  any infection by or spread of computer viruses.

 

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

 

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

 

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

 

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

 

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

 

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

 

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The operating entities’ business and results of operations depend on their ability to maintain or raise the level of the course and service fees the operating entities charge.

 

One of the most significant factors affecting the operating entities’ profitability is the course and service fees they charge. For the years ended December 31, 2019 and 2020 and 2021, the course and service fees derived from the operating entities’ business at their headquarters and self-operated learning centers, including revenue from the sale of goods, as well as their online ELT courses delivered on the “Likeshuo” platform, constituted approximately 97.8%, 98.6% and 98.3% of their total revenue, respectively. The amounts of those fees the operating entities charge are primarily determined based on the demand of their offline students and online users for their ELT services, their operating costs, the competitors’ pricing level, their pricing strategy to gain market share and the general economic conditions in China. However, there can be no assurance that the operating entities will be able to maintain or raise the course fees and other fees they charge for their services in the future. Even if the operating entities are able to maintain or raise course fees and other fees they charge for their services, we cannot assure you that the operating entities will be able to attract prospective students to enroll in the operating entities’ courses at such increased fee rates. The operating entities’ business, financial condition and operation results may be materially and adversely affected if they fail to maintain or raise the fee level or attract sufficient prospective students.

 

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

 

For the years ended December 31, 2019, 2020 and 2021, the operating entities’ selling and marketing expenses amounted to RMB438.0 million, RMB310.4 million and RMB 250.9 million (US$39.4 million) respectively, representing approximately 47.6%, 44.9% and 41.0% respectively, of the total operating expenses, which consist of selling and marketing expenses, general and administrative expenses and research and development expenses. The operating entities’ selling and marketing expenses mainly included advertising and promotion expenses and employee benefit expenses for the operating entities’ sales and marketing staff. There is no assurance that the operating entities’ sales and marketing activities will always be well received by students or result in the levels of sales that they anticipate. Furthermore, we cannot guarantee that the operating entities will always be able to improve the operational efficiency of their sales and marketing staff or they will be able to retain or recruit experienced sales staff, or efficiently train junior sales staff. In addition, marketing and branding approaches and tools in the ELT market in China are evolving, especially for mobile platforms. This further requires the operating entities to enhance their marketing and branding approaches and experiment with new methods to keep pace with industry development and student preferences. Failure to refine the operating entities’ existing marketing and branding approaches in order to introduce new marketing and branding approaches in a cost-effective manner could reduce the operating entities’ market share, cause their revenue to decline and negatively impact their profitability. In addition, the operating entities utilize a broad mix of marketing and public relations programs, including social media platforms, to promote their products and services to prospective students. If advertising rates increase or if the operating entities become concerned that their customers deem certain marketing activity less appealing, or more intrusive or damaging to the operating entities’ brands, they may limit or discontinue the use or support of certain marketing sources or activities. Further, companies that promote the operating entities’ services may decide that the operating entities negatively impact their business or may make business decisions that in turn adversely impact the operating entities. For instance, if they decide that they want to compete directly with the operating entities, enter a similar business or exclusively support the operating entities’ competitors, the operating entities may no longer have access to their marketing channels.

 

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

 

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

 

Under the Advertisement Law of the PRC, an advertisement for education or training shall not contain any of the following items: (i) any promise relating to progression, passing examinations, or obtaining a degree or qualification certificate, or any express or implied guaranteed promise relating to education or training results; (ii) express or implied statement that the relevant examination agency or its personnel or any examination test designer will be involved in the education or training; and (iii) the use of the names or images of research institutes, academic institutions, education institutions, industry associations, professionals or beneficiaries for recommendation or as proof. Publishing advertisements for education and training in violation of the provisions may be subject to order to discontinue the publishing of advertisements, to eliminate the ill-effects within the corresponding and a fine of one to five times of the advertising fees, or may revoke the business licenses and approval documents for advertisement review. The Anti-Unfair Competition Law of the PRC also stipulate that, when trading on the market, operators shall abide by the principles of voluntariness, equality, fairness, honesty and credibility, and observe generally recognized business ethics. According to the Anti-Unfair Competition Law, businesses may not engage in improper market activities to undermine their competitors, including infringing trademark rights or confidential business information, generating false publicity through advertising or other means or forging and disseminating false information, infringing upon the goodwill of competitors or the reputation of their products, bribing or interfering or sabotaging the normal operation of online products or services legally provided by another operator by other technical means.

 

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

 

The market recognition of the operating entities’ “Meten” brand has significantly contributed to the operating entities’ success. Maintaining and enhancing the reputation of the operating entities’ brands is critical to sustaining their competitive advantage. The operating entities’ ability to maintain and enhance their brand recognition primarily depends on the perceived effectiveness and quality of their course offerings as well as the success of their marketing efforts. The operating entities have devoted significant resources to promoting their courses and brands in recent years, including marketing and advertising in both offline and online media channels. The operating entities have been subject to some penalties and legal sanctions for improper advertising activities but they have rectified in a timely manner and strengthen on the internal review on the contents of marketing and advertising. However, we cannot assure you the operating entities will not be subject to any other penalties or legal sanctions in the future for advertisements. The operating entities’ marketing efforts may not be successful or may negatively impact their brand recognition and reputation inadvertently if any government authority or competitor publicly alleges that any of their advertisements are misleading.

 

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

 

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

 

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

 

The operating entities may not be able to achieve the benefits they expect from recent and future acquisitions, and recent and future acquisitions may have an adverse effect on their ability to manage their business.

 

As part of the operating entities’ business strategy, the operating entities have pursued and intend to continue to pursue selective strategic acquisitions of businesses that complement their existing businesses. Acquisitions expose the operating entities to potential risks, including risks associated with the diversion of resources from their existing businesses, difficulties in successfully integrating the acquired businesses, failure to achieve expected growth by the acquired businesses and an inability to generate sufficient revenue to offset the costs and expenses of acquisitions. If the revenue and cost synergies that the operating entities expect to achieve from their acquisitions do not materialize, they may have to recognize impairment charges.

 

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

 

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

 

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

 

The operating entities lease a significant number of properties from third parties. As of the date of this annual report, the operating entities entered into 44 leases for their premises with a total gross floor area of approximately 31,015 square meters, which were or will be primarily used by their self-operated learning centers, and owned one property with a total gross floor area of approximately 1,290 square meters, which were primarily used as one of their self-operated learning centers. The leased properties were maintained by the operating entities’ landlords. Accordingly, the operating entities are not in a position to effectively control the quality, maintenance and management of these buildings. In the event the quality of the buildings deteriorates, or if any or all of the landlords fail to properly maintain and renovate such buildings in a timely manner or at all, the operating entities’ business operations could be materially and adversely affected. In addition, if any of the landlords terminates the existing lease agreements, refuses to renew the lease agreements when such lease agreements expire, or increase the rent to a level that is unacceptable to the operating entities, the operating entities will be forced to look for alternative locations for their self-operated learning centers. The operating entities may not be able to find suitable premises for such relocation without incurring significant time and costs, and there is no guarantee that they may be able to find suitable premises for relocation or at all. If the operating entities fail to find suitable replacement sites in a timely manner or on terms acceptable to them, their business and results of operations could be materially and adversely affected. Moreover, if the operating entities’ use of the leased premise is challenged by the relevant government authorities for lack of fire inspection, they may be subject to fines and also be forced to relocate the affected learning centers and incur additional expenses. If any of the above events occurs, the operating entities’ business, results of operations and financial condition could be materially and adversely affected.

 

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

 

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

 

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

 

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

 

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Higher labor costs may adversely affect the operating entities’ business and profitability.

 

Labor costs in China have risen in recent years as a result of social development, and increasing inflation in China. As of December 31, 2021, the operating entities employed 1,229 full-time staff. Staff costs constituted a major portion of the total cost of revenue, reaching 62.5%, 64.9% and 66.9% of the operating entities’ total cost of revenue for the years ended December 31, 2019 and 2020 and 2021, respectively. The increase in labor cost may erode the operating entities’ profitability and materially harm the operating entities’ business, financial condition and results of operations. As the operating entities’ businesses have been continuing to expand in recent years, the absolute amounts of labor costs in the regions where the operating entities operate have also been increasing and could continue to increase. If labor costs in these regions continue to increase, the operating entities’ operating costs will increase. The operating entities may not be able to pass on these increased costs to the customers by increasing the fees of the operating entities’ courses in light of competitive pressure in the market. In such circumstances, the operating entities’ profit margin may decrease, which could have an adverse effect on the operating entities’ business, financial condition and results of operations.

 

The COVID-19 pandemic has had a material adverse impact on the general economic outlook, economic growth and business sentiment. See “— Any natural catastrophes, severe weather conditions, health epidemics, including COVID-19, and other extraordinary events could severely disrupt the operating entities’ business operations.” Additionally, certain restrictive measures, including quarantining policies and travel restrictions, implemented by China and other countries in response to the COVID-19 pandemic has imposed obstacles for the operating entities to recruit teachers and operational staff suitable for the operating entities’ business.

 

The operating entities have limited experience in operating some of their newer service offerings.

 

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

 

Course and service fee refunds or potential refund disputes may negatively affect the operating entities’ cash flow, financial condition, and reputation.

 

The operating entities have different course and service fee refund policies for the operating entities’ students depending on the time of enrollment and the operating entities are subject to certain conditions and restrictions in the service contract between the operating entities and each of our students. For details of the refund policies, see “Item 4. Information on the Company—B. Business Overview—Pricing and Refund Policies.” When calculating gross billings for a specific period, the operating entities deduct the total amount of refunds from the total amount of cash received for the sale of course packages for such period.

 

For the years ended December 31, 2019 and 2020 and 2021, the operating entities had made RMB184.8 million, RMB90.5 million and RMB108.5 million (US$17.0 million) of refund payments, respectively. For the same periods, the operating entities’ course withdrawal rate, which is determined as the amount of refunds the operating entities issued as a percentage of the total amount of gross billings for the relevant period, was 10.9%, 11.01%, and 16.4%, respectively. The number of refund requests and the amount of refunds could be affected by a number of factors, many of which are beyond control. These factors include, without limitation, student dissatisfaction with the operating entities’ teaching quality and course and educational content offerings, privacy concerns relating to the operating entities’ online platforms, negative publicity regarding the operating entities or online ELT in general, and any change or development in the PRC laws and regulations with respect to course fees charged by online education providers like the operating entities. Any refund payments that the operating entities may be required to make to the students, as well as the expenses the operating entities could incur for processing refunds and resolving refund disputes, could be substantial and could adversely affect the operating entities’ gross billings, net revenue, liquidity and financial condition. A high volume of refund applications and refund disputes may also generate negative publicity that could harm the operating entities’ reputation. The operating entities have experienced in the past, and may experience in the future, negative publicity in relation to refund disputes between the operating entities and the students, which may significantly harm the operating entities’ brand names and divert their attention from operating their business.

 

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

 

In order to provide a more convenient and flexible payment method for students, the operating entities have cooperated with accredited third-party financial institutions in China to set up an installment payment arrangement through which students can pay for the courses and/or services the operating entities offer in several pre-determined installments during the course of the contract period. Under such arrangement, a third-party financial institution provides an interest-free loan to a student and remits the course/service fee to the operating entities on behalf of the borrowing student to complete his/her purchase of the relevant course. The borrowing student is obligated to repay the loan in pre-agreed installments over a period ranging from six months to 24 months to the financial institution. A transaction fee associated with the installment payment arrangement typically ranges from 4.4% to 10.8% of the total amount of such loan, depending on the length of the installment period, which was generally withheld by such financial institution prior to remitting the course/service fee to the operating entities. For the year ended December 31, 2021, approximately 24% of the operating entities’ total gross billings have been paid through such installment payment arrangement. There is an inherent uncertainty relating to such arrangement compared to a lump sum upfront payment scheme as students under the installment payment arrangement are more prone to cease to take classes during the contract period that they had initially registered. For the year ended December 31, 2021, the course withdrawal rate, which is equal to the amount of refunds the operating entities issued in a specific period of time as a percentage of the sum of the amount of gross billings and the amount of refunds for such period, of the students who participated in such installment arrangement was approximately 27.1%, and the course withdrawal rate of the students who provided lump sum upfront payments was approximately 9.0%. When the operating entities receive refund requests from students, the operating entities typically determine the eligibility of and amounts of refund entitled by such students in accordance with the existing refund policies. Once the operating entities determine a student to be eligible for refund, they generally provide the entire amount of refund to him/her directly. In the event more students who participate in the installment payment arrangement decide not to complete their registered course(s) for any reason, the operating entities may be required to provide large sums of refund to these students, which may materially and adversely impact the operating entities’ business, results of operations and operating cash flow. Thus, the operating entities’ business and results of operations could be materially and adversely affected.

 

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

 

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

 

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The operating entities’ results of operations are subject to seasonal fluctuations.

 

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

 

Failure to protect confidential information of the operating entities’ students and teaching staff against security breaches could damage the operating entities’ reputation and brands and substantially harm their business and results of operations.

 

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

 

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

 

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

 

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The operating entities may be liable for improper use or appropriation of personal information provided by the customers and any failure to comply with PRC laws and regulations over data security could result in materially adverse impact on the operating entities’ business, results of operations, and our continued listing on Nasdaq.

 

The operating entities’ business involves collecting and retaining certain internal data and student information. The integrity and protection of student information and company data is crucial to the operating entities. The students expect that the operating entities will adequately protect their personal information. The operating entities are required by applicable laws to keep strictly confidential the personal information that they collect, and to take adequate security measures to safeguard such information.

 

The PRC Criminal Law, as amended by its Amendment 7 (effective on February 28, 2009) and Amendment 9 (effective on November 1, 2015), prohibits institutions, companies and their employees from selling or otherwise illegally disclosing a citizen’s personal information obtained in performing duties or providing services or obtaining such information through theft or other illegal ways.

 

On November 7, 2016, the Standing Committee of the PRC National People’s Congress issued the Cyber Security Law of the PRC, or Cyber Security Law, which became effective on June 1, 2017. Pursuant to the Cyber Security Law, network operators must not, without users’ consent, collect their personal information, and may only collect users’ personal information necessary to provide their services. Providers are also obliged to provide security maintenance for their products and services and shall comply with provisions regarding the protection of personal information as stipulated under the relevant laws and regulations.

 

The Civil Code of the PRC (issued by the PRC National People’s Congress on May 28, 2020 and effective from January 1, 2021) provides legal basis for privacy and personal information infringement claims under the Chinese civil laws. PRC regulators, including the Cyberspace Administration of China (“CAC”), the Ministry of Industry and Information Technology, and the Ministry of Public Security, have been increasingly focused on regulation in data security and data protection.

 

On December 28, 2021, the CAC, together with 12 other governmental departments of the PRC, jointly promulgated the Cybersecurity Review Measures, which became effective on February 15, 2022. The Cybersecurity Review Measures provides that, in addition to critical information infrastructure operators (“CIIOs”) that intend to purchase Internet products and services, data processing operators engaging in data processing activities that affect or may affect national security must be subject to cybersecurity review by the Cybersecurity Review Office of the PRC. According to the Cybersecurity Review Measures, a cybersecurity review assesses potential national security risks that may be brought about by any procurement, data processing, or overseas listing. The Cybersecurity Review Measures further requires that CIIOs and data processing operators that possess personal data of at least one million users must apply for a review by the Cybersecurity Review Office of the PRC before conducting listings in foreign countries.

 

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On November 14, 2021, the CAC published the Draft Regulations on the Network Data Security Administration (Draft for Comments) (the “Security Administration Draft”), which provides that data processing operators engaging in data processing activities that affect or may affect national security must be subject to cybersecurity review by the relevant Cyberspace Administration of the PRC. According to the Security Administration Draft, data processing operators who possess personal data of at least one million users conducting listings in foreign countries or process data that affects or may affect national security must be subject to cybersecurity review by the relevant Cyberspace Administration of the PRC. The deadline for public comments on the Security Administration Draft was December 13, 2021.

 

As of the date of this annual report, as an English language training service provider through the VIEs and their subsidiaries in China, the operating entities have not received any notice from any authorities identifying the operating entities as a CIIO or requiring the operating entities to go through cybersecurity review or network data security review by the CAC. As there remains significant uncertainty in the interpretation and enforcement of relevant PRC cybersecurity laws and regulations, the operating entities could be subject to cybersecurity review, and if so, the operating entities may not be able to pass such review. In addition, the operating entities could become subject to enhanced cybersecurity review or investigations launched by PRC regulators in the future. Any failure or delay in the completion of the cybersecurity review procedures or any other non-compliance with the related laws and regulations may result in fines or other penalties, including suspension of business, website closure, removal of the operating entities’ app from the relevant app stores, and revocation of prerequisite licenses, as well as reputational damage or legal proceedings or actions against the operating entities, which may have material adverse effect on the operating entities’ business, financial condition or results of operations. As of the date of this annual report, the operating entities have not been involved in any investigations on cybersecurity review initiated by the CAC or related governmental regulatory authorities, and the operating entities have not received any inquiry, notice, warning, or sanction in such respect. We believe that the operating entities are in compliance with the aforementioned regulations and policies that have been issued by the CAC.

 

On June 10, 2021, the Standing Committee of the National People’s Congress of China, or the SCNPC, promulgated the PRC Data Security Law, which became effective in September 2021. The PRC Data Security Law imposes data security and privacy obligations on entities and individuals carrying out data activities, and introduces a data classification and hierarchical protection system based on the importance of data in economic and social development, and the degree of harm it will cause to national security, public interests, or legitimate rights and interests of individuals or organizations when such data is tampered with, destroyed, leaked, illegally acquired or used. The PRC Data Security Law also provides for a national security review procedure for data activities that may affect national security and imposes export restrictions on certain data and information.

 

As of the date of this annual report, we do not expect that the current PRC laws on cybersecurity or data security would have a material adverse impact on the operating entities’ business operations. However, as uncertainties remain regarding the interpretation and implementation of these laws and regulations, we cannot assure you that the operating entities will comply with such regulations in all respects and the operating entities may be ordered to rectify or terminate any actions that are deemed illegal by regulatory authorities. The operating entities may also become subject to fines and/or other sanctions which may have material adverse effect on their business, operations and financial condition.

 

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

 

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

 

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

 

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

 

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

 

The operating entities may not maintain adequate insurance, which could expose them to significant costs and business disruption.

 

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

 

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

 

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

 

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The operating entities may encounter infringement disputes from time to time relating to their use of intellectual properties of third parties.

 

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

 

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

 

The operating entities’ self-operated learning centers are mainly located on properties leased by the operating entities from third parties. The operating entities generally make decoration work to the leased properties to meet their business operational needs. According to the relevant PRC laws and regulations, the operating entities’ decoration work falls within the scope of construction work. If the investment amount of such construction work exceeds RMB300,000 and the gross floor area is more than 300 square meters, the records of the fire safety design and the completion inspection must be filed with the competent fire safety authorities after the decoration work obtains the relevant construction permit and passes the completion inspection. As of the date of this annual report, the operating entities entered into 44 leases for their premises, 34 of which have been put into use for self-operated learning centers, and the operating entities have complied with the foregoing fire safety design and filing requirements with respect to 30 of these premises. As of December 31, 2021, four leased properties comprised of four of the operating entities’ self-operated learning centers currently in use had not completed the filing of fire protection design and completion inspection record. Additionally, the operating entities owned premises that were used as space for one of their self-operated learning centers with a total gross floor area of approximately 8,057 square meters, and the operating entities have not completed the filing of fire protection design and completion inspection record for such properties as of the date of this annual report. The four self-operated learning centers contributed to approximately 5.6% to the operating entities’ gross billings for the year ended December 31, 2021.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

The operating entities may be involved in legal and other disputes and claims arising out of their operations from time to time.

 

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

 

The operating entities may be adversely affected by any negative publicity concerning them, their business, founders, shareholders, affiliates, directors, senior management and employees, as well as their third-party commercial partners and the industry in which they operate, regardless of its accuracy, which could harm their reputation and business.

 

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

 

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

 

  false or malicious allegations or rumors about the operating entities or their founders, directors, shareholders, senior management, affiliates, teaching staff and other employees, as well as students;

 

  complaints by the students about the operating entities’ education services and sales and marketing activities;

 

  course fee refund disputes between the operating entities and their students or administrative penalties;

 

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

 

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

 

  governmental and regulatory investigations or penalties resulting from the operating entities’ failure to comply with applicable laws and regulations.

 

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

 

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

 

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

 

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

 

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


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

 

The occurrence of natural catastrophes such as earthquakes, floods, typhoons, tsunamis or any acts of terrorism may result in significant property damages as well as loss of revenue due to disruptions in the operating entities’ business operations. As the operating entities store books and course materials at their premises, there is a risk that these products and premises may be damaged or destroyed by fire and other natural calamities. Any disruption of electricity supply or any outbreaks of fire or similar calamities at the operating entities’ premises may result in the breakdown of their facilities and the disruption to their business. Health epidemics such as outbreaks of avian influenza, severe acute respiratory syndrome (SARS), COVID-19, swine flu (H1N1) or the Influenza A virus, and severe weather conditions such as snowstorm and hazardous air pollution, as well as the government measures adopted in response to these events, could significantly impact the operating entities’ operations.

 

Due to the quarantine measures to contain the spread of the COVID-19, the operating entities temporarily closed their learning centers in China from February 2020 to April 2020. In April 2020, the operating entities reopened a select number of learning centers, and gradually reopened the remaining in May and June 2020 as permitted by the MOE and provincial education bureaus. As a result, the operating entities’ ability to deliver their services, particularly offline ELT services, had been adversely impacted and the costs to deliver services may also increase. Some students changed their study plans due to these restrictive measures or safety considerations, and thus, the demand for the operating entities’ services, especially demand for overseas training services, decreased.

 

The COVID-19 pandemic had a material adverse impact on the operating entities’ business operations for the fiscal year ended December 31, 2021. The operating entities’ revenue for the fiscal year ended December 31, 2021 decreased by RMB168.0 million, or 18.7%, from RMB897.0 million for the fiscal year ended December 31, 2020.

 

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The extent to which COVID-19 impacts the operating entities’ financial position, results of operations and cash flows in 2022 and beyond will depend on future developments of the pandemic, including new information concerning the global severity of and actions taken to contain the pandemic, which are highly uncertain and unpredictable. In addition, the operating entities’ financial position, results of operations and cash flows could be adversely affected to the extent that the COVID-19 pandemic negatively impacts the Chinese economy in general. We cannot assure you that the COVID-19 pandemic can be eliminated or contained in the near future, or at all, or a similar outbreak will not occur again. If similar outbreak occurs, the operating entities may be forced to close learning centers or offices again while they remain obligated to pay rent and other expenses for these facilities, have quarantine policies in place for students, teachers, or employees and the disinfection of the affected properties along with the temporary suspension of operations, or cancel or defer student enrollment to avoid the spread or recurrence of contagion.

 

The operating entities’ results of operations may continue to be adversely affected to the extent that the COVID-19 pandemic continues to affect the Chinese economy in general. In addition, the longer-term trajectory of COVID-19, both in terms of scope and intensity of the pandemic, in China, together with its impact on the industry and the broader economy are still difficult to assess or predict and face significant uncertainties that will be difficult to quantify. If the situation materially deteriorates in China, the operating entities’ business operations and financial performance may be materially and adversely affected.

 

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

 

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

 

Our independent registered public accounting firm has not conducted an audit of our internal control over financial reporting. In the course of auditing our consolidated financial statements for the fiscal year ended December 31, 2021, our independent registered public accounting firm identified two material weaknesses and other control deficiencies in our internal control over financial reporting.

 

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

 

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

 

As a public company, we will be subject to Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley Act. Since we qualify as an “emerging growth company” pursuant to the JOBS Act with less than US$1.07 billion in revenue for our last fiscal year. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, in the assessment of the emerging growth company’s internal control over financial reporting. Moreover, even if management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm, after conducting its own independent testing, may issue a report that is qualified if it is not satisfied with our internal controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us.

 

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

  

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Risks Related to Our Cryptocurrency Business

 

We are transitioning our business focus and our results of operations may be materially and adversely affected.

 

As of the date of this annual report, the operating entities have been primarily operating in the ELT industry in China. Since 2022, we have started to transition the business focus to blockchain and cryptocurrency business through our Cayman Islands holding company. We have built a business division dedicated to blockchain and cryptocurrency business and set up subsidiaries devoted to cryptocurrency related business operations. There are risks in connection with the new business ventures. The blockchain and cryptocurrency business may not develop as we anticipate. As we have limited experience in the blockchain and cryptocurrency business, our efforts in developing such business may not succeed and we may not be able to generate sufficient revenue to cover our investment and become profitable. During such process, our results of operations and financial condition may not be improved in a timely manner, or at all. We cannot assure you that we will successfully transition the business focus and it is possible that they remain in such status for a period of time. During such period, our revenue may be very limited and our may continue to experience material and adverse effect to our results of operations, financial condition and business prospects.

 

New Lines of business or new products and services may subject us to additional risks.

 

From time to time, we may implement new lines of business or offer new products and services within the existing lines of business. We have recently ventured into the blockchain and cryptocurrency business and launched our metaverse vocational education courses. As a new entrant into the new lines of business, we face significant challenges, uncertainties and risks, including, among others, with respect to our ability to:

 

build a well-recognized and respected brand;

 

establish and expand the customer base;

 

improve and maintain operational efficiency for new lines of business;

 

maintain a reliable, secure, high-performance and scalable technology infrastructure for new lines of business;

 

anticipate and adapt to changing market conditions, including technological developments and changes in competitive landscape;

 

navigate an evolving and complex regulatory environment, such as licensing and compliance requirements; and

 

manage the resources and attention of management between the current core business and new lines of business.

 

Moreover, there can be no assurance that the introduction and development of new lines of business or new products and services would not encounter significant difficulties or delay or would achieve the profitability as we expect. Failure to successfully manage these risks in the development and implementation of new lines of business or new products or services could have a material adverse effect on our business, results of operations and prospects. For example, with respect to our plan to develop the blockchain and cryptocurrency business, we may not be able to acquire cryptocurrency mining machines at a reasonable cost, or at all. Due to our limited experience with blockchain and cryptocurrency activities, we also face challenges and uncertainties relating to the possibility of success of the new business. As of the date of this annual report, the operating entities have deployed about 1,482 miners into operation for mining bitcoin in Tennessee and Pennsylvania. There is no assurance that this new line of business will succeed and become profitable.

 

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As we enter into new business sectors, we are also subject to competition from such industry. For example, the blockchain and cryptocurrency industry is highly competitive despite its relatively short history. There can be no assurance that we are able to compete effectively with respect to the new businesses. If we fail to establish strengths or maintain competitiveness in those industries, our business prospects, results of operations and financial condition may be materially and adversely affected.

 

As we develop our blockchain and cryptocurrency business, our total revenue and cash flow will become materially dependent on the market value of digital assets and the volume of digital assets received from our mining efforts. If such market value or volume declines, our business, operating results and financial condition would be adversely affected. 

 

As we develop our blockchain and cryptocurrency business, the operating cash flow will be materially dependent on our ability to sell cryptocurrency for fiat currency as needed. As such, any declines in the number of cryptocurrencies that we successfully mine, the price of such cryptocurrencies or market liquidity for cryptocurrencies and digital assets generally would adversely affect our revenue and ability to fund the operations.

 

The price of cryptocurrencies and digital assets and associated demand for buying, selling, and trading cryptocurrencies and digital assets have historically been subject to significant volatility. For example, Bitcoin’s aggregate market value exceeded $1 trillion in October 2021 compared to $250 billion in October 2020, based on Bitcoin prices quoted on major exchanges. The price and trading volume of any digital asset is subject to significant uncertainty and volatility, depending on a number of factors, including:

 

market conditions across the broader blockchain ecosystem;

 

trading activities on digital asset platforms worldwide, many of which may be unregulated, and may include manipulative activities;

 

investment and trading activities of highly active retail and institutional users, speculators, miners and investors;

 

the speed and rate at which digital assets are able to gain worldwide adoption as a medium of exchange, utility, store of value, consumptive asset, security instrument or other financial assets, if at all;

 

changes in user and investor confidence in digital assets and digital asset platforms;

 

publicity and events relating to the blockchain ecosystem, including public perception of the impact of the blockchain ecosystem on the environment;

 

unpredictable social media coverage or “trending” of digital assets;

 

the functionality and utility of digital assets and their associated ecosystems and networks, including digital assets designed for use in various applications;

 

consumer preferences and perceived value of digital assets;

 

increased competition from other payment services or other digital assets that exhibit better speed, security, scalability or other characteristics;

 

the correlation between the prices of digital assets, including the potential that a crash in one digital asset or widespread defaults on one digital asset exchange or trading venue may cause a crash in the price of other digital assets, or a series of defaults by counterparties on digital asset exchanges or trading venues;

 

regulatory or legislative changes and updates affecting the blockchain ecosystem;

 

the characterization of digital assets under the laws of various jurisdictions around the world;

 

the maintenance, troubleshooting and development of the blockchain networks underlying digital assets, including by miners, validators and developers worldwide;

 

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the ability for digital asset networks to attract and retain miners or validators to secure and confirm transactions accurately and efficiently;

 

ongoing technological viability and security of digital assets and their associated protocols, smart contracts, applications and networks, including vulnerabilities against hacks and scalability;

 

fees and speed associated with processing digital asset transactions, including on the underlying blockchain networks and on digital asset platforms;

 

financial strength of market participants;

 

interruptions in service from, or failures of, major digital asset trading platforms;

 

availability of an active derivatives market for various digital assets;

 

availability of banking and payment services to support digital asset-related projects;

 

level of interest rates and inflation; and

 

monetary policies of governments, trade restrictions and fiat currency devaluations.

 

There is no assurance that any digital asset, including Bitcoin, will maintain its value or that there will be meaningful levels of trading activities to support markets in any digital asset. A decline in the market value of digital assets or in the demand for trading digital assets could lead to a corresponding decline in the value of our  cryptocurrency assets, their returns on investments in mining machines, and could adversely affect their business, operating results and financial condition.

 

Digital assets may be subject to momentum pricing due to speculation regarding future appreciation or depreciation in value, leading to greater volatility. Momentum pricing typically is associated with growth stocks and other assets whose valuation, as determined by the investing public, accounts for future changes in value. It is possible that momentum pricing of digital assets has resulted, and may continue to result, in speculation regarding future changes in the value of digital assets, making digital assets’ prices more volatile. As a result, digital assets may be more likely to fluctuate in value due to changing investor confidence, which could impact future appreciation or depreciation in digital asset prices. As a result, our business, operating results and financial condition could be adversely affected.

 

Banks and financial institutions may not provide banking services, or may cut off services, to businesses that engage in cryptocurrency-related activities.

 

A number of companies that engage in Bitcoin and/or other cryptocurrency-related activities have been unable to find banks or financial institutions that are willing to provide them with bank accounts and other services. Similarly, a number of companies and individuals or businesses associated with cryptocurrencies may have had and may continue to have their existing bank accounts closed or services discontinued with financial institutions in response to government action, particularly in China, where regulatory response to cryptocurrencies has been to initially exclude their use for ordinary consumer transactions within China and later to deem all cryptocurrency-related transactions illegal in September 2021.

 

The public perception of cryptocurrencies could be damaged if banks or financial institutions were to close the accounts of businesses engaging in Bitcoin and/or other cryptocurrency-related activities. This could occur as a result of compliance risk, cost, government regulation or public pressure. The risk applies to securities firms, clearance and settlement firms, national stock and derivatives on commodities exchanges, the over-the-counter market, and the Depository Trust Company (“DTC”), which, if any of such entities adopts or implements similar policies, rules or regulations, could negatively affect our relationships with financial institutions and impede our ability to convert cryptocurrencies to fiat currencies. Such factors could have a material adverse effect on our ability to continue as a going concern or to monetize our mining efforts, which could have a material adverse effect on our business, prospects or operations and harm investors.

 

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The cost of acquiring new mining machines has historically been capital intensive, and is likely to continue to be very capital intensive, which may have a material and adverse effect on our business and results of operations.

 

The success and profitability of our mining operations conducted depends largely on the costs, including costs of mining machines and electricity, associated with our mining activities. We can be profitable only if such costs are lower than the prices of the cryptocurrencies we mine when we sell them. Our mining machines experience ordinary wear and tear from operation and may also face more significant malfunctions caused by factors which may be beyond our control. Over time, we will replace those mining machines which are no longer functional with new mining machines we manufacture. Additionally, as technology evolves, we are required to continue investing in research and development to invent newer models of mining machines to remain competitive in the market.

 

All of the mining machines deployed by us will degrade due to ordinary wear and tear from usage. Additionally, all of these machines will eventually become obsolete, and may also be lost or damaged due to factors outside of our control. Once such event happens, these mining machines will need to be repaired or replaced along with other equipment from time to time for us to stay competitive. This upgrading process requires substantial capital investment, and we may face challenges in doing so on a timely and cost-effective basis based on our ability to develop new mining machines with greater processing power and our access to adequate capital resources. If we are unable to obtain adequate numbers of new and replacement mining machines at scale, we may be unable to remain competitive in our highly competitive and evolving industry. If this happens, we may not be able to mine cryptocurrencies through our subsidiaries as efficiently or in similar amounts as our competitors and, as a result, our business and financial results could suffer. This could, in turn, materially and adversely affect the trading price of our securities and our investors could lose part or all of their investment.

 

To the extent that the profit margins of bitcoin mining operations are not high, operators of bitcoin mining operations are more likely to immediately sell bitcoin rewards earned by mining in the market, thereby constraining growth of the price of bitcoin, which could adversely impact us.

 

Over the past few years, bitcoin mining operations have evolved from individual users mining with computer processors, graphics processing units and first-generation ASIC servers. New processing power being added by incorporated and unincorporated “professionalized” mining operations is gaining market share. Professionalized mining operations may use proprietary hardware or sophisticated ASIC machines acquired from ASIC manufacturers. Acquiring this specialized hardware at scale requires the investment of significant up-front capital, and mining operations incur significant expenses related to the operation of this hardware at scale, such as leasing operating space (often in data centers or warehousing facilities), incurring electricity costs to run the miners and employing technicians to operate mining farms. With the greater scale of professionalized mining operations (compared to individual mining operations) comes pressure to maintain profit margins on the rapid sale of bitcoin, whereas individual mining operations in past years were more likely to hold newly mined bitcoin for more extended periods. To the extent the price of bitcoin declines and such profit margin is constrained, professionalized mining operations are incentivized to sell bitcoin earned from mining operations soon after mining. This rapid selling of newly mined bitcoin greatly increases the volume of bitcoin that would otherwise be available for sale under normal market circumstances, creating downward pressure on the market price of bitcoin rewards.

 

Profit margin for a bitcoin mining operation is in essence the value of bitcoin mined by a professionalized mining operation minus the allocable capital and operating costs to mine bitcoin. A professionalized mining operation may be more likely to rapidly sell a higher percentage of its newly mined bitcoin if it is operating at a low profit margin and it may partially or completely cease operations if its profit margin is negative. In a low profit margin environment, a higher percentage could be sold more rapidly, thereby potentially depressing bitcoin prices. Lower bitcoin prices could result in further tightening of profit margins for professionalized mining operations, creating a network effect that may further reduce the price of bitcoin until mining operations with higher operating costs become unprofitable. Ultimately this effect could force professionalized mining operations to reduce mining power or temporarily cease mining operations.

 

The reward for adding new blocks to the bitcoin blockchain is subject to halving, and the value of bitcoin may not adjust to compensate us for the reduction in the rewards we receive from our mining efforts.

 

Halving is a process incorporated into many proof-of-work consensus algorithms that reduces the bitcoin reward paid to those who mine bitcoin over time according to a pre-determined schedule. This reduction in reward spreads out the release of bitcoin over a long period of time resulting in an ever-smaller number of bitcoin being mined, reducing the risk of coin-based inflation. At a predetermined block, the mining reward is cut in half, hence the term “halving.” For bitcoin, the reward was initially set at 50 bitcoin currency rewards per block and this was cut in half to 25 on November 28, 2012 at block 210,000, then again to 12.5 on July 9, 2016 at block 420,000. The most recent halving for bitcoin happened on May 11, 2020 at block 630,000 and the reward reduced to 6.25. According to bitcoin.org, the next halving is projected to occur in 2024. This process will reoccur until the total amount of bitcoin currency rewards issued reaches 21 million bitcoin, which is expected around 2140. While bitcoin price has had a history of price fluctuations around the halving of its rewards, there is no guarantee that the price change will be favorable or would compensate for the reduction in mining reward. If a corresponding and proportionate increase in the trading price of bitcoin or a proportionate decrease in mining difficulty does not follow these anticipated halving events, the revenue we earn from our bitcoin mining operations could see a corresponding decrease, which could have a material adverse effect on our business and operations.

 

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Because the only type of cryptocurrency we currently mine is bitcoin, our future success will depend in large part upon the value of bitcoin, and any sustained decline in its value could adversely affect our business and results of operations.

 

Our operating results will depend in large part upon the value of bitcoin because it is the only cryptocurrency we currently mine. Specifically, our revenues from our bitcoin mining operations are based upon two factors: (1) the number of bitcoin rewards we successfully mine and (2) the value of bitcoin. In addition, our operating results are directly impacted by changes in the value of bitcoin. This means that our operating results will be subject to swings based upon increases or decreases in the value of bitcoin. The introduction of alternative cryptocurrencies, such as those backed by central banks known as Central Bank Digital Currencies, could significantly reduce the demand for bitcoin. This would reduce both our ability to earn mining rewards and transaction fees, and would also impair our ability to monetize the bitcoin we earn in accordance with our financial projections.

 

We do not maintain any insurance coverage for our cryptocurrency mining operations, and any potential material losses could materially and adversely affect our business and results of operations.

 

We do not maintain any insurance coverage for our cryptocurrency mining operations and, as such, we are subject to liabilities that we may incur in connection with the operation of our business. For instance, because of the high cost of new mining machines, we may be required to expend additional capital resources to replace any mining machines we lose as a result of casualty events.

 

Furthermore, the bitcoin held by us is not insured by any government-sponsored investor protection program or otherwise. Therefore, any loss of bitcoin held by us, either through an information security failure, a mistaken transaction or otherwise, would not be reimbursed. This could adversely affect our operations and, consequently, an investment in our securities.

 

We are subject to risks associated with our need for significant electrical power.

 

Our mining operations have historically required significant amounts of electrical power. As we continue to expand our mining operations, we anticipate our demand for electrical power will continue to grow. If we are unable to continue to obtain sufficient electrical power to operate our miners on a cost-effective basis, we may not realize the anticipated benefits of our significant capital investments in new miners.

 

Additionally, our mining operations could be materially adversely affected by prolonged power outages. Although our miners may be powered by backup generators on a temporary basis, it would not be feasible or cost-effective to run miners on back-up power generators for extended periods of time. We would likely need to reduce or cease our operations in the event of an extended power outage or as a result of the unavailability or increased cost of electrical power, which would materially and adversely affect our business and results of operations

 

We may be subject to risks in connection with acquisitions.

 

We may, in the future, pursue asset acquisitions or acquisitions of businesses in the cryptocurrency industry. The process of upgrading acquired assets to our specifications and integrating acquired assets or businesses may involve unforeseen costs and delays or other operational, technical and financial difficulties and may require a significant amount time and resources. Our failure to incorporate acquired assets or businesses into our existing operations successfully or to minimize any unforeseen operational difficulties could have a material adverse effect on our financial condition and results of operations. Such events could also mean an acquisition that we expected to be accretive is not accretive and, in extreme cases, the asset is idle.

 

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Risks Related to Doing Business in China

 

The approval and/or other requirements of the CSRC, CAC or other PRC governmental authorities may be required in connection with an offering under PRC rules, regulations or policies, and, if required, we cannot predict whether or how soon we will be able to obtain such approval.

 

The Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, purport to require offshore special purpose vehicles that are controlled by PRC companies or individuals and that have been formed for the purpose of seeking a public listing on an overseas stock exchange through acquisitions of PRC domestic companies or assets to obtain CSRC approval prior to publicly listing their securities on an overseas stock exchange. The interpretation and application of the regulations remain unclear. If a governmental approval is required, it is uncertain how long it will take for us to obtain such approval, and, even if we obtain such approval, the approval could be rescinded. Any failure to obtain, or a delay in obtaining, the requisite governmental approval for an offering, or a rescission of such CSRC approval if it is obtained by us, may subject us to sanctions imposed by the relevant PRC regulatory authority, which could include fines and penalties on the operations of the VIEs and their subsidiaries in China, restrictions or limitations on our ability to pay dividends outside of China, and other forms of sanctions that may materially and adversely affect our business, financial condition, and results of operations.

 

Our PRC counsel has advised us that, based on its understanding of the current PRC laws and regulations, we will not be required to submit an application to the CSRC for the approval under the M&A Rules for an offering, because (i) the CSRC currently has not issued any definitive rule or interpretation concerning whether any follow-on offerings are subject to this regulation; (ii) we established Zhuhai Meten and Shenzhen Meten by means of direct investment and not through a merger or acquisition of the equity interests or assets of a “PRC domestic company,” as such terms are defined under the M&A Rules; and (iii) no provision in the M&A Rules classifies the contractual arrangements under the VIE agreements as a type of acquisition transaction falling under the M&A Rules.

 

However, our PRC counsel has further advised us that there remains some uncertainty as to how the M&A Rules will be interpreted or implemented in the context of an overseas offering, and its opinions summarized above are subject to any new laws, rules and regulations or detailed implementations and interpretations in any form relating to the M&A Rules. We cannot assure you that relevant PRC governmental authorities, including the CSRC, would reach the same conclusion as our PRC counsel, and hence, we may face regulatory actions or other sanctions from them.

 

Furthermore, relevant PRC governmental authorities promulgated the Opinions on Strictly Cracking Down Illegal Securities Activities, which provided that the administration and supervision of overseas-listed China-based companies will be strengthened, and the special provisions of the State Council on overseas issuance and listing of shares by such companies will be revised, clarifying the responsibilities of domestic industry competent authorities and regulatory authorities. Such opinions further provided that the special provisions of the State Council on overseas offerings and listings by those companies limited by shares will be revised and therefore the duties of domestic industry competent authorities and regulatory agencies will be clarified. Subsequently, CAC issued the Draft Data Securities Regulations and CAC, the National Development and Reform Commission of the PRC (“NDRC”), the Ministry of Industry and Information Technology (“MIIT”) and other ten PRC regulatory authorities jointed issued the Cybersecurity Review Measures which further strengthened the cybersecurity review measures. For more details, please see “Risks Related to Doing Business in China—The operating entities may be liable for improper use or appropriation of personal information provided by the customers and any failure to comply with PRC laws and regulations over data security could result in materially adverse impact on the operating entities’ business, results of operations, and our continued listing on Nasdaq.”

 

In addition, on December 24, 2021, CSRC issued the draft Administrative Provisions of the State Council on Overseas Issuance and Listing of Securities by Domestic Enterprises, or the Draft Administrative Provisions and the draft Administrative Measures for the Record-Filings of Overseas Issuance and Listing of Securities by Domestic Enterprises, or the Draft Filing Measure for public comment. The Draft Administrative Provisions clarify the responsibilities of the CSRC to supervise the activities of “overseas issuance and listing of securities by domestic enterprises” and that overseas issuance and listing of domestic enterprises shall be subject to filing procedures with the CSRC, as well as regulatory requirements for the overseas issuance and listing of domestic enterprises. The Draft Filing Measures, as a supporting rule to the Draft Administrative Provisions, detail the main procedures of record-filing management of domestic enterprises’ overseas issuance and listing. Pursuant to the Draft Administrative Provisions, domestic enterprises seeking overseas listing or issuance of securities directly or indirectly will be required to both go through filing procedures and report relevant information to the securities regulatory authority under the State Council. A “direct” issuance and listing of securities by a domestic enterprise refers to the overseas issuance of securities or overseas securities listing for trading by a company limited by shares incorporated in the PRC. An “indirect” issuance and listing of securities by a domestic enterprise refers to, enterprises whose main business activities are in the PRC in the name of overseas enterprises issuing securities overseas or listing overseas based on the equity, assets, income or other similar rights and interests of domestic enterprises. Domestic enterprises seeking an overseas listing or issuance of securities are also required to operate in compliance with laws and regulations on foreign investment, state-owned asset management, industry supervision, and overseas investment. On April 2, 2022, CSRC issued the Provisions on Strengthening Confidentiality and Archives Administration of Overseas Securities Offering and Listing by Domestic Companies (Draft for Comments), or the Draft Confidentiality and Archives Administration Provisions for public comment, according to which a domestic company that seeks to offer and list its securities in an overseas market shall strictly abide by applicable PRC laws and regulations, enhance legal awareness of keeping state secrets and strengthening archives administration, institute a sound confidentiality and archives administration system, and take necessary measures to fulfill confidentiality and archives administration obligations. As such Draft Administrative Provisions, the Draft Filing Measures and the Draft Confidentiality and Archives Administration Provisions have not been adopted and it remains unclear whether the formal version to be adopted in the future will have any further material changes, it is uncertain how such measures and provisions will be enacted, interpreted or implemented and how they will affect us.

 

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If it is determined in the future that approval from CSRC or CAC, or other procedural requirements are required to be met for, and prior to, an offering, it is uncertain whether we can or how long it will take us to obtain such approval or complete such procedures and any such approval could be rescinded. Any failure to obtain or delay in obtaining such approval or completing such procedures for an offering, or a rescission of any such approval, could subject us to sanctions by the relevant PRC governmental authorities. The governmental authorities may impose restrictions and penalties on our operations in China, such as the suspension of our apps and services, revocation of our licenses, or shutting down part or all of our operations, limit our ability to pay dividends outside of China, delay or restrict the repatriation of the proceeds from an offering into China or take other actions that could have a material adverse effect on our business, financial condition, results of operations and prospects, as well as the trading price of the ordinary shares. The PRC governmental authorities may also take actions requiring us, or making it advisable for us, to halt an offering before settlement and delivery of the ordinary shares. Consequently, if you engage in market trading or other activities in anticipation of and prior to settlement and delivery, you do so at the risk that settlement and delivery may not occur. In addition, if the PRC governmental authorities later promulgate new rules or explanations requiring that we obtain their approvals for filings, registrations or other kinds of authorizations for an offering, we cannot assure you that we can obtain the approval, authorizations, or complete required procedures or other requirements in a timely manner, or at all, or obtain a waiver of the requisite requirements if and when procedures are established to obtain such a waiver.

 

Our ordinary shares may be delisted and prohibited from being traded under the Holding Foreign Companies Accountable Act if the PCAOB is unable to inspect auditors who are located in China. The delisting and the cessation of trading of our ordinary shares, or the threat of their being delisted and prohibited from being traded, may materially and adversely affect the value of your investment. Additionally, the inability of the PCAOB to conduct inspections deprives our investors with the benefits of such inspections.

 

On April 21, 2020, SEC Chairman Jay Clayton and PCAOB Chairman William D. Duhnke III, along with other senior SEC staff, released a joint statement highlighting the risks associated with investing in companies based in or have substantial operations in emerging markets including China. The joint statement emphasized the risks associated with lack of access for the PCAOB to inspect auditors and audit work papers in China and higher risks of fraud in emerging markets.

 

On May 18, 2020, Nasdaq filed three proposals with the SEC to (i) apply minimum offering size requirement for companies primarily operating in “Restrictive Market”, (ii) adopt a new requirement relating to the qualification of management or board of director for Restrictive Market companies, and (iii) apply additional and more stringent criteria to an applicant or listed company based on the qualifications of the company’s auditors.

 

On May 20, 2020, the Senate passed the Holding Foreign Companies Accountable Act requiring a foreign company to certify it’s not owned or manipulated by a foreign government if the PCAOB is unable to audit specified reports because the company uses a foreign auditor not subject to PCAOB inspection. If the PCAOB is unable to inspect the company’s auditors for three consecutive years, the issuer’s securities are prohibited to trade on a national exchange.

 

On March 24, 2021, the SEC announced that it had adopted interim final amendments to implement congressionally mandated submission and disclosure requirements of the Act. The interim final amendments will apply to registrants that the SEC identifies as having filed an annual report on Forms 10-K, 20-F, 40-F or N-CSR with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction and that the PCAOB has determined it is unable to inspect or investigate completely because of a position taken by an authority in that jurisdiction. The SEC will implement a process for identifying such a registrant and any such identified registrant will be required to submit documentation to the SEC establishing that it is not owned or controlled by a governmental entity in that foreign jurisdiction, and will also require disclosure in the registrant’s annual report regarding the audit arrangements of, and governmental influence on, such a registrant.

 

On June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act which, if passed by the U.S. House of Representatives and signed into law, would reduce the number of consecutive non-inspection years required for triggering the prohibitions under the Holding Foreign Companies Accountable Act from three years to two.

 

On September 22, 2021, the PCAOB adopted a final rule implementing the Holding Foreign Companies Accountable Act, which provides a framework for the PCAOB to use when determining, as contemplated under the Holding Foreign Companies Accountable Act, whether the board of directors of a company is unable to inspect or investigate completely registered public accounting firms located in a foreign jurisdiction because of a position taken by one or more authorities in that jurisdiction.

 

On December 2, 2021, the SEC adopted amendments to finalize rules implementing the submission and disclosure requirements in the Holding Foreign Companies Accountable Act.

 

On December 16, 2021, the PCAOB issued a report on its determinations that it is unable to inspect or investigate completely PCAOB-registered public accounting firms headquartered in mainland China and in Hong Kong because of positions taken by PRC and Hong Kong authorities in those jurisdictions and identified the registered public accounting firms in China and Hong Kong that are subject to such determinations.

 

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

  

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Our auditor, Audit Alliance LLP, is an independent registered public accounting firm with the PCAOB, and as an auditor of publicly traded companies in the U.S., is subject to laws in the U.S. pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. On December 16, 2021, the PCAOB issued its determination that the PCAOB is unable to inspect or investigate completely PCAOB-registered public accounting firms headquartered in mainland China and in Hong Kong, because of positions taken by PRC authorities in those jurisdictions, and the PCAOB included in the report of its determination a list of the accounting firms that are headquartered in the PRC or Hong Kong. This list does not include our auditor, Audit Alliance LLP. However, the recent developments would add uncertainties to our offering and we cannot assure you whether Nasdaq or regulatory authorities would apply additional and more stringent criteria to us since we are an emerging growth company and the majority of our operations are conducted in China. Furthermore, the Holding Foreign Companies Accountable Act, which requires that the PCAOB be permitted to inspect an issuer’s public accounting firm within three years, may result in the delisting of our Company in the future if the PCAOB is unable to inspect our accounting firm at such future time. The Accelerating Holding Foreign Companies Accountable Act, if passed by the U.S. House of Representatives and signed into law, would reduce the period of time for foreign companies to comply with PCAOB audits to two consecutive years instead of three, thus reducing the time period for triggering the prohibition on trading.

 

The SEC has announced that the SEC staff is preparing a consolidated proposal for the rules regarding the implementation of the Holding Foreign Companies Accountable Act. It is unclear when the SEC will complete its rulemaking and when such rules will become effective. The implications of this possible regulation, the requirements of the Holding Foreign Companies Accountable Act, in addition to the rules promulgated by PCAOB, are uncertain as of the date of this annual report. Such uncertainty could cause the market price of our ordinary shares to be materially and adversely affected, and our securities could be delisted earlier than would be required by the Holding Foreign Companies Accountable Act. If our securities are unable to be listed on another securities exchange by then, such a delisting would substantially impair your ability to sell or purchase our ordinary shares when you wish to do so, and the risk and uncertainty associated with a potential delisting would have a negative impact on the price of our ordinary shares.

 

The PRC government’s significant oversight over the operating entities’ business could result in a material adverse change in their operations and the value of our ordinary shares.

 

The operating entities’ business in China are governed by the PRC laws and regulations. The PRC government has significant oversight over the conduct of the operating entities’ business, and it regulates and may intervene in their operations, which could result in a material adverse change in their operations and/or the value of our ordinary shares. Also, the PRC government has recently indicated an intent to exert more oversight over offerings that are conducted overseas and/or foreign investment in China-based issuers. Any such action could significantly limit or completely hinder our ability to offer or continue to offer securities to investors. In addition, implementation of industry-wide regulations directly targeting the operating entities’ operations could cause our securities to significantly decline in value or become worthless. Therefore, investors of our Company face potential uncertainty from actions taken by the PRC government affecting the operating entities’ business.

 

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

 

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

 

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

 

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

 

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

 

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

 

  political instability or changes in social conditions of the PRC;

 

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

 

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

 

  measures changes in the rate or method of taxation.

 

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

 

Additionally, the outbreak of COVID-19 may have a material adverse impact on the overall economic outlook, economic growth and business sentiment in China, and may in turn influence the operation of the operating entities’ business. See “— Risks Related to Our Business and Operations in the ELT Markets — Any natural catastrophes, severe weather conditions, health epidemics, including COVID-19, and other extraordinary events could severely disrupt the operating entities’ business operations.”

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Regulation and censorship of information disseminated over the internet in China may adversely affect the operating entities’ business and reputation and subject them to liability for information displayed on their website.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Risks Related to Our Ordinary Shares

 

Our share price has recently declined substantially, and our ordinary shares could be delisted from the Nasdaq or trading could be suspended.

 

The listing of our ordinary shares on the Nasdaq Capital Market is contingent on our compliance with the Nasdaq Capital Market’s conditions for continued listing. On January 5, 2022, we received written notification (the “Notification Letter”) from the Nasdaq Stock Market LLC (“Nasdaq”) that we were not in compliance with the minimum bid price requirement of US$1.00 per share under the Nasdaq Listing Rules. In accordance with Nasdaq Listing Rules, we must regain compliance within 180 calendar days, or until July 5, 2022. To regain compliance, our ordinary shares must have a closing bid price of at least US$1.00 for a minimum of 10 consecutive business days. In the event we do not regain compliance by July 5, 2022, we may face delisting. On May 4, 2022, we effected a 30-to-1 Share Consolidation in order to cure the deficiency. See “Item 4. Information on the Company — A. History and Development of the Company — Nasdaq Notification Letter.”

 

We cannot assure you that we will be able to regain compliance with the minimum bid price requirement under the Nasdaq Listing Rules. Even if we are able to regain compliance, we cannot assure you that we will not receive other deficiency notifications from Nasdaq in the future. A decline in the closing price of our ordinary shares could result in a breach of the requirements for listing on the Nasdaq Capital Market. If we do not maintain compliance, Nasdaq could commence suspension or delisting procedures in respect of our ordinary shares. The commencement of suspension or delisting procedures by an exchange remains at the discretion of such exchange and would be publicly announced by the exchange. If a suspension or delisting were to occur, there would be significantly less liquidity in the suspended or delisted securities. In addition, our ability to raise additional necessary capital through equity or debt financing would be greatly impaired. Furthermore, with respect to any suspended or delisted ordinary shares, we would expect decreases in institutional and other investor demand, analyst coverage, market making activity and information available concerning trading prices and volume, and fewer broker-dealers would be willing to execute trades with respect to such ordinary shares. A suspension or delisting would likely decrease the attractiveness of our ordinary shares to investors and cause the trading volume of our ordinary shares to decline, which could result in a further decline in the market price of our ordinary shares.

 

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

 

We may issue additional ordinary shares or other equity securities of equal or senior rank in the future for any reason or in connection with, among other things, future acquisitions or repayment of outstanding indebtedness, without shareholder approval.

 

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

 

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

 

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

 

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

 

  the market price of our ordinary shares may decline.

 

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

 

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

 

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

 

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

 

Based on the projected composition of our income and valuation of our assets, including goodwill, we are not expected to be a passive foreign investment company (“PFIC”) for its current taxable year, and we do not expect to become one in the future, although there can be no assurance in this regard. Although we do not expect to be a PFIC, it is not entirely clear how the contractual arrangements between our Company and the VIEs will be treated for purposes of the PFIC rules. If it were determined that we do not own the stock of the VIEs for U.S. federal income tax purposes (for instance, because the relevant PRC authorities do not respect these arrangements), we may be treated as a PFIC. See “Item 10. Additional Information—E. Taxation—U.S. Holders—Passive Foreign Investment Company.” If we are or were to become a PFIC, such characterization could result in adverse United States federal income tax consequences to you if you are a U.S. investor. For example, if we are a PFIC, its U.S. investors will become subject to increased tax liabilities under U.S. federal income tax laws and regulations and will become subject to burdensome reporting requirements. We cannot assure you that we will not be a PFIC for our current taxable year or any future taxable year.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

As a Cayman Islands company listed on the Nasdaq, we are subject to Nasdaq corporate governance listing standards. However, the Nasdaq rules permit a foreign private issuer like us to follow the corporate governance practices of its home country. Certain corporate governance practices in the Cayman Islands, which is our home country, may differ significantly from Nasdaq corporate governance listing standards. A Cayman Islands company is not required to have annual general meetings. Shareholders of Cayman Islands exempted companies like us have no general rights under Cayman Islands law to inspect corporate records or to obtain copies of lists of shareholders of these companies. Our directors have discretion under our articles of association to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest. To the extent we choose to follow home country practice with respect to corporate governance matters such as the exemption from holding an annual general meeting pursuant to Nasdaq Rule 5620(a), our shareholders may be afforded less protection than they otherwise would under rules and regulations applicable to U.S. domestic issuers. For details as to the corporate governance matters for which we have elected to follow our home country practices, rather than Nasdaq listing standards, please see “Item 16.G—Corporate Governance.”

 

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We have incurred and will continue to incur increased costs as a result of being a public company.

 

We are a public company and we incur significant accounting, legal and other expenses. The Sarbanes-Oxley Act, as well as rules subsequently implemented by the SEC and the Nasdaq, have detailed requirements concerning corporate governance practices of public companies, including Section 404 of the Sarbanes-Oxley Act of 2002 relating to internal controls over financial reporting. These rules and regulations applicable to public companies have increased our accounting, legal and financial compliance costs and made certain corporate activities more time-consuming and costly. Our management is required to devote substantial time and attention to our public company reporting obligations and other compliance matters. Our reporting and other compliance obligations as a public company may place a strain on our management, operational and financial resources and systems for the foreseeable future.

 

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

 

ITEM 4. INFORMATION ON THE COMPANY

 

A. History and Development of the Company

 

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

 

On 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., a Cayman Islands exempted company and wholly owned subsidiary of the Company (“Meten Merger Sub”, and together with EdtechX Merger Sub, the “Merger Subs”), and Meten International Education Group, a Cayman Islands exempted company (“Meten”) which, among other things, provided for (i) Meten Merger Sub to merge with and into the Company, with the Company being the surviving entity of such merger (the “Meten Merger”) and becoming a wholly-owned subsidiary of the Company (“Surviving Cayman Islands Company”) and (ii) EdtechX Merger Sub to merge with and into EdtechX, with EdtechX being the surviving entity of the merger (the “EdtechX Merger” and together with the Meten Merger, the “Mergers”) and becoming a wholly-owned subsidiary of the Company.

 

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

 

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On March 30, 2020, our ordinary shares were listed on the Nasdaq Capital Market under the symbol “METX.” Our warrants have been trading on the Nasdaq Capital Market under the symbol “METXW” since May 27, 2020.

 

On August 11, 2021, we changed our name from “Meten EdtechX Education Group Ltd.” to “Meten Holding Group Ltd.” 

 

The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC using its EDGAR system.

 

See “Item 5. Operating and Financial Review and Prospects — B. Liquidity and Capital Resources — Capital Expenditures” for a discussion of our capital expenditures.

 

Registration Statement

 

On May 13, 2021, we filed with the SEC a registration statement on Form F-3 (File No. 333-256087), utilizing a shelf registration process, which registration statement was declared effective by the SEC on May 21, 2021. Under this shelf registration process, we may, from time to time, in one or more offerings, offer and sell up to US$150,000,000 of any combination, together or separately, of our ordinary shares, par value US$0.0001 per share, preferred shares, debt securities, warrants, rights, and units, or any combination thereof as described in the accompanying prospectus.

 

On May 25, 2021, we filed with the SEC a prospectus supplement to the registration statement on Form F-3 (File No. 333-256087), offering 40,000,000 ordinary shares at a purchase price of US$1.00 per share.

 

On September 3, 2021, we filed with the SEC a prospectus supplement to the registration statement on Form F-3 (File No. 333-256087), offering 22,500,000 ordinary shares at a purchase price of US$0.30 per share. In the same prospectus supplement, we also offered 177,500,000 pre-funded warrants to purchase 177,500,000 ordinary shares, exercisable at an exercise price of $0.0001 per share, at a purchase price of $0.2999 per pre-funded warrant. As of the date of this annual report, all pre-funded warrants issued in that offering have been exercised.

 

On November 12, 2021, we filed with the SEC a prospectus supplement to the registration statement on Form F-3 (File No. 333-256087), offering 33,333,334 ordinary shares, directly to certain institutional investors pursuant to certain securities purchase agreement, dated November 9, 2021, at a purchase price of US$0.60 per share.

 

Nasdaq Notification Letter

 

On July 7, 2021, we received a written Notification Letter from the Nasdaq that we are not in compliance with the minimum bid price requirement set forth in Nasdaq Rules for continued listing on Nasdaq. Nasdaq Listing Rule 5550(a)(2) requires listed securities to maintain a minimum bid price of US$1.00 per share, and Listing Rule 5810(c)(3)(A) provides that a failure to meet the minimum bid price requirement exists if the deficiency continues for 30 consecutive business days. Based on the closing bid price of our ordinary shares for the 30 consecutive business days from May 24, 2021 to July 6, 2021, we no longer meet the minimum bid price requirement. On January 5, 2022, we were notified by Nasdaq that we were eligible for another 180 days to regain compliance, or until July 5, 2022. In the event we do not regain compliance by July 5, 2022, we may face delisting.

 

On May 4, 2022, we effected a 30-to-1 Share Consolidation in order to cure the deficiency. As of the date of this annual report, we have yet to regain compliance with Listing Rule 5550(a)(2).

 

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Extraordinary General Meeting and Share Consolidation

 

On April 14, 2022, we held an extraordinary general meeting of shareholders, during which our shareholders approved the Share Consolidation. As a result, the Share Consolidation became effective on May 4, 2022, and the ordinary shares began trading on a post-Share Consolidation basis on the Nasdaq Capital Market when the market opened on May 6, 2022 under the same symbol “METX” but under a new CUSIP number of G6055H 148. No fractional shares were issued in connection with the Share Consolidation. All fractional shares were rounded up to the whole number of shares. Immediately following the Share Consolidation, the authorized share capital of the Company became US$50,000.00 divided into 16,666,667 ordinary shares of par value of US$0.003 each.

 

B. Business Overview

 

Meten Holding Group Ltd. is not an operating company but a Cayman Islands holding company. Our operations in the PRC ELT markets are conducted through contractual arrangements with the VIEs based in China. PRC laws, regulations, and rules restrict and impose conditions on direct foreign investment in certain types of businesses, and we therefore operate these businesses in China through the VIEs. Meten Holding Group Ltd. does not own equity interest in the VIEs or their subsidiaries and rely on contractual arrangements entered into with such entities and their respective nominee shareholders to control their business operations. For a summary of these contractual arrangements, see “Item 4. Information on the Company—B. Business Overview—Organizational Structure—Contractual Arrangements with the VIEs and Their Respective Shareholders.” Investors in our ordinary shares thus are not acquiring equity interest in the operating entities in China but instead are acquiring interest in a Cayman Islands holding company.

 

We face various legal and operational risks and uncertainties associated with having a major part of our operations in China and with the complex and evolving PRC laws and regulations. For example, we face risks associated with PRC governmental authorities’ significant oversight and discretion over the businesses and financing activities of the VIEs, the requirement of regulatory approvals for offerings conducted overseas and foreign investment in China-based issuers, the use of variable interest entities, the enforcement of anti-monopoly regime, the regulatory oversight on cybersecurity and data privacy as well as the risk of delisting if the PCAOB is unable to conduct inspection on our auditors, which may impact our ability to conduct certain businesses, accept foreign investments, or list on a United States or other foreign exchange. These risks could result in a material adverse change in our operations and the value of our ordinary shares, significantly limit or completely hinder our ability to offer or continue to offer such securities to investors, or cause the value of such securities to significantly decline. For a detailed description of risks related to doing business in China, see “Risk Factors—Risks Related to Doing Business in China.”

 

Our corporate structure is subject to risks associated with our contractual arrangements with the VIEs. Investors may never directly hold equity interests in the VIEs. If the PRC government finds that the contractual arrangements which establish the structure of our business operations do not comply with PRC laws and regulations, or if these regulations or their interpretations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations, which would result in the VIEs being deconsolidated. A majority of our assets, including the necessary licenses to conduct business are held by the VIEs and their subsidiaries. Substantial all of our revenue is generated by the VIEs. The deconsolidation of the VIEs would have a material adverse effect on our operations and substantially diminish the value of our ordinary shares. There are uncertainties about potential future actions by the PRC government that could affect the enforceability of our contractual arrangements with the VIEs and, consequently, significantly affect our financial performance. The value of the ordinary shares may significantly decline or become worthless as a result. For a detailed description of the risks associated with our corporate structure, please refer to risks disclosed under “Risk Factors—Risks Related to Our Corporate Structure.”

 

In addition, trading in our securities may be prohibited under the Holding Foreign Companies Accountable Act if the PCAOB determines that it cannot inspect the workpapers prepared by our auditor, and that as a result an exchange may determine to delist our securities. On June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act, which, if passed by the U.S. House of Representatives and signed into law, would reduce the period of time for foreign companies to comply with PCAOB audits to two consecutive years instead of three, thus reducing the time period for triggering the prohibition on trading. On December 16, 2021, the PCAOB issued a report on its determination that it is unable to inspect or investigate completely PCAOB-registered public accounting firms headquartered in China and in Hong Kong because of positions taken by PRC and Hong Kong authorities in those jurisdictions, and the PCAOB included in the report of its determination a list of the accounting firms that are headquartered in the PRC or Hong Kong. This list does not include our auditor, Audit Alliance LLP. Our auditor, the independent registered public accounting firm that issues the audit report included elsewhere in this annual report, as an auditor of companies that are traded publicly in the U.S. and a firm registered with the PCAOB, is subject to laws in the U.S. Our auditor is an emerging growth company and the majority of our operations are conducted in China. Our auditor is not subject to the determinations issued by the PCAOB on December 16, 2021.

 

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Cash Transfers and Dividend Distribution

 

We conduct our operations in China primarily through our affiliated entities. As a result, our ability to pay dividends depends upon dividends paid by our subsidiaries, the VIEs and their subsidiaries. If the 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, the 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, the PRC subsidiaries are required to set aside a portion of their 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, the PRC subsidiaries’ ability to pay dividends to us. For details, see “Item 5. Operating and Financial Review And Prospects—B. Liquidity and Capital Resources.”

 

Cash flows have occurred between the Cayman Islands holding company and its subsidiaries. The Cayman Islands holding company transferred cash to its subsidiaries in the amount of Nil, $10.8 million, and $97.7 million for the fiscal years ended December 31, 2019, 2020 and 2021, respectively. The Cayman holding company’s subsidiaries transferred cash to the Cayman holding company in the amount of Nil, $15.9 million, and $12.9million for the fiscal years ended December 31, 2019, 2020 and 2021, respectively. Our subsidiaries transferred cash to the VIEs in the amount of $13.0million, $23.3million, and $81.4million for the fiscal years ended December 31, 2019, 2020 and 2021, respectively. The VIEs transferred cash to our subsidiaries in the amount of $22.1million, $17.9million, and $28.7million for the fiscal years ended December 31, 2019, 2020 and 2021, respectively.

 

We have not declared or paid dividends in the past, nor any dividends or distributions were made by a subsidiary or VIE to our holding company. We do not intend to distribute dividends in the foreseeable future, but we do not have a fixed dividend policy. Our board of directors have complete discretion on whether to distribute dividends, subject to applicable laws. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Ordinary Shares—We are not expected to pay dividends on our ordinary shares in the foreseeable future.”

 

Recent Regulatory Developments

 

On December 28, 2021, the CAC, together with 12 other governmental departments of the PRC, jointly promulgated the Cybersecurity Review Measures, which became effective on February 15, 2022. The Cybersecurity Review Measures provides that, in addition to CIIOs that intend to purchase Internet products and services, data processing operators engaging in data processing activities that affect or may affect national security must be subject to cybersecurity review by the Cybersecurity Review Office of the PRC. According to the Cybersecurity Review Measures, a cybersecurity review assesses potential national security risks that may be brought about by any procurement, data processing, or overseas listing. The Cybersecurity Review Measures further requires that CIIOs and data processing operators that possess personal data of at least one million users must apply for a review by the Cybersecurity Review Office of the PRC before conducting listings in foreign countries. On November 14, 2021, the CAC released the Regulations on the Network Data Security (Draft for Comments), or the Security Administration Draft and accepted public comments until December 13, 2021. The draft Regulations provided that data processors refer to individuals or organizations that autonomously determine the purpose and the manner of processing data. If a data processor that processes personal data of more than one million users would like to list overseas, it shall apply for a cybersecurity review according to the draft Regulations. Besides, data processors that are listed overseas shall carry out an annual data security assessment.

 

As advised by our PRC legal counsel, the Security Administration Draft was released for public comment only, and its provisions and anticipated adoption or effective date may be subject to change and thus its interpretation and implementation remain substantially uncertain. We cannot predict the impact of the draft regulations, if any, at this stage, and we will closely monitor and assess the statutory developments in this regard. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Operations in the ELT Markets —The operating entities may be liable for improper use or appropriation of personal information provided by the customers and any failure to comply with PRC laws and regulations over data security could result in materially adverse impact on the operating entities’ business, results of operations, and our continued listing on Nasdaq.”

 

On July 6, 2021, the relevant PRC governmental authorities made public the Opinions on Strictly Cracking Down Illegal Securities Activities in Accordance with the Law. These opinions emphasized the need to strengthen the administration over illegal securities activities and the supervision on overseas listings by China-based companies and proposed to take effective measures, such as promoting the construction of relevant regulatory systems to deal with the risks and incidents faced by China-based overseas-listed companies. As these opinions are recently issued, official guidance and related implementation rules have not been issued yet and the interpretation of these opinions remains unclear at this stage. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—The approval and/or other requirements of the CSRC, CAC or other PRC governmental authorities may be required in connection with an offering under PRC rules, regulations or policies, and, if required, we cannot predict whether or how soon we will be able to obtain such approval.” As of the date of this annual report, we have not received any inquiry, notice, warning, or sanctions regarding offshore offering from the CSRC or any other PRC governmental authorities.

 

We have been advised by our PRC legal counsel that in the event that we conduct a follow-on offering of securities, if the Draft Administrative Provisions and the Draft Filing Measures are adopted in their current form, we would likely be required to submit filings to the CSRC. In the absence of such offering plan, we believe that we are currently not required to obtain any permission or approval from the CSRC and the CAC in the PRC to issue securities to foreign investors. However, there is no guarantee that this will continue to be the case in the future in relation to our future offerings or the continued listing of our securities on a U.S. securities exchange, or even in the event such permission or approval is required and obtained, it will not be subsequently revoked or rescinded. If we do not receive or maintain the approvals, or we inadvertently conclude that such approvals are not required, or applicable laws, regulations, or interpretations change such that we are required to obtain approval in the future, we may be subject to an investigation by competent regulators, fines or penalties, or an order prohibiting us from conducting an offering, and these risks could result in a material adverse change in our operations and the value of our securities, significantly limit or completely hinder our ability to offer or continue to offer securities to investors, or cause such securities to significantly decline in value or become worthless.

 

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Selected Condensed Consolidated Financial Schedule of Meten Holding Group and the VIEs

 

The following tables present selected condensed consolidated financial data of Meten Holding Group and its subsidiaries and VIEs for the fiscal years ended December 31, 2021, 2020, and 2019, and balance sheet data as of December 31, 2021 and 2020, which have been derived from our audited consolidated financial statements for those years.

 

SELECTED CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE LOSS 

 

    For the year ended December 31, 2019  
RMB in thousands   Meten Holding
Group Ltd.
    Subsidiaries     VIE and its
Subsidiaries
    Eliminations     Consolidated
Total
 
Revenue              -        49,234        1,447,899        (49,234 )      1,447,899  
Net loss     -       (54,471 )     (121,363 )     (49,234 )     (225,068 )
Comprehensive loss     -       (54,471 )     (121,363 )      (49,234 )      (225,068 )

 

    For the year ended December 31, 2020  
RMB in thousands   Meten Holding
Group Ltd.
    Subsidiaries     VIE and its
Subsidiaries
    Eliminations     Consolidated
Total
 
Revenue     -        29,216        897,035        (29,216)        897,035  
Net loss     (56,199 )     (43,539 )     (283,829 )     (29,216 )     (412,783 )
Comprehensive loss      (56,199 )     (43,539 )     (283,829 )      (29,216 )      (412,783 )

 

    For the year ended December 31, 2021  
RMB in thousands   Meten Holding
Group Ltd.
    Subsidiaries     VIE and its
Subsidiaries
    Eliminations     Consolidated
Total
 
Revenue     -        50,289        728,996        (50,289 )      728,996  
Net loss     (60,748 )     (48,189 )     (227,071 )     (50,289 )     (386,297 )
Comprehensive loss      (60,748 )      (48,189 )      (227,071 )      (50,289 )      (386,297 )

 

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SELECTED CONDENSED CONSOLIDATED BALANCE SHEETS

 

   As of December 31, 2020 
RMB in thousands  Meten Holding
Group Ltd.
   Subsidiaries   VIE and its
Subsidiaries
   Eliminations   Consolidated
Total
 
Cash   19,860    3,268    66,987    -    90,115 
Total current assets   19,860    129,988    203,198    (109,547)   243,499 
Investments in subsidiaries and VIEs   29,000    -    -    (29,000)   - 
Total assets   48,860    121,151    1,067,366    (138,547)   1,098,830 
Total liabilities   65    11,889    1,558,965    (109,547)   1,461,372 
Total shareholders’ equity   48,795    109,262)   (491,599)   (29,000)   (362,542)
Total liabilities and shareholders’ equity   48,860    121,151    1,067,366    (138,547)   1,098,830 

 

   As of December 31, 2021 
RMB in thousands  Meten Holding
Group Ltd.
   Subsidiaries   VIE and its
Subsidiaries
   Eliminations   Consolidated
Total
 
Cash   32,015    74,854    61,535    -    168,404 
Total current assets   67,550    762,624    203,093    (643,529)   389,738 
Investments in subsidiaries and VIEs   29,000    -    -    (29,000)   - 
Total assets   96,550    764,330    697,015    (672,529)   885,366 
Total liabilities   21,320    9,134    1,461,866    (643,529)   848,791 
Total shareholders’ equity   75,230    755,196    (764,851)   (29,000)   36,575 
Total liabilities and shareholders’ equity   96,550    764,330    697,015    (672,529)   885,366 

 

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SELECTED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   For the year ended December 31, 2019 
RMB in thousands  Meten Holding
Group Ltd.
   Subsidiaries   VIE and its
Subsidiaries
   Eliminations   Consolidated
Total
 
Net cash used in operating activities   -    (5,376)   (16,195)         -    (21,571)
Net provided by (used in) investing activities   -    9,928    (99,087)   -    (89,159)
Net cash provided by financing activities   -    217    72,778    -    72,995 

 

   For the year ended December 31, 2020 
RMB in thousands  Meten Holding
Group Ltd.
   Subsidiaries   VIE and its
Subsidiaries
   Eliminations   Consolidated
Total
 
Net cash used in operating activities   (177,139)   (1,811)   (164,268)        -    (343,218)
Net provided by (used in) investing activities   495    (1,121)   (54)   -    (680)
Net cash provided by financing activities   196,505    4,894    91,241    -    292,640 

 

   For the year ended December 31, 2021 
RMB in thousands  Meten Holding
Group Ltd.
   Subsidiaries   VIE and its
Subsidiaries
   Eliminations   Consolidated
Total
 
Net cash used in operating activities   (730,075)   646,694    (375,922)                     (459,303)
Net used in investing activities   (16,641)   (52,617)   (2,685)        (71,943)
Net cash provided by (used in) financing activities   777,818    (541,438)   371,637         608,017 

 

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Business Overview

 

Through our affiliated entities’ business operations, we are a leading ELT service provider in China. China’s ELT market is segmented into general ELT, test-oriented ELT and after-school language training sectors. The operating entities offer a comprehensive ELT service portfolio comprising of 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. The operating entities conduct their business through offline-online business model designed to maximize compatibility within their business segments in order to scale up at relatively low costs.

 

As of December 31, 2021, the operating entities had a nationwide offline learning center network of 34 self-operated learning centers (including one learning center under the “ABC” brand of ABC Education Group, which we acquired in June 2018) covering 15 cities in nine provinces, autonomous regions and municipalities in China, and two franchised learning centers (including four franchised learning centers under the “ABC” brand) covering two cities in two provinces and municipalities in China. Leveraging the operating entities’ experience gained from operating offline learning centers, the operating entities launched the online English learning platform “Likeshuo” in 2014 to further expand their service reach to a larger student base. As of December 31, 2021, the operating entities had approximately 1.99 million registered users on the “Likeshuo” platform and cumulatively over 460,000 paying users who purchased their online ELT courses or trial lessons. As of the same date, the cumulative number of student enrollments for the operating entities’ online ELT courses since 2014 was approximately 200,000 and the operating entities had delivered over 5.3 million accumulated course hours to the students online. The operating entities take advantage of their business model of combining offline learning center network and online platform to deepen their market penetration and further develop their business.

 

The operating entities’ qualified personnel, centralized management system driven by artificial intelligence, and technical expertise enable the operating entities to create a learning environment that caters to the specific learning demands of the students. The operating entities have a high-caliber teaching staff and an experienced content development team, who are supported by the operating entities’ centralized teaching and management systems to optimize the students’ learning experiences. As of December 31, 2021, the operating entities had a team of 664 full-time teachers, study advisors and teaching service staff, of which 306 were study advisors and teaching service staff for our offline and online businesses. As of the same date, the operating entities also had 50 full-time and part-time foreign teachers from English-speaking countries for the offline ELT services. The operating entities have a dedicated content development team focusing on developing practical and innovative education materials independently and in collaboration with strategic partners. The operating entities have built highly centralized and scalable management systems to manage teaching, marketing, finance and human resources activities across offline and online businesses. In addition to management systems, the operating entities have made significant investments in developing platforms and systems to support teaching activities. For example, the operating entities utilize the intelligent tracking and learning coaching function of artificial intelligence-driven teaching management systems to record and analyze the students’ real-time learning process and personalize the course content to address the students’ learning needs.

 

Since the beginning of 2022, through our Cayman Islands holding company, we have ventured into cryptocurrency mining business. As of the date of this annual report, we have deployed 1,482 miners of model S19j Pro manufactured by Bitmain Technologies Ltd. (“Bitmain”), with a total power capacity of approximately 150PH/s, to the mining of bitcoins. Currently, all of our mining machines are located at the mining farms operated by a third-party company in Pennsylvania and Tennessee in the U.S. Additionally, we have purchased 600 miners of model S19 XP from Bitmain, with an aggregate computing power of approximately 100PH/s, which are expected to be delivered in the second half of 2022. We have generated revenue from our bitcoin mining operations since 2022, and we expect revenue from such operations to represent a material portion of our total revenue for the fiscal year ending December 31, 2022.

 

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Education Services

 

The operating entities offer a comprehensive portfolio of English language learning and training services covering a full spectrum of student age groups, including general adult ELT, junior ELT, overseas training services, online ELT and other English language-related services. The operating entities’ offline strong track record of helping students improve English language skills through high-quality courses has made their programs popular in China. From 2019 to 2021, the operating entities generated all their revenue from their operations in the PRC. The following table sets forth the breakdown of student enrollment at the operating entities’ self-operated learning centers by service type for the periods indicated.

 

   Student Enrollment(1)(2) 
   For the Year Ended 
December 31,
 
   2019   2020   2021 
General adult ELT   49,974    11,337    8,065 
Junior ELT   15,057    10,503    8,519 
Overseas training services   8,775    5,527    6,967 
Online ELT(3)   49,639    42,943    40,516 
Total   123,445    70,310    64,067 

 

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

 

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

 

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

 

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

 

   For the Year Ended December 31, 
   2019   2020   2021 
   RMB   %   RMB   %   RMB   % 
   (in thousands, except for percentages) 
General adult ELT(1)   783,988    54.1    333,500    37.2    176,795    24.3 
Overseas training services   203,677    14.1    130,567    14.6    151,110    20.7 
Online ELT                              
For adults   203,982    14.1    203,546    22.7    207,571    28.5 
For juniors   37,215    2.6    64,175    7.2    56,608    7.8 
For international test preparation   19,066    1.3    19,820    2.2    18,147    2.5 
Japanese, Korean and Spanish           2,174    0.2    8,026    1.1 
Subtotal   260,263    18.0    289,715    32.3    290,352    39.8 
Junior ELT   167,924    11.6    130,348    14.5    97,984    13.4 
Other English language-related services(2)   32,047    2.2    12,905    1.4    12,755    1.8 
Total   1,447,899    100.0    897,035    100.0    728,996    100.00 

 

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

 

(2)Comprise primarily of (i) revenue from the “Shuangge English” App, which had over 9,859, 814 and 79 paying users for the years ended December 31, 2019, 2020 and 2021 respectively; and (ii) the franchise fees the operating entities received from the franchised learning centers under the “Meten” brand.

 

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General Adult ELT

 

The operating entities’ general adult ELT is primarily designed for students over 15 years of age, which are offered at the operating entities’ learning centers across the PRC. For details on the learning centers, see “— Offline Network.” The courses mainly focus on helping students learn to use English for personal improvement or professional use through close and frequent interaction with the operating entities’ teachers in an engaging environment. General adult ELT is a major component of the operating entities’ business in terms of student enrollment and revenue. In 2019, 2020 and 2021, general adult ELT segment had 49,974, 11,337 and 8,065 students enrolled, respectively, and generated revenue of RMB784.0 million, RMB333.5 million, and RMB 176.8 million (US$27.7 million), respectively.

 

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

 

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

 

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

 

Overseas Training Services

 

The operating entities provide comprehensive overseas training services for students planning to take international standardized tests and/or study abroad. Such services comprise international standardized test preparation courses and overseas study application and study abroad services. In 2019, 2020 and 2021, the number of student enrollments in overseas training services was approximately 8,775, 5,527 and 6,967, respectively, which generated revenue of RMB203.7 million, RMB130.6 million and RMB151.1 million (US$23.7 million) for the respective period.

 

International Standardized Test Preparation. The operating entities primarily focus on providing training services to students aged 12 and above who are preparing for TOEFL, IELTS, SAT and ACT, among other international standardized tests. The operating entities had an aggregate of more than 24,000 students enrolled since they introduced such services in 2011. Courses are offered in a one-on-one setting to address students’ individualized learning needs and achieve the optimal learning outcomes for each student. A test preparation course is typically two hours. The operating entities also utilize their self-developed iManager system, an intelligent analysis and evaluation system, to analyze students’ learning progress and collect student feedback to enhance the quality of teaching services.

 

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Overseas Study Services. The operating entities offer overseas study application services and short-term study abroad programs for students interested in obtaining overseas education. For students planning to obtain overseas education, the operating entities provide step-by-step overseas study application services, which cover consultation and planning, college major selection, preparation of application documents and visas, as well as campus tours. As of December 31, 2021, the operating entities had provided customized overseas study application services to approximately 3,500 students. The operating entities also leverage their self-developed iFuture system to help students access teachers for study consultation and keep track of the application process. The operating entities offer short-term study abroad programs to expose students to the culture and language environment in various native English-speaking countries.

 

Online ELT

 

Leveraging the operating entities’ experience in providing offline ELT, the operating entities initiated the online ELT platform, “Likeshuo,” in 2014 to further diversify and expand their ELT service lines and market coverage.

 

Through the “Likeshuo” platform, the operating entities offer online live streaming English courses on their websites or in the “Likeshuo” App accessible on mobile devices and tablets. The operating entities utilize the intelligent course scheduling function on their self-developed “Likeshuo” platform to give online users the flexibility to design their own studying plans. An online ELT course hour is typically 45 minutes. As of December 31, 2021, the operating entities had approximately 1.99 million registered users on the “Likeshuo” platform. Since the launch of “Likeshuo” and up to December 31, 2021, the operating entities had cumulatively over 460,000 paying users who purchased the online ELT courses or trial lessons. In 2019, 2020 and 2021, the student enrollment on the “Likeshuo” platform reached 49,639, 42,943 and 40,516, respectively. As of December 31, 2021, the cumulative number of student enrollments in the online ELT since 2014 was approximately 200,000 and the operating entities had delivered over 5.3 million accumulated course hours to students online. For the paying users of the online English language business, the average course fee per student (also known as average spending) for the fiscal year ended December 31, 2021 was approximately RMB9,100. The revenue generated from online ELT was RMB260.3 million, RMB289.7 million and RMB290.4 million (US$45.6 million) for the years ended December 31, 2019, 2020 and 2021, respectively. Certain refund policies are applicable to the online ELT. See “—Pricing and Refund Policies” for details.

 

The operating entities currently offer four types of live streaming English language courses on the “Likeshuo” platform, including:

 

English for Adults. The operating entities have developed a comprehensive lessons database covering more than 18 topics in over 5,000 real-life English-speaking scenarios to train students’ practical English language abilities. The curriculums are primarily designed for students aged over 15, which include basic English grammar, basic spelling skills, English speaking, English for travel and English for interviews. The operating entities primarily offer small classes with up to 15 students per class. The operating entities’ high-caliber teaching staff for the online adult English language courses consists of local teachers and foreign teachers from native English-speaking countries, including the United States, the United Kingdom, Australia and Canada. The operating entities have established a deep pool of approximately 45,000 teachers who have registered with the “Likeshuo” platform and are accessible by the students online, including approximately 19,000 foreign teachers.

 

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

 

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

  

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

 

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Junior ELT

The operating entities’ junior ELT courses are mainly designed for students aged six to 18, with the goal of improving their communication ability, critical thinking and creativity by offering an integrated curriculum to cater to their learning demands. For the fiscal year ended December 31, 2021, the operating entities had a student enrollment of 8,519 in junior ELT (including the student enrollment of ABC Education Group, which was acquired in June 2018). As of the date of this annual report, the operating entities had 34 self-operated junior English language learning centers (including 1 learning centers the operating entities operated under the “ABC” brand) located in Beijing, Foshan, Zhongshan and Nanchang, among other cities in the PRC. For the years ended December 31, 2019 and 2020 and 2021, the operating entities’ revenue generated from junior ELT was RMB167.9 million, RMB130.3 million and RMB98.0 million (US$15.4 million), respectively.

 

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

 

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

 

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

 

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Japanese, Korean and Spanish Language Training Services

 

To further broaden the operating entities’ service offering, in the first quarter of 2020, the operating entities launched online Japanese, Korean and Spanish language training services through a subsidiary formed in partnership with a leading Japanese education brand in China, which caters predominantly to corporate customers. In the fiscal years ended December 31, 2020 and 2021, the revenue derived from Japanese, Korean and Spanish language training services was RMB 2.2 million and RMB8.0 million (US$1.3 million), respectively.

 

Other English Language-Related Services

 

In addition to the major ELT services, the operating entities also offer English language-related services. The operating entities launched the “Shuangge English” App in 2014 to offer other English language-related services, which applies cutting-edge voice evaluation technology to improve students’ listening, speaking and reading abilities. The “Shuangge English” App had reached over 2.6 million downloads as of December 31, 2021. The operating entities also receive franchise fees for the franchised learning centers. For details, please see “— Offline Network.”

 

Offline Network

 

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

 

As of December 31, 2021, the operating entities have established a nationwide network of 34 learning centers covering 15 cities in nine provinces, autonomous regions and municipalities in China. The operating entities directly operate 32 learning centers covering 15 cities in nine provinces, autonomous regions and municipalities in China (including one learning center under the “ABC” brand of ABC Education Group, which was acquired in June 2018), and have two franchised learning centers covering two cities in two provinces and municipalities in China (including four learning centers under the “ABC” brand). The following table sets forth the total number of learning centers in each province, autonomous region and municipality as of December 31, 2021.

 

Province, Autonomous Region and Municipality  Number of
Learning
Center
 
Self-operated learning centers under the “Meten” brand    
Guangdong   19 
Jiangsu   4 
Sichuan   2 
Hubei   2 
Zhejiang   1 
Anhui   1 
Fujian   1 
Hunan   1 
Subtotal   31 
Self-operated learning centers under the “ABC” brand     
Beijing   1 
Sub-total   1 
Franchised learning centers under the “Meten” brand     
Hunan   1 
Fujian   1 
Subtotal   2 
Total   34 

  

The operating entities’ extensive network currently covers a majority of the major cities in the PRC. The operating entities provide offline ELT at their learning centers. Each of the self-operated learning centers is managed by a principal, who is responsible for the daily operations, customer service and marketing activities of the learning center.

 

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

 

In addition to the self-operated learning centers, the operating entities utilize a franchise business model to increase market penetration. The operating entities apply stringent standards in the selection of franchisees and require the franchisees to adopt centralized management systems to monitor the daily operations at each franchised learning centers under the operating entities’ “Meten” brand in order to ensure the consistent delivery of high-quality services to the students. As of December 31, 2021, the operating entities had two franchised learning centers in operation under the “Meten” brand in two provinces and municipalities in China.

 

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

 

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

 

In addition, ABC Education Group was acquired in June 2018, which had four franchised learning centers that are operated under the “ABC” brand. These franchised learning centers are located in Ningxia, Hebei, Hubei and Inner Mongolia. These franchised learning centers ceased operations in 2021.

 

Pricing and Refund Policies

 

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

 

Students can use installment payment methods provided by accredited third-party financial institutions to pay for the relevant course and/or service fees. For the fiscal year ended December 31, 2021, approximately 24% of the students have participated in such installment payment arrangement. Under such arrangement, a third-party financial institution provides an interest-free loan to a student and remits the course or service fee to the operating entities on behalf of the borrowing student to complete his/her purchase of the relevant course. The borrowing student is obligated to repay the loan to the financial institution in pre-agreed installments a period ranging from six months to 24 months. A transaction fee associated with such installment payment arrangement typically ranges from 4.4% to 10.8% of the total amount of such loan, depending on the length of the installment period, which is generally withheld by such financial institution prior to remitting the course/service fee to the operating entities.

 

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

 

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

 

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

 

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

 

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

 

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

 

Course Content Development

 

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

 

The operating entities develop courses at headquarters and their learning centers across the PRC adopt the curricula and course materials with certain customization to local requirements and demands. The operating entities have a dedicated content development team of approximately 1,229 staff as of December 31, 2021, which team actively participates in the research and development and updates of products, course content and IT systems. All of the research and development team members have solid education background and extensive teaching and research experience in the English language education field. As of December 31, 2021, approximately 59% of the research and development staff had a bachelor’s degree or above, and approximately 9% obtained a master’s degree or above.

 

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Centralized Management

 

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

 

Teaching service management. The operating entities have effectively adopted a technology-based management strategy to record and assess course offerings, teachers’ performance and students’ learning experiences. The operating entities have developed customer relationship management system, or CRM system, and an artificial intelligence-driven integrated teaching management system, or EME system, to provide real-time support and precise analysis of the teachers’ performance in course offerings and the quality of follow-up services for the students throughout the network. For example, the operating entities have established a set of standardized evaluation procedures in the EME system to record and assess the performance of their teaching staff.

 

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

 

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

 

Sales and marketing. The operating entities have also adopted a standardized online and offline marketing strategies to recruit prospective students and enhance their reputation. For details, see “—Marketing and Sales.” The operating entities have also established approximately 31 offline sales points in China to form an integrated marketing network to assist the recruitment of prospective students as of December 31, 2021. They enable prospective students to obtain in-person experience of live streaming online ELT courses delivered on the “Likeshuo” platform.

 

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

 

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

 

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Marketing and Sales

 

The operating entities engage in a broad range of marketing approaches to strengthen the brand recognition and enhance the understanding of different course offerings by prospective students and users, which can help generate prospective students’ and users’ interests in the operating entities’ services.

 

The operating entities actively promote their brands and services through a wide range of offline sales activities. The operating entities have employed over 315 professional marketing personnel to conduct effective marketing activities, including advertisement distribution and tele-marketing with customized content to advertise the brands and services to the prospective customers from specific target age groups and regions. As part of the sales efforts, the operating entities had approximately 31 offline sales points nationwide as of December 31, 2021, which are generally small marketing booths set up in locations with high traffic and exposure, such as shopping malls, to attract potential customers and educate them about the diverse programs and services the operating entities offer.

 

In terms of online marketing efforts, the operating entities leverage various online marketing channels and online technologies to selectively provide promotional content on the internet. The operating entities have a professional team of approximately 51 online marketing staff, who are responsible for designing and distributing promotional materials through diversified online channels to facilitate online marketing activities. The operating entities utilize the big data technology to effectively target the prospective customers with high demands to learn English from certain age groups and regions. The operating entities customize the marketing content regularly to cater for the target student groups by widely using search engine keywords and distributing in-feed advertisements on various types of leading search engines and social media platforms. In addition to advertising on social platforms, the operating entities also strive to promote their services efficiently by engaging third-party merchants to conduct digital marketing activities.

 

Teaching Staff

 

The operating entities’ teaching staff generally comprises teachers and study advisors, who are critical to maintaining the quality of their education services and promoting their brand recognition for future growth. The operating entities have assembled a high-caliber team of teaching professionals with outstanding abilities and passion for teaching, consisting of dedicated local teachers and foreign teachers for offline courses as well as online teachers for courses on the “Likeshuo” platform. The total number of full-time teachers decreased from 998 as of December 31, 2020 to 358 as of December 31, 2021. The operating entities had in total 328 full-time teachers offering ELT courses at offline learning centers and the remaining 30 teachers for online courses. In addition, the operating entities have employed a number of part-time teachers for offline and online ELT businesses. As of December 31, 2021, the operating entities employed 3,960 part-time teachers, among whom 2,160 were foreign teachers from English-speaking countries.

 

Personalized Support Provided by Study Advisors

 

The operating entities adopt a collaborative working practice among teachers and study advisors in the daily education services. Each student is assigned a study advisor who supports the teacher’s offline teaching activities by providing personalized support and guidance to students. Study advisors provide professional advice to students regarding learning methods, follow up and check students’ learning schedules, offer supplementary materials to improve students’ understanding of the content taught in class, collect feedback on teaching quality and provide general counselling services. Study advisors also act as the liaison between the students and the sales staff to facilitate course renewals. As of December 31, 2021, the operating entities employed 175 full-time study advisors. As of the same date, the operating entities also had 131 full-time teaching service staff to provide all-round management and consultancy services for the students.

 

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Teaching Staff Recruitment

 

The operating entities seek to engage teachers who possess strong academic credentials, excellent communication skills and practical knowledge to employ effective teaching methods to optimize the learning experiences of the students. The operating entities’ human resources staff examines candidates’ language proficiency, work experience, education background and teaching qualifications, such as TESOL, TEFL and CELTA. As of December 31, 2021, approximately 98.6% of the full-time teachers had a bachelor’s degree or above, and approximately 26.3% have a master’s degree or above. For study advisors, the operating entities seek to engage candidates with excellent English language ability and preferably related work experience. Study advisors are required to have strong teamwork skills and are required to be detail-oriented when assisting the teachers in course preparation, event organization and daily classroom operations.

 

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

 

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

 

Training and Performance Evaluation

 

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

 

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

 

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

 

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

 

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

 

Competition

 

ELT Industry

 

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

 

We believe the operating entities’ principal competitive factors include the following:

 

scope and quality of the course offerings and services;

 

extensive operating experience;

 

quality and performance of the teaching staff;

 

overall student experience and satisfaction;

 

brand recognition;

 

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

 

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

 

utilization of technologies to optimize students’ learning experiences; and

 

ability to attract and retain highly qualified teachers.

 

We believe that the operating entities are well-positioned to effectively compete in the markets in which they operate on the basis of strong reputation, high-quality portfolio of courses, convenient and useful technologies, scalable and efficient business model, extensive and qualified teacher network, strong course content development capabilities and experienced management team. However, some of the current or future competitors may have longer operating histories, greater brand recognition, or greater financial, technical or marketing resources than the operating entities do. For a discussion of risks related to competition, see “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Operations in the ELT Markets — The operating entities face significant competition in major programs they offer and geographic markets in which they operate, and if they fail to compete effectively, they would lose their market share and their profitability would be adversely affected.”

 

Cryptocurrency Industry

 

Mining is a constantly evolving business with a wide range of competition. Broadly, we compete with other companies that focus on mining bitcoin at a large scale. We face competition based on securing low-cost, reliable and renewable power, purchasing miners and other essential technology, buying or leasing sites to host our miners. We also face competition in the ability to raise capital and hire qualified personnel.

 

Our competitors vary from solo enthusiasts to large corporations with significant scale of operations, including their own data centers. We compete with respect to hash rate, access to low-cost renewable power, operational efficiency, technological innovation and return on investment. We believe the recent increase in market prices for bitcoin and other digital assets has allowed new competition to enter the market and allowed existing competitors to access the requisite capital required to quickly scale their operations through large power contracts and additional miners. We expect this trend to continue as bitcoin and other digital assets continue to appreciate in value.

 

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Proof-of-stake networks also serve as competition to the bitcoin blockchain. As proof-of-stake algorithms create new blocks in a blockchain without resource intensive calculations to validate transactions, companies with significant advantages in terms of scale or low-cost power may be less competitive on a proof-of-stake network.

 

Technologies

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

The operating entities’ system infrastructure is designed to meet the requirements of their business operations, to support the growth and expansion of the learning center network and to ensure the reliability of the operations. Our data is currently maintained at the headquarters and an offsite IT facility in Shenzhen. For details of the risks associated with the technologies, see “Item 3. Key Information—D. Risk Factors—Risk Related to Our Business and Operations in the ELT Markets —Failure to protect confidential information of the operating entities’ students and teaching staff against security breaches could damage the operating entities’ reputation and brands and substantially harm their business and results of operations.”

 

Intellectual Property

 

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

 

As of the date of this annual report, the operating entities had registered five patents and 55 trademarks which bolstered their strong brand recognition in the PRC. The operating entities also held 40 domain names relating to their business, including www.meten.comwww.likeshuo.com and www.investor.metenedu-edtechx.com, 15 copyrights to certain course content and technologies the operating entities developed in-house and 18 copyrights registration certificates for software programs developed by the operating entities relating to various aspects of the operations.

 

The operating entities had not been subject to any intellectual property infringement claims which had any material impact on the operating entities up to the date of this annual report. While the operating entities actively take steps to protect their intellectual property rights, these steps may not be adequate to prevent the infringement or misappropriation of the intellectual property created by or licensed to the operating entities. Further, we cannot be certain that the course materials that the operating entities license, and their redesign of these materials, do not or will not infringe on the valid patents, copyrights or other intellectual property rights held by third parties. The operating entities may be subject to legal proceedings and claims from time to time relating to the intellectual property of others, as discussed in Item 3. “Key Information — D. Risk Factors — Risks Related to Our Business and Operations in the ELT Markets — The operating entities may encounter infringement disputes from time to time relating to the operating entities’ use of intellectual properties of third parties.”

 

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Seasonality

 

ELT Business

 

Seasonal fluctuations have affected, and are likely to affect the operating entities’ business in the future. Historically, the PRC offline ELT industry experiences lower gross billings growth rate in the first quarter of each year due to the Chinese New Year holiday, and the industry enjoys increases in gross billings growth during the summer months as certain students are generally on summer holiday and have more time to take ELT courses. Overall, the historical seasonality of the operating entities’ business has been relatively mild due to their growth and focus on the general ELT business. However, the seasonal trends that the operating entities have experienced in the past may not be indicative of their future operating results. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Operations in the ELT Markets —The operating entities’ results of operations are subject to seasonal fluctuations.”

 

Cryptocurrency Business

 

Miners are relatively energy intensive and produce a high amount of heat. Typically, machines operate more efficiently in the colder seasons when operators do not need to utilize as many cooling methods.

 

Insurance

 

The operating entities maintain various insurance policies to safeguard against risks and unexpected events. The operating entities maintain insurance to cover their liability should any injuries occur at the learning centers. The operating entities maintain medical insurance for the employees and management. The operating entities also maintain company property insurance, decoration protection insurance and accident insurance which cover property damage and casualty damage in accidents. The operating entities do not have business interruption, general third-party liability, product liability or key-man insurance. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Operations in the ELT Markets — The operating entities may not maintain adequate insurance, which could expose them to significant costs and business disruption.” We do not currently maintain any insurance for our cryptocurrency mining operations.

 

REGULATIONS

 

Overview of the PRC Laws and Regulations

 

This section summarizes the principal PRC regulations relating to the operating entities’ businesses.

 

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

 

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

 

Catalog of Industries Encouraging Foreign Investment (Amended in 2020) and Special Administrative Measures for Access of Foreign Investments (Negative List for Access of Foreign Investments)

 

Pursuant to the Catalog of Industries Encouraging Foreign Investment (2020 Version), or the 2020 Encouraged Catalog, which was amended and promulgated jointly by the National Development and Reform Commission and the Ministry of Commerce on December 27, 2020 and became effective on January 27, 2021, and the Special Administrative Measures for Access of Foreign Investments (Negative List for Access of Foreign Investments) (2021version), or the 2021 Negative List, which was promulgated on December 27, 2021 and implemented on January 1, 2022, foreign investment industries are classified into two categories, (1) industries in which foreign investments are encouraged; and (2) industries in which foreign investments are regulated by the Negative List. The Negative List has further classified regulated foreign investment industries as industries in which foreign investments are restricted and industries in which foreign investments are prohibited. Industries which are not included in the 2021 Negative List are industries in which foreign investments are allowed, unless otherwise prescribed by PRC laws.

 

According to Catalog of Industries Encouraging Foreign Investment (2020 Version), non-academic language training institutions (excluding those catering to pre-school education, compulsory education and senior high school education) are listed as an encouraged foreign investment industry.

 

Pursuant to the 2021 Negative List, the operating entities’ offline ELT services do not fall in the restricted category, while the online ELT services fall within the scope of value-added telecommunications, which is considered “restricted” and, with a few exceptions, the percentage of foreign ownership cannot exceed 50%.

 

Foreign Investment Law and Implementing Regulations of the Foreign Investment Law

 

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

 

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

 

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

 

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Regulations on Sino-Foreign Cooperation in Operating Schools

 

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

 

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

 

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

 

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

 

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

 

Regulations on Foreign Investment in Telecommunications Enterprises

 

The Regulations on Administration of Foreign-Invested Telecommunications Enterprises, or the FITE Regulations, which took effect on January 1, 2002, and was most recently amended on March 29, 2022, are the key regulations that regulate foreign direct investment in telecommunications enterprises in China. According to the FITE Regulations, foreign investors are prohibited from holding more than 50% of the equity interests in a company providing value-added telecommunications services.

 

In light of the above restrictions, we conduct online ELT and offline ELT service business through a variable interest entity structure.

 

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Regulations on Private Education in the PRC

 

Education Law of the PRC

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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Implementation Regulations for Classification Registration of Private Schools

 

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

 

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

 

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

 

For a detailed discussion on how the Amended Private Education Promotion Law and the above rules will affect our training institutions, see “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Operations in the ELT Markets — We are subject to uncertainties brought by the Amended Private Education Promotion Law and other rules, regulations and opinions promulgated by the PRC government from time to time.”

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Potential Impact of the Regulatory Uncertainty on The operating entities’ Business and Financial Performance

 

Regulatory Background and Development

 

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

 

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The State Council issued the Implementing Rules for the Private Education Promotion Law (Revised in 2021) on 14 May 2021, which became effective on September 1, 2021. The Revised Implementation Rules deletes the classification of a private training institution for language, art, sports, science and technology teaching and a private training institution for cultural education or non-academic continuing education for adults which are defined in the Draft Implementation Rules of the Private Education Promotion Law published by Ministry of Justice on August 10 and requests public comment, or the Committee Draft Implementation Rules of the Private Education Promotion Law.

 

Enforcement Actions on Private Training Institutions

 

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

 

On July 24, 2021, the Opinions on Further Alleviating the Burden of Homework and After-School Training for Students in Compulsory Education were 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. The Double Reduction Opinion contain high-level policy directives about requirements and restrictions related to online and offline after-school training services, including: (i) institutions providing after-school training services on academic subjects in China’s compulsory education system, or academic after-school training services institutions, need to be registered as non-profit, no approval will be granted to new academic after-school training services institutions for students in compulsory education, and an approval mechanism will be adopted for online academic after-school training services institutions; (ii) foreign ownership in academic after-school training services institutions is prohibited, including through contractual arrangements, and companies with existing foreign ownership need to rectify the situation; (iii) listed companies are prohibited from raising capital to invest in businesses that teach academic subjects in compulsory education; (iv) academic after-school training services institutions are prohibited from providing training services on academic subjects in compulsory education during public holidays, weekends and school breaks; and (v) academic after-school training services Institutions must follow the fee standards to be established by relevant authorities.

 

On July 28, 2021, the General Office of MOE promulgated the Notice on Further Clarifying the Scope of Academic Subjects and Non-Academic Subjects of After-School Training in the Compulsory Education, which specifies that according to the national curriculum on compulsory education, when after-school institutions carry out tutoring, morality and rule of law, Chinese, history, geography, mathematics, foreign language (including English, Japanese, Russian), physics, chemistry and biology are classified as academic subjects, while sports (or sports and health), art (or music, art),and comprehensive practical activities (including information technology education, labor and technology education) are classified as non-academic subjects.

 

On March 3, 2022, the MOE jointly with SAMR and NDRC promulgated the Notice on Regulating Non-Academic After-school Training Institutions, which provide that, among others, (i) non-academic after-school tutoring institutions shall have the corresponding qualifications and their staffs shall have the corresponding certificates for their profession; (ii) non-academic afterschool tutoring institutions shall ensure that training contents and training methods are suitable for the students’ age, mental and physical characteristics and cognitive level. The notice also specifies a series of operating requirements that non-academic after-school tutoring institutions must meet regarding the course content, course time, advertisements, tuition fees, contract form and premise, etc.

 

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

 

The MOE promulgated the Measures for Punishment for Violation of Professional Ethics of Elementary and Secondary School Teachers on January 11, 2014 and amended such measures on November 8, 2018, which prohibits teachers of elementary and secondary schools from providing paid training in schools or in out-of-school training institutions. Some provinces and cities where our schools are located have adopted more stringent regulations which prohibit public school teachers from teaching, on a part-time basis, at private schools or learning centers. For a detailed description of the risk associated with these matters, see “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Operations in the ELT Markets — The operating entities may not be able to continue to recruit, train and retain dedicated and qualified teaching staff, who are critical to the success of their business and the effective delivery of their ELT services to students.”

 

Regulations and Government Policies Relating to the Cryptocurrency Industry

 

Pursuant to the Circular on Prevention of Risks Associated with Bitcoin, or the Circular, jointly promulgated by the PBOC, the MIIT, the China Banking Regulatory Commission, the CSRC and the China Insurance Regulatory Commission on December 3, 2013, Bitcoin shall be considered a kind of virtual commodity in nature, which does not have the same legal status with fiat currencies and shall not be used and circulated in the market as currency. This circular also provides that financial institutions and payment institutions shall not engage in businesses related to Bitcoin.

 

Pursuant to the Announcement on Prevention of Risks from Offering and Financing of Cryptocurrencies promulgated by seven PRC governmental authorities including the PBOC on September 4, 2017, illegal activities in offering and financing of cryptocurrencies, including initial coin offerings (ICOs), are forbidden in the PRC because such activities may be considered to constitute illegal offering of securities or illegal fundraising. This announcement further provides that financial institutions and payment institutions shall not engage in businesses related to cryptocurrency offering or financing transactions.

 

On September 3, 2021, the NDRC, together with 10 other governmental departments of the PRC, jointly promulgated the Circular on Regulating Virtual Currency “Mining” Activities, or the Circular 1283. Virtual currency mining activities refer to the process of calculating and producing virtual currencies through dedicated mining machines, which have high energy consumption and carbon emissions, and can breed illicit financial activities. Pursuant to the Circular 1283, the rectification of virtual currency mining projects should distinguish between incremental and existing projects, and adhere to the principle of classified treatment. It is strictly forbidden to invest in the construction of incremental virtual currency mining projects, and to develop virtual currency mining projects in any name. The existing projects should be accelerated and orderly exit from the market, and under the premise of ensuring a smooth transition, the competent departments of each locality shall scientifically determine the exit timetable and implementation path according to the actual situation. Before virtual currency mining is added to the Catalog for Guidance on Adjustment of Industrial Structure, efforts shall be made to treat the virtual currency mining as an eliminated industry, prohibit any investment, and strong measures shall be taken to rectify and eliminate existing virtual currency mining projects in an immediate and orderly manner. This circular further provides that all financial institutions and non-bank payment institutions are forbidden to directly or indirectly provide financial services and various forms of credit support to virtual currency mining enterprises and projects, and measures shall be taken to recover loans that have been issued.

 

The PBOC and 9 other governmental departments promulgated the Circular on Further Preventing and Disposing of Risks in Virtual Currency Trading and Speculation on September 15, 2021, which provides that exchange between legal tender and virtual currencies, exchange between virtual currencies, trading virtual currencies as a central counterparty, providing information intermediary and pricing services for the trading of virtual currencies, ICO, trading of virtual currencies derivatives and other virtual currency related business activities are suspected of illegal sale of tokens and coupons, unauthorized public offering of securities, illegal operation of futures business, illegal fund raising and other illegal financial activities which shall be strictly prohibited and banned by law. Foreign virtual currency exchanges providing services to residents in China through the Internet are also considered illegal financial activities. The circular further provides that financial institutions or non-bank payment institutions shall not provide services such as account opening, fund transfer, clearing and settlement for virtual currency-related business activities, and shall not include virtual currencies in the scope of pledge and collaterals, carry out virtual currency-related insurance business or include virtual currencies in the scope of insurance liability.

 

Regulations Related to Online Business

 

Value-Added Telecommunications Services

 

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

 

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

 

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Internet Information Services

 

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

 

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

 

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

 

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

 

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

 

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Internet Cultural Activities

 

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

 

Internet Publishing

 

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

 

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

 

Regulation Relating to Publication Distribution

 

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

 

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Provisions on Intermediary Service for Self-Funded Overseas Studies

 

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

 

Provisions on Travel Agency

 

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

 

Regulations on Fire Safety

 

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

 

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

 

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Pursuant to these regulations, failure to pass the relevant fire control design examination or complete the relevant fire control acceptance inspection shall subject a company to: (i) orders to suspend the construction of projects, use of such projects or operation of relevant business; and (ii) a fine of between RMB30,000 and RMB300,000. Failure to complete a fire safety filing shall subject a company to: (i) orders to make rectifications within a specified time limit; and (ii) a fine of not more than RMB5,000. See “Item 3. Key Information—Risk Factors—Risks Related to Our Business and Operations in the ELT Markets — A certain number of the operating entities’ self-operated learning centers and their owned properties are not in compliance with fire safety regulations.”

 

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

 

Regulations Relating to Employment, Social Insurance and Housing Provident Fund

 

Employment

 

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

 

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

 

Social Insurance

 

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

 

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

 

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Housing Provident Fund

 

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

 

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

 

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

 

Trademark

 

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

 

Domain Name

 

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

 

Copyright and Software Registration

 

The Standing Committee of the NPC adopted the Copyright Law in 1990 and amended it in 2001, 2010 and 2020, respectively. The amended Copyright Law extends copyright protection to internet activities, products disseminated over the internet and software products. In addition, there is a voluntary registration system administered by the China Copyright Protection Center. The amended Copyright Law also requires registration of a copyright pledge. To address the problem of copyright infringement related to the content posted or transmitted over the internet, the National Copyright Administration and the MIIT jointly promulgated the Measures for Administrative Protection of Copyright Related to Internet on April 29, 2005. This measure became effective on May 30, 2005.

 

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

 

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Regulations on Companies

 

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

 

Regulations on Tax

 

PRC Enterprise Income Tax Law

 

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

 

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

 

Pursuant to the Arrangement between the PRC and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income, the withholding tax rate with respect to the payment of dividends by a PRC enterprise to a Hong Kong enterprise may be reduced to 5% from a standard rate of 10% if the Hong Kong enterprise directly holds at least 25% of the PRC enterprise. Pursuant to the Notice of the State Administration of Taxation on the Issues concerning the Application of the Dividend Clauses of Tax Agreements, or SAT Circular 81, a Hong Kong resident enterprise must meet the following conditions, among others, in order to apply the reduced withholding tax rate: (i) it must be a company; (ii) it must directly own the required percentage of equity interests and voting rights in the PRC resident enterprise; and (iii) it must have directly owned such required percentage in the PRC resident enterprise throughout the 12 months prior to receiving the dividends. In August 2015, the State Administration of Taxation promulgated the Administrative Measures for Nonresident Taxpayers to Enjoy Treatment under Tax Treaties, or SAT Circular 60, which became effective on November 1, 2015 and was repealed in January 1, 2020. SAT Circular 60 provides that nonresident enterprises are not required to obtain pre-approval from the relevant tax authority in order to enjoy the reduced withholding tax. Instead, nonresident enterprises and their withholding agents may, by self-assessment and on confirmation that the prescribed criteria to enjoy the tax treaty benefits are met, directly apply the reduced withholding tax rate, and file necessary forms when performing tax filings, which will be subject to post-tax filing examinations by the relevant tax authorities. In accordance with the Measures for Administration of Non-Resident Taxpayers’ Enjoyment of the Treatment under Tax Treaties which was promulgated by the SAT on October 14, 2019, and came into effect on January 1, 2020, if non-resident taxpayers consider they are eligible for treatments under the tax treaties through self-assessment, they may, at the time of filing tax returns or making withholding tax filings through withholding agents, enjoy the treatments under the tax treaties, and shall concurrently collect and retain the relevant documents for inspection according to relevant regulations, and accept tax authorities’ post-filing administration.

 

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

 

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

 

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

 

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

 

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

  

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

  

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

 

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

 

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

 

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

 

PRC Value-added Tax in Lieu of Business Tax

 

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

 

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PRC Laws and Regulations Relating to Foreign Exchange

 

Regulations on Loans to and Direct Investment