METX BTC Digital Ltd

ITEM 3. KEY INFORMATION

Not applicable.

Not applicable.

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:

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:

Risks Related to Our Cryptocurrency Business

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

Risks Related to Doing Business in China

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

Risks Related to Our Ordinary Shares

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.

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:

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 Overview—Organizational Structure,” as a form of foreign investment, it contains a catch-all provision under the definition of “foreign investment,” which includes investments made by foreign investors in China through other means stipulated by laws or administrative regulations or other methods prescribed by the State Council without elaboration on the meaning of “other means.” However, the Implementing Regulations of the Foreign Investment Law still does not specify whether foreign investment includes contractual arrangements.

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

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.

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:

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.

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.

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 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.

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.

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.

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.

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.

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.

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.

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.

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.

Major risks involving the operating entities’ network infrastructure include:

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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:

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.

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.

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.

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.

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:

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.

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:

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.

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.

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.

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.

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.

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.

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:

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.

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.

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.

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.

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.

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:

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.

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.

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:

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.”

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.