We are offering 22,500,000 ordinary shares, par
value US$0.0001 per share (the “ordinary shares”), pursuant to this prospectus supplement and the accompanying prospectus,
at a purchase price of US$0.30 per share. We are also offering 177,500,000 pre-funded warrants (each a “Pre-funded Warrant”)
to purchase 177,500,000 ordinary shares, exercisable at an exercise price of $0.0001 per share, to those purchasers whose purchase of
ordinary shares in this offering would otherwise result in the purchaser, together with its affiliates and certain related parties, beneficially
owning more than 4.99% (or, at the election of the holder, 9.99%) of our outstanding ordinary shares immediately following the consummation
of this offering. The purchase price of each Pre-funded Warrant is $0.2999, which equals the price per ordinary share being sold to the
public in this offering, minus $0.0001. The Pre-funded Warrants will be immediately exercisable and may be exercised at any time until
all of the Pre-funded Warrants are exercised in full.
Our ordinary shares are listed on The Nasdaq Capital Market, or Nasdaq,
under the symbol “METX.” On September 2, 2021, the last reported sale price of our ordinary shares on Nasdaq was US$0.39 per
share. There is no established trading market for the Pre-funded Warrants and we do not intend to list the Pre-funded Warrants on any
securities exchange or nationally recognized trading system.
We are an “emerging growth company”
as defined in the Jumpstart Our Business Act of 2012, as amended, and, as such, will be subject to reduced public company reporting requirements.
The aggregate market value of our outstanding ordinary shares held
by non-affiliates, or public float, as of September 1, 2021, was approximately US$77.74 million, which was calculated based on 84,501,953
ordinary shares held by non-affiliates as of September 1, 2021 and a per share price of US$0.92, which was the closing price of our ordinary
shares on Nasdaq on September 1, 2021.
We are a holding company incorporated in the Cayman
Islands and not a Chinese operating company. As a holding company with no material operations of our own, we conduct a substantial majority
of our operations through our PRC subsidiaries, our variable interest entities, or VIEs, and their subsidiaries in the People’s
Republic of China. We control and receive the economic benefits of our VIEs and their subsidiaries’ business operations through
certain contractual arrangements. Our ordinary shares and the ordinary shares underlying the Pre-funded Warrants offered in this offering
are shares of our offshore holding company instead of shares of our VIEs or their subsidiaries in China. The VIE structure is used to
replicate foreign investment in China-based companies where Chinese law prohibits direct foreign investment in our VIEs and their subsidiaries.
As a result of our use of the VIE structure, you may never directly hold equity interests in our VIEs and their subsidiaries.
Because we do not directly hold equity interests
in our VIEs and their subsidiaries, we are subject to risks and uncertainties of the interpretations and applications of PRC laws and
regulations, including but not limited to, limitations on foreign ownership of English language training service providers, regulatory
review of overseas listing of PRC companies through special purpose vehicles, and the validity and enforcement of the contractual arrangements
among WFOEs, our VIEs and their shareholders. We are also subject to the risks and uncertainties about any future actions of the PRC government
in this regard that could disallow the VIE structure, which would likely result in a material change in our operations, and the value
of our ordinary shares may depreciate significantly or become worthless. See “Risk Factors — Risks Related to our Corporate
Structure,” “Risk Factors — Risks Related to Doing Business in China,” and “Risk Factors — Risks Related
to This Offering and our Ordinary Shares.”
We are subject to certain legal and operational
risks associated with being based in China. PRC laws and regulations governing our current business operations are sometimes vague and
uncertain, and as a result these risks may result in material changes in the operations of our VIEs and their subsidiaries, significant
depreciation of the value of our ordinary shares, or a complete hindrance of our ability to offer or continue to offer our securities
to investors. Recently, the PRC government adopted a series of regulatory actions and issued statements to regulate business operations
in China, including cracking down on illegal activities in the securities market, enhancing supervision over China-based companies listed
overseas using variable interest entity structure, adopting new measures to extend the scope of cybersecurity reviews, and expanding the
efforts in anti-monopoly enforcement. As of the date of this prospectus supplement, our Company, our VIEs and their subsidiaries have
not been involved in any investigations on cybersecurity review initiated by any PRC regulatory authority, nor has any of them received
any inquiry, notice or sanction. As of the date of this prospectus supplement, 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. However, since these
statements and regulatory actions are newly published, official guidance and related implementation rules have not been issued. It is
highly uncertain what the potential impact such modified or new laws and regulations will have on our daily business operation, the ability
to accept foreign investments and our ability to continue our listing on an U.S. exchange.
(1) We will also pay the underwriter for certain
expenses incurred in this offering. See “Underwriting” on page S-58 of this prospectus supplement for more information regarding
the underwriting compensation.
We expect that delivery of the ordinary shares
and Pre-funded Warrants being offered pursuant to this prospectus supplement and the accompanying prospectus will be made on or about
September 7, 2021, subject to customary closing conditions.
RISK FACTORS
The following is a summary of certain risks
that should be carefully considered along with the other information contained or incorporated by reference in this prospectus supplement,
the accompanying prospectus, and the documents incorporated by reference, as updated by our subsequent filings under the Exchange Act.
Particularly, you should carefully consider the risk factors incorporated by reference to our annual report on Form 20-F for the fiscal
year ended December 31, 2020 and in the accompanying prospectus. If any of the following events actually occurs, our business, operating
results, prospects, or financial condition could be materially and adversely affected. The risks described below are not the only ones
that we face. Additional risks not presently known to us or that we currently deem immaterial may also significantly impair our business
operations and could result in a complete loss of your investment.
Risks Relating to Our Business and Operations
Failure to attract and retain students to
enroll in our courses would have a material adverse impact on our business and prospects.
The success of our business
depends primarily on the number of student enrollments in the offline courses we offer at our learning centers, the number of paying users
on our “Likeshuo” online platform, and the amount of our course fees. As a result, our ability to attract students to enroll
in our courses is critical to the continued success and growth of our business. This, in turn, will depend on several factors, including,
among others, our ability to develop new educational programs and enhance existing educational programs to respond to the changes in market
trends, student demands and government policies, to maintain our consistent and high teaching quality, to market our programs to a broader
prospective student base, to develop additional high-quality educational content, sites and availability of our learning centers
and to respond effectively to competitive market pressures.
If our students perceive that
our education quality deteriorated due to unsatisfying learning experiences, which may be subject to a number of subjective judgments
that we have limited or no influence over, our overall market reputation may diminish, which in turn may affect our word-of-mouth referrals
and ultimately our student enrollment. In addition, the expansion of our offering of courses and services may not succeed due to competition,
our failure to effectively market our new courses and services, maintain the quality of our courses and services, or other factors. We
may be unable to develop and offer additional educational content on commercially reasonable terms and in a timely manner, or at all,
to keep pace with changes in market trends and student demands. Moreover, we cannot assure you that we will always be able to maintain
or increase our course fee levels without compromising our student enrollment, which may materially and adversely affect our revenues
and profitability. In addition, international relations and policies related to overseas study of Chinese students may become volatile
or unfavorable to our existing and prospective students who plan to study abroad due to various factors that are beyond our control, which
could materially and adversely affect our business, results of operations, financial condition and prospects.
If we are unable to continue
to attract students to enroll in our courses, our revenue may decline, which would have a material adverse effect on our business, financial
condition and results of operations.
Our business depends on the market recognition
of our brands and if we are not able to maintain our reputation and enhance our brand recognition, our business and operating results
would be harmed.
We believe that our success
is heavily dependent on the market recognition of our brand names, including our “Meten” and “Likeshuo” brands,
as well as the “ABC” brand associated with ABC Education Group, which we acquired in June 2018. Our ability to maintain
our brand recognition and reputation depends on a number of factors, some of which are beyond our control. It may become difficult to
maintain the quality and consistency of the services we offer while we continue to grow in size and expand our business and services,
which in turn may lead to diminishing confidence in our brand names.
Our ability to maintain and
enhance our brand recognition and reputation depends primarily on the following factors:
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the perceived effectiveness and quality of our courses, services and teaching staff;
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the quality and coverage of our course portfolio, value of courses, services and functions and the quality, variety and appeal of content available of the courses and services offered at our learning centers and on our “Likeshuo” platform;
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the reliability of the courses offered at our learning centers and through our “Likeshuo” platform, as well as the commitment to high levels of service, reliability, security and data protection by the merchants, our franchised learning centers and other participants in our ecosystem; and
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the effectiveness of our operational system governing the courses and services offered at our learning centers and on our “Likeshuo” platform.
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We have developed our student
base primarily through word-of-mouth referrals. We have also invested significantly in brand promotion initiatives by conducting
certain marketing activities, including, but not limited to, advertisement through our cost per sale merchants, which are generally publishers
and website owners that are paid by us on the basis of the number of sales that are directly generated by an advertisement, and major
search engines, as well as on social media platforms. However, we cannot assure you that these or our other marketing efforts will be
successful in promoting our brands to remain competitive. If we are unable to further enhance our brand recognition and increase awareness
of our services, or if we incur excessive sales and marketing expenses or if we are required to incur excessive sales and marketing expenses
in order to remain competitive, our business and results of operations would be materially and adversely affected. The sales and marketing
expense may also increase as we further develop and expand our business. In addition, any negative publicity relating to the general ELT
market in China, our Company or services, regardless of its veracity, could damage our reputation and in turn cause material and adverse
harm to our business and results of operations. Furthermore, certain enterprises in various industries in China have brand names that
are similar to ours and may result in name confusion to our existing and prospective customers. Any negative publicity associated with
these enterprises may have an adverse impact on our reputation and brand recognition, which is beyond our control, and could cause harm
to our business, results of operations, financial condition and prospects.
We are subject to uncertainties brought
by the Amended Private Education Promotion Law and other rules, regulations and opinions promulgated by the PRC government from time to
time.
Our business is regulated
by certain rules and regulations, including the Amended Private Education Promotion Law, which became effective on September 1, 2017.
The Amended Private Education Promotion Law classifies private schools into non-profit schools and for-profit schools by whether
they are established and operated for profit-making purposes. The sponsors of private schools may at their own discretion choose
to establish non-profit or for-profit private schools, but the Amended Private Education Promotion Law does not allow sponsors
to establish for-profit private schools that engage in compulsory education. According to the Amended Private Education Promotion
Law, for-profit private training institutions, such as our learning centers, are classified as private schools and are required to
obtain private school operating permits.
The State Council issued Implementing
Rules for the Law for Promoting Private Education of the PRC (Revised in 2021) on 14 May 2021, which is effective from 1 September 2021.
The Revised Implementation Rules deleted 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 were defined
in the Draft Implementation Rules of the Private Education Promotion Law of the PRC published by Ministry of Justice on August 10 and
requested 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. By the end of 2018, there
should be no training institutions that are still carrying out training activities without permits or licenses. The local government authorities
may propose a practical rectification plan to ensure that the rectification could be completed by the end of the year. As of the date
of this prospectus supplement, a majority of our self-operated learning centers did not have the relevant private school operating permits.
As of December 31, 2020, no learning centers of our Group that did not have the relevant private school operating permits have been ordered
by the government authorities to suspend their operations for rectification, cease business operations or revoke their business licenses.
However, we cannot assure you that the PRC government authorities will not extend the rectification period 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 we offer, including general adult ELT (which is designed for students aged 15 and above) and junior ELT (which is designed for
students aged six to 18), will be deemed “non-academic” in nature by the relevant PRC education authorities. If such training
services are deemed “academic,” the government authorities could order the learning centers which are deemed to be “non-academic”
providing such training services to cease their business operations and revoke their business licenses. If any of the above occurs, our
business, results of operations, business prospects and reputation could be materially and adversely affected.
Uncertainties exist with respect
to the interpretation and enforcement of the new and existing laws and regulations that may be applicable to us. While we intend to comply
with all new and existing laws and regulations, we cannot assure you that we will always be deemed to be in compliance with such laws
and regulations, nor can we assure you that we will always be able to change our business practice successfully to adapt to the changing
regulatory environment. Any such failure could materially and adversely affect our business, results of operations, financial condition
and prospects.
Uncertainties exist in relation to the Opinions
of the General Office of the State Council on Regulating the Development of After-school Training Institutions, which may materially and
adversely affect our business, results of operations, financial condition and prospects.
On August 22, 2018, the
General Office of the State Council issued the Opinions of the General Office of the State Council on Regulating the Development of After-school Training
Institutions, or Circular 80, which came into effect on the same date. Pursuant to Circular 80, the after-school training
institutions for the primary and secondary school students must obtain relevant school operating permits and business licenses (either
corporate legal person certificates or private non-enterprise unit registration certificates) for carrying out the training business
and shall meet certain standards in respect of tuition fees, sites, teachers and management. Circular 80 provides, among other things,
that (i) the average available-for-use area per student must be no less than three square meters within the same training hours;
(ii) private school shall purchase safety insurance for training participants; (iii) no in-service primary and secondary
teachers may be concurrently employed in an after-school training institution, and any teachers employed by an after-school institution
for primary and secondary school subjects shall hold relevant teaching qualifications; (iv) the content, classes and subject enrollment,
progress and school hours information in connection with training of traditional disciplines shall be filed with the local education authorities
and be made public; (v) no training courses shall be given after 8:30 p.m., and no homework from after-school institutions
can be given; and (vi) no advance tuition fees of more than three months may be collected. The approval and registration of
after-school training institutions shall be subject to local government authorities. Education departments at the county level are
responsible for the issuance of private school operating permits upon examination and approval.
Circular 80 only sets
out the general guidance on regulating after-school education institutions targeting primary and secondary school students. Without
the approval by the relevant education department, no after-school training institution shall provide training for primary and secondary
school students in the name of consulting and cultural transmission, among others. However, detailed rules of implementation of Circular
80 have yet to be introduced by the competent authorities, such as whether Circular 80 should apply to our learning centers providing
junior ELT services, which mainly focus on promoting and developing language competence, rather than providing supplementary training
services relating to school cultural and educational curriculums, admission into schools of a higher grade or examinations. In 2018, we
introduced offline junior ELT services to students aged six through 18 at our existing self-operated learning centers. Our offline
junior ELT business may be subject to the requirements of Circular 80, which may potentially increase our compliance costs. For instance,
Circular 80 provides that personal safety insurance shall be purchased for students to mitigate risks, but is silent as to the specific
type, amount and coverage of such required personal safety insurance.
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
ICP records (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 organising 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 our 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 we intend to comply
with all applicable laws and regulations, due to existing uncertainties, we cannot assure you that we will be able to meet the relevant
regulatory requirements in a timely manner, any more specific and stringent requirements in relation to our operations to be established
by the relevant local government authorities in particular. Also, additional compliance costs may be incurred. As a result, our business,
results of operations, financial condition and prospect may be adversely and materially affected.
Uncertainties exist in relation to the inspection
plan on resumption of After-school Training Institutions in certain areas in the PRC, which may materially and adversely affect our business,
results of operations, financial condition and prospects in these certain areas.
Due to the adverse effects
of COVID-19 and governmental requirements for epidemic prevention and control, our learning centers were temporarily closed in January
2021 in Beijing, and we gradually re-opened the learning centers from June 2020 to September 2020. During such time, the relevant municipal
and district departments jointly examined the teachers’ qualifications, information disclosure, training courses and other information
of after-school offline training institutions and urged to make rectification. In addition, according to the Inspection Plan on Resuming
Offline Training of Academic Training Institutions issued by the Beijing Municipal Education Commission on February 26, 2021, an inspection
targeting the after-school academic training institutions and foreign language training institutions which have been approved by the education
commission of all districts to resume their classes was conducted from March 1 to June 30, 2021. The contents of inspection consisted
of (1) permits and qualifications of operation; (2) qualification of teachers; (3) advertising and publicity; (4) standardization of contracts;
(5) charging management; (6) compliance with safety standards; and (7) epidemic prevention and control. As of the date of this prospectus
supplement, we have not received any notifications for rectification. However, we cannot assure you whether any further inspections or
policies will require our offline learning centers to conduct self-inspections and rectification procedures. While we intend to comply
with all requirements to resume operating our leaning centers in Beijing at the soonest, due to existing uncertainties, we cannot assure
you that we will be able to meet the relevant regulatory requirements in a timely manner, any more specific and stringent requirements
in relation to our operations to be established by the relevant local government authorities in particular. Also, additional compliance
costs may be incurred. As a result, our business, results of operations, financial condition and prospect may be adversely and materially
affected.
Uncertainties exist in relation to the Double
Reduction Opinions of After-school Training Institutions in the PRC, which may materially and adversely affect our business, results of
operations, financial condition and prospects in these certain areas.
On 24 July 2021, the Opinions
on Further Alleviating the Burden of Homework and After-School Training for Students in Compulsory Education was issued by the General
Office of the Central Committee of the Communist Party of China and the General Office of the State Council of the PRC, or the Double
Reduction Opinions, which regulates institutions offering after-school training services on academic subjects. The Double Reduction Opinion
contains 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, 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 provides 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 does not contain explicit and specific requirements on English teaching content. As of the date of this prospectus
supplement, there are no explicit requirements in PRC laws, regulations or local policies for our junior ELT services shall be categorized
as academic subjects and as of the date of prospectus, we have not received any notifications for rectification or administrative measures
which requires us to rectify in accordance with the Double Reduction Opinion. However, we cannot assure you that whether the government
authorities would further implement or issue regulations or polices to administer our junior ELT services as academic subjects. If our
junior ELT training services are deemed academic subjects, we should rectify our junior ELT training services according the Double Reduction
Opinion, including register our 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, our business, results of operations, business prospects and reputation could be materially and adversely affected.
The Chinese government exerts substantial
influence over the manner in which we must conduct our business activities. If the Chinese government significantly regulate our business
operations in the future and we are not able to substantially comply with such regulations, our business operations may be materially
adversely affected and the value of our ordinary shares may significantly decrease.
The Chinese government has
exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state
ownership. Our ability to operate in China may be harmed by changes in its laws and regulations, including those relating to taxation,
environmental regulations, land use rights, property and other matters. The central or local governments of these jurisdictions may impose
new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part
to ensure our compliance with such regulations or interpretations. Accordingly, government actions in the future, including any decision
not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in
the implementation of economic policies, could have a significant effect on economic conditions in China or particular regions thereof,
and could require us to divest ourselves of any interest we then hold in Chinese properties.
As such, our business operations
of and the industries we operate in may be subject to various government and regulatory interference in the provinces in which they operate.
We could be subject to regulation by various political and regulatory entities, including various local and municipal agencies and government
sub-divisions. We may incur increased costs necessary to comply with existing and newly adopted laws and regulations or penalties for
any failure to comply. In the event that we are not able to substantially comply with any existing or newly adopted laws and regulations,
our business operations may be materially adversely affected and the value of our ordinary shares may significantly decrease.
Furthermore, the PRC government
authorities may strengthen oversight and control over offerings that are conducted overseas and/or foreign investment in China-based issuers
like us. Such actions taken by the PRC government authorities may intervene or influence our operations at any time, which are beyond
our control. Therefore, any such action may adversely affect our operations and significantly limit or hinder our ability to offer or
continue to offer securities to you and reduce the value of such securities.
Our development of new courses, services
and technologies or innovation and upgrades made to existing courses, services and technologies may not adequately respond to the expectations
of our students, changes in market demands and standards of school admission or standardized tests, may fail to achieve the expected satisfactory
results, or may compete with our pre-existing courses, as a result of which, our competitive position, ability to generate revenue and
growth prospects would be materially and adversely affected.
We constantly update and improve
the content of our existing courses and develop new courses or services to meet changing market demands or requirements from related government
authorities. Revisions to our existing courses and development of our new courses or services may not be well received by existing or
prospective students and online users. We may have limited experience in developing the content of new courses or services and may need
to adjust our systems and strategies to incorporate new courses or services into our existing offerings. If we cannot respond timely and
cost-effectively to changes in market demands or requirements from related government authorities, our business would be adversely
affected. Even if we are able to develop new courses or services that are well received, we may not be able to introduce them in an effective
manner. If we do not respond adequately to changes in market demands, our ability to attract and retain students may be impaired and our
financial results could suffer. For example, we introduced the new “Explore Curriculum” for our general adult ELT business
beginning in 2018. We did not complete the implementation of such new curriculum across our national learning center network until May
2019. This adversely affected the number of course hours delivered and segment revenue recognized during the period of implementation
as we focused on providing relevant training to our teaching staff and delivering such new course in a small-class setting during
the transition period.
The offline and online English
language training services we provide and the technologies we use are subject to continuous development, update and enhancement in terms
of content and functionality, driven by the demand for innovative skills, evolving course content and changes in overseas admission and
standardized tests. In particular, admission and standardized tests undergo continuous changes, in terms of the focus of the questions
tested, test formats and the manner in which the tests are administered. In the past, certain admission and standardized tests overseas
have undergone changes in test questions and formats. Authorities in overseas jurisdictions may also promote policies that encourage schools
to make admission decisions based less on entrance exam scores and more on a combination of other factors. There is no assurance that
overseas colleges, universities and other higher education institutions will not reduce or eliminate their reliance on considering the
international standardized test results as important standards to make admission decisions. Furthermore, changes in test standards for
professional qualifications, or changes in employers’ preferences to hire staff with select qualifications, may particularly affect
sales of our international standardized test preparation courses designed for relevant qualifications.
We believe that the internet-based ELT
market is characterized by the rapid changes and innovation of technologies, unpredictable product life cycles and online user preferences.
We have gained limited experience in generating revenue from our online training services and our investment in research and development
may not result in satisfactory outcomes. The flexibility of taking internet-based ELT courses may increase the amount of online training
services. We must quickly modify our services to adapt to the change in needs and preferences of our students, technological advances
and evolving internet practices. However, ongoing enhancement of our online course offerings and related technologies may entail significant
expenses and technical risks. In addition, the technologies used on the internet and value-added telecommunication services and products
in general, and in ELT services in particular, may evolve and change over time. We may fail to anticipate and adapt to such technological
development, or address any of the risks related to such new courses and services using such technologies, which in turn could have a
material and adverse effect on our business development, financial condition and results of operations. If our improvement to our online
offerings and the related technologies is delayed, which causes systems interruptions or is not aligned with the prevalent market expectations
or preferences, we may lose market share and our business would be adversely affected.
We face significant competition in major
programs we offer and geographic markets in which we operate, and if we fail to compete effectively, we would lose our market share and
our profitability would be adversely affected.
The ELT industry in China
is rapidly evolving, highly fragmented and competitive, and we expect competition in this industry to continue to persist and intensify.
We face competition in the major courses and/or training programs we offer and the geographic markets where we operate. For example, we
face nationwide competition for our international standardized test preparation courses from other relevant services provided by some
of our competitors. We face competition from several ELT service providers that focus on providing general adult English language training
in specific regions in China. We also face competition from companies that focus on providing overseas college application services.
Our student enrollment may
decrease due to intense competition. Some of our competitors may adopt similar curricula and marketing approaches, with different pricing
and service packages that may be deemed more attractive than our offerings. In addition, some of our competitors may have more resources
than we do and may be able to devote greater resources than we can to promote and develop their services. These competitors may be able
to respond more promptly than we can to the changes in student preferences, new technologies or market demands. In addition, the
increasing use of the internet and advances in internet- and computer-related technologies, such as web video conferencing and online
testing simulators, are eliminating geographic and entry barriers to providing private education services. As a result, many of our international
competitors that offer online test preparation and language training courses may be able to penetrate the China market more effectively.
We may need to reduce course
fees or increase spending in response to competition in order to retain or attract students or pursue new market opportunities. We cannot
assure you that we will be able to compete successfully against existing or future competitors. If we are unable to successfully compete
for new students, maintain or increase our fee level, attract and retain competent teachers or other key personnel and enhance our competitiveness
in terms of the quality of our education courses and services in a cost-effective manner, our business, financial condition and results
of operations would be materially and adversely affected.
We may not be able to continue to recruit,
train and retain dedicated and qualified teaching staff, who are critical to the success of our business and the effective delivery of
our ELT services to students.
We rely heavily on our teaching
staff, which generally comprises our teachers and study advisors, to deliver high-quality education services to our students. Our
teaching staff is vital for the maintenance of our reputation. We seek to hire qualified and dedicated teaching staff with the necessary
experience and language proficiency, who are able to deliver effective and inspirational instructions. There is a limited pool of teaching
staff with these attributes and we implement a highly selective hiring process to ensure that the new hires possess the skills commensurate
with our knowledge requirements. As a result, we must provide competitive compensation packages to attract and retain such teaching staff.
We may not be able to recruit, train and retain a sufficient number of qualified teaching staff in the future to keep pace with our growth
while maintaining consistent teaching quality in the different markets we serve. A shortage of qualified teaching staff or decreases in
terms of the quality of our teaching staff’s instructions, whether actual or perceived, in one or more of our markets, or a significant
increase in compensation needed to attract and retain qualified teaching staff, would have a material adverse effect on our business,
financial condition and results of operations.
Failure to comply with applicable laws and
regulations in relation to the employment of foreign employees may subject us to fines and penalties, and our business and operations
may be adversely affected if we are not able to retain foreign teachers due to non-compliance with such laws and regulations.
The foreign teachers we employ
are required to apply for and obtain work visas and residence permits to be able to work in China. We hired certain foreign teachers without
them obtaining the necessary work visas and residence permits. Under the PRC laws, if we hire foreign employees without work visas and
residence permits, we may be fined RMB10,000 for each illegally employed foreign employees, with a cap of RMB100,000 in the aggregate
and any illegal gains, which are not well-defined under the PRC laws, may be confiscated. We have been fined for an immaterial amount
of penalties relating to our hiring of foreign teachers without them obtaining the necessary work visas and residence permits, and we
cannot assure you that we will not face additional penalties or fines for any past or future violations. Additionally, in the event we
hire foreign employees without work visas or residence permits, we may have to terminate our employment relationship with them. In such
event, we may need to hire qualified replacements, which could be difficult and/or time consuming. We may also face the risk of insufficient
number of available foreign employees in the ELT market in China due to various factors beyond our control. If we are unable to retain
foreign employees, including our foreign teachers, the teaching quality of our courses and services could be negatively impacted, which
in turn, could materially and adversely affect our business, results of operations, reputation and prospects.
For our online English language
training, we match students with foreign teachers who reside in foreign countries. While we are not required to obtain PRC work visas
and residence permits for our foreign teachers who conduct online ELT courses on our “Likeshuo” platform under the existing
PRC laws and regulations, we cannot assure you that the PRC government will not impose any restriction or other qualification requirement
in the future, which we may not be able to comply with on a timely manner or at all, and due to which we may incur substantial compliance
costs. In the event this occurs, our business and results of operations may be materially and adversely affected.
The continuing efforts of our senior management
team and other key personnel are important to our success, and our business may be harmed if we lose their services.
Our future success depends
heavily upon our senior management for their smooth and efficient operations of our learning centers and online platform as well as their
execution of our overall business plans. There is intense competition for hiring experienced management personnel in the ELT industry,
and the pool of qualified candidates is very limited. If any member of our senior management team is unable to continue his/her employment
with us and we fail to effectively manage a transition to new personnel in the future, or if we fail to attract and retain qualified and
experienced professionals on commercially acceptable terms, our business, financial condition and results of operations could be adversely
affected.
Our success also depends on
having highly trained financial, technical, human resources, sales and marketing staff, management personnel and qualified and dedicated
domestic and foreign teachers. We will need to continue to hire additional personnel as our business grows. In the event we lose their
services, we may not be able to attract experienced senior management or other key personnel in the future, and we may, in turn, lose
our students, teaching staff and other personnel. In addition, a shortage in the supply of personnel with requisite skills or our failure
to recruit them could impede our ability to increase revenue from our existing services, launch new course offerings and expand our operations,
and could pose an adverse effect on our business and financial results.
We derive a majority of our revenue from
a limited number of cities. Any event negatively affecting the private education market in these cities, or any increase in the level
of competition for the types of services we offer in these cities, could have a material adverse effect on our overall business and results
of operations.
For the fiscal year ended
December 31, 2020, we derived approximately 50.8% of the total student enrollment in our offline ELT courses and services from our self-operated learning
centers in Shenzhen, Guangzhou and Dongguan in Guangdong Province, Chengdu in Sichuan Province, and Nanjing and Suzhou in Jiangsu Province,
and we expect these cities to continue to be important sources of our student enrollment and revenue. If any of these cities experiences
any event that would negatively affect its private education market, such as a serious economic downturn, natural disaster or outbreak
of contagious disease, or that the governments of which adopt regulations relating to and affecting the private education market that
place additional restrictions or burdens on us, or experiences an increase in the level of competition for the types of services we offer,
our overall business and results of operations may be materially and adversely affected.
We are required to obtain various operating
permits and licenses for our ELT services in China and failure to comply with these requirements may materially and adversely affect our
business operations.
Under the PRC laws and regulations,
our learning centers are required to obtain a number of licenses, permits and approvals from, and make filings or complete registrations
with the relevant government authorities. Certain of our learning centers that are registered with the State Administration for Market
Regulation (formerly known as the State Administration for Industry and Commerce, or the SAIC), or the SAMR, are required to obtain business
licenses, and our other learning centers registered with the Ministry of Civil Affairs, or the MCA, are required to obtain non-enterprise entity
registration certificates.
According to the Amended Private
Education Promotion Law, Implementation Rules of the Private Education Law, Circular 10, our learning centers are required to obtain
private school operating permits.
The business licenses of certain
of our learning centers did not include “English language training” or “language-related training.” We were
not able to include “English language training” or “language related training” in the authorized business scope
of these learning centers mainly because the industry and commerce administration authorities in the areas where such learning centers
are located have a general policy prohibiting the inclusion of “English language training” or “language-related training”
in the business scope of any company before such company obtains relevant private school operating permits. As of the date of this prospectus
supplement, some of our learning centers were operating beyond their authorized business scope. For these learning centers, we have been
communicating, and will continue to communicate, with the competent industry and commerce administration authorities to expand the authorized
business scope of the relevant learning centers to include “language related training” or similar statements. However, we
cannot assure you that our efforts to expand the business scope or include the statements above in the business license of these learning
centers will be successful. While we have not been subject to any penalties or disciplinary action in the past relating to the business
scope of our learning centers, the relevant PRC government authorities may determine that these learning centers have been or are operating
beyond their authorized business scope and may subject these learning centers to warning, fine, confiscation of illegal earnings, suspension
of business for rectification, or revoking the business license for current or past non-compliant learning centers, which may materially
and adversely affect our business and results of operation.
Given the significant amount
of discretion held by the local PRC authorities in interpreting, implementing and enforcing the relevant rules and regulations, as well
as other factors beyond our control, we may not be able to obtain and maintain all requisite licenses, permits, approvals and filings
or pass all requisite assessments.
Among our self-operated learning
centers in operation as of December 31, 2020, 37 learning centers did not have private school operating permits or business licenses,
or were operating beyond their authorized business scope, which contributed in the aggregate to approximately 9.8% of our total gross
billings for the fiscal year ended December 31, 2020. Among our self-operated learning centers in operation as of December 31, 2020,
37 learning centers did not have private school operating permits or business licenses, or were operating beyond their authorized business
scope, which contributed in the aggregate to approximately 9.8% of our total gross billings for the fiscal year ended December 31, 2020.
We cannot assure you that
our other learning centers without requisite permits or licenses will not be subject to similar penalties. In addition, if any of our
current or future learning centers fails to receive or renew the requisite licenses, permits and approvals, make the necessary filings,
or complete all requisite registrations, such learning center may also be subject to various penalties. These may include fines, orders
to promptly rectify the non-compliance, or if the non-compliance is deemed serious by the regulators, the learning center may be ordered
to return course and service fees collected and pay a multiple of the amount of returned course and/or service fees to regulators as a
penalty or may even be ordered to cease operations. If this occurs, our business, results of operations and financial condition could
be materially and adversely affected.
Our failure to obtain permits/licenses which
may be required for the operation of our online platform could result in fines, confiscation of the gains derived from non-compliant operations,
or suspension of non-compliant operations.
Under the PRC laws and regulations,
we may be required to obtain an Internet Content Provider permit, or ICP license, an audio or video program transmission license, an internet
culture permit, an online publishing services permit and a radio or television programs producing and distributing permit for the operation
of our online education products. We have obtained the relevant ICP license but we have not obtained the audio or video program transmission
license, the internet culture permit, the online publishing services permit or the radio or television programs producing and distributing
permit. Although we have not received any material fines or other penalties from the relevant government authorities for such non-compliance in
the past, if we are not able to comply with all applicable requirements, we may be subject to fines, confiscation of the gains derived
from our non-compliant operations, suspension of our non-compliant operations, any of which may materially and adversely affect
our business, financial condition and results of operations.
We face risks associated with our franchised
learning centers.
A relatively small portion
of our offline ELT business is operated through franchisees. These franchisees are located in the PRC and have learning centers which
are operated under our brands. These franchised learning centers account for a relatively small percentage of our overall business and
financial performance. However, we are still subject to risks inherent to the franchise model and we have limited experience in operating
the franchise model and dealing with such risks.
Our control over the franchised
learning centers is based on the contractual agreements we entered with our franchisees, which may not be as effective as direct ownership
and potentially makes it difficult for us to manage the franchised learning centers. While we have some control over the operation of
our franchised learning centers, nevertheless, we may not be able to fully and successfully monitor, maintain and improve the performance
of the management and other staff at the franchised learning centers as these teaching staff carry out the training services and directly
interact with students. In the event of any delinquent performance by the franchisees and their employees, we may suffer from business
reduction as well as reputational damage. If the franchisees and/or their employees commit any unlawful or unethical conduct, we may suffer
financial losses, incur liabilities and suffer reputation damage. We may also face the risk that our prospective franchisees may not want
to adopt our stringent centralized management system, which may affect our franchise business development. Meanwhile, a franchisee may
suspend or terminate its cooperation with us voluntarily or involuntarily due to various reasons, including, but not limited to, disagreement
or dispute with us, or failure to maintain requisite approvals, licenses or permits or to comply with governmental regulations. A franchisee
might also choose not to continue to cooperate with us after the expiration of the existing cooperation arrangement. We may not be able
to find alternative ways to continue to provide the training services formerly covered by such franchisee, and our customer satisfaction,
brand reputation and financial performance may be adversely affected.
We are dependent on our information systems,
and if we fail to further develop our technologies, or if our systems, software, applications, database or source code contain “bugs”
or other undetected errors, or encounter unexpected network interruptions, security breaches or computer virus attacks, our operations
may be seriously distracted.
The successful development
and maintenance of our systems, software, applications and database, such as our management software and systems and student database,
is crucial to the attractiveness of our education services and the management of our business operations. In order to achieve our strategic
objectives and to remain competitive, we must continue to develop and enhance our technology. However, our efforts may prove to be unsuccessful.
The performance and reliability of our online platform infrastructure, including our “Likeshuo” platform and other online
systems we use for our business operations, are critical to our reputation and ability to retain students and increase student enrollment.
Any system error or failure, or a sudden and significant increase in traffic, could result in the difficulty or unavailability of accessing
our websites and/or online courses by our students. In addition, our technology platform upon which our management systems and online
programs operate, and our other databases, products, systems and source codes could contain undetected errors or “bugs” that
could adversely affect their performance.
Our computer networks may
also be vulnerable to unauthorized access, hacking, computer viruses and other security breaches. A user who circumvents our security
measures could misappropriate proprietary information or cause interruptions or malfunctions in operations. Any interruption to our computer
systems or operations could have a material adverse effect on our ability to retain students and increase student enrollment. Moreover,
we may be required to expend significant resources to protect against the threat of security breaches or to alleviate problems caused
by these breaches.
Major risks involving our
network infrastructure include:
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breakdowns or system failures resulting in a prolonged shutdown of our servers, including those attributable to power shutdowns, or attempts to get an unauthorized access to our systems, which may cause any loss or corruption of data and malfunctions of the software or hardware;
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disruption or failure in the national backbone network, which would make it impossible for visitors and students to log onto our websites;
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damages from fire, flood, power loss and telecommunications failures; and
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any infection by or spread of computer viruses.
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Any network interruption or
inadequacy that causes interruptions in the availability of our websites, applications or other online platforms or deterioration in the
quality of access to our websites, applications or other online platforms could reduce customer satisfaction and results in a reduction
in the number of students using our services. If sustained or repeated, these performance issues could reduce the attractiveness of our
websites, applications, other online platforms and course offerings. In China, almost all access to the internet is maintained through
state-controlled telecommunication operators. In many parts of China, the internet infrastructure is relatively underdeveloped, and
internet connections are generally slower and less stable than in more developed countries. We cannot assure you that the internet infrastructure
in China will remain sufficiently reliable for our needs or ever develop and make available more reliable internet access to our students
and teachers.
In addition, any security
breach caused by hackings, which involve attempts to gain unauthorized access of or to cause intentional malfunctions of the information
or systems, or to cause intentional malfunctions or loss or corruption of data, software, hardware or other computer equipment could cause
a disruption in our services and leakage of personal data of our teaching staff and students. Inadvertent transmission of computer viruses
could expose us to a material risk of loss of our course files or a litigation and possible liability, as well as damage to our reputation.
Furthermore, increases in
the volume of traffic on our websites could also strain the capacity of our existing computer systems, which could lead to slow responses
or system failures. This would cause a disruption or suspension in our course offerings, which would damage our brands and reputation,
and thus negatively affect our revenue growth. We may need to incur additional costs to upgrade our computer systems in order to accommodate
increased demand if we anticipate that our systems cannot handle higher volumes of traffic in the future.
To date, our information systems
have not encountered any material error or technical issue that could have adversely affected or disrupted our operations. If we encounter
errors or other service quality or reliability issues, or if we are unable to design, develop, implement and utilize information systems
and the data derived from these systems, our ability to realize our strategic objectives and our profitability could be adversely affected,
which, in turn may cause us to lose market share, harm our reputation and brand names, and materially adversely affect our business and
results of operations.
Our historical financial and operating results
are not indicative of our future performance and our financial and operating results may fluctuate.
Our past results may not be
indicative of future performance mainly due to the new businesses developed or acquired by us. Moreover, the results of operations of
our Company may vary from period to period in response to a variety of other factors beyond our control, including general economic conditions
and regulations or government actions pertaining to the private education service sector and the ELT sector in China, changes in consumers’
spending on private education as well as non-recurring charges incurred under unexpected circumstances or in connection with acquisitions,
equity investments or other extraordinary transactions. Due to these and other factors, our historical financial and operating results,
growth rates and profitability as well as quarter-to-quarter comparisons of our operating results may not be indicative of our future
performance and you should not rely on them to predict our future performance.
Our business and results of operations depend
on our ability to maintain and/or raise the level of the course and service fees we charge.
One of the most significant
factors affecting our profitability is the course and service fees we charge. For the years ended December 31, 2018, 2019 and 2020,
course and service fees derived from our business at our headquarters and self-operated learning centers, including revenue from
the sale of goods, as well as our online ELT courses delivered on the “Likeshuo” platform, constituted approximately 98.7%,
97.8%, and 98.6% of our total revenue, respectively. The amounts of those fees we charge are primarily determined based on the demand
of our offline students and online users for our ELT services, our operating costs, our competitors’ pricing level, our pricing
strategy to gain market share and the general economic conditions in China. However, there can be no assurance that we will be able to
maintain or raise the course fees and/or other fees we charge for our services in the future. Even if we are able to maintain or raise
course fees and/or other fees we charge for our services, we cannot assure you that we will be able to attract prospective students to
enroll in our courses at such increased fee rates. Our business, financial condition and operation results may be materially and adversely
affected if we fail to maintain or raise the fee level or attract sufficient prospective students.
If we are unable to conduct our sales and
marketing activities in a cost-effective manner, our results of operations and financial condition may be materially and adversely affected.
In 2018, 2019 and 2020, our
selling and marketing expenses amounted to RMB425.2 million, RMB438.0 million, and RMB310.4 million (US$47.6 million) respectively,
representing approximately 57.1%, 47.6%, and 44.9%, respectively, of our total operating expenses, which consist of selling and marketing
expenses, general and administrative expenses and research and development expenses. Our selling and marketing expenses mainly included
advertising and promotion expenses and employee benefit expenses for our sales and marketing staff. There is no assurance that our sales
and marketing activities will always be well received by students or result in the levels of sales that we anticipate. Furthermore, we
cannot guarantee that we will always be able to improve the operational efficiency of our sales and marketing staff or we will be able
to retain or recruit experienced sales staff, or efficiently train junior sales staff. In addition, marketing and branding approaches
and tools in the ELT market in China are evolving, especially for mobile platforms. This further requires us to enhance our marketing
and branding approaches and experiment with new methods to keep pace with industry development and student preferences. Failure to refine
our existing marketing and branding approaches in order to introduce new marketing and branding approaches in a cost-effective manner
could reduce our market share, cause our revenue to decline and negatively impact our profitability. In addition, we utilize a broad mix
of marketing and public relations programs, including social media platforms, to promote our products and services to prospective students.
If advertising rates increase or if we become concerned that our customers deem certain marketing activity less appealing, or more intrusive
or damaging to our brands, we may limit or discontinue the use or support of certain marketing sources or activities. Further, companies
that promote our services may decide that we negatively impact their business or may make business decisions that in turn adversely impact
us. For instance, if they decide that they want to compete directly with us, enter a similar business or exclusively support our competitors,
we may no longer have access to their marketing channels.
There is no assurance that
our branding efforts will be successful or we are not inadvertently negatively impacting our brand recognition and reputation. If we are
unable to maintain and further enhance our brand recognition and reputation and promote awareness of our platform and courses, we may
not be able to expand or even maintain our current level of student base and fees as well as engage qualified teachers, and our results
of operations may be materially and adversely affected. Furthermore, any negative publicity relating to our Company, our management, our
courses, teachers and our other staff, regardless of its veracity, could harm our brand image and in turn materially and adversely affect
our business and results of operations.
If we fail to conduct our marketing activities
in compliance with the advertisement regulations in China, our results of operations and financial condition may be materially and adversely
affected.
Under the Advertisement Law
of the PRC, an advertisement for education or training shall not contain any of the following items: (i) any promise relating to
progression, passing examinations, or obtaining a degree or qualification certificate, or any express or implied guaranteed promise relating
to education or training results; (ii) express or implied statement that the relevant examination agency or its personnel or any
examination test designer will be involved in the education or training; and (iii) the use of the names or images of research institutes,
academic institutions, education institutions, industry associations, professionals or beneficiaries for recommendation or as proof. Publishing
advertisements for education and training in violation of the provisions may be subject to order to cessation of the publishing of advertisements,
eliminate the ill-effects within the corresponding and a fine of one to five times of the advertising fees, or may revoke the business
licenses and approval documents for advertisement review. The Anti-Unfair Competition Law of the PRC also stipulates that, when trading
on the market, operators shall abide by the principles of voluntariness, equality, fairness, honesty and credibility, and observe generally
recognised 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
our “Meten” brand has significantly contributed to our success. Maintaining and enhancing the reputation of our brands is
critical to sustaining our competitive advantage. Our ability to maintain and enhance our brand recognition primarily depends on the perceived
effectiveness and quality of our course offerings as well as the success of our marketing efforts. We have devoted significant resources
to promoting our courses and brands in recent years, including marketing and advertising in both offline and online media channels. We
have been subjected to certain penalties and legal sanctions for our improper advertising activities but we have rectified in a timely
manner and have strengthened the internal review on the contents of our marketing and advertising. However, we cannot assure you we will
not be subject to any other penalties or legal sanctions in the future for our advertisements. Our marketing efforts may not be successful
or may negatively impact our brand recognition and reputation inadvertently if any government authority or competitor publicly alleges
that any of our advertisements are misleading.
Our brand image, reputations, business and
results of operations may be adversely impacted by our students’ and teaching staff’s misuse of our websites, applications
and other online platforms, and in misconducts or other illegal or improper activities of our students, teachers, franchise partners,
management personnel and other employees.
Our websites, applications
and other online platforms allow our teaching staff and students to engage in real-time communication. Because we do not have full
control over how our teaching staff and students will use these platforms to communicate, our online platforms may from time to time be
misused by individuals or groups of individuals to engage in immoral, disrespectful, fraudulent or illegal activities. Although we are
not aware of any material incidents on our platform and such incidents have not been covered by media reports or internet forums, any
such exposure or coverage could generate negative publicity about our brands and platform. We have implemented control procedures, such
as training and sample auditing, and require our teaching staff not to distribute any illegal or inappropriate content and conduct any
illegal or fraudulent activities on our platforms, but such procedures may not prevent all such content or activities from being posted
or carried out. Moreover, as we have limited control over the real-time and offline behavior of our students and teaching staff,
to the extent such behavior is associated with our platforms, our ability to protect our brand image and reputation may be limited. Our
business and the public perception of our brands may be materially and adversely affected by misuse of our platform. In addition, if any
of our students or teaching staff suffers or alleges to have suffered physical, financial or emotional harm following contact initiated
on our platform, we may face civil lawsuits or other liabilities initiated by the affected student or teaching staff, or governmental
or regulatory actions against us. In response to allegations of illegal or inappropriate activities conducted on our platform or any negative
media coverage about us, the PRC government authorities may intervene and hold us liable for non-compliance with the applicable PRC
laws and regulations concerning the dissemination of information on the internet and subject us to administrative penalties or other sanctions,
such as requiring us to restrict or discontinue some of the features and services provided on our platform. As a result, our business
may suffer and our brand image, student base, results of operations and financial condition may be materially and adversely affected.
Our brand image, reputation,
business and results of operations may also be adversely affected by various misconducts and other illegal or improper activities of our
franchisees, management personnel and other employees, such as intentionally failing to comply with government regulations, engaging in
unauthorized activities and misrepresentation to our potential students during marketing activities, improper use of our students’
and teaching staff’s sensitive or classified information, making payments to government officials or third parties that would expose
us to being in violation of laws. We cannot assure you that we will always be able to deter such misconducts, and the precautions we take
to prevent and detect such activities may not be effective in preventing these activities or controlling the relevant risks or losses.
Moreover, even if some of these misconducts and illegal or improper activities are not related to our business or the services provided
by our franchisees, management personnel or other employees to us, they may nevertheless cause negative publicity about us and thereby,
harm our brands and reputation.
We may not be able to achieve the benefits
we expect from recent and future acquisitions, and recent and future acquisitions may have an adverse effect on our ability to manage
our business.
As part of our business strategy,
we have pursued and intend to continue to pursue selective strategic acquisitions of businesses that complement our existing businesses.
For example, in June 2018, we acquired 80% equity interest in ABC Education Group, an English language training service provider. Acquisitions
expose us to potential risks, including risks associated with the diversion of resources from our existing businesses, difficulties in
successfully integrating the acquired businesses, failure to achieve expected growth by the acquired businesses and an inability to generate
sufficient revenue to offset the costs and expenses of acquisitions. If the revenue and cost synergies that we expect to achieve from
our acquisitions do not materialize, we may have to recognize impairment charges.
In addition, we may be unable
to identify appropriate acquisition or strategic investment targets when it is necessary or desirable to make such acquisition or investment
to remain competitive or to expand our business. Even if we identify an appropriate acquisition or investment target, we may not be able
to negotiate the terms of the acquisition or investment successfully, finance the proposed transaction or integrate the relevant businesses
into our existing business and operations. Furthermore, as we often do not have control over the companies in which we only have minority
stake, we cannot ensure that these companies always will comply with the applicable laws and regulations in their business operations.
Material non-compliance by our investees may cause substantial harm to our reputation and the value of our investments.
If any one or more of the
aforementioned risks associated with acquisitions or investments materialize, our acquisitions or investments may not be beneficial to
us and may have a material adverse effect on our business, financial condition and results of operations.
Failure to control rental costs, obtain
leases at desired locations at reasonable prices or failure to comply with the applicable PRC property laws and regulations regarding
certain of our leased and owned premises could materially and adversely affect our business.
We lease a significant number
of properties from third parties. As of the date of prospectus supplement, we entered into 121 leases for our premises with a total gross
floor area of approximately 82,040 square meters, which were or will be primarily used by our 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 our self-operated learning
centers. The leased properties were maintained by our landlords. Accordingly, we are not in a position to effectively control the quality,
maintenance and management of these buildings. In the event the quality of the buildings deteriorates, or if any or all of our landlords
fail to properly maintain and renovate such buildings in a timely manner or at all, our business operations could be materially and adversely
affected. In addition, if any of our landlords terminates the existing lease agreements, refuses to renew the lease agreements when such
lease agreements expire, or increase the rent to a level that is unacceptable to us, we will be forced to look for alternative locations
for our self-operated learning centers. We may not be able to find suitable premises for such relocation without incurring significant
time and costs, and there is no guarantee that we may be able to find suitable premises for relocation or at all. If we fail to find suitable
replacement sites in a timely manner or on terms acceptable to us, our business and results of operations could be materially and adversely
affected. Moreover, if our use of the leased premise is challenged by the relevant government authorities for lack of fire inspection,
we may be further subject to fines and also be forced to relocate the affected learning centers and incur additional expenses. If any
of the above events occurs, our business, results of operations and financial condition could be materially and adversely affected.
We have not been able to receive
from the lessors of some of our leased properties copies of the title certificates or proof of authorization to lease the properties to
us. As of the date of this prospectus supplement, we were not aware of any actions, claims or investigations threatened against us or
our lessors with respect to the defects in our leasehold interests. However, if any of our leases is terminated as a result of challenges
by third parties or government authorities for lack of title certificates or proof of authorization to lease, while we do not expect to
be subject to any fines or penalties, we may be forced to relocate the affected learning centers and incur additional expenses relating
to such relocation, or we may not be able to find suitable premises for relocation at all.
Under the applicable PRC laws
and regulations, the parties to a lease agreement are required to register and file the executed lease agreement with the relevant government
authorities. As of the date of this prospectus supplement, most of the lease agreements for the leased properties that we occupy had not
been registered or filed. While the failure to complete the lease registration will not affect the legal effectiveness of the lease agreements
according to PRC law, the relevant real estate administrative authorities may require the parties to the lease agreements to complete
lease registration within a prescribed period of time and the failure to do so may subject the parties to fines from RMB1,000 to RMB10,000.
While we have not been subject to any penalties or disciplinary action related to the failure to register our lease agreements, we cannot
assure you that we will not be subjected to penalties or other disciplinary actions for our past and future non-compliance.
We currently and may in the
future occupy premises for which we have paid the purchase price but have not obtained titles. If we are unable to obtain titles to the
properties, we may not be able to get a full refund on our purchase price and may have to relocate and incur additional expenses relating
to such relocation, or we may not be able to find suitable premises for relocation at all.
Therefore, the failure to
comply with the applicable PRC property laws and regulations regarding certain of our leased and owned premises may cause us to make relocations
and be subject to fines and suspension of business, which may materially and adversely affect our business, financial condition and results
of operations.
Higher labor costs may adversely affect
our business and our profitability.
Labor costs in China have
risen in recent years as a result of social development, and increasing inflation in China. As of December 31, 2020, we employed 3,721
full-time staff. Staff costs constituted a major portion of our total cost of revenues, reaching 63.1%, 62.5%, and 64.9% of our total
cost of revenues for the years ended December 31, 2018, 2019 and 2020, respectively. The increase in labor cost may erode our profitability
and materially harm our business, financial condition and results of operations. As our businesses have been continuing to expand in recent
years, the absolute amounts of our labor costs in the regions where we operate have also been increasing and could continue to increase.
If labor costs in these regions continue to increase, our operating costs will increase. We may not be able to pass on these increased
costs to our customers by increasing the fees of our courses in light of competitive pressure in the market. In such circumstances, our
profit margin may decrease, which could have an adverse effect on our business, financial condition and results of operations.
The outbreak of COVID-19 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 our
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 us to recruit teachers and operational staff
suitable for our business.
We have limited experience in operating
some of our newer service offerings.
We currently offer a comprehensive
service portfolio, including our offline general adult ELT, junior ELT, overseas training services and online ELT. We are constantly upgrading
and plan to develop new services to expand our business and student base. For example, we have started to offer our offline junior ELT
in 2018. We have expanded our offerings through internal development and external investments. However, some of our new service offerings
have not generated significant or any profit to date, as we have limited experience responding quickly to changes and competing successfully
for certain of these new areas. In addition, newer offerings may require more financial and managerial resources than what is available.
Furthermore, there is limited operating history on which you can base your evaluation of the business and prospects of these relatively
more recent offerings. The operation results of new services may also vary from period to period in response to a variety of factors beyond
our control, and we may not be able to achieve our expected profitability and performance of these new service offerings.
Course and service fee refunds or potential
refund disputes may negatively affect our cash flow, financial condition, and reputation.
We have different course and
service fee refund policies for our students depending on the time of their enrollment and we are subject to certain conditions and restrictions
in the service contract between us and each of our students. When calculating gross billings for a specific period, we deduct the total
amount of refunds from the total amount of cash received for the sale of course packages for such period.
For the years ended December
31, 2018, 2019 and 2020, we had made RMB154.1 million, RMB184.8 million, and RMB90.5 million (US$13.9 million) of refund payments, respectively.
For the same periods, our course withdrawal rate, which is determined as the amount of refunds we issued as a percentage of the total
amount of gross billings for the relevant period, was 10.2%, 10.9%, and 11.01%, respectively. Our course withdrawal rate increased in
2018, mainly due to our implementation of a new refund policy that allowed students to request refunds unconditionally during the first
20 days of enrolling in an offline general adult ELT program (such unconditional refund period had been changed to 10 days since September
2019), and partially because we introduced new curriculums at certain of our learning centers in 2018, which led to an initially adverse
student reception. We believe the implementation of the unconditional refund period for the general adult ELT business will improve our
students’ overall experience with our services. Additionally, the number of refund requests and the amount of refunds could be affected
by a number of factors, many of which are beyond our control. These factors include, without limitation, student dissatisfaction with
our teaching quality and our course and educational content offerings, privacy concerns relating to our online platforms, negative publicity
regarding us or online ELT in general, and any change or development in the PRC laws and regulations with respect to course fees charged
by online education providers like us. Any refund payments that we may be required to make to our students, as well as the expenses we
could incur for processing refunds and resolving refund disputes, could be substantial and could adversely affect our gross billings,
net revenue, liquidity and financial condition. A high volume of refund applications and refund disputes may also generate negative publicity
that could harm our reputation. We have experienced in the past, and may experience in the future, negative publicity in relation to refund
disputes between us and our students, which may significantly harm our brand names and divert our attention from operating our business.
We offer an installment payment arrangement
to our students, which may adversely affect our business, results of operations and operating cash flow if students participating in such
scheme decide not to complete the course(s) they have registered and request refund from us, or if such arrangement is found to be in
violation of any existing or future laws and regulations in China or otherwise subject to negative publicity.
In order to provide a more
convenient and flexible payment method for students, we have cooperated with accredited third-party financial institutions in China
to set up an installment payment arrangement through which students can pay for the courses and/or services we offer in several pre-determined installments
during the course of the contract period. Under such arrangement, a third-party financial institution provides an interest-free loan
to a student and remits the course/service fee to us on behalf of the borrowing student to complete his/her purchase of the relevant course.
The borrowing student is obligated to repay the loan in pre-agreed installments over a period ranging from six months to 24 months
to the financial institution. A transaction fee associated with the installment payment arrangement typically ranges from 4.4% to 10.8%
of the total amount of such loan, depending on the length of the installment period, which was generally withheld by such financial institution
prior to remitting the course/service fee to us. For the fiscal year ended December 31, 2020, approximately 24% of our total gross billings
have been paid through such installment payment arrangement. There is an inherent uncertainty relating to such arrangement compared to
a lump sum upfront payment scheme as students under the installment payment arrangement are more prone to cease to continue to take classes
during the contract period that they had initially registered. For the fiscal year ended December 31, 2020, the course withdrawal rate,
which is equal to the amount of refunds we issued in a specific period of time as a percentage of the sum of the amount of gross billings
and the amount of refunds for such period, of the students who participated in such installment arrangement was approximately 27.1%, and
the course withdrawal rate of the students who provided lump sum upfront payments was approximately 9.0%. When we receive refund requests
from our students, we typically determine the eligibility of and amounts of refund entitled by such students in accordance with our existing
refund policies. Once we determine a student to be eligible for refund, we generally provide the entire amount of refund to him/her directly.
In the event more students who participate in the installment payment arrangement decide not to complete their registered course(s) for
any reason, we may be required to provide large sums of refund to these students, which may materially and adversely impact our business,
results of operations and operating cash flow. Thus, our business and results of operations could be materially and adversely affected.
In addition, the PRC government
has tightened the regulation of consumer credit transactions in recent years. For example, the PRC government has prohibited any entity
that is not a licensed commercial bank or policy bank in China to provide any loan to students registered in universities in China. The
Notice on Regulating and Rectifying “Cash Loan” Business, or Circular 141, also prohibits online lending information intermediaries
from facilitating loans with no designated purpose. While we did not provide any loan to our students directly, we cannot assure you that
the relevant PRC government authorities will not impose additional restrictions on consumer credit transactions in the future that will
render our existing installment payment arrangement illegal. In such case, we may have to cease such arrangement, which could adversely
affect our student recruitment efforts, and we may be subject to penalties. In addition, there has been negative publicity about similar
arrangement offered by other ELT service providers in China, and we cannot assure you that we will not be subject to similar negative
publicity regarding our installment payment arrangement in the future, which may materially and adversely affect our brands, reputation
and business.
In addition, since students
who participate in the installment payment arrangement generally enter into separate financing arrangements with certain third-party financial
institutions whom we have no control over, we may not be able to ensure that these students will have a pleasant or satisfactory experience
dealing with such financial institutions. In the event the students are dissatisfied with any aspect of the services provided by such
financial institutions, our reputation and business prospects could be adversely affected.
Our results of operations are subject to
seasonal fluctuations.
The PRC offline ELT industry
generally experiences seasonality, reflecting a combination of traditional education industry patterns and new patterns associated with
the online platform in particular. Seasonal fluctuations have affected, and are likely to continue to affect, our business. In general,
the offline ELT industry experiences lower growth of gross billings in the first quarter of each calendar year due to the Chinese New
Year holiday, and our industry enjoys higher growth of gross billings in the third quarter during the summer months as some of our students
are generally on summer holiday and have more time to take English language training courses. Overall, the historical seasonality of our
business has been relatively mild due to our rapid growth. Our financial condition and results of operations for future periods may continue
to fluctuate due to seasonality of our business.
Failure to protect confidential information
of our students and teaching staff against security breaches could damage our reputation and brands and substantially harm our business
and results of operations.
A significant challenge to
the offline and online ELT industry is the secure storage of confidential information and its secure transmission over public networks.
All purchases of our course packages are made by our students and/or their parents through our learning centers, websites and mobile applications.
In addition, online payments for our course packages are settled through third-party online payment services. Maintaining complete
security for the storage and transmission of confidential information on our technology platform, such as student names, personal information
and billing addresses, is essential to maintaining student confidence.
We have adopted security policies
and measures to protect our proprietary data and student information. However, advances in technology, the expertise of hackers, new discoveries
in the field of cryptography or other events or developments could result in a compromise or breach of the technology that we use to protect
confidential information. We may not be able to prevent third parties, especially hackers or other individuals or entities engaging in
similar activities, from illegally obtaining such confidential or private information we hold as a result of our students’ visits
to our website and use of our mobile applications. Such individuals or entities obtaining our students’ confidential or private
information may further engage in various other illegal activities using such information. Any negative publicity on our website’s
or mobile applications’ safety or privacy protection mechanisms and policies, and any claim asserted against us or fine imposed
upon us as a result of actual or perceived failures, could have a material and adverse effect on our public image, reputation, financial
condition and results of operations.
Practices regarding the collection,
use, storage, transmission and security of personal information by companies operating over the internet and mobile platforms have recently
come under increased public scrutiny. Increased regulation by the PRC government of data privacy on the internet is likely and we may
become subject to new laws and regulations applying to the solicitation, collection, processing or use of personal or consumer information
that could affect how we store and process the data of our teaching staff and students. We generally comply with industry standards and
are subject to the terms of our own privacy policies. Compliance with any additional laws could be expensive, and may place restrictions
on the conduct of our business and the manner in which we interact with our students. Any failure to comply with applicable regulations
could also result in regulatory enforcement actions against us.
Significant capital and other
resources may be required to protect against information security breaches or to alleviate problems caused by such breaches or to comply
with our privacy policies or privacy-related legal obligations. The resources required may increase over time as the methods used
by hackers and others engaged in online criminal activities are increasingly sophisticated and constantly evolving. Any failure or perceived
failure by us to prevent information security breaches or to comply with privacy policies or privacy-related legal obligations, or
any compromise of security that results in the unauthorized release or transfer of personally identifiable information or other student
data, could cause our students to lose trust in us and could expose us to legal claims and liabilities. Any perception by the public that
online transactions or the privacy of user information are becoming increasingly unsafe or vulnerable to attacks could inhibit the growth
of online education services generally, which may negatively impact our business prospects.
We may be liable for improper use or appropriation
of personal information provided by our customers and any failure to comply with PRC laws and regulations over data security could result
in materially adverse impact on our business, results of operations, our continued listing on Nasdaq, and this offering.
Our business involves collecting
and retaining certain internal data and student information. the integrity and protection of student information and company data is crucial
to us and our business. Our students expect that we will adequately protect their personal information. We are required by applicable
laws to keep strictly confidential the personal information that we 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, 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.
The PRC regulatory requirements
regarding cybersecurity are evolving. For instance, various regulatory bodies in China, including the Cyberspace Administration of China,
the Ministry of Public Security and the State Administration for Market Regulation, have enforced data privacy and protection laws and
regulations with varying and evolving standards and interpretations. In April 2020, the Chinese government promulgated Cybersecurity Review
Measures, which came into effect on June 1, 2020. According to the Cybersecurity Review Measures, operators of critical information infrastructure
must pass a cybersecurity review when purchasing network products and services which do or may affect national security.
In July 2021, the Cyberspace
Administration of China and other related authorities released the draft amendment to the Cybersecurity Review Measures for public comments
through July 25, 2021. The draft amendment proposes the following key changes:
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companies who are engaged in data processing are also subject to the regulatory scope;
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the CSRC is included as one of the regulatory authorities for purposes of jointly establishing the state
cybersecurity review working mechanism;
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the operators (including both operators of critical information infrastructure and relevant parties who
are engaged in data processing) holding more than one million users/users’ (which to be further specified) individual information
and seeking a listing outside China shall file for cybersecurity review with the Cybersecurity Review Office; and
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the risks of core data, material data or large amounts of personal information being stolen, leaked, destroyed,
damaged, illegally used or transmitted to overseas parties and the risks of critical information infrastructure, core data, material data
or large amounts of personal information being influenced, controlled or used maliciously shall be collectively taken into consideration
during the cybersecurity review process.
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Currently, the draft amendment
has been released for public comment only, and its implementation provisions and anticipated adoption or effective date remains substantially
uncertain and may be subject to change. If the draft amendment is adopted into law in the future, we may become subject to enhanced cybersecurity
review. Certain internet platforms in China have been reportedly subject to heightened regulatory scrutiny in relation to cybersecurity
matters. As of the date of this prospectus supplement, as an English language training service provider through our VIEs and their subsidiaries
in China, we have not been included within the definition of “operator of critical information infrastructure” by competent
authority, nor have we been informed by any PRC governmental authority of any requirement that we file for a cybersecurity review. However,
if we are deemed to be a critical information infrastructure operator or a company that is engaged in data processing and holds personal
information of more than one million users, we could be subject to PRC cybersecurity review.
As there remains significant
uncertainty in the interpretation and enforcement of relevant PRC cybersecurity laws and regulations, we could be subject to cybersecurity
review, and if so, we may not be able to pass such review. In addition, we 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 our app from the relevant app stores, and revocation of prerequisite licenses, as well as reputational damage or legal proceedings
or actions against us, which may have material adverse effect on our business, financial condition or results of operations. As of the
date of this prospectus supplement, we have not been involved in any investigations on cybersecurity review initiated by the Cyber Administration
of China or related governmental regulatory authorities, and we have not received any inquiry, notice, warning, or sanction in such respect.
We believe that we are in compliance with the aforementioned regulations and policies that have been issued by the Cyber Administration
of China.
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 will take effect
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 an information.
As of the date of this prospectus
supplement, we do not expect that the current PRC laws on cybersecurity or data security would have a material adverse impact on our business
operations. However, as uncertainties remain regarding the interpretation and implementation of these laws and regulations, we cannot
assure you that we will comply with such regulations in all respects and we may be ordered to rectify or terminate any actions that are
deemed illegal by regulatory authorities. We may also become subject to fines and/or other sanctions which may have material adverse effect
on our business, operations and financial condition.
If we fail to develop or adopt new technologies
to effectively meet challenges from changing consumer requirements, emerging standards in the industry or mobile operating systems, or
if our efforts to invest in the development of new technologies are unsuccessful our business may be materially and adversely affected.
The ELT industry is characterized
by rapid technological changes in the teachers’ and students’ requirements and preferences, frequent introduction of new courses
or services utilizing new technologies and the emergence of new standards and practices, any of which could render our existing technologies
and systems obsolete. Our success will depend in part on our ability to identify, develop, acquire or license leading technologies useful
to our business, and respond to technological advances and emerging industry standards and practices, such as mobile internet, in a cost-effective and
timely way. The development of websites, mobile applications and other proprietary technologies entails significant technical and business
risks. We cannot assure you that our existing technologies will remain competitive or that we will be able to successfully develop or
effectively use new technologies, recoup the costs of developing new technologies or adapt our websites, mobile applications, proprietary
technologies and systems to meet customer requirements or emerging industry standards. If we are unable to develop technologies successfully
or adapt in a cost-effective and timely manner in response to changing technological standards, market conditions or customer requirements,
whether for technical, financial or other reasons, our business, prospects, financial condition and results of operations may be materially
and adversely affected.
In addition, purchases using
mobile devices by consumers generally, and by our customers specifically, have increased, and we expect this trend to continue. To optimize
the mobile shopping experience, we are somewhat dependent on our customers downloading our specific mobile applications for their particular
devices as opposed to accessing our websites from an internet browser on their mobile devices. As new mobile devices and platforms are
released, it is difficult to predict the problems we may encounter in developing applications for their alternative devices and platforms,
and we may need to devote significant resources to the development, support and maintenance of such applications. In addition, our future
growth and results of operations could suffer if we experience difficulties in integrating our mobile applications into mobile devices
in the future, if problems arise with our relationships with providers of mobile operating systems or mobile applications download stores,
if our applications receive unfavorable treatment compared to competing applications on the download stores, or if we face increased costs
to distribute or have customers using our mobile applications. We are further dependent on the interoperability of our websites with popular
mobile operating systems that we do not control, such as iOS and Android operating systems, and any changes in search systems that degrade
the functionality of our websites or give preferential treatment to competitive products could adversely affect the usage of our websites
on mobile devices. In the event that this is more difficult for our customers to access and use our website on their mobile devices, or
if our customers choose not to access or to use our websites on their mobile devices or to use mobile products that do not offer access
to our websites or mobile applications, our business, financial condition and results of operations may be adversely affected.
Accidents or injuries suffered by our students
and other people on our premises may adversely affect our reputation, business operation and financial performance.
We do not have any insurance
for our students or other people at our learning centers. In the event of accidents, injuries or other harm to students or other people
on our premises, including those caused by and arising from the actions of our employees at our learning centers and/or our other premises,
our facilities may be perceived to be unsafe, which may discourage prospective students from attending our courses and we may face lawsuits.
Our students may also hurt themselves or other persons due to psychological pressure. We could also face claims alleging that we were
negligent or provided inadequate supervision to our employees and therefore should be held jointly liable for harm caused by then or are
otherwise liable for injuries suffered by our students or other people on our premises. A liability claim, even if unsuccessful, against
us or any of our employees could adversely affect our reputation, enrollment and revenue, causing us to incur substantial expenses and
divert the time and attention of our management.
We may not maintain adequate insurance,
which could expose us to significant costs and business disruption.
The insurance industry in
China is still at an early stage of development. In particular, PRC insurance companies offer limited business insurance products to education
service providers. We do not have key employee insurance, business liability insurance or business disruption insurance to cover our operations,
which we believe is consistent with customary industry practice in China. We have determined that the costs of insuring for these risks
and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us to have such
insurance. In addition, we do not maintain any insurance policies covering risks including loss and theft of and damages to our servers
or other technology infrastructure. Any uninsured occurrence of business disruption, litigation or natural disaster, or significant damages
to our uninsured equipment or technology infrastructure could result in substantial costs and diversion of resources for us and could
adversely affect our financial condition and results of operations.
If we fail to prevent the loss or misappropriation
of, or disputes over, our intellectual property rights, our brands and business may suffer.
We consider our copyrights,
trademarks, trade names, internet domain names, patents and other intellectual property rights invaluable to our ability to continue to
develop and enhance our brand recognition. Unauthorized use of our intellectual property rights may damage our reputation and brands.
We rely on a combination of copyright, trademark and trade secrets laws to protect our intellectual property rights. Nevertheless, the
measures we take to protect our intellectual property rights may not be adequate to prevent unauthorized uses. In addition, preventing
infringement on or misuse of intellectual property rights could be difficult, costly and time-consuming in China. The practice
of intellectual property rights enforcement action by the PRC regulatory authorities is in its early stage of development and is subject
to significant uncertainty. For example, third parties may obtain and use our intellectual property without due authorization, particularly
in China. We may also need to resort to litigation and other legal proceedings to enforce our intellectual property rights. Any such action,
litigation or other legal proceedings could result in substantial costs and diversion of our management’s attention and resources
and could disrupt our business. There is no assurance that we will be able to enforce our intellectual property rights effectively or
otherwise prevent others from the unauthorized use of our intellectual property. Failure to adequately protect our intellectual property
could materially and adversely affect our brand names and reputation, and our business, financial condition and results of operations.
We may encounter infringement disputes from
time to time relating to our use of intellectual properties of third parties.
We cannot assure you that
our offline ELT courses and marketing materials, online ELT courses, products, platforms and applications or other intellectual property
developed or used by us do not or will not infringe upon valid copyrights or other intellectual property rights held by third parties.
We may encounter disputes from time to time over rights and obligations concerning intellectual property, and we may not prevail in those
disputes. We have adopted policies and procedures to prohibit our employees and contractors from infringing upon third-party copyright
or intellectual property rights. However, we cannot assure you that our teachers or other personnel will not, against our policies, use
third-party copyrighted materials or intellectual property without proper authorization in our classes, on our websites, at any of
our locations or via any medium through which we provide our programs. Our users may also post unauthorized third-party content on
our websites. We may incur liability for unauthorized duplication or distribution of the materials posted on our websites or used in our
classes. We have been involved in claims against us alleging our infringement of third-party intellectual property rights and we
may be subject to such claims in the future. Any such intellectual property infringement claim could result in costly litigation, harm
our reputation, divert our management attention and resources and subject us to substantial financial harm.
A certain number of our self-operated learning
centers and our owned properties are not in compliance with fire safety regulations.
Our self-operated learning
centers are mainly located on properties leased by us from third parties. We generally make decoration work to the leased properties to
meet our business operational needs. According to the relevant PRC laws and regulations, our decoration work falls within the scope of
construction work. If the investment amount of such construction work exceeds RMB300,000 and the gross floor area is more than 300 square
meters, the records of the fire safety design and the completion inspection must be filed with the competent fire safety authorities after
the decoration work obtains the relevant construction permit and passes the completion inspection. As of the date of this prospectus supplement,
we entered into 121 leases for our premises, 111 of which have been put into use for our self-operated learning centers, and we have
complied with the foregoing fire safety design and filing requirements with respect to 101 of these premises. As of December 31, 2020,
14 leased properties comprised of 12 of our self-operated learning centers currently in use had not completed the filing of fire protection
design and completion inspection record. Additionally, we owned premises that were used as space for one of our self-operated learning
centers with a total gross floor area of approximately 8,057 square meters, and we have not completed the filing of fire protection design
and completion inspection record for such properties as of the date of this prospectus supplement. The 12 self-operated learning
centers contributed to approximately 5.0% to our gross billings for the fiscal year ended December 31, 2020.
In case of failure to complete
the foregoing procedures, the competent fire safety authorities in the PRC can order rectifications within a specified period of time,
impose a fine of less than RMB5,000 per property, and order the stoppage of use. We have been fined for such violations in the past for
an immaterial amount, and we cannot assure you that we will not be fined in the future for past and future violations. In the case of
failure to rectify, such authorities can order stoppage of construction and use and suspension of business, and impose a fine of more
than RMB30,000 and less than RMB300,000. If we cannot complete the filing of fire protection design and completion inspection according
to the relevant requirements, we may be subject to a fine or may be ordered to make rectification within a specified period of time or
suspend our operation on the affected properties. In addition, according to Circular 10, if we cannot meet the requirements of the
fire safety standards, the relevant training qualifications could be revoked by the government authorities. If complying with fire safety
regulations would require us to terminate or break our existing leases, we may be liable for any associated termination or breakage costs
in addition to the costs of relocation, renovation and decoration. It may also disrupt our scheduled courses and force us to postpone
or cancel some courses and refund the related course fees, all of which could materially and adversely affect our business, financial
condition and results of operations.
Failure to make adequate contributions to
various employee benefits plans as required by PRC regulations may subject us to penalties.
Pursuant to the PRC laws and
regulations, we are required to participate in various social insurance benefit plans for our employees, whether PRC nationals or foreign
citizens, including pension insurance, unemployment insurance, medical insurance, work-related injury insurance and maternity insurance.
We are also required to participate in housing provident fund plan for our PRC national employees. We are required to contribute to the
plans in amounts equal to certain percentages of the salaries, including bonuses and allowances, of our employees up to a maximum amount
specified by the local government from time to time at locations where we operate our business. The requirement of employee benefit plans
has not been implemented consistently by the local governments in China given the different levels of economic development in various
locations. In some locations where we operate, consistent with local practices, we did not strictly follow the laws and regulations relating
to participating in various social insurance benefit plans for our PRC national employees, including housing provident fund. We also did
not make full contribution of our foreign employees’ social insurance, which was mainly due to an administrative oversight and unfamiliarity
with the relevant laws and regulations of our staff in charge. While we have not faced any penalty or disciplinary action in the past,
our failure in making contributions to various employee benefit plans and in complying with the applicable PRC labor-related laws
may subject us to late payment penalties. We may be required to make up the contributions for these plans as well as to pay late fees
and fines. If we are subject to late fees or fines in relation to the underpaid employee benefits, our financial condition and results
of operations may be adversely affected.
We cannot assure you that
our employees will not complain to the relevant authorities by reporting our failure to make contributions to the social insurance plans.
Moreover, we cannot assure you that the relevant local government authorities will not require us to pay the outstanding amount within
a prescribed time or impose penalties or overdue fines on us, which may in turn adversely affect our financial condition and results of
operations.
Certain of our teachers do not possess teaching
qualifications, which may be subject to penalty under the relevant PRC laws and regulations. Our failure to comply with these requirements
may result in material and adverse effect on our business, results of operations and prospects.
Under the relevant PRC laws
and regulations, teachers of all types of schools and other education institutions are required to obtain teacher qualification certificates
or other relevant professional skill qualifications, although the definition or scope of the relevant professional skill qualifications
is not explicitly stated in the relevant PRC laws and regulations. If teachers are employed in violation of such regulations, the examination
and approval authorities or other relevant government departments will order the schools and other education institutions to make corrections
within a specified period of time and give a warning in accordance with the applicable laws and regulations. If there is income generated
from teachers without teaching qualifications, the illegal income will be confiscated. In the event the circumstances are deemed serious
by the relevant government authorities, student enrollment will be ordered to stop and the school license will be revoked. As of the date
of this prospectus supplement, some of our teachers did not possess any teaching qualifications or relevant professional skill qualifications.
As of the date of this prospectus supplement, we have not received any notice or warning or been subject to any penalties or disciplinary
action from government authorities due to the lack of teaching licenses of our teachers. As advised by our PRC counsel, the current PRC
laws and regulations remain unclear as to whether our teachers are required to obtain and hold teaching qualifications. However, we cannot
assure you that the relevant PRC government authorities will not take a contrary view and impose penalties, fines or other disciplinary
action for our past or future non-compliance.
We cannot assure you that we will not be
subject to liability claims for any inaccurate or inappropriate content in our training programs, which could cause us to incur legal
costs and damage our reputation.
We develop the content for
our ELT programs ourselves or through partnerships with third parties. We cannot assure you that there will be no inaccurate or inappropriate
materials included in our training programs or the materials we obtain from our third-party partners. In addition, our mock examination
questions designed internally based on our understanding of the relevant examination requirements may be investigated by the regulatory
authorities. Therefore, we may face civil, administrative or criminal liability if an individual or corporate, governmental or other entity
believes that the content of any of our training programs violets any laws, regulations or governmental policies or infringes upon its
legal rights. Even if such claim were not successful, defending it may cause us to incur substantial costs including the time and attention
of our management. Moreover, any accusation of an accurate so inappropriate conduct could lift to significant negative publicity, which
could harm our reputation and future business prospects.
We may be involved in legal and other disputes
and claims arising out of our operations from time to time.
We may, from time to time,
be involved in disputes with and subject to claims by parents and students, teachers and other school personnel, and other parties involved
in our business. We cannot assure you that when legal actions arise in the ordinary course of our business, any of the legal actions will
be resolved in our favor. We are subject to uncertainties as to the outcome of such legal proceedings and our business operations may
be disrupted. Legal or other proceedings involving us may, among others, result in us incurring significant costs, divert management’s
attention and other resources, negatively affect our business operations, cause negative publicity against us or damage our reputation,
regardless whether we are successful in defending such claims or proceedings. Our business, financial condition and results of operations
may be materially and adversely affected as a result.
We may be adversely affected by any negative
publicity concerning us, our business, founders, shareholders, affiliates, directors, senior management and employees, as well as our
third-party commercial partners and the industry in which we operate, regardless of its accuracy, which could harm our reputation and
business.
Negative publicity about us,
our business, founders, shareholders, affiliates, directors, senior management, teachers and other employees, as well as our third-party commercial
partners and the industry in which we operate, can harm our operations. We have been exposed to negative publicity concerning, among other
things, miscalculation involving and delays in the payments of staff salaries and/or bonuses, student refund disputes, administrative
penalties, alleged improper or misleading statements made in our sales and marketing activities in the past and actions of our founders
and directors and members of our senior management. Negative publicity concerning these parties could be related to a wide variety of
matters, including, but are not limited to:
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misconduct, alleged or otherwise, or other improper activities committed by our founders, students or our directors, shareholders, senior management, affiliates, teaching staff and other employees, including misrepresentation made by our employees to prospective students during sales and marketing activities;
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false or malicious allegations or rumors about us or our founders, directors, shareholders, senior management, affiliates, teaching staff and other employees, as well as our students;
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complaints by our students about our education services and sales and marketing activities;
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course fee refund disputes between us and our students or administrative penalties;
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security breaches of our student’s or employee’s confidential information;
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employment-related complaints and claims relating to alleged employment discrimination, wage and hour violations, miscalculations involving and delays in the payments of staff salaries and/or bonuses; and
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governmental and regulatory investigations or penalties resulting from our failure to comply with applicable laws and regulations.
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We may also be exposed the
risk of any misconduct of our third party commercial partners that any negative publicity and claims asserted against our third party
commercial partners or fines imposed upon them as a result of actual or perceived failures, could have a material and adverse effect on
our public image, reputation, financial condition and results of operations. In addition, negative publicity of the industry in which
we operate, including, but not limited to, bankruptcy and cessation of business operations of any of our major competitors, may materially
and adversely affect our business prospects and results of operations.
In addition to traditional
media, there has been an increasing use of social media and similar platforms in China, including instant messaging applications, such
as WeChat, social media websites and other forms of internet-based communications that provide individuals with access to a broad
audience of consumers and other interested persons. The availability of information on instant messaging applications and social media
platforms is virtually immediate as is its impact without affording us an opportunity for redress or correction. The opportunity for dissemination
of information, including inaccurate information, is seemingly limitless and readily available.
Information concerning our
company, shareholders, directors, officers and employees may be posted on such platforms at any time. The risks associated with any such
negative publicity or incorrect information cannot be completely eliminated or mitigated and may materially harm our reputation, business,
financial condition and results of operations.
We are subject to regulatory inspections,
examinations, inquiries and audits, and future sanctions, fines and other administrative penalties resulting from such inspections and
audits could materially and adversely affect our business, financial condition and results of operations.
We are subject to certain
regulation and supervision from the PRC government authorities. These relevant regulatory authorities have broad powers to adopt regulations
and other requirements affecting or restricting our operations, including tax policies. Moreover, these relevant regulatory authorities
possess significant powers to enforce applicable regulatory requirements in the event of our non-compliance, including the imposition
of fines, sanctions or the revocation of licenses or permits to operate our business. We have in the past been subject to tax penalties
concerning certain of our subsidiaries, and we cannot assure you that we will not face similar or other administrative fines or penalties
concerning our operations or our subsidiaries.
Any natural catastrophes, severe weather
conditions, health epidemics, including COVID-19, and other extraordinary events could severely disrupt our business operations.
The occurrence of natural
catastrophes such as earthquakes, floods, typhoons, tsunamis or any acts of terrorism may result in significant property damages as well
as loss of revenue due to interactions in our business operations. As we store books and course materials at our premises, there is a
risk that these products and our promises may be damaged or destroyed by fire and other natural calamities. Any disruption of electricity
supply or any outbreaks of fire or similar calamities at our premises may result in the breakdown of our facilities and the disruption
to our business. Health epidemics such as outbreaks of avian influenza, severe acute respiratory syndrome (SARS), COVID-19, swine flu
(H1N1) or the Influenza A virus, and severe weather conditions such as snowstorm and hazardous air pollution, as well as the government
measures adopted in response to these events, could significantly impact our operations.
Due to the quarantine measures
to contain the spread of the COVID-19, we temporarily closed our learning centers in China from February 2020 to April 2020. In April
2020, we reopened a select number of our learning centers, and gradually reopened the remaining in May and June 2020 as permitted to do
so by the MOE and provincial education bureaus. As a result, our ability to deliver our services, particularly our offline ELT services,
had been adversely impacted and the costs for us to deliver our services may also increase. Some students changed their study plans due
to these restrictive measures or safety considerations, and thus, the demand for our services, especially demand for our overseas training
services, decreased.
The COVID-19 pandemic had
a material adverse impact on our business operations for the fiscal year ended December 31, 2020. Our revenues for the fiscal year ended
December 31, 2020 decreased by RMB552.7 million, or 38.2%, from RMB1,447.9 million for the fiscal year ended December 31, 2019.
The extent to which COVID-19
impacts our financial position, results of operations and cash flows in 2021 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, our 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, we may be forced to close our learning
centers or our offices again while we remain obligated to pay rent and other expenses for these facilities, have quarantine policies in
place for our students, teachers, or employees and the disinfection of the affected properties along with the temporary suspension of
our operations, or cancel or defer student enrollment to avoid the spread or recurrence of contagion.
As of the date of this prospectus
supplement, most of the quarantine measures in China have been relaxed. However, our results of operations may still 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, our business operations and financial performance may be materially and adversely affected.
While we have migrated our
offline general adult ELT, overseas training and junior ELT courses online during the COVID-19 pandemic to provide continued training
services to our students, our ability to conduct live-streaming lectures and provide other online education services depends on the
continuing operation of our technology systems, which is vulnerable to damage or interruption from natural catastrophes and other extraordinary
events. In addition, any fire or other calamity at the facilities of our third-party service providers that host our servers could
severely disrupt our ability to deliver our online courses. Our disaster recovery planning cannot account for every conceivable possibility.
Any damage or failure of our technology system could result in interruptions in our services, and our brands could be damaged if students
believe our systems are unreliable. Such disruptions could severely interfere with our business operation and adversely affect our results
of operations.
If we fail to implement and maintain an
effective system of internal controls, we may be unable to accurately or timely report our results of operations or prevent fraud, and
investor confidence and the market price of our securities may be materially and adversely affected.
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, 2020, 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.
Our predecessor independent registered public
accounting firm, KPMG Huazhen LLP, that issued an audit report included in our annual report for the fiscal year ended December 31, 2020
is located in China, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the PRC authorities,
and as such, investors may be deprived of the benefits of such inspection.
Our predecessor independent
registered public accounting firm that issue an audit report included in our annual report for the fiscal year ended December 31, 2021,
as an auditor of the companies that are traded publicly in the United States and a firm registered with the Public Company Accounting
Oversight Board (United States), or the PCAOB, is required by the laws of the United States to undergo regular inspections by the PCAOB
to assess its compliance with the laws of the United States and professional standards. Our predecessor auditor is located in China, a
jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the PRC authorities. In May 2013, the
PCAOB announced that it had entered into a Memorandum of Understanding on Enforcement Cooperation with the China Securities Regulation
Commission, or the CSRC, and the Ministry of Finance, which establishes a cooperative framework between the parties for the production
and exchange of audit documents relevant to investigations undertaken by the PCAOB, the CSRC or the Ministry of Finance in the United
States and the PRC, respectively. The PCAOB continues to be in discussions with the CSRC and the Ministry of Finance to permit joint inspections
in the PRC of audit firms that are registered with the PCAOB and audit Chinese companies that trade on U.S. exchanges. On December 7,
2018, the SEC and the PCAOB issued a joint statement highlighting continued challenges faced by the U.S. regulators in their oversight
of financial statement audits of U.S.-listed companies with significant operations in China. In June 2019, a bill entitled the “Ensuring
Quality Information and Transparency for Abroad-Based Listings on our Exchanges (EQUITABLE) Act” was introduced in the U.S. Congress.
The proposed EQUITABLE Act requires the SEC to maintain a list of issuers for which the PCAOB is not able to inspect or investigate an
auditor report issued by a foreign public accounting firm and prescribes increased disclosure requirements for such issuers. The proposed
EQUITABLE Act also prescribes that, beginning in 2025 the delisting from U.S. national securities exchanges of issuers included on the
SEC’s list for three consecutive years. Additionally, on May 20, 2020, the U.S. Senate passed S. 945, the Holding Foreign Companies
Accountable Act. On December 18, 2020, the Holding Foreign Companies Accountable Act was enacted. In essence, the Holding Foreign Companies
Accountable Act directs the SEC to prohibit the securities of any registrant from being listed on any of the U.S. securities exchanges
or traded “over-the-counter” if the auditor of the registrant’s financial statements is not subject to PCAOB inspection
for three consecutive years, beginning in 2021, and require certain disclosures in the registrant’s annual reports covering years
when the auditor of the registrant’s financial statements is not subject to PCAOB inspection. Furthermore, Nasdaq has proposed changes
to its rules to allow it to consider whether the auditor of a company has been inspected by the PCAOB in considering whether to allow
the new or continued listing of that company. The proposed Nasdaq rule changes are subject to approval by the SEC. The joint statement,
the bills and the proposed Nasdaq rule changes reflect a heightened interest in an issue that has vexed U.S. regulators in recent years.
However, it remains unclear what further actions the U.S. Congress, SEC and/or the PCAOB will take to address the problem, or whether
the proposed Nasdaq rule changes will be put into place.
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 a bill 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 HFCA Act from three years to two.
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.
We are transitioning our business focus
and our results of operations may be materially and adversely affected.
As of the date of this prospectus
supplement, we have been primarily operating in the ELT industry in China. We plan to transition our business focus to blockchain and
cryptocurrency business. Our Company plans to build a business division dedicated to blockchain and cryptocurrency business. There are
risks in connection with our 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 our
business focus and it is possible that we remain in such status for a certain period of time. During such period, our revenue may be very
limited and we 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 our existing lines of business. Currently, we plan to venture
into the blockchain and cryptocurrency business. 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:
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build a well-recognized and respected brand;
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establish and expand our customer base;
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improve and maintain our operational efficiency for new lines of business;
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maintain a reliable, secure, high-performance and scalable technology infrastructure for our new lines of business;
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anticipate and adapt to changing market conditions, including technological developments and changes in competitive landscape;
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navigate an evolving and complex regulatory environment, such as licensing and compliance requirements; and
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manage the resources and attention of management between our current core business and new lines of business.
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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 our 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 our new business. As of the date of this prospectus
supplement, no definitive agreement has been entered into by our Company related to this new line of business. There is no assurance that
our efforts to develop this new line of business will succeed.
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 our new businesses.
If we fail to establish our strengths or maintain our competitiveness in those industries, our business prospects, results of operations
and financial condition may be materially and adversely affected.
Risks Related to Our Corporate Structure
If the PRC government finds that the contractual
arrangements that establish the structure for operating our business do not comply with applicable PRC laws and regulations, we could
be subject to severe penalties or be forced to relinquish our interests in those operations.
Currently, the PRC laws and
regulations do not explicitly impose restrictions on foreign investment in ELT services in the PRC. However, some local government authorities
in the PRC have adopted different approaches in granting licenses and permits (particularly, imposing more stringent restrictions on foreign-invested entities)
for entities providing ELT services. In the areas where we operate our ELT service business, most local government authorities do not
allow foreign-invested entities to establish private schools to engage in the ELT services, other than in the forms of Sino-foreign cooperative
schools, and the domestic party shall play a dominant role in such cooperation. According to the relevant regulations, foreign investors
of Sino-foreign cooperative institutions must be foreign educational institutions with relevant qualifications and experiences. As
a foreign company, we are not qualified to run Sino-foreign cooperative schools in the PRC. In addition, according to Notice 75,
foreign-invested language training institutions are required to apply for the private school operating permit. However, based on
the interviews we conducted in November 2019 with the officials of the local educational authorities in the areas where we have learning
centers in operation, most of the local educational authorities provided oral confirmations that due to the fact that the Notice 75 has
just been issued for a short period of time and that no detailed supporting rules and regulations have been promulgated, the relevant
procedure, approval process and transitional period regarding the application by the foreign-invested language training institutions
for the private school operating permit are not yet clear and the relevant government authorities have not yet begun to accept applications.
In addition, the PRC laws and regulations restrict foreign ownership in value-added telecommunication services and require that a
foreign investor who invests in a value-added telecommunications business in the PRC must possess prior experience in operating value-added telecommunications
businesses and a proven track record of business operations overseas. Due to these restrictions, we operate our offline and online ELT
business in the PRC primarily through our affiliated entities. We entered into a series of contractual arrangements with Shenzhen Meten
and Shenzhen Likeshuo and their shareholders, respectively. Our affiliated entities are the entities that hold certain licenses and permits
relating to the offline and online ELT business in the PRC. We have been and expect to continue to be dependent on our affiliated entities
to operate our business.
As advised by our PRC counsel,
there are substantial uncertainties regarding the interpretation and application of the PRC laws and regulations, and we cannot assure
you that the PRC government would agree that our corporate structure or any of the above-mentioned contractual arrangements comply
with the current or future PRC laws or regulations. The PRC laws and regulations governing the validity of these contractual arrangements
are uncertain and the relevant government authorities may have broad discretion in interpreting these laws and regulations. If our ownership
structure and contractual arrangements are found to be in violation of any existing or future PRC laws or regulations, or we fail to obtain
any of the required licenses and permits, the relevant PRC regulatory authorities including the MOE, which regulates the education industry
in the PRC, the Ministry of Commerce, or the MOFCOM, which regulate the foreign investments in the PRC, the MCA, which regulates the registration
of non-profit private schools in the PRC after the Amended Private Education Promotion Law became effective, and the SAIC, which
regulates the registration and operation of for-profit private schools in the PRC after the Amended Private Education Promotion Law became
effective, would have broad discretion in dealing with such violations, including:
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revoking the business licenses and operating permits held by Zhuhai Meten and Zhuhai Likeshuo and their respective subsidiaries, or our other PRC subsidiaries, and/or our affiliated entities;
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discontinuing or restricting the operations of any related-party transactions among our PRC subsidiaries and our affiliated entities;
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limiting our business expansion in the PRC by way of entering into contractual arrangements;
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confiscating the income of our affiliated entities;
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imposing fines, penalties or other requirements with which we, our PRC subsidiaries, or affiliated entities may not be able to comply;
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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 our 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, as a form of foreign investment, it contains
a catch-all provision under the definition of “foreign investment,” which includes investments made by foreign investors
in China through other means stipulated by laws or administrative regulations or other methods prescribed by the State Council without
elaboration on the meaning of “other means.” However, the Implementing Regulations of the Foreign Investment Law still does
not specify whether foreign investment includes contractual arrangements.
It is possible that future
laws, administrative regulations or provisions prescribed by the State Council may regard contractual arrangements as a form of foreign
investment, at which time it will be uncertain whether the contractual arrangements will be deemed to be in violation of the foreign investment
access requirements and how the above-mentioned contractual arrangements will be handled. Therefore, there is no guarantee that the
contractual arrangements and the business of our affiliated entities will not be materially and adversely affected in the future due to
changes in the PRC laws and regulations. Furthermore, if future laws, administrative regulations or provisions prescribed by the State
Council mandate further actions to be completed by companies with existing contractual arrangements, we may face substantial uncertainties
as to the timely completion of such actions. In the extreme case scenario, we may be required to unwind the contractual arrangements and/or
dispose of our VIEs and affiliated, which could have a material and adverse effect on our business, financial conditions and results of
operations.
We rely on contractual arrangements with
our VIEs and their shareholders for our operations in China, which may not be as effective in providing operational control as direct
ownership.
We have relied and expect
to continue to rely on the contractual arrangements with our ELT businesses in China. However, these contractual arrangements may not
be as effective as direct equity ownership in providing us with control over our affiliated entities. Any failure by our VIEs and their
shareholders to perform their obligations under the contractual arrangements would have a material adverse effect on the financial position
and performance of our Company. For example, the contractual arrangements are governed by the PRC law and provide for the resolution of
disputes through arbitration in the PRC. Accordingly, these contracts would be interpreted in accordance with the PRC law and any disputes
would be resolved in accordance with arbitral procedures as contractually stipulated. The commercial arbitration system in the PRC is
not as developed as in some other jurisdictions, such as the United States.
As a result, uncertainties
in the commercial arbitration system or legal system in the PRC could limit our ability to enforce these contractual arrangements. In
addition, if the legal structure and the contractual arrangements were found to violate any existing or future PRC laws and regulations,
we may be subject to fines or other legal or administrative sanctions.
If any government action causes
us to lose our right to direct the activities of our affiliated entities or lose our right to receive substantially all the economic benefits
and residual returns from our affiliated entities and we are not able to restructure our ownership structure and operations in a satisfactory
manner, we would no longer be able to consolidate the financial results of our affiliated entities.
Our VIEs or their shareholders may fail
to perform their obligations under the contractual arrangements.
If Shenzhen Meten, Shenzhen
Likeshuo or any of their respective shareholders fails to perform their obligations under the contractual arrangements, we may have to
incur substantial costs and resources to enforce our rights under the contracts, and rely on legal remedies under the PRC law, including
seeking specific performance or injunctive relief and claiming damages, which may not be effective. For example, if the shareholders of
Shenzhen Meten or Shenzhen Likeshuo were to refuse to transfer their equity interest in Shenzhen Meten or Shenzhen Likeshuo to us or our
designee when we exercise the call option pursuant to these contractual arrangements, or if they were otherwise to act in bad faith toward
us, then we may have to take legal actions to compel them to perform their contractual obligations.
All the material agreements
under our contractual arrangements are governed by the PRC law and provide for the resolution of disputes under the agreements through
arbitration in the Shenzhen Court of International Arbitration. Accordingly, these contracts would be interpreted in accordance with the
PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal system in the PRC is not as developed as
some other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce
these contractual arrangements. Under the PRC law, rulings by arbitrators are final, parties cannot appeal the arbitration results in
courts, and the prevailing parties may only enforce the arbitration awards in the PRC courts through arbitration award recognition proceedings,
which would incur additional expenses and delay. In the event that we are unable to enforce these contractual arrangements, we may not
be able to exert effective control over our affiliated entities, and our ability to conduct our business may be negatively affected.
The shareholders of our VIEs may have actual
or potential conflicts of interest with us and not act in the best interests of our Company.
Our control over affiliated
entities is based upon the contractual arrangements with our affiliated entities, the VIEs and their shareholders and the directors of
our affiliated entities. The shareholders of the VIEs may potentially have conflicts of interest with us and breach their contracts or
undertaking with if it would further their own interest or if they otherwise act in bad faith. These shareholders may refuse to sign or
breach, or cause our VIEs to breach or refuse to renew the existing contractual arrangements, which would have a material and adverse
effect on our ability to effectively control our affiliated entities and receive economic benefits from them. For example, these shareholders
may be able to cause our agreements with our VIEs to be performed in a manner adverse to us by, among other things, failing to remit payments
due under the contractual arrangements to us on a timely basis. When conflicts of interest arise any or all of these shareholders will
act in the best interests of our Company or such conflicts will be resolved in our favor. Currently, we do not have any arrangements to
address potential conflicts of interest between these shareholders and our Company. If we cannot resolve any conflict of interest or dispute
between us and these shareholders, we would have to rely on legal proceedings, which could result in disruption of our business and subject
us to substantial uncertainty as to the outcome of any such legal proceedings. If we are unable to resolve such conflicts, including where
the shareholders of our VIEs breached their contracts or undertakings with us and as a result or otherwise subject us to claims from third
parties, our business, financial condition and operations could be materially and adversely affected.
The contractual arrangements may be subject
to the scrutiny of the PRC tax authorities and additional tax may be imposed, which may materially and adversely affect our results of
operation and value of your investment.
Under the PRC laws and regulations,
arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities. We could face material
and adverse tax consequences if the PRC tax authorities determine that the Exclusive Management Cooperation Agreement we have with our
affiliated entities does not represent an arm’s length price and determines to adjust any of those entities’ income in the
form of a transfer pricing adjustment. A transfer pricing adjustment could increase our tax liabilities. In addition, the PRC tax authorities
may have reason to believe that our subsidiaries or our affiliated entities are dodging their tax obligations, and we may not be able
to rectify such incident within the limited timeline required by the PRC tax authorities. As a result, the PRC tax authorities may impose
late payment fees and other penalties on us for underpaid taxes, which could materially and adversely affect our business, financial condition
and results of operations.
If any of our affiliated entities becomes
subject to winding up or liquidation proceedings, we may lose the ability to make use of certain important assets, which could negatively
impact our business and materially and adversely affect our ability to generate revenue.
We currently conduct our operations
in China through contractual arrangements. As part of these arrangements, substantially all of our education-related assets, permits
and licenses that are important to the operation of our business are held by our affiliated entities. If any of these affiliated entities
is wound up, and all or part of their assets become subject to liens or rights of third-party creditors, we may be unable to continue
some or all of our business activities, which would materially and adversely affect our business, financial condition and results of operations.
If any of our affiliated entities undergoes a voluntary or involuntary liquidation proceeding, its equity owner or unrelated third-party creditors
may claim rights relating to some or all of these assets, which would hinder our ability to operate our business and could materially
and adversely affect our business and our ability to generate revenue. As a result, we may not be able to exercise our rights in a timely
manner and our business, financial condition and operations may be materially and adversely affected.
The custodians or authorized users of our
controlling non-tangible assets, including chops and seals, may fail to fulfill their responsibilities, or misappropriate or misuse these
assets.
Under the PRC law, legal documents
for corporate transactions, including agreements and contracts that our business relies on, are executed using the chop or seal of the
signing entity or with the signature of a legal representative whose designation is registered and filed with the relevant PRC industry
and commerce authorities. In order to maintain the physical security of our chops, we generally have them stored in secured locations
accessible only to certain authorized employees. Although we monitor such authorized employees, the procedures may not be sufficient to
prevent all instances of abuse or negligence. There is a risk that our employees could abuse their authority, for example, by entering
into a contract not approved by us or by seeking to gain control of our subsidiaries, our VIEs or any of their subsidiaries. If any employee
obtains, misuses or misappropriates our chops and seals or other controlling intangible assets for whatever reason, we could experience
disruption to our normal business operations. We may have to take corporate or legal action, which could involve significant time and
resources to resolve and divert management from our operations.
The PRC regulation of loans and direct investments
in PRC subsidiaries by offshore holding companies and governmental control of currency conversion may delay us from using working capital
to make loan or additional capital contributions to our PRC subsidiaries, our affiliated entities, which could harm our liquidity and
our ability to fund and expand our business.
From time to time in the ordinary
course of our business, we may (i) make loans to our PRC subsidiaries; (ii) make additional capital contributions to our PRC
subsidiaries; (iii) establish new PRC subsidiaries and make capital contributions to them; and (iv) acquire offshore entities
with business operations in the PRC in an offshore transaction. However, most of these uses are subject to PRC regulations and approvals.
For example:
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loans by us to our PRC subsidiaries cannot exceed a statutory limit and shall be filed with the State Administration of Foreign Exchange of the PRC, or the SAFE, after the loan agreement is signed and at least three business days before the borrower makes any drawdown under the loan; and
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capital contributions to our PRC subsidiaries shall be filed with the MOFCOM and SAMR or their local counterparts and also be registered with the local banks authorized by the SAFE.
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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 prospectus supplement, subject to the completion of statutory procedures with the relevant government
authorities and banks, we may extend a loan with an estimated aggregate maximum amount of approximately RMB160.0 million to
our PRC subsidiaries. We may increase the Total Investment and Registered Capital Balance of our PRC subsidiaries, which is subject to
governmental procedures and may require a PRC subsidiary to increase its registered capital at the same time. If we choose to make a loan
to a PRC entity based on its Net Assets Limit, the maximum amount we would be able to loan to the relevant PRC entity would depend on
the relevant entity’s net assets and the applicable statutory multiple at the time of calculation. As of the date of this prospectus
supplement, 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 Doing Business in China
Adverse changes in the PRC economic, political
and social conditions, as well as possible interventions and influences of any government policies and actions, may materially and adversely
affect our business, financial condition, results of operations, growth prospects, and the value of our ordinary shares.
Substantially all of our operations
are conducted in China, and substantially all of our revenue is derived from China. Accordingly, our business, prospects, financial condition
and results of operations are subject, to a significant extent, to economic, political and legal developments in China.
The economic, political and
social conditions in the PRC differ from those in more developed countries in many respects, including structure, government involvement,
level of development, growth rate, control of foreign exchange, capital reinvestment, allocation of resources, rate of inflation and trade
balance position. Before the adoption of its reform and opening up policies in 1978, the PRC was primarily a planned economy. In recent
years, the PRC government has been reforming the PRC economic system and government structure. For example, the PRC government has implemented
economic reforms and measures emphasizing the utilization of market forces in the development of the PRC economy in the past three decades.
These reforms have resulted in significant economic growth and social prospects. Economic reform measures, however, may be adjusted, modified
or applied inconsistently from industry to industry or across different regions of the country.
We cannot predict whether
the resulting changes will have any adverse effect on our current or future business, financial condition or results of operations. Despite
these economic reforms and measures, the PRC government continues to play a significant role in regulating industrial development, allocation
of natural and other resources, production, pricing and management of currency, and there can be no assurance that the PRC government
will continue to pursue a policy of economic reform or that the direction of reform will continue to be market friendly.
Our ability to successfully
expand our business operations in the PRC depends on a number of factors, including macro-economic and other market conditions, and
credit availability from lending institutions. Stricter credit or lending policies in the PRC may affect our customers’ consumer
credit or consumer banking business, and may also affect our ability to obtain external financing, which may reduce our ability to implement
our expansion strategies. We cannot assure you that the PRC government will not implement any additional measures to tighten credit or
lending standards, or that, if any such measure is implemented, it will not adversely affect our future results of operations or profitability.
Demand for our services and
our business, financial condition and results of operations may be materially and adversely affected by the following factors:
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political instability or changes in social conditions of the PRC;
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changes in laws, regulations, and administrative directives or the interpretation thereof;
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measures which may be introduced to control inflation or deflation; and
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measures changes in the rate or method of taxation.
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These factors are affected
by a number of variables, which are beyond our control.
Additionally, the outbreak
of COVID-19 may have a material adverse impact on the overall economic outlook, economic growth and business sentiment in China, and may
in turn influence the operation of our business. See “— Risks Related to Our Business and Operations — Any natural catastrophes,
severe weather conditions, health epidemics, including COVID-19, and other extraordinary events could severely disrupt our business operations.”
Furthermore, our Company,
our VIEs and their subsidiaries, and our investors may face uncertainty about future actions by the government of China that could significantly
affect the VIEs and their subsidiaries’ financial performance and operations, including the enforceability of the contractual arrangements.
We cannot assure you that the PRC government will not initiate possible governmental actions or scrutiny to us, which could substantially
affect our operation and the value of our ordinary shares may depreciate quickly. China’s economic, political and social conditions,
as well as interventions and influences of any government policies, laws and regulations are uncertain and could have a material adverse
effect on our business.
The legal system of the PRC is not fully
developed and there are inherent uncertainties that may affect the protection afforded to our business and our shareholders.
Our business and operations
in the PRC are governed by the PRC legal system that is based on written statutes. Prior court decisions may be cited for reference but
have limited precedential value. Since the late 1970s, the PRC government has promulgated laws and regulations dealing with economic matters
such as foreign investment, corporate organization and governance, commerce, taxation and trade. However, as these laws and regulations
are relatively new and continue to evolve, interpretation and enforcement of these laws and regulations involve significant uncertainties
and different degrees of inconsistency. Some of the laws and regulations are still in the developmental stage and are therefore subject
to policy changes. Many laws, regulations, policies and legal requirements have only been recently adopted by PRC central or local government
agencies, and their implementation, interpretation and enforcement may involve uncertainty due to the lack of established practice available
for reference. We cannot predict the effect of future legal developments in the PRC, including the promulgation of new laws, changes in
existing laws or their interpretation or enforcement, or the pre-emption of local regulations by national laws. As a result, there
is substantial uncertainty as to the legal protection available to us and our shareholders. Moreover, due to the limited volume of published
cases and the non-binding nature of prior court decisions, the outcome of dispute resolution may not be as consistent or predictable
as in other more developed jurisdictions, which may limit the legal protection available to us. In addition, any litigation in the PRC
may be protracted and result in substantial costs and the diversion of resources and management attention.
In addition, we are subject
to risks and uncertainties of the interpretations and applications of PRC laws and regulations, including but not limited to, limitations
on foreign ownership of English language training service providers, regulatory review of overseas listing of PRC companies through special
purpose vehicles, and the validity and enforcement of the contractual arrangements among WFOEs, our VIEs and their shareholders. We are
also subject to the risks and uncertainties about any future actions of the PRC government in this regard that could disallow the VIE
structure, which would likely result in a material change in our operations, and the validity of our ordinary shares may depreciate significantly
or become worthless.
PRC governmental control and restrictions
on the convertibility of Renminbi may materially and adversely affect the value of your investments.
The PRC government imposes
controls and restrictions on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of currency
out of the PRC. The majority of our income is received in Renminbi and shortages in the availability of foreign currencies may restrict
our ability to pay dividends or other payments, or otherwise satisfy their foreign currency denominated obligations, if any. Under existing
PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures
from trade-related transactions, can be made in foreign currencies without prior approval from SAFE, by complying with certain procedural
requirements. Approval from appropriate government authorities is required where Renminbi is to be converted into foreign currency and
remitted out of the PRC to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may,
at its discretion, impose restrictions on access to foreign currencies for current account transactions and if this occurs in the future,
we may not be able to pay dividends in foreign currencies to our shareholders.
The enforcement of the PRC Labor Contract
Law and other labor-related regulations in the PRC may adversely affect our business and our results of operations.
The PRC Labor Contract Law
became effective and was implemented on January 1, 2008, which was amended on December 28, 2012. It has reinforced the protection
of employees who, under the PRC Labor Contract Law, have the right, among others, to have written labor contracts, to enter into labor
contracts with no fixed terms under certain circumstances, to receive overtime wages and to terminate or alter terms in labor contracts.
According to the PRC Social Insurance Law, which became effective on July 1, 2011 and was amended on December 29, 2018, and
the Administrative Regulations on the Housing Funds, which became effective on April 3, 1999 and was amended on March 24, 2002
and March 24, 2019, companies operating in China are required to participate in pension insurance, work-related injury insurance,
medical insurance, unemployment insurance, maternity insurance and housing funds plans, and the employers must pay all or a portion of
the social insurance premiums and housing funds for their employees.
As these laws and regulations
designed to enhance labor protection, we expect our labor costs will continue to increase. In addition, since the interpretation and implementation
of these laws and regulations are still evolving, our employment practice may not at all times be deemed in compliance with the new laws
and regulations. If we are subject to severe penalties or incur significant liabilities in connection with labor disputes or investigations,
our business and results of operations may be adversely affected.
Regulation and censorship of information
disseminated over the internet in China may adversely affect our business and reputation and subject us to liability for information displayed
on our website.
The PRC government has adopted
regulations governing internet access and the distribution of news and other information over the internet. Under these regulations, internet
content providers are prohibited from posting or displaying over the internet content that, among other things, violates PRC laws and
regulations, impairs the national dignity of China, or is reactionary, obscene, superstitious, fraudulent or defamatory. Failure to comply
with these requirements may result in the revocation of licenses to provide Internet content and other licenses, and the closure of the
concerned websites. The website operator may also be held liable for such censored information displayed on or linked to the websites.
If our websites are found to be in violation of any such requirements, we may be penalized by relevant authorities, and our operations
or reputation could be adversely affected.
Regulation and censorship of information
disseminated over the internet in China may adversely affect our business and reputation and subject us to liability for information displayed
on our website.
The PRC government has adopted
regulations governing internet access and the distribution of news and other information over the internet. Under these regulations, internet
content providers are prohibited from posting or displaying over the internet content that, among other things, violates PRC laws and
regulations, impairs the national dignity of China, or is reactionary, obscene, superstitious, fraudulent or defamatory. Failure to comply
with these requirements may result in the revocation of licenses to provide Internet content and other licenses, and the closure of the
concerned websites. The website operator may also be held liable for such censored information displayed on or linked to the websites.
If our websites are found to be in violation of any such requirements, we may be penalized by relevant authorities, and our operations
or reputation could be adversely affected.
PRC regulations relating to foreign exchange
registration of overseas investment by PRC residents may subject our PRC resident beneficial owners or our PRC subsidiaries to liability
or penalties, limit our ability to inject capital into the PRC subsidiaries, limit PRC subsidiaries’ ability to increase their registered
capital or distribute profits to us, or may otherwise adversely affect us.
The SAFE has promulgated certain
regulations, including the Notice on Relevant Issues Relating to Foreign Exchange Control on Domestic Residents’ Investment and
Financing and Round-Trip Investment through Special Purpose Vehicles, or Circular 37, effective on July 4, 2014, and its
appendices, that require PRC residents, including PRC institutions and individuals, to register with local branches of the SAFE in connection
with their direct establishment or indirect control of an offshore entity for the purpose of overseas investment and financing with such
PRC residents’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests, referred to in
Circular 37 as a “special purpose vehicle.” The term “control” under Circular 37 is broadly defined as the
operation rights, beneficiary rights or decision-making rights acquired by the PRC residents in the offshore special purpose vehicles
by such means as acquisition, trust, proxy, voting rights, repurchase, convertible bonds or other arrangements. Circular 37 further requires
amendment to the registration in the event of any significant changes with respect to the special purpose vehicle, such as decrease of
capital contributed by PRC individuals, share transfer or exchange, merger, division or other material event. In the event that a PRC
shareholder holding interests in a special purpose vehicle fails to fulfill the required registration with the SAFE, the PRC subsidiaries
of that special purpose vehicle may be prohibited from making profit distributions to the offshore parent and from carrying out subsequent
cross-border foreign exchange activities. Further, failure to comply with the various SAFE registration requirements described above
could result in liability under PRC law for foreign exchange evasion.
On February 13, 2015,
the SAFE promulgated a Notice on Further Simplifying and Improving Foreign Exchange Administration Policy on Direct Investment, or Notice 13,
which became effective on June 1, 2015. Under Notice 13, applications for foreign exchange registration of inbound foreign direct
investments and outbound overseas direct investments, including those required under Circular 37 will be directly reviewed and handled
by banks, and the SAFE and its branches shall perform indirect regulation over the direct investment-related foreign exchange registration
via banks.
These regulations apply to
our direct and indirect shareholders who are PRC residents and may apply to any offshore acquisitions or share transfers that we make
in the future if our shares are issued to PRC residents. However, in practice, different local SAFE branches may have different views
and procedures on the application and implementation of SAFE regulations, and since Circular 37 was recently issued, there remains uncertainty
with respect to its implementation.
All PRC residents known to
us that currently hold direct or indirect interests in our company have completed the necessary registrations as required by Circular
37. We cannot assure you that any shareholders or beneficial owners of our company who are PRC residents will be able to successfully
complete the registration or update the registration of their direct and indirect equity interest as required in the future. If any of
them fail to make or update the registration, our PRC subsidiaries could be subject to fines and legal penalties, and the SAFE could restrict
our cross-border investment activities and our foreign exchange activities, including restricting our PRC subsidiaries’ ability
to distribute dividends to, or obtain loans denominated in foreign currencies from, our company, or prevent us from contributing additional
capital into our PRC subsidiaries. As a result, our business operations and our ability to make distributions to you could be materially
and adversely affected.
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 our employees who are PRC citizens.
Pursuant to the Notices on
Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in a Stock Incentive Plan of an Overseas
Publicly-Listed Company issued by the SAFE on February 15, 2012, or Circular 7, the PRC citizens and non-PRC citizens
who reside in China for a continuous period of not less than one year who participate in any stock incentive plan of an overseas publicly
listed company, subject to a few exceptions, are required to register with the SAFE through a domestic qualified agent, which could be
the PRC subsidiaries of such overseas listed company, and complete certain other procedures. Such PRC individuals’ foreign exchange
income received from the sale of shares and dividends distributed by the overseas listed company and any other income shall be fully remitted
into a collective foreign currency account in the PRC opened and managed by the PRC domestic agent before distribution to such individuals.
In addition, such domestic individuals must also retain an overseas entrusted institution to handle matters in connection with their exercise
of share options and their purchase and sale of shares. The PRC domestic agent also needs to update registration with the SAFE within
three months after the overseas-listed company materially changes its share incentive plan or make any new share incentive plans.
From time to time, we will
need to apply for or update its registration with the SAFE or its local branches on behalf of employees who receive options or other equity-based incentive
grants under our share incentive plans or material changes in our share incentive plans. However, we may not always be able to make applications
or update its registration on behalf of employees in compliance with Circular 7, nor can we ensure you that such applications or
update of registration will be successful. If we or the participants of its share incentive plans who are PRC citizens fail to comply
with Circular 7, we and/or such participants of our share incentive plans may be subject to fines and legal sanctions, there may
be additional restrictions on the ability of such participants to exercise their share options or remit proceeds gained from sale of their
shares into the PRC, and we may be prevented from further granting share incentive awards under its share incentive plans to employees
who are PRC citizens.
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.
We are a company incorporated
under the laws of the Cayman Islands. We conduct substantially all of our operations in the PRC and substantially all of our assets are
located in PRC. In addition, all our senior executive officers reside within the PRC for a significant portion of the time and most are
PRC nationals. As a result, it may be difficult for our shareholders to effect service of process upon us or those persons inside the
PRC. In addition, the PRC does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts with
the Cayman Islands and many other countries and regions. Therefore, recognition and enforcement in the PRC of judgments of a court
in any of these non-PRC jurisdictions in relation to any matter not subject to a binding arbitration provision may be difficult or
impossible.
Fluctuations in the value of the Renminbi
could have a material and adverse effect on your investment.
The change in value of the
Renminbi against the U.S. dollar and other currencies is affected by various factors such as changes in political and economic conditions
in the PRC. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to the U.S.
dollar, and the Renminbi appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June
2010, this appreciation was halted and the exchange rate between the Renminbi and the U.S. dollar remained within a narrow band. Since
June 2010, the Renminbi has fluctuated against the U.S. dollar, at times significantly and unpredictably. It is difficult to predict how
market forces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and the U.S. dollar in the future.
Any significant appreciation
or revaluation of the Renminbi may have a material adverse effect on the value of, and any dividends payable on, our securities in foreign
currency terms. More specifically, if we decide to convert our Renminbi into U.S. dollars, appreciation of the U.S. dollar against the
Renminbi would have a negative effect on the U.S. dollar amount available to us. To the extent that we need to convert U.S. dollars we
receive from our initial public offering into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would
have an adverse effect on the Renminbi amount we would receive from the conversion. In addition, appreciation or depreciation in the exchange
rate of the Renminbi to the U.S. dollar could materially and adversely affect the price of our securities in U.S. dollars without giving
effect to any underlying change in our business or results of operations.
Risks Related to this Offering and our Ordinary
Shares
Our share price may be volatile and could
decline substantially.
The market price of our ordinary
shares may be volatile, both because of actual and perceived changes in the company’s financial results and prospects, and because
of general volatility in the stock market. The factors that could cause fluctuations in our share price may include, among other factors
discussed in this section, the following:
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actual or anticipated variations in the financial results and prospects of the company or other companies in the retail business;
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changes in financial estimates by research analysts;
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changes in the market valuations of other education technology companies;
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announcements by us or our competitors of new education services, expansions, investments, acquisitions, strategic partnerships or joint ventures;
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mergers or other business combinations involving us;
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additions and departures of key personnel and senior management;
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changes in accounting principles;
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the passage of legislation or other developments affecting us or our industry;
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the trading volume of our ordinary shares in the public market;
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the release of lockup, escrow or other transfer restrictions on our outstanding equity securities or sales of additional equity securities;
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potential litigation or regulatory investigations;
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changes in economic conditions, including fluctuations in global and Chinese economies;
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financial market conditions;
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natural disasters, terrorist acts, acts of war or periods of civil unrest; and
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the realization of some or all of the risks described in this section.
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In addition, the stock markets
have experienced significant price and trading volume fluctuations from time to time, and the market prices of the equity securities of
retailers have been extremely volatile and are sometimes subject to sharp price and trading volume changes. These broad market fluctuations
may materially and adversely affect the market price of our ordinary shares.
There is no established public trading market
for the Pre-funded Warrants being offered in this offering, and we do not expect a market to develop for the Pre-funded Warrants.
There is no established public
trading market for the Pre-funded Warrants being offered in this offering, and we do not expect a market to develop. In addition, we do
not intend to apply to list the Pre-funded Warrants on any national securities exchange or other nationally recognized trading system.
Without an active market, the liquidity of the Pre-funded Warrants will be limited. Further, the existence of the Pre-funded Warrants
may act to reduce both the trading volume and the trading price of our ordinary shares.
The Pre-funded Warrants are speculative
in nature.
Except as otherwise provided
in the Pre-funded Warrants, until holders of Pre-Funded Warrants acquire our ordinary shares upon exercise of the Pre-funded Warrants,
holders of Pre-funded Warrants will have no rights with respect to our ordinary shares underlying such Pre-funded Warrants. Upon exercise
of the Pre-funded Warrants, the holders will be entitled to exercise the rights of a shareholder only as to matters for which the record
date occurs after the exercise date.
Moreover, following this offering,
the market value of the Pre-funded Warrants is uncertain. There can be no assurance that the market price of our ordinary shares will
ever equal or exceed the price of the Pre-funded Warrants, and, consequently, whether it will ever be profitable for investors to exercise
their Pre-funded Warrants.
Since our management will have broad discretion
in how we use the proceeds from this offering, we may use the proceeds in ways with which you disagree.
Our management will have significant flexibility
in applying the net proceeds of this offering. You will be relying on the judgment of our management with regard to the use of those net
proceeds, and you will not have the opportunity, as part of your investment decision, to influence how the proceeds are being used. It
is possible that the net proceeds will be invested in a way that does not yield a favorable, or any, return for us. The failure of our
management to use such funds effectively could have a material adverse effect on our business, financial condition, operating results,
and cash flow.
Future sales of our ordinary shares, whether
by us or our shareholders, could cause the price of our ordinary shares to decline.
If our existing shareholders sell, or indicate
an intent to sell, substantial amounts of our ordinary shares in the public market, the trading price of our ordinary shares could decline
significantly. Similarly, the perception in the public market that our shareholders might sell our ordinary shares could also depress
the market price of our shares. A decline in the price of our ordinary shares might impede our ability to raise capital through the issuance
of additional ordinary shares or other equity securities. In addition, the issuance and sale by us of additional ordinary shares, or securities
convertible into or exercisable for our ordinary shares, or the perception that we will issue such securities, could reduce the trading
price for our ordinary shares as well as make future sales of equity securities by us less attractive or not feasible. The sale of ordinary
shares issued upon the exercise of our outstanding warrants could further dilute the holdings of our then existing shareholders.
We do not know whether a market for the
ordinary shares will be sustained or what the trading price of the ordinary shares will be and as a result it may be difficult for you
to sell your ordinary shares.
Although our ordinary shares trade on Nasdaq,
an active trading market for the ordinary shares may not be sustained. It may be difficult for you to sell your ordinary shares without
depressing the market price for the ordinary shares. As a result of these and other factors, you may not be able to sell your ordinary
shares. Further, an inactive market may also impair our ability to raise capital by selling ordinary shares, or may impair our ability
to enter into strategic partnerships or acquire companies or products by using our ordinary shares as consideration.
Securities
analysts may not cover our ordinary shares and this may have a negative impact on the market price of our ordinary shares.
The
trading market for our ordinary shares will depend, in part, on the research and reports that securities or industry analysts publish
about us or our business. We do not have any control over independent analysts (provided that we have engaged various non-independent
analysts). We do not currently have and may never obtain research coverage by independent securities and industry analysts. If no independent
securities or industry analysts commence coverage of us, the trading price for our ordinary shares would be negatively impacted. If we
obtain independent securities or industry analyst coverage and if one or more of the analysts who covers us downgrades our ordinary shares,
changes their opinion of our shares or publishes inaccurate or unfavorable research about our business, the price of our ordinary shares
would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for
our ordinary shares could decrease and we could lose visibility in the financial markets, which could cause the price and trading volume
of our ordinary shares to decline.
You
will experience immediate dilution as a result of this offering and may experience future dilution as a result of future equity offerings
or other equity issuances.
We believe that purchaser
of ordinary shares in this offering will experience an immediate dilution relative to net tangible book value per ordinary share. Our
net tangible book value on December 31, 2020 was US$58.53 million, or negative US$1.03 per ordinary share. After giving effect to the
sale of our ordinary shares and Pre-funded Warrants of approximately US$59.98 million in this offering at an offering price of US$0.30
per ordinary share and US$0.2999 per Pre-funded Warrant, and after deducting the underwriting discounts and estimated offering expenses
payable by us in connection with this offering, our as adjusted net tangible book value as of December 31, 2020 would have been US$33.74
million, or US$0.26 per ordinary share. This represents an immediate increase in net tangible book value of US$1.29 per ordinary share
to our existing shareholders and an immediate decrease in net tangible book value of US$0.04 per ordinary share to the investor participating
in this offering.
We
may in the future issue additional ordinary shares or other securities convertible into or exchangeable for our ordinary shares. We cannot
assure you that we will be able to sell our ordinary shares or other securities in any other offering or other transactions at a price
per ordinary share that is equal to or greater than the price per ordinary share paid by the investor in this offering. The price per
ordinary share at which we sell additional ordinary shares or other securities convertible into or exchangeable for our ordinary shares
in future transactions may be higher or lower than the price per ordinary share in this offering. If we do issue any such additional
ordinary shares, such issuance also will cause a reduction in the proportionate ownership and voting power of all other shareholders.
Because
we do not expect to pay dividends in the foreseeable future, you must rely on the price appreciation of our ordinary shares for return
on your investment.
We
currently intend to retain most, if not all, of our available funds and any future earnings to fund the development and growth of our
business. As a result, we do not expect to pay any cash dividends in the foreseeable future. Therefore, you should not rely on an investment
in our ordinary shares as a source for any future dividend income.
Our
board of directors has complete discretion as to whether to distribute dividends, subject to certain requirements of Cayman Islands law.
In addition, our shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our
board of directors. Under Cayman Islands law, a Cayman Islands company may pay a dividend out of either profit or share premium account,
provided that in no circumstances may a dividend be paid if this would result in the company being unable to pay its debts as they fall
due in the ordinary course of business. 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. There is no 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.
Techniques
employed by short sellers may drive down the market price of our ordinary shares.
Short
selling is the practice of selling securities that the seller does not own but rather has borrowed from a third party with the intention
of buying identical securities back at a later date to return to the lender. The short seller hopes to profit from a decline in the value
of the securities between the sale of the borrowed securities and the purchase of the replacement shares, as the short seller expects
to pay less in that purchase than it received in the sale. As it is in the short seller’s interest for the price of the security
to decline, many short sellers publish, or arrange for the publication of, negative opinions regarding the relevant issuer and its business
prospects in order to create negative market momentum and generate profits for themselves after selling a security short. These short
attacks have, in the past, led to selling of shares in the market.
Public
companies listed in the United States that have a substantial majority of their operations in China have been the subject of short selling.
Much of the scrutiny and negative publicity has centered on allegations of a lack of effective internal control over financial reporting
resulting in financial and accounting irregularities and mistakes, inadequate corporate governance policies or a lack of adherence thereto
and, in many cases, allegations of fraud. As a result, many of these companies are now conducting internal and external investigations
into the allegations and, in the interim, are subject to shareholder lawsuits and/or SEC enforcement actions.
We
may in the future be the subject of unfavorable allegations made by short sellers. Any such allegations may be followed by periods of
instability in the market price of our ordinary shares and negative publicity. If and when we become the subject of any unfavorable allegations,
whether such allegations are proven to be true or untrue, we could have to expend a significant amount of resources to investigate such
allegations and/or defend ourselves. While we would strongly defend against any such short seller attacks, we may be constrained in the
manner in which we can proceed against the relevant short seller by principles of freedom of speech, applicable federal or state law
or issues of commercial confidentiality. Such a situation could be costly and time- consuming and could distract our management from
growing our business. Even if such allegations are ultimately proven to be groundless, allegations against us could severely impact our
business operations and shareholder’s equity, and the value of any investment in our could be greatly reduced or rendered worthless.
As
an exempted company incorporated in the Cayman Islands with limited liability, we are permitted to adopt certain home country practices
in relation to corporate governance matters that differ significantly from the Nasdaq corporate governance listing standards; these practices
may afford less protection to shareholders than they would enjoy if we complied fully with the Nasdaq corporate governance listing standards.
As
an exempted company incorporated in the Cayman Islands company with limited liability that is listed on the Nasdaq, we are subject to
the Nasdaq corporate governance listing standards. However, 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 the Nasdaq corporate governance listing standards. We have relied on and plan to rely on home country practice
with respect to our corporate governance. Specifically, we do not plan to have a majority of independent directors serving on our board
of directors or to establish a nominating committee and a compensation committee composed entirely of independent directors, and we are
not required to seek shareholder approval for issuance 20% or more of our outstanding ordinary shares or voting power in a private offering.
As a result, our shareholders may be afforded less protection than they otherwise would enjoy under the Nasdaq corporate governance listing
standards applicable to U.S. domestic issuers.
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. 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 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 its assets are located outside of the United States. All of our current operations are conducted
in the PRC. In addition, the majority of our officers and directors are nationals and residents of countries other than the United States
and all of their assets are located outside the United States. As a result, it may be difficult or impossible for you to bring an action
against us or against these individuals in the United States in the event that you believe that your rights have been infringed under
the U.S. federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman
Islands and of the PRC may render you unable to enforce a judgment against our assets or the assets of our directors and officers. For
more information regarding the relevant laws of the Cayman Islands and the PRC.
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:
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the
rules under the Exchange Act requiring the filing of quarterly reports on Form 10-Q or current reports on Form 8-K with the SEC;
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the
sections of the Exchange Act regulating the solicitation of proxies, consents, or authorizations in respect of a security registered
under the Exchange Act;
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the
sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability
for insiders who profit from trades made in a short period of time; and
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the
selective disclosure rules by issuers of material nonpublic information under Regulation FD.
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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.
We
incur increased costs as a result of being a public company.
We
are a public company and as a result, we have incurred, and expect to continue to 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. We expect these rules and regulations applicable to public companies to increase our accounting, legal and financial
compliance costs and to make certain corporate activities more time-consuming and costly. Our management will be required to devote substantial
time and attention to our public company reporting obligations and other compliance matters. We are currently evaluating and monitoring
developments with respect to these rules and regulations, and we cannot predict or estimate the amount of additional costs we may incur
or the timing of such costs. Our reporting and other compliance obligations as a public company may place a strain on our management,
operational and financial resources and systems for the foreseeable future.
In
the past, shareholders of a public company often brought securities class action suits against the company following periods of instability
in the market price of that company’s securities. If we were involved in a class action suit, it could divert a significant amount
of our management’s attention and other resources from our business and operations, which could harm our results of operations
and require us to incur significant expenses to defend the suit. Any such class action suit, whether or not successful, could harm our
reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be
required to pay significant damages, which could have a material adverse effect on our financial condition and results of operations.