UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
OR
For the fiscal year ended
OR
For the transition period from to
OR
Date of event requiring this shell company report .. . . . . . . . . . . . . . . . . . .
For the transition period from to
Commission file number:
| (Exact Name of Registrant as Specified in Its Charter) |
| Not Applicable |
| (Translation of Registrant’s Name Into English) |
| The |
| (Jurisdiction of Incorporation or Organization) |
| (Address of principal executive offices) |
| Telephone: + |
| Email: |
| (Name, Telephone, E-mail, and/or Facsimile number and Address of Company Contact Person) |
Securities registered or to be registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol | Name of Each Exchange On Which Registered | ||
| American depositary shares, each American depositary share representing 1,000 Class A ordinary shares |
| * | Not for trading, but only in connection with the listing on the New York Stock Exchange of American depositary shares. |
Securities registered or to be registered pursuant to Section 12(g) of the Act:
| None |
| (Title of Class) |
| Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: |
| None |
| (Title of Class) |
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:
As
of August 31, 2022, there were
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
☐ Yes ☒
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
☐ Yes ☒
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Non-accelerated filer ☐ | Emerging growth company |
If an emerging growth company that prepare its
financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition
period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange
Act.
†The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant
has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued
its audit report.
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
| International Financial Reporting Standards as issued by the International Accounting Standards Board ☐ | Other ☐ |
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
☐ Item 17 ☐ Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
☐ Yes
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
☐ Yes ☐ No
TABLE OF CONTENTS
i
INTRODUCTION
Except where the context otherwise requires and for purposes of this annual report only, references in this annual report to:
| ● | “ADSs” are to our American depositary shares, each of which represents 1,000 Class A ordinary shares; |
| ● | “ADRs” are to the American depositary receipts that evidence our ADSs; |
| ● | “China” or the “PRC” are to the People’s Republic of China, including, for the purposes of this annual report only, Taiwan and the special administrative regions of Hong Kong and Macau; |
| ● | each “enrollment,” for the purpose of calculation, are to a student who takes at least one class for one subject in a certain period is treated as one enrollment in the same period. Under this methodology, a student taking at least one class for each of two subjects in a certain period is treated as two enrollments in the same period. The number of students enrolled in our invested schools is not included for this purpose; |
| ● | “Hong Kong” are to the Hong Kong Special Administrative Region of the People’s Republic of China for the purposes of this annual report only; |
| ● | “mainland China” or “mainland Chinese” are to the mainland China of the People’s Republic of China, excluding Taiwan and the special administrative regions of Hong Kong and Macau for the purposes of this annual report only; |
| ● | “ordinary shares” are to our Class A ordinary shares and Class B ordinary shares, par value US$0.000001 per share; |
| ● | “RMB” and “Renminbi” are to the legal currency of China; |
| ● | “US$,” “U.S. dollars,” “$,” and “dollars” are to the legal currency of the United States; and |
| ● | “we” “us” “our company” and “our” are to Meta Data Limited, and its subsidiaries. |
ii
FORWARD-LOOKING STATEMENTS
This annual report on Form 20-F contains forward-looking statements that reflect our current expectations and views of future events. Known and unknown risks, uncertainties and other factors, including those listed under “Item 3. Key Information-D. Risk Factors,” may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements.
You can identify some of these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “is/are likely to,” “potential,” “continue” or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include statements relating to:
| ● | our goals and strategies; |
| ● | our future business development, results of operations and financial conditions; |
| ● | our expectations regarding demand for and market acceptance of our products and services; |
| ● | our relationships with our business partners and other stakeholders; |
| ● | competition in our industry; and |
| ● | relevant government policies and regulations relating to our industry. |
These forward-looking statements involve various risks and uncertainties. Although we believe that our expectations expressed in these forward-looking statements are reasonable, our expectations may later be found to be incorrect. Our actual results could be materially different from our expectations. Important risks and factors that could cause our actual results to be materially different from our expectations are generally set forth in “Item 3. Key Information-D. Risk Factors,” “Item 4. Information on the Company-B. Business Overview,” “Item 5. Operating and Financial Review and Prospects,” and other sections in this annual report. You should read thoroughly this annual report and the documents that we refer to with the understanding that our actual future results may be materially different from and worse than what we expect. We qualify all of our forward-looking statements by these cautionary statements.
The forward-looking statements made in this annual report relate only to events or information as of the date on which the statements are made in this annual report. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this annual report and the documents that we refer to in this annual report and have filed as exhibits to the registration statement, of which this annual report is a part, completely and with the understanding that our actual future results may be materially different from what we expect.
iii
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
A. [Reserved]
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
A description of factors that could materially affect our business, financial condition or operating results is provided below.
Summary of Risk Factors
An investment in our ADSs is subject to a number of risks, including risks related to our business and corporate structure, risks related to doing business in China and risks related to our ADSs. The following summarizes some, but not all, of these risks. Please carefully consider all of the information discussed in “Item 3. Key Information—D. Risk Factors” in this annual report for a more thorough description of these and other risks.
1
Risks Related to Our Business
| ● | We are transitioning our business from a PRC based business to being internationally operated. Our business plan is at its early stage of development. |
| ● | System limitations or failures could harm our business. |
| ● | The success of our business depends on our ability to market and advertise the services we provide effectively. |
| ● | The failure to manage growth effectively could have an adverse effect on our employee efficiency, product quality, working capital levels, and results of operations. |
| ● | If we need additional capital to fund our growing operations, we may not be able to obtain sufficient capital and may be forced to limit the scope of our operations. |
| ● | We are dependent on a trained workforce and any inability to retain or effectively recruit such employees, particularly distribution personnel and regional retail managers for our business, could have a material adverse effect on our business, financial condition and results of operations. |
| ● | Security breaches and attacks against our systems and network, and any potentially resulting breach or failure to otherwise protect confidential and proprietary information, could damage our reputation and negatively impact our business, as well as materially and adversely affect our financial condition and results of operations |
| ● | Our business, financial condition and results of operations have been and are likely to continue to be materially and adversely affected by the ongoing effects of the COVID-19. |
Risks Related to Our Corporate Structure
| ● | We rely on dividends and other distributions on equity paid by our subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our subsidiaries to make payments to us could have a material adverse effect on our ability to conduct our business. |
| ● | PRC laws and regulations related to our current business operations are sometimes vague and uncertain and any changes in such laws and regulations and interpretations of which may impair our ability to operate profitably. |
Risks Related to Doing Business in Hong Kong and Having Clients in Mainland China
| ● | If the Chinese government chooses to exert more oversight and control over offerings that are conducted overseas and/or foreign investment in China based issuers, such action may significantly limit or completely hinder our ability to offer or continue to offer ADSs to investors and cause the value of our ADSs to significantly decline or be worthless. |
| ● | It may be difficult for overseas shareholders and/or regulators to conduct investigation or collect evidence within China. |
| ● | You may incur additional costs and procedural obstacles in effecting service of legal process, enforcing foreign judgments or bringing actions in Hong Kong against us or our management named in the prospectus based on Hong Kong laws |
| ● | The enactment of Law of the PRC on Safeguarding National Security in the Hong Kong Special Administrative Region (the “Hong Kong National Security Law”) could impact our Hong Kong holding subsidiary. |
| ● | The Hong Kong legal system embodies uncertainties which could limit the availability of legal protections. |
2
| ● | Although the audit report included in this annual report is prepared by U.S. auditors who are currently inspected by the Public Company Accounting Oversight Board (the “PCAOB”), there is no guarantee that future audit reports will be prepared by auditors inspected by the PCAOB and, as such, in the future investors may be deprived of the benefits of such inspection. Furthermore, trading in our securities may be prohibited under the Holding Foreign Companies Accountable Act (the “HFCA Act”) if the SEC subsequently determines our audit work is performed by auditors that the PCAOB is unable to inspect or investigate completely, and as a result, U.S. national securities exchanges, such as the Nasdaq, may determine to delist our securities. Furthermore, on June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act, which, if enacted, would amend the HFCA Act and require the SEC to prohibit an issuer’s securities from trading on any U.S. stock exchanges if its auditor is not subject to PCAOB inspections for two consecutive years instead of three. |
Risks Related to Our ADSs
| ● | The trading price of our ADSs is likely to be volatile, which could result in substantial losses to investors. |
| ● | Our dual-class voting structure will limit your ability to influence corporate matters and could discourage others from pursuing any change of control transactions that holders of our Class A ordinary shares and ADSs may view as beneficial. |
| ● | Because we do not expect to pay dividends in the foreseeable future, you must rely on a price appreciation of our ADSs for a return on your investment. |
| ● | You, as holders of ADSs, may have fewer rights than holders of our Class A ordinary shares and must act through the deposit to exercise those rights. You may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited, because we are incorporated under Cayman Islands law. |
| ● | You may experience dilution of your holdings due to the inability to participate in rights offerings and may be subject to limitations on the transfer of your ADSs. |
| ● | We are an emerging growth company within the meaning of the Securities Act and may take advantage of certain reduced reporting requirements, and will incur increased costs as a result of being a public company, particularly after we cease to qualify as an “emerging growth company.” |
Risks Related to Our Business
We are transitioning our business from a PRC based business to being internationally operated. Our business plan is at its early stage of development.
Historically, the Company operated as one of the leading providers of K-12 after-school education services in China which developed a comprehensive K-12 after-school education platform that primarily focused on young children mathematics training services and FasTrack English services through a nationwide network of 480 learning centers across 40 cities in China. However, on July 24, 2021, the General Office of Central Committee of the Communist Party of China and the General Office of the State Council jointly released Opinions on what they termed “Further Reducing the Burden of Homework and Off-campus Tutoring for Compulsory Education Students”, the (“Double Reduction Policy”), which basically requires suspension of all subject-based off-campus tutoring business targeting pre-school kids and K12 students. As a result, since October 12, 2021, the Company suspended all education programs and learning centers in China, and we started to expand our business to Artificial Intelligent Education (AIE) service and Artificial Intelligent Universe (AIU) IAAS service and develop smart training systems incorporating VR (virtual reality), AI (artificial intelligence), blockchain and other technologies to facilitate the teaching and training process. We are currently in an early development stage and may be subject to growth-related risks.
Although our management believes that our current business strategy has significant potential, our Company may never attain profitable operations and our management may not succeed in realizing its business objectives. If it is not able to execute our business strategy as anticipated, the Company may not be able to achieve profitability, and our business and financial condition may be adversely affected.
3
System limitations or failures could harm our business.
Our businesses depend on the integrity and performance of the technology, computer and communications systems supporting them. If our systems cannot expand to cope with increased demand or otherwise fail to perform, we could experience unanticipated disruptions in service, slower response times and delays in the introduction of new services. These consequences could result financial losses and decreased customer service and satisfaction. If trading volumes increase unexpectedly or other unanticipated events occur, we may need to expand and upgrade our technology, transaction processing systems and network infrastructure. We do not know whether we will be able to accurately project the rate, timing or cost of any increases, or expand and upgrade our systems and infrastructure to accommodate any increases in a timely manner.
The success of our business depends on our ability to market and advertise the services we provide effectively.
Our ability to establish effective marketing campaigns is the key to our success. Our advertisements promote our corporate image and our services. If we are unable to increase awareness of our brand, we may not be able to attract new customers. Our marketing activities may not be successful in promoting our services or in retaining and increasing our customer base. We cannot assure you that our marketing programs will be adequate to support our future growth, which may result in a material adverse effect on our results of operations.
The failure to manage growth effectively could have an adverse effect on our employee efficiency, product quality, working capital levels, and results of operations.
Any significant growth in the market for our services or our entry into new markets may require an expansion of our employee base for managerial, operational, financial, and other purposes. During any growth, we may face problems related to our operational and financial systems and controls, including quality control and delivery and service capacities. We would also need to continue to expand, train and manage our employee base. Continued future growth will impose significant added responsibilities upon the members of management to identify, recruit, maintain, integrate, and motivate new employees.
Aside from increased difficulties in the management of human resources, we may also encounter working capital issues, as we will need increased liquidity to finance the development of new products and services, and the hiring of additional employees. For effective growth management, we will be required to continue improving our operations, management, and financial systems and controls. Our failure to manage growth effectively may lead to operational and financial inefficiencies that will have a negative effect on our profitability. We cannot assure investors that we will be able to timely and effectively meet that demand and maintain the quality standards required by our existing and potential customers.
If we need additional capital to fund our growing operations, we may not be able to obtain sufficient capital and may be forced to limit the scope of our operations.
If adequate additional financing is not available on reasonable terms, we may not be able to undertake our expansion plan and we would have to modify our business plans accordingly. There is no assurance that additional financing will be available to us.
In connection with our growth strategies, we may experience increased capital needs and accordingly, we may not have sufficient capital to fund our future operations without additional capital investments. Our capital needs will depend on numerous factors, including (i) our profitability; (ii) the release of competitive products by our competitors; (iii) the level of our investment in research and development; and (iv) the amount of our capital expenditures, including acquisitions. We cannot assure you that we will be able to obtain capital in the future to meet our needs.
4
If we cannot obtain additional funding, we may be required to: (i) limit our investments in research and development; (ii) limit our marketing efforts; and (iii) decrease or eliminate capital expenditures. Such reductions could materially adversely affect our business and our ability to compete.
Even if we do find a source of additional capital, we may not be able to negotiate terms and conditions for receiving the additional capital that are acceptable to us. Any future capital investments could dilute or otherwise materially and adversely affect the holdings or rights of our existing shareholders. In addition, new equity or convertible debt securities issued by us to obtain financing could have rights, preferences and privileges senior to our ordinary shares. We cannot give you any assurance that any additional financing will be available to us, or if available, will be on terms favorable to us.
We are dependent on a trained workforce and any inability to retain or effectively recruit such employees, particularly distribution personnel and regional retail managers for our business, could have a material adverse effect on our business, financial condition and results of operations.
We must attract, recruit and retain a sizeable workforce of qualified and trained staff to operate our business. Our ability to implement effectively our business strategy and expand our operations will depend upon, among other factors, the successful recruitment and retention of highly skilled and experienced distribution personnel, regional retail managers and other technical and marketing personnel. There is significant competition for qualified personnel in our business and we may not be successful in recruiting or retaining sufficient qualified personnel consistent with our current and future operational needs.
Security breaches and attacks against our systems and network, and any potentially resulting breach or failure to otherwise protect confidential and proprietary information, could damage our reputation and negatively impact our business, as well as materially and adversely affect our financial condition and results of operations.
Although we have employed significant resources to develop our security measures against breaches, our cybersecurity measures may not detect or prevent all attempts to compromise our systems, including distributed denial-of-service attacks, viruses, malicious software, break-ins, phishing attacks, social engineering, security breaches or other attacks and similar disruptions that may jeopardize the security of information stored in and transmitted by our systems or that we otherwise maintain. Breaches of our cybersecurity measures could result in unauthorized access to our systems, misappropriation of information or data, deletion or modification of client information, or a denial-of-service or other interruption to our business operations. As techniques used to obtain unauthorized access to or sabotage systems change frequently and may not be known until launched against us or our third-party service providers, we may be unable to anticipate, or implement adequate measures to protect against, these attacks.
If we are unable to avert these attacks and security breaches, we could be subject to significant legal and financial liability, our reputation would be harmed and we could sustain substantial revenue loss from lost sales and customer dissatisfaction. We may not have the resources or technical sophistication to anticipate or prevent rapidly evolving types of cyber-attacks. Cyber-attacks may target us, our business partners or other participants, the communication infrastructure, or the e-platform on which we depend. Actual or anticipated attacks and risks may cause us to incur significantly higher costs, including costs to deploy additional personnel and network protection technologies, train employees, and engage third-party experts and consultants. Cybersecurity breaches would not only harm our reputation and business, but also could materially decrease our revenue and net income.
5
Our business, financial condition and results of operations have been and are likely to continue to be materially and adversely affected by the ongoing effects of COVID-19.
Since the beginning of 2020, there has been an outbreak of COVID-19 in China and other countries. As of the date of this annual report, COVID-19 is still spreading in communities in some parts of the world. In response, the governmental authorities have periodically imposed, and others in the future may impose, significant governmental measures, including lockdowns, closures, quarantines, and travel bans, intended to control the spread of the virus. Such governmental actions, together with the further development of the COVID-19 pandemic, could materially disrupt our business and operations, slow down the overall economy, and make it difficult to adequately staff our operations.
We currently are unable to predict the duration and severity of the long-term impact of the ongoing COVID-19 on our business and operations, our results of operations, financial condition, cash flows and liquidity, as these depend on rapidly evolving developments, which are highly uncertain and will be a function of factors beyond our control. Such factors include, among others, the continued spread or recurrence of contagion, the implementation of effective preventative and containment measures, the development of effective medical solutions, and the extent to which governmental restrictions on travel, public gatherings, mobility and other activities remain in place or are augmented. The COVID-19 outbreak has to some extent, impacted our results of operations and financial conditions and will likely have a continued adverse impact on our results of operations.
Future strategic alliances or acquisitions may materially and adversely affect our business, financial condition and results of operations.
We have pursued and may continue to pursue selected strategic alliances and potential strategic acquisitions that are complementary to our business and operations. See “Item 4. Information on the Company— A. History and Development of the Company” for some examples. Strategic alliances or acquisitions could subject us to a number of risks, including risks associated with sharing proprietary information, and non-performance or default by counterparties, any of which may materially and adversely affect our business. We may have little ability to control or monitor the actions of our counterparties in these transactions or alliances. To the extent a strategic partner or investment target suffers any negative publicity as a result of its business operations, our reputation may be negatively affected by virtue of our association with such party.
Strategic acquisitions and subsequent integrations of newly acquired businesses would also require significant managerial and financial resources and could result in a diversion of resources from our existing business. The cost and duration of integrating newly acquired businesses could substantially exceed our expectations and the acquired businesses or assets may not generate expected financial results and may have historically incurred and continue to incur losses. Any such negative developments could materially and adversely affect our business, financial condition, and results of operations.
If we fail to protect our intellectual property rights, our brand 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. Unauthorized use of any of our intellectual property may adversely affect our business and reputation. However, preventing unauthorized uses of intellectual property rights could be difficult, costly and time-consuming, particularly in China. Implementation and enforcement of PRC laws relating to intellectual property have historically been deficient and ineffective. Accordingly, protection of intellectual property rights in China may not be as effective as in the United States or other developed countries.
The measures we take to protect our intellectual property rights may not be adequate to prevent infringement on or misuse of our intellectual property. Furthermore, the practice of intellectual property rights enforcement by the PRC regulatory authorities is subject to significant uncertainty. Failure to adequately protect our intellectual property could harm our brand name and materially affect our business and results of operations. Furthermore, our management’s attention may be diverted by violations of our intellectual property rights, and we may have to enter into costly litigation to protect our proprietary rights against any infringement or violation.
6
We may from time to time become a party to litigation, legal disputes, claims or administrative proceedings that may materially and adversely affect us.
We may from time to time become a party to various litigation, legal disputes, claims or administrative proceedings arising in the ordinary course of our business. Negative publicity relating to such litigation, legal disputes, claims or administrative proceedings may damage our reputation and adversely affect the image of our brands and services. In addition, ongoing litigation, legal disputes, claims or administrative proceedings may distract our management’s attention and consume our time and other resources. Furthermore, any litigation, legal disputes, claims or administrative proceedings which are not of material importance may escalate due to the various factors involved, such as the facts and circumstances of the cases, the likelihood of winning or losing, the monetary amount at stake, and the parties concerned continue to evolve in the future, and such factors may result in these cases becoming of material importance to us. We cannot assure you that the outcome of legal proceedings in the future, if any, will be favorable to us. If any verdict or award is rendered against us or if we decide to settle the disputes, we may be required to incur monetary damages or other liabilities. Even if we can successfully defend ourselves, we may have to incur substantial costs and spend substantial time and efforts in these lawsuits. Consequently, any ongoing or future litigation, legal disputes, claims or administrative proceedings could materially and adversely affect our business, financial condition and results of operations.
If we grant employees share options or other equity incentives in the future, our net income could be adversely affected.
In connection with our initial public offering, we undertook a series of corporate restructuring, or 2017 Restructuring. See “Item 4. Information on the Company—A. History and Development of the Company.” Prior to the 2017 Restructuring, we, through our predecessor holding company in the British Virgin Islands, adopted a 2013 share incentive plan in March 2013, which was replaced by a domestic share incentive plan of Shanghai OneSmart approved in February 2016, or the 2015 Plan. As a part of the 2017 Restructuring, we adopted an amended and restated 2015 share incentive plan in September 2017, which was further amended on February 5, 2018, or the Amended and Restated 2015 Plan. The maximum aggregated number of our ordinary shares which may be issued pursuant to all awards under the Amended and Restated 2015 Plan is 336,642,439 Class A ordinary shares, plus an annual 2.0% increase of the total number of ordinary shares outstanding on August 31 of the preceding calendar year of the Company on the first day of each of the nine-fiscal-year period commencing on September 1, 2018. Following the annual increase on September 1, 2021, the maximum aggregate number of shares which may be issued pursuant to all awards under the Amended and Restated 2015 Plan is 727,674,893. We were, and may from time to time be, subject to disputes with our current or former employees or advisors who receive our share incentive grants, which may distract our management’s attention and attract negative publicity.
We are required to account for share-based compensation in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718, Compensation—Stock Compensation, which generally requires a company to recognize, as an expense, the fair value of share options and other equity incentives to employees based on the fair value of equity awards on the date of the grant, with the compensation expense recognized over the period in which the recipient is required to provide service in exchange for the equity award. If we grant options or other equity incentives in the future, we could incur significant additional compensation charges, and our results of operations could be adversely affected.
7
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 ADSs may be materially and adversely affected.
We are a public company in the United States subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, requires that we include a report of management on our internal control over financial reporting in our annual report on Form 20-F. Our management has concluded that our internal control over financial reporting was ineffective as of August 31, 2022. We intend to implement a number of measures to address the identified material weakness subsequent to August 31, 2022. See “Item 15. Controls and Procedures-Management’s Annual Report on Internal Control over Financial Reporting.” See “Item 15. Controls and Procedures—Management’s Report on Internal Control over Financial Reporting.” However, we can give no assurance that the implementation of these measures will be sufficient to eliminate such material weakness or that material weaknesses in our internal control over financial reporting will not be identified in the future.
In addition, if we cease to be an “emerging growth company” as such term is defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, our independent registered public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting. Our management may conclude that our internal control over financial reporting is not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm, after conducting its own independent testing, may issue a report that is qualified if it is not satisfied with our internal controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. In addition, our reporting obligations as a public company may place a significant strain on our management, operational and financial resources and systems for the foreseeable future. We may be unable to timely complete our evaluation testing and any required remediation.
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 ADSs. 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.
We may require additional capital to meet our future capital needs, which may adversely affect our financial position and result in additional shareholder dilution.
We will require significant capital expenditures to fund our future growth. We may need to raise additional funds through equity or debt financings in the future in order to meet our capital needs mostly in relation to execution on our business plan. For example, in August 2022, we entered into a securities purchase agreement with certain “non-U.S. Persons” pursuant to which we sold an aggregate of 21,404,109,589 units. Each Unit consisted of one Class A ordinary share and a warrant to purchase half of a share with an initial exercise price of $0.001402 per Share, or $1.402 per ADS of the Company at a price of $0.001168 per Unit, or $1.168 per ADS, raising $25 million. The warrants will expire five years from its date of issuance.
If we raise additional funds through further issuances of equity or equity-linked securities, our existing shareholders could suffer significant dilution in their percentage ownership of our company, and any new equity securities we issue could have rights, preferences, and privileges senior to those of holders of our ADSs or ordinary shares.
8
Risks Related to Our Corporate Structure
We rely on dividends and other distributions on equity paid by our subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our subsidiaries to make payments to us could have a material adverse effect on our ability to conduct our business.
We are a holding company incorporated in the Cayman Islands, and we rely on dividends and other distributions on equity paid by our subsidiaries for our cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders and service any debt we may incur. If any of our subsidiaries incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other distributions to us.
According to the Companies Ordinance of Hong Kong, a Hong Kong company may only make a distribution out of profits available for distribution or other distributable reserves. Dividends cannot be paid out of share capital. As of the date of this report, there are no restrictions or limitation under the laws of Hong Kong imposed on the conversion of HK$ into foreign currencies and the remittance of currencies out of Hong Kong or across borders and to U.S investors. The PRC laws and regulations do not currently have any material impact on transfer of cash from our Hong Kong Subsidiaries to the Company or our shareholders. However, there can be no assurance that in the future the PRC government will not intervene or impose restrictions on our Hong Kong subsidiary, Metaverse Information Technology Limited (the “Meta HK”)’s ability to transfer or distribute cash/assets to entities outside of Hong Kong, any limitation on the ability of Meta HK to pay dividends or make other distributions to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business.
PRC laws and regulations related to our current business operations are sometimes vague and uncertain and any changes in such laws and regulations and interpretations of which may impair our ability to operate profitably.
Although we have direct ownership of our operating entity in Hong Kong and have entered a share purchase agreement to sell our VIE structure in mainland China, we are still subject to certain legal and operational risks associated with our operating subsidiary, Meta HK, being based in Hong Kong and having all of its operations to date in Hong Kong. There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations including, but not limited to, the laws and regulations related to our business and the enforcement and performance of our arrangements with customers in certain circumstances. The laws and regulations are sometimes vague and may be subject to future changes, and their official interpretation and enforcement may involve substantial uncertainty. The effectiveness and interpretation of newly enacted laws or regulations, including amendments to existing laws and regulations, may be delayed, and our business may be affected if we rely on laws and regulations which are subsequently adopted or interpreted in a manner different from our understanding of these laws and regulations. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively. We cannot predict what effect the interpretation of existing or new PRC laws or regulations may have on our business.
The uncertainties regarding the enforcement of laws and the fact that rules and regulations in mainland China can change quickly with little advance notice, along with the risk that the Chinese government may intervene or influence our operations at any time, or may exert more control over offerings conducted overseas and/or foreign investment in our subsidiary in Hong Kong could result in a material change in our operations, financial performance and/or the value of our ordinary shares or impair our ability to raise money.
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Risks Related to Doing Business in Hong Kong and Having Clients in Mainland China
If the Chinese government chooses to exert more oversight and control over offerings that are conducted overseas and/or foreign investment in China based issuers, such action may significantly limit or completely hinder our ability to offer or continue to offer ADSs to investors and cause the value of our ADSs to significantly decline or be worthless.
Recent statements by the Chinese government have indicated an intent to exert more oversight and control over offerings that are conducted overseas and/or foreign investments in China-based issuers. On July 6, 2021, the General Office of the Communist Party of China Central Committee and the General Office of the State Council jointly issued a document to crack down on illegal activities in the securities market and promote the high-quality development of the capital market, which, among other things, requires the relevant governmental authorities to strengthen cross-border oversight of law-enforcement and judicial cooperation, to enhance supervision over China-based companies listed overseas, and to establish and improve the system of extraterritorial application of the PRC securities laws. On December 24, 2021, the CSRC published the Provisions of the State Council on the Administration of Overseas Securities Offering and Listing by Domestic Companies (the “Draft Administration Provisions”), and the Administrative Measures for the Filing of Overseas Securities Offering and Listing by Domestic Companies (the “Draft Measures”) for public comment.
Furthermore, on July 10, 2021, the CAC issued a revised draft of the Measures for Cybersecurity Review for public comments, which required that, among others, in addition to “operator of critical information infrastructure”, any “data processor” controlling personal information of no less than one million users which seeks to list in a foreign stock exchange should also be subject to cybersecurity review, and further elaborated the factors to be considered when assessing the national security risks of the relevant activities. On December 28, 2021, the CAC, the National Development and Reform Commission (“NDRC”), and several other administrations jointly issued the revised Measures for Cybersecurity Review, or the “Revised Review Measures”, which became effective and replaced the existing Measures for Cybersecurity Review on February 15, 2022. According to the Revised Review Measures, if an “online platform operator” that is in possession of personal data of more than one million users intends to list in a foreign country, it must apply for a cybersecurity review. Based on a set of Q&A published on the official website of the State Cipher Code Administration in connection with the issuance of the Revised Review Measures, an official of the said administration indicated that an online platform operator should apply for a cybersecurity review prior to the submission of its listing application with non-PRC securities regulators. Moreover, the CAC released the draft of the Regulations on Network Data Security Management in November 2021 for public consultation, which among other things, stipulates that a data processor listed overseas must conduct an annual data security review by itself or by engaging a data security service provider and submit the annual data security review report for a given year to the municipal cybersecurity department before January 31 of the following year. Given the recency of the issuance of the Revised Review Measures and their pending effectiveness, there is a general lack of guidance and substantial uncertainties exist with respect to their interpretation and implementation.
It remains unclear whether a Hong Kong company which collects personal information from mainland Chinese individuals shall be subject to the Revised Review Measures. We do not currently expect the Revised Review Measures to have an impact on our business, operations or this offering as we do not believe that Meta HK is deemed to be an “operator of critical information infrastructure” or a “data processor” controlling personal information of no less than one million users, that are required to file for cybersecurity review before listing in the U.S., because (i) Meta HK is incorporated and operating in Hong Kong and the Revised Review Measures remains unclear whether it shall be applied to a Hong Kong company; (ii) Meta HK operates without any subsidiary or VIE structure in mainland China; (iii) as of date of this prospectus, Meta HK has not yet collected any personal or customer or vendor information from mainland China, and it has two customers and one vendor from the U.S.; and (iv) as of the date of this prospectus, Meta HK has not been informed by any PRC governmental authority of any requirement that it file for a cybersecurity review. However, there remains significant uncertainty in the interpretation and enforcement of relevant PRC cybersecurity laws and regulations. If Meta HK is deemed to be an “operator of critical information infrastructure” or a “data processor” controlling personal information of no less than one million users, Meta HK’s operation and the listing of our ADSs in the U.S. could be subject to CAC’s cybersecurity review in the future. We believe, as of the date of this prospectus, Meta HK is not required to obtain any permission or approval from Hong Kong authorities to operate our business. We are also not required to obtain permissions or approvals from Hong Kong authorities nor any PRC authorities for our listing in the U.S. or issuing our ADSs to foreign investors, including the CSRC or the CAC.
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However, uncertainties still exist, due to the possibility that laws, regulations, or policies in the PRC could change rapidly in the future. In the event that (i) the PRC government expanded the categories of industries and companies whose overseas listings are subject to review by the CSRC or the CAC that we are required to obtain such permissions or approvals; or (ii) we inadvertently concluded that relevant permissions or approvals were not required or that we did not receive or maintain relevant permissions or approvals required, any action taken by the PRC government could significantly limit or completely hinder our operations in Hong Kong and our ability to continue to offer securities to investors and could cause the value of such securities to significantly decline or be worthless.
It may be difficult for overseas shareholders and/or regulators to conduct investigation or collect evidence within China.
Shareholder claims or regulatory investigations that are common in the United States generally are difficult to pursue as a matter of law or practicality in China. For example, in China, there are significant legal and other obstacles to providing information needed for regulatory investigations or litigation initiated outside China. Although the authorities in China may establish a regulatory cooperation mechanism with the securities regulatory authorities of another country or region to implement cross-border supervision and administration, such cooperation with the securities regulatory authorities in the Unities States may not be efficient in the absence of mutual and practical cooperation mechanism. Furthermore, according to Article 177 of the PRC Securities Law, or Article 177, which became effective in March 2020, no overseas securities regulator is allowed to directly conduct investigation or evidence collection activities within the territory of the PRC. While detailed interpretation of or implementation rules under Article 177 have yet to be promulgated, the inability for an overseas securities regulator to directly conduct investigation or evidence collection activities within China may further increase difficulties faced by you in protecting your interests.
Part of our business operation is conducted in Hong Kong. In the event that the U.S. regulators carry out investigation on us and there is a need to conduct investigation or collect evidence within the territory of the PRC, the U.S. regulators may not be able to carry out such investigation or evidence collection directly in the PRC under the PRC laws. The U.S. regulators may consider cross-border cooperation with securities regulatory authority of the PRC by way of judicial assistance, diplomatic channels or regulatory cooperation mechanism established with the securities regulatory authority of the PRC.
You may incur additional costs and procedural obstacles in effecting service of legal process, enforcing foreign judgments or bringing actions in Hong Kong against us or our management named in the prospectus based on Hong Kong laws.
Currently, part of our operations is conducted outside the United States, and part of our assets are located outside the United States. You may incur additional costs and procedural obstacles in effecting service of legal process, enforcing foreign judgments or bringing actions in Hong Kong against us or our management named in this annual report, as judgments entered in the United States can be enforced in Hong Kong only at common law. If you want to enforce a judgment of the United States in Hong Kong, it must be a final judgment conclusive upon the merits of the claim, for a liquidated amount in a civil matter and not in respect of taxes, fines, penalties, or similar charges, the proceedings in which the judgment was obtained were not contrary to natural justice, and the enforcement of the judgment is not contrary to public policy of Hong Kong. Such a judgment must be for a fixed sum and must also come from a “competent” court as determined by the private international law rules applied by the Hong Kong courts.
The enactment of Law of the PRC on Safeguarding National Security in the Hong Kong Special Administrative Region (the “Hong Kong National Security Law”) could impact our Hong Kong holding subsidiary.
On June 30, 2020, the Standing Committee of the PRC National People’s Congress adopted the Hong Kong National Security Law. This law defines the duties and government bodies of the Hong Kong National Security Law for safeguarding national security and four categories of offences — secession, subversion, terrorist activities, and collusion with a foreign country or external elements to endanger national security — and their corresponding penalties. On July 14, 2020, the former U.S. President Donald Trump signed the Hong Kong Autonomy Act, or HKAA, into law, authorizing the U.S. administration to impose blocking sanctions against individuals and entities who are determined to have materially contributed to the erosion of Hong Kong’s autonomy. On August 7, 2020 the U.S. government imposed HKAA-authorized sanctions on eleven individuals, including HKSAR chief executive Carrie Lam. On October 14, 2020, the U.S. State Department submitted to relevant committees of Congress the report required under HKAA, identifying persons materially contributing to “the failure of the Government of China to meet its obligations under the Joint Declaration or the Basic Law.” The HKAA further authorizes secondary sanctions, including the imposition of blocking sanctions, against foreign financial institutions that knowingly conduct a significant transaction with foreign persons sanctioned under this authority. The imposition of sanctions may directly affect the foreign financial institutions as well as any third parties or customers dealing with any foreign financial institution that is targeted. It is difficult to predict the full impact of the Hong Kong National Security Law and HKAA on Hong Kong and companies located in Hong Kong. If our Hong Kong subsidiary is determined to be in violation of the Hong Kong National Security Law or the HKAA by competent authorities, our business operations, financial position and results of operations could be materially and adversely affected.
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Chinese government may intervene or influence our operations at any time or may exert more control over overseas listings and foreign investment in China-based issuers, which may result in a material change in our operations and/or the value of our ADSs. Additionally, the governmental and regulatory interference could significantly limit or completely hinder our ability to continue to offer securities to investors and cause the value of such securities to significantly decline or be worthless.
We are aware that recently, the PRC government initiated a series of regulatory actions and statements to regulate business operations in certain areas in mainland China with little advance notice, 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.
The Hong Kong legal system embodies uncertainties which could limit the availability of legal protections.
As one of the conditions for the handover of the sovereignty of Hong Kong to mainland China, mainland China accepted conditions such as Hong Kong’s Basic Law. The Basic Law ensured Hong Kong will retain its own currency (the Hong Kong Dollar), legal system, parliamentary system and people’s rights and freedom for fifty years from 1997. This agreement has given Hong Kong the freedom to function with a high degree of autonomy. The Special Administrative Region of Hong Kong is responsible for its own domestic affairs including, but not limited to, the judiciary and courts of last resort, immigration and customs, public finance, currencies and extradition. Hong Kong continues using the English common law system.
However, if the PRC attempts to alter its agreement to allow Hong Kong to function autonomously, this could potentially impact Hong Kong’s common law legal system and may in turn bring about uncertainty in, for example, the enforcement of our contractual rights. This could, in turn, materially and adversely affect our business and operations. Additionally, intellectual property rights and confidentiality protections in Hong Kong may not be as effective as in the United States or other countries. Accordingly, we cannot predict the effect of future developments in the Hong Kong legal system, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, or the preemption of local regulations by national laws.
Although the audit report included in this annual report is prepared by auditors who are currently inspected by the Public Company Accounting Oversight Board (the “PCAOB”), there is no guarantee that future audit reports will be prepared by auditors inspected by the PCAOB and, as such, in the future investors may be deprived of the benefits of such inspection. Furthermore, trading in our securities may be prohibited under the Holding Foreign Companies Accountable Act (the “HFCA Act”) if the SEC subsequently determines our audit work is performed by auditors that the PCAOB is unable to inspect or investigate completely, and as a result, U.S. national securities exchanges, such as the Nasdaq, may determine to delist our securities. Furthermore, on June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act, which, if enacted, would amend the HFCA Act and require the SEC to prohibit an issuer’s securities from trading on any U.S. stock exchanges if its auditor is not subject to PCAOB inspections for two consecutive years instead of three.
As part of a continued regulatory focus in the United States on access to audit and other information currently protected by national law, in particular in Mainland China and Hong Kong, the Holding Foreign Companies Accountable Act, or the HFCAA has been signed into law on December 18, 2020. The HFCAA states that if the SEC determines that we have filed audit reports issued by a registered public accounting firm that has not been subject to inspection for the PCAOB for three consecutive years beginning in 2021, the SEC shall prohibit our shares or ADSs from being traded on a national securities exchange or in the over-the-counter trading market in the U.S. Accordingly, under the current law this will happen in 2024.
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On March 24, 2021, the SEC adopted interim final rules relating to the implementation of certain disclosure and documentation requirements of the HFCAA. We will be required to comply with these rules if the SEC identifies us as having a “non-inspection” year under a process to be subsequently established by the SEC.
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 HFCAA from three years to two. The SEC is also assessing how to implement other requirements of the HFCAA, including the listing and trading prohibition requirements described above.
On November 5, 2021, the SEC approved the PCAOB Rule 6100 that provides a framework for the PCAOB to determine whether it is unable to inspect or investigate completely registered public accounting firms located in a foreign jurisdiction because of a position taken by one or more authorities in that jurisdiction. The rule states that the PCAOB will make these determinations promptly.
On December 2, 2021, the SEC adopted final amendments to its rules implementing the HFCAA, or the Final Amendments. The Final Amendments include requirements to disclose information, including the auditor name and location, the percentage of shares of the issuer owned by governmental entities, whether governmental entities in the applicable foreign jurisdiction with respect to the auditor has a controlling financial interest with respect to the issuer, the name of each official of the Chinese Communist Party who is a member of the board of the issuer, and whether the articles of incorporation of the issuer contains any charter of the Chinese Communist Party. The Final Amendments also establish procedures the SEC will follow in identifying issuers and prohibiting trading by certain issuers under the HFCAA. According to the Final Amendments, the SEC will identify Commission-Identified Issuers for fiscal years beginning after December 18, 2020. A Commission-Identified Issuer will be required to comply with the submission and disclosure requirements in the annual report for each year in which it was identified. If a registrant is identified as a Commission-Identified Issuer based on its annual report for the fiscal year ended December 31, 2021, the registrant will be required to comply with the submission or disclosure requirements in its annual report filing covering the fiscal year ended December 31, 2022.
On December 16, 2021, the PCAOB issued the HFCAA Determination Report, according to which our auditor is subject to the determinations that the PCAOB is unable to inspect or investigate completely. The HFCAA Determination Report is a report relaying to the SEC its determinations that the PCAOB is unable to inspect or investigate completely registered public accounting firms in Mainland China and Hong Kong due to positions taken by Chinese authorities. The report, issued under Rule 6100, lists dozens of accounting firms based in Mainland China and Hong Kong subject to the determinations. Under Rule 6100, the PCAOB will reassess its determinations at least annually. Our auditor, the independent registered public accounting firm that issues the audit report included elsewhere in this annual report, as an auditor of companies that are traded publicly in the United States and a firm registered with the PCAOB, is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. Our auditor, Onestop Assurance PAC, is headquartered in Singapore, not mainland China or Hong Kong and was not identified in this report as a firm subject to the PCAOB’s determination. Therefore, our auditor is not currently subject to the determinations announced by the PCAOB on December 16, 2021, and it is currently subject to PCAOB inspections.
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While our auditor is based in Singapore and is registered with PCAOB and has been inspected by the PCAOB on a regular basis, in the event it is later determined that the PCAOB is unable to inspect or investigate completely our auditor because of a position taken by an authority in a foreign jurisdiction, then such lack of inspection could cause trading in the our securities to be prohibited under the Holding Foreign Companies Accountable Act, and ultimately result in a determination by a securities exchange to delist the our securities. In addition, the recent developments would add uncertainties to our offering and we cannot assure you whether NYSE or regulatory authorities would apply additional and more stringent criteria to us after considering the effectiveness of our auditor’s audit procedures and quality control procedures, adequacy of personnel and training, or sufficiency of resources, geographic reach or experience as it relates to the audit of our financial statements. It remains unclear what the SEC’s implementation process related to the above rules will entail or what further actions the SEC, the PCAOB or Nasdaq will take to address these issues and what impact those actions will have on U.S. companies that have significant operations in the PRC and have securities listed on a U.S. stock exchange (including a national securities exchange or over-the-counter stock market). In addition, the above amendments and any additional actions, proceedings, or new rules resulting from these efforts to increase U.S. regulatory access to audit information could create some uncertainty for investors, the market price of our ADSs could be adversely affected, and we could be delisted if we and our auditor are unable to meet the PCAOB inspection requirement or being required to engage a new audit firm, which would require significant expense and management time.
On August 26, 2022, the China Securities Regulatory Commission, the Ministry of Finance of the PRC (the “MOF”), and the PCAOB signed a Statement of Protocol (the “Protocol”), governing inspections and investigations of audit firms based in mainland China and Hong Kong, taking the first step toward opening access for the PCAOB to inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong. Pursuant to the fact sheet with respect to the Protocol disclosed by the U.S. Securities and Exchange Commission (the “SEC”), the PCAOB shall have independent discretion to select any issuer audits for inspection or investigation and has the unfettered ability to transfer information to the SEC. On December 15, 2022, the PCAOB Board determined that the PCAOB was able to secure complete access to inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong and voted to vacate its previous determinations to the contrary. However, should PRC authorities obstruct or otherwise fail to facilitate the PCAOB’s access in the future, the PCAOB Board will consider the need to issue a new determination.
Risks Related to Our ADSs
The trading price of our ADSs is likely to be volatile, which could result in substantial losses to investors.
During our fiscal year ended August 31, 2022, the trading price of our ADSs has ranged from US$7. 25 to US$0. 98 per ADS. The trading price of our ADSs is likely to continue to be volatile and could fluctuate widely due to factors beyond our control. This may happen because of broad market and industry factors, including the performance and fluctuation of the market prices of other companies with business operations located mainly in China that have listed their securities in the United States. The securities of some of these companies, especially companies in the education industry, have experienced significant volatility since their initial public offerings, including, in some cases, substantial price declines in their trading prices. The trading performances of other Chinese companies’ securities after their offerings may affect the attitudes of investors toward Chinese companies listed in the United States in general and consequently may impact the trading performance of our ADSs, regardless of our actual operating performance.
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In addition to market and industry factors, the price and trading volume for our ADSs may be highly volatile for factors specific to our own operations, including the following:
| ● | variations in our revenues, earnings and cash flow; |
| ● | announcements of new investments, acquisitions, strategic partnerships or joint ventures by us or our competitors; |
| ● | changes in financial estimates by securities analysts; |
| ● | detrimental adverse publicity about us, our services or our industry; |
| ● | additions or departures of key personnel; |
| ● | release of lockup or other transfer restrictions on our outstanding equity securities or sales of additional equity securities; and |
| ● | actual or potential litigation or governmental and regulatory investigations or penalties resulting from our failure to comply with applicable laws, regulations and policies, including those adopted by the government to apply more stringent social, ethical and environmental standards in connection with increased global focus on these areas. |
Any of these factors may result in large and sudden changes in the volume and price at which our ADSs will trade.
In the past, shareholders of public companies have often brought securities class action suits against those companies following periods of instability in the market price of their 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 and require us to incur significant expenses to defend the suit, which could harm our results of operations. 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.
Our dual-class voting structure will limit your ability to influence corporate matters and could discourage others from pursuing any change of control transactions that holders of our Class A ordinary shares and ADSs may view as beneficial.
We have a dual-class voting structure such that our ordinary shares consist of Class A ordinary shares and Class B ordinary shares. Holders of Class A ordinary shares are entitled to one vote per share in respect of matters requiring the votes of shareholders, while holders of Class B ordinary shares are entitled to twenty votes per share, subject to certain exceptions. Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof, while Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. Upon any transfer of Class B ordinary shares by a holder thereof to any person or entity which is not an affiliate of such holder, such Class B ordinary shares shall be automatically and immediately converted into the equal number of Class A ordinary shares.
As of the date of this report, there are no Class B ordinary shares issued and outstanding. If we issue new Class B ordinary shares in the future, such shareholders will gain considerable influence over matters requiring shareholder approval, over matters such as electing directors and approving material mergers, acquisitions or other business combination transactions. This concentrated control will limit your ability to influence corporate matters and could also discourage others from pursuing any potential merger, takeover or other change of control transactions, which could have the effect of depriving the holders of our Class A ordinary shares and our ADSs of the opportunity to sell their shares at a premium over the prevailing market price.
If securities or industry analysts do not publish research or publishes inaccurate or unfavorable research about our business, or if they adversely change their recommendations regarding our ADSs, the market price for our ADSs and trading volume could decline.
The trading market for our ADSs will be influenced by research or reports that industry or securities analysts publish about our business. If one or more analysts who cover us downgrade our ADSs or publishes inaccurate or unfavorable research about our business, the market price for our ADSs would likely decline. If one or more of these analysts cease to cover us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the market price or trading volume for our ADSs to fall.
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The sale or availability for sale of substantial amounts of our ADSs could adversely affect their market price.
Sales of substantial amounts of our ADSs in the public market, or the perception that these sales could occur, could adversely affect the market price of our ADSs and could materially impair our ability to raise capital through equity offerings in the future. We cannot predict what effect, if any, market sales of securities held by our significant shareholders or any other shareholder or the availability of these securities for future sale will have on the market price of our ADSs. In addition, we may issue additional ordinary shares or ADSs for future acquisitions. If we pay for our future acquisitions in whole or in part with additionally issued ordinary shares or ADSs, your ownership interest in our company would be diluted and this, in turn, could have a material adverse effect on the price of our ADSs.
Because we do not expect to pay dividends in the foreseeable future, you must rely on a price appreciation of our ADSs for a 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 ADSs as a source for any future dividend income.
Our board of directors has 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 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 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 ADSs will likely depend entirely upon any future price appreciation of our ADSs. There is no guarantee that our ADSs will appreciate in value or even maintain the price at which you purchased the ADSs. You may not realize a return on your investment in our ADSs, and you may even lose your entire investment in our ADSs.
Our memorandum and articles of association contain anti-takeover provisions that could have a material adverse effect on the rights of holders of our Class A ordinary shares and ADSs.
Our sixth amended and restated memorandum and articles of association contain certain provisions to limit the ability of others to acquire control of our company or cause us to engage in change-of-control transactions, including a provision that grants authority to our board of directors to establish and issue from time to time one or more series of preferred shares without action by our shareholders and to determine, with respect to any series of preferred shares, the terms and rights of that series. These provisions could have the effect of depriving our shareholders and ADSs holders of the opportunity to sell their shares or ADSs at a premium over the prevailing market price by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transactions.
You may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited, because we are incorporated under Cayman Islands law.
We are an exempted company incorporated under the laws of the Cayman Islands. Our corporate affairs are governed by our sixth amended and restated memorandum and articles of association, the Companies Act (2020 Revision) of the Cayman Islands, or the Companies Act, and the common law of the Cayman Islands. The rights of 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 precedent 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 precedent in some jurisdictions in the United States. In particular, the Cayman Islands have a less developed body of securities laws than the United States. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States.
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Shareholders of Cayman Islands exempted companies like us have no general rights under Cayman Islands law to inspect corporate records (other than those available under the Companies Act) or to obtain copies of lists of shareholders of these companies. Our directors have discretion under our articles of association to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but our directors are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.
As a result of all of the above, our public shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders than they would as public 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 most of our assets are located outside of the United States. Part of our current operations are conducted in Hong Kong. In addition, most of our current directors and officers are nationals and residents of countries other than the United States, except Dr. Robert Angell and Mengchu Zhou, two of our independent directors. Substantially all of the assets of these persons 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 Hong Kong may render you unable to enforce a judgment against our assets or the assets of our directors and officers.
You, as holders of ADSs, may have fewer rights than holders of our Class A ordinary shares and must act through the deposit to exercise those rights.
Holders of ADSs do not have the same rights as our registered shareholders. As a holder of our ADSs, you will not have any direct right to attend general meetings of our shareholders or to cast any votes at such meetings. You will only be able to exercise the voting rights that are carried by the underlying Class A ordinary shares represented by your ADSs indirectly in accordance with the provisions of the deposit agreement. Under the deposit agreement, you may vote only by giving voting instructions to the depositary. Upon receipt of your voting instructions, the depositary will try, as far as is practicable, to vote the Class A ordinary shares underlying your ADSs in accordance with your instructions. If we ask for your instructions, then upon receipt of your voting instructions, the depositary will try to vote the underlying Class A ordinary shares in accordance with these instructions. If we do not instruct the depositary to ask for your instructions, the depositary may still vote in accordance with instructions you give, but it is not required to do so. You will not be able to directly exercise your right to vote with respect to the underlying Class A ordinary shares unless you withdraw the shares and become the registered holder of such shares prior to the record date for the general meeting.
Under our articles of association, the minimum notice period required to convene a general meeting is ten days. When a general meeting is convened, you may not receive sufficient advance notice of the meeting to withdraw the shares underlying your ADSs and become the registered holder of such shares to allow you to attend the general meeting and to vote directly with respect to any specific matter or resolution to be considered and voted upon at the general meeting. In addition, under our articles of association, for the purposes of determining those shareholders who are entitled to attend and vote at any general meeting, our directors may close our register of members and/or fix in advance a record date for such meeting, and such closure of our register of members or the setting of such a record date may prevent you from withdrawing the Class A ordinary shares underlying your ADSs and becoming the registered holder of such shares prior to the record date, so that you would not be able to attend the general meeting or to vote directly. If we ask for your instructions, the depositary will notify you of the upcoming vote and will arrange to deliver our voting materials to you. We have agreed to give the depositary at least 30 business days’ prior notice of shareholder meetings. Nevertheless, we cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote the underlying Class A ordinary shares represented by your ADSs. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for their manner of carrying out your voting instructions. This means that you may not be able to exercise your right to direct how the shares underlying your ADSs are voted, and you may have no legal remedy if the shares underlying your ADSs are not voted as you requested.
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You may experience dilution of your holdings due to the inability to participate in rights offerings.
We may, from time to time, distribute rights to our shareholders, including rights to acquire securities. Under the deposit agreement, the depositary will not distribute rights to holders of ADSs unless the distribution and sale of rights and the securities to which these rights relate are either exempt from registration under the Securities Act with respect to all holders of ADSs, or are registered under the provisions of the Securities Act. The depositary may, but is not required to, attempt to sell these undistributed rights to third parties, and may allow the rights to lapse. We may be unable to establish an exemption from registration under the Securities Act, and we are under no obligation to file a registration statement with respect to these rights or underlying securities or to endeavor to have a registration statement declared effective. Accordingly, holders of ADSs may be unable to participate in our rights offerings and may experience dilution of their holdings as a result.
You may be subject to limitations on the transfer of your ADSs.
Your ADSs are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems it expedient in connection with the performance of its duties. The depositary may close its books from time to time for a number of reasons, including in connection with corporate events such as a rights offering, during which time the depositary needs to maintain an exact number of ADS holders on its books for a specified period. The depositary may also close its books in emergencies, and on weekends and public holidays. The depositary may refuse to deliver, transfer or register transfers of our ADSs generally when our share register or the books of the depositary are closed, or at any time if we or the depositary thinks it is advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.
We are an emerging growth company within the meaning of the Securities Act and may take advantage of certain reduced reporting requirements.
We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from requirements applicable to other public companies that are not emerging growth companies, including, most significantly, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 for so long as we remain an emerging growth company. As a result, if we elect not to comply with such auditor attestation requirements, our investors may not have access to certain information they may deem important.
The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting standards. However, we have elected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted for public companies. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.
We will incur increased costs as a result of being a public company, particularly after we cease to qualify as an “emerging growth company.”
We are now a public company and expect to incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC and the New York Stock Exchange, impose various requirements on the corporate governance practices of public companies.
We expect these rules and regulations to increase our legal and financial compliance costs and to make some corporate activities more time-consuming and costly. After we are no longer an “emerging growth company,” we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the other rules and regulations of the SEC. For example, as a result of becoming a public company, we will need to increase the number of independent directors and adopt policies regarding internal controls and disclosure controls and procedures. We also expect that operating as a public company will make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. In addition, we will incur additional costs associated with our public company reporting requirements. It may also be more difficult for us to find qualified persons to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate with any degree of certainty the amount of additional costs we may incur or the timing of such costs.
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As a company incorporated in the Cayman Islands, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from the New York Stock Exchange corporate governance listing standards; these practices may afford less protection to shareholders than they would enjoy if we complied fully with the NYSE corporate governance listing standards.
As a Cayman Islands company listed on the New York Stock Exchange, we are subject to the New York Stock Exchange corporate governance listing standards. However, New York Stock Exchange 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 New York Stock Exchange corporate governance listing standards. As we have chosen, and may from time to time to choose, to follow home country practice exemptions with respect to certain corporate matters, such as the requirement of shareholders’ approval for adoption of an equity incentive plan or composition of our committees of board of directors, our shareholders may be afforded less protection under Cayman Islands law than they would under the NYSE rules applicable to U.S. domestic issuers. See “Item 16G. Corporate Governance.”
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 U.S. domestic public companies.
Because we qualify as a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the securities rules and regulations in the United States that are applicable to U.S. domestic issuers, including:
| ● | the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q or current reports on Form 8-K; |
| ● | the sections of the Exchange Act regulating the solicitation of proxies, consents, or authorizations in respect of a security registered under the Exchange Act; |
| ● | the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time; |
| ● | the selective disclosure rules by issuers of material nonpublic information under Regulation FD; and |
| ● | certain audit committee independence requirements in Rule 10A-3 of the Exchange Act. |
There can be no assurance that we will not be a passive foreign investment company, or PFIC, for U.S. federal income tax purposes for any taxable year, which could result in adverse U.S. federal income tax consequences to U.S. holders of our ADSs or Class A ordinary shares.
A non-U.S. corporation will be a passive foreign investment company, or PFIC, for any taxable year if either (1) at least 75% of its gross income for such year consists of certain types of “passive” income; or (2) at least 50% of the value of its assets (generally determined on the basis of a quarterly average) during such year is attributable to assets that produce passive income or are held for the production of passive income (the “asset test”). We do not believe that we were a PFIC for the taxable year ended August 31, 2021 and do not anticipate becoming a PFIC for the foreseeable future. However, no assurance can be given in this regard because the determination of whether we are or will become a PFIC is a fact-intensive inquiry made on an annual basis that depends, in part, upon the composition of our income and assets. Fluctuations in the market price of our ADSs may cause us to become a PFIC for the current or subsequent taxable years because the value of our assets for the purpose of the asset test may be determined by reference to the market price of our ADSs from time to time (which may be volatile). The composition of our income and assets may also be affected by how, and how quickly, we use our liquid assets.
If we were to be or become a PFIC for any taxable year during which a U.S. Holder (as defined in “Item 10. Additional Information—E. Taxation—United States Federal Income Tax Considerations”) holds our ADSs or Class A ordinary shares, certain adverse U.S. federal income tax consequences could apply to such U.S. Holder. See “Item 10. Additional Information—E. Taxation—United States Federal Income Tax Considerations—Passive Foreign Investment Company Rules.”
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ITEM 4. INFORMATION ON THE COMPANY
A. History and Development of the Company
Corporate History and Structure
We established Shanghai OneSmart Education and Training Co., Ltd. (formerly known as Shanghai OneSmart Education Information Consulting Co., Ltd.), or Shanghai OneSmart, a domestic company in China, in 2007. In January 2008, we opened our first learning center in Shanghai to provide premium K-12 after-school education services.
In June 2009, we established Shanghai Rui Si Technology Information Consulting Co., Ltd., or Rui Si, to provide tutoring services that are currently covered under our premium young children education program.
In September 2011, we established Shanghai Jing Xue Rui Information and Technology Co., Ltd., or the WFOE.
In October 2015, we established Shanghai Jing Yu Investment Co., Ltd., or Jing Yu, which is a wholly owned subsidiary of Shanghai OneSmart in the PRC. Currently, it operates the learning centers for our premium tutoring programs outside of Shanghai.
In March 2017, we incorporated Meta Data Limited (formerly known as OneSmart International Education Group Limited), or Meta Data, an exempted company incorporated under the laws of the Cayman Islands, as our offshore holding company to facilitate financing and offshore listing. In connection with our initial public offering, we subsequently undertook a series of corporate restructuring, or 2017 Restructuring. In March 2017, OneSmart Education acquired OneSmart Edu Inc., or OneSmart BVI, a company incorporated in the British Virgin Islands, as our intermediary holding company, which holds 100% of the share capital of OneSmart Edu (HK) Limited, or OneSmart HK. In September 2017, OneSmart HK acquired all of the equity interests in the WFOE, which entered into a series of contractual arrangements with Shanghai OneSmart and its then shareholders. Subsequent to that, we also entered into a series of contractual arrangements with Rui Si and its then shareholders. In January 2018, the WFOE entered into another series of contractual arrangements with Shanghai OneSmart and its then shareholders, replacing the original set. As a result of the foregoing transactions, OneSmart Education became the entity that consolidates Shanghai OneSmart and Rui Si. The 2017 Restructuring was completed under the common control of Xi Zhang, our founder. See also “Item 4. Information on the Company-C. Organizational Structure-Contractual Arrangements with Shanghai OneSmart, Rui Si and their respective shareholders.”
During the past few years, we pursued several strategic acquisitions of companies in the education industry that are complementary to our business in order to expand and diversify our service offerings. We have integrated and will continue to integrate such acquired business into our operations.
In September 2018, we acquired 100% equity interest in Tianjin Huaying Education Co., Ltd., one of the largest K-12 after-school education service provider based in Tianjin, China, for cash consideration of RMB240.0 million.
In October 2018, we made a strategic investment by acquiring 30% minority equity stake in Beijing Tus-Juren Education Technology Co., Ltd., or Tus-Juren, a leading K-12 after-school education company in China, for consideration of RMB239.4 million. In March 2019, we disposed 12% of equity stake in Tus-Juren.
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During the fiscal year 2019, we extended a series of five-year convertible loan in an aggregate amount of RMB668.7 million to Tus-Juren, or the 2019 Tus-Juren Convertible Loan. Such convertible loan bears a 10% annual coupon and we have the option to convert the principal and any unpaid interests of such convertible loan into new equity interest of Tus-Juren at a pre-determined valuation at any time after either the third or fourth anniversary from the borrowing date, as applicable. During the fiscal year 2020, we extended another series of five-year convertible loan in an aggregate amount of RMB51.2 million to Tus-Juren, or the 2020 Tus-Juren Convertible Loan, with terms substantially similar to the 2019 Tus-Juren Convertible Loan. In February 2020, the annual coupon rate of these convertible loans was adjusted to nil, applicable to the outstanding loan period starting from December 1, 2019. As a part of the Yutang transactions in December 2020, we have the option to convert the principal and any unpaid interests of the convertible loans to Tus-Juren into new equity interests of Yutang Inc. at any time within five years starting from December 15, 2020. During the fiscal year 2020, we made a series of 12-month loan available to Tus-Juren and its subsidiaries in an aggregate amount of RMB170.9 million. A majority of such loans bear a 4.35% annual interest rate.
In March 2019, we entered into a US$139 million term facility agreement with a group of arrangers led by UBS AG, Singapore Branch. Pursuant to the agreement, we were provided an interest-bearing secured term facility of up to US$139 million. The term facility has a three-year term from the initial drawdown date and should be repaid in installments. We drew down the US$139 million term facility in full in April 2019. The proceeds from this term facility were used for our working capital, capital expenditure, and other general corporate purposes. As of the date of this annual report, the current total outstanding balance of the loan is US$125 million, after a scheduled repayment in October 2020.
In February 2020, we entered into a share swap agreement and an asset and business transfer agreement with Yimi Education Technology Inc., or Yimi Cayman, its affiliated companies and VIE, Shanghai Yimi Education Technology Co., Ltd., or Shanghai Yimi to acquire certain technologies and business as part of Company’s continuing efforts to enhance the quality and customer experience on OneSmart Online, the online platform of the Company, for a total consideration of approximately RMB311.1 million. The foregoing transactions are collectively referred to as the “Yimi transactions.” In connection with the Yimi transactions, in December 2019, we established OneSmart Online Edu Inc., an exempted company duly incorporated and validly existing under the laws of the Cayman Islands, which is 100% owned by OneSmart BVI before the share swap occurs. Immediately after the share swap, we, through OneSmart BVI, hold 90% share capital of OneSmart Online Edu Inc., which in turns hold 100% share capital of Yimi Cayman. Yimi Education Technology (HK) Limited, or Yimi HK, which was established by Yimi Cayman under the laws of Hong Kong and was wholly owned by Yimi Cayman, holds 100% share capital Yimi Education Technology (Shanghai) Co., Ltd., or Yimi Shanghai, a WFOE under the laws of the PRC. In December 2019, we established Xiangyuan (Shanghai) Education Technology Co., Ltd., or Xiangyuan, which entered into a series of contractual agreements with its shareholders and Yimi Shanghai. As a result of the Yimi transactions, OneSmart Education became the entity that consolidates Xiangyuan. See also “Item 4. Information on the Company-C. Organizational Structure-Contractual Arrangements with Xiangyuan and its shareholders.”
In September 2019, we acquired 15% equity interest in Shanghai Yousheng Education and Technology Co., Ltd., or Yousheng, a company providing online English tutoring services to young children in China. In June 2020, we step-acquired 85% equity interest in Yousheng for a total consideration of approximately RMB145.4 million, and we held in aggregate 100% of its equity interest.
In August 2020, we acquired the business from Beijing Ruiyipeiyou Education and Technology Co., Ltd., or Ruiyipeiyou, a company providing online math tutoring services to young children in China, for a total consideration of approximately RMB131.3 million.
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In December 2020, we entered into certain agreements to establish a sizable and stronger small-class business by merging a number of small-class K-12 after-school education businesses that OneSmart has invested in for a few years into Yutang Inc., or Yutang. The foregoing transactions are collectively referred to as the “Yutang transactions.” In connection with Yutang transactions, we entered into a share sale and purchase agreement with Yutang, Tus-Juren related parties, pursuant to which, Yutang has agreed to issue 100,340,631 ordinary shares of Yutang to us as share consideration in exchange for all the equity interest of JUREN Education & Technology Group Inc. held by us. We also entered into a share subscription agreement with Yutang Inc. and its shareholder, Tus-Juren related parties and Tianjin Huaying Education Consulting Co., Ltd. to acquire certain equity interest in Yutang. Pursuant to which, Yutang has agreed to (i) issue 36,762,505 ordinary shares of Yutang to us at a purchase price of US$0.0001 per share as consideration to acquire all the equity interests of Tianjin Huaying Education Consulting Co., Ltd. indirectly held by us through VIE contractual arrangement, and (ii) issue 2,188,244 ordinary shares to us at a purchase price of US$0.0001 per share as consideration to acquire our equity interest in Tus-Juren online business. After the Yutang transactions, we became a minority shareholder of Yutang.
On March 28, 2018, our ADSs commenced trading on the NYSE under the symbol “ONE.” We raised approximately US$162.7 million in net proceeds from the issuance of new shares from the initial public offering after deducting underwriting commissions and the offering expenses payable by us.
In December 2021, Metaverse Information Technology Limited, or Meta BVI was incorporated in British Virgin Islands. In January 2022, Metaverse Information Technology Limited, or Meta HK was incorporated in Hong Kong as a wholly owned subsidiary of Meta BVI.
On January 11, 2022, Metaverse Digital Technology Co., Ltd. was formed in Wyoming, USA.
On April 28, 2022, our shareholders approved the change of the Company’s name from OneSmart International Education Group Limited to Meta Data Limited at the Company’s annual general meeting. In connection with the change of name, we changed our ticker symbol from “ONE” to “AIU.”
On October 28, 2022, we, OneSmart BVI, and Muckle Capital Investment Co., Ltd. (“Muckle Capital”) entered into a certain share purchase agreement, pursuant to which Muckle Capital agreed to purchase OneSmart BVI in cash consideration of $1,000,000. On November 25, 2022, we completed the Disposition after the satisfaction or waiver of all closing conditions, and Muckle Capital became the sole shareholder of OneSmart BVI and as a result, assumed all assets and liabilities of all the subsidiaries and VIE entities owned or controlled by OneSmart BVI.
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The chart below illustrates our corporate legal structure as of the date of this annual report:
Corporate Information
Our principal executive offices are located at Flat H 3/F, Haribest Industrial Building, 45-47 Au Pui Wan Street, Sha Tin New Territories, Hong Kong. Our telephone number is +86-13655939932. Our registered office in the Cayman Islands is located at the offices of Maples Corporate Services Limited, PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands. We maintain a corporate website at www.aiumeta.com.
See “Item 5. Operating and Financial Review and Prospects-B. Liquidity and Capital Resources-Capital Expenditures” for a discussion of our capital expenditures.
B. Business Overview
Historically, the Company operated as one the leading providers of K-12 after-school education services in China which developed a comprehensive K-12 after-school education platform that primarily focused on young children mathematics training services and FasTrack English services through a nationwide network of 480 learning centers across 40 cities in China. The Company had three primary segments, i. e. OneSmart VIP, OneSmart Young Children Education and One Smart Online.
On July 24, 2021, the General Office of Central Committee of the Communist Party of China and the General Office of the State Council jointly released Opinions on what they termed “Further Reducing the Burden of Homework and Off-campus Tutoring for Compulsory Education Students,” (the “Double Reduction Policy”), which basically requires suspension of all subject-based off-campus tutoring business targeting pre-school kids and K12 students. As a result, on October 12, 2021, the Company suspended all education programs and learning centers in China and started to have a new business in artificial intelligent education (AIE), artificial intelligent universe (AIU) IAAS and smart ID card services since 2nd quarter of fiscal 2023 (December 2021 to February 2023). The revenue from AIE and AIU for fiscal year ended August 31, 2022 are RMB12.2 million (US$1.9 million) and RMB2.4 million (US$0.4 million), respectively. The revenue from AIE and AIU are 100.0% of the total revenue for the fiscal year ended August 31, 2022.
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On October 28, 2022, the Company, OneSmart BVI, and Muckle Capital entered into a certain share purchase agreement, pursuant to which Muckle Capital agreed to purchase OneSmart BVI in cash consideration of $1,000,000. On November 25, 2022, the transaction closed, and Muckle Capita became the sole shareholder of OneSmart BVI.
The Company has been actively implementing its new business model, using the original channels to carry out quality education and technology output, including 5G technology, smart campus system, and virtual training systems based on the Metaverse. The new business model is based on using the six core technologies of Metaverse and artificial intelligence blockchain network computing, interaction, game technology, and the Internet of Things (“IoT”) as core technologies, building a new type of blockchain smart student card and global smart employment quality educational virtual world (a new type of artificial intelligence employment training), a combination of virtual and real prediction world (digital education, risk prediction, computing power output), VR shopping world (new e-commerce) and other products to provide global customers with a new digital world experience.
Our Business Model
The new business model takes many of the components not affected by the suspension and expands with new initiatives. The model consists of the following segments but will not include providing subject-based off-campus training and tutoring to pre-school kids or K-12 students in China. As such, the new business will not be adversely affected by the Double Reduction Policy.
| 1. | Artificial Intelligent Education (AIE). The Company has started building a smart training system incorporating virtual reality, artificial intelligence, blockchain and other technologies in order to facilitate the teaching and training process. If successfully developed and implemented, the smart training system is expected to enhance the immersion and interactivity of virtual reality and is suitable for many education and training scenarios. |
| 2. | Artificial Intelligent Universe (AIU) IAAS. The Company provides software & hardware infrastructure (IAAS) to Metaverse business operators or individual users. The IAAS package is targeted to improve the accessibility of rendering modes through cloud computing and edge computing algorithms and computing power to improve the virtual world. Use of spatial localization algorithm, virtual scene fitting, real-time network transmission, GPU server, and edge computing to reduce cost and network congestion. |
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Smart Training System
The Company is actively developing an intelligent training system based on intelligent training platform to provide the maximum immersive experience and the best technical foundation for learning. The company charges users a one-time sign-up fee plus consumption usage/hours one month following the month sales, creating a reoccurring revenue stream. The Company plans to sell the platform to academics and professional training centers. This smart training system known as (the “Metaverse Smart Training Module”) will become a technical service provider in the smart education/training industry.
The services include technical services including simulation teaching modules, 3D teaching modules, VR (virtual reality modules), etc. for smart education business operation service providers. Users will be able to exercise, cook, practice Tai Chi and yoga, learning through smart devices, VR devices, and through the Metaverse Smart Training Module to be developed by the Company. The Company plans to sell its modules in the form of chapters according to the needs of its operators and services providers, collecting an annual fee per module chapter.
The Company has been working closely with several companies and has entered into several strategic cooperation agreements with HK XINRONG Technology Global Limited, Cinda Communication Co., Limited and TT Motor HK Industrial Co., Ltd. to pre-launch in the near-term its smart education training business.
AI Computing Power Output, Software/Hardware Services
The Company provides software & hardware infrastructure (IAAS) to Metaverse business operators or individual users. The IAAS package is targeted to improve the accessibility of rendering modes through cloud computing and edge computing algorithms and computing power to improve the virtual world. Use of spatial localization algorithm, virtual scene fitting, real-time network transmission, GPU server, and edge computing to reduce cost and network congestion. It allows the operator to reduce the performance threshold requirements for terminal equipment and improve the immersive user experience. There are two key drivers of revenue growth for this segment, number of customers/contracts and unit price. According to Mordor Intelligence, the global gaming market was valued at over $170 billion in 2020, and it is expected to reach over $300 billion by 2026 (CAGR of 9.64%). Management believes that GameFi will continue to be one of the hottest trends to emerge from the crypto industry.
The Company has entered into a strategic cooperation agreement with Sesame Technology Corporation and Spirtas Worldwide to provide them with AI Computing.
Intellectual Property
AIU currently owns the Internet domain name of http://www.aiumeta.com/.
The Company is currently in the testing and optimization stage of its Cloud Rendering Public Service Platform, a self-built platform, providing technical support such as batch data calculation for users (engineering, scientific research project data calculation and accuracy checking), film and television special effects, three-dimensional animation, advertising/effect of drawing and rendering.
The Company’s cloud rendering public service platform is oriented to architectural design, VR/AR, interactive games, film and television. Animation, industrial design and other fields of three-dimensional content production to provide cloud rendering services to help users quickly complete. Rendering calculation of 3D content, animation and renderings to avoid problems caused by insufficient local computer configuration. Greatly improves work efficiency, reduce the cost of fixed assets investment for users. Cloud rendering service for flexible, efficient and unlimited expansion of massive nodes. Meet the needs of graphics and image industry, the professional needs of users, and support users in the cloud to achieve global collaboration, so that users get rid of the heavy invest in IT and computing facilities, put more energy and resources on content creation and operation, and greatly improve high industry production collaboration efficiency, reduce costs, thus promoting the rapid development of the entire industry.
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Competition
We believe we also have a competitive advantage. Most Metaverse companies focus on gaming platforms, virtual reality products, back-end technologies etc. For example, Unity Software - a top Metaverse technology and software company, Coinbase - Great Metaverse stock for direct exposure to cryptocurrency, Nike - Best Metaverse stock in the retail industry, Match Group - a dating service software provider, Roblox Corporation - an avatar community and gaming platform, Fastly Inc. - a leading RT3D software and hardware supplier to enhance digital experience, and Matterport - a leading the digitization and datafication of the built world. All peers have incurred substantial losses due to heavy investment in research & development (“R&D”). Having been historically a technology-based company, we believe that our foundation will allow us to more easily enter these markets with expected lower R&D expenses.
Employees
Due to the impact of Double Reduction policy on education from Chinese’s central government, the Company suspended its legacy business operation and is transforming itself into a different sector in Metaverse business in fiscal 2022. As of August 31, 2020, 2021 and 2022, we had a total of 12,667, 13,497 and 13 employees, respectively. Almost all of our employees are located in China.
The following table sets forth the numbers of our employees, categorized by function, as of August 31, 2022:
| Functions: | Number of Employees | |||
| Sales and marketing | 3 | |||
| Research Technology Center | 5 | |||
| General and administrative | 5 | |||
| Total | 13 | |||
We believe we offer our employees competitive compensation packages and a merit-based work environment and, as a result, we have generally been able to attract and retain qualified personnel.
As required by PRC regulations, we participate in various government statutory employee benefit plans, including social insurance funds, namely a pension contribution plan, a medical insurance plan, an unemployment insurance plan, a work-related injury insurance plan, a maternity insurance plan, and a housing provident fund. We are required by PRC law to make contributions to employee benefit plans at specified percentages of the salaries, bonuses and certain allowances of our employees, up to a maximum amount specified by the local government from time to time.
We enter into standard labor agreements with our employees; in addition, we enter into confidentiality and intellectual property rights agreements with our key employees. We believe that we have maintained a good working relationship with our employees, and we have not experienced any major labor disputes.
Insurance
We do not maintain business interruption insurance or general third-party liability insurance, nor do we maintain directors and officers liability insurance or key-man insurance. We consider our insurance coverage to be in line with that of other companies in the same industry of similar size.
Property, Plant and Equipment
Our principal executive offices are located at Flat H 3/F, Haribest Industrial Building, 45-47 Au Pui Wan Street, Sha Tin New Territories, Hong Kong. We believe that the offices that we currently lease are adequate to meet our needs for the immediate future.
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Regulations
Regulations Related to our Business Operation in Hong Kong
Business registration requirement
The Business Registration Ordinance (Chapter 310 of the Laws of Hong Kong) requires every person carrying on any business to make an application to the Commissioner of Inland Revenue in the prescribed manner for the registration of that business. The Commissioner of Inland Revenue must register each business for which a business registration application is made and as soon as practicable after the prescribed business registration fee and levy are paid and issue a business registration certificate or branch registration certificate for the relevant business or the relevant branch, as the case may be.
Regulations related to employment and labor protection
Employment Ordinance (Chapter 57 of the Laws of Hong Kong)
The Employment Ordinance (Chapter 57 of the Laws of Hong Kong), or the EO, is an ordinance enacted for, amongst other things, the protection of the wages of employees and the regulation of the general conditions of employment and employment agencies. Under the EO, an employee is generally entitled to, amongst other things, notice of termination of his or her employment contract; payment in lieu of notice; maternity protection in the case of a pregnant employee; not less than one rest day in every period of seven days; severance payments or long service payments; sickness allowance; statutory holidays or alternative holidays; and paid annual leave of up to 14 days depending on the period of employment.
Employees’ Compensation Ordinance (Chapter 282 of the Laws of Hong Kong)
The Employees’ Compensation Ordinance (Chapter 282 of the Laws of Hong Kong), or the ECO, is an ordinance enacted for the purpose of providing for the payment of compensation to employees injured in the course of employment. As stipulated by the ECO, no employer shall employ any employee in any employment unless there is in force in relation to such employee a policy of insurance issued by an insurer for an amount not less than the applicable amount specified in the Fourth Schedule of the ECO in respect of the liability of the employer. According to the Fourth Schedule of the ECO, the insured amount shall be not less than HKD100,000,000 per event if a company has no more than 200 employees. Any employer who contravenes this requirement commits a criminal offence and is liable on conviction to a fine and imprisonment. An employer who has taken out an insurance policy under the ECO is required to display a prescribed notice of insurance in a conspicuous place on each of its premises where any employee is employed.
Mandatory Provident Fund Schemes Ordinance (Chapter 485 of the Laws of Hong Kong)
The Mandatory Provident Fund Schemes Ordinance (Chapter 485 of the Laws of Hong Kong), or the MPFSO, is an ordinance enacted for the purposes of providing for the establishment of non-governmental mandatory provident fund schemes, or the MPF Schemes. The MPFSO requires every employer of an employee of 18 years of age or above but under 65 years of age to take all practical steps to ensure the employee becomes a member of a registered MPF Scheme. Subject to the minimum and maximum relevant income levels, it is mandatory for both employers and their employees to contribute 5% of the employee’s relevant income to the MPF Scheme. Any employer who contravenes this requirement commits a criminal offence and is liable on conviction to a fine and imprisonment. As of the date of this prospectus, the Company believes it has made all contributions required of ALECS under the MPFSO.
Regulations related to Hong Kong Taxation
Inland Revenue Ordinance (Chapter 112 of the Laws of Hong Kong)
Under the Inland Revenue Ordinance (Chapter 112 of the Laws of Hong Kong), where an employer commences to employ in Hong Kong an individual who is or is likely to be chargeable to tax, or any married person, the employer shall give a written notice to the Commissioner of Inland Revenue not later than three months after the date of commencement of such employment. Where an employer ceases or is about to cease to employ in Hong Kong an individual who is or is likely to be chargeable to tax, or any married person, the employer shall give a written notice to the Commissioner of Inland Revenue not later than one month before such individual ceases to be employed in Hong Kong.
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Tax on dividends
Under the current practice of the Inland Revenue Department of Hong Kong, no tax is payable in Hong Kong in respect of dividends paid by the Company.
Capital gains and profit tax
No tax is imposed in Hong Kong in respect of capital gains from the sale of shares. However, trading gains from the sale of shares by persons carrying on a trade, profession or business in Hong Kong, where such gains are derived from or arise in Hong Kong, will be subject to Hong Kong profits tax which is imposed at the rates of 8.25% on assessable profits up to HKD2,000,000 and 16.5% on any part of assessable profits over HKD2,000,000 on corporations from the year of assessment commencing on or after 1 April 2018. Certain categories of taxpayers (for example, financial institutions, insurance companies and securities dealers) are likely to be regarded as deriving trading gains rather than capital gains unless these taxpayers can prove that the investment securities are held for long-term investment purposes.
Stamp Duty Ordinance (Chapter 117 of the Laws of Hong Kong)
Under the Stamp Duty Ordinance (Chapter 117 of the Laws of Hong Kong), the Hong Kong stamp duty currently charged at the ad valorem rate of 0.1% on the higher of the consideration for or the market value of the shares, will be payable by the purchaser on every purchase and by the seller on every sale of Hong Kong shares (in other words, a total of 0.2% is currently payable on a typical sale and purchase transaction of Hong Kong shares). In addition, a fixed duty of HKD5 is currently payable on any instrument of transfer of Hong Kong shares. Where one of the parties is a resident outside Hong Kong and does not pay the ad valorem duty due by it, the duty not paid will be assessed on the instrument of transfer (if any) and will be payable by the transferee. If no stamp duty is paid on or before the due date, a penalty of up to ten times the duty payable may be imposed.
Estate duty
Hong Kong estate duty was abolished effective from 11 February 2006. No Hong Kong estate duty is payable by shareholders in relation to the shares owned by them upon death.
Regulations related to anti-money laundering and counter-terrorist financing
Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Chapter 615 of the Laws of Hong Kong)
The Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Chapter 615 of the Laws of Hong Kong), or the AMLO, imposes requirements relating to client due diligence and record-keeping and provides regulatory authorities with the powers to supervise compliance with the requirements under the AMLO. In addition, the regulatory authorities are empowered to (i) ensure that proper safeguards exist to prevent contravention of specified provisions in the AMLO; and (ii) mitigate money laundering and terrorist financing risks.
Drug Trafficking (Recovery of Proceeds) Ordinance (Chapter 405 of the Laws of Hong Kong)
The Drug Trafficking (Recovery of Proceeds) Ordinance (Chapter 405 of the Laws of Hong Kong), or the DTROP, contains provisions for the investigation of assets suspected to be derived from drug trafficking activities, the freezing of assets on arrest and the confiscation of the proceeds from drug trafficking activities. It is an offence under the DTROP if a person deals with any property knowing, or having reasonable grounds to believe, it to be the proceeds from drug trafficking. The DTROP requires a person to report to an authorized officer if he/she knows or suspects that any property (directly or indirectly) is the proceeds from drug trafficking or is intended to be used or was used in connection with drug trafficking, and failure to make such disclosure constitutes an offence under the DTROP.
Organized and Serious Crimes Ordinance (Chapter 455 of the Laws of Hong Kong)
The Organized and Serious Crimes Ordinance (Chapter 455 of the Laws of Hong Kong), or the OSCO, empowers officers of the Hong Kong Police Force and the Hong Kong Customs and Excise Department to investigate organized crime and triad activities, and it gives the Hong Kong courts jurisdiction to confiscate the proceeds from organized and serious crimes, to issue restraint orders and charging orders in relation to the property of defendants of specified offences. The OSCO extends the money laundering offence to cover the proceeds of all indictable offences in addition to drug trafficking.
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United Nations (Anti-Terrorism Measures) Ordinance (Chapter 575 of the Laws of Hong Kong)
The United Nations (Anti-Terrorism Measures) Ordinance (Chapter 575 of the Laws of Hong Kong), or the UNATMO, provides that it is a criminal offence to: (i) provide or collect funds (by any means, directly or indirectly) with the intention or knowledge that the funds will be used to commit, in whole or in part, one or more terrorist acts; or (ii) make any funds or financial (or related) services available, directly or indirectly, to or for the benefit of a person knowing that, or being reckless as to whether, such person is a terrorist or terrorist associate. The UNATMO also requires a person to report his knowledge or suspicion of terrorist property to an authorized officer, and failure to make such disclosure constitutes an offence under the UNATMO.
Guidelines issued by the SFC
Licensed corporations are required to comply with the applicable anti-money laundering and counter-terrorist financing laws and regulations in Hong Kong as well as the Guideline on Anti-Money Laundering and Counter-Financing of Terrorism, or the AML & CFT Guideline, issued by the SFC on 1 November 2018, and the Prevention of Money Laundering and Terrorist Financing Guideline issued by the Securities and Futures Commission for Associated Entities issued by the SFC on 1 November 2018.
The AML & CFT Guideline sets out the anti-money laundering and counter-financing of terrorism statutory and regulatory requirements, and the anti-money laundering and counter-financing of terrorism standards which licensed corporations should meet in order to comply with the statutory requirements under the AMLO. The AML & CTF Guideline provides practical guidance to licensed corporations and their senior management in designing and implementing their own anti-money laundering and counter-terrorist financing policies, procedures and controls in order to meet the relevant legal and regulatory requirements in Hong Kong. Licensed corporations are required to ensure that proper safeguards exist to prevent contravention of specified provisions in the AML & CFT Guideline and mitigate money laundering and terrorist financing risks. Pursuant to the AML & CTF Guideline, licensed corporations should, among other things, assess the risks of any new products, new business practices, and use of new or developing technologies before they are offered to the market, identify the client and verify the client’s identity, conduct on-going monitoring of activities of the clients, maintain a database of names and particulars of terrorist suspects and designated parties and conduct on-going monitoring for identification of suspicious transactions.
Personal Data (Privacy) Ordinance (Chapter 486 of the Laws of Hong Kong)
The Personal Data (Privacy) Ordinance (Chapter 486 of the Laws of Hong Kong), or the PDPO, imposes a statutory duty on data users to comply with the requirements of the six data protection principles (the “Data Protection Principles”) contained in Schedule 1 to the PDPO. The PDPO provides that a data user shall not do an act, or engage in a practice, that contravenes a Data Protection Principle unless the act or practice, as the case may be, is required or permitted under the PDPO. The six Data Protection Principles are:
| ● | Principle 1 — purpose and manner of collection of personal data; |
| ● | Principle 2 — accuracy and duration of retention of personal data; |
| ● | Principle 3 — use of personal data; |
| ● | Principle 4 — security of personal data; |
| ● | Principle 5 — information to be generally available; and |
| ● | Principle 6 — access to personal data. |
Non-compliance with a Data Protection Principle may lead to a complaint to the Privacy Commissioner for Personal Data (the “Privacy Commissioner”). The Privacy Commissioner may serve an enforcement notice to direct the data user to remedy the contravention and/ or instigate prosecution actions. A data user who contravenes an enforcement notice commits an offense which may lead to a fine and imprisonment.
The PDPO also gives data subjects certain rights, inter alia:
| ● | the right to be informed by a data user whether the data user holds personal data of which the individual is the data subject; |
| ● | if the data user holds such data, to be supplied with a copy of such data; and |
| ● | the right to request correction of any data they consider to be inaccurate. |
The PDPO criminalizes, including but not limited to, the misuse or inappropriate use of personal data in direct marketing activities, non-compliance with a data access request and the unauthorized disclosure of personal data obtained without the relevant data user’s consent. An individual who suffers damage, including injured feelings, by reason of a contravention of the PDPO in relation to his or her personal data may seek compensation from the data user concerned.
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C. Organizational Structure
See “—A. History and Development of the Company.”
D. Property, Plant and Equipment
See “—B. Business overview—Property, Plant and Equipment.”
ITEM 4A. UNRESOLVED STAFF COMMENTS
None.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
You should read the following discussion together with our consolidated financial statements and the related notes included elsewhere in this annual report on Form 20-F. This discussion contains forward-looking statements that involve risks and uncertainties about our business and operations. Our actual results may differ materially from those we currently anticipate as a result of various factors, including those we describe under “Item 3. Key Information-D. Risk Factors” and elsewhere in this annual report on Form 20-F. See “Forward-Looking Statements.”
A. Operating Results
Overview
For the fiscal year ended August 31, 2022, we generated our revenue primarily from artificial intelligent education (AIE) service and artificial intelligent universe (AIU) IAA service.
AIE is based on intelligent training plat-form, so as to provide the maximum immersive experience to users, this enables all users no longer bound to physical world with improved digital life experience
AIU provides software & hardware infrastructure (IAAS) to Metaverse business operator or individual users. It improves the accessibility of rendering modes through cloud computing and edge computing algorithms and computing power to improve the virtual world. Use of spatial localization algorithm, virtual scene fitting, real-time network transmission, GPU server, and edge computing to reduce cost and network congestion. Reduce the performance threshold requirements for terminal equipment, and improve the immersive user experience.
As we sold our after-school tutoring service segment on November 25, 2022, the financial position and operating results of OneSmart Edu Inc. (BVI) have been classified as discontinued operations within the accompanying consolidated financial statements of the Company.
Impact of COVID-19
The outbreak of COVID-19 pandemic around the globe has had and is expected to continue to have an impact on our operations and financial performance.
The COVID-19 outbreak may continue to affect our business operations and its financial condition and operating results for the fiscal year 2023, including but not limited to negative impact to our total revenues, fair value adjustments or impairment to our long-term investments.
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Key Components of Results of Operations
Net Revenues
On September 1, 2018, we adopted ASC 606, Revenue from Contracts with Customers (“Topic 606”), applying the modified retrospective method to all contracts that were not completed as of September 1, 2018. Results for the year ended August 31, 2020, 2021 and 2022 are presented under Topic 606, while revenues for the years ended August 31, 2018 are not adjusted and continue to be reported under ASC Topic 605, Revenue Recognition (“Topic 605”). Based on our assessment, the adoption of ASC 606 did not have any material impact on our consolidated financial statements.
Due to the impact of Double Reduction policy on education from Chinese’s central government, we suspended our legacy business operation from 1st quarter of fiscal 2022 (September 2021 to November 2021) onwards and is transforming us into a different sector in Metaverse business. In fiscal 2022, all of our revenues were generated from artificial intelligent education (AIE) and artificial intelligent universe (AIU) IAAS services. The following table sets forth the breakdown, both in absolute amount and as a percentage of our net revenues, for the periods presented.
| Year Ended August 31, | ||||||||||||||||||||||||||||
| 2020 | 2021 | 2022 | ||||||||||||||||||||||||||
| RMB | % | RMB | % | RMB | US$ | % | ||||||||||||||||||||||
| (in thousands, except for percentages) | ||||||||||||||||||||||||||||
| Net revenues | ||||||||||||||||||||||||||||
| OneSmart VIP business | 2,625,179 | 76.3 | 2,780,106 | 81.2 | - | - | - | |||||||||||||||||||||
| OneSmart Young Children Education business | 599,414 | 17.4 | 546,487 | 16.0 | - | - | - | |||||||||||||||||||||
| OneSmart Online | 103,848 | 3.1 | 48,076 | 1.4 | - | - | - | |||||||||||||||||||||
| Other | 110,440 | 3.2 | 48,741 | 1.4 | ||||||||||||||||||||||||
| Artificial Intelligent Universe IAAS | - | - | - | - | 2,411 | 350 | 83.5 | |||||||||||||||||||||
| Artificial Intelligent Education | - | - | - | - | 12,194 | 1,770 | 16.5 | |||||||||||||||||||||
| Total net revenues | 3,438,881 | 100.0 | 3,423,410 | 100.0 | 14,605 | 2,120 | 100.0 | |||||||||||||||||||||
For artificial intelligent universe IAAS and artificial intelligent education services, we provide online training system and applications to academic and professional training centers by charging users one-time sign up fees plus consumption usage/hours one month following the month sales.
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Cost of Revenues
In fiscal 2022, our cost of revenues primarily includes the delivery of service or performance of service of AIE and AIU, including salaries and wages for technical support employees, related payroll deductions, staff benefits, share-based compensations, i-cloud rental expenses, depreciation for PP&E, amortization for software etc. The table below sets forth a breakdown of our cost of revenues for the periods indicated, both in absolute amount and as a percentage of our revenues:
| Year Ended August 31, | ||||||||||||||||||||||||||||
| 2020 | 2021 | 2022 | ||||||||||||||||||||||||||
| RMB | % | RMB | % | RMB | US$ | % | ||||||||||||||||||||||
| (in thousands, except for percentages) | ||||||||||||||||||||||||||||
| Cost of revenues | ||||||||||||||||||||||||||||
| Tutoring service-staff costs | (1,240,871 | ) | (36.1 | ) | (1,253,082 | ) | (36.6 | ) | - | - | - | |||||||||||||||||
| Tutoring service-rental costs | (488,592 | ) | (14.2 | ) | (577,208 | ) | (16.9 | ) | - | - | - | |||||||||||||||||
| Tutoring service-depreciation and amortization | (204,598 | ) | (5.9 | ) | (84,490 | ) | (2.5 | ) | - | - | - | |||||||||||||||||
| Tutoring service-other costs | (235,678 | ) | (6.9 | ) | (178,963 | ) | (5.2 | ) | - | - | - | |||||||||||||||||
| Artificial intelligent education service | - | - | - | - | (10,787 | ) | (1,566 | ) | (84.4 | ) | ||||||||||||||||||
| Artificial intelligent universe IAAS service | - | - | - | - | (2,000 | ) | (290 | ) | (15.6 | ) | ||||||||||||||||||
| Total cost of revenues | (2,169,739 | ) | (63.1 | ) | (2,093,743 | ) | (61.2 | ) | (12,787 | ) | (1,856 | ) | (100% | ) | ||||||||||||||
Operating Expenses
Our operating expenses consist of selling and marketing expenses and general and administrative expenses.
Selling and Marketing Expenses
In fiscal 2022, there is no selling and marketing expenses incurred due to classification of our legacy education business as discontinued operations.
In fiscal 2021, selling and marketing expenses primarily consist of (i) compensation to selling personnel, including the salaries, and other benefits, (ii) advertising, marketing and brand promotion expenses, (iii) rental costs for the leases related to the sales and marketing function, and (iv) office supplies in relation to the selling and marketing activities. Our selling and marketing expenses as a percentage of revenues were 23.9%, 27.2% and nil% for the fiscal years of 2020, 2021 and 2022, respectively. Our selling and marketing expenses as a percentage of revenues increased from 2020 to 2022 as a result of our increased sales and marketing activities to support new students enrollment growth and adoption of more effective sales and marketing channels. We expect that our selling and marketing expenses will decrease in absolute amounts as we are planning to restructure our business by selling tutoring services and then focus on smart education services.
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General and Administrative Expenses
In fiscal 2022, our general and administrative expenses mainly consist of (i) compensation to the employees at our headquarters, including salaries and benefits, (ii) rental costs for the general and administrative function, (iii) office expenses in relation to the general and administrative activities and others.
On July 24, 2021, the General Office of the Communist Party of China Central Committee and the General Office of the State Council of the PRC jointly issued the “Opinions on Further Alleviating the Burden of Homework and After-School Tutoring for Students in Compulsory Education (compulsory education includes primary school education of six years and middle school education of three years, together as the “Compulsory Stage Education”)” (the “Opinion”). The key provisions of the Opinion include, but are not limited to: (i) institutions providing after-school tutoring (the “AST”) services on academic subjects in relation to the Compulsory Stage Education (“Academic AST Institutions”) are required to be registered as non-profit organization, (ii) Academic AST Institutions providing online tutoring services are required to make application to renew their operating permit in order to maintain the internet content provider license (the “ICP License”); (iii) foreign investors shall not control or hold interest in Academic AST Institutions by means of direct investment, merger and acquisition, franchise or contractual arrangements; (iv) certain restrictions on timing and fee of academic AST services.
On September 7, 2021, to implement the Opinion, the Chinese Ministry of Education (“MOE”) published on its website that the MOE, together with two other government authorities, issued a circular requiring all Academic AST ID. All Academic AST Institutions to complete registration as non-profit by the end of 2021, and all Academic AST Institutions shall, before completing such registration, suspend enrollment of students and charging fees. The Opinion and a related series of notice, administrative measures or circular have a material adverse impact on our AST services relating to academic subjects in the PRC’s Compulsory Stage Education. To the extent we are unable to provide AST related services related to this obligation in the future as a result of the Opinion, we may be required to refund any remaining balance in cash to our customers. Additionally, a significant portion of the Company’s long-lived assets related to its AST business. Those assets might be subject to future impairment based on the future steps that the Company will take to comply with the Opinion. We have considered the impact of the Opinion on our current business and the necessary steps that need to be undertaken in order to fully comply with the Opinion. As a result, we recorded impairment losses of RMB 4.4 billion in fiscal 2021.
Our general and administrative expenses decrease in absolute amounts in fiscal 2022 as we start to restructure our business from selling tutoring services into artificial intelligent education and artificial intelligent universe IAAS services from 2nd quarter of fiscal 2022.
The following table sets forth our operating expenses, both in absolute amount and as a percentage of our expenses, for the periods presented.
| Year Ended August 31, | ||||||||||||||||||||||||||||
| 2020 | 2021 | 2022 | ||||||||||||||||||||||||||
| RMB | % | RMB | % | RMB | US$ | % | ||||||||||||||||||||||
| (in thousands, except for percentages) | ||||||||||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||||
| Selling and marketing expenses | (820,883 | ) | (23.9 | ) | (930,140 | ) | (27.2 | ) | - | - | - | |||||||||||||||||
| General and administrative expenses | (810,936 | ) | (23.6 | ) | (5,261,978 | ) | (153.7 | ) | (368,116 | ) | (53,435 | ) | (2,520.5 | ) | ||||||||||||||
| Total operating expenses | (1,631,819 | ) | (47.5 | ) | (6,192,118 | ) | (180.9 | ) | (368,116 | ) | (53,435 | ) | (2,520.5 | ) | ||||||||||||||
Taxation
Cayman Islands
We are incorporated in the Cayman Islands. The Cayman Islands currently have no income, corporation or capital gains tax and no estate duty, inheritance tax or gift tax. The Cayman Islands does not impose a withholding tax on payments of dividends to shareholders.
British Virgin Islands
Meta BVI, our wholly-owned subsidiary incorporated in the British Virgin Islands, is not subject to tax on income or capital gains in the British Virgin Islands. In addition, upon payments of dividends by Meta BVI to us, no British Virgin Islands withholding tax will be imposed.
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Hong Kong
Meta HK, our subsidiary in Hong Kong, are subject to Hong Kong profits tax of 16.5% on its activities conducted in Hong Kong. No provision for Hong Kong profits tax has been made as it has no assessable income for the fiscal years ended August 31, 2020, 2021 and 2022.
Critical Accounting Policies
We prepare our financial statements in accordance with U.S. GAAP, which requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting periods. We continually evaluate these judgments and estimates based on our own historical experience, knowledge and assessment of current business and other conditions, our expectations regarding the future based on available information and assumptions that we believe to be reasonable, which together form our basis for making judgments about matters that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, our actual results could differ from those estimates. Some of our accounting policies require a higher degree of judgment than others in their application.
The selection of critical accounting policies, the judgments and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors that should be considered when reviewing our financial statements. We believe the following accounting policies involve the most significant judgments and estimates used in the preparation of our financial statements. You should read the following description of critical accounting policies, judgments and estimates in conjunction with our consolidated financial statements and other disclosures included with this annual report.
Revenue recognition
On September 1, 2018, we adopted ASC Topic 606, Revenue from Contracts with Customers, or Topic 606, applying the modified retrospective method to all contracts that were not completed as of September 1, 2018. Results for the year ended August 31, 2020,2021 and 2022 are presented under Topic 606, while revenues for the years ended August 31, 2018 are not adjusted and continue to be reported under ASC Topic 605, Revenue Recognition, or Topic 605.
Revenue is recognized when control of promised services are transferred to our customers in amounts of consideration to which we expect to be entitled to in exchange for those services. We follow the five steps approach for revenue recognition under Topic 606: (i) identify the contract with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue as we satisfy a performance obligation.
In fiscal 2022, we generated revenues through artificial intelligent education (AIE) and artificial intelligent universe (AIU) IAAS services. The following table presents our revenues disaggregated by revenue sources for the year ended August 31, 2022.
| Disaggregation of net revenues | RMB | |||
| AIE service | 12,194 | |||
| AIU service | 2,411 | |||
| 14,605 | ||||
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Primary sources of our revenues are as follows:
| (1) |
Artificial Intelligent Education (AIE) service is to build an intelligent training system based on intelligent training plat-from to provide the maximum immersive experience and the best technical foundation for learning, implementation in RT3D with 360 degree landscape, so that all users are no longer bound to bult World with improved digital life experience. |
| (2) |
AIU (Artificial Intelligent Universe) IAAS service provides software & hardware infrastructure (IAAS) to Metaverse business operator or individual users. It improves the accessibility of rendering modes through cloud computing and edge computing algorithms and computing power to improve the virtual world. Use of spatial localization algorithm, virtual scene fitting, real-time network transmission, GPU server, and edge computing to reduce cost and network congestion. Reduce the performance threshold requirements for terminal equipment, and improve the immersive user experience.
For above, we provided online training system and applications to academic and professional training centers by charging users one-time sign-up fees plus consumption usage/hours one month following the month sales. |
Leases
We adopted ASU No. 2016-02, Leases (Topic 842), or ASC 842, from September 1, 2019 by using the modified retrospective method and did not restate the comparable periods. We have elected the package of practical expedients, which allows us not to reassess (1) whether any expired or existing contracts as of the adoption date are or contain a lease, (2) lease classification for any expired or existing leases as of the adoption date and (3) initial direct costs for any expired or existing leases as of the adoption date. We also elected the short-term lease exemption for all contracts with lease terms of 12 months or less. We have lease agreements with lease and non-lease components, which are generally accounted for separately.
We determine if an arrangement is a lease or contains a lease at lease inception. For operating leases, we recognize a right-of-use (“ROU”) asset and a lease liability based on the present value of the lease payments over the lease term on the consolidated balance sheets at commencement date. As most of our leases do not provide an implicit rate, we estimate our incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The incremental borrowing rate is estimated to approximate the interest rate on a collateralized basis with similar terms and payments, and in economic environments where the leased asset is located. The ROU assets also include any lease payments made, net of lease incentives. Lease expense is recorded on a straight-line basis over the lease term. Our leases often include options to extend and lease terms include such extended terms when we are reasonably certain to exercise those options. Lease terms also include periods covered by options to terminate the leases when we are reasonably certain not to exercise those options.
As of August 31, 2021, we recognized ROU assets of RMB1,632.2 million and total lease liabilities (including current and non-current) RMB1,550.9 million for operating leases. There were no ROU assets in fiscal 2022 due to classified as discontinued operations.
We have gradually terminated our after-school tutoring services related to academic subjects business since August 2021, and officially ceased our all business in October 2021. By the end of August 31, 2022, all rental deposits related to those early terminated lease contracts have been expensed as the early termination penalty by the Company.
Income taxes
We follow the liability method of accounting for income taxes in accordance with ASC 740, Income Taxes, or ASC 740. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period in which the differences are expected to reverse. We record a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rate is recognized in tax expense in the period that includes the enactment date of the change in tax rate.
We accounted for uncertainties in income taxes in accordance with ASC 740. Interest and penalties related to unrecognized tax benefit recognized in accordance with ASC 740 are classified in the consolidated statements of income as income tax expense.
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Business combination
We account for our business combinations using the purchase method of accounting in accordance with ASC 805, Business Combinations, or ASC 805. The purchase method of accounting requires that the consideration transferred to be allocated to the assets, including separately identifiable assets and liabilities we acquired, based on their estimated fair values. The consideration transferred in an acquisition is measured as the aggregate of the fair values at the date of exchange of the assets given, liabilities incurred, and equity instruments issued as well as the contingent considerations and all contractual contingencies as of the acquisition date. The costs directly attributable to the acquisition are expensed as incurred. Identifiable assets, liabilities and contingent liabilities acquired or assumed are measured separately at their fair value as of the acquisition date, irrespective of the extent of any non-controlling interests. The excess of (i) the total of cost of acquisition, fair value of the non-controlling interests and acquisition date fair value of any previously held equity interest in the acquiree over (ii) the fair value of the identifiable net assets of the acquiree, is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the businesses acquired, the difference is recognized directly in earnings.
In a business combination achieved in stages, we remeasure the previously held equity interest in the acquiree immediately before obtaining control at its acquisition-date fair value and the remeasurement gain or loss, if any, is recognized in the consolidated statements of income.
The determination and allocation of fair values to the identifiable assets acquired, liabilities assumed and non-controlling interests is based on various assumptions and valuation methodologies requiring considerable judgment from management. The most significant variables in these valuations are discount rates, terminal values, the number of years on which the cash flow projections are based, as well as the assumptions and estimates used to determine the cash inflows and outflows. We determine discount rates to be used based on the risk inherent in the related activity’s current business model and industry comparisons. Terminal values are based on the expected life of assets, forecasted life cycle and forecasted cash flows over that period.
Goodwill
We assess goodwill for impairment in accordance with ASC 350-20, Intangibles-Goodwill and Other: Goodwill, or ASC 350-20, which requires that goodwill be tested for impairment at the reporting unit level at least annually and more frequently upon the occurrence of certain events, as defined by ASC 350-20.
We determined that we have five reporting units. Goodwill was allocated to five reporting units as of 2020 and 2021. We have the option to assess qualitative factors first to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. In the qualitative assessment, we consider primary factors such as industry and market considerations, overall financial performance of the reporting unit, and other specific information related to the operations. Based on the qualitative assessment, if it is more likely than not that the fair value of each reporting unit is less than the carrying amount, the quantitative impairment test is performed.
Specifically, the quantitative impairment test is determined using a two-step process. The first step compares the fair value of each reporting unit to its carrying amount, including goodwill. If the fair value of each reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and the second step will not be required. If the carrying amount of a reporting unit exceeds its fair value, the second step compares the implied fair value of the affected reporting unit’s goodwill to the carrying value of that goodwill. The implied fair value of goodwill is determined in a manner similar to accounting for a business combination with the allocation of the assessed fair value determined in the first step to the assets and liabilities of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. An impairment loss is recognized for any excess in the carrying value of goodwill over the implied fair value of goodwill. Estimating fair value is performed by utilizing various valuation techniques, with the primary technique being a discounted cash flow.
Affected by the Opinion and a related series of notice, administrative measures or circular, all subsidiaries acquired by the Company also terminated their education programs and learning centers from August 2021 gradually. In fiscal 2021, we recognized an impairment loss with amount of RMB 1.08 billion (US$166.6 million) for goodwill.
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Long-term investments
Our long-term investments consist of equity securities without readily determinable fair value, investment in debt securities accounted for at fair value and equity method investments.
We adopted ASC Topic 321, Investments-Equity Securities, or ASC 321, from September 1, 2018. Pursuant to ASC 321, for equity securities measured at fair value with changes in fair value record in earnings, we do not assess whether those investments are impaired. For those equity securities that we select to use the measurement alternative, we use the measurement alternative to measure those investments at cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer. We make a qualitative assessment of whether the investment is impaired at each reporting date. If a qualitative assessment indicates that the investment is impaired, we have to estimate the investment’s fair value in accordance with ASC Topic 820, Fair Value Measurements and Disclosures, (“ASC 820”). If the fair value is less than the investment’s carrying value, we recognize an impairment loss in net income equal to the difference between the carrying value and fair value.
Investments in equity investees represent investments in entities in which we can exercise significant influence but does not own a majority equity interest or control are accounted for using the equity method of accounting in accordance with ASC 323-10, Investments-Equity Method and Joint Ventures: Overall, or ASC 323-10. Under the equity method, we initially record our investment at cost and prospectively recognize our proportionate share of each equity investee’s net profit or loss into its consolidated statements of income. The difference between the cost of the equity investee and the amount of the underlying equity in the net assets of the equity investee is recognized as equity method goodwill included in equity method investments on the consolidated balance sheets. We evaluate our equity method investment for impairment under ASC 323-10. An impairment loss on the equity method investment is recognized in the consolidated statements of income when the decline in value is determined to be other-than-temporary.
Investment in debt securities accounted for at fair value with original maturities of greater than twelve months are classified as long-term investments. As investment in debt securities classified as available for sale in accordance with ASC 320 are reported at fair value. Any unrealized gains and losses on available-for-sale investments are included in other comprehensive income. Interest income are recognized in earnings. When a decline in value is determined to be other-than-temporary, the impairment loss on the long-term available-for-sale investments would be recognized in the consolidated statements of comprehensive income.
In 2020, 2021 and 2022, we evaluated our investments, taking into consideration, including, but not limited to, the duration, degree and causes of the decline in financial results, its intent and ability to hold the investment and the invested companies’ financial performance and near-term prospects. Based on the evaluation, we recorded impairment loss of RMB161.6 million, RMB1.7 billion and RMB nil million (US$ nil million) for the years ended August 31, 2020, 2021 and 2022, respectively. The impairment loss accrued for the long-term investment is mainly driven by the Opinion and a related series of notice, administrative measures or circular, which affected on the business of all of our invested companies.
37
Measurement of Share-based Compensation
Amended and Restated 2015 Plan
In connection with the Reorganization on September 17, 2017, we adopted the Amended and Restated 2015 Plan to replace the 2015 Plan which was cancelled concurrently. Under the Amended and Restated 2015 Plan, the board of directors is authorized to grant share options or other equity incentives to employees, directors or consultants to purchase up to an aggregate of 336,642,439 Class A ordinary shares. The employees generally received 102.10 options for each fully vested share that was outstanding as of September 17, 2017, totaling 63,880,024 fully vested options. The employees also received 16,442,655 and 49,634,837 share options at the same exchange ratio to replace the restricted shares that were vested or vesting on December 1, 2017 and 2018, respectively, as issued under the 2015 Plan. All of the share options contain a performance condition whereby no share options are exercisable until the consummation of a qualified initial public offering. The share options expire 10 years from the date of grant. We accounted for the termination of the shares under the 2015 Plan and the concurrent issuance of options as replacement awards as a Type II modification in accordance with ASC 718, under which, we deferred the recognition of the incremental share-based compensation expense until the qualified initial public offering occurred. Upon the completion date of our initial public offering, we recognized incremental share-based compensation amounting to RMB39.9 million (US$6.2 million).
From November 2017 to immediately before the initial public offering, we granted 164,865,010 share options under the Amended and Restated 2015 Plan. Whereas some of the share options carry requisite service periods of four years with: (i) 50%, 25% and 25% of the share options vesting on the second, third and fourth anniversary of the vesting commencement date, respectively; or (ii) 50% and 50% of the share options vesting on the second and fourth anniversary of the vesting commencement date, respectively, all of the share options contain the same IPO performance condition described in the paragraph above.
In February 2018, our board of directors approved an evergreen term of the Amended and Restated 2015 Plan which permits an annual 2.0% increase of the total number of ordinary shares outstanding on August 31 of our preceding calendar year on the first day of each the following nine fiscal years commencing on September 1, 2018.
During the year ended August 31, 2018, subsequent to the completion of the initial public offering, we granted 9,172,674 share options under the Amended and Restated 2015 Plan. Vesting terms included (i) immediate vesting of 100% of the share options on date of grant; (ii) vesting periods of 2 years, with immediate vesting of 1/3 of the share options on date of grant, first and second anniversary of the vesting commencement date, respectively; (iii) a vesting period of 4 years, with 50% and 50% of the share options vesting on the second and fourth anniversary of the vesting commencement date, respectively; or (iv) vesting periods of 4 years, with 25% of the share options vesting on each anniversary of the vesting commencement date.
During the year ended August 31, 2019, we granted 141,997,178 share options under the Amended and Restated 2015 Plan. Vesting terms included (i) immediate vesting of 100% of the share options on date of grant; (ii) vesting periods of 3 years, with immediate vesting of 25% of the share options on date of grant, 1/48 of the share options in the each month 1 year after the vesting commencement date, respectively; (iii) vesting periods of 3 years, with 1/3 of the share options vesting on each anniversary of the vesting commencement date; (iv) vesting periods of 4 years, with 50% and 50% of the share options vesting on the second and fourth anniversary of the vesting commencement date, respectively; or (v) vesting periods of 4 years, with 25% of the share options vesting on each anniversary of the vesting commencement date. During the year, we also granted to an executive 39,669,960 options under the Amended and Restated 2015 Plan with market conditions tied to our market capitalization for specified periods while he remains employed by us. In addition, certain share options were modified to become fully invested immediately prior to an employee’s termination.
During the year ended August 31, 2019, the Group granted 14,556,320 restricted Class A ordinary shares (“Restricted Shares”) under the Amended and Restated 2015 Plan. Vesting terms included i) immediate vesting of 100% of the Restricted Shares after one year of the vesting commencement date, ii) vesting periods of 4 years, with 25% of the Restricted Shares vesting on each anniversary of the vesting commencement date.
38
During the fiscal year ended August 31, 2020, we granted 93,574,240 share options under the Amended and Restated 2015 Plan. Vesting terms included i) immediate vesting of 100% of the share options on date of grant, ii) vesting periods of 4 years, with 50% and 50% of the share options vesting on the second and fourth anniversary of the vesting commencement date, or iii) vesting periods of 4 years, with 25% of the share options vesting on each anniversary of the vesting commencement date, respectively.
During the year ended August 31, 2020, we granted 39,821,200 restricted Class A ordinary shares under the Amended and Restated 2015 Plan. Vesting terms included vesting periods of 4 years, with 25% of the Restricted Shares vesting on each anniversary of the vesting commencement date.
During the fiscal year ended August 31, 2021, we granted 120,744,240 share options under the Amended and Restated 2015 Plan. Vesting terms included i) immediate vesting of 100% of the share options on date of grant, ii) vesting periods of 4 years, with 50% and 50% of the share options vesting on the second and fourth anniversary of the vesting commencement date, or iii) vesting periods of 4 years, with 25% of the share options vesting on each anniversary of the vesting commencement date, respectively.
During the year ended August 31, 2021, we granted 5,502,840 restricted Class A ordinary shares under the Amended and Restated 2015 Plan. Vesting terms included vesting periods of 4 years, with 25% of the Restricted Shares vesting on each anniversary of the vesting commencement date.
All the outstanding employee stock options were cancellation in fiscal 2022.
The fair value of the share options under the Amended and Restated 2015 Plan were determined on the grant dates using the binomial option pricing model with assistance from an independent valuation firm. Prior to our initial public offering, we determined the fair value of our ordinary shares using the income approach based on key assumptions including WACC and DLOM. The income approach involved applying appropriate discount rates to estimated cash flows that were based on earnings forecasts. The growth rates of our revenues, as well as major milestones that we achieved, contributed to the fair value of the ordinary shares. Subsequently to our initial public offering, fair value of the ordinary shares is the price of our publicly traded shares. The assumptions adopted to estimate the fair value of share options granted were as follows:
| Year Ended | Year Ended | Year Ended | ||||||||
August 31, 2020 | August 31, 2021 | August 31, 2022 | ||||||||
| Risk-free interest rate | 0.65%-1.92% | 0.65%-1.92% | 0.65%-1.92%- | |||||||
| Expected volatility | 51.8%-52.7% | 33.27% | 99.7% | |||||||
| Suboptimal exercise factor | 2.20-2.80 | 2.20-2.80 | 2,2-2.8 | |||||||
| Fair value per ordinary share | US$0.05-US$0.12 | US$0.05-US$0.12 | US$0.98-US$7.25 | |||||||
Domestic Plan
In March 2017, one of our subsidiaries approved an employee share incentive scheme under which, incentives are provided by certain of Shanghai OneSmart’s subsidiaries to their regional management and staff, or the Domestic Plan. According to the scheme, the subsidiaries may grant to their employees options with independent annual performance conditions specified for each tranche of options, in four tranches, as well as an additional performance condition at the end of the fourth year based on the cumulative result of the business over the term of the four years. When vested, the options are exercisable into the subsidiaries’ equity interests. The share options expire 4 years from the date of grant.
On May 2, 2017, 120,000 options were granted to employees, accounting for 8% of the total equity interests in the subsidiaries. The exercise price ranged from RMB40 to RMB160 per option. The options are equity awards measured at their fair values on May 2, 2017, the grant date. Given only the achievement of the performance conditions of the first two tranches of the options were determined to be probable, each of the first two tranches of the options was accounted for as a separate award with its own service inception date and requisite service period. On March 31, 2019, we modified the annual performance condition for the fourth tranche of the options granted on May 2, 2017, however, the achievement of the third and fourth traches as well as the final cumulative result of the business over the term of four years continued to improbable. Thus, no incremental costs were incurred as a result of the modification. As of August 31, 2019 and 2020, 60,000 and nil options did not meet the performance conditions and were forfeited. The remaining 70,000 options were vested and exercised as of August 31, 2020.
On March 31, 2019, 10,000 options were granted to a certain employee, accounting for 1% of the total equity interests in a certain subsidiary. The exercise price is RMB80 per option. The options are equity awards measured at their fair values on March 31, 2019, the grant date, immediate vesting of 100% of the share options on date of grant.
39
We calculated the estimated fair value of the share options under the Domestic Plan on the grant date using the binomial option pricing model with assistance from an independent valuation firm. Assumptions used to determine the fair value of the share options granted under the Domestic Plan is summarized in the following table:
For the year ended August 31, 2020 | ||
| Risk-free interest rate | 0.65%-1.92% | |
| Expected volatility | 51.8%-52.7% | |
| Suboptimal exercise factor | 2.20-2.80 | |
| Fair value per ordinary share | US$0.05-US$0.12 |
Restricted shares issued to the founding shareholders of Shanghai Yimi
On February 1, 2020, we granted 9,677,288 restricted shares to the founding shareholders of Shanghai Yimi in connection with Yimi transactions. The vesting of the restricted shares is subject to the achievement of certain online tutoring business from Yimi Cayman and Shanghai Yimi. If performance target is achieved, 50% of the restricted shares shall vest on January 1, 2021 and remaining 50% shall vest on January 1, 2022. The restricted shares are measured at their fair values on February 1, 2020, the grant date. Given the achievement of the performance conditions were determined to be probable, each of the two tranches was accounted for as a separate award with its own service inception date and requisite service period.
We calculated the estimated fair value of the restricted shares on the grant date using the binomial option pricing model with assistance from an independent valuation firm. Assumptions used to determine the fair value of the restricted shares is summarized in the following table:
| For the year ended | ||
August 31, 2021 | ||
| Risk-free interest rate | 0.65%-1.92% | |
| Expected volatility | 33.27% | |
| Suboptimal exercise factor | 2.20-2.80 | |
| Fair value per ordinary share | US$0.05-US$0.12 |
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A summary of the share option activities under the Amended and Restated 2015 Plan is as follows:
Number of share options |
Weighted average exercise price | Weighted average grant date fair value | Aggregate intrinsic value | Weighted average remaining contractual term | ||||||||||||||||
| US$ | US$ | US$ | ||||||||||||||||||
| Outstanding as of September 1, 2019 | 393,844,018 | 0.05 | 0.13 | 53,966 | 7.80 | |||||||||||||||
| Granted | 93,574,240 | 0.05 | 0.10 | - | - | |||||||||||||||
| Forfeited | (29,876,751 | ) | 0.11 | 0.11 | - | - | ||||||||||||||
| Exercised | (65,654,200 | ) | 0.01 | 0.13 | - | - | ||||||||||||||
| Outstanding as of August 31, 2020 | 391,887,307 | 0.05 | 0.04 | 31,356 | 7.57 | |||||||||||||||
| Granted | 115,241,400 | 0.04 | 0.05 | - | - | |||||||||||||||
| Forfeited | (82,902,302 | ) | 0.03 | 0.05 | - | - | ||||||||||||||
| Exercised | (81,138,360 | ) | 0.02 | 0.05 | - | - | ||||||||||||||
| Outstanding as of August 31, 2021 | 343,088,045 | 0.06 | 0.04 | 1,375 | 5.58 | |||||||||||||||
| Granted | ||||||||||||||||||||
| Cancelled | (343,088,045 | ) | 0.06 | 0.04 | ||||||||||||||||
| Exercised | ||||||||||||||||||||
| Outstanding as of August 31, 2022 | - | |||||||||||||||||||
A summary of the Restricted Shares activities under the Amended and Restated 2015 Plan is as follows:
| Weighted | ||||||||||||||||
| Weighted | average | |||||||||||||||
| Number of | average | Aggregate | remaining | |||||||||||||
| Restricted | grant date | intrinsic | contractual | |||||||||||||
| Shares | fair value | value | term | |||||||||||||
| US$ | US$ | |||||||||||||||
| Outstanding as of September 1, 2020 | 47,408,631 | 0.07 | 5,025 | 0.01 | ||||||||||||
| Granted | 5,502,840 | 0.11 | - | - | ||||||||||||
| Forfeited | (7,949,681 | ) | 0.19 | - | - | |||||||||||
| Exercised | (2,185,400 | ) | 0.22 | - | - | |||||||||||
| Outstanding as of August 31, 2021 | 42,776,390 | 0.17 | 596 | 1.61 | ||||||||||||
| Granted | ||||||||||||||||
| Cancelled | (42,776,390 | ) | 0.17 | |||||||||||||
| Exercised | ||||||||||||||||
| Outstanding as of August 31, 2022 | - | |||||||||||||||
A summary of the activities under the Domestic Plan is as follows:
| Weighted | Weighted | |||||||||||||||
| Number of | average | average | Aggregate | |||||||||||||
| share | purchase | grant date | intrinsic | |||||||||||||
| options | price | fair value | value | |||||||||||||
| RMB | RMB | RMB | ||||||||||||||
| Outstanding as of September 1, 2018 | 120,000 | 93.33 | 151.19 | 79,990 | ||||||||||||
| Granted | 10,000 | 80.00 | 148.47 | - | ||||||||||||
| Forfeited | (60,000 | ) | 93.33 | 151.19 | - | |||||||||||
| Outstanding as of August 31, 2019 | 70,000 | 91.43 | 150.80 | 39,687 | ||||||||||||
| Granted | - | - | - | - | ||||||||||||
| Forfeited | - | - | - | - | ||||||||||||
| Outstanding as of August 31, 2020 | (70,000 | ) | 91.43 | 150.80 | - | |||||||||||
| Granted | ||||||||||||||||
| Forfeited | ||||||||||||||||
| Exercised | ||||||||||||||||
| Outstanding as of August 31, 2021 | - | |||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ||||||||||||||||
| Vested and expected to vest as of August 31, 2022 | - | |||||||||||||||
The aggregate intrinsic value is calculated as the difference between the exercise price of the awards and the fair value of the underlying ordinary shares at each reporting date, for those awards that had exercise price below the estimated fair value of the relevant ordinary shares.
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We recognized total share-based compensation expenses of RMB138.0 million, RMB42.9 million and nil for the years ended August 31, 2020, 2021 and 2022, respectively.
Results of Operations
The following table sets forth a summary of our consolidated results of operations for the periods presented, both in absolute amount and as a percentage of our revenues for the periods presented. Due to the Opinions on Further Alleviating the Burden of Homework and After-School Tutoring for Students in Compulsory Education issued by the General Office of the CPC Central Committee and the General Office of the State Council in July 24, 2021, the company suspended all education programs and learning centers and the services relating to premium K-12 after-school education and premium young children education services and classified as discontinued operations in October 2021.
This information should be read together with our consolidated financial statements and related notes included elsewhere in this annual report. The results of operations in any period are not necessarily indicative of our future trends.
| Year Ended August 31, | ||||||||||||||||||||||||||||
| 2020 | 2021 | 2022 | ||||||||||||||||||||||||||
| RMB | % | RMB | % | RMB | US$ | % | ||||||||||||||||||||||
| (in thousands, except for percentages) | ||||||||||||||||||||||||||||
| Net revenues | ||||||||||||||||||||||||||||
| OneSmart VIP business | 2,625,179 | 76.3 | 2,780,106 | 81.2 | - | - | - | |||||||||||||||||||||
| OneSmart Young Children Education business | 599,414 | 17.4 | 546,487 | 16.0 | - | - | - | |||||||||||||||||||||
| OneSmart Online | 103,848 | 3.1 | 48,076 | 1.4 | - | - | - | |||||||||||||||||||||
| Other | 110,440 | 3.2 | 48,741 | 1.4 | - | - | - | |||||||||||||||||||||
| Artificial Intelligent Universe IAAS | - | - | - | - | 2,411 | 350 | 83.5 | |||||||||||||||||||||
| Artificial Intelligent Education | - | - | - | - | 12,194 | 1,770 | 16.5 | |||||||||||||||||||||
| Total net revenues | 3,438,881 | 100.0 | 3,423,410 | 100.0 | 14,605 | 2,120 | 100.0 | |||||||||||||||||||||
| Artificial Intelligent Universe IAAS | - | - | - | - | (2,001 | ) | (290 | ) | (78.2 | ) | ||||||||||||||||||
| Artificial Intelligent Education | - | - | - | - | (10,787 | ) | (1,566 | ) | (89.5 | ) | ||||||||||||||||||
| Total Cost of revenues | (2,169,739 | ) | (63.1 | ) | (2,093,743 | ) | (61.2 | ) | (12,787 | ) | (1,856 | ) | (87.6 | ) | ||||||||||||||
| Artificial Intelligent Universe IAAS | - | - | - | - | 410 | 81 | 21.8 | |||||||||||||||||||||
| Artificial Intelligent Education | - | - | - | - | 1,407 | 308 | 17.6 | |||||||||||||||||||||
| Total Gross profit | 1,269,142 | 36.9 | 1,329,667 | 38.8 | 1,818 | 264 | 12.5 | |||||||||||||||||||||
| Operating expenses (1) | ||||||||||||||||||||||||||||
| Selling and marketing expenses | (820,883 | ) | (23.9 | ) | (930,140 | ) | (27.2 | ) | - | - | - | |||||||||||||||||
| General and administrative expenses | (810,936 | ) | (23.6 | ) | (5,261,978 | ) | (153.7 | ) | (368,116 | ) | (53,435 | ) | (2,520.5 | ) | ||||||||||||||
| Total operating expenses | (1,631,819 | ) | (47.5 | ) | (6,192,118 | ) | (180.9 | ) | (368,116 | ) | (53,435 | ) | (2,520.5 | ) | ||||||||||||||
| Operating income/(loss) | (362,677 | ) | (10.5 | ) | (4,862,451 | ) | (142.0 | ) | (366,298 | ) | (53,171 | ) | (2,508.1 | ) | ||||||||||||||
| Interest income | 37,393 | 1.1 | 9,443 | 0.3 | 4 | 1 | 0.03 | |||||||||||||||||||||
| Interest expense | (103,600 | ) | (3.0 | ) | (98,302 | ) | (2.9 | ) | (51,032 | ) | (7,409 | ) | (349.4 | ) | ||||||||||||||
| Other income | 93,894 | 2.7 | 99,335 | 2.9 | - | - | - | |||||||||||||||||||||
| Other expenses | (453,391 | ) | (13.2 | ) | (135,239 | ) | (4.0 | ) | - | - | - | |||||||||||||||||
| Foreign exchange gain/(loss) | (69 | ) | (0.0 | ) | 3,295 | 0.1 | 18 | 3 | - | |||||||||||||||||||
| Income/(loss) before income tax and share of net (loss)/income from equity interests | (788,450 | ) | (22.9 | ) | (4,983,919 | ) | (145.6 | ) | (417,307 | ) | (60,575 | ) | (2,857.3 | ) | ||||||||||||||
| Income tax (expense)/benefit | 37,785 | 1.1 | (30,870 | ) | (0.9 | ) | - | - | - | |||||||||||||||||||
| Income/(loss) before share of net (loss)/income from equity investees | (750,665 | ) | (21.8 | ) | (5,014,789 | ) | (146.5 | ) | (417,307 | ) | (60,575 | ) | (2,857.3 | ) | ||||||||||||||
| Share of net (loss)/income from equity investees | (17,977 | ) | (0.5 | ) | (10,705 | ) | (0.3 | ) | - | - | - | |||||||||||||||||
| Income from discontinued operations | (782,685 | ) | (113,614 | ) | (5,359.0 | ) | ||||||||||||||||||||||
| Net income/(loss) | (768,642 | ) | (22.3 | ) | (5,025,494 | ) | (146.8 | ) | (1,199,992 | ) | (174,189 | ) | (8,216.3 | ) | ||||||||||||||
Note:
| (1). | Including share-based compensation expenses as set forth below: |
| Year Ended August 31, | ||||||||||||||||
| 2020 | 2021 | 2022 | ||||||||||||||
| RMB | RMB | RMB | US$ | |||||||||||||
| (in thousands) | ||||||||||||||||
| Allocation of Share-based Compensation Expenses | ||||||||||||||||
| Selling and marketing | 674 | 110 | - | - | ||||||||||||
| General and administrative | 137,312 | 42,752 | 306,832 | 44,539 | ||||||||||||
| Total | 137,986 | 42,862 | 306,832 | 44,539 | ||||||||||||
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Fiscal Year Ended August 31, 2022 compared to Fiscal Year Ended August 31, 2021
Net Revenues. Due to the Double Reduction policy aforementioned, in 1st quarter of fiscal year 2022, we suspended our after-school tutoring service segment where the revenues accounted for a majority of our total revenues in fiscal year 2021 and classified as discontinued operations.
The above Alleviating Burden Opinion provides that (i) Academic AST Institutions are prohibited from raising funds by listing on stock markets or conducting any capitalization activities; (ii) foreign capital is prohibited from controlling or participating in any Academic AST Institutions through mergers and acquisitions, entrusted operation, joining franchise or variable interest entities; (iii) online tutoring for preschool-age children is prohibited, and offline academic subjects (including foreign language) tutoring services for preschool-age children is also strictly prohibited. The Alleviating Burden Opinion provides that any violation of the foregoing shall be rectified. The Alleviating Burden Opinion further states that the administration and supervision over academic subjects tutoring institutions for students on grade ten to twelve shall be implemented by reference to the relevant provisions of the Alleviating Burden Opinion.
In order to comply with the above applicable rules and regulations, we shut down all the education programs and learning centers in China and began to transform ourself into a different sector in Metaverse business. In fiscal year 2022, all our revenues derived from artificial intelligent education and artificial intelligent universe IAAS. Accordingly, our net revenues changed dramatically from nil in the fiscal year 2021 to RMB14.6 million (US$2.1 million) in the fiscal year 2022 due to the classification of the education related revenue to the discontinued operations in fiscal year 2022.
Cost of Revenues. Our cost of revenues increased by 100% from nil in fiscal year 2021 to RMB12.8 million (US$1.9 million) in the fiscal year 2022 which was in line with the decrease in revenues as we shut down all education programs and learning centers in China and classified as discontinued operations in October, 2021 (1st quarter of fiscal year 2022) in order to comply with the above Alleviating Burden Opinion.
Gross Profit and Gross Margin. As a result of the factors set out above, our gross profit increased by 100% from nil in fiscal 2021 to RMB1.8 million (US$0.3 million) in fiscal year 2022.
Selling and Marketing Expenses. Our selling and marketing expenses decreased by 100.0% from RMB0.11 million (US$0.02 million) in fiscal 2021 to nil in fiscal 2022 mainly attributable to a decrease in sales and marketing expenses from the discontinued operation.
General and Administrative Expenses. Our general and administrative expenses increased by 489.1% from RMB62.5 million (US$9.6 million) in fiscal 2021 to RMB368.1 million (US$53.4 million) in fiscal 2022 was mainly attributable to the one-time expenses in RMB306.8 million (US$44.5 million) recognized to the vested outstanding stock options issued to the terminated staff due to Double Reduction policy.
Operating Loss. As a result of the factors set out above, we had RMB62.6 million (US$9.6 million) operating loss in fiscal 2021 and RMB366.3 million (US$53.2 million) operating loss in fiscal 2022.
Loss from Continuing Operations
As a result of the foregoing, loss from continuing operations increased by 329.4% from RMB109.9 million (US$16.9 million) in fiscal 2021 to RMB362.7 million (US$52.6 million) in fiscal 2022.
Loss per Share
Basic and diluted loss per share from continuing operations was RMB0.0377(US$0.0055) in fiscal 2022 as compared to a loss of RMB0.0166(US$0.0025) in fiscal 2021. Basic and diluted income per share attributable to discontinued operations was RMB0.0673(US$0.0098) in fiscal 2022 as compared to a loss of RMB0.7377(US$0.1131) in fiscal 2021.
43
Fiscal Year Ended August 31, 2021 compared to Fiscal Year Ended August 31, 2020
Net Revenues. Our net revenues maintained from RMB3.4 billion in the fiscal year 2020 to RMB3.4 billion (US$529.9 million) in the fiscal year 2021. Our average monthly enrollment decreased from 170,995 for the fiscal year 2020 to 170,854 for the fiscal year 2021. Our total number of consumed class units maintained from 20.1 million for the fiscal year 2020 to 20.1 million for the fiscal year 2021.
Net revenues from Unsmart VIP business: The increase of the revenues was primarily due to the increase in student enrollments in our premium tutoring programs and OneSmart International Education.
Revenues from OneSmart Young Children Education business: The decrease of the revenues was primarily due to the decrease of the student attendance to class as a result of COVID-19.
Revenues from OneSmart Online: The decrease of the revenues was primarily due to the offline class units consumed which offset the online courses in the second half of fiscal year 2021.
Revenues from other: The decrease of the revenues was primarily due to the decrease of student attendance to class during COVID-19 period.
Cost of Revenues. Our cost of revenues decreased by 3.5% from RMB2.2 billion in the fiscal year 2020 to RMB2.1 billion (US$324.1 million) in the fiscal year 2021, primarily due to operating efficiency of our learning centers and program offerings.
Gross Profit and Gross Margin. As a result of the factors set out above, our gross profit increased by 4.8% from RMB1.27 billion in the fiscal year 2020 to RMB1.33 billion (US$205.8 million) in the fiscal year 2021 as revenue was mainly fixed while the costs were decreased by continued internal cost control and operating efficiency of our learning centers and program offering.
Selling and Marketing Expenses. Our selling and marketing expenses increased by 13.3% from RMB820.9 million in the fiscal year 2020 to RMB930.1 million (US$144.0 million) in the fiscal year 2021. This increase was primarily due to the increase in (i) the selling and marketing personnel and staff related costs, and (ii) sales and marketing activities to support new student enrollments growth and adoption of more effective sales and marketing channel during COVID 19 pandemic period.
General and Administrative Expenses. Our general and administrative expenses increased by 548.9% from RMB810.9 million in the fiscal year 2020 to RMB5.3 billion (US$814.5 million) in the fiscal year 2021. This increase was primarily due to impairment loss accrued with amount of RMB4.4 billion (US$ 677.1 million) according to the Opinion and a related series of notice, administrative measures or circular and the compliance measures taken by the Company.
Operating Loss. As a result of the factors set out above, we had RMB362.7 million operating loss in the fiscal year 2020 and RMB4.9 billion (US$752.7 million) operating loss in the fiscal year 2021.
Interest Income. We had interest income of RMB37.4 million and RMB9.4 million (US$1.5 million) in the fiscal year 2020 and 2021, respectively, which consisted primarily of interest earned from our cash and cash equivalents and short-term investments.
Other Income. We recorded other income of RMB93.9 million and RMB99.3 million (US$15.4 million) in the fiscal year 2020 and 2021, respectively. Other income in the fiscal year 2021 was mainly attributable to government subsidies in the form of cash and taxation award during COVID 19 pandemic period, and gains from disposals of investment. However, government subsidies in the form of cash and taxation award are discretionary in nature and we do not believe that the increase in government subsidies during the referenced period is reflective of a known trend.
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Other Expense. We recorded other expense of RMB453.4 million and RMB135.2 million (US$20.9 million) in the fiscal year 2020 and 2021, respectively. The decrease was primarily due to more operating efficiency of our learning centers and program offerings.
Income Tax (Expenses)/Benefit. Our income tax benefit was RMB37.8 million in the fiscal year 2020, our income tax expenses was RMB30.9 million (US$4.8 million) in the fiscal year 2021.
Net Loss. As a result of the foregoing, we had net loss of RMB768.6 million in the fiscal year 2020 and net loss of RMB5.0 billion (US$777.9 million) in the fiscal year 2021.
Recent Accounting Pronouncements
A list of recently issued accounting pronouncements that are relevant to us is included in “Summary of Significant Accounting Policies-(ae) Recent accounting pronouncements” of our audited consolidated financial statements included elsewhere in this annual report.
B. Liquidity and Capital Resources
Cash Flows and Working Capital
In assessing our liquidity and substantial doubt about our ability to continue as a going concern, we monitor and analyze cash on-hand and operating expenditure commitments. Our liquidity needs are to meet working capital requirements and operating expense obligations. To date, we financed our operations primarily through cash generated by operating activities, IPO proceeds, equity or convertible securities financing activities and commercial bank loan.
Our management has considered whether there is substantial doubt about our ability to continue as a going concern due to (1) loss from continuing operations of approximately RMB0.4 billion (US$60.6 million) for the year ended August 31, 2022, (2) accumulated deficit of approximately RMB11.2 billion (US$1.6 billion); (3) the working capital deficit of approximately RMB5.1 billion (US$746.5 million) as of August 31, 2022; (4) net operating cash used of approximately RMB287.6 million (US$41.8 million) for the year ended August 31, 2022; and the cash and cash equivalents were RMB202.4 million (US$29.4 million) for the year ended August 31, 2022. Cash and cash equivalents primarily consist of cash in bank. Based on the above considerations, the Company’s management is of the opinion that we will probably not having sufficient funds to meet our working capital requirements and debt obligations as they become due starting from one year from the date of this report. As a result, the Company’s management has determined there is substantial doubt about our ability to continue as a going concern. In evaluating if there is substantial doubt about the ability to continue as a going concern, we are trying to alleviate the going concern risk through (1) equity or debt financing, (2) increasing cash generated from new business model operations, and (3) Debt divestiture, to meet our anticipated working capital requirements for at least the next 12 months. We may, however, need additional capital in the future to fund our operation. If we determine that our cash requirements exceed the amount of cash and cash equivalents we have on hand at the time, we may seek to issue equity or debt securities or obtain credit facilities. The issuance and sale of additional equity would result in further dilution to our shareholders.
We entered into certain securities purchase agreement on January 24, 2022 (the “SPA”) with certain non-affiliated and accredited “non-U.S. Persons”, (the “Purchasers”) as defined in Regulation S of the Securities Act of 1933, as amended (the “Securities Act”), pursuant to which the Company agreed to sell 8,000,000,000 Class A ordinary shares, (the “Shares”) par value $0.000001 per share, at a per share purchase price $0.0035625 (the “Offering”), which is 90% of the average NYSE official closing price of the ADS divided by 1,000, the current conversion ratio of ADS, for the three trading days immediately preceding the execution of the SPA. On February 11, 2022, the Offering closed as all the conditions of the SPA have been satisfied and we issued the Shares to the Purchasers. The gross proceeds to the Company from the Offering were $28.5 million.
We plan to restructure our business by selling tutoring services and then focus on smart education services. The sale of the tutoring services has not been determined as of the date of the issuance of these financial statements. We have carried out product iterations on our original business: shifting from education and training to education and technology, using the original channels to carry out quality education and technology output, including 5G technology, smart campus system, virtual training system based on Metaverse, etc. The Company’s new business is using the six core technologies of Metaverse and artificial intelligence, blockchain, network computing, interaction, game technology, and the Internet of Things as the company’s core technologies, building a new type of blockchain smart student card and global smart employment quality Educational virtual world (new type of artificial intelligence employment training), combination of virtual and real prediction world (digital education, risk prediction, computing power output), VR shopping world (new e-commerce) and other products provide global customers with a new digital world experience. As of May 2022, we have signed a series of strategic cooperation agreements with six non-affiliated companies to pre-launch smart education training business.
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Although we consolidate the results of our consolidated VIEs and their subsidiaries, we only have access to the assets or earnings of our VIEs and their subsidiaries through our contractual arrangements with our VIEs and their shareholders. See “Item 4. Information on the Company-C. Organizational Structure-Contractual Arrangements with Shanghai OneSmart, Rui Si and their respective shareholders” and “-Contractual Arrangements with Xiangyuan and its shareholders.” For restrictions and limitations on liquidity and capital resources as a result of our corporate structure, see “Item 5. Operating and Financial Review and Prospects-B. Liquidity and Capital Resources-Holding Company Structure.”
Substantially all of our future revenues are likely to continue to be in the form of Renminbi. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior SAFE approval as long as certain routine procedural requirements are fulfilled. Therefore, our PRC subsidiary is allowed to pay dividends in foreign currencies to us without prior SAFE approval by following certain routine procedural requirements. However, current PRC regulations permit our PRC subsidiary to pay dividends to us only out of its accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. Our PRC subsidiary is required to set aside at least 10% of its after-tax profits after making up previous years’ accumulated losses each year, if any, to fund certain reserve funds until the total amount set aside reaches 50% of its registered capital. These reserves are not distributable as cash dividends. Furthermore, capital account transactions, which include foreign direct investment and loans, must be approved by and/or registered with SAFE and its local branches. See “Item 3. Key Information-D. Risk Factors-Risks Related to Doing Business in China-Governmental control of currency conversion may limit our ability to utilize our revenues effectively and affect the value of your investment.”
The following table sets forth a summary of our cash flows for the periods presented:
| Year Ended August 31, | ||||||||||||||||
| 2020 | 2021 | 2022 | ||||||||||||||
| RMB | RMB | RMB | US$ | |||||||||||||
| (in thousands) | ||||||||||||||||
| Summary Consolidated Cash Flow: | ||||||||||||||||
| Net cash provided by operating activities | 240,692 | 138,343 | (301,944 | ) | (43,830 | ) | ||||||||||
| Net cash used in investing activities | (906,931 | ) | (147,947 | ) | 79,715 | 11,571 | ||||||||||
| Net cash provided by financing activities | 648,759 | (935,190 | ) | 156,251 | 22,681 | |||||||||||
| Effect of exchange rate changes | (23,647 | ) | (15,848 | ) | (5,361 | ) | (778 | ) | ||||||||
| Net increase/(decrease) in cash and cash equivalents and restricted cash | (41,127 | ) | (960,642 | ) | (57,249 | ) | (8,311 | ) | ||||||||
| Cash and cash equivalents and restricted cash, at beginning of year | 1,386,412 | 1,345,285 | 384,643 | 55,834 | ||||||||||||
| Cash and cash equivalents and restricted cash, at end of year | 1,345,285 | 384,643 | 313,304 | 45,479 | ||||||||||||
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Operating Activities
Net cash generated from operating activities in the fiscal year ended August 31, 2022 was RMB301.9 million (US$41.8 million). The difference between our net loss of RMB1.2 million (US$174.2 million) and the net cash generated from operating activities was primarily due to (i) share-based compensation of RMB307.0 million (US$44.5 million), (ii) and was partially offset by a decrease of accrued expenses and other current liabilities of RMB58.3 million (US$8.5 million).
Net cash generated from operating activities in the fiscal year ended August 31, 2021 was RMB138.3 million (US$21.4 million). The difference between our net loss of RMB5,025.5 million (US$777.9 million) and the net cash generated from operating activities was primarily due to (i) an adjustment of RMB4,590.2 million (US$710.5 million) in non-cash items, which mainly consisted of depreciation and amortization of RMB173.3 million (US$26.8 million), share-based compensation of RMB42.9 million (US$6.6 million), impairments of long-lived assets and goodwill of RMB4,374.0 million (US$677.1 million), (ii) a decrease of prepayments and other current assets of RMB281.9 million (US$43.6 million), and (iii) an increase of prepayments from customers of RMB210.9 million (US$32.7 million), and was partially offset by a decrease of accrued expenses and other current liabilities of RMB24.6 million (US$3.8 million).
Net cash generated from operating activities in the fiscal year ended August 31, 2020 was RMB240.7 million (US$37.3 million). The difference between our net loss of RMB768.6 million (US$119 million) and the net cash generated from operating activities was primarily due to (i) an adjustment of RMB717.0 million (US$111 million) in non-cash items, which mainly consisted of depreciation and amortization of RMB248.0 million (US$38.4 million), share-based compensation of RMB138.0 million (US$21.4 million), impairments of long-term investments and losses on extinguishment of a debt security RMB314.7 million (US$48.7 million), (ii) a decrease of prepayments and other current assets of RMB166.3 million (US$25.7 million), and (iii) an increase of prepayments from customers of RMB239.6 million (US$37.1 million), and was partially offset by a decrease of accrued expenses and other current liabilities of RMB85.3 million (US$13.2 million).
Investing Activities
Net cash used in investing activities was RMB79.7 million (US$11.6million) in the fiscal year ended August 31, 2022, primarily due to (i) purchase of short-term investments of RMB59.0 million (US$8.6 million).
Net cash used in investing activities was RMB147.9 million (US$140.4 million) in the fiscal year ended August 31, 2021, primarily due to (i) purchase of long-term investments of RMB89.0 million (US$13.8 million), (ii) purchase of short-term investments of RMB104.0 million (US$16.1 million), (iii) purchase of property and equipment of RMB20.5 million (US$3.2 million) as we expanded our existing learning centers and opened new learning centers, partially offset by the proceeds from sales of short-term investments of RMB65.0 million (US$10.1 million).
Net cash used in investing activities was RMB906.9 million (US$140.4 million) in the fiscal year ended August 31, 2020, primarily due to (i) purchase of long-term investments of RMB181.0 million (US$28 million), (ii) purchase of short-term investments of RMB582.6 million (US$90.2 million), (iii) purchase of property and equipment of RMB193.2 million (US$29.9 million) as we expanded our existing learning centers and opened new learning centers, (iv) due from third parties of RMB284.6 million (US$44.1 million), and (v) acquisition and disposal of subsidiaries of RMB75.9 million (US$11.7 million), partially offset by the proceeds from sales of short-term investments of RMB404.9 million (US$62.7 million).
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Financing Activities
Net cash used in financing activities in the fiscal year ended August 31, 2022 was RMB156.3 million (US$22.7 million), primarily due to (i) an increase in the proceeds from the issuance of common stock, net of issuance costs of RMB196.4 million (US$28.5 million), partially offset by repayments of third-party of RMB15.8 million (US$2.3 million).
Net cash used in financing activities in the fiscal year ended August 31, 2021 was RMB935.2 million (US$144.8 million), primarily due to (i) an increase in the proceeds from bank loan of RMB498.6 million (US$77.2 million), partially offset by repayments of bank loans of RMB1,440.0 million (US$222.9 million).
Net cash provided by financing activities in the fiscal year ended August 31, 2020 was RMB648.8 million (US$100.4 million), primarily due to (i) an increase in the proceeds from bank loan of RMB803.8 million (US$124.4 million), and (ii) an increase in the proceeds from convertible senior notes, net of issuance costs of RMB246.1 million (US$38.1 million), partially offset by share repurchases of RMB70.9 million (US$11.0 million), repayments of bank loans of RMB322.4 million (US$49.9 million).
Capital Expenditures
We made capital expenditures of RMB193.2 million, RMB20.5 million and nil in the fiscal year 2020, 2021 and 2022, respectively. The decrease of capital expenditures in the fiscal year 2022 was mainly due to the shut-down of learning centers due to the Double Reduction Policy in July 2021. Our capital expenditures have been primarily funded by cash generated from our operations.
C. Research and Development, Patents and Licenses, etc.
See “Item 4. Information on the Company-B. Business Overview-Intellectual Property.”
D. Trend Information
Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the fiscal year ended August 31, 2022 that are reasonably likely to have a material effect on our net revenues, income, profitability, liquidity or capital resources, or that would cause the disclosed financial information to be not necessarily indicative of future results of operations or financial conditions.
E. Critical Accounting Estimates and Policies
Management’s discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. Our financial statements reflect the selection and application of accounting policies, which require management to make significant estimates and judgments. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe that the following reflects the more critical accounting policies that currently affect our financial condition and results of operations.
Discontinued Operations
On November 25, 2022, Meta Data Limited (the “Seller”) completed the transfer of its ownership of OneSmart Edu Inc. (“OneSmart BVI”) to Muckle Capital Investment Co., Ltd. (the “Buyer”), an unrelated third party for a total price of US$ 1 million, pursuant to a Share Transfer Agreement entered into by the Seller and the Buyer on October 28, 2022 and approved by the Board of Directors on July 11, 2022. As the Company believed that no continued cash flow would be generated by the sold component, in accordance with ASC 205-20, the Company presented the operating results from OneSmart BVI has been presented as discontinued operations within the accompanying consolidated financial statements of the Company.
Segment Information Reclassification
Historically, the Company operated as one the leading providers of K-12 after-school education services in China which developed a comprehensive K-12 after-school education platform that primarily focused on young children mathematics training services and FasTrack English services through a nationwide network of 480 learning centers across 40 cities in China. The Company had three primary segments, i. e. OneSmart VIP, OneSmart Young Children Education and One Smart Online.
On July 24, 2021, the General Office of Central Committee of the Communist Party of China and the General Office of the State Council jointly released Opinions on what they termed “Further Reducing the Burden of Homework and Off-campus Tutoring for Compulsory Education Students,” (the “Double Reduction Policy”), which basically requires suspension of all subject-based off-campus tutoring business targeting pre-school kids and K12 students. As a result, on October 12, 2021, the Company suspended all education programs and learning centers in China. The Company classified the education related operation into discontinued operation in fiscal 2022. In accordance with the Company’s new business strategy, the Company classified business segment into Artificial Intelligent Education (AIE) service and Artificial Intelligent Universe (AIU) IAAS service.
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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
The following table sets forth information regarding our directors and executive officers as of the date of this annual report.
| Directors and Executive Officers | Age | Position/Title | ||
| Xiaoming Li | 40 | Chairman and Chief Executive Officer | ||
| Chee Jiong Ng | 51 | Chief Financial Officer | ||
| Dr. Robert Angell | 61 | Independent Director | ||
| Dr. Mengchu Zhou | 59 | Independent Director | ||
| Yanyi Tang | 38 | Independent Director | ||
| Shengcong Ma | 48 | Director and Chief Operating Officer |
Mr. Xiaoming Li, aged 40, has served as the CEO of Henan Shenglong Culture Communication Co., Ltd. since December 2019. From December 2016 to May 2019, he served as the chief technical officer of Shenzhen Aladdin Technology Development Co., Ltd. Mr. Li served as a professor at Henan Agricultural University’s enterprise, Henan Big Feed Technology Co., Ltd., where he taught in the teaching and research department, as well as actively researching the development and direction of contemporary education and new educational technology systems. Mr. Li graduated from Henan University of Economics and Law, China, with a bachelor’s degree in software engineering with a concentration in IT and education.
Mr. Chee Jiong Ng, served as chief financial officer of Dunxin Financial Holdings Ltd (NYSE: DXF) from June 2010 to May 2021. Mr. Ng has more than 20 years of experience in the finance sector and has served in various management roles at several companies before joining the Company. Mr. Ng has been qualified as a Certified Public Accountant of the Australian Society of Certified Public Accountants since 1999. Mr. Ng received his bachelor’s degree in Economics from the University of Sydney, Australia and his master’s degree in Commerce from the University of New South Wales, Australia.
Mr. Shengcong Ma served as the vice president of Aier Medical Investment Group CO., Ltd. from March 2017 to March 2021. From October 2016 to March 2021, he served as the general manager of Aier Health Insurance Co., Ltd. Mr. Ma was a member of the Technology Committee of Anbang Insurance Group and also the general manager of its Community Finance Business Department from October 2014 to March 2017. From October 2010 to October 2014, Mr. Ma served as the deputy general manager of the Shandong Banking Insurance Division of Centennial Life Corporation. Mr. Ma received his bachelor’s degree in Industrial and Foreign Trade from the Beijing Technology and Business University, an MBA from The Open University of Hong Kong, and an Executive MBA from Peking University National Development Research Institute.
Ms. Yanyi Tang has served as Project Manager at Shanghai Jiaan Certified Public Accountants since December 2010. From January 2007 to November 2010, she served as Assistant Manager at KPMG Huazhen Accounting Firm. Ms. Tang received her bachelor’s degree in Economics and Business from Shanghai University, China and University of Technology, Sydney, respectively. Ms. Tang is a certified public accountant in China (CICPA) and also a certified public accountant in the United States (AICPA) in the State of Texas.
Dr. Mengchu Zhou has been the Distinguished Professor of electrical and computer engineering in the Helen and John C. Hartmann Dept. of Electrical and Computer Engineering at New Jersey Institute of Technology (NJIT) since 2013. He is a Fellow of the Institute of Electrical and Electronics Engineers (IEEE), a Fellow of the International Federation of Automatic Control (IFAC), a Fellow of the American Association for the Advancement of Science (AAAS) and a Fellow of the Chinese Association of Automation (CAA). Zhou is the Founding Editor-in-Chief of the IEEE/Wiley Book Series on Systems Science and Engineering and the Editor-in-Chief of the IEEE/CAA Journal of Automatica Sinica. In 2015, he received the Norbert Wiener Award for “fundamental contributions to the area of Petri net theory and applications to discrete event systems,” from the IEEE Systems, Man, and Cybernetics Society which also awarded him the Franklin V. Taylor Memorial Award for Best Paper award in 2010. Dr, Zhou earned his Ph.D. in Computer & Systems Engineering, Rensselaer Polytechnic Institute in 1990. He completed his M. S. in Automatic Control, Beijing Institute of Technology in, 1986 following the completion of his B. S. in Control Engineering, Nanjing University of Science & Technology in 1983.
Dr. Robert Angell is an expert in healthcare AI, predictive analytics, temporal medicine, and data science. Since May 2019, he has been the principal and founder of Applied Data Sciences, LLC, a data science company, and CoMorbus, a public health provider. Dr. Angell was a data scientist at the division of cardiovascular genetics in University of Utah, where he provided support to all data science activities from 2014 to 2018. Dr. Angell was an adjunct faculty at Salt Lake Community College from 2009 to 2014, where he taught computer science related courses. Dr. Angell received her Ph.D. degree in biomedical informatics and Bachelor’s degree in industrial engineering from University of Utah.
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Board Diversity
The table below provides certain information regarding the diversity of our board of directors as of the date of this annual report.
| Board Diversity Matrix | ||||
| Country of Principal Executive Offices: | Hong Kong | |||
| Foreign Private Issuer | Yes | |||
| Disclosure Prohibited under Home Country Law | No | |||
| Total Number of Directors | 5 | |||
| Female | Male |
Non- Binary |
Did Not Disclose Gender | |
| Part I: Gender Identity | ||||
| Directors | 1 | 4 | 0 | 0 |
| Part II: Demographic Background | ||||
| Underrepresented Individual in Home Country Jurisdiction | 0 | |||
| LGBTQ+ | 0 | |||
| Did Not Disclose Demographic Background | 0 | |||
Family Relationships
None of our directors or executive officers has a family relationship as defined in Item 401 of Regulation S-K.
B. Compensation
For the fiscal year ended August 31, 2022, we paid an aggregate of RMB2.2 million (US$0.3 million) in cash to our directors and officers. We have not set aside or accrued any amount to provide pension, retirement or other similar benefits to our executive officers and directors.
Amended and Restated 2015 Plan
To attract and retain the best available personnel, provide additional incentives to employees, directors and consultants and promote the success of our business, we, through our predecessor Cayman Islands company, initially adopted an employee stock incentive plan in March 2013, which was subsequently replaced by a domestic share incentive plan of Shanghai OneSmart approved in February 2015. As part of the 2017 Restructuring, we adopted an amended and restated 2015 Share Incentive Plan in April 2017, which was further amended on February 5, 2018, or the Amended and Restated 2015 Plan. The maximum aggregated number of our ordinary shares which may be issued pursuant to all awards under the Amended and Restated 2015 Plan is 336,642,439 Class A ordinary shares, plus an annual 2.0% increase of the total number of ordinary shares outstanding on August 31 of the preceding calendar year on the first day of each the following nine fiscal years of the Company commencing on September 1, 2018. As of the date of this annual report, the maximum aggregate number of shares which may be issued pursuant to all awards under the Amended and Restated 2015 Plan is 727,674,893 and options to purchase 581,844,440 Class A ordinary shares have been granted and outstanding, excluding awards that were forfeited or cancelled after the relevant grant dates.
The following paragraphs describe the principal terms of the Amended and Restated 2015 Plan.
Types of Awards. The Amended and Restated 2015 Plan permits the awards of options, restricted share purchase rights or any other type of awards approved by the committee or the board of directors.
Plan Administration. Our board of directors or a committee appointed by our board will administer the Amended and Restated 2015 Plan. The committee or the full board of directors, as applicable, will determine the participants to receive awards, the type and number of awards to be granted to each participant, and the terms and conditions of each award grant.
Award Agreement. Awards granted under the Amended and Restated 2015 Plan are evidenced by an award agreement that sets forth terms, conditions and limitations for each award, which may include the number of shares subject to the award, the exercise price or the purchase price, the provisions applicable in the event of the grantee’s employment or service terminates (if applicable). The plan administrator may amend the terms of any award, provided that no such amendment may impair the rights of any grantee without his or her consent.
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Eligibility. We may grant awards to our employees, directors, consultants and qualified former employees. However, we may grant options that are intended to qualify as incentive share options only to our employees.
Acceleration of Awards upon Change in Control. If a change in control of our company occurs, each outstanding awards shall be assumed and substituted by or assigned to the successor or its parent or subsidiary. If the outstanding awards are not assumed by the successor, all the awards shall become fully vested and exercisable immediately and each participant has the right to exercise the vested awards during a specific period of time.
Vesting Schedule. In general, the plan administrator determines the vesting schedule, which is specified in the relevant award agreement.
Exercise of Options. The plan administrator determines the exercise price for each award, which is stated in the award agreement. No option shall become exercisable unless we have consummated the initial public offering. The vested portion of option will expire if not exercised prior to the time as the plan administrator determines at the time of its grant. However, the maximum exercisable term is the tenth anniversary after the date of a grant.
Transfer Restrictions. Awards may not be transferred in any manner by the recipient other than by will or the laws of descent and distribution, except as otherwise provided by the plan administrator.
Termination of the Amended and Restated 2015 Plan. Unless terminated earlier, the Amended and Restated 2015 Plan will terminate automatically in April, 2027. Our board of directors has the authority to amend or terminate the plan subject to shareholder approval to the extent necessary and desirable to comply with applicable law, but no amendment or termination shall be made if such amendment or termination would materially impair the rights of a grantee with respect to an outstanding award without such grantee’s consent.
As of the date of this annual report, all the outstanding options unvested has been cancelled as the grantees’ service contracts were terminated due to the impact of Double Reduction policy on education from Chinese’s central government in 2021.
As of the date of this annual report, other employees, including certain former employees, as a group held outstanding options awarded to purchase 343,088,045 Class A ordinary shares of our company, with exercise price of US$0.0003 - 0.2225 per share.
Restricted shares issued to the founding shareholders of Shanghai Yimi
On February 1, 2020, we granted 9,677,288 restricted shares to the founding shareholders of Shanghai Yimi in connection with Yimi transactions. The vesting of the restricted shares is subject to the achievement of certain online tutoring business from Yimi Cayman and Shanghai Yimi. If performance target is achieved, 50% of the restricted shares shall vest on January 1, 2021 and remaining 50% shall vest on January 1, 2022. All the outstanding restricted shares have been cancelled due to the impact of Double Reduction policy on education from Chinese’s central government in 2021.
The restricted shares are measured at their fair values on February 1, 2020, the grant date. Given the achievement of the performance conditions were determined to be probable, each of the two tranches was accounted for as a separate award with its own service inception date and requisite service period.
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C. Board Practices
Board of Directors
Our board of directors consists of five directors. A director is not required to hold any shares in our company to qualify to serve as a director. A director who is in any way, whether directly or indirectly, interested in a contract or proposed contract with our company is required to declare the nature of his interest at a meeting of our directors. A director may vote in respect of any contract, proposed contract, or arrangement notwithstanding that he may be interested therein, and if he does so his vote shall be counted and he may be counted in the quorum at any meeting of our directors at which any such contract or proposed contract or arrangement is considered. The directors may exercise all the powers of the company to borrow money, mortgage its undertaking, property and uncalled capital, and issue debentures or other securities whenever money is borrowed or as security for any obligation of the company or of any third party. None of our non-executive directors has a service contract with us that provides for benefits upon termination of service.
Committees of the Board of Directors
We have established three committees under the board of directors: an audit committee, a compensation committee and a nominating and corporate governance committee. We have adopted a charter for each of the three committees. Each committee’s members and functions are described below.
Audit Committee. Our audit committee consists of Dr. Robert Angell, Dr. Mengchu Zhou and Ms. Yanyi Tang. Ms. Yanyi Tang is the chairwoman of our audit committee. We have determined that Dr. Robert Angell, Dr. Mengchu Zhou and Ms. Yanyi Tang satisfy the “independence” requirements of Section 303A of the Corporate Governance Rules of the New York Stock Exchange and Rule 10A-3 under the Exchange Act. We have determined that Ms. Yanyi Tang qualifies as an “audit committee financial expert.” The audit committee oversees our accounting and financial reporting processes and the audits of the financial statements of our company. The audit committee is responsible for, among other things:
| ● | appointing the independent auditors and pre-approving all auditing and non-auditing services permitted to be performed by the independent auditors; |
| ● | reviewing with the independent auditors any audit problems or difficulties and management’s response; |
| ● | discussing the annual audited financial statements with management and the independent auditors; |
| ● | reviewing the adequacy and effectiveness of our accounting and internal control policies and procedures and any steps taken to monitor and control major financial risk exposures; |
| ● | reviewing and approving all proposed related party transactions; |
| ● | meeting separately and periodically with management and the independent auditors; and |
| ● | monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our procedures to ensure proper compliance. |
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Compensation Committee. Our compensation committee consists of Dr. Robert Angell, Dr. Mengchu Zhou and Ms. Yanyi Tang. Dr. Mengchu Zhou is the chairman of our compensation committee. We have determined that Dr. Robert Angell, Dr. Mengchu Zhou and Ms. Yanyi Tang satisfy the “independence” requirements of Section 303A of the Corporate Governance Rules of the New York Stock Exchange. The compensation committee assists the board in reviewing and approving the compensation structure, including all forms of compensation, relating to our directors and executive officers. Our chief executive officer may not be present at any committee meeting during which his compensation is deliberated. The compensation committee is responsible for, among other things:
| ● | reviewing and approving, or recommending to the board for its approval, the compensation for our chief executive officer and other executive officers; |
| ● | reviewing and recommending to the board for determination with respect to the compensation of our non-employee directors; |
| ● | reviewing periodically and approving any incentive compensation or equity plans, programs or similar arrangements; and |
| ● | selecting compensation consultant, legal counsel or other adviser only after taking into consideration all factors relevant to that person’s independence from management. |
Nominating and Corporate Governance Committee. Our nominating and corporate governance committee consists of Dr. Robert Angell, Dr. Mengchu Zhou and Ms. Yanyi Tang. Dr. Robert Angell is the chairman of our nominating and corporate governance committee. We have determined that Dr. Robert Angell, Dr. Mengchu Zhou and Ms. Yanyi Tang satisfy the “independence” requirements of Section 303A of the Corporate Governance Rules of the New York Stock Exchange. The nominating and corporate governance committee assists the board of directors in selecting individuals qualified to become our directors and in determining the composition of the board and its committees. The nominating and corporate governance committee is responsible for, among other things:
| ● | selecting and recommending to the board nominees for election by the shareholders or appointment by the board; |
| ● | reviewing annually with the board the current composition of the board with regards to characteristics such as independence, knowledge, skills, experience and diversity; |
| ● | making recommendations on the frequency and structure of board meetings and monitoring the functioning of the committees of the board; and |
| ● | advising the board periodically with regards to significant developments in the law and practice of corporate governance as well as our compliance with applicable laws and regulations, and making recommendations to the board on all matters of corporate governance and on any remedial action to be taken. |
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Duties of Directors
Under Cayman Islands law, our directors owe fiduciary duties to our company, including a duty to act honestly, and a duty to act in what they consider in good faith to be in our best interests. Our directors must also exercise their powers only for a proper purpose. Our directors also have a duty to act with skills they actually possess and exercise the care and diligence that a reasonably prudent person would exercise in comparable circumstances. It was previously acknowledged that a director does not need to act with skills greater than those expected to be processed by a reasonable person. However, English and Commonwealth courts have moved towards an objective standard with regard to the required skills and care and these authorities are likely to be followed in the Cayman Islands. In fulfilling their duty of care to us, our directors must ensure compliance with our sixth amended and restated memorandum and articles of association, as amended and restated from time to time, and the class rights vested thereunder in the holders of the shares. Our directors owe their fiduciary duties to our company and not to our company’s individual shareholders, and our company has the right to seek damages if a duty owed by our directors is breached. In certain limited exceptional circumstances, a shareholder may have the right to seek damages in our name if a duty owed by our directors is breached.
Our board of directors has all the powers necessary for managing, and for directing and supervising, our business affairs. The functions and powers of our board of directors include, among others:
| ● | convening shareholders’ annual and extraordinary general meetings and reporting its work to shareholders at such meetings; |
| ● | declaring dividends and distributions; |
| ● | appointing officers and determining the term of office of the officers; |
| ● | exercising the borrowing powers of our company and mortgaging the property of our company; and |
| ● | approving the transfer of shares in our company, including the registration of such shares in our share register. |
Terms of Directors and Officers
Our directors may be elected by a resolution of our board of directors, or by an ordinary resolution of our shareholders. Our directors are not subject to a term of office and hold office until such time as they are removed from office by ordinary resolution of the shareholders. A director will be removed from office automatically if, among other things, the director (i) becomes bankrupt or makes any arrangement or composition with his creditors; (ii) is found by our company to be or becomes of unsound mind; (iii) resigns his office by notice in writing to the company; or (iv) without special leave of absence from our board, is absent from three consecutive board meetings and our directors resolve that his office be vacated. Our officers are elected by and serve at the discretion of the board of directors.
Employment Agreements and Indemnification Agreements
We have entered into employment agreements with each of our executive officers. Under these agreements, each of our executive officers is employed for a specified time period. We may terminate employment for cause, at any time, without advance notice or remuneration, for certain acts of the executive officer, such as conviction or plea of guilty to a felony or any crime involving moral turpitude, negligent or dishonest acts to our detriment, or misconduct or a failure to perform agreed duties. We may also terminate an executive officer’s employment without cause upon three-month advance written notice. In such case of termination by us, we will provide severance payments to the executive officer as expressly required by applicable law of the jurisdiction where the executive officer is based. The executive officer may resign at any time with a three-month advance written notice.
Each executive officer has agreed to hold, both during and after the termination or expiry of his or her employment agreement, in strict confidence and not to use, except as required in the performance of his or her duties in connection with the employment or pursuant to applicable law, any of our confidential information or trade secrets, any confidential information or trade secrets of our clients or prospective clients, or the confidential or proprietary information of any third party received by us and for which we have confidential obligations. The executive officers have also agreed to disclose in confidence to us all inventions, designs and trade secrets which they conceive, develop or reduce to practice during the executive officer’s employment with us and to assign all right, title and interest in them to us, and assist us in obtaining and enforcing patents, copyrights and other legal rights for these inventions, designs and trade secrets.
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In addition, each executive officer has agreed to be bound by non-competition and non-solicitation restrictions during the term of his or her employment and typically for one year following the last date of employment. Specifically, each executive officer has agreed not to (i) approach our suppliers, clients, customers or contacts or other persons or entities introduced to the executive officer in his or her capacity as a representative of us for the purpose of doing business with such persons or entities that will harm our business relationships with these persons or entities; (ii) assume employment with or provide services to any of our competitors, or engage, whether as principal, partner, licensor or otherwise, any of our competitors, without our express consent; or (iii) seek directly or indirectly, to solicit the services of any of our employees who is employed by us on or after the date of the executive officer’s termination, or in the year preceding such termination, without our express consent.
We have also entered into indemnification agreements with each of our directors and executive officers. Under these agreements, we agree to indemnify our directors and executive officers against certain liabilities and expenses incurred by such persons in connection with claims made by reason of their being a director or officer of our company.
D. Employees
See “Item 4. Information on the Company—B. Business Overview—Employees.”
E. Share Ownership
Except as specifically noted, the following table sets forth information with respect to the beneficial ownership of our ordinary shares as of December 21, 2022 by:
| ● | each of our directors and executive officers; and |
| ● | each person known to us owning beneficially 5% or more of our ordinary shares. |
The calculations in the table below are based on 36.0 billion ordinary shares outstanding as of December 21, 2022, including (i) 36.0 billion Class A ordinary shares, and (ii) nil Class B ordinary shares.
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Beneficial ownership is determined in accordance with the rules and regulations of the SEC. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, we have included shares that the person has the right to acquire within 60 days, including through the exercise of any option, warrant or other right or the conversion of any other security, subject to certain conditions. These shares, however, are not included in the computation of the percentage ownership of any other person.
| Class A ordinary | Class B ordinary | Total shares on | % of voting | |||||||||||||||||
| shares | shares | basis | % | power | ||||||||||||||||
| Directors and Executive Officers**: | ||||||||||||||||||||
| Xiaoming Li | - | - | - | - | - | |||||||||||||||
| Chee Jiong Ng | 100,000 | - | - | * | * | |||||||||||||||
| Dr. Robert Angell | 100,000 | - | - | * | * | |||||||||||||||
| Dr. Mengchu Zhou | 100,000 | - | - | * | * | |||||||||||||||
| Yanyi Tang | 100,000 | - | - | * | * | |||||||||||||||
| Shengcong Ma | 100,000 | - | - | * | * | |||||||||||||||
| All Directors and Executive Officers as a Group | 500,000 | - | - | * | * | |||||||||||||||
| Principal Shareholders: | ||||||||||||||||||||
| Metaverse Digital Investment Co., Limited (1) | 2,290,430,016 | - | 2,290,430,016 | 6.4 | 6.4 | |||||||||||||||
| Origin Investment Holdings Limited and its affiliates (2) | 926,285,677 | - | 926,285,677 | 2.6 | 2.6 | |||||||||||||||
| * | Less than 1% of our total outstanding shares. |
| ** | Except as otherwise indicated below, the business address of our directors and executive officers is Flat H 3/F, Haribest Industrial Building, 45-47 Au Pui Wan Street, Sha Tin New Territories, Hong Kong |
| † | For each person and group included in this column, percentage of voting power is calculated by dividing the voting power beneficially owned by such person or group by the voting power of all of our Class A and Class B ordinary shares as a single class. Each holder of Class A ordinary shares is entitled to one vote per share and each holder of our Class B ordinary shares is entitled to twenty votes per share on all matters submitted to them for a vote. Our Class A ordinary shares and Class B ordinary shares vote together as a single class on all matters submitted to a vote of our shareholders, except as may otherwise be required by law. Our Class B ordinary shares are convertible at any time by the holder thereof into Class A ordinary shares on a one-for-one basis. |
| (1) | Represents 2,290,430,016 Class A ordinary shares held by Metaverse Digital Investment Co., Limited, a Hong Kong corporation. The registered address of Metaverse Digital Investment Co., Limited is Rm 517, New City Centre, 2 Lei Yue Mun Road, Kwun Tong, Kowloon, Hong Kong SAR. |
| (2) | Represents 926,285,677 Class A ordinary shares held by Origin Investment Holdings Limited, is an exempted company incorporated in the Cayman Islands, and its affiliates. The registered address of Origin Investment Holdings Limited is 27 Hospital Road, George Town, Grand Cayman KY1-9008, Cayman Islands. |
To our knowledge, as of December 21, 2022, 3.2 billion of our ordinary shares were held by record holder in the United States, which was Deutsche Bank Trust Company Americas, the depositary of our ADS program. The number of beneficial owners of our ADSs in the United States is likely to be much larger than the number of record holders of our ordinary shares in the United States.
We are not aware of any arrangement that may, at a subsequent date, result in a change of control of our company.
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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
Please refer to “Item 6. Directors, Senior Management and Employees-E. Share Ownership.”
B. Related Party Transactions
Transaction with Shareholders and Affiliates
In the fiscal year 2017, we provided an interest-free, unsecured loan of RMB16.5 million, payable within five years from draw down in April 2017 to Shanghai Ya Qiao Education Investment Co., Ltd., or Ya Qiao Education, for its operation purposes. In April 2019, we and Ya Qiao Education entered into an agreement to convert the loan into 75% equity interests in Ya Qiao Education. As of August 31, 2021, such conversion was not completed and we recorded RMB20.4 million (US$3.2 million) as amounts due from the related parties in connection with the loan extended to Ya Qiao Education. The loan extended to Ya Qiao Education is outstanding as of the date of this annual report.
In October 2018, we acquired a strategic minority equity stake in Tus-Juren. From November 2018 to February 2019, we provided management consulting services and receive licensing fee from Tus-Juran of RMB6.8 million (US$1.1 million). From November 2018 to February 2020, we extended a series of five-year convertible loan in an aggregate principal amount of RMB721.2 million to Tus-Juren. Such convertible loan bear a 10% annual coupon and we have the option to convert the principal and any unpaid interests of such convertible loan into new equity interest of Tus-Juren at a pre-determined valuation at any time after either the third or fourth anniversary from the borrowing date. On February 18, 2020, the annual coupon rate of these convertible loans was adjusted to nil, applicable to the outstanding loan period starting from December 1, 2019. As a part of the Yutang transactions in December 2020, we have the option to convert the principal and any unpaid interests of the convertible loans to Tus-Juren into new equity interests of Yutang Inc. at any time within five years starting from December 15, 2020. During the fiscal year 2020, we made a series of 12-month loan available to Tus-Juren and its subsidiaries in an aggregate amount of RMB170.9 million. A majority of such loans bear a 4.35% annual interest rate.
In December 2020, we entered into certain agreements to establish a sizable and stronger small-class business by merging a number of small-class K-12 after-school education businesses that OneSmart has invested in for a few years into Yutang Inc., or Yutang. The foregoing transactions are collectively referred to as the “Yutang transactions.” In connection with Yutang transactions, we entered into a share sale and purchase agreement with Yutang, Tus-Juren related parties, pursuant to which, Yutang has agreed to issue 100,340,631 ordinary shares of Yutang to us as share consideration in exchange for all the equity interest of JUREN Education & Technology Group Inc. held by us. We also entered into a share subscription agreement with Yutang Inc. and its shareholder, Tus-Juren related parties and Tianjin Huaying Education Consulting Co., Ltd. to acquire certain equity interest in Yutang. Pursuant to which, Yutang has agreed to (i) issue 36,762,505 ordinary shares of Yutang to us at a purchase price of US$0.0001 per share as consideration to acquire all the equity interests of Tianjin Huaying Education Consulting Co., Ltd. indirectly held by us through VIE contractual arrangement, and (ii) issue 2,188,244 ordinary shares to us at a purchase price of US$0.0001 per share as consideration to acquire our equity interest in Tus-Juren online business. After the Yutang transactions, we will become a minority shareholder of Yutang.
Shareholders Agreement
We entered into our shareholders agreement on April 21, 2017 and amended the shareholders agreement on December 11, 2017. Pursuant to shareholders agreement and amendment to the shareholders agreement, or the Shareholders Agreement, we have granted registration rights to holders of our registrable securities, which include (i) our ordinary shares issued or issuable upon conversion of the preferred shares, (ii) our ordinary shares issued or issuable as a dividend or other distribution with respect to, in exchange for, or in replacement of, the shares referenced in (i) herein, and (iii) any ordinary shares owned or hereafter acquired by the holders; excluding those acquired in violation of the shareholders agreement. Set forth below is a description of the registration rights granted under the agreement.
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Demand Registration Rights. At any time or from time to time after the earlier of (i) the third (3rd) anniversary of the Shareholders Agreement or (ii) the date that is six (6) months after the consummation of the IPO, any holder of 50% of the registrable securities or holders of 50% of the registrable securities then outstanding has the right to demand in writing that we effect a registration of registrable securities (together with the registrable securities which the other holders elect to include in such registration). We, however, are not obligated to consummate a registration if we have consummated three registrations. We have the right to defer filing of a registration statement for a period of not more than 90 days if our board of directors determines in good faith judgment that filing of a registration in the near future will be materially detrimental to us, but we cannot exercise the deferral right more than once in any 12-month period and cannot register any other securities during such period. Further, if the registrable securities are offered by means of an underwriting and the underwriter advises us in writing that marketing factors require a limitation of the number of securities to be underwritten, a maximum of 75% of such registrable securities may be first reduced as required by the underwriters and the number of the registrable securities will be allocated among the holders on a pro rata basis according to the number of registrable securities then outstanding held by each holder requesting registration, provided that in no event may any registrable securities be excluded from such underwriting unless all other securities are first excluded.
Registration on Form F-3 or Form S-3s. Any holder of 15% of registrable securities of holders of 15% of the registrable securities then outstanding have the right to request us to file a registration statement on Form F-3 or Form S-3 if we qualify for registration on Form F-3 or Form S-3. We, however, are not obligated to consummate a registration (i) if we have consummated two registrations within any twelve-month period; and (ii) if the aggregate offering price to the public of such registration is less than US$2,000,000. We have the right to defer filing of a registration statement for a period of not more than 90 days if our board of directors determines in good faith judgment that filing of a registration in the near future will be materially detrimental to us, but we cannot exercise the deferral right more than once in any 12-month period and cannot register any other securities during such period.
Piggyback Registration Rights. If we propose to register for a public offering or our securities other than relating to any share incentive plan or a corporate reorganization, we must offer holders of our registrable securities an opportunity to be included in such registration. If the underwriters advise that market factors require a limitation of the number of registrable securities to be underwritten, the underwriters may decide to exclude shares from and to allocate among all non-excluded holders in proportion.
Expenses of Registration. We will bear all registration expenses, other than the underwriting discounts and selling commissions applicable to the sale of registrable securities, incurred in connection with registrations, filings or qualification pursuant to the shareholders agreement.
Termination of Obligations. We have no obligation to effect any demand, piggyback or Form F-3 registration upon the earlier of (i) the fifth anniversary from the date of closing of a qualified IPO as defined in the Shareholders Agreement, and (ii) with respect to any holder, the date on which such holder may sell all of such holder’s registrable securities under Rule 144 of the Securities Act in any 90-day period.
Employment Agreements and Indemnification Agreements
See “Item 6. Directors, Senior Management and Employees-A. Directors and Senior Management-Employment Agreements and Indemnification Agreements.”
Share Incentive Plans
See “Item 6. Directors, Senior Management and Employees-B. Compensation-Amended and Restated 2015 Plan.”
C. Interests of Experts and Counsel
Not applicable.
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ITEM 8. FINANCIAL INFORMATION
A. Consolidated Statements and Other Financial Information
We have appended consolidated financial statements filed as part of this annual report. See “Item 18. Financial Statements.”
Legal Proceedings
Except as listed below, we are currently not a party to any material legal or administrative proceedings. We may from time to time be subject to various legal or administrative claims and proceedings arising in the ordinary course of business. Litigation or any other legal or administrative proceeding, regardless of the outcome, is likely to result in substantial cost and diversion of our resources, including our management’s time and attention.
As of the date of this annual report, the Company has been named in a number of lawsuits due to cessation of business in October 2021 which was caused by a series of rules, regulations and administrative measures for after-school tutoring for primary and secondary school students issued by the General Office of Ministry of Education of PRC from July 2021 to September 2021.
The following table presents the total number of the lawsuits by category, the amount involved in thousands, and the scope of the amount per case in each category (classified to the discontinued operations in fiscal 2022):
| Numbers |
Total amount involved (thousands) |
Amount involved scope per case (thousands) | ||||||||
| Amounts in thousands of Renminbi (“RMB”) except for number of cases | RMB | RMB | ||||||||
| Lease | 5 | 2,167 | From 371 to 797 | |||||||
| Advertisement | 1 | 3,969 | 3,969 | |||||||
| Technology Service | 2 | 504 | From 237 to 266 | |||||||
| Education Service | 99 | 3,795 | From 9 to 2,378 | |||||||
| Purchase | 4 | 2,424 | From 49 to 1,298 | |||||||
| Property Preservation | 2 | 2,440 | From 62 to 2,377 | |||||||
| Decoration | 3 | 4,020 | From 680 to 2,540 | |||||||
| Total | 116 | 19,320 | ||||||||
As of the date of this annual report, the Company is using all commercially reasonable efforts to defend itself in these proceedings and is still undergoing on-going discussion with regulatory authorities.
Dividend Policy
Our board of directors has discretion on 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. In either case, all dividends are subject to certain restrictions under Cayman Islands law, namely that our company may only pay dividends out of profits or share premium, and provided always that in no circumstances may a dividend be paid if this would result in our company being unable to pay its debts as they fall due in the ordinary course of business. Even if we decide to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant.
We do not have any present plan to pay any cash dividends on our Class A ordinary shares in the foreseeable future. We currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.
We are a holding company incorporated in the Cayman Islands. We may rely on dividends from our subsidiaries in Hong Kong and Wyoming, U.S. for our cash requirements, including any payment of dividends to our shareholders. See “Item 4. Information on the Company-B. Business Overview-Regulation-Regulations Related to Our Business Operation in Hong Kong-Regulations related to Hong Kong Taxation.”
If we pay any dividends on our Class A ordinary shares, we will pay those dividends which are payable in respect of the Class A ordinary shares underlying our ADSs to the depositary, as the registered holder of such Class A ordinary shares, and the depositary then will pay such amounts to our ADS holders in proportion to Class A ordinary shares underlying the ADSs held by such ADS holders, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. Cash dividends on our Class A ordinary shares, if any, will be paid in U.S. dollars.
B. Significant Changes
Except as otherwise disclosed in this report, we have not experienced any significant changes since the date of our audited consolidated financial statements included in this annual report.
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ITEM 9 THE OFFER AND LISTING
A. Offering and Listing Details
Our ADSs, each representing 1,000 of our Class A ordinary shares, have been listed on the NYSE since March 28, 2018. Our ADSs trade under the symbol “AIU.”
B. Plan of Distribution
Not applicable.
C. Markets
Our ADSs, each representing 1,000 of our Class A ordinary shares, have been listed on the NYSE since March 28, 2018. Our ADSs trade under the symbol “AIU.”
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
We have adopted a sixth amended and restated memorandum and articles of association. The following are summaries of material provisions of the amended and restated memorandum and articles of association that we adopt and of the Companies Act, insofar as they relate to the material terms of our ordinary shares.
Objects of Our Company
Under our sixth amended and restated memorandum and articles of association, the objects of our company are unrestricted and we have the full power and authority to carry out any object not prohibited by the law of the Cayman Islands.
Ordinary Shares
Our authorized share capital is US$50,000 consisting of 50,000,000,000 shares comprising of (i) 37,703,157,984 Class A ordinary shares of a par value of US$0.000001 each, (ii) 2,296,842,016 Class B ordinary shares of a par value of US$0.000001 each and (iii) 10,000,000,000 shares of a par value of US$0.000001 each of such class or classes (however designated) as our board of directors may determine in accordance with our sixth amended and restated memorandum and articles of association. All of our issued and outstanding ordinary shares are fully paid and non-assessable. Our ordinary shares are issued in registered form, and are issued when registered in our register of members. Our shareholders who are non-residents of the Cayman Islands may freely hold and vote their ordinary shares. Under our sixth amended and restated memorandum and articles of association, our company may not issue bearer shares.
Dividends
The holders of our ordinary shares are entitled to such dividends as may be declared by our board of directors. Dividends may be declared and paid out of our profits, share premium account or any other fund or account which can be authorized for this purpose in accordance with the Companies Act. Under the laws of the Cayman Islands, our 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 our company being unable to pay its debts as they fall due in the ordinary course of business.
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Voting Rights
Voting at any shareholders’ meeting is by show of hands unless a poll is demanded. A poll may be demanded by the chairman of such meeting or any shareholder present in person or by proxy at the meeting.
An ordinary resolution to be passed at a meeting by the shareholders requires the affirmative vote of a simple majority of the votes attaching to the ordinary shares cast at a meeting, while a special resolution requires the affirmative vote of no less than two-thirds of the votes cast attaching to the outstanding ordinary shares at a meeting. A special resolution will be required for important matters such as a change of name or making changes to our sixth amended and restated memorandum and articles of association. Holders of our ordinary shares may effect certain changes by ordinary resolution, including increasing the amount of our authorized share capital, consolidating all or any of our share capital into shares of larger amount than our existing shares, sub-dividing our shares or any of them into shares of an amount smaller than that fixed by our memorandum, and cancelling any unissued shares. Both ordinary resolution and special resolution may also be passed by an unanimous written resolution signed by all the shareholders of our company, as permitted by the Companies Act and our sixth amended and restated memorandum and articles of association.
Appointment and Removal of Directors
Our board of directors may, by the affirmative vote of a simple majority of the directors present and voting at a board meeting, appoint any person as a director, to fill a casual vacancy on the board or as an addition to the existing board. Directors may be removed by ordinary resolution of our shareholders.
General Meetings of Shareholders
As a Cayman Islands exempted company, we are not obliged by the Companies Act to call shareholders’ annual general meetings. Our sixth amended and restated memorandum and articles of association provide that we may (but are not obliged to) in each year hold a general meeting as our annual general meeting in which case we shall specify the meeting as such in the notices calling it, and the annual general meeting shall be held at such time and place as may be determined by our directors.
Shareholders’ general meetings may be convened by the chairman of board of directors or a majority of our board of directors. Advance notice of at least ten days is required for the convening of our annual general shareholders’ meeting (if any) and any other general meeting of our shareholders. A quorum required for any general meeting of shareholders consists of at least one shareholder present or by proxy, representing not less than one-third of all votes attaching to all of our shares in issue and entitled to vote.
The Companies Act provides shareholders with only limited rights to requisition a general meeting, and does not provide shareholders with any right to put any proposal before a general meeting. However, these rights may be provided in a company’s articles of association. Our sixth amended and restated memorandum and articles of association provide that upon the requisition of shareholders representing in aggregate not less than one-third of the votes attaching to the outstanding shares of our company entitled to vote at general meetings, our board will convene an extraordinary general meeting and put the resolutions so requisitioned to a vote at such meeting. However, our sixth amended and restated memorandum and articles of association do not provide our shareholders with any right to put any proposals before annual general meetings or extraordinary general meetings not called by such shareholders.
Transfer of Ordinary Shares
Subject to the restrictions set out below, any of our shareholders may transfer all or any of his or her ordinary shares by an instrument of transfer in the usual or common form or any other form approved by our board of directors.
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Our board of directors may, in its absolute discretion, decline to register any transfer of any ordinary share which is not fully paid up or on which we have a lien. Our board of directors may also decline to register any transfer of any ordinary share unless:
| ● | the instrument of transfer is lodged with us, accompanied by the certificate for the ordinary shares to which it relates and such other evidence as our board of directors may reasonably require to show the right of the transferor to make the transfer; |
| ● | the instrument of transfer is in respect of only one class of ordinary shares; |
| ● | the instrument of transfer is properly stamped, if required; |
| ● | in the case of a transfer to joint holders, the number of joint holders to whom the ordinary share is to be transferred does not exceed four; and |
| ● | a fee of such maximum sum as the New York Stock Exchange may determine to be payable or such lesser sum as our directors may from time to time require is paid to us in respect thereof. |
If our directors refuse to register a transfer they shall, within three months after the date on which the instrument of transfer was lodged, send to each of the transferor and the transferee notice of such refusal.
The registration of transfers may, after compliance with any notice required of the New York Stock Exchange, be suspended and the register closed at such times and for such periods as our board of directors may from time to time determine, provided, however, that the registration of transfers shall not be suspended nor the register closed for more than 30 days in any year as our board may determine.
Liquidation
On the winding up of our company, if the assets available for distribution amongst our shareholders shall be more than sufficient to repay the whole of the share capital at the commencement of the winding up, the surplus shall be distributed amongst our shareholders in proportion to the par value of the shares held by them at the commencement of the winding up, subject to a deduction from those shares in respect of which there are monies due, of all monies payable to our company for unpaid calls or otherwise. If our assets available for distribution are insufficient to repay all of the paid-up capital, the assets will be distributed so that the losses are borne by our shareholders in proportion to the par value of the shares held by them.
Calls on Shares and Forfeiture of Shares
Our board of directors may from time to time make calls upon shareholders for any amounts unpaid on their shares in a notice served to such shareholders at least 14 days prior to the specified time and place of payment. The shares that have been called upon and remain unpaid are subject to forfeiture.
Redemption, Repurchase and Surrender of Shares
We may issue shares on terms that such shares are subject to redemption, at our option or at the option of the holders of these shares, on such terms and in such manner as may be determined by our board of directors or by the shareholders by special resolution. Our Company may also repurchase any of our shares on such terms and in such manner as have been approved by our board of directors or by an ordinary resolution of our shareholders. Under the Companies Act, the redemption or repurchase of any share may be paid out of our Company’s profits or out of the proceeds of a new issue of shares made for the purpose of such redemption or repurchase, or out of capital (including share premium account and capital redemption reserve) if our company can, immediately following such payment, pay its debts as they fall due in the ordinary course of business. In addition, under the Companies Act no such share may be redeemed or repurchased (a) unless it is fully paid up, (b) if such redemption or repurchase would result in there being no shares outstanding or (c) if the company has commenced liquidation. In addition, our company may accept the surrender of any fully paid share for no consideration.
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Variations of Rights of Shares
If at any time, out share capital is divided into different classes or series of shares, the rights attached to any class or series of shares (unless otherwise provided by the terms of issue of the shares of that class or series), whether or not our company is being wound-up, may be varied with the consent in writing of the holders of two-thirds of the issued shares of that class or series or with the sanction of a resolution passed by a two-thirds majority of the votes cast at a separate meeting of the holders of the shares of the class or series. The rights conferred upon the holders of the shares of any class issued shall not, unless otherwise expressly provided by the terms of issue of the shares of that class, be deemed to be varied by the creation or issue of further shares ranking pari passu with such existing class of shares.
Issuance of Additional Shares
Our amended and restated amended and restated memorandum of association authorizes our board of directors to issue additional ordinary shares from time to time as our board of directors shall determine, to the extent of available authorized but unissued shares.
Our amended and restated amended and restated memorandum of association also authorizes our board of directors to establish from time to time one or more series of preference shares and to determine, with respect to any series of preference shares, the terms and rights of that series, including:
| ● | the designation of the series; |
| ● | the number of shares of the series; |
| ● | the dividend rights, dividend rates, conversion rights, voting rights; and |
| ● | the rights and terms of redemption and liquidation preferences. |
Our board of directors may issue preference shares without action by our shareholders to the extent authorized but unissued. Issuance of these shares may dilute the voting power of holders of ordinary shares.
Inspection of Books and Records
Holders of our ordinary shares will have no general right under Cayman Islands law to inspect or obtain copies of our list of shareholders or our corporate records (other than copies of our memorandum and articles of association, our register of mortgage and charges, and any special resolution passed by our shareholders). However, we will provide our shareholders with annual audited financial statements.
Changes in Capital
Our shareholders may from time to time by ordinary resolution to:
| ● | increase our share capital by such sum, to be divided into shares of such classes and amount, as the resolution shall prescribe; |
| ● | consolidate and divide all or any of our share capital into shares of a larger amount than our existing shares; |
| ● | sub-divide our existing shares, or any of them into shares of a smaller amount, provided that in the subdivision the proportion between the amount paid and the amount, if any, unpaid on each reduced share shall be the same as it was in case of the share from which the reduced share is derived; or |
| ● | cancel any shares that, at the date of the passing of the resolution, have not been taken or agreed to be taken by any person and diminish the amount of our share capital by the amount of the shares so cancelled. |
Our shareholders may, by special resolution and subject to confirmation by the Grand Court of the Cayman Islands on an application by our company for an order confirming such reduction, reduce our share capital and any capital redemption reserve in any manner authorized by law.
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Anti-Takeover Provisions
Some provisions of our sixth amended and restated memorandum and articles of association may discourage, delay or prevent a change of control of our company or management that shareholders may consider favorable, including provisions that:
| ● | authorize our board of directors to issue preference shares in one or more series and to designate the price, rights, preferences, privileges and restrictions of such preference shares without any further vote or action by our shareholders; and |
| ● | limit the ability of shareholders to requisition and convene general meetings of shareholders. |
However, under Cayman Islands law, our directors may only exercise the rights and powers granted to them under our sixth amended and restated memorandum and articles of association for a proper purpose and for what they believe in good faith to be in the best interests of our company.
Exempted Company
We are an exempted company with limited liability under the Companies Act. The Companies Act distinguishes between ordinary resident companies and exempted companies. Any company that is registered in the Cayman Islands but conducts business mainly outside of the Cayman Islands may apply to be registered as an exempted company. The requirements for an exempted company are essentially the same as for an ordinary company except that an exempted company:
| ● | does not have to file an annual return of its shareholders with the Registrar of Companies; |
| ● | is not required to open its register of members for inspection; |
| ● | does not have to hold an annual general meeting; |
| ● | may issue negotiable or bearer shares or shares with no par value; |
| ● | may obtain an undertaking against the imposition of any future taxation (such undertakings are usually given for 20 years in the first instance); |
| ● | may register by way of continuation in another jurisdiction and be deregistered in the Cayman Islands; |
| ● | may register as a limited duration company; and |
| ● | may register as a segregated portfolio company. |
“Limited liability” means that the liability of each shareholder is limited to the amount unpaid by the shareholder on the shares of the company (except in exceptional circumstances, such as involving fraud, the establishment of an agency relationship or an illegal or improper purpose or other circumstances in which a court may be prepared to pierce or lift the corporate veil).
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Differences Between the Law of Different Jurisdictions
The Companies Act is modeled after that of England but does not follow recent English statutory enactments and differs from laws applicable to U.S. corporations and their shareholders. Set forth below is a summary of the significant differences between the provisions of the Companies Act applicable to us and the laws applicable to companies incorporated in the United States and their shareholders.
Mergers and Similar Arrangements. The Companies Act permits mergers and consolidations between Cayman Islands companies and between Cayman Islands companies and non-Cayman Islands companies. For these purposes, (a) “merger” means the merging of two or more constituent companies and the vesting of their undertaking, property and liabilities in one of such companies as the surviving company, and (b) a “consolidation” means the combination of two or more constituent companies into a consolidated company and the vesting of the undertaking, property and liabilities of such companies to the consolidated company. In order to effect such a merger or consolidation, the directors of each constituent company must approve a written plan of merger or consolidation, which must then be authorized by (a) a special resolution of the shareholders of each constituent company, and (b) such other authorization, if any, as may be specified in such constituent company’s articles of association. The plan must be filed with the Registrar of Companies of the Cayman Islands together with a declaration as to the solvency of the consolidated or surviving company, a list of the assets and liabilities of each constituent company and an undertaking that a copy of the certificate of merger or consolidation will be given to the members and creditors of each constituent company and that notification of the merger or consolidation will be published in the Cayman Islands Gazette. Court approval is not required for a merger or consolidation which is effected in compliance with these statutory procedures.
A merger between a Cayman parent company and its Cayman subsidiary or subsidiaries does not require authorization by a resolution of shareholders of that Cayman subsidiary if a copy of the plan of merger is given to every member of that Cayman subsidiary to be merged unless that member agrees otherwise. For this purpose a company is a “parent” of a subsidiary if it holds issued shares that together represent at least ninety percent (90%) of the votes at a general meeting of the subsidiary.
The consent of each holder of a fixed or floating security interest over a constituent company is required unless this requirement is waived by a court in the Cayman Islands.
Save in certain limited circumstances, a shareholder of a Cayman constituent company who dissents from the merger or consolidation is entitled to payment of the fair value of his shares (which, if not agreed between the parties, will be determined by the Cayman Islands court) upon dissenting to the merger or consolidation, provide the dissenting shareholder complies strictly with the procedures set out in the Companies Act. The exercise of dissenter rights will preclude the exercise by the dissenting shareholder of any other rights to which he or she might otherwise be entitled by virtue of holding shares, save for the right to seek relief on the grounds that the merger or consolidation is void or unlawful.
Separate from the statutory provisions relating to mergers and consolidations, the Companies Act also contains statutory provisions that facilitate the reconstruction and amalgamation of companies by way of schemes of arrangement, provided that the arrangement is approved by a majority in number of each class of shareholders and creditors with whom the arrangement is to be made, and who must in addition represent three-fourths in value of each such class of shareholders or creditors, as the case may be, that are present and voting either in person or by proxy at a meeting, or meetings, convened for that purpose. The convening of the meetings and subsequently the arrangement must be sanctioned by the Grand Court of the Cayman Islands. While a dissenting shareholder has the right to express to the court the view that the transaction ought not to be approved, the court can be expected to approve the arrangement if it determines that:
| ● | the statutory provisions as to the required majority vote have been met; |
| ● | the shareholders have been fairly represented at the meeting in question and the statutory majority are acting bona fide without coercion of the minority to promote interests adverse to those of the class; |
| ● | the arrangement is such that may be reasonably approved by an intelligent and honest man of that class acting in respect of his interest; and |
| ● | the arrangement is not one that would more properly be sanctioned under some other provision of the Companies Act. |
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The Companies Act also contains a statutory power of compulsory acquisition which may facilitate the “squeeze out” of dissentient minority shareholder upon a tender offer. When a tender offer is made and accepted by holders of 90% of the shares affected within four months, the offeror may, within a two-month period commencing on the expiration of such four-month period, require the holders of the remaining shares to transfer such shares to the offeror on the terms of the offer. An objection can be made to the Grand Court of the Cayman Islands but this is unlikely to succeed in the case of an offer which has been so approved unless there is evidence of fraud, bad faith or collusion.
If an arrangement and reconstruction is thus approved, or if a tender offer is made and accepted, a dissenting shareholder would have no rights comparable to appraisal rights, save that objectors to a takeover offer may apply to the Grand Court of the Cayman Islands for various orders that the Grand Court of the Cayman Islands has a broad discretion to make, which would otherwise ordinarily be available to dissenting shareholders of Delaware corporations, providing rights to receive payment in cash for the judicially determined value of the shares.
Shareholders’ Suits. In principle, we will normally be the proper plaintiff to sue for a wrong done to us as a company and as a general rule, a derivative action may not be brought by a minority shareholder. However, based on English authorities, which would in all likelihood be of persuasive authority in the Cayman Islands, there are exceptions to the foregoing principle which permit a minority shareholder to commence a class action against, or derivative actions in the name of, a company, including when:
| ● | a company acts or proposes to act illegally or ultra vires; |
| ● | the act complained of, although not ultra vires, could only be effected duly if authorized by more than a simple majority vote that has not been obtained; and |
| ● | those who control the company are perpetrating a “fraud on the minority.” |
Indemnification of Directors and Executive Officers and Limitation of Liability. Cayman Islands law does not limit the extent to which a company’s memorandum and articles of association may provide for indemnification of officers and directors, except to the extent any such provision may be held by the Cayman Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime. Our sixth amended and restated memorandum and articles of association permit indemnification of officers and directors for losses, damages, cost and expenses incurred in their capacities as such unless such losses or damages arise from dishonesty or fraud of such directors or officers. This standard of conduct is generally the same as permitted under the Delaware General Corporation Law for a Delaware corporation.
In addition, we have entered into indemnification agreements with our directors and executive officers that provide such persons with additional indemnification beyond that provided in our sixth amended and restated memorandum and articles of association.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers or persons controlling us under the foregoing provisions, we have been informed that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
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Anti-Takeover Provisions in the Memorandum and Articles of Association. Some provisions of our current memorandum and articles of association may discourage, delay or prevent a change in control of our company or management that shareholders may consider favorable, including provisions that authorize our board of directors to issue preferred shares in one or more series and to designate the price, rights, preferences, privileges and restrictions of such preferred shares without any further vote or action by our shareholders.
However, under Cayman Islands law, our directors may only exercise the rights and powers granted to them under our sixth amended and restated memorandum and articles of association, as amended and restated from time to time, for a proper purpose and for what they believe in good faith to be in the best interests of our company.
Directors’ Fiduciary Duties. Under Delaware corporate law, a director of a Delaware corporation has a fiduciary duty to the corporation and its shareholders. This duty has two components: the duty of care and the duty of loyalty. The duty of care requires that a director act in good faith, with the care that an ordinarily prudent person would exercise under similar circumstances. Under this duty, a director must inform himself of and disclose to shareholders, all material information reasonably available regarding a significant transaction. The duty of loyalty requires that a director acts in a manner he reasonably believes to be in the best interests of the corporation. He must not use his corporate position for personal gain or advantage. This duty prohibits self-dealing by a director and mandates that the best interest of the corporation and its shareholders take precedence over any interest possessed by a director, officer or controlling shareholder and not shared by the shareholders generally. In general, actions of a director are presumed to have been made on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the corporation. However, this presumption may be rebutted by evidence of a breach of one of the fiduciary duties. Should such evidence be presented concerning a transaction by a director, the director must prove the procedural fairness of the transaction and that the transaction was of fair value to the corporation.
As a matter of Cayman Islands law, a director of a Cayman Islands company is in the position of a fiduciary with respect to the company and therefore it is considered that he owes the following duties to the company - a duty to act bona fide in the best interests of the company, a duty not to make a profit based on his position as director (unless the company permits him to do so) and a duty not to put himself in a position where the interests of the company conflict with his personal interest or his duty to a third party. A director of a Cayman Islands company owes to the company a duty to act with skill and care. It was previously considered that a director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience. However, English and Commonwealth courts have moved towards an objective standard with regard to the required skill and care and these authorities are likely to be followed in the Cayman Islands.
Shareholder Action by Written Consent. Under the Delaware General Corporation Law, a corporation may eliminate the right of shareholders to act by written consent by amendment to its certificate of incorporation. Our sixth amended and restated memorandum and articles of association do not allow our shareholders to approve matters to be determined at shareholders’ meetings by way of written resolutions without a meeting.
Shareholder Proposals. Under the Delaware General Corporation Law, a shareholder has the right to put any proposal before the annual meeting of shareholders, provided it complies with the notice provisions in the governing documents. A special meeting may be called by the board of directors or any other person authorized to do so in the governing documents, but shareholders may be precluded from calling special meetings.
The Companies Act provides shareholders with only limited rights to requisition a general meeting, and does not provide shareholders with any right to put any proposal before a general meeting. However, these rights may be provided in a company’s articles of association. Our sixth amended and restated memorandum and articles of association do not allow our shareholders to requisition an extraordinary general meeting of our shareholders and do not provide our shareholders with any other right to put proposals before annual general meetings or extraordinary general meetings. As a Cayman Islands exempted company, we are not obliged by law to call shareholders’ annual general meetings.
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Cumulative Voting. Under the Delaware General Corporation Law, cumulative voting for elections of directors is not permitted unless the corporation’s certificate of incorporation specifically provides for it. Cumulative voting potentially facilitates the representation of minority shareholders on a board of directors since it permits the minority shareholder to cast all the votes to which the shareholder is entitled on a single director, which increases the shareholder’s voting power with respect to electing such director. While there is nothing under the laws of the Cayman Islands which specifically prohibits or restricts the creation of cumulative voting rights for the election of directors of our company, it is not a concept that is accepted as a common practice in the Cayman Islands, and our company has made no provisions in our sixth amended and restated memorandum and articles of association to allow cumulative voting for such elections. As a result, our shareholders are not afforded any less protections or rights on this issue than shareholders of a Delaware corporation.
Removal of Directors. Under the Delaware General Corporation Law, a director of a corporation with a classified board may be removed only for cause with the approval of a majority of the outstanding shares entitled to vote, unless the certificate of incorporation provides otherwise. Under our sixth amended and restated memorandum and articles of association, a director may be removed by a special resolution of our shareholders.
Transactions with Interested Shareholders. The Delaware General Corporation Law contains a business combination statute applicable to Delaware corporations whereby, unless the corporation has specifically elected not to be governed by such statute by amendment to its certificate of incorporation, it is prohibited from engaging in certain business combinations with an “interested shareholder” for three years following the date that such person becomes an interested shareholder. An interested shareholder generally is a person or a group who or which owns or owned 15% or more of the target’s outstanding voting share within the past three years. This has the effect of limiting the ability of a potential acquirer to make a two-tiered bid for the target in which all shareholders would not be treated equally. The statute does not apply if, among other things, prior to the date on which such shareholder becomes an interested shareholder, the board of directors approves either the business combination or the transaction which resulted in the person becoming an interested shareholder. This encourages any potential acquirer of a Delaware corporation to negotiate the terms of any acquisition transaction with the target’s board of directors.
Cayman Islands law has no comparable statute. As a result, we cannot avail ourselves of the types of protections afforded by the Delaware business combination statute. However, although Cayman Islands law does not regulate transactions between a company and its significant shareholders, it does provide that such transactions must be entered into bona fide in the best interests of the company and not with the effect of constituting a fraud on the minority shareholders.
Dissolution; Winding up. Under the Delaware General Corporation Law, unless the board of directors approves the proposal to dissolve, dissolution must be approved by shareholders holding 100% of the total voting power of the corporation. Only if the dissolution is initiated by the board of directors may it be approved by a simple majority of the corporation’s outstanding shares. Delaware law allows a Delaware corporation to include in its certificate of incorporation a supermajority voting requirement in connection with dissolutions initiated by the board.
Under Cayman Islands law, a company may be wound up by either an order of the courts of the Cayman Islands or by a special resolution of its members or, if the company is unable to pay its debts as they fall due, by an ordinary resolution of its members. The court has authority to order winding up in a number of specified circumstances including where it is, in the opinion of the court, just and equitable to do so.
Variation of Rights of Shares. Under the Delaware General Corporation Law, a corporation may vary the rights of a class of shares with the approval of a majority of the outstanding shares of such class, unless the certificate of incorporation provides otherwise. Under our sixth amended and restated memorandum and articles of association, all or any of the special rights for the time being attached to the shares or any class of shares may, unless otherwise provided by the terms of issue of the shares of that class, from time to time be varied, modified or abrogated by a special resolution passed at a separate general meeting of the holders of the shares of that class. The special rights conferred upon the holders of any shares or class of shares shall not, unless otherwise expressly provided in the rights attaching to or the terms of issue of such shares, be deemed to be varied, modified or abrogated by the creation or issue of further shares ranking pari passu with such existing class of shares.
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Amendment of Governing Documents. Under the Delaware General Corporation Law, a corporation’s governing documents may be amended with the approval of a majority of the outstanding shares entitled to vote, unless the certificate of incorporation provides otherwise. As permitted by Cayman Islands law and our sixth amended and restated memorandum and articles of association, our sixth amended and restated memorandum and articles of association may only be amended with a special resolution of our shareholders.
Rights of Non-resident or Foreign Shareholders. There are no limitations imposed by our sixth amended and restated memorandum and articles of association on the rights of non-resident or foreign shareholders to hold or exercise voting rights on our shares. In addition, there are no provisions in our sixth amended and restated memorandum and articles of association which require our company to disclose shareholder ownership above any particular ownership threshold.
Exempted Company. The Companies Act in the Cayman Islands distinguishes between ordinary resident companies and exempted companies. Any company that is registered in the Cayman Islands but conducts business mainly outside of the Cayman Islands may apply to be registered as an exempted company. The requirements for an exempted company are essentially the same as for an ordinary company except for the exemptions and privileges listed below:
| ● | an exempted company does not have to file an annual return of its shareholders with the Registrar of Companies; |
| ● | an exempted company’s register of members is not required to be open to inspection; |
| ● | an exempted company does not have to hold an annual general meeting; |
| ● | an exempted company may issue no par value shares; |
| ● | an exempted company may obtain an undertaking against the imposition of taxation on profits, capital gains or inheritance (such undertakings are usually given for 20 years in the first instance); |
| ● | an exempted company may register by way of continuation in another jurisdiction and be deregistered in the Cayman Islands; |
| ● | an exempted company may register as a limited duration company; and |
| ● | an exempted company may register as a segregated portfolio company. |
“Limited liability” means that the liability of each shareholder is limited to the amount unpaid by the shareholder on that shareholder’s shares of the company (except in exceptional circumstances, such as involving fraud, the establishment of an agency relationship or an illegal or improper purpose or other circumstances in which a court may be prepared to pierce or lift the corporate veil).
C. Material Contracts
We have not entered into any material contracts other than in the ordinary course of business and other than those described in “Item 4. Information on the Company,” “Item 7. Major Shareholders and Related Party Transactions,” or elsewhere in this annual report on Form 20-F.
D. Exchange Controls
The Cayman Islands, British Virgin Islands and Hong Kong currently have no exchange control regulations or currency restrictions.
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E. Taxation
The following summary of the material Cayman Islands, PRC and U.S. federal income tax consequences of an investment in our ADSs or ordinary shares is based upon laws and relevant interpretations thereof in effect as of the date of this annual report, all of which are subject to change. This summary does not deal with all possible tax consequences relating to an investment in our ADSs or ordinary shares, such as the tax consequences under U.S. state and local tax laws or under the tax laws of jurisdictions other than the Cayman Islands, the People’s Republic of China and the United States.
Cayman Islands Taxation
According to Maples and Calder (Hong Kong) LLP, our Cayman Islands counsel, the Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to us levied by the government of the Cayman Islands except for stamp duties which may be applicable on instruments executed in, or, after execution, brought within the jurisdiction of the Cayman Islands. The Cayman Islands is not party to any double tax treaties that are applicable to any payments made to or by our company. There are no exchange control regulations or currency restrictions in the Cayman Islands.
Payments of dividends and capital in respect of our ordinary shares and ADSs will not be subject to taxation in the Cayman Islands and no withholding will be required on the payment of a dividend or capital to any holder of our ordinary shares or ADSs, nor will gains derived from the disposal of our ordinary shares or ADSs be subject to Cayman Islands income or corporation tax.
Hong Kong Taxation
The following summary of certain relevant taxation provisions under the laws of Hong Kong is based on current law and practice and is subject to changes therein. This summary does not purport to address all possible tax consequences relating to purchasing, holding or selling our ADSs, and does not take into account the specific circumstances of any particular investors, some of whom may be subject to special rules. Accordingly, holders or prospective purchasers (particularly those subject to special tax rules, such as banks, dealers, insurance companies and tax-exempt entities) should consult their own tax advisers regarding the tax consequences of purchasing, holding or selling our ADSs. Under the current laws of Hong Kong:
| ● | No profit tax is imposed in Hong Kong in respect of capital gains from the sale of the ADSs. |
| ● | Revenues gains from the sale of our ADSs by persons carrying on a trade, profession or business in Hong Kong where the gains are derived from or arise in Hong Kong from the trade, profession or business will be chargeable to Hong Kong profits tax, which is currently imposed at the rate of 16.5% on corporations and at a maximum rate of 15% on individuals and unincorporated businesses. |
| ● | Gains arising from the sale of ADSs, where the purchases and sales of the ADSs are effected outside of Hong Kong such as, for example, on Cayman Islands, should not be subject to Hong Kong profits tax. |
According to the current tax practice of the Hong Kong Inland Revenue Department, dividends paid on the ordinary shares would not be subject to any Hong Kong tax.
No Hong Kong stamp duty is payable on the purchase and sale of the ADSs.
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United States Federal Income Tax Considerations
The following discussion is a summary of U.S. federal income tax considerations generally applicable to the ownership and disposition of our ADSs or Class A ordinary shares by a U.S. Holder (as defined below) and holds our ADSs or Class A ordinary shares as “capital assets” (generally, property held for investment) under the U.S. Internal Revenue Code of 1986, as amended, or the Code. This discussion is based upon existing U.S. federal tax law, which is subject to differing interpretations or change, possibly with retroactive effect. There can be no assurance that the IRS or a court will not take a contrary position. This discussion, moreover, does not address the U.S. federal estate, gift, Medicare net investment income and alternative minimum tax considerations, or any state, local and non-U.S. tax considerations, relating to the ownership or disposition of our ADSs or Class A ordinary shares. The following summary does not address all aspects of U.S. federal income taxation that may be important to particular investors in light of their individual circumstances or to persons in special tax situations such as:
| ● | banks and other financial institutions; |
| ● | insurance companies; |
| ● | pension plans; |
| ● | cooperatives; |
| ● | regulated investment companies; |
| ● | real estate investment trusts; |
| ● | broker-dealers; |
| ● | traders that elect to use a mark-to-market method of accounting; |
| ● | certain former U.S. citizens or long-term residents; |
| ● | tax-exempt entities (including private foundations); |
| ● | persons liable for alternative minimum tax; |
| ● | holders who acquire their ADSs or Class A ordinary shares pursuant to any employee share option or otherwise as compensation; |
| ● | investors that will hold their ADSs or Class A ordinary shares as part of a straddle, hedge, conversion, constructive sale or other integrated transaction for U.S. federal income tax purposes; |
| ● | investors that have a functional currency other than the U.S. dollar; |
| ● | persons that actually or constructively own 10% or more of our stock by vote or value; or |
| ● | partnerships or other entities taxable as partnerships for U.S. federal income tax purposes, or persons holding ADSs or Class A ordinary shares through such entities. |
All of such persons in special tax situations may be subject to tax rules that differ significantly from those discussed below.
Each U.S. Holder is urged to consult its tax advisor regarding the application of U.S. federal taxation to its particular circumstances, and the state, local, non-U.S. and other tax considerations of the ownership and disposition of our ADSs or Class A ordinary shares.
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General
For purposes of this discussion, a “U.S. Holder” is a beneficial owner of our ADSs or Class A ordinary shares that is, for U.S. federal income tax purposes:
| ● | an individual who is a citizen or resident of the United States; |
| ● | a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created in, or organized under the law of the United States or any state thereof or the District of Columbia; |
| ● | an estate the income of which is includible in gross income for U.S. federal income tax purposes regardless of its source; or |
| ● | a trust (A) the administration of which is subject to the primary supervision of a U.S. court and which has one or more U.S. persons who have the authority to control all substantial decisions of the trust or (B) that has otherwise validly elected to be treated as a U.S. person under the Code. |
If a partnership (or other entity treated as a partnership for U.S. federal income tax purposes) is a beneficial owner of our ADSs or Class A ordinary shares, the tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. Partnerships holding our ADSs or Class A ordinary shares and their partners are urged to consult their tax advisors regarding an investment in our ADSs or Class A ordinary shares.
For U.S. federal income tax purposes, it is generally expected that a U.S. Holder of ADSs will be treated as the beneficial owner of the underlying shares represented by the ADSs. The remainder of this discussion assumes that a U.S. Holder of our ADSs will be treated in this manner. Accordingly, deposits or withdrawals of Class A ordinary shares for ADSs will generally not be subject to U.S. federal income tax.
Passive Foreign Investment Company Considerations
A non-U.S. corporation, such as our company, will be classified as a PFIC, for U.S. federal income tax purposes for any taxable year, if either (i) 75% or more of its gross income for such year consists of certain types of “passive” income or (ii) 50% or more of the value of its assets (generally determined on the basis of a quarterly average) during such year is attributable to assets that produce or are held for the production of passive income. For this purpose, cash and assets readily convertible into cash are categorized as a passive asset and the company’s goodwill and other unbooked intangibles are taken into account. Passive income generally includes, among other things, dividends, interest, rents, royalties, and gains from the disposition of passive assets. We will be treated as owning a proportionate share of the assets and earning a proportionate share of the income of any other corporation in which we own, directly or indirectly, at least 25% (by value) of the stock.
We do not believe that we were a PFIC for the taxable year ended August 31, 2022 and do not anticipate becoming a PFIC for the foreseeable future. While we do not anticipate becoming a PFIC in the foreseeable future, no assurance can be given in this regard because the determination of whether we will be or become a PFIC is a factual determination made annually that will depend, in part, upon the composition of our income and assets. Fluctuations in the market price of our ADSs may cause us to be classified as a PFIC for the current or future taxable years because the value of our assets for purposes of the asset test, including the value of our goodwill and unbooked intangibles, may be determined by reference to the market price of our ADSs from time to time (which may be volatile). If our market capitalization subsequently declines, we may be or become classified as a PFIC for the current taxable year or future taxable years. Furthermore, the composition of our income and assets may also be affected by how, and how quickly, we use our liquid assets. Under circumstances where our revenue from activities that produce passive income significantly increases relative to our revenue from activities that produce non-passive income, or where we determine not to deploy significant amounts of cash for active purposes, our risk of becoming classified as a PFIC may substantially increase.
If we are classified as a PFIC for any year during which a U.S. Holder holds our ADSs or Class A ordinary shares, the PFIC rules discussed below under “Passive Foreign Investment Company Rules” generally will apply to such U.S. Holder for such taxable year, and unless the U.S. Holder makes certain elections, will apply in future years even if we cease to be a PFIC.
The discussion below under “Dividends” and “Sale or Other Disposition” is written on the basis that we will not be or become classified as a PFIC for U.S. federal income tax purposes. The U.S. federal income tax rules that apply generally if we are treated as a PFIC are discussed below under “Passive Foreign Investment Company Rules.”
Dividends
Any cash distributions (including the amount of any PRC tax withheld) paid on our ADSs or Class A ordinary shares out of our current or accumulated earnings and profits, as determined under U.S. federal income tax principles, will generally be includible in the gross income of a U.S. Holder as dividend income on the day actually or constructively received by the U.S. Holder, in the case of Class A ordinary shares, or by the depositary, in the case of ADSs. Because we do not intend to determine our earnings and profits on the basis of U.S. federal income tax principles, any distribution we pay will generally be treated as a “dividend” for U.S. federal income tax purposes. Dividends received on our ADSs or Class A ordinary shares will not be eligible for the dividends received deduction allowed to corporations. A non-corporate U.S. Holder will be subject to tax at the lower capital gain tax rate applicable to “qualified dividend income,” provided that certain conditions are satisfied, including that (1) the ADSs or ordinary shares on which the dividends are paid are readily tradable on an established securities market in the United States, or, in the event that we are deemed to be a PRC resident enterprise under the PRC tax law, we are eligible for the benefit of the United States-PRC income tax treaty, (2) we are neither a PFIC nor treated as such with respect to a U.S. Holder (as discussed below) for the taxable year in which the dividend was paid or the preceding taxable year, and (3) certain holding period requirements are met. Our ADSs are listed on the New York Stock Exchange, which is an established securities market in the United States, and are expected to be readily tradable. There can be no assurance, however, that our ADSs will continue to be considered readily tradable on an established securities market in later years.
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In the event that we are deemed to be a PRC resident enterprise under the PRC Enterprise Income Tax Law (see “Item 10. Additional Information-E. Taxation-People’s Republic of China Taxation”), we may be eligible for the benefits of the United States-PRC income tax treaty. If we are eligible for such benefits, dividends we pay on our Class A ordinary shares, regardless of whether such shares are represented by the ADSs, would be eligible for the reduced rates of taxation described in the preceding paragraph (subject to clauses (2) and (3) of such paragraph). U.S. Holders are urged to consult their tax advisors regarding the availability of the reduced tax rate on dividends in their particular circumstances. Dividends will generally be treated as income from foreign sources for U.S. foreign tax credit purposes and will generally constitute passive category income. Depending on the U.S. Holder’s individual facts and circumstances, a U.S. Holder may be eligible, subject to a number of complex limitations, to claim a foreign tax credit in respect of any non-refundable foreign withholding taxes imposed on dividends received on our ADSs or Class A ordinary shares. A U.S. Holder who does not elect to claim a foreign tax credit for foreign tax withheld may instead claim a deduction, for U.S. federal income tax purposes, in respect of such withholding, but only for a year in which such holder elects to do so for all creditable foreign income taxes. The rules governing the foreign tax credit are complex and their outcome depends in large part on the U.S. Holder’s individual facts and circumstances. Accordingly, U.S. Holders are urged to consult their tax advisors regarding the availability of the foreign tax credit under their particular circumstances.
Sale or Other Disposition
A U.S. Holder will generally recognize capital gain or loss upon the sale or other disposition of ADSs or Class A ordinary shares in an amount equal to the difference between the amount realized upon the disposition and the holder’s adjusted tax basis in such ADSs or Class A ordinary shares. Any capital gain or loss will be long-term if the ADSs or Class A ordinary shares have been held for more than one year and will generally be U.S.-source gain or loss for U.S. foreign tax credit purposes. In the event that gain from the disposition of the ADSs or Class A ordinary shares is subject to tax in the PRC, a U.S. Holder may elect to treat such gain as PRC source gain under the United States-PRC income tax treaty (assuming such holder is eligible for benefits under that treaty). If a U.S. Holder does not make this election, such holder may not be able to credit any PRC tax imposed upon the disposition of the ADSs or Class A ordinary shares unless such holder has other income from foreign sources in the appropriate category for purposes of the foreign tax credit rules. U.S. Holders are urged to consult their tax advisors regarding the tax consequences if a foreign tax is imposed on a disposition of our ADSs or Class A ordinary shares, including the availability of the foreign tax credit under their particular circumstances. The deductibility of a capital loss may be subject to limitations.
Passive Foreign Investment Company Rules
If we are classified as a PFIC for any taxable year during which a U.S. Holder holds our ADSs or Class A ordinary shares, and unless the U.S. Holder makes a mark-to-market election (as described below), the U.S. Holder will generally be subject to special tax rules on (i) any excess distribution that we make to the U.S. Holder (which generally means any distribution paid during a taxable year to a U.S. Holder that is greater than 125 percent of the average annual distributions paid in the three preceding taxable years or, if shorter, the U.S. Holder’s holding period for the ADSs or Class A ordinary shares), and (ii) any gain realized on the sale or other disposition of ADSs or Class A ordinary shares. Under the PFIC rules:
| ● | the excess distribution or gain will be allocated ratably over the U.S. Holder’s holding period for the ADSs or Class A ordinary shares; |
| ● | the amount allocated to the current taxable year and any taxable years in the U.S. Holder’s holding period prior to the first taxable year in which we are classified as a PFIC (each, a “pre-PFIC year”), will be taxable as ordinary income; |
| ● | the amount allocated to each prior taxable year, other than a pre-PFIC year, will be subject to tax at the highest tax rate in effect for individuals or corporations, as appropriate, for that year; and |
| ● | the interest charge generally applicable to underpayments of tax will be imposed on the tax attributable to each prior taxable year, other than a pre-PFIC year. |
If we are a PFIC for any taxable year during which a U.S. Holder holds our ADSs or Class A ordinary shares and any of our subsidiaries, variable interest entities or any of the subsidiaries of our variable interest entities is also a PFIC, such U.S. Holder would be treated as owning a proportionate amount (by value) of the shares of the lower-tier PFIC for purposes of the application of these rules. U.S. Holders are urged to consult their tax advisors regarding the application of the PFIC rules to any of our subsidiaries, variable interest entities or any of the subsidiaries of our variable interest entities.
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As an alternative to the foregoing rules, a U.S. Holder of “marketable stock” in a PFIC may make a mark-to-market election with respect to such stock, provided that such stock is regularly traded. Our ADSs are expected to qualify as being regularly traded, but no assurances may be given in this regard. If a U.S. Holder makes this election, the holder will generally (i) include as ordinary income for each taxable year that we are a PFIC the excess, if any, of the fair market value of ADSs held at the end of the taxable year over the adjusted tax basis of such ADSs and (ii) deduct as an ordinary loss the excess, if any, of the adjusted tax basis of the ADSs over the fair market value of such ADSs held at the end of the taxable year, but such deduction will only be allowed to the extent of the net amount previously included in income as a result of the mark-to-market election. The U.S. Holder’s adjusted tax basis in the ADSs would be adjusted to reflect any income or loss resulting from the mark-to-market election. If a U.S. Holder makes a mark-to-market election in respect of a corporation classified as a PFIC and such corporation ceases to be classified as a PFIC, the holder will not be required to take into account the gain or loss described above during any period that such corporation is not classified as a PFIC. If a U.S. Holder makes a mark-to-market election, any gain such U.S. Holder recognizes upon the sale or other disposition of our ADSs in a year when we are a PFIC will be treated as ordinary income and any loss will be treated as ordinary loss, but such loss will only be treated as ordinary loss to the extent of the net amount previously included in income as a result of the mark-to-market election.
Because a mark-to-market election cannot be made for any lower-tier PFICs that we may own, a U.S. Holder may continue to be subject to the PFIC rules with respect to such U.S. Holder’s indirect interest in any investments held by us that are treated as an equity interest in a PFIC for U.S. federal income tax purposes.
We do not intend to provide information necessary for U.S. Holders to make qualified electing fund elections which, if available, would result in tax treatment different from (and generally less adverse than) the general tax treatment for PFICs described above.
If a U.S. Holder owns our ADSs or Class A ordinary shares during any taxable year that we are a PFIC, the holder must generally file an annual IRS Form 8621. You should consult your tax advisors regarding the U.S. federal income tax consequences of owning and disposing of our ADSs or Class A ordinary shares if we are or become a PFIC.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
We are subject to the periodic reporting and other informational requirements of the Exchange Act. Under the Exchange Act, we are required to file reports and other information with the SEC. Specifically, we are required to file annually a Form 20-F no later than four months after the close of each fiscal year. Copies of reports and other information, when so filed, may be inspected without charge and may be obtained at prescribed rates at the public reference facilities maintained by the SEC at 100 F Street, N.E., Room 1580, Washington, D.C. 20549.
The public may obtain information regarding the Washington, D.C. Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a web site at www.sec.gov that contains reports, proxy and information statements, and other information regarding registrants that make electronic filings with the SEC using its EDGAR system.
As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we will not be required under the Exchange Act to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act. However, we will furnish Deutsche Bank Trust Company Americas, the depositary of our ADSs, with our annual reports, which will include a review of operations and annual audited consolidated financial statements prepared in conformity with U.S. GAAP, and all notices of shareholders’ meetings and other reports and communications that are made generally available to our shareholders. The depositary will make such notices, reports and communications available to holders of ADSs and, upon our request, will mail to all record holders of ADSs the information contained in any notice of a shareholders’ meeting received by the depositary from us.
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I. Subsidiary Information
For a listing of our subsidiaries, see “Item 4. Information on the Company—A. History and Development of the Company.”
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Inflation
To date, inflation in China has not materially impacted our results of operations. According to Wind Information (www.wind.com.cn), the year-over-year percent changes in the consumer price index for November 2022 was 2.02%. According to the National Bureau of Statistics of China, the year-over-year percent changes in the consumer price index for December 2021 was 0.9%. Although we have not been materially affected by inflation in the past, we can provide no assurance that we will not be affected by higher rates of inflation in China in the future.
Market Risks
Foreign Exchange Risk
Substantially all of our revenues and expenses are denominated in U.S. dollars and Hong Kong dollars and our expenses are denominated in U.S. dollars, and Hong Kong dollars. To date, we have not used any derivative financial instruments to hedge exposure to such risk. Financial instruments held for proprietary trading are denominated in Hong Kong dollars, and U.S. dollars. Although in general our exposure to foreign exchange risks should be limited, the value of your investment in our ADSs will be affected by the exchange rate between the U.S. dollar and Hong Kong dollar. We may seek to reduce the currency risk by entering into foreign currency instruments.
To the extent we need to convert U.S. dollars into Hong Kong dollars for our operations, appreciation of Hong Kong dollar against the U.S. dollar would reduce the amount in Hong Kong dollars we receive from the conversion. Conversely, if we decide to convert Hong Kong dollars into U.S. dollars for the purpose of making payments for dividends on our ADSs, or for other business purposes, appreciation of the U.S. dollar against the Hong Kong dollar would reduce the U.S. dollar amounts available to us.
Interest Rate Risk
Our exposure to interest rate risk primarily relates to the interest income generated by excess cash, which is mostly held in interest-bearing bank deposits and bank loans that bear floating interest rates. In March 2019, we entered into a US$139 million term facility agreement with a group of arrangers led by UBS AG, Singapore Branch. Pursuant to the agreement, we were entitled to borrow US$139 million term facility with a floating interest rate of LIBOR+2.7%. In April 2020, we entered into an €10 million term facility agreement with China Everbright Bank, Seoul Branch. Pursuant to the agreement, we were entitled to borrow €10 million term facility with a floating interest rate of EURIBOR+1.7%. The interest rate risk may result from many factors, including government monetary and tax policies, domestic and international economic and political considerations, and other factors that are beyond our control. We may incur additional loans or other financing facilities in the future. The objective of interest rate risk management is to minimize financial costs and uncertainties associated with interest rate changes. We strive to effectively manage our interest rate risk by periodic monitoring and responding to risk factors on a timely basis, improve the structure of long-term and short-term borrowings and maintain the appropriate balance between loans with floating interest rates and fixed interest rates.
We are subject to interest rate sensitivity on our outstanding convertible notes and loans. We account for our convertible notes on fair value basis and convertible loans on an amortized cost basis. Also, because convertible notes and loans we have issued and extended either bear interest at a fixed rate or bear no interest, we have not incurred financial statement impact resulting from changes in interest rates. However, changes in market interest rates impact the fair value of the convertible notes and loans along with other variables such as our credit spreads and the market price and volatility of our ADSs and ordinary shares. Increases in market interest rates would result in a decrease in the fair value of our outstanding convertible notes and loans and decreases in market interest rates would result in an increase in the fair value of our outstanding convertible notes and loans. For information on the maturities and other contractual terms of our convertible notes and loans, see “Item 4. Information on the Company-A. History and Development of the Company” and “Item 7. Major Shareholders and Related Party Transactions-B. Related Party Transactions-Transaction with Shareholders and Affiliates.”
With regard to interest rate sensitivity on our loans, we present the sensitivity analysis below based on the exposure to interest rates for interest bearing loans with variable interest rates as of August 31, 2022. The analysis is prepared assuming that those balances outstanding as of August 31, 2022 were outstanding for the whole financial year. A 1.0% increase or decrease which represents the management’s assessment of the reasonably possible change in interest rates is used. Assuming no change in the outstanding balance of our existing interest bearing loans balances with floating interest rates as of August 31, 2022, a 1.0% increase or decrease in each applicable interest rate would add or deduct RMB13.8 million (US$2.0 million) to our interest expense for the fiscal year ended August 31, 2022.
In addition, we may from time to time invest in interest-earning instruments. Investments in both fixed rate and floating rate interest-earning instruments carry certain interest rate risk associated with our investment return. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall.
We have not been exposed to material risks due to changes in interest rates, and we have not used any derivative financial instruments to manage our interest risk exposure. However, our future interest income may fall short of expectations due to changes in market interest rates.
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ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
A. Debt Securities
Not applicable.
B. Warrants and Rights
Not applicable.
C. Other Securities
Not applicable.
D. American Depositary Shares
Fees and Charges Our ADS Holders May Have to Pay
As an ADS holder, you will be required to pay the following service fees to the depositary bank and certain taxes and governmental charges (in addition to any applicable fees, expenses, taxes and other governmental charges payable on the deposited securities represented by any of your ADSs):
| Service | Fees | |
| To any person to which ADSs are issued or to any person to which a distribution is made in respect of ADS distributions pursuant to stock dividends or other free distributions of stock, bonus distributions, stock splits or other distributions (except where converted to cash) | Up to US$0.05 per ADS issued | |
| Cancellation of ADSs, including the case of termination of the deposit agreement | Up to US$0.05 per ADS cancelled | |
| Distribution of cash dividends | Up to US$0.05 per ADS held | |
| Distribution of cash entitlements (other than cash dividends) and/or cash proceeds from the sale of rights, securities and other entitlements | Up to US$0.05 per ADS held | |
| Distribution of ADSs pursuant to exercise of rights | Up to US$0.05 per ADS held | |
| Distribution of securities other than ADSs or rights to purchase additional ADSs | Up to US$0.05 per ADS held | |
| Depositary services | Up to US$0.05 per ADS held on the applicable record date(s) established by the depositary bank |
As an ADS holder, you will also be responsible to pay certain fees and expenses incurred by the depositary bank and certain taxes and governmental charges (in addition to any applicable fees, expenses, taxes and other governmental charges payable on the deposited securities represented by any of your ADSs) such as:
| ● | Fees for the transfer and registration of Class A ordinary shares charged by the registrar and transfer agent for the Class A ordinary shares in the Cayman Islands (i.e., upon deposit and withdrawal of Class A ordinary shares). |
| ● | Expenses incurred for converting foreign currency into U.S. dollars. |
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| ● | Expenses for cable, telex and fax transmissions and for delivery of securities. |
| ● | Taxes and duties upon the transfer of securities, including any applicable stamp duties, any stock transfer charges or withholding taxes (i.e., when Class A ordinary shares are deposited or withdrawn from deposit). |
| ● | Fees and expenses incurred in connection with the delivery or servicing of Class A ordinary shares on deposit. |
| ● | Fees and expenses incurred in connection with complying with exchange control regulations and other regulatory requirements applicable to Class A ordinary shares, deposited securities, ADSs and ADRs. |
| ● | Any applicable fees and penalties thereon. |
The depositary fees payable upon the issuance and cancellation of ADSs are typically paid to the depositary bank by the brokers (on behalf of their clients) receiving the newly issued ADSs from the depositary bank and by the brokers (on behalf of their clients) delivering the ADSs to the depositary bank for cancellation. The brokers in turn charge these fees to their clients. Depositary fees payable in connection with distributions of cash or securities to ADS holders and the depositary services fee are charged by the depositary bank to the holders of record of ADSs as of the applicable ADS record date.
The depositary fees payable for cash distributions are generally deducted from the cash being distributed or by selling a portion of distributable property to pay the fees. In the case of distributions other than cash (i.e., share dividends, rights), the depositary bank charges the applicable fee to the ADS record date holders concurrent with the distribution. In the case of ADSs registered in the name of the investor (whether certificated or uncertificated in direct registration), the depositary bank sends invoices to the applicable record date ADS holders. In the case of ADSs held in brokerage and custodian accounts (via DTC), the depositary bank generally collects its fees through the systems provided by DTC (whose nominee is the registered holder of the ADSs held in DTC) from the brokers and custodians holding ADSs in their DTC accounts. The brokers and custodians who hold their clients’ ADSs in DTC accounts in turn charge their clients’ accounts the amount of the fees paid to the depositary banks.
In the event of refusal to pay the depositary fees, the depositary bank may, under the terms of the deposit agreement, refuse the requested service until payment is received or may set off the amount of the depositary fees from any distribution to be made to the ADS holder.
The depositary may make payments to us or reimburse us for certain costs and expenses, by making available a portion of the ADS fees collected in respect of the ADR program or otherwise, upon such terms and conditions as we and the depositary bank agree from time to time.
Fees and Other Payments Made by the Depositary to US
The depositary anticipates to make payments to us or reimburse us for certain costs and expenses, by making available a portion of the ADS fees collected in respect of the ADR program or otherwise, upon such terms and conditions as we and the depositary bank agree from time to time. We did not receive such reimbursement from the depositary in the fiscal year ended August 31, 2022.
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PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
Material Modifications to the Rights of Security Holders
See “Item 10. Additional Information-B. Memorandum and Articles of Association-Ordinary Shares” for a description of the rights of securities holders, which remain unchanged.
Use of Proceeds
As of August 31, 2019, we have used up the net proceeds from our initial public offering.
ITEM 15. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, we carried out an evaluation of the effectiveness of our disclosure controls and procedures, which is defined in Rules 13a-15(e) of the Exchange Act, as of August 31, 2022. Based upon that evaluation, our management has concluded that, due to the material weakness identified below, our disclosure controls and procedures were not effective in ensuring that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act was recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with Generally Accepted Accounting Principles (GAAP) in the United States of America and includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of our company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with GAAP, and that receipts and expenditures of our company are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of the unauthorized acquisition, use or disposition of our company’s assets that could have a material effect on the consolidated financial statements.
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Because of its inherent limitations, internal control over financial reporting may not prevent or detect all potential misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As required by Section 404 of the Sarbanes-Oxley Act of 2002 and related rules as promulgated by the Securities and Exchange Commission, our management, including our chief executive officer and chief financial officer, assessed the effectiveness of internal control over financial reporting as of August 31, 2022 using the criteria set forth in the report “Internal Control—Integrated Framework (2013)” published by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, the management concluded that our internal control over financial reporting was ineffective as of August 31, 2022 because of the material weakness described below.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our company’s annual consolidated financial statements will not be prevented or detected on a timely basis. The material weakness identified relate to (i) a lack of accounting staff and resources with appropriate knowledge of generally accepted accounting principles in the United States (“U.S. GAAP”) and SEC reporting and compliance requirements; (ii) a lack of sufficient documented financial closing policies and procedures; (iii) lack of risk assessment in accordance with the requirement of COSO 2013 framework; (iv) a lack of an effective review process by the accounting manager which led to material audit adjustments to the financial statements; and (v) Leaving of many management personnel.
To remedy our identified material weakness subsequent to August 31, 2022, we plan to undertake steps to strengthen our internal control over financial reporting, including (i) hiring more qualified accounting personnel with relevant U.S. GAAP and SEC reporting experience and qualifications to strengthen the financial reporting function and to set up a financial and system control framework; (ii) implementing regular and continuous U.S. GAAP accounting and financial reporting training programs for our accounting and financial reporting personnel; (iii) setting up an internal audit function as well as engaging an external consulting firm to assist us with assessment of Sarbanes-Oxley compliance requirements and improvement of overall internal control, (iv) hiring professional management personnel. However, we cannot assure you that we will remediate our material weaknesses in a timely manner, or at all. See “Item 3. Key Information—Risk Factors—Risks Relating to Our Business—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 Ordinary Shares may be materially and adversely affected.”
Attestation Report of the Registered Public Accounting Firm
This annual report on Form 20-F does not include an attestation report of our registered public accounting firm due to rules of the SEC where domestic and foreign registrants that are non-accelerated filers, which we are, and “emerging growth companies” which we also are, are not required to provide the auditor attestation report.
Changes in Internal Control
Other than as described above, there were no changes in our internal controls over financial reporting that occurred during the period covered by this annual report on Form 20-F that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 16. [RESERVED]
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
See “Item 6. Directors, Senior Management and Employees-C. Board Practices.”
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ITEM 16B. CODE OF ETHICS
Our board of directors adopted a code of business conduct and ethics that applies to our directors, officers, employees and advisors in March 2018. We have posted a copy of our code of business conduct and ethics on our website at http://www.aiumeta.com/en/Investors.html
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the aggregate fees by categories specified below in connection with certain professional services rendered and billed by OneStop Assurance PAC, our independent registered public accounting firms, for the periods indicated. We did not pay any other fees to our independent registered public accounting firms during the periods indicated below.
OneStop Assurance PAC
| Year Ended August 31, | ||||||||
| 2021 | 2022 | |||||||
| (in US$ thousands) | ||||||||
| Audit fees (1) | 380 | 350 | ||||||
| All other fees (2) | - | - | ||||||
| Tax fees (3) | - | - | ||||||
| (1) | “Audit fees” means the aggregate fees billed in each of the fiscal years listed for professional services rendered by our principal auditors for the audit of our annual financial statements, net of out-of-pocket expenses incurred and taxes. |
| (2) | “All other fees” represents the aggregate fees billed listed for services rendered by our principal auditors associated with certain due diligence project and review of our financial statements and not reported under “Audit fees” in the fiscal year of 2021 and 2022, respectively, net of out-of-pocket expenses incurred and taxes. |
| (3) | “Tax fees” represents the aggregate fees billed listed for the professional tax services rendered by our principal auditors. |
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
On October 5, 2018, our board of directors authorized a share repurchase program, under which we may purchase up to US$30.0 million worth of our shares over the next 12 months from October 5, 2018. The US$30.0 share repurchase program was publicly announced on October 5, 2018. This share repurchase program expired on October 4, 2019.
On April 29, 2019, our board of directors authorized a share repurchase program, under which we may purchase up to US$50.0 million worth of our shares over the next 12 months from April 29, 2019 through April 28, 2020. The US$50.0 share repurchase program was publicly announced on April 29, 2019.
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The table below summarizes the repurchases we made in the periods indicated.
| Month | Total Number of Ordinary Shares Purchased | Average Price Paid Per Ordinary Share (US$) | Total Number of Ordinary Shares Purchased as Part of Share Repurchase Program | Approximate Dollar Value of Ordinary Shares that May Yet Be Purchased Under Share Repurchase Program (US$, in millions) | ||||||||||||
| September 2019 | - | - | - | 55.01 | ||||||||||||
| October 2019 | - | - | - | 55.01 | ||||||||||||
| November 2019 | - | - | - | 55.01 | ||||||||||||
| December 2019 | - | - | - | 55.01 | ||||||||||||
| January 2020 | - | - | - | 55.01 | ||||||||||||
| February 2020 | 5,513,240 | 0.14 | 5,513,240 | 54.24 | ||||||||||||
| March 2020 | 48,793,800 | 0.13 | 48,793,800 | 47.79 | ||||||||||||
| April 2020 | - | - | - | 47.79 | ||||||||||||
| May 2020 | 22,633,560 | 0.12 | 22,633,560 | 45.01 | ||||||||||||
| June 2020 | - | - | - | 45.01 | ||||||||||||
| July 2020 | - | - | - | 45.01 | ||||||||||||
| August 2020 | - | - | - | 45.01 | ||||||||||||
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
Not applicable.
ITEM 16G. CORPORATE GOVERNANCE
As a Cayman Islands company listed on the NYSE, we are subject to the NYSE corporate governance listing standards. However, NYSE 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 NYSE corporate governance listing standards. Under the New York Stock Exchange Listed Company Manual, or the NYSE Manual, U.S. domestic listed companies are required to have a majority independent board, which is not required under the Companies Act of the Cayman Islands. Currently, our board of directors is composed of five members, three of whom are independent directors. In addition, the NYSE Manual requires U.S. domestic listed companies to have a compensation committee and a nominating/corporate governance committee, each composed entirely of independent directors, which are not required under the Companies Act of the Cayman Islands. Currently, our compensation committee is composed of three members, all of whom are independent directors. Our nominating and corporate governance committee is composed of three members, all of whom are independent directors. In addition, the NYSE Manual requires shareholder approval for certain matters, including (i) requiring that shareholders must be given the opportunity to vote on all equity compensation plans and material revisions to those plans, and (ii) requiring that shareholder approval is required prior to the issuance of common stock, or of securities convertible into or exercisable for common stock in certain transaction or series of related transactions, which is not required under the Cayman Islands law. We intend to comply with the requirements of Cayman Islands law only in determining whether shareholder approval is required.
As a result of our choice to follow home country practice in those matters, our shareholders may be afforded less protection than they otherwise would under the NYSE corporate governance listing standards applicable to U.S. domestic issuers. See “Item 3. Key Information-D. Risk Factors- Risks Related to Our ADSs-As a company incorporated in the Cayman Islands, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from the New York Stock Exchange corporate governance listing standards; these practices may afford less protection to shareholders than they would enjoy if we complied fully with the NYSE corporate governance listing standards “and”-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 U.S. domestic public companies.”
ITEM 16H. MINE SAFETY DISCLOSURE
Not applicable.
ITEM 16I. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
81
PART III
ITEM 17. FINANCIAL STATEMENTS
We have elected to provide financial statements pursuant to Item 18.
ITEM 18. FINANCIAL STATEMENTS
The consolidated financial statements of Meta Data Limited, its subsidiaries and its consolidated affiliated entities are included at the end of this annual report.
ITEM 19. EXHIBITS
| * | Filed with this annual report on Form 20-F |
| ** | Furnished with this annual report on Form 20-F |
82
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
| Meta Data Limited | |||
| By: | /s/ Xiaoming Li | ||
| Name: | Xiaoming Li | ||
| Title: | Chief Executive Officer | ||
Date: December 30, 2022 |
|||
83
META DATA LIMITED
Index to Consolidated Financial Statements
F-1
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of
Meta Data Limited
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Meta Data Limited (the “Company”) and subsidiaries as of August 31, 2022 and 2021, the related consolidated statements of loss, comprehensive loss, shareholders’ equity/(deficit) and cash flows for each of the three years in the period ended August 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial positions of the Company at August 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended August 31, 2022, in conformity with U.S. generally accepted accounting principles.
Going Concern Uncertainty
The accompanying consolidated financial statements have been prepared on a basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has suffered recurring losses from operations of RMB 1.2 billion, is in default of its debt obligations and as of August 31, 2022 was in net liability and shareholders’ deficit position of RMB 5.4 billion. As shown in the accompanying consolidated financial statements as of August 31, 2022, the Company had net cash decreased of RMB57 million and RMB961 million for the years ended August 31, 2022 and 2021, respectively. Between July 2021 and September 2021, the General Office of Ministry of Education issued a series of rules, regulations, notices and circulars on further alleviating the burden of homework and after-school tutoring for students in compulsory education. In order to comply with all applicable rules and regulations in providing educational services, the Company ceased all the domestic education programs and learning centers operations in China on October 12, 2021. The aforementioned matters raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of such uncertainty.
As of August 31, 2022, the Company had cash balance of RMB202 million and restricted cash of nil (classified as discontinued operations). The Company has historically met its cash needs through a combination of cash flows from operating activities, proceeds from bank loans and proceeds from disposal of short-term investments. The cash requirements of the Company are generally for operating activities, repayments of bank loans, purchase of property and equipment and excess cash was used in the purchase of short-term and long-term investments.
In evaluating if there is substantial doubt about the ability to continue as a going concern, the Company is trying to alleviate the going concern risk through (1) equity or debt financing, (2) increasing cash generated from new business model in artificial intelligent education service and artificial intelligent universe IAAS service, and (3) debt divestiture, to meet its anticipated working capital requirements for at least the next 12 months. The Company may, however, need additional capital in the future to fund its further expansion. If the Company determines that its cash requirements exceed the amount of cash and cash equivalents it has on hand at the time, the Company may seek to issue equity or debt securities or obtain credit facilities. The issuance of additional equity would result in dilution to shareholders of the Company. Management’s plans in regard to these matters are described in Note 2(b) to the consolidated financial statements.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/
We have served as the Company’s auditor since 2022.
December 30, 2022
PCAOB ID#:
F-2
META DATA LIMITED
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares and per share data)
| As of August 31, | ||||||||||||||
| Notes | 2021 | 2022 | 2022 | |||||||||||
| RMB | RMB | US$ | ||||||||||||
| ASSETS | ||||||||||||||
| Current assets: | ||||||||||||||
| Cash and cash equivalents | 5 | |||||||||||||
| Restricted cash | 5 | |||||||||||||
| Amount due from a related party | ||||||||||||||
| Short-term investments | 6 | |||||||||||||
| Prepayments and other current assets | ||||||||||||||
| Current assets from discontinued operations | 21 | |||||||||||||
| Total current assets | ||||||||||||||
| Non-current assets: | ||||||||||||||
| Property and equipment, net | ||||||||||||||
| Intangible assets, net | ||||||||||||||
| Long-term investments | ||||||||||||||
| Goodwill | ||||||||||||||
| Deferred tax assets | ||||||||||||||
| Amount due from a related party | ||||||||||||||
| Operating lease right-of-use assets | ||||||||||||||
| Other non-current assets | ||||||||||||||
| Non-current assets from discontinued operations | 21 | |||||||||||||
| Total non-current assets | ||||||||||||||
| Total assets | ||||||||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||
| Current liabilities: | ||||||||||||||
| Accrued expenses and other current liabilities | 7 | |||||||||||||
| Loan payables | 12 | |||||||||||||
| Income taxes payable | ||||||||||||||
| Prepayments from customers | ||||||||||||||
| Amounts due to related parties | ||||||||||||||
| Short-term loans | 11 | |||||||||||||
| Operating lease liabilities, current portion | ||||||||||||||
| Current liabilities from discontinued operations | ||||||||||||||
| Long-term loans, current portion | 11 | |||||||||||||
| Total current liabilities | ||||||||||||||
| Non-current liabilities: | ||||||||||||||
| Deferred tax liabilities | ||||||||||||||
| Long-term loans | 11 | |||||||||||||
| Convertible senior notes | 13 | |||||||||||||
| Unrecognized tax benefit | ||||||||||||||
| Operating lease liabilities, non-current portion | ||||||||||||||
| Other non-current liabilities | ||||||||||||||
| Non-current liabilities from discontinued operations | 21 | |||||||||||||
| Total non-current liabilities | ||||||||||||||
| Total liabilities | ||||||||||||||
| Commitments and contingencies | ||||||||||||||
| Shareholders’ equity: | ||||||||||||||
| Class A ordinary shares (US$ |
10 | |||||||||||||
| 10 | ||||||||||||||
| Treasury stock | ( |
) | ||||||||||||
| Additional paid-in capital | 8 | |||||||||||||
| Statutory reserves | 9 | |||||||||||||
| Accumulated deficit | ( |
) | ( |
) | ( |
) | ||||||||
| Accumulated other comprehensive income | 15 | |||||||||||||
| Total Meta Data Limited shareholders’ equity | ( |
) | ( |
) | ( |
) | ||||||||
| Non-controlling interests | ( |
) | ( |
) | ||||||||||
| Total shareholders’ equity | ( |
) | ( |
) | ( |
) | ||||||||
| Total liabilities, non-controlling interests and shareholders’ equity | ||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-3
META DATA LIMITED
CONSOLIDATED STATEMENTS OF INCOME/(LOSS)
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares and per share data)
| For the years ended August 31, | ||||||||||||||||||
| Notes | 2020 | 2021 | 2022 | 2022 | ||||||||||||||
| RMB | RMB | RMB | US$ | |||||||||||||||
| Net revenues | 4 | |||||||||||||||||
| Cost of revenues | ( | ) | ( | ) | ||||||||||||||
| Gross profit | ||||||||||||||||||
| Operating expenses: | ||||||||||||||||||
| Selling and marketing | ||||||||||||||||||
| General and administrative | ||||||||||||||||||
| Total operating expenses | ||||||||||||||||||
| Operating loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||
| Interest income | ||||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||
| Other income | ||||||||||||||||||
| Other expense | ||||||||||||||||||
| Foreign exchange gain/(loss) | ( | ) | ||||||||||||||||
| Loss before income tax and share of net loss from equity investees | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||
| Income tax (expense)/benefit | 10 | |||||||||||||||||
| Loss before share of net loss from equity investees | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||
| Share of net loss from equity investees | ||||||||||||||||||
| Net loss from continuing operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||
| Discontinued Operations | ||||||||||||||||||
| Net loss from discontinued operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||
| Add: Net loss attributable to non-controlling interests | ||||||||||||||||||
| Net loss attributable to Meta Data Limited’s shareholders | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||
| Net loss attributable to ordinary shareholders of Meta Data Limited | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||
| Basic loss per share: | ||||||||||||||||||
| Continuing operations | 14 | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||
| Discontinuing operations | 14 | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||
| Diluted loss per share: | ||||||||||||||||||
| Continuing operations | 14 | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||
| Discontinuing operations | 14 | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||
| Shares used in loss per share computation (in millions of shares): | ||||||||||||||||||
| Basic | 14 | |||||||||||||||||
| Diluted | 14 | |||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-4
META DATA LIMITED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares and per share data)
| For the years ended August 31, | ||||||||||||||||
| 2020 | 2021 | 2022 | 2022 | |||||||||||||
| RMB | RMB | RMB | US$ | |||||||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other comprehensive loss: | ||||||||||||||||
| Unrealized gain on available-for-sale investments, net of tax | ( | ) | ||||||||||||||
| Foreign currency translation adjustment | ( | ) | ( | ) | ||||||||||||
| Comprehensive loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Add: Comprehensive loss attributable to non-controlling interests | ||||||||||||||||
| Comprehensive loss attributable to Meta Data Limited’s shareholders | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-5
META DATA LIMITED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY/(DEFICIT)
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares and per share data)
| Number of | Additional | Accumulated other | Meta
Data Limited | Non- | Total | |||||||||||||||||||||||||||||||||||
| ordinary | Ordinary | paid-in | Treasury | Statutory | Accumulated | comprehensive | shareholders’ | controlling | shareholders’ | |||||||||||||||||||||||||||||||
| shares | shares | capital | Stock | reserves | deficit | income | equity | interests | equity | |||||||||||||||||||||||||||||||
| RMB | RMB | RMB | RMB | RMB | RMB | RMB | RMB | RMB | ||||||||||||||||||||||||||||||||
| Balance as of August 31, 2019 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Comprehensive income | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||
| Appropriation of statutory reserves | - | ( | ) | |||||||||||||||||||||||||||||||||||||
| Share repurchase (Note 10) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Exercise of employee stock options | ||||||||||||||||||||||||||||||||||||||||
| Acquisition of subsidiaries | - | |||||||||||||||||||||||||||||||||||||||
| Disposal of interests in subsidiaries | - | ( | ) | - | ||||||||||||||||||||||||||||||||||||
| Disposal of subsidiaries | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||
| Acquisition of noncontrolling interests | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||
| Distribution to noncontrolling interests | - | - | - | - | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Capital contribution | - | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation (Note 8) | - | |||||||||||||||||||||||||||||||||||||||
| Balance as of August 31, 2020 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
F-6
META DATA LIMITED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY/(DEFICIT) (CONTINUED)
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares and per share data)
| Accumulated | Meta Data | |||||||||||||||||||||||||||||||||||||||
| Number of | Additional | other | Limited | Non- | Total | |||||||||||||||||||||||||||||||||||
| ordinary | Ordinary | paid-in | Treasury | Statutory | Accumulated | comprehensive | shareholders’ | controlling | shareholders’ | |||||||||||||||||||||||||||||||
| shares | shares | capital | Stock | reserves | deficit | income | equity | interests | equity | |||||||||||||||||||||||||||||||
| RMB | RMB | RMB | RMB | RMB | RMB | RMB | RMB | RMB | ||||||||||||||||||||||||||||||||
| Balance as of August 31, 2020 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Comprehensive loss | - | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Appropriation of statutory reserves | - | |||||||||||||||||||||||||||||||||||||||
| Exercise of employee stock options | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Share-based compensation (Note 8) | - | |||||||||||||||||||||||||||||||||||||||
| Balance as of August 31, 2021 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
F-7
META DATA LIMITED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY/(DEFICIT) (CONTINUED)
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares and per share data)
| Accumulated | Meta Data | |||||||||||||||||||||||||||||||||||||||
| Number of | Additional | other | Limited | Non- | Total | |||||||||||||||||||||||||||||||||||
| ordinary | Ordinary | paid-in | Treasury | Statutory | Accumulated | comprehensive | shareholders’ | controlling | shareholders’ | |||||||||||||||||||||||||||||||
| shares | shares | capital | Stock | reserves | deficit | income | equity | interests | equity | |||||||||||||||||||||||||||||||
| RMB | RMB | RMB | RMB | RMB | RMB | RMB | RMB | RMB | ||||||||||||||||||||||||||||||||
| Balance as of August 31, 2021 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Comprehensive loss | - | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Exercise of employee stock options | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Disposal of subsidiaries | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Capital contribution | ||||||||||||||||||||||||||||||||||||||||
| Share-based compensation (Note 8) | - | |||||||||||||||||||||||||||||||||||||||
| Balance as of August 31, 2022 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Balance as of August 31, 2022 in US$ | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-8
META DATA LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares and per share data)
| For the years ended August 31, | ||||||||||||||||
| 2020 | 2021 | 2022 | 2022 | |||||||||||||
| RMB | RMB | RMB | US$ | |||||||||||||
| Cash flows from operating activities | ||||||||||||||||
| Net loss | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Net loss from discontinued operations | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Net loss from continuing operation | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||||||||||
| Share-based compensation | ||||||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||||
| Accrued expenses and other current liabilities | ||||||||||||||||
| Net cash used in operating activities from continuing operations | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Net cash provided by (used in) operating activities from discontinued operations | ( |
) | ( |
) | ||||||||||||
| Net cash provided by (used in) operating activities | ( |
) | ( |
) | ||||||||||||
| Cash flows from investing activities | ||||||||||||||||
| Purchase of short-term investment | ( |
) | - | |||||||||||||
| Proceeds from disposal of short-term investments | ||||||||||||||||
| Net inflow related to deconsolidation of subsidiaries | - | - | ||||||||||||||
| Amounts due from third parties | ||||||||||||||||
| Net cash (used in) provided by investing activities from continuing operations | ( |
) | ||||||||||||||
| Net cash (used in) provided by investing activities from discontinued operations | ( |
) | ( |
) | ||||||||||||
| Net cash (used in) provided by investing activities | ( |
) | ( |
) | ||||||||||||
| Cash flows from financing activities | ||||||||||||||||
| Repayment of convertible note | ( |
) | ||||||||||||||
| Proceeds from issuance of common shares | ||||||||||||||||
| Repayment of third-party loans | ||||||||||||||||
| Repayment of bank loans | ( |
) | ( |
) | ||||||||||||
| Proceeds from exercise of share options | ||||||||||||||||
| Share repurchase | ( |
) | ||||||||||||||
| Net cash (used in) provided by financing activities from continuing operations | ( |
) | ( |
) | ||||||||||||
| Net cash provided by (used in) financing activities from discontinued operations | ( |
) | ( |
) | ( |
) | ||||||||||
| Net cash provided by (used in) financing activities | ( |
) | ||||||||||||||
| Effect of exchange rate changes | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Net decrease in cash and cash equivalents and restricted cash | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Cash and cash equivalents and restricted cash, at the beginning of year | ||||||||||||||||
| Cash and cash equivalents and restricted cash, at the end of year | ||||||||||||||||
| Less: Cash and cash equivalents and restricted cash of discontinued operations, at the end of year | ||||||||||||||||
| Cash and cash equivalents and restricted cash of continuing operations, at the end of year | ||||||||||||||||
| Supplemental disclosure of cash flow information: | ||||||||||||||||
| Interest paid | ||||||||||||||||
| Income tax paid | ||||||||||||||||
| Supplemental disclosure of non-cash activities: | ||||||||||||||||
| Operating lease liabilities arising from obtaining right-of-use assets | ||||||||||||||||
| Supplemental disclosure of non-cash investing activities: | ||||||||||||||||
| Acquisition of subsidiaries with conversion of previously held long-term investments in and loans to the subsidiaries | ||||||||||||||||
| Purchase of property and equipment included in accrued expenses and other current liabilities | ||||||||||||||||
| Purchase of long-term investments included in accrued expenses and other current liabilities | ||||||||||||||||
| Contingent consideration for business acquisition included in other non-current liabilities | ||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-9
META DATA LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares and per share data)
| 1. | Organization and Principal Activities |
Meta Data Limited (the “Company”, formerly known as “OneSmart International Education Group Limited (“OneSmart”) is a limited company incorporated under the laws of Cayman Islands on March 10, 2017. Since fiscal year 2022, the Company through its consolidated subsidiaries, are engaged in artificial intelligent education service (AIE) and artificial intelligent universe (AIU) IAAS service.
AIE is to build an intelligent training system based on intelligent training plat-from to provide the maximum immersive experience and the best technical foundation for learning, implementation in RT3D with 360-degree landscape, so that all users are no longer bound to bult World with improved digital life experience. AIU IAAS service provides software & hardware infrastructure (IAAS) to Metaverse business operator or individual users. It improves the accessibility of rendering modes through cloud computing and edge computing algorithms and computing power to improve the virtual world. Use of spatial localization algorithm, virtual scene fitting, real-time network transmission, GPU server, and edge computing to reduce cost and network congestion. Reduce the performance threshold requirements for terminal equipment, and improve the immersive user experience
Before fiscal year 2021, the company was principally engaged in the provision of premium tutoring services for students of kindergarten and primary, middle and high schools (“K12”) and premium young children education services in the People’s Republic of China (the “PRC”). Due to the PRC legal restrictions on foreign ownership and investment in the education business, the Company conducts its primary business operations through its VIEs.
The Company’s Board adopts resolutions approving, and recommends to the shareholders for their approval to change the Company’s corporate name from “OneSmart International Education Group Ltd” to “Meta Data Limited” on its annual general meeting held on April 28, 2022.
The Company undergone a reorganization in 2017
whereby the Company became the ultimate parent entity of its subsidiaries, the VIEs and the VIEs’ subsidiaries. As part of the reorganization,
the business operations of the consolidated subsidiaries, the VIEs and the VIEs’ subsidiaries were transferred to the Company. In
return, the Company issued
In September 2017, immediately following
the Reorganization, the Company issued
In September 2017, immediately following the Reorganization,
the Company also repurchased an aggregate of
In December 2017, the Founder transferred
As the Company, its subsidiaries, VIEs and the VIEs’ subsidiaries were all under the control of the Founder, the Reorganization was accounted for as a transaction under common control in a manner similar to a pooling of interests. Therefore, the accompanying consolidated financial statements have been prepared as if the corporate structure of the Company had been in existence since the beginning of the periods presented.
On March 28, 2018, the Company completed
its an initial public offering (“IPO”) on the New York Stock Exchange. The Company offered
F-10
META DATA LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares and per share data)
| 1. | Organization and Principal Activities (continued) |
Details of the Group’s subsidiaries as of August 31, 2022 are as follows:
| Entity | Date of incorporation/ acquisition | Place of incorporation | Percentage of direct or indirect ownership by the Company | Principal activities | ||||
| Direct | ||||||||
| Meta Data Limited (“Mata Data”) | 2017 | |||||||
| Metaverse Information Technology Limited (“Metaverse BVI”) | 2021 | |||||||
| Metaverse Digital Technology Co. Limited (“Metaverse Digital”) | 2022 | |||||||
| Metaverse Information Technology Limited (“Metaverse HK”) | 2022 |
The VIE arrangements
PRC laws and regulations currently require any foreign entity that invests in the education business in China to be an educational institution with relevant experience in providing educational services outside China. The Group’s offshore holding companies are not educational institutions and do not provide educational services outside China. Accordingly, the Group’s offshore holding companies are not allowed to directly engage in the education business in China. To comply with PRC laws and regulations, the Group conducts all of its business in China through the VIEs. The VIEs hold the requisite licenses and permits necessary to conduct the Group’s premium tutoring services and premium young children education services business. In addition, the VIEs hold leases and other assets necessary to operate the Group’s study centers, employ teachers and generate substantially all of the Group’s revenues. Despite the lack of technical majority ownership, the Company has effective control of the VIEs through a series of contractual arrangements (the “Contractual Agreements”) and a parent-subsidiary relationship exists between the Company and the VIEs. The equity interests of the VIEs are legally held by PRC individuals (the “Nominee Shareholders”). Through the Contractual Agreements, the Nominee Shareholders of the VIEs effectively assign all their voting rights underlying their equity interests in the VIEs to the Company, and therefore, the Company has the power to direct the activities of the VIEs that most significantly impact its economic performance. The Company also has the right to receive economic benefits and obligations to absorb losses from the VIEs that potentially could be significant to the VIEs. Based on the above, the Company consolidates the VIEs in accordance with SEC Regulation SX-3A-02 and ASC810-10, Consolidation: Overall.
The following is a summary of the Contractual Agreements:
Shareholders’ Voting Rights
Agreements Pursuant to the Shareholders’ Voting Rights Agreements signed between the respective Nominee Shareholders and
the WFOE, the Nominee Shareholders agreed to entrust the Company through the WFOE an irrevocable proxy to exercise all of their voting
rights as shareholders of the VIEs and approve on behalf of the Nominee Shareholders, all related legal documents pertinent to the exercise
of their rights in their capacity as the shareholders of the VIEs. The WFOE is also entitled to re-authorize or assign its voting rights
to any other person or entity at its own discretion and without giving prior notice to the Nominee Shareholders or obtaining their consent.
The Shareholders’ Voting Rights Agreements remain valid for as long as at least
Loan Agreements Pursuant
to the Loan Agreements between the respective Nominee Shareholders and the WFOE, the WFOE granted interest-free loans to the Nominee Shareholders
for the purpose of providing capital to the VIEs to develop their business. The loans have terms of
F-11
META DATA LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares and per share data)
| 1. | Organization and Principal Activities (continued) |
The VIE arrangements (continued)
Exclusive Purchase Right Agreements
Pursuant to the Exclusive Purchase Right Agreements entered into between the Nominee Shareholders, the VIEs and the WFOE, the
Nominee Shareholders granted to the WFOE or its designees proxy of shareholders’ rights and voting rights of their respective equity
interests in the VIEs. The WFOE has the sole discretion as to when to exercise the options, whether in part or full. The exercise price
of the options to purchase all or part of the equity interests in the VIEs will be higher of RMB
Equity Pledge Agreement Pursuant to the Equity Pledge Agreement entered into among the WFOE, the Nominee Shareholders and the VIEs, the Nominee Shareholders pledged all of their equity interests in the VIEs to the WFOE as collateral to secure their obligations under the above agreements. The Nominee Shareholders further undertake that they will remit any distributions in connection with such shareholder’s equity interests in the VIEs to the WFOE, to the extent permitted by PRC laws. If the VIEs or any of their Nominee Shareholders breach any of their respective contractual obligations under the above agreements, the WFOE, as the pledgee, will be entitled to certain rights, including the right to sell, transfer or dispose of the pledged equity interest. The Nominee Shareholders of the VIEs agree not to create any encumbrance on or otherwise transfer or dispose of their respective equity interest in the VIEs, without the prior consent of the WFOE. The Equity Pledge Agreement will be valid until the VIEs and their respective shareholders fulfill all the contractual obligations under the above agreements in full and the pledged equity interests have been transferred to the WFOE and/or its designees.
Exclusive Technology and Consultation Service Agreements Pursuant to the Exclusive Technology and Consultation Service Agreements, WFOE retains exclusive right to provide to the VIEs the technology support and consulting services included but not limited to the system technology support service, business professional consulting service, human resource, technical and business operation staff training, marketing research, planning and development service, business plan and strategy consulting service and client based support and development consulting service. WFOE owns the intellectual property rights developed in the performance of these agreements. However, if there are clearly definitions which do not allow WFOE to own certain intellectual property rights under the applicable PRC laws, VIEs should own them initially and grant their exclusive use rights to WFOE with minimum consideration. In exchange for these services, WFOE is entitled to charge the VIEs annual service fees which typically amount to what would be substantially all of the VIEs’ pre-tax profits (after offset prior year losses, if applicable), resulting in a transfer of substantially all of the profits from the VIEs to the WFOE.
Based on the opinion of the Company’s PRC legal counsel, (i) the ownership structure of the Group, including its subsidiaries in the PRC and VIEs are not in violation with any applicable PRC laws and regulations; and (ii) each of the Contractual Agreements among the WFOE, the VIEs and the Nominee Shareholders governed by PRC laws, are legal, valid and binding, enforceable against such parties.
F-12
META DATA LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares and per share data)
| 1. | Organization and Principal Activities (continued) |
The VIE arrangements (continued)
However, uncertainties in the PRC legal system could cause the relevant regulatory authorities to find the current Contractual Agreements and businesses to be in violation of any existing or future PRC laws or regulations. If the Company, the WFOE or any of its current or future VIEs are found in violation of any existing or future laws or regulations, or fail to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities would have broad discretion in dealing with such violations, which may include, but not limited to, revocation of business and operating licenses, being required to discontinue or restrict its business operations, restriction of the Group’s right to collect revenues, being required to restructure its operations, imposition of additional conditions or requirements with which the Group may not be able to comply, or other regulatory or enforcement actions against the Group that could be harmful to its business. The imposition of any of these or other penalties may result in a material and adverse effect on the Group’s ability to conduct its business. In addition, if the imposition of any of these penalties causes the Company to lose the rights to direct the activities of the VIEs or the right to receive their economic benefits, the Company would no longer be able to consolidate the VIEs.
The Group’s business has been
directly operated by the VIEs and their subsidiaries. For the years ended August 31, 2020, 2021 and 2022, the VIEs contributed
There are no consolidated VIEs’
assets that are pledged or collateralized for the VIEs’ obligations and which can only be used to settle the VIEs’ obligations,
except for registered capital and the PRC statutory reserves and certain property with carrying amounts of RMB
F-13
META DATA LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares and per share data)
| 2. | Summary of Significant Accounting Policies |
| (a) | Basis of presentation |
The accompanying consolidated financial statements have been prepared in accordance with the accounting principles generally accepted in the United States of America (“US GAAP”).
The Company’s functional currency of subsidiaries and VIEs in China is the Chinese Renminbi (RMB). Other subsidiaries outside of China use USD as the functional currency; however, the accompanying consolidated financial statements have been translated and presented in USD.
According to USGAAP ASC 810-10-15-8, for legal entities other than limited partnerships, the usual condition for a controlling financial interest is ownership of a majority voting interest, and, therefore, as a general rule ownership by one reporting entity, directly or indirectly, of more than 50 percent of the outstanding voting shares of another entity is a condition pointing toward consolidation. The power to control may also exist with a lesser percentage of ownership, for example, by contract, lease, agreement with other stockholders, or by court decree.
The consolidated financial statements include the accounts of the Company and its subsidiaries. The consolidated financial statements are prepared in accordance with U.S. GAAP. This basis differs from that used in the statutory accounts of subsidiaries and VIEs in the PRC, which were prepared in accordance with the accounting principles and relevant financial regulations applicable to enterprises in the PRC. All necessary adjustments have been made to present the financial statements in accordance with U.S. GAAP. All significant inter-company accounts and transactions have been eliminated.
Discontinued Operations
On November 25, 2022, Meta Data Limited (the “Seller”)
completed the transfer of its ownership of OneSmart Edu Inc. (“OneSmart BVI”) to Muckle Capital Investment Co., Ltd. (the “Buyer”),
an unrelated third party for a total price of US$
Segment Information Reclassification
Historically, the Company operated as one the leading providers of K-12 after-school education services in China which developed a comprehensive K-12 after-school education platform that primarily focused on young children mathematics training services and FasTrack English services through a nationwide network of 480 learning centers across 40 cities in China. The Company had three primary segments, i. e. OneSmart VIP, OneSmart Young Children Education and One Smart Online.
On July 24, 2021, the General Office of Central Committee of the Communist Party of China and the General Office of the State Council jointly released Opinions on what they termed “Further Reducing the Burden of Homework and Off-campus Tutoring for Compulsory Education Students,” (the “Double Reduction Policy”), which basically requires suspension of all subject-based off-campus tutoring business targeting pre-school kids and K12 students. As a result, on October 12, 2021, the Company suspended all education programs and learning centers in China. The Company classified the education related operation into discontinued operation in fiscal 2022. In accordance with the Company’s new business strategy, the Company classified business segment into Artificial Intelligent Education (AIE) service and Artificial Intelligent Universe (AIU) IAAS service.
F-14
META DATA LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares and per share data)
| 2. | Summary of Significant Accounting Policies (continued) |
| (b) | Liquidity |
In assessing the Company’s liquidity and substantial doubt about its ability to continue as a going concern, the Company monitors and analyzes cash on-hand and operating expenditure commitments. The Company’s liquidity needs are to meet working capital requirements and operating expense obligations. To date, the Company financed its operations primarily through cash generated by operating activities, IPO proceeds, equity or convertible securities financing activities and commercial bank loan.
The accompanying financial statements
do not include any adjustments or classifications that may result from the possible inability of the Company to continue as a going concern.
The accompanying financial statements have been prepared on a basis, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. The Company has suffered recurring losses from operations of RMB
The Company has historically met its cash needs through a combination of cash flows from operating activities, proceeds from bank loans and proceeds from disposal of short-term investments. The cash requirements of the Company are generally for operating activities, repayments of bank loans, purchase of property and equipment and excess cash was used in the purchase of short-term and long-term investments. Between July 2021 and September 2021, the General Office of Ministry of Education issued a series of rules, regulations, notices and circulars on further alleviating the burden of homework and after-school tutoring for students in compulsory education (“the Opinion”). In order to comply with all applicable rules and regulations in providing educational services, the Company ceased all the domestic education programs and learning centers operations in China on October 12, 2021. As a result, this raises substantial doubt about its ability to continue as a going concern.
In evaluating if there is substantial doubt about the ability to continue as a going concern, the Group is trying to alleviate the going concern risk through (1) equity or debt financing, (2) increasing cash generated from new business model in artificial intelligent education service and artificial intelligent universe IAAS service, and (3) debt divestiture, to meet our anticipated working capital requirements for at least the next 12 months. The Group may, however, need additional capital in the future to fund our further expansion. If the Group determines that its cash requirements exceed the amount of cash and cash equivalents it has on hand at the time, the Group may seek to issue equity or debt securities or obtain credit facilities. The issuance and sale of additional equity would result in further dilution to shareholders of the Group.
F-15
META DATA LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares and per share data)
| 2. | Summary of Significant Accounting Policies (continued) |
| (b) | Liquidity (continued) |
The Company entered into certain securities
purchase agreement on January 24, 2022 (the “SPA”) with certain non-affiliated and accredited “non-U.S. Persons”,
(the “Purchasers”) as defined in Regulation S of the Securities Act of 1933, as amended (the “Securities Act”),
pursuant to which the Company agreed to sell
The Company plans to restructure its business by selling tutoring services and then focus on smart education services. The sale of the tutoring services was completed on November 25,2022. The Company has carried out product iterations on our original business: shifting from education and training to education and technology, using the original channels to carry out quality education and technology output, including 5G technology, smart campus system, virtual training system based on Metaverse, etc. The new business is using the six core technologies of Metaverse and artificial intelligence, blockchain, network computing, interaction, game technology, and the Internet of Things as the company’s core technologies, building a new type of blockchain smart student card and global smart employment quality Educational virtual world (new type of artificial intelligence employment training), combination of virtual and real prediction world (digital education, risk prediction, computing power output), VR shopping world (new e-commerce) and other products provide global customers with a new digital world experience. As of May 2022, the Company has signed a series of strategic cooperation agreements with six non-affiliated companies to pre-launch smart education training business.
The Company have recruited a global management team and technology research and development team to develop new products and new business directions that combine education and technology. In order to diversify the negative impact from local regulation, the Company has also decided to expend its business outside China.
As a result, the Company prepared the consolidated financial statements assuming the Company will continue as a going concern. However, there is no assurance that the measures above can be achieved as planned. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
| (c) | Principles of consolidation |
The consolidated financial statements include the financial statements of the Company, its subsidiaries, the VIEs and the subsidiaries of the VIEs. All significant inter-company transactions and balances between the Company, its subsidiaries and the VIEs have been eliminated upon consolidation. Results of subsidiaries, businesses acquired from third parties and the VIEs are consolidated from the date on which control is transferred to the Company.
| (d) | Consolidation of variable interest entities |
In accordance with accounting standards regarding consolidation of variable interest entities (“VIEs”), VIEs are generally entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders lack adequate decision-making ability. All VIEs with which the Company is involved must be evaluated to determine the primary beneficiary of the risks and rewards of the VIE. The primary beneficiary is required to consolidate the VIE for financial reporting purposes.
The Company determined that Shanghai Onesmart, Shanghai Rui Si and Shanghai Xiangyuan are VIEs because the Company is the primary beneficiary of risks and rewards of those VIEs.
F-16
META DATA LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares and per share data)
|
2. |
Summary of Significant Accounting Policies (continued) |
(d) |
Consolidation of variable interest entities (continued) |
The condensed consolidating table below disaggregated the Consolidated Balance Sheets of the Company into Meta data, the VIE and its subsidiaries, the WFOE that is the primary beneficiary of the VIEs, of which assets and liabilities are classified as discontinued operation as detailed in note 21, and an aggregation of other entities that are consolidated as of August 31, 2022 and 2021.
| As of August 31, 2022 | ||||||||||||||||||||
| Other entities that are |
WFOE that is the primary beneficiary |
VIE and its | Meta Data | Consolidated | ||||||||||||||||
| consolidated | of the VIE | subsidiaries | Ltd. | total | ||||||||||||||||
| RMB | RMB | RMB | RMB | RMB | ||||||||||||||||
| Intercompany receivables | - | |||||||||||||||||||
| Current assets excluding intercompany receivables | ||||||||||||||||||||
| Current assets | ||||||||||||||||||||
| Non-current assets excluding investment in subsidiaries | ||||||||||||||||||||
| Non-current assets | ||||||||||||||||||||
| Total assets | ||||||||||||||||||||
| Intercompany payables | - | |||||||||||||||||||
| Current liabilities excluding intercompany payables | ||||||||||||||||||||
| Current liabilities | ||||||||||||||||||||
| Non-current liabilities | ||||||||||||||||||||
| Total liabilities | ||||||||||||||||||||
| Total shareholders’ equity (net assets) | ( |
) | ( |
) | ( |
) | ||||||||||||||
| As of August 31, 2021 | ||||||||||||||||||||
| Other entities that are | WFOE that is the primary beneficiary | VIE and its | Consolidated | |||||||||||||||||
| consolidated | of the VIE | subsidiaries | Meta Data | total | ||||||||||||||||
| RMB | RMB | RMB | RMB | RMB | ||||||||||||||||
| Intercompany receivables | ||||||||||||||||||||
| Current assets excluding intercompany receivables | ||||||||||||||||||||
| Current assets | ||||||||||||||||||||
| Non-current assets excluding investment in subsidiaries | ||||||||||||||||||||
| Non-current assets | ||||||||||||||||||||
| Total assets | ||||||||||||||||||||
| Intercompany payables | ||||||||||||||||||||
| Current liabilities excluding intercompany payables | ||||||||||||||||||||
| Current liabilities | ||||||||||||||||||||
| Non-current liabilities | ||||||||||||||||||||
| Total liabilities | ||||||||||||||||||||
| Total shareholders’ equity (net assets) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
F-17
META DATA LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares and per share data)
|
2. |
Summary of Significant Accounting Policies (continued) |
(d) |
Consolidation of variable interest entities (continued) |
The condensed consolidating table below disaggregated the Consolidated Statements of Operations and Comprehensive Income (Loss) of the Company into Meta Data, the VIE and its subsidiaries, the WFOE that is the primary beneficiary of the VIEs and an aggregation of other entities that are consolidated for the financial years ended August 31, 2021 and 2022.
| For the years ended August 31, 2022 | ||||||||||||||||||||
| WFOE | ||||||||||||||||||||
| Other entities | that is the primary | |||||||||||||||||||
| that are | beneficiary | VIE and its | Consolidated | |||||||||||||||||
| consolidated | of the VIE | subsidiaries | Meta Data | total | ||||||||||||||||
| RMB | RMB | RMB | RMB | RMB | ||||||||||||||||
| Net revenues | - | |||||||||||||||||||
| Cost of revenues | ( | ) | - | ( | ) | |||||||||||||||
| Gross profit | - | |||||||||||||||||||
| Operating expenses | ( | ) | - | ( | ) | ( | ) | |||||||||||||
| Income (loss) from operations | - | ( | ) | ( | ) | |||||||||||||||
| Other expenses | ( | ) | - | ( | ) | ( | ) | |||||||||||||
| Income (loss) before income taxes | - | ( | ) | ( | ) | |||||||||||||||
| Provision for income taxes | ||||||||||||||||||||
| Net income (loss) from continuing operations | - | ( | ) | ( | ) | |||||||||||||||
| Net income (loss) from discontinuing operations | - | ( | ) | ( | ) | - | ( | ) | ||||||||||||
| For the years ended August 31, 2021 | ||||||||||||||||||||
| WFOE | ||||||||||||||||||||
| Other entities |
that is the primary |
|||||||||||||||||||
| that are | beneficiary | VIE and its | Consolidated | |||||||||||||||||
| consolidated | of the VIE | subsidiaries | Meta Data | total | ||||||||||||||||
| RMB | RMB | RMB | RMB | RMB | ||||||||||||||||
| Net revenues | - | - | - | - | ||||||||||||||||
| Cost of revenues | - | - | ||||||||||||||||||
| Gross profit | - | - | - | - | ||||||||||||||||
| Operating expenses | - | - | - | ( |
) | ( |
) | |||||||||||||
| Income (loss) from operations | - | - | - | ( |
) | ( |
) | |||||||||||||
| Other expenses | - | - | - | ( |
) | ( |
) | |||||||||||||
| Income (loss) before income taxes | - | - | - | ( |
) | ( |
) | |||||||||||||
| Provision for income taxes | - | - | - | - | - | |||||||||||||||
| Net income (loss) from continuing operations | - | - | - | ( |
) | ( |
) | |||||||||||||
| Net income (loss) from discontinuing operations | ( |
) | ( |
) | ( |
) | - | ( |
) | |||||||||||
F-18
META DATA LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares and per share data)
|
2. |
Summary of Significant Accounting Policies (continued) |
|
(d) |
Consolidation of variable interest entities (continued) |
The condensed consolidating table below disaggregated the Consolidated Statements of Cash Flows of the Company into Meta Data, the VIE and its subsidiaries, the WFOE that is the primary beneficiary of the VIEs and an aggregation of other entities that are consolidated for the financial years ended August 30, 2021 and 2022.
| For the years ended August 31, 2022 | ||||||||||||||||||||
| WFOE | ||||||||||||||||||||
| Other | that is the | |||||||||||||||||||
| entities | primary | |||||||||||||||||||
| that are | beneficiary | VIE and its | Consolidated | |||||||||||||||||
| consolidated | of the VIE | subsidiaries | Meta Data | total | ||||||||||||||||
| RMB | RMB | RMB | RMB | RMB | ||||||||||||||||
| Net cash provided by (used in) operating activities from continuing operations | - | ( |
) | ( |
) | |||||||||||||||
| Net cash provided by (used in) operating activities from discontinuing operations | - | ( |
) | ( |
) | - | ( |
) | ||||||||||||
| Net cash used in investing activities from continuing operations | ||||||||||||||||||||
| Net cash used in investing activities from discontinuing operations | - | |||||||||||||||||||
| Net cash provided by (used in) financing activities from continuing operations | ||||||||||||||||||||
| Net cash provided by (used in) financing activities from discontinuing operations | - | - | ( |
) | - | ( |
) | |||||||||||||
| Effect of exchange rate changes on cash and restricted cash from continuing operations | - | - | - | ( |
) | ( |
) | |||||||||||||
| Effect of exchange rate changes on cash and restricted cash from discontinuing operations | - | - | - | |||||||||||||||||
| Net increase (decrease) in cash and restricted cash | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||
| Cash and restricted cash from continuing and discontinued operations, beginning of year | ||||||||||||||||||||
| Cash and restricted cash from continuing and discontinued operations, end of year | ||||||||||||||||||||
F-19
META DATA LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares and per share data)
|
2. |
Summary of Significant Accounting Policies (continued) |
|
(d) |
Consolidation of variable interest entities (continued) |
| For the years ended August 31, 2021 | ||||||||||||||||||||
| WFOE | ||||||||||||||||||||
| Other | that is the | |||||||||||||||||||
| entities | primary | |||||||||||||||||||
| that are | beneficiary | VIE and its | Consolidated | |||||||||||||||||
| consolidated | of the VIE | subsidiaries | Meta Data | total | ||||||||||||||||
| RMB | RMB | RMB | RMB | RMB | ||||||||||||||||
| Net cash provided by (used in) operating activities from continuing operations | - | - | - | ( | ) | ( | ) | |||||||||||||
| Net cash provided by (used in) operating activities from discontinuing operations | ( | ) | - | |||||||||||||||||
| Net cash used in investing activities from continuing operations | - | - | - | |||||||||||||||||
| Net cash used in investing activities from discontinuing operations | ( | ) | - | ( | ) | |||||||||||||||
| Net cash provided by (used in) financing activities from continuing operations | - | ( | ) | ( | ) | |||||||||||||||
| Net cash provided by (used in) financing activities from discontinuing operations | - | - | ( | ) | - | ( | ) | |||||||||||||
| Effect of exchange rate changes on cash and restricted cash from continuing operations | ( | ) | ( | ) | ||||||||||||||||
| Effect of exchange rate changes on cash and restricted cash from discontinuing operations | - | - | - | - | - | |||||||||||||||
| Net increase (decrease) in cash and restricted cash | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Cash and restricted cash from continuing and discontinued operations, beginning of year | ||||||||||||||||||||
| Cash and restricted cash from continuing and discontinued operations, end of year | ||||||||||||||||||||
Cash is transferred within the Company
through the banking system in PRC. Under the VIE agreements, the Company intends to distribute all or part of VIE’s earnings after
eliminating VIE’s accumulated losses and making appropriation of VIE’s after-tax net income into the statutory surplus reserve
based on at least
F-20
META DATA LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares and per share data)
| 2. | Summary of Significant Accounting Policies (continued) |
| (e) | Use of estimates |
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the balance sheet date and revenue and expenses during the reporting periods. Significant accounting estimates reflected in the Group’s consolidated financial statements include, but not limited to valuation allowance for deferred tax assets, uncertain tax position, the initial valuation of the assets acquired and liabilities assumed in a business combination, economic lives and impairment of long-lived assets, impairment of goodwill, the valuation of short-term and long-term investments and share-based compensation. Actual results could differ from those estimates, and as such, differences may be material to the consolidated financial statements.
| (f) | Foreign currency |
The functional currency of the Company, OneSmart BVI, and OneSmart HK is the United States Dollars (“US$”). The Company’s PRC subsidiaries and the VIEs determined their functional currency to be Renminbi (the “RMB”). The Group uses the RMB as its reporting currency.
Transactions denominated in foreign currencies are re-measured into the functional currency at the exchange rates prevailing on the transaction dates. Monetary assets and liabilities denominated in foreign currencies are re-measured at the exchange rates prevailing at the balance sheet date. Non-monetary items that are measured in terms of historical cost in foreign currency are re-measured using the exchange rates at the dates of the initial transactions. Exchange gains and losses are included in the consolidated statements of income.
The Company uses the average exchange rate for the year and the exchange rate at the balance sheet date to translate the operating results and financial position, respectively. Translation differences are recorded in accumulated other comprehensive income, a component of shareholders’ equity.
| (g) | Convenience translation |
Amounts in US$ are presented for the
convenience of the reader and are translated at the noon buying rate of US$
| (h) | Cash and cash equivalents |
Cash and cash equivalents consist of cash on hand and highly liquid investments which are unrestricted as to withdrawal or use.
| (i) | Restricted cash |
Restricted cash primarily represents deposits held in a designated bank account as pledged security for the principle, interest payments on the Group’s long-term or short-term loans and restricted cash with banks. The restricted cash related to the frozen cash in the bank accounts by court order is disclosed in Note 6, the restricted cash related to deposits held in designated bank accounts as pledge of long-term or short-term loans are disclosed in Note 11.
F-21
META DATA LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares and per share data)
| 2. | Summary of Significant Accounting Policies (continued) |
| (j) | Short-term investments |
The Group accounts for all investments in accordance with ASC topic 320 (“ASC 320”), Investments – Debt Securities. The Group classifies the investments in debt and equity securities as “held-to-maturity”, “trading” or “available-for-sale”, whose classification determines the respective accounting methods stipulated by ASC 320. All investments with original maturities of greater than three months not exceeding twelve months are classified as short-term investments, while those of more than twelve months are classified as long-term investments (Note 6). Investments that are expected to be realized in cash during the next twelve months are also included in short-term investments. Dividend and interest income, including amortization of the premium and discount arising at acquisition, for all categories of investments in securities, are included in earnings. Any realized gains or losses on the sale of the short-term investments, are determined on a specific identification method, and such gains and losses are reflected in earnings during the period in which gains or losses are realized.
The securities that the Group has the positive intent and the ability to hold to maturity are classified as held-to-maturity securities and stated at amortized cost.
The securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities. Unrealized holding gains and losses for trading securities are included in earnings.
Investments not classified as trading or as held-to-maturity are classified as available-for-sale securities. Available-for-sale investments are reported at fair value, with unrealized gains and losses recorded in accumulated other comprehensive income. Realized gains or losses are included in earnings during the period in which the gain or loss is realized.
| (k) | Property and equipment, net |
Property and equipment are stated at cost less accumulated depreciation and impairment. Depreciation is calculated on a straight-line basis over the following estimated useful lives:
| Category | Estimated Useful Lives | |
| Furniture | ||
| Electronic equipment | ||
| Vehicles | ||
| Buildings | ||
| Leasehold improvement |
Repair and maintenance costs are charged to expense as incurred, whereas the cost of renewals and betterments that extend the useful lives of property and equipment are capitalized as additions to the related assets. Retirements, sales and disposals of assets are recorded by removing the cost and accumulated depreciation from the asset and accumulated depreciation accounts with any resulting gain or loss reflected in the consolidated statements of income.
Direct costs that are related to the construction of property and equipment and incurred in connection with bringing the assets to their intended use are capitalized as construction in progress. Construction in progress is transferred to specific property and equipment, and the depreciation of these assets commences when the assets are ready for their intended use.
F-22
META DATA LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares and per share data)
| 2. | Summary of Significant Accounting Policies (continued) |
| (l) | Impairment of long-lived assets other than goodwill |
The Group evaluates its long-lived assets, including fixed assets and intangible assets with finite lives, for impairment whenever events or changes in circumstances, such as a significant adverse change to market conditions that will impact the future use of the assets, indicate that the carrying amount of an asset may not be fully recoverable. When these events occur, the Group evaluates the recoverability of long-lived assets by comparing the carrying amount of the assets to the future undiscounted cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flows is less than the carrying amount of the assets, the Group recognizes an impairment loss based on the excess of the carrying amount of the assets over their fair value. Fair value is generally determined by discounting the cash flows expected to be generated by the assets, when the market prices are not readily available.
| (m) | Business combination |
The Group accounts for its business combinations using the purchase method of accounting in accordance with ASC 805 (“ASC 805”), Business Combinations. The purchase method of accounting requires that the consideration transferred to be allocated to the assets, including separately identifiable assets and liabilities the Group acquired, based on their estimated fair values. The consideration transferred in an acquisition is measured as the aggregate of the fair values at the date of exchange of the assets given, liabilities incurred, and equity instruments issued as well as the contingent considerations and all contractual contingencies as of the acquisition date. The costs directly attributable to the acquisition are expensed as incurred. Identifiable assets, liabilities and contingent liabilities acquired or assumed are measured separately at their fair value as of the acquisition date, irrespective of the extent of any non-controlling interests. The excess of (i) the total of cost of acquisition, fair value of the non-controlling interests and acquisition date fair value of any previously held equity interest in the acquiree over (ii) the fair value of the identifiable net assets of the acquiree, is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the businesses acquired, the difference is recognized directly in earnings.
In a business combination achieved in stages, the Group remeasures the previously held equity interest in the acquiree immediately before obtaining control at its acquisition-date fair value and the remeasurement gain or loss, if any, is recognized in the consolidated statements of income.
The determination and allocation of fair values to the identifiable assets acquired, liabilities assumed and non-controlling interests is based on various assumptions and valuation methodologies requiring considerable judgment from management. The most significant variables in these valuations are discount rates, terminal values, the number of years on which the cash flow projections are based, as well as the assumptions and estimates used to determine the cash inflows and outflows. The Group determines discount rates to be used based on the risk inherent in the related activity’s current business model and industry comparisons. Terminal values are based on the expected life of assets, forecasted life cycle and forecasted cash flows over that period. There is no additional business combination by the Company in fiscal year of 2022.
| (n) | Goodwill |
The Group assesses goodwill for impairment in accordance with ASC 350-20, Intangibles-Goodwill and Other: Goodwill (“ASC 350-20”), which requires that goodwill be tested for impairment at the reporting unit level at least annually and more frequently upon the occurrence of certain events, as defined by ASC 350-20. No goodwill was recognized for continued operations.
F-23
META DATA LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares and per share data)
| 2. | Summary of Significant Accounting Policies (continued) |
| (o) | Intangible assets |
| (p) | Long-term investments |
The Group’s long-term investments consist of equity securities without readily determinable fair value, investment in debt securities accounted for at fair value and equity method investments.
The Group adopted ASC Topic 321, Investments-Equity Securities (“ASC 321”) from September 1, 2018. Pursuant to ASC 321, for equity securities measured at fair value with changes in fair value record in earnings, the Group does not assess whether those investments are impaired. For those equity securities that the Group selects to use the measurement alternative, the Group uses the measurement alternative to measure those investments at cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer. The Group makes a qualitative assessment of whether the investment is impaired at each reporting date. If a qualitative assessment indicates that the investment is impaired, the Group has to estimate the investment’s fair value in accordance with ASC Topic 820, Fair Value Measurements and Disclosures, (“ASC 820”). If the fair value is less than the investment’s carrying value, the Group recognizes an impairment loss in net income equal to the difference between the carrying value and fair value.
Investments in equity investees represent investments in entities in which the Group can exercise significant influence but does not own a majority equity interest or control are accounted for using the equity method of accounting in accordance with ASC 323-10 (“ASC 323-10”), Investments-Equity Method and Joint Ventures: Overall. Under the equity method, the Group initially records its investment at cost and prospectively recognizes its proportionate share of each equity investee’s net profit or loss into its consolidated statements of income. The difference between the cost of the equity investee and the amount of the underlying equity in the net assets of the equity investee is recognized as equity method goodwill included in equity method investments on the consolidated balance sheets. The Group evaluates its equity method investment for impairment under ASC 323-10. An impairment loss on the equity method investment is recognized in the consolidated statements of income when the decline in value is determined to be other-than-temporary.
Investment in debt securities accounted for at fair value with original maturities of greater than twelve months are classified as long-term investments. As investment in debt securities classified as available for sale in accordance with ASC 320 are reported at fair value. Any unrealized gains and losses on available-for-sale investments are included in other comprehensive income. Interest income are recognized in earnings. When a decline in value is determined to be other-than-temporary, the impairment loss on the long-term available-for-sale investments would be recognized in the consolidated statements of comprehensive income.
In 2021 and 2022, we evaluated our investments, taking into consideration, including, but not limited to, the duration, degree and causes of the decline in financial results, its intent and ability to hold the investment and the invested companies’ financial performance and near-term prospects.
| (q) | Fair value of financial instruments |
Financial instruments include cash and cash equivalents, restricted cash, short-term and long-term investments, due from third party payment platforms, due from third parties, amount due from a related party, redeemable convertible preferred shares, short-term and long-term loans, and convertible senior notes.
F-24
META DATA LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares and per share data)
| 2. | Summary of Significant Accounting Policies (continued) |
| (q) | Fair value of financial instruments (continued) |
The carrying amounts of these financial instruments, except for the short-term and long-term investments, redeemable convertible preferred shares, long-term loans and convertible senior notes, approximate their fair values because of their short-term maturities. Available-for-sale investments are adjusted to fair value at each reporting date. The redeemable convertible preferred shares were initially recognized at fair value upon issuance and immediately accreted to their full redemption value as of redemption occurred at the end of the reporting periods. If a beneficial conversion feature exists as of the commitment date, its intrinsic value is bifurcated from the carrying value of the redeemable convertible preferred shares as a contribution to additional paid in capital. The discount resulting from the beneficial conversion feature is amortized from the date of issuance to the earliest conversion date. The carrying amount of the long-term loan and convertible senior notes approximate their fair value due to the fact that the related interest rates approximate the interest rates currently offered by financial institutions for similar debt instruments with comparable maturities.
| (r) | Revenue recognition |
On September 1, 2018, the Group adopted ASC Topic 606 Revenue from Contracts with Customers (“Topic 606”), applying the modified retrospective method to all contracts that were not completed as of September 1, 2018. Results for the year ended August 31, 2019,2020 and 2021 are presented under Topic 606, while revenues for the years ended August 31, 2018 are not adjusted and continue to be reported under ASC Topic 605, Revenue Recognition (“Topic 605”).
Revenue is recognized when control of promised services are transferred to the Group’s customers in amounts of consideration to which the Group expects to be entitled to in exchange for those services. The Group follows the five steps approach for revenue recognition under Topic 606: (i) identify the contract with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue as the Group satisfies a performance obligation.
In fiscal 2022, the Group generates revenues primarily through Artificial Intelligent Education (AIE) service and Artificial Intelligent Universe (AIU) IAAS service and develop smart training systems incorporating VR (virtual reality), AI (artificial intelligence), blockchain and other technologies to facilitate the teaching and training process. The following table presents the Group’s revenues disaggregated by revenue sources for the years ended August 31 2022.
| Disaggregation of net revenues | For the year ended August 31, 2022 RMB | |||
| AIE services | ||||
| AIU services | ||||
F-25
META DATA LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares and per share data)
| 2. | Summary of Significant Accounting Policies (continued) |
| (r) | Revenue recognition (continued) |
In fiscal year 2022, primary sources of the Group’s revenues are as follows:
| 1) |
Artificial Intelligent Education (AIE) service:
To build an intelligent training system based on intelligent training plat-from to provide the maximum immersive experience and the best technical foundation for learning. Implementation in RT3D with 360 degree landscape, so that all users are no longer bound to bult World with improved digital life experience. The company provides online training system and applications to academic and professional training centers by charging users one-time sign up fees plus consumption usage/hours one month following the month sales. |
| 2) |
Artificial Intelligent Universe (AIU) IAAS service:
To Metaverse business operator or individual users. It improves the accessibility of rendering modes through cloud computing and edge computing algorithms and computing power to improve the virtual world. Use of spatial localization algorithm, virtual scene fitting, real-time network transmission, GPU server, and edge computing to reduce cost and network congestion. Reduce the performance threshold requirements for terminal equipment, and improve the immersive user experience. The Company provides online training system and applications to academic and professional training centers by charging users one-time sign-up fees plus consumption usage/hours one month following the month sales. |
The Group’s contract assets consisted
of accounts receivable for other services. The balance of contract assets amounted to nil as of August 31, 2021 and August 31, 2022. The
Group’s contract liabilities mainly consisted of prepayments from customers, with a balance of RMB
F-26
META DATA LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares and per share data)
| 2. | Summary of Significant Accounting Policies (continued) |
| (r) | Revenue recognition (continued) |
Refund liabilities mainly related to
the estimated refunds that are expected to be provided to students if they decide they no longer want to attend tutoring. The refund liability
estimation is based on historical refund ratio on a portfolio basis using the most likely amount method. As of August 31, 2021 and 2022,
refund liability amounted to RMB
| (s) | Cost of revenues |
Cost of revenues consist primarily of performance of service such as salaries and wages for technical support employees, related payroll deductions, staff benefits, share-based compensations, i-cloud rental expenses, depreciation for PP&E, amortization for software, utilities and other expenses directly attributable to the Group’s revenues.
| (t) | Advertising expenditures |
Advertising expenditures are expensed
when incurred and are included in selling and marketing expenses, which amounted to RMB
| (u) | Government grants |
The Group receives government subsidies at the discretion of the local government. Government grants are recognized when it is probable that the Group will comply with the conditions attached to them, and the grants are received. Government grants without attached conditions are recognized when received. When the grant relates to an expense item, it is recognized in the consolidated statement of income over the period necessary to match the grant on a systematic basis to the costs that it is intended to compensate, as a reduction of the related operating expense. When the grant relates to an asset, it is recognized as a deferred government grant and released to the consolidated statement of income in equal amounts over the expected useful life of the related asset, when operational, as a reduction of the related depreciation expense.
For the years ended August 31, 2020,
2021 and 2022, government grants in the amounts of RMB
| (v) | Leases |
The Group adopted ASU No. 2016-02, Leases (Topic 842) (“ASC 842”) from September 1, 2019 by using the modified retrospective method and did not restate the comparable periods. The Group has elected the package of practical expedients, which allows the Group not to reassess (1) whether any expired or existing contracts as of the adoption date are or contain a lease, (2) lease classification for any expired or existing leases as of the adoption date and (3) initial direct costs for any expired or existing leases as of the adoption date. The Group also elected the short-term lease exemption for all contracts with lease terms of 12 months or less. The Group have lease agreements with lease and non-lease components, which are generally accounted for separately.
F-27
META DATA LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares and per share data)
| 2. | Summary of Significant Accounting Policies (continued) |
| (v) | Leases (continued) |
The Group determines if an arrangement is a lease or contains a lease at lease inception. For operating leases, the Group recognizes a right-of-use (“ROU”) asset and a lease liability based on the present value of the lease payments over the lease term on the consolidated balance sheets at commencement date. As most of the Group’s leases do not provide an implicit rate, the Group estimates its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The incremental borrowing rate is estimated to approximate the interest rate on a collateralized basis with similar terms and payments, and in economic environments where the leased asset is located. The ROU assets also include any lease payments made, net of lease incentives. Lease expense is recorded on a straight-line basis over the lease term. The Company’s leases often include options to extend and lease terms include such extended terms when the Company is reasonably certain to exercise those options. Lease terms also include periods covered by options to terminate the leases when the Company is reasonably certain not to exercise those options.
However, the Opinion and a related
series of notice, administrative measures or circular and the compliance measures taken by the Company have material adverse impact on
our after-school tutoring services related to academic subjects in China’s compulsory education system, which in turn have adversely
affected the Company’s results of operations and prospect. We have gradually terminated our after-school tutoring services related
to academic subjects business since August 2021, and officially ceased our all business in October 2021. All of the Company’s operating
leases mainly related to offices and classroom facilities were gradually terminated since August 2021. The Company removed the right-of-use
asset and the lease liability, with loss recognized of RMB
| (w) | Income taxes |
The Group follows the liability method of accounting for income taxes in accordance with ASC 740 (“ASC 740”), Income Taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period in which the differences are expected to reverse. The Group records a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rate is recognized in tax expense in the period that includes the enactment date of the change in tax rate.
The Group accounted for uncertainties in income taxes in accordance with ASC 740. Interest and penalties related to unrecognized tax benefit recognized in accordance with ASC 740 are classified in the consolidated statements of income as income tax expense.
| (x) | Share-based compensation |
The Group applies ASC 718 (“ASC 718”), Compensation - Stock Compensation, to account for its employee share-based payments. In accordance with ASC 718, the Group determines whether an award should be classified and accounted for as a liability award or an equity award. All the Group’s share-based awards to employees were classified as equity awards.
F-28
META DATA LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares and per share data)
| 2. | Summary of Significant Accounting Policies (continued) |
| (x) | Share-based compensation (continued) |
In accordance with ASC 718, the Group recognizes share-based compensation cost for equity awards to employees with a performance condition based on the probable outcome of that performance condition. Compensation cost is recognized if it is probable that the performance condition will be achieved.
A change in any of the terms or conditions of the awards is accounted for as a modification of the awards. Incremental compensation cost is measured as the excess, if any, of the fair value of the modified award over the fair value of the original award immediately before its terms are modified, measured based on the fair value of the awards and other pertinent factors at the modification date. For vested awards, the Group recognizes incremental compensation cost in the period the modification occurs. For unvested awards, the Group recognizes over the remaining requisite service period, the sum of the incremental compensation cost and the remaining unrecognized compensation cost for the original award on the modification date. If the fair value of the modified award is lower than the fair value of the original award immediately before modification, the minimum compensation cost the Group recognizes is the cost of the original award. When the vesting conditions (or other terms) of the equity awards granted to employees are modified, the Group first determines on the modification date whether the original vesting conditions were expected to be satisfied, regardless of the entity’s policy election for accounting for forfeitures. If the original vesting conditions were not expected to be satisfied, the grant date fair value of the original equity awards are ignored and the fair value of the equity awards measured at the modification date are recognized if the modified awards ultimately vest.
The Group uses the accelerated method to recognize compensation expense for all awards granted. The Group, with the assistance of an independent third-party valuation firm, determined the fair value of the awards granted to employees. The Group adopted ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, (“ASU 2016-09”) and elected to account for forfeitures as they occur.
An award that is cancelled without a replacement award or other form of consideration given to the grantee should be accounted for as a repurchase for no consideration. If an award is cancelled before the completion of the employee’s requisite service period or nonemployee’s vesting period, any previously unrecognized compensation cost should be recognized at the date of the cancellation. Because a cancellation is not the forfeiture of an award, previously recognized compensation cost is not reversed in connection with a cancellation.
In September 2021, the Company cancelled all the stock options and restricted shares with no replacement agreements because all the grantees’ service contracts were terminated due to the impact of Double Reduction Policy on education from Chinese’s central government. (“ASC 718-20-35-9”) elected to account for cancellation.
| (y) | Employee benefit expenses |
All eligible employees of the Group
are entitled to staff welfare benefits including medical care, welfare subsidies, unemployment insurance and pension benefits through
a PRC government-mandated multi-employer defined contribution plan. The Group is required to make contributions to the plan and accrues
for these benefits based on certain percentages of the qualified employees’ salaries. The Group recorded employee benefit expenses
of (classified as discontinued operation) and RMB
| (z) | Comprehensive income/(loss) |
Comprehensive income/(loss) is defined as the changes in equity of the Group during a period from transactions and other events and circumstances excluding transactions resulting from investments by owners and distributions to owners. Among other disclosures, ASC 220, Comprehensive Income, requires that all items that are required to be recognized under current accounting standards as components of comprehensive income/(loss) be reported in a financial statement that is displayed with the same prominence as other financial statements. For each of the periods presented, the Group’s comprehensive income/(loss) includes net income and unrealized gain on available-for-sale investments, net of tax and is presented in the consolidated statements of comprehensive income/(loss).
F-29
META DATA LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares and per share data)
| 2. | Summary of Significant Accounting Policies (continued) |
| (aa) | Earnings/(Loss) per share |
Basic earnings/(loss) per share is computed by dividing net income/(loss) attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period using the two-class method. Under the two-class method, net income/(loss) is allocated between ordinary shares and other participating securities based on their participating rights. Diluted earnings/(loss) per share is calculated by dividing net income/(loss) attributable to ordinary shareholders by the weighted average number of ordinary and dilutive ordinary equivalent shares outstanding during the period. Ordinary equivalent shares consist of the ordinary shares issuable upon the conversion of the Group’s redeemable convertible preferred shares and convertible senior notes using the if-converted method and ordinary shares issuable upon the exercise of share options and restricted Class A ordinary shares (“Restricted Shares”) using the treasury stock method. Ordinary equivalent shares are not included in the denominator of the diluted loss per share calculation when inclusion of such shares would be anti-dilutive.
Basic and diluted earnings/(loss) per share are not reported separately for Class A or Class B ordinary shares (the “Ordinary Shares”) as each class of shares has the same rights to undistributed and distributed earnings.
| (ab) | Segment reporting |
In accordance with ASC 280, Segment
Reporting, operating segments are defined as components of an enterprise about which separate financial information is available that
is evaluated regularly by the chief operating decision maker (“CODM”), or decision making group, in deciding how to allocate
resources and in assessing performance. The Group has only
| (ac) | Comparative information |
Certain of the prior year comparative figures have been reclassified to conform to the current year’s presentation.
| (ad) | Non-controlling interests |
For certain subsidiaries, a non-controlling interest is recognized to reflect the portion of their equity which is not attributable, directly or indirectly, to the Group. Consolidated net loss or income on the consolidated statements of income includes the net loss or income attributable to non-controlling interests. The cumulative results of operations attributable to non-controlling interests are recorded as non-controlling interests in the Group’s consolidated balance sheets.
F-30
META DATA LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares and per share data)
| 2. | Summary of Significant Accounting Policies (continued) |
| (ae) | Recent accounting pronouncements |
The Company considers the applicability and impact of all ASUs. Management periodically reviews new accounting standards that are issued.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. ASU 2016-13 was subsequently amended by ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments — Credit Losses, ASU 2019-04 Codification Improvements to Topic 326, Financial Instruments — Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, and ASU 2019-05, Targeted Transition Relief. For public entities, ASU 2016-13 and its amendments is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. For all other entities, this guidance and its amendments will be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. As an emerging growth company, the Company plans to adopt this guidance effective October 1, 2023. The Company is currently evaluating the impact of its pending adoption of ASU 2016-13 on its consolidated financial statements but does not expect this guidance will have a material impact on its consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (ASU 2020-06). The amendments in ASU 2020-06 simplify the accounting for convertible instruments by removing major separation models and removing certain settlement condition qualifiers for the derivatives scope exception for contracts in an entity’s own equity, and simplify the related diluted net income per share calculation for both Subtopics. ASU 2020-06 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2023, for smaller reporting companies, as defined by the SEC. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company is evaluating the impact of this ASU on its consolidated financial statements and disclosures.
F-31
META DATA LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares and per share data)
| 3. | Concentration of Risks |
| (a) | Concentration of credit risk |
Financial instruments that potentially subject the Group to significant concentration of credit risk consist primarily of cash and cash equivalents, restricted cash, due from third party payment platform, due from third parties, amount due from a related party, and short-term and long-term investments. As of August 31, 2022, all of the Group’s cash and cash equivalents, restricted cash, certain short-term investments were deposited with financial institutions with high-credit ratings and quality. There has been no recent history of default in relation to these financial institutions.
The Group manages credit risk of due from third party payment platform, due from third parties, amount due from a related party and certain short-term and long-term available-for-sale investments by performing credit assessments on its borrowers and its ongoing monitoring of the outstanding balances.
| (b) | Business, customer, political, social and economic risks |
The Group believes that changes in any of the following areas could have a material adverse effect on the Group’s future financial position, results of operations or cash flows: changes in the overall demand for services; competitive pressures due to new entrants; advances and new trends in new industry standards; changes in certain strategic relationships or customer relationships; regulatory considerations; and risks associated with the Group’s ability to attract and retain employees necessary to support its growth. The Group’s operations could be also adversely affected by significant political, economic and social uncertainties in the PRC. From July 2021 and September 2021, the General Office of Ministry of Education issued a series of rules, regulations, notices and circulars on further alleviating the burden of homework and after-school tutoring for students in compulsory education. The Company complies with all applicable rules and regulations in providing educational services. On October 12, 2021, the Company ceased all the domestic education programs and learning centers in China. The Company plans to sell its original tutoring service business and restructure to smart education business.
| (c) | Major customers and suppliers |
There were two customers, Spirtas Worldwide and
Sesame Tech Corp. that accounted for
One supplier, Neoway Inc. accounted for
F-32
META DATA LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares and per share data)
| 3. | Concentration of Risks (continued) |
| (d) | Foreign currency exchange rate risk |
From July 21, 2005, the RMB is
permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. For RMB against US$, there
was appreciation of approximately
| (e) | Currency convertibility risk |
The Group transacts all of its business in RMB, which is not freely convertible into foreign currencies. On January 1, 1994, the PRC government abolished the dual rate system and introduced a single rate of exchange as quoted daily by the People’s Bank of China (the “PBOC”). However, the unification of the exchange rates does not imply that the RMB may be readily convertible into US$ or other foreign currencies. All foreign exchange transactions continue to take place either through the PBOC or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the PBOC. Approval of foreign currency payments by the PBOC or other institutions requires submitting a payment application form together with suppliers’ invoices, shipping documents and signed contracts.
| 4. | Net revenues |
| For the years ended August 31, | ||||||||||||||||
| 2020 | 2021 | 2022 | 2022 | |||||||||||||
| RMB | RMB | RMB | US$ | |||||||||||||
| Artificial intelligent education service | ||||||||||||||||
| Artificial intelligent universe IAAS service | ||||||||||||||||
| 5. | Cash, cash equivalents and restricted cash |
| As of August 31, | ||||||||||||
| 2021 | 2022 | 2022 | ||||||||||
| RMB | RMB | US$ | ||||||||||
| Cash in bank | ||||||||||||
| Restricted cash in bank Note 2 <i> | ||||||||||||
F-33
META DATA LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares and per share data)
| 6. | Short-term Investments |
The Company’s short-term investments included cash deposits at floating rates in commercial banks and available-for-sale securities with maturities of one year or less. The following is a summary of the Company’s short-term investments:
| As of August 31, | ||||||||||||
| 2021 | 2022 | 2022 | ||||||||||
| RMB | RMB | US$ | ||||||||||
| Available-for-sale securities | ||||||||||||
For the years ended August 31, 2021
and 2022, the continued operation recognized unrealized gains/(loss) of RMB
| 7. | Accrued Expenses and Other Current Liabilities |
Accrued expenses and other current liabilities consisted of the following:
| As of August 31, | ||||||||||||
| 2021 | 2022 | 2022 | ||||||||||
| RMB | RMB | US$ | ||||||||||
| Salary and welfare payable | ||||||||||||
| Interest payable | ||||||||||||
| Others | ||||||||||||
| 8. | Share-Based Compensation |
Amended and Restated 2015 Plan (the “Amended 2015 Plan”)
In connection with the Reorganization
on September 17, 2017, the Company adopted the Amended and Restated 2015 Plan (the “Amended 2015 Plan”) to replace the 2015
Plan which was cancelled concurrently. Under the Amended 2015 Plan, the Board of Directors of the Company authorized to grant share options
or other equity incentives to employees, directors or consultants to purchase up to an aggregate of
From November 2017 to immediately before
IPO, the Group granted
In February 2018, the Board of Directors
approved an evergreen term of the Amended 2015 Plan which permits an annual
F-34
META DATA LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares and per share data)
| 8. | Share-Based Compensation (continued) |
Amended and Restated 2015 Plan (the “Amended 2015 Plan”) (continued)
During the year ended August 31, 2018,
subsequent to the completion of the IPO, the Group granted
During the year ended August 31, 2019,
the Group granted
During the year ended August 31, 2019,
the Group granted
During the year ended August 31, 2020,
the Group granted
During the year ended August 31, 2020,
the Group granted
During the fiscal year ended
August 31, 2021, the Group granted
During the year ended August 31, 2021,
the Group granted
Due to the impact of Double Reduction policy on education from Chinese’s central government, the company suspended its legacy business operation from October 2021 onwards and transformed into a different sector in Metaverse business. Service contracts of most of the employees in after-school private tutoring sector were terminated. Accordingly, all the outstanding options were cancelled.
F-35
META DATA LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares and per share data)
| 8. | Share-Based Compensation (continued) |
Amended and Restated 2015 Plan (the “Amended 2015 Plan”) (continued)
The fair value of the share options under the Amended 2015 Plan were determined on the grant dates using the binomial option pricing model with assistance from an independent valuation firm. Pre IPO, the Group determined the fair value of its ordinary shares using the income approach based on key assumptions including WACC and DLOM. The income approach involved applying appropriate discount rates to estimated cash flows that were based on earnings forecasts. The growth rates of the Group’s revenues, as well as major milestones that it achieved, contributed to the fair value of the ordinary shares. Subsequently to the IPO, fair value of the ordinary shares is the price of the Company’s publicly traded shares.
Domestic Plan
In March 2017, the Board of Directors
of Shanghai OneSmart approved an employee share incentive scheme under which, incentives are provided by certain of Shanghai OneSmart’s
subsidiaries to their regional management and staff (the “Domestic Plan”). According to the scheme, the subsidiaries may grant
to their employee options with independent annual performance conditions specified for each tranche of options, in
On May 2, 2017,
On March 31, 2019,
F-36
META DATA LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares and per share data)
| 8. | Share-Based Compensation (continued) |
Domestic Plan (continued)
The Group calculated the estimated fair value of the share options under the Domestic Plan on the grant date using the binomial option pricing model with assistance from an independent valuation firm.
Restricted shares issued to the founding shareholders of Shanghai Yimi (Note 4)
On February 1, 2020, OneSmart Online
granted
The Group calculated the estimated fair value of the share option and restricted shares on the grant date using the binomial option pricing model with assistance from an independent valuation firm. Assumptions used to determine the fair value of the restricted shares is summarized in the following table:
| For the year ended |
|||
| August 31, 2020 |
|||
| Risk-free interest rate | |||
| Expected volatility | |||
| Suboptimal exercise factor | |||
| Fair value per ordinary share | US$ |
| For the year ended | ||||
| August 31, 2021 | ||||
| Risk-free interest rate | ||||
| Expected volatility | ||||
| Suboptimal exercise factor | ||||
| Fair value per ordinary share | US$ | |||
F-37
META DATA LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares and per share data)
| 8. | Share-Based Compensation (continued) |
Restricted shares issued to the founding shareholders of Shanghai Yimi (Note 4) (continued)
A summary of the share option activities under the Amended 2015 Plan is as follows:
| Weighted | ||||||||||||||||||||
| Weighted | Weighted | average | ||||||||||||||||||
| Number of | average | average | Aggregate | remaining | ||||||||||||||||
| Share | exercise | grant date | intrinsic | contractual | ||||||||||||||||
| Options | price | fair value | value | term | ||||||||||||||||
| US$ | US$ | US$ | ||||||||||||||||||
| Outstanding as of August 31, 2019 | ||||||||||||||||||||
| Granted | ||||||||||||||||||||
| Forfeited | ( | ) | ||||||||||||||||||
| Exercised | ( | ) | ||||||||||||||||||
| Outstanding as of August 31, 2020 | ||||||||||||||||||||
| Granted | ||||||||||||||||||||
| Forfeited | ( | ) | ||||||||||||||||||
| Exercised | ( | ) | ||||||||||||||||||
| Outstanding as of August 31, 2021 | ||||||||||||||||||||
| Granted | - | |||||||||||||||||||
| Cancelled | ( | ) | ||||||||||||||||||
| Exercised | - | |||||||||||||||||||
| Outstanding as of August 31, 2022 | ||||||||||||||||||||
A summary of the Restricted Shares activities under the Amended 2015 Plan is as follows:
| Weighted | ||||||||||||||||
| Weighted | average | |||||||||||||||
| Number of | average | Aggregate | remaining | |||||||||||||
| Restricted | grant date | intrinsic | contractual | |||||||||||||
| Shares | fair value | value | term | |||||||||||||
| US$ | US$ | |||||||||||||||
| Outstanding as of September 1, 2019 | ||||||||||||||||
| Granted | ||||||||||||||||
| Forfeited | ( | ) | ||||||||||||||
| Exercised | ( | ) | ||||||||||||||
| Outstanding as of August 31, 2020 | ||||||||||||||||
| Granted | ||||||||||||||||
| Forfeited | ( | ) | ||||||||||||||
| Exercised | ( | ) | ||||||||||||||
| Outstanding as of August 31, 2021 | ||||||||||||||||
| Granted | ||||||||||||||||
| Cancelled | ( | ) | ||||||||||||||
| Exercised | ||||||||||||||||
| Outstanding as of August 31, 2022 | ||||||||||||||||
F-38
META DATA LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares and per share data)
| 8. | Share-Based Compensation (continued) |
Restricted shares issued to the founding shareholders of Shanghai Yimi (continued)
A summary of the activities under the Domestic Plan is as follows:
| Weighted | Weighted | |||||||||||||||
| Number of | average | average | Aggregate | |||||||||||||
| share | purchase | grant date | intrinsic | |||||||||||||
| options | price | fair value | value | |||||||||||||
| RMB | RMB | RMB | ||||||||||||||
| Outstanding as of August 31, 2019 | ||||||||||||||||
| Granted | ||||||||||||||||
| Forfeited | ||||||||||||||||
| Exercised | ( | ) | ||||||||||||||
| Outstanding as of August 31, 2020 | - | |||||||||||||||
| Vested and expected to vest as of August 31, 2020 | - | |||||||||||||||
The Company recognized share-based compensation expense for the years ended August 31, 2020, 2021 and 2022 as follows:
| For the years ended August 31, | ||||||||||||||||
| 2020 | 2021 | 2022 | 2022 | |||||||||||||
| RMB | RMB | RMB | US$ | |||||||||||||
| Sales and marketing | - | - | ||||||||||||||
| General and administrative | ||||||||||||||||
| Total share-based compensation expense | ||||||||||||||||
F-39
META DATA LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares and per share data)
| 9. | Income Taxes |
Cayman Islands
Under the current laws of the Cayman Islands, the Company, OneSmart Online and Yimi Cayman are not subject to tax on income or capital gain arising in Cayman Islands. Additionally, upon payments of dividends by the Company, OneSmart Online and Yimi Cayman to its shareholders, no Cayman Islands withholding tax will be imposed.
British Virgin Islands
Under the current laws of the British Virgin Islands, OneSmart BVI is not subject to tax on income or capital gains. In addition, upon payments of dividends by the company to its shareholders, no British Virgin Islands withholding tax will be imposed.
Hong Kong
OneSmart HK, Great EDU and Yimi HK are
incorporated in Hong Kong and are subject to Hong Kong profits tax of
PRC
The Company’s subsidiaries and
VIEs in the PRC are subject to the statutory rate of
Dividends, interests, rent or royalties
payable by the Group’s PRC subsidiaries, to non-PRC resident enterprises, and proceeds from any such non-resident enterprise investor’s
disposition of assets (after deducting the net value of such assets) shall be subject to
F-40
META DATA LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares and per share data)
| 9. | Income Taxes (continued) |
PRC (continued)
The reconciliations of the income tax expense for the years ended August 31, 2020, 2021 and 2022 were as follows:
| For the years ended August 31, | ||||||||||||||||
| 2020 | 2021 | 2022 | 2022 | |||||||||||||
| RMB | RMB | RMB | US$ | |||||||||||||
| Income/(loss) before income tax expense and share of net (loss)/income from equity investees | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| PRC statutory tax rate | % | % | % | % | ||||||||||||
| Income tax/(benefit) at statutory tax rate | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Non-deductible expenses | ||||||||||||||||
| International tax rate difference | ||||||||||||||||
| Preferential tax rate | ||||||||||||||||
| Effect of income tax exemptions | ||||||||||||||||
| Equity pick-up | ||||||||||||||||
| Additional tax deduction for qualified research and development expenses | ||||||||||||||||
| Change in valuation allowance | ||||||||||||||||
| Expired loss | ||||||||||||||||
| Interest and penalty | ||||||||||||||||
| Outside basis difference | ||||||||||||||||
| Effect of changes in tax rates on deferred taxes | - | - | ||||||||||||||
F-41
META DATA LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares and per share data)
| 9. | Income Taxes (continued) |
Composition of deferred tax assets and liabilities:
| As of | ||||
| August 31, 2022 | ||||
| Deferred tax assets | ||||
| Tax losses carried forward and other | ||||
| Valuation allowance | ( | ) | ||
| Total deferred tax assets | ||||
| 10. | Shareholders’ Equity |
On March 28, 2018, the Company completed
its IPO on the New York Stock Exchange. The Company offered
Pursuant to the Company’s memorandum
and articles of association, upon the completion of the IPO, all of the then outstanding redeemable convertible preferred shares automatically
converted into
As of August 31, 2022, the Company
had ordinary shares outstanding comprising of
As of August 31, 2021, the Company
had ordinary shares outstanding comprising of
During the year ended August 31, 2020,
On July 1, 2020, the Group acquired
additional
F-42
META DATA LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares and per share data)
| 11. | Loans |
The following table presents the Company’s outstanding loans as of August 31, 2021 and 2022:
| As of August 31, | ||||||||||||||||
| 2021 | 2022 | 2022 | ||||||||||||||
| RMB | RMB | US$ | ||||||||||||||
| Short-term loans | (a) | |||||||||||||||
| Long-term loans, current portion | (b) | |||||||||||||||
| Long-term loans | (b) | |||||||||||||||
| (a) | Short-term loans |
In
July 2022, Meta Data entered into one loan agreement with One Capital Fund I.L.P., pursuant to which Meta Data is entitled to borrow
HK17,
| (b) | Long-term loans |
In November 2017, Shanghai OneSmart
entered into a banking facility agreement with Shanghai Pudong Development Bank, pursuant to which Shanghai OneSmart is entitled to borrow
a RMB denominated loan of RMB
In March 2019, The Company entered
into a banking facility agreement with UBS AG Singapore Branch, pursuant to which Shanghai OneSmart is entitled to borrow a USD denominated
loan of US$
F-43
META DATA LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares and per share data)
| 11. | Loans (continued) |
In April 2019, Shanghai OneSmart Education
Investment entered into a banking facility agreement with Shanghai Pudong Development Bank, pursuant to which Shanghai OneSmart is entitled
to borrow a RMB denominated loan of RMB
In January 2020, OneSmart Education
Investment entered into a bank loan agreement with Shanghai Pudong Development Bank, pursuant to which Shanghai OneSmart is entitled to
borrow a RMB denominated loan of RMB
As of August 31, 2022, the maturities of the loan principals will be due according to the following schedule:
| RMB | US$ | |||||||
| 2023 | ||||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
F-44
META DATA LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares and per share data)
| 12. | Loan Payable |
| As of August 31, | ||||||||||||
| 2021 | 2022 | 2022 | ||||||||||
| RMB | RMB | US$ | ||||||||||
| Loan Payable | ||||||||||||
| Total | ||||||||||||
In July 2022, Metaverse Digital
entered into an agreement with WWJ Group, Inc, pursuant to which Metaverse Digital is entitled to borrow a loan of USD
In April 2022, Metaverse Digital
entered into an agreement with SOS Information Technology New York Inc, pursuant to which Metaverse Digital is entitled to borrow a
loan of USD
In February 2022, the Company
entered into an agreement with Mr. Feng, pursuant to which the Company borrowed a loan of USD
In December 2021, the Company
entered into an agreement with Mr. Li, pursuant to which the Company borrowed a loan of USD
In December 2021, the Company entered
into an agreement with Mr. Li, pursuant to which the Company borrowed a loan of USD
| 13. | Convertible senior notes |
On February 28, 2020 and March 16, 2020,
the Company issued US$
The Notes holders have the right, at
their option, to convert the outstanding principal amount of the Notes, to convert all or any portion (if the portion to be converted
is US$
The initial conversion price is US$
The holders may require the Company
to repurchase all or a portion of the Notes for cash on February 28, 2023 and March 16, 2023 at a repurchase price equal to
F-45
META DATA LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares and per share data)
| 13. | Convertible Senior Notes (continued) |
If certain events of default, changes in tax laws of the relevant taxing jurisdiction or fundamental change as defined in the indenture for the Notes were to occur, the outstanding obligations under the Notes could be immediately due and payable (the “Contingent Redemption Options”). The Company will pay additional interest, at its election, as the sole remedy relating to the failure to comply with certain reporting obligations as defined in the indenture of the Notes. In addition, the Notes provide its holders with additional interest equal to the fair value of any dividends received by the holders of the Company’s ordinary shares (the “Contingent Interest Features”).
The Company evaluated the embedded conversion features contained in the Notes and determined that the Conversion Option was not required to be bifurcated because it met the scope exception provided for under ASC 815-10-15-74(a).
The Company also evaluated the embedded Contingent Redemption Options and Contingent Interest Features contained in the Notes in accordance with ASC 815 to determine if these features require bifurcation. The Contingent Redemption Options were not required to be bifurcated because they are considered to be clearly and closely related to the debt host, as the Notes were not issued at a substantial discount and are redeemable at par.
The Contingent Interest Features are not considered to be clearly and closely related to the debt host and met the definition of a derivative. However, the fair value of the Contingent Interest Features on the issuance date and at December 31, 2020 was not significant. In addition, the Company assessed whether the additional interest payments need to be accrued as a liability in accordance with ASC 450. Since the likelihood of the occurrence of such default events is determined to be remote, the Company did not accrue additional interest expense for the year ended August 31, 2021. The Company will continue to assess the accrual for these additional interest payment liabilities at each reporting date.
Furthermore, no beneficial conversion
feature was recognized for the Notes as the fair value per ADS at the commitment date was US$
F-46
META DATA LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares and per share data)
| 14. | Earnings/(Loss) Per Share |
The following table sets forth the computation of basic and diluted net income per share for the following periods:
| As of August 31, | ||||||||||||||||
| 2020 | 2021 | 2022 | 2022 | |||||||||||||
| RMB | RMB | RMB | US$ | |||||||||||||
| Numerator: | ||||||||||||||||
| Net income/(loss) from continuing operations attributable to ordinary shareholders for computing net income per ordinary share - basic and diluted. | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net income/(loss) from discontinued operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| ( | ) | ( | ) | ( | ) | ( | ) | |||||||||
| Denominator: | ||||||||||||||||
| Weighted average number of shares used in calculating net income/(loss) per ordinary share - basic (in millions of shares) | ||||||||||||||||
| Incremental weighted-average ordinary shares from assumed exercise of share options and vesting of restricted shares using the treasury stock method (in millions of shares) | ||||||||||||||||
| Weighted average number of shares used in calculating net income/(loss) per ordinary share - diluted (in millions of shares) | ||||||||||||||||
| ( | ) | ( | ) | ( | ) | ( | ) | |||||||||
| ( | ) | ( | ) | ( | ) | ( | ) | |||||||||
No adjustments were made to the basic earnings/(loss) per share amounts presented for the year ended August 31, 2021 and August 31, 2022 as the impact of the outstanding share options and restricted shares and convertible senior notes in the relevant periods were anti-dilutive.
F-47
META DATA LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares and per share data)
| 15. | Accumulated Other Comprehensive Income |
The components of accumulated other comprehensive income were as follows:
| Unrealized gains/(loss) on | Foreign currency translation | |||||||||||
| investment | adjustment | Total | ||||||||||
| RMB | RMB | |||||||||||
| Balance as of August 31, 2019 | ||||||||||||
| Other comprehensive income before reclassification, net of tax | ( | ) | ( | ) | ||||||||
| Amounts reclassified from accumulated other comprehensive income, net of tax | ||||||||||||
| Foreign currency translation adjustment | ||||||||||||
| Balance as of August 31, 2020 | ||||||||||||
| Other comprehensive income before reclassification, net of tax | ( | ) | ( | ) | ||||||||
| Amounts reclassified from accumulated other comprehensive income, net of tax | ||||||||||||
| Foreign currency translation adjustment | ||||||||||||
| Balance as of August 31, 2021 | ( | ) | ||||||||||
| Other comprehensive income before reclassification, net of tax | ||||||||||||
| Foreign currency translation adjustment | ( | ) | ( | ) | ||||||||
| Balance as of August 31, 2022 | ( | ) | ||||||||||
| Balance as of August 31, 2022, in US$ | ( | ) | ||||||||||
F-48
META DATA LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares and per share data)
| 16. | Restricted Net Assets |
Prior to payment of dividends, pursuant to the laws applicable to the PRC’s foreign investment enterprises, the VIEs and the VIEs’ subsidiaries must make appropriations from after-tax profit to non-distributable reserve funds as determined by the board of directors of each company. These reserves include (i) general reserve and (ii) the development fund.
Subject to certain cumulative limits,
in the event the Company’s board of directors declares dividends, the general reserve requires annual appropriations of
PRC laws and regulations also require
private schools to make annual appropriations of no less than
The general reserve and development fund cannot be transferred to the Company in the form of loans or advances and are not distributable as cash dividends except in the event of liquidation.
| 17. | Leases |
The Group’s operating leases mainly related to offices and classroom facilities. The Group has no finance leases. The Company do not assume renewals in our determination of the lease term unless the renewals are reasonably certain to be exercised at lease commencement. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The Opinion and a related series of notice, administrative measures or circular and the compliance measures taken by the Company have material adverse impact on our after-school tutoring services related to academic subjects in China’s compulsory education system, which in turn have adversely affected the Company’s results of operations and prospect. We have gradually terminated our after-school tutoring services related to academic subjects business since August 2021, and officially ceased our all business in October 2021. All of the Company’s operating leases mainly related to offices and classroom facilities were gradually terminated since August 2022. The Company removed the right-of-use asset and the lease liability, with loss recognized of RMB (US$ ) for the difference in accordance with ASC842-20-40-1. By the end of August 31, 2022, all rental deposits related to those early terminated lease contracts have been expensed as the early termination penalty by the Company .
F-49
META DATA LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares and per share data)
| 18. | Commitments and Contingencies |
| (a) | Capital expenditure commitments |
The Group has no capital expenditure
commitment as of August 31, 2022, which are expected to be paid within
| (b) | Contingencies |
The Group has been named as a defendant
in a number of lawsuits arising in its ordinary course of business (classified to the discontinued operations in fiscal 2022). As of the
date of this annual report, the Company continues to use all commercially reasonable efforts to defend itself in these proceedings and
is undergoing on-going discussion with regulatory authorities. We make the accrual in RMB
Amount in thousands of Renminbi (“RMB”) except for number of cases
| Numbers | Total amount involved RMB | Amount involved scope per case | ||||||||
| Lease | From | |||||||||
| Advertisement | ||||||||||
| Technology service | From | |||||||||
| Purchase | From | |||||||||
| Property preservation | From | |||||||||
| Decoration | From | |||||||||
| Education service | From | |||||||||
| Total | ||||||||||
As of the date of this annual report, the Company is using all commercially reasonable efforts to defend itself in these proceedings and is still undergoing on-going discussion with regulatory authorities.
| 19. | Fair Value Measurement |
The Group applies ASC 820 (“ASC 820”), Fair Value Measurements and Disclosures. ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. ASC 820 requires disclosures to be provided on fair value measurement.
ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 - Other inputs that are directly or indirectly observable in the marketplace.
Level 3 - Unobservable inputs which are supported by little or no market activity.
ASC 820 describes three main approaches to measuring the fair value of assets and liabilities: (1) market approach; (2) income approach; and (3) cost approach. The market approach uses prices and other relevant information generated from market transactions involving identical or comparable assets or liabilities. The income approach uses valuation techniques to convert future amounts to a single present value amount. The measurement is based on the value indicated by current market expectations about those future amounts. The cost approach is based on the amount that would currently be required to replace an asset.
Assets and Liabilities Measured or Disclosed at Fair Value on a recurring basis
In accordance with ASC 820, the Group measures available-for-sale investments and contingent consideration for business acquisitions at fair value on a recurring basis. The fair value of the Group’s available-for-sale investments were measured using the income approach, based on the value indicated by current market expectations about those future amounts with the exception of one debt security, which was measured using the market approach, based on market value of comparable companies operating in similar businesses and other significant inputs derived from or corroborated by observable market data. The Company measured the fair value of contingent consideration for business combination using management’s estimates of the acquiree’s adjusted net operating profits for the years ended August 31, 2019 and 2020, as well as a discount factor which considered the time value of money and credit risk. Significant increases (decreases) in the inputs used in the fair value measurement of Level 3 available-for-sale securities and contingent consideration in isolation would result in a significant lower (higher) fair value measurement.
F-50
META DATA LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares and per share data)
| 19. | Fair Value Measurement (continued) |
Assets and liabilities measured or disclosed at fair value on a recurring basis are summarized below (continued):
| Fair value measurement or disclosure | ||||||||||||||||
| at August 31, 2022 using | ||||||||||||||||
| Total fair value at August 31, 2022 | Quoted prices in active market for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | |||||||||||||
| RMB | RMB | RMB | RMB | |||||||||||||
| Fair value measurement | ||||||||||||||||
| Short-term investments: | ||||||||||||||||
| Available-for-sale | ||||||||||||||||
| Long-term investments: | ||||||||||||||||
| Available-for-sale | ||||||||||||||||
| Total assets measured at fair value | ||||||||||||||||
| Total assets measured at fair value in US$ | ||||||||||||||||
| Fair value measurement | ||||||||||||||||
| Contingent consideration | ||||||||||||||||
| Total liability measured at fair value | - | - | ||||||||||||||
| Total liability measured at fair value in US$ | ||||||||||||||||
| Fair value measurement or disclosure | ||||||||||||||||
| at August 31, 2021 using | ||||||||||||||||
| Total fair value at August 31, 2021 | Quoted prices in active market for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | |||||||||||||
| RMB | RMB | RMB | RMB | |||||||||||||
| Fair value measurement | ||||||||||||||||
| Short-term investments: | ||||||||||||||||
| Available-for-sale | ||||||||||||||||
| Long-term investments: | ||||||||||||||||
| Available-for-sale | ||||||||||||||||
| Total assets measured at fair value | ||||||||||||||||
| Total assets measured at fair value in US$ | ||||||||||||||||
| Fair value measurement | ||||||||||||||||
| Contingent consideration | ||||||||||||||||
| Total liability measured at fair value | ||||||||||||||||
| Total liability measured at fair value in US$ | ||||||||||||||||
F-51
META DATA LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares and per share data)
| 19. | Fair Value Measurement (continued) |
Reconciliations of assets categorized within Level 3 under the fair value hierarchy are as follow:
Available-for-sale investments:
| RMB | ||||
| Balance as of August 31, 2019 | ||||
| Additions | ||||
| Disposals | ( | ) | ||
| Changes in fair value | ( | ) | ||
| Accrued interest | ||||
| Impairment loss | ( | ) | ||
| Balance as of August 31, 2020 | ||||
| Additions | ||||
| Disposals | ( | ) | ||
| Changes in fair value | ( | ) | ||
| Accrued interest | ||||
| Impairment loss | ( | ) | ||
| Balance as of August 31, 2021 | ||||
| Additions | ||||
| Disposals | ( | ) | ||
| Changes in fair value | ||||
| Accrued interest | ||||
| Impairment loss | ||||
| Balance as of August 31, 2022 | ||||
| Balance as of August 31, 2022, in US$ | ||||
Assets and Liabilities Measured or Disclosed at Fair Value on a nonrecurring basis
The Group measures certain financial assets, including equity method investments and equity securities without readily determinable fair value, at fair value on a nonrecurring basis only if impairment charges were to be recognized. The Group’s non-financial assets, such as goodwill, intangible assets and property and equipment, would be measured at fair value only if they were determined to be impaired on an other-than-temporary basis.
During the years ended August 31,2022, RMB (US$ ) impairment charge was recorded for equity securities without readily determinable fair value. The valuations are classified within Level 3, using income approach based on the Group’s best estimate of the future cash flow forecast and the discount rate.
F-52
META DATA LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares and per share data)
| 20. | Subsequent Events |
| 20.1. | Closing of Private Placement |
The Company entered into certain
securities purchase agreement on August 9, 2022 (the “SPA”) with certain non-affiliated and accredited “non-U.S. Persons”,
(the “Purchasers”). Pursuant to which the Company agreed to sell
| 20.2. | Disposition |
On October 28, 2022, the Company,
OneSmart Edu Inc. (“OneSmart BVI”), the Company’s wholly owned subsidiary, and Muckle Capital Investment Co., Ltd.
(the “Purchaser”), entered into a certain share purchase agreement (the “Disposition SPA”). Pursuant to the
Disposition SPA, the Purchaser agreed to purchase OneSmart BVI in exchange for cash consideration of $
As of November 25, 2022, the Company completed the disposition after the satisfaction or waiver of all closing conditions.
F-53
META DATA LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares and per share data)
| 21. | Disposition of a subsidiary |
On October 28, 2022, the Company, OneSmart
Edu Inc. (“OneSmart BVI”), the Company’s wholly owned subsidiary, and Muckle Capital Investment Co., Ltd. (the “Purchaser”),
entered into a certain share purchase agreement (the “Disposition SPA”). Pursuant to the Disposition SPA, the Purchaser agreed
to purchase OneSmart BVI in exchange for cash consideration of $
The following is a reconciliation of the carrying amounts of major classes of assets and liabilities held for sale in the consolidated balance sheet of August 31, 2022 and August 31, 2021.
| As of August 31, | ||||||||||||
| 2021 | 2022 | 2022 | ||||||||||
| RMB | RMB | US$ | ||||||||||
| Carrying amounts of major classes of assets held for sale: | ||||||||||||
| Cash and cash equivalents | ||||||||||||
| Restricted cash | ||||||||||||
| Short-term investments | ||||||||||||
| Property and equipment, net | ||||||||||||
| Total assets of disposal group | ||||||||||||
| Carrying amounts of major classes of liabilities held for sale: | ||||||||||||
| Accrued expenses and other current liabilities | ||||||||||||
| Income taxes payable | ||||||||||||
| Prepayments from customers | ||||||||||||
| Amounts due to related parties | ||||||||||||
| Short-term loans | ||||||||||||
| Long-term loans, current portion | ||||||||||||
| Long-term loans | ||||||||||||
| Other non-current liabilities | ||||||||||||
| Total liabilities of disposal group | ||||||||||||
The following is a reconciliation of the amounts of major classes of operations classified as discontinued operations in the consolidated statements of operations and other comprehensive income (loss) for the years ended August 31, 2020, 2021 and 2022.
| For the years ended August 31, | ||||||||||||||||
| 2020 | 2021 | 2022 | 2022 | |||||||||||||
| RMB | RMB | RMB | US$ | |||||||||||||
| Net revenues | 3,423,410 | |||||||||||||||
| Cost of revenues | ( | ) | (2,093,743 | ) | ( | ) | ( | ) | ||||||||
| Gross profit | 1,329,667 | ( | ) | ( | ) | |||||||||||
| Operating expenses: | ||||||||||||||||
| Selling and marketing | 930,030 | |||||||||||||||
| General and administrative | 5,199,486 | |||||||||||||||
| Total operating expenses | 6,129,516 | |||||||||||||||
| Operating income/(loss) | ( | ) | (4,799,849 | ) | ( | ) | ( | ) | ||||||||
| Interest income | 3,765 | |||||||||||||||
| Interest expense | ( | ) | (46,967 | ) | ( | ) | ( | ) | ||||||||
| Other income | 99,335 | |||||||||||||||
| Other expense | ( | ) | (135,239 | ) | ( | ) | ( | ) | ||||||||
| Foreign exchange gain/(loss) | ( | ) | 4,950 | - | ||||||||||||
| Income/(loss) before income tax and share of net income/(loss) from equity investees | ( | ) | (4,874,005 | ) | ( | ) | ( | ) | ||||||||
| Income tax (expense)/benefit | (30,870 | ) | ||||||||||||||
| Income/(loss) before share of net loss from equity investees | ( | ) | (4,904,875 | ) | ( | ) | ( | ) | ||||||||
| Share of net loss from equity investees | ( | ) | (10,705 | ) | - | |||||||||||
| Net (loss)/income from discontinuing operations | ( | ) | (4,915,580 | ) | ( | ) | ( | ) | ||||||||
F-54
META DATA LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares and per share data)
| 22. | Condensed Financial Information of the Company |
The following is the condensed financial information of the Company on a parent company only basis.
Condensed balance sheets
| As of August 31, 2021 | As of August 31, 2022 | As of August 31, 2022 | ||||||||||
| RMB | RMB | US$ | ||||||||||
| ASSETS | ||||||||||||
| Current assets: | ||||||||||||
| Cash and cash equivalents | ||||||||||||
| Restricted cash | ||||||||||||
| Short-term investments | ||||||||||||
| Amounts due from subsidiaries | ||||||||||||
| Total current assets and total assets | ||||||||||||
| Liabilities and Shareholders’ Equity | ||||||||||||
| Current liabilities: | ||||||||||||
| Short-term loans | ||||||||||||
| Loan payables | ||||||||||||
| Accrued expenses and other current liabilities | ||||||||||||
| Long-term loan, current portion | ||||||||||||
| Total current liabilities | ||||||||||||
| Non-current liabilities: | ||||||||||||
| Loss in excess of investments in subsidiaries, VIEs and VIEs’ subsidiaries | ||||||||||||
| Convertible Senior Notes | ||||||||||||
| Amounts due to subsidiaries | ||||||||||||
| Total non-current liabilities | ||||||||||||
| Total liabilities | ||||||||||||
| Commitments and contingencies | ||||||||||||
| Shareholders’ equity | ||||||||||||
| Class A ordinary shares (US$ | ||||||||||||
| Class B ordinary shares (US$ | ||||||||||||
| Additional paid-in capital | ||||||||||||
| Treasury stock | ( | ) | ||||||||||
| Statutory reserves | ||||||||||||
| Accumulated deficits | ( | ) | ( | ) | ( | ) | ||||||
| Accumulated other comprehensive income | ||||||||||||
| Total shareholders’ equity | ( | ) | ( | ) | ( | ) | ||||||
| Total liabilities and shareholders’ equity | ||||||||||||
F-55
META DATA LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares and per share data)
| 22. | Condensed Financial Information of the Company (continued) |
Condensed statements of income/(loss) and condensed statements of comprehensive income/(loss)
| For the years ended August 31, | ||||||||||||||||
| 2020 | 2021 | 2022 | 2022 | |||||||||||||
| RMB | RMB | RMB | US$ | |||||||||||||
| Operating expenses: | ||||||||||||||||
| Selling and marketing | ( | ) | ( | ) | ||||||||||||
| General and administrative | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest income | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Foreign exchange gain/(loss) | ( | ) | ||||||||||||||
| Share of loss in subsidiaries, VIEs and VIEs’ subsidiaries | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss before income tax provision | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Provision for income tax | ||||||||||||||||
| Net loss attributable to ordinary shareholders of Meta Data Limited | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Unrealized gain on available-for-sale investments, net of tax | - | |||||||||||||||
| Foreign currency translation adjustment | ( | ) | ( | ) | ||||||||||||
| Comprehensive loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
F-56
META DATA LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares and per share data)
| 22. | Condensed Financial Information of the Company (continued) |
Condensed statements of cash flows
| For the years ended August 31, | ||||||||||||||||
| 2020 | 2021 | 2022 | 2022 | |||||||||||||
| RMB | RMB | RMB | US$ | |||||||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net cash (used in) provided by investing activities | ( | ) | ||||||||||||||
| Net cash (used in) provided by financing activities | ( | ) | ( | ) | ||||||||||||
| Effect of exchange rate changes | ( | ) | ( | ) | ( | ) | ||||||||||
| Net decrease in cash and cash equivalents and restricted cash | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Cash and cash equivalents and restricted cash, at beginning of year | ||||||||||||||||
| Cash and cash equivalents and restricted cash, at end of year | ||||||||||||||||
Basis of presentation
Condensed financial information is used for the presentation of the Company, or the parent company. The condensed financial information of the parent company has been prepared using the same accounting policies as set out in the Company’s consolidated financial statements except that the parent company used the equity method to account for investment in its subsidiaries and VIEs and the VIEs’ subsidiaries.
The parent company records its investment in its subsidiaries and VIEs and the VIEs’ subsidiaries under the equity method of accounting as prescribed in ASC 323, Investments-Equity Method and Joint Ventures. Such investments are presented on the condensed balance sheets as “Investment in subsidiaries, VIEs and VIEs’ subsidiaries” and their respective profit or loss as “Share of income/(loss) in subsidiaries, VIEs and VIEs’ subsidiaries” on the condensed statements of income. Equity method accounting ceases when the carrying amount of the investment, including any additional financial support, in a subsidiary and VIE is reduced to zero unless the parent company has guaranteed obligations of the subsidiary and VIE or is otherwise committed to provide further financial support. If the subsidiary and VIE subsequently reports net income, the parent company shall resume applying the equity method only after its share of that net income equals the share of net losses not recognized during the period the equity method was suspended.
The parent company’s condensed financial statements should be read in conjunction with the Company’s consolidated financial statements.
F-57