DRS/A 1 filename1.htm Amendment No.2 to Draft Registration Statement
Table of Contents

As confidentially submitted to the Securities and Exchange Commission on April 27, 2018

Registration No. 333 –                    

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Puxin Limited

(Exact name of Registrant as specified in its charter)

 

 

Not Applicable

(Translation of Registrant’s name into English)

 

 

 

Cayman Islands   8200   Not Applicable
(State or Other Jurisdiction of
Incorporation or Organization)
  (Primary Standard Industrial
Classification Code Number)
 

(I.R.S. Employer

Identification Number)

Floor 16, Chuangfu Mansion, No. 18 Danling Street, Haidian District,

Beijing, 100080, the People’s Republic of China

+86 10 8260 5578

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

Cogency Global Inc.

10 E. 40th Street, 10th Floor

New York, New York 10016

(800) 221-0102

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Li He, Esq.
Davis Polk & Wardwell LLP

2201 China World Office 2

No. 1 Jian Guo Men Wai Avenue

Chaoyang District, Beijing 100004

People’s Republic of China

+86 10 8567-5000

 

James C. Lin, Esq.
Davis Polk & Wardwell LLP

c/o 18th Floor

The Hong Kong Club Building
3A Chater Road, Central
Hong Kong
+852 2533-3300

 

Dan Ouyang, Esq.

Weiheng Chen, Esq.

Wilson Sonsini Goodrich & Rosati

Suit 1509, 15F, Jardine House

1 Connaught Place, Central

Hong Kong

+852 3972-4955

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933. Emerging growth company  ☒

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 7(a)(2)(B) of the Securities 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.

 

 

CALCULATION OF REGISTRATION FEE

 

 

 

Title of each class of

securities to be registered

  Proposed
maximum aggregate
offering price(3)
  Amount of
registration fee

Ordinary shares, par value US$0.00005 per share(1)(2)

  US$           US$        

 

 

(1) American depositary shares issuable upon deposit of the ordinary shares registered hereby will be registered pursuant to a separate registration statement on Form F-6 (Registration No. 333-            ). Each American depositary share represents              ordinary shares.
(2) Includes ordinary shares initially offered and sold outside the United States that may be resold from time to time in the United States either as part of their distribution or within 40 days after the later of the effective date of this registration statement and the date the shares are first bona fide offered to the public, and also includes shares that may be purchased by the underwriters pursuant to an over-allotment option. These ordinary shares are not being registered for the purpose of sales outside the United States.
(3) Estimated solely for the purpose of computing the amount of registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where such offer or sale is not permitted.

 

SUBJECT TO COMPLETION

PRELIMINARY PROSPECTUS DATED            , 2018

American Depositary Shares

 

LOGO

Puxin Limited

Representing              Ordinary Shares

 

 

This is the initial public offering of American depositary shares, or ADSs, of Puxin Limited. We are offering              ADSs. [The selling shareholders are offering              ADSs. We will not receive any proceeds from the sale of shares by the selling shareholders.] Each ADS represents              ordinary shares, par value US$0.00005 per share.

Prior to this offering, there has been no public market for the ADSs or our ordinary shares. We anticipate that the initial public offering price of the ADSs will be between US$             and US$             per ADS.

We [have applied] to have the ADSs listed on the New York Stock Exchange, or NYSE, under the symbol “NEW.”

We are an “emerging growth company” under applicable U.S. federal securities laws and are eligible for reduced public company reporting requirements.

 

 

Investing in the ADSs involves risks. See “Risk Factors” beginning on page 16 of this prospectus.

 

 

 

Neither the United States Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

     Per ADS      Total  

Initial public offering price

   US$                   US$               

Underwriting discount and commissions(1)

   US$                   US$               

Proceeds, before expenses, to the Issuer

   US$                   US$               

[Proceeds, before expenses, to the selling shareholders]

   US$                   US$               

 

  (1) For a description of compensation payable to the underwriters, see “Underwriting.”

The underwriters have an option to purchase up to an aggregate of              additional ADSs from us [and the selling shareholders] at the initial public offering price, less underwriting discounts and commissions.

The underwriters expect to deliver the ADSs against payment in U.S. dollars on                 , 2018.

 

 

 

Citigroup   Deutsche Bank Securities   Barclays   Haitong International   CICC

 

 

Prospectus dated             , 2018


Table of Contents

 

 

 

[Page intentionally left blank for graphics]

 

 

 


Table of Contents

TABLE OF CONTENTS

 

 

 

     PAGE  

Prospectus Summary

     1  

The Offering

     8  

Summary Consolidated Financial and Operating Data

     10  

Risk Factors

     16  

Special Note Regarding Forward-Looking Statements

     53  

Use of Proceeds

     54  

Dividend Policy

     55  

Capitalization

     56  

Exchange Rate Information

     58  

Dilution

     59  

Enforceability of Civil Liabilities

     61  

Corporate History and Structure

     63  

Selected Consolidated Financial and Operating Data

     70  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     75  

Unaudited Pro Forma Condensed Consolidated Financial Data

     108  

Industry Overview

     113  

Business

     119  

Regulation

     143  

Management

     161  

Principal [and Selling] Shareholders

     168  

Related Party Transactions

     170  

Description of Share Capital

     171  

Description of American Depositary Shares

     183  

Shares Eligible for Future Sale

     193  

Taxation

     195  

Underwriting

     201  

Expenses Relating to This Offering

     210  

Legal Matters

     211  

Experts

     212  

Where You Can Find Additional Information

     213  

Index to Consolidated Financial Statements

     F-1  

 

 

We have not authorized anyone to provide any information other than that contained in this prospectus or in any free writing prospectus prepared by or on our behalf or to which we have referred you. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We are offering to sell, and seeking offers to buy, the ADSs only in jurisdictions where such offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or the sale of any ADS.

We have not taken any action to permit a public offering of the ADSs outside the United States or to permit the possession or distribution of this prospectus outside the United States. Persons outside the United States who came into possession of this prospectus must inform themselves about and observe any restrictions relating to the offering of the ADSs and the distribution of this prospectus outside of the United States.

Until             , 2018 (the 25th day after the date of this prospectus), all dealers that buy, sell or trade ADSs, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

i


Table of Contents

PROSPECTUS SUMMARY

This summary highlights information appearing elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. You should carefully read this entire prospectus, including the “Risk Factors” section and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and the financial statements and the related notes, before deciding whether to invest in our ADSs. This prospectus contains information from an industry report commissioned by us and prepared by Frost & Sullivan, a third-party research firm, to provide information regarding our industry and market position in China. We refer to this report as the Frost & Sullivan report.

Our Mission

We believe that education inspires personal growth and opens up opportunities. Our mission is to empower people to build better lives through learning. We are committed to providing high quality education services to students, as well as upgrading the service quality in China’s after-school education industry by applying our acquisition and integration expertise.

Overview

We are a successful consolidator of the after-school education industry in China. We have strong acquisition and integration expertise to effectively improve education quality and operational performance of acquired schools. Through acquisitions and organic growth, we have grown rapidly and became the third largest after-school education service provider in China in 2017 in terms of student enrollments, according to the Frost & Sullivan report. Since our inception, we had acquired 48 schools and built a nationwide network of 397 learning centers across 35 cities in China as of March 31, 2018. Our total student enrollments increased 180.4% from 454,945 in 2016 to 1,275,723 in 2017, representing the fastest growth among major after-school education service providers in China, according to the Frost & Sullivan report. In the first quarter of 2017 and 2018, our total student enrollments were 185,446 and 260,973, respectively.

We offer a full spectrum of K-12 and study-abroad tutoring programs designed to help students achieve academic excellence, as well as prepare for admission tests and applications for top schools, universities and graduate programs in China and other countries. In addition to classroom-based tutoring, we have also developed online and mobile applications to increase students’ after-class exposure to our services and enhance their learning experience.

Market Opportunity

China’s after-school education market is fast-growing. Its market size reached RMB483.4 billion in 2017 and is expected to grow substantially to RMB804.9 billion in 2022, according to the Frost & Sullivan report. At the same time, this market is highly fragmented and competitive. According to the Frost & Sullivan report, as of December 31, 2017, there were over 100,000 K-12 after-school tutoring service providers in China, among which the top five players had less than 4% market share in 2017 in terms of revenue. Many service providers operate limited number of learning centers, often at a loss, and lack the scale or management expertise necessary to invest in curriculum development, instructor training and technology necessary to improve students’ academic results and attract more students.

The continued growth of China’s after-school education market is driven by a number of factors, including rapid economic growth, intensified competition for high-quality educational resources and the increasing demand for overseas education and experience.



 

1


Table of Contents

Chinese culture attaches great importance to education as a means of enhancing an individual’s worth and promoting his or her career and social status. Given the pressure to excel on entrance exams to high schools and universities, the shortened school hours required by recent government policies (such as the National Plan for Medium- and Long-Term Education Reform and Development (2010-2020) issued in July 2010 and the Administrative Standards for Compulsory Education Schools issued in December 2017), as well as the limited supply of quality schools, a large number of parents and students choose private after-school tutoring services to complement public school education. According to the Frost & Sullivan report, urban students in China spent on average 10.6 hours per week on after-school tutoring in 2017. The demand for study-abroad test preparation and consulting services has also benefited from the growing number of Chinese students pursuing higher education abroad.

We believe that this large and fragmented market presents an attractive consolidation opportunity for us to leverage our acquisition and operational expertise, strong teaching quality, brand and reputation.

Our Solutions

We have developed a business model effectively combining strategic acquisitions and organic growth achieved through successful post-acquisition integration, which has differentiated us from other after-school education service providers in China. This approach has enabled us to achieve rapid growth and capture consolidation opportunities in China’s fragmented after-school education market.

We have adopted a systematic and disciplined approach towards acquisitions. We screen and evaluate potential acquisitions through a set of rigorous criteria, including the targets’ geographic location, reputation in the local market, growth potential, synergies with our existing schools and the probability of successful integration. Since our inception, we identified and contacted over 1,000 targets, of which we acquired 48 schools. These acquisitions enabled us to penetrate our target markets with relatively low customer acquisition and marketing costs by leveraging the well-established presence of our acquired schools in local markets.

We are able to efficiently complete our acquisitions and rapidly improve operations and management of acquired schools because of our superior post-acquisition management and operational capabilities. In all acquired schools, we implement our modular management system, Puxin Business System, or PBS. It is designed in-house by our core management team reflecting over 15 years of accumulated management experience in China’s education industry. PBS incorporates the best practices of operating after-school learning centers in a standard, common collection of business processes and process improvement methodologies. It covers over 3,000 management processes and we use PBS tools to analyze schools’ growth potential and formulate improvement plans.

We are committed to providing our students with high quality services and outstanding learning experience. Our commitment is reflected in recruitment, training and retaining the best teachers, developing and improving our curriculum and course materials, as well as standardizing operating procedures and learning practices throughout our network. This focus on quality has led to a high level of student satisfaction and strong academic results, enabling us to reach high student retention rate and contributing to student recruitment. As a result, most of our acquired schools achieved robust organic growth under our operations.

We believe that our track record of successful acquisitions and post-acquisition integration has not only created network effects attracting increasing number of independent after-school operators seeking potential exit, but also created entry barriers for potential competitors. We have established “Puxin” as one of the most-recognized brand names among industry participants and built our first-mover advantage to capture consolidation opportunities in China’s after-school education market.



 

2


Table of Contents

Our net revenues increased by 192.0% from RMB439.2 million in 2016 to RMB1,282.6 million (US$204.5 million) in 2017. For the three months ended March 31, 2018, our net revenues reached RMB495.7 million (US$79.0 million), an increase of 150.1% from RMB198.2 million for the same period in 2017. Our net loss was RMB127.6 million, RMB397.2 million (US$63.3 million) and RMB355.0 million (US$56.6 million) in 2016, 2017 and the first quarter of 2018, respectively. As of December 31, 2016 and 2017 and March 31, 2018, our deferred revenue was RMB318.3 million, RMB1,035.4 million (US$165.1 million) and RMB875.2 million (US$139.5 million), respectively. Our adjusted EBITDA was RMB(62.5) million and RMB(219.4) million (US$(35.0) million) in 2016 and 2017, respectively, and for the three months ended March 31, 2017 and 2018, our adjusted EBITDA was RMB(14.8) million and RMB(19.0) million (US$(3.0) million), respectively. For a detailed description of our non-GAAP measures, see “Summary Consolidated Financial and Operating Data — Non-GAAP Financial Measures.”

Our Strengths

We believe the following strengths contribute to our success and differentiate us from our competitors:

 

    leading position in China’s after-school education market;

 

    modular and evolving management system;

 

    track record of disciplined acquisitions;

 

    established reputation underpinned by teaching quality; and

 

    visionary management team and sophisticated talent system.

Our Strategies

We plan to pursue the following strategies to expand our business and further strengthen our leadership in the education market in China:

 

    expand our network and geographic coverage;

 

    improve performance, scale and profitability of our schools;

 

    cultivate and acquire talent;

 

    promote online initiatives and invest in technology; and

 

    enhance our brand name.

Risks and Uncertainties

Investing in our ADSs involves a high degree of risk. You should carefully consider the risks and uncertainties summarized below, the risks described under “Risk Factors” beginning on page 13 of, and the other information contained in, this prospectus before you decide whether to purchase our ADSs:

 

    our ability to achieve and maintain profitability;

 

    our ability to attract and retain students to enroll in our courses and study-abroad consulting programs;

 

    our ability to effectively manage our business expansion and successfully integrate businesses we acquire;

 

    our ability to continue to recruit, train and retain a sufficient number of qualified teachers and consultants;

 

    our ability to improve the content of our existing courses or to develop new courses;


 

3


Table of Contents
    our ability to comply with the relevant laws and regulations in the PRC; and

 

    our ability to exercise effective control over our variable interest entity structure.

Corporate History and Structure

We are an exempted company with limited liability incorporated in the Cayman Islands. In September 2014, Puxin Education Technology Group Co., Ltd. (formerly known as Beijing Puxin Education Technology Co., Ltd.), or Puxin Education, was incorporated in Beijing, China. We operate our business through Puxin Education and its subsidiaries in China.

Beginning in March 2017, we underwent a series of restructuring in contemplation of this offering. In particular:

 

    Incorporation of the listing entity. In March 2017, we incorporated Puxin Limited under the laws of the Cayman Islands as our proposed listing entity in the Cayman Islands.

 

    Incorporation of Hong Kong and PRC subsidiaries. In April 2017, we established a wholly-owned subsidiary in Hong Kong, Prepshine Holdings Co., Limited, or Prepshine Holdings, to be our intermediate holding company and to facilitate our initial public offering in the United States. In January 2018, we also established a wholly-owned subsidiary in China, Purong (Beijing) Information Technology Co., Ltd., or Purong Beijing, through which we obtained control over Puxin Education based on a series of contractual arrangements entered into on February 5, 2018.

 

    Contractual arrangements. Due to PRC legal restrictions on foreign ownership in education services, we carry out our business in China through Puxin Education and its subsidiaries. In February 2018, we, through our PRC subsidiary, Purong Beijing, entered into a series of contractual arrangements with (i) Puxin Education, and (ii) the shareholders of Puxin Education, to obtain effective control of our variable interest entity.

Subsequent to the establishment of Puxin Education, we acquired and established a number of entities to grow our business. From 2015 to 2017, the total number of our learning centers increased from 99 as of December 31, 2015 to 231 as of December 31, 2016, and further increased to 400 as of December 31, 2017. The number of our learning centers slightly decreased to 397 as of March 31, 2018, reflecting the combination of 25 learning centers we closed and 22 learning centers we constructed in the first quarter of 2018. We closed the 25 learning centers during our integration process of acquired schools, some of which were combined with other learning centers to improve operational efficiency of our learning centers.



 

4


Table of Contents

The following diagram illustrates our corporate structure immediately following the completion of this offering, assuming no exercise of the over-allotment option granted to the underwriters:

 

LOGO

 

(1) Mr. Liang Gao, Mr. Gang Li, Mr. Yun Xiao, Tianjin Puxian Education and Technology Limited Partnership, Shanghai Trustbridge Investment Management Co., Ltd. and Ningbo Meishan Bonded Port Area Zhimei Phase V Equity Investment Limited Partnership hold a 5.698%, 3.419%, 1.140%, 18.233%, 3.6335% and 3.6335% equity interest in Puxin Education, respectively.

Corporate Information

Our corporate headquarters is located at Floor 16, Chuangfu Mansion, No. 18 Danling Street, Haidian District, Beijing, the People’s Republic of China. Our telephone number at this address is +86 10 8260 5578.

Our registered office in the Cayman Islands is located at the offices of Osiris International Cayman Limited, Suite #4-210, Governors Square, 23 Lime Tree Bay Avenue, PO Box 32311, Grand Cayman KY1-1209, Cayman Islands.



 

5


Table of Contents

Our agent for service of process in the United States is Cogency Global Inc. located at 10 East 40th Street, 10th Floor, New York, New York 10016.

Our website can be found at http://www.pxjy.com. The information contained on our website is not a part of this prospectus.

We are an “emerging growth company” as the term is used in the Jumpstart Our Business Startups Act of 2012, or the “JOBS Act,” and, as such, we are subject to certain reduced public company reporting requirements. See the applicable disclosure under the section captioned “Risk Factors—Risk Factors Related to Our ADSs and This Offering.”

Implications of Being an Emerging Growth Company

As a company with less than US$1.07 billion in total annual gross revenue for our last fiscal year, we qualify as an “emerging growth company” pursuant to the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements compared to those that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002 in the assessment of the emerging growth company’s internal control over financial reporting. 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 remain an emerging growth company until the earliest of (i) the last day of the fiscal year during which we have total annual gross revenues of at least US$1.07 billion; (ii) the last day of our fiscal year following the fifth anniversary of the completion of this offering; (iii) the date on which we have, during the preceding three-year period, issued more than US$1.0 billion in non-convertible debt; or (iv) the date on which we are deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended, or the Exchange Act, which would occur if the market value of the ADSs that are held by non-affiliates exceeds US$700 million as of the last business day of our most recently completed second fiscal quarter. Once we cease to be an emerging growth company, we will not be entitled to the exemptions provided in the JOBS Act discussed above.

Conventions that Apply to this Prospectus

Except where the context otherwise indicates and for the purpose of this prospectus only:

 

    “ADSs” refers to our American depositary shares, each representing              of our ordinary shares, and “ADRs” refer to the American depositary receipts that evidence our ADSs;

 

    “China” or “PRC” refers to the People’s Republic of China, excluding, for purposes of this prospectus, Hong Kong, Macau and Taiwan;

 

    “K-12” refers to the three years before the first grade through the last year of high school;

 

    “K-12 course withdrawal rate” refers to the ratio of the number of students withdrawing from a K-12 course to the total number of students enrolled at the beginning of that course;

 

    “K-12 group class utilization rate” refers to the number of students enrolled in a K-12 tutoring group class course as a percentage of the maximum number of students for that course;


 

6


Table of Contents
    “K-12 group class student retention rate” refers to the number of students who continue to enroll in K-12 tutoring group class courses (excluding promotional programs) at our learning centers after completing a K-12 tutoring group class course in a particular period as a percentage of the total number of students who complete K-12 tutoring group class courses during the same period;

 

    “learning centers” refers to the physical establishment of an education facility providing K-12 tutoring services, study-abroad test preparation courses or study-abroad consulting services at a specific geographic location, directly owned and operated by our VIE or its subsidiaries. For the avoidance of doubt, references to and calculations of “learning centers” do not include the franchised schools operated under the brand of Global Education;

 

    “ordinary shares” refers to our ordinary shares, par value US$0.00005 per share, carrying one vote per share;

 

    “RMB” or “Renminbi” refers to the legal currency of China;

 

    “school” or “schools,” with respect to our acquisitions and business, refers to (i) entities providing K-12 tutoring services and study-abroad test preparation services which are required to obtain the private school operation permits in China, and (ii) entities providing study-abroad consulting services or online education services in China;

 

    “student enrollments” refers to the cumulative total number of courses registered and paid for by our students during a given period of time; if one student enrolls in multiple courses, it will be counted as multiple student enrollments;

 

    “tier-1 cities” refers to cities with strong economic development and high per capita disposable income, including Beijing, Shanghai, Guangzhou and Shenzhen;

 

    “tier-2 cities” refers to capital cities in 30 provinces and certain economically developed prefecture-level cities;

 

    “training institution” or “training institutions” refers to the learning centers providing K-12 tutoring services or study-abroad test preparation services, which are registered as corporate or private non-enterprise entities with relevant PRC government authorities;

 

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

 

    “variable interest entity,” “VIE” or “Puxin Education” refers to Puxin Education Technology Group Co., Ltd., which is a PRC company in which we do not have equity interests but whose financial results have been consolidated into our consolidated financial statements in accordance with U.S. GAAP due to our having effective control over, and our being the primary beneficiary of, such entity;

 

    “we,” “us,” “our company,” “our,” or “Puxin Limited” refers to Puxin Limited, a Cayman Islands company and its subsidiaries, and unless the context requires otherwise, includes its VIE and VIE’s subsidiaries.

The translations from RMB to U.S. dollars and from U.S. dollars to RMB in this prospectus were made at a rate of RMB6.2726 to US$1.00, the exchange rates set forth in the H.10 statistical release of the Federal Reserve Board on March 30, 2018. We make no representation that the RMB or U.S. dollar amounts referred to in this prospectus could have been or could be converted into U.S. dollars or RMB, as the case may be, at any particular rate or at all. On April 20, 2018, the exchange rate as set forth in the H.10 statistical release of the Federal Reserve Board for RMB was RMB6.2945 to US$1.00.



 

7


Table of Contents

THE OFFERING

 

Offering price

We currently estimate that the initial public offering price will be between US$             and US$             per ADS.

 

ADSs offered by us

             ADSs (or              ADSs if the underwriters exercise their over-allotment option in full).

 

Ordinary shares outstanding immediately after this offering

             ordinary shares (or              ordinary shares if the underwriters exercise their over-allotment option in full).

 

ADSs outstanding immediately after this offering

             ADSs (or              ADSs if the underwriters exercise their over-allotment option in full).

 

The ADSs

Each ADS represents              ordinary shares, par value US$0.00005 per share.

 

  The depositary will hold the ordinary shares underlying your ADSs. You will have rights as provided in the deposit agreement, the form of which is filed as an exhibit to the registration statement that includes this prospectus.

 

  If we declare dividends on our ordinary shares, the depositary will pay you the cash dividends and other distributions it receives on our ordinary shares, after deducting its fees and expenses.

 

  You may turn in your ADSs to the depositary in exchange for ordinary shares. The depositary will charge you fees for any exchange.

 

  We may amend or terminate the deposit agreement without your consent. If you continue to hold your ADSs, you agree to be bound by the deposit agreement as amended.

 

  To better understand the terms of the ADSs, you should carefully read the “Description of American Depositary Shares” section of this prospectus. You should also read the deposit agreement, the form of which is filed as an exhibit to the registration statement that includes this prospectus.

 

Over-allotment option

We have granted to the underwriters an option, which is exercisable within 30 days from the date of this prospectus, to purchase up to an additional              ADSs.

 

Use of proceeds

Our net proceeds from this offering will be approximately US$             million, assuming an initial public offering price per ADS of US$            , the midpoint of the estimated public offering price range, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us and assuming no exercise of the underwriters’ over-allotment option.


 

8


Table of Contents
  We intend to use the net proceeds from this offering for the following purposes:

 

    approximately [70]%, or US$             million for [financing potential strategic acquisitions and launch of new schools in China];

 

    approximately [15]%, or US$             million for [upgrading our information technology systems and promoting online platforms];

 

    approximately [10]%, or US$             million for [marketing and brand promotion]; and

 

    the remaining amount to fund [working capital and for other general corporate purposes].

 

  See “Use of Proceeds” for additional information.

 

Lockup

We, our officers and directors, [certain of our employees, certain of our shareholders and certain option and warrant holders] have agreed with the underwriters, without the prior written consent of [the underwriters], not to sell, transfer, dispose of or hedge any of our ordinary shares, ADSs, or any securities convertible into or exchangeable for our ordinary shares for a period of 180 days after the date of the prospectus. See “Shares Eligible for Future Sale” and “Underwriting” for more information.

 

Proposed NYSE symbol

We [have applied] to have the ADSs listed on the NYSE under the symbol “NEW.” Our ADSs and ordinary shares will not be listed on any other stock exchange or traded on any automated quotation system.

 

Payment and settlement

The underwriters expect to deliver the ADSs against payment therefor through the facilities of The Depository Trust Company on             , 2018.

 

Depositary

 

[Reserved ADSs

At our request, the underwriters have reserved for sale, at the initial public offering price, up to              ADSs offered by this prospectus to our directors, officers, employees, business associates and related persons. We do not know if these persons will choose to purchase all or any portion of these reserved ADSs, but any purchases they do make will reduce the number of ADSs available to the general public. Any reserved ADSs not so purchased will be offered by the underwriters to the general public on the same terms as the other ADSs.]

 

Risk factors

See “Risk Factors” and other information included in this prospectus for a discussion of risks that you should carefully consider before investing in our ADSs.


 

9


Table of Contents

SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA

We present below our summary consolidated financial data for the periods indicated. The following summary consolidated statements of operations for the years ended December 31, 2016 and 2017 and the summary consolidated balance sheets as of December 31, 2016 and 2017 have been derived from the audited consolidated financial statements of Puxin Limited included elsewhere in this prospectus. The selected consolidated statements of operations data for the three months ended March 31, 2017 and 2018 and selected consolidated balance sheet data as of March 31, 2018 have been derived from the unaudited condensed consolidated financial statements of Puxin Limited included elsewhere in this prospectus.

The summary consolidated financial data should be read in conjunction with our consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. The consolidated financial statements are prepared and presented in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. Our historical results are not necessarily indicative of our results for any future periods.

Consolidated Statements of Operations Data

 

    For the Year Ended December 31,     For the Three Months
Ended March 31,
 
    2016     2017     2017     2018  
    RMB     RMB     US$     RMB     RMB     US$  
    (in thousands)  

Summary Consolidated Statements of Operations:

           

Net revenues

    439,181       1,282,562       204,471       198,203       495,708       79,028  

Cost of revenues (including share-based compensation expenses of nil, RMB1,152, RMB46 and RMB976 for the years ended December 31, 2016 and 2017 and for the three months ended March 31, 2017 and 2018, respectively)

    257,995       794,342       126,637       120,075       273,458       43,596  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    181,186       488,220       77,834       78,128       222,250       35,432  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

           

Selling expenses (including share-based compensation expenses of RMB991, RMB3,058, RMB527 and RMB2,236 for the years ended December 31, 2016 and 2017 and for the three months ended March 31, 2017 and 2018, respectively)

    123,370    

 

444,927

 

 

 

70,932

 

    54,920       164,647       26,249  

General and administrative expenses (including share-based compensation expenses of RMB50,272, RMB51,625, RMB8,619 and RMB282,202 for the years ended December 31, 2016 and 2017 and for the three months ended March 31, 2017 and 2018, respectively)

    185,496       362,748       57,831       54,177       383,373       61,119  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    308,866       807,675       128,763       109,097       548,020       87,368  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 


 

10


Table of Contents
    For the Year Ended December 31,     For the Three Months
Ended March 31,
 
    2016     2017     2017     2018  
    RMB     RMB     US$     RMB     RMB     US$  
    (in thousands)  

Operating loss

    (127,680     (319,455     (50,929     (30,969     (325,770     (51,936

Interest expense

    —         5,556       886       —         5,040       803  

Interest income

    464       549       88       346       103       16  

Loss on changes in fair value of convertible notes, derivative liabilities and warrants

    —         70,336       11,213       —         23,665       3,773  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss on extinguishment of convertible notes

    —         —         —         —         900       143  

Loss before income taxes

    (127,216     (394,798     (62,940     (30,623     (355,272     (56,639

Income tax expenses (benefits)

    388       2,436       388       189       (223     (36
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (127,604     (397,234     (63,328     (30,812     (355,049     (56,603
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Less: Net (loss) income attributable to non-controlling interest

    (48     79       13    

 

(16

 

 

(25

 

 

(4

Net loss attributable to equity shareholders of Puxin Limited

    (127,556     (397,313     (63,341     (30,796     (355,024     (56,599

On January 1, 2018, we adopted Accounting Standards Updates 2016-12 Revenue from Contracts with Customers (Topic 606) issued by Financial Accounting Standards Board. The main impact on our results of operations for the three months ended March 31, 2018 was an increase of RMB7.9 million in our net revenues.

 

    For the Year Ended December 31,     For the Three Months
Ended March 31,
 
    2016     2017     2017     2018  
    RMB     RMB     US$     RMB     RMB     US$  
    (in thousands)  

Allocation of Share-based Compensation Expenses

           

Cost of revenues

    —         1,152       184       46       976       156  

Selling expenses

    991       3,058       487       527       2,236       356  

General and administrative expenses

    50,272       51,625       8,230       8,619       282,202       44,990  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    51,263       55,835       8,901       9,192       285,414       45,502  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 


 

11


Table of Contents

Consolidated Balance Sheets Data

 

     As of December 31,     As of March 31,  
     2016     2017     2018  
     RMB     RMB     US$     RMB     US$  
     (in thousands)  

Summary Consolidated Balance Sheets:

          

Current assets

          

Cash and cash equivalents

     100,109       164,684       26,255       66,019       10,525  

Inventories

     —         10,408       1,659       9,522       1,518  

Prepaid expenses and other current assets

     36,262       132,473       21,119       145,435       23,186  

Amounts due from related parties

     9       113       18       —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     136,380       307,678       49,051       220,976       35,229  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-current assets

          

Restricted cash

     5,409       24,478       3,902       28,472       4,539  

Property, plant and equipment, net

     33,723       221,212       35,266       225,605       35,967  

Intangible assets

     55,167       243,927       38,888       235,875       37,604  

Goodwill

     346,972       1,152,913       183,802       1,152,913       183,801  

Deferred tax assets

     637       3,012       480       5,203       829  

Rental deposit

     15,829       55,173       8,796       58,609       9,344  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-current assets

     457,737       1,700,715       271,134       1,706,677       272,084  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

     594,117       2,008,393       320,185       1,927,653       307,313  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Accrued expenses and other current liabilities

     173,395       350,446       55,869       383,471       61,134  

Income taxes payable

     2,925       10,022       1,598       11,646       1,857  

Deferred revenue

     318,319       1,035,370       165,062       875,217       139,530  

Amounts due to related parties

     3,048       3,836       612       180,000       28,696  

Deferred tax liabilities

     13,734       77,580       12,368       75,516       12,039  

Franchise deposits

     —         3,856       615       1,221       195  

Convertible notes

     —         499,192       79,583       352,520       56,200  

Promissory note

     —         162,658       25,932       350,215       55,833  

Derivative liabilities

     —         18,218       2,904       17,563       2,800  

Warrants

     —         —         —         15,100       2,407  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     511,421       2,161,178       344,543       2,262,469       360,691  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total mezzanine equity

     120,000       120,000       19,131       71,088       11,333  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Puxin Limited shareholders’ deficit

     (37,202     (272,762     (43,485     (405,856     (64,703
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-controlling interests

     (102     (23     (4     (48     (8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total deficit

     (37,304     (272,785     (43,489     (405,904     (64,711
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities, mezzanine equity and total shareholders’ deficit

     594,117       2,008,393       320,185       1,927,653       307,313  

Selected Quarterly Results of Operations

The following table sets forth our unaudited consolidated quarterly results of operations for the periods indicated. You should read the following table in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus. We have prepared the unaudited consolidated quarterly financial information on the same basis as our consolidated financial statements. The unaudited consolidated



 

12


Table of Contents

quarterly financial information includes all adjustments, consisting only of normal and recurring adjustments, that we consider necessary for a fair representation of our operating results for the quarters presented.

 

    For the Three Months Ended  
    March 31,
2016
    June 30,
2016
    September 30,
2016
    December 31,
2016
    March 31,
2017
    June 30,
2017
    September 30,
2017
    December 31,
2017
    March
31, 2018
 
          (RMB in thousands)  

Summary Consolidated Statements of Operations

                 

Net revenues

    61,402       91,236       140,134       146,409       198,203       238,047       418,360       427,952       495,708  

Cost of revenues

    37,252       52,076       81,141       87,526       120,075       141,535       258,806       273,926       273,458  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    24,150       39,160       58,993       58,883       78,128       96,512       159,554       154,026       222,250  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

                 

Selling expenses

    17,078       24,457       35,955       45,880       54,920       72,686       140,677       176,644       164,647  

General and administrative expenses

    35,310       39,354       51,526       59,306       54,177       65,769       100,270       142,532       383,373  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    52,388       63,811       87,481       105,186       109,097       138,455       240,947       319,176       548,020  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

    (28,238     (24,651     (28,488     (46,303     (30,969     (41,943     (81,393     (165,150     (325,770

Interest expense

    —         —         —         —         —         —         2,150       3,406       5,040  

Interest income

    87       67       126       184       346       110       53       40       103  

Loss on changes in fair value of convertible notes, derivative liabilities and warrants

    —         —         —         —         —         —         22,795       47,541       23,665  

Loss on extinguishment of convertible notes

    —         —         —         —         —         —         —         —         900  

Loss before income taxes

    (28,151     (24,584     (28,362     (46,119     (30,623     (41,833     (106,285     (216,057     (355,272

Income tax expenses (benefits)

    86       75       86       141       189       258       656       1,333       (223

Net loss

    (28,237     (24,659     (28,448     (46,260     (30,812     (42,091     (106,941     (217,390     (355,049
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

We adopted Topic 606 on January 1, 2018. The main impact on our results of operations for the three months ended March 31, 2018 was an increase of RMB7.9 million in our net revenues.

Non-GAAP Financial Measures

To supplement our consolidated financial statements which are presented in accordance with U.S. GAAP, we also use adjusted EBITDA and adjusted net loss as additional non-GAAP financial measures. We present



 

13


Table of Contents

these non-GAAP financial measures because they are used by our management to evaluate our operating performance. We also believe that these non-GAAP financial measures provide useful information to investors and others in understanding and evaluating our consolidated results of operations in the same manner as our management and in comparing financial results across accounting periods and to those of our peer companies.

Adjusted EBITDA and adjusted net loss should not be considered in isolation or construed as an alternative to net loss or any other measure of performance or as an indicator of our operating performance. Investors are encouraged to compare the historical non-GAAP financial measures with the most directly comparable GAAP measures. Adjusted EBITDA and adjusted net loss presented here may not be comparable to similarly titled measures presented by other companies. Other companies may calculate similarly titled measures differently, limiting their usefulness as comparative measures to our data. We encourage investors and others to review our financial information in its entirety and not rely on a single financial measure.

Adjusted EBITDA represents net loss, which excludes depreciation, amortization, interest expense, interest income and income tax expenses (benefits), before share-based compensation expenses, loss on changes in fair value of convertible notes, derivative liabilities and warrants and loss on extinguishment of convertible notes. The table below sets forth a reconciliation of our net loss to adjusted EBITDA for the periods indicated:

 

     For the Year Ended December 31,      For the Three Months
Ended March 31,
 
     2016      2017      2017      2018  
     RMB      RMB      US$      RMB      RMB      US$  
    

(in thousands)

 

Net loss

     (127,604      (397,234      (63,328      (30,812      (355,049      (56,603

Add:

                 

Income tax expenses (benefits)

     388        2,436        388        189        (223      (36

Depreciation of property, plant and equipment

     3,735        20,545        3,275        2,707        13,347        2,128  

Amortization of intangible assets

     10,158        23,644        3,769        4,241        8,052        1,284  

Interest expense

     —          5,556        886        —          5,040        803  

Interest income

     (464      (549      (88      (346      (103      (16

EBITDA

     (113,787      (345,602      (55,098      (24,021      (328,936      (52,440

Add:

                 

Share-based compensation expenses

     51,263        55,835        8,901        9,192        285,414        45,502  

Loss on changes in fair value of convertible notes, derivative liabilities and warrants

     —          70,336        11,213        —          23,665        3,773  

Loss on extinguishment of convertible notes

     —          —          —          —          900        143  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

     (62,524      (219,431      (34,984      (14,829      (18,957      (3,022
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 


 

14


Table of Contents

Adjusted net loss represents net loss before share-based compensation expenses, loss on changes in fair value of convertible notes, derivative liabilities and warrants and loss on extinguishment of convertible notes. The table below sets forth a reconciliation of our net loss to adjusted net loss for the periods indicated:

 

     For the Year Ended December 31,      For the Three Months
Ended March 31,
 
     2016      2017      2017      2018  
     RMB      RMB      US$      RMB      RMB      US$  
     (in thousands)  

Net loss

     (127,604      (397,234      (63,328      (30,812      (355,049      (56,603

Add:

                 

Share-based compensation expenses

     51,263        55,835        8,901        9,192        285,414        45,502  

Loss on changes in fair value of convertible notes, derivative liabilities and warrants

            70,336        11,213        —          23,665        3,773  

Loss on extinguishment of convertible notes

     —          —          —          —          900        143  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted net loss

     (76,341      (271,063      (43,214      (21,620      (45,070      (7,185
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Key Operating Data

The following table presents our key operating data for the periods indicated:

 

    

 

For the Year Ended December 31,

    For the Three
months ended
March 31,
2018
 
     2016     2017    

Student enrollments(1)

      

K-12 tutoring services

     451,353       1,238,070       244,638  

Study-abroad tutoring services

     3,592       37,653       16,335  

Number of learning centers(2)

     231       400       397  

K-12 group class student retention rate(3)

     65.1     70.1     78.9

K-12 course withdrawal rate(4)

     4.7     4.7     4.2

 

(1) Refers to the cumulative total number of courses registered and paid for by our students during a given period of time; if one student enrolls in multiple courses, it will be counted as multiple student enrollments.
(2) Refers to the total number of locations of our premises providing educational services.
(3) Refers to the number of students who continue to enroll in K-12 tutoring group class courses (excluding promotional programs) at schools operating under our management for over 12 months after completing a K-12 tutoring group class course in a particular period as a percentage of the total number of students who complete K-12 tutoring group class courses during the same period.
(4) Refers to the number of students withdrawing from a K-12 course as a percentage of the total number of students enrolled in that course at the beginning.


 

15


Table of Contents

RISK FACTORS

Investing in the ADSs entails a significant level of risk. Before investing in the ADSs, you should carefully consider all of the risks and uncertainties mentioned in this section, in addition to all of the other information in this prospectus, including the financial statements and related notes. We may face additional risks and uncertainties aside from the ones mentioned below. There may be risks and uncertainties that we are unaware of, or that we currently do not consider material, that may become important factors that adversely affect our business in the future. Any of the following risks and uncertainties could have a material adverse effect on our business, financial condition, results of operations and prospects. In such case, the market prices of the ADSs could decline and you may lose part or all of your investment.

Risk Factors Related to Our Business and Industry

We have limited operating history and our historical financial and operating results, growth rates and profitability may not be indicative of future performance.

We began to provide K-12 tutoring services in May 2015 and study-abroad tutoring services in June 2015. In 2016 and 2017, we had 451,353 and 1,238,070 student enrollments in our K-12 courses and 3,592 and 37,653 student enrollments in our study-abroad tutoring programs, respectively. In the first quarter of 2018, our student enrollments in our K-12 courses and study-abroad tutoring programs reached 244,638 and 16,335, respectively. Despite the rapid growth in our business size and operation scale in the recent years, we incurred operating loss of RMB127.7 million and RMB319.5 million (US$50.9 million) in 2016 and 2017, respectively. For the three months ended March 31, 2018, we incurred operating loss of RMB325.8 million (US$51.9 million). As of December 31, 2016 and 2017 and March 31, 2018, we had accumulated deficit of RMB282.3 million, RMB679.6 million (US$108.3 million) and RMB986.3 million (US$157.2 million), respectively. We expect that both our cost and our operating expenses will increase as we continue our business expansions and that we may face difficulties in achieving or maintaining profitability. As we plan to continue to expand our business, we may need to devote substantial resources to planning for acquisitions of new schools or entities, integrating newly acquired schools, upgrading our services and programs and marketing our brands and recruiting teachers. Any failure to realize anticipated revenue growth could result in further operating losses. Thus, we cannot assure you that we will achieve or maintain profitability or that we will not incur losses in the future.

We may not be able to effectively manage our business expansion and increasingly complicated operations and successfully integrate businesses we acquire, which could harm our business.

We have expanded rapidly through both acquisitions and internal growth, and we plan to continue to expand our operations in different geographic areas as we address growth in our customer base and market opportunities. Since the commencement of our operations in May 2015, the number of our directly operated learning centers increased to 231, 400 and 397 as of December 31, 2016 and 2017 and March 31, 2018, respectively. Our rapid expansion has resulted, and will continue to result, in substantial demands on our management, personnel, operational, technological and other resources. The sustainable post-acquisition organic growth is largely dependent on our ability to integrate operations, system infrastructure and management philosophies of acquired schools. The integration of acquired schools is extremely complicated and time-consuming and requires significant resource commitment, standardized integration process, and adequate planning and implementation. The main challenges involved in integrating acquired schools include the following:

 

    implementing standardized integration process and performance management systems to ensure management philosophies, group-wide strategies and evaluation benchmarks can be effectively carried out at each acquired school;

 

    demonstrating to students of our acquired schools that the acquisitions will not result in adverse changes in the service quality and business focus;

 

    retaining qualified education professionals of our acquired schools;

 

16


Table of Contents
    integrating and streamlining different system infrastructure;

 

    consolidating service offerings of different acquired schools;

 

    preserving strategic, marketing or other important relationships of the acquired schools;

 

    coordinating and optimizing research and development activities to launch new products and technologies with reduced cost; and

 

    integrating our data management system in newly acquired schools.

We may not successfully integrate the schools we acquire in a timely manner and may not effectively and efficiently manage our expansion, which would have a material adverse effect on our financial condition and results of operations.

In addition, we need to be registered as the sponsor or shareholders of sponsor companies of the acquired schools. We are in the process of being registered with local authorities as the sponsor or shareholders of sponsor companies of four subsidiaries. Although pursuant to our acquisition agreements with original sponsors or shareholders of the acquired schools, the original sponsors or shareholders have obligations to cooperate with us to complete such registrations with local competent authorities, we cannot assure you that we are able to complete such registration in a timely manner.

Failure to attract and retain students to enroll in our courses and study-abroad consulting programs may have a material adverse impact on our business and prospects.

The success of our business depends heavily on the number of student enrollments in our courses and study-abroad consulting programs. Our ability to continue to attract students to enroll in our courses and consulting programs is critical to the continued success and growth of our business. This ability is dependent on a variety of factors, including our ability to acquire schools that create synergies and complement our businesses, develop new programs and improve our existing programs to respond to changes in market trends and student demand, continually develop high-quality educational content and consultation services, expand our geographic reach, manage our growth while maintaining consistent and high teaching quality, effectively market our programs to a broader base of prospective students and respond effectively to competitive pressures.

Our ability to retain existing students and their parents by improving students’ academic performance and delivering a satisfactory learning experience is also critical to the success of our business. Our ability to improve the academic performance of our students is largely dependent upon the learning ability, attitude, efforts and time and resource commitments of each student, which are beyond our control. Students may feel dissatisfied with our services or fail to perform up to expectation after attending our programs. In addition, our programs may not be able to satisfy all of our students or their parents’ requirements. Satisfaction with our services may be affected by a number of factors, many of which may not relate to the quality or effectiveness of our course or consultancy program curriculum and content. If students or parents feel that we are not providing them the learning experience they have subscribed for, they may choose to withdraw from or not to renew their existing courses. For our K-12 group classes and study-abroad test preparation courses, we usually offer refunds for remaining classes to students who decide to withdraw from a course. For our K-12 personalized courses, we offer refunds to students who decide to withdraw from a course for all the remaining classes. For our study-abroad consulting services, we usually offer refunds of the consulting fees to the students who fail to gain any admission or obtain the relevant visa, which is consistent with market practices. Although we have not experienced any significant refund requests in the past, if an increasing number of students request refunds, our cash flow, revenues and results of operations may be adversely affected. In addition, the students who fail to improve their performance after attending our programs or have unsatisfactory learning experiences with us may also choose not to refer other students to us, which in turn may adversely affect the number of student enrollments.

If we are unable to attract and retain students to enroll in our courses and study-abroad consulting programs, our revenues may decline, which may have a material adverse effect on our business, financial condition and results of operations.

 

17


Table of Contents

We may not be able to effectively identify or pursue targets for acquisitions as we did in the past several years, and even if we are able to identify suitable targets, we may not be able to complete such transactions in a cost-effective manner, which may cause us to lose anticipated benefits from such acquisitions.

Historically, we have significantly expanded our network by selected acquisitions of new schools and businesses. We expect to continue to selectively acquire or invest in new schools or businesses that complement our existing operations. We may not, however, be able to identify suitable candidates for acquisitions or investments in the future due to a decrease in the amount of small and medium-sized targets or an increase in the number of acquirers. Even if we are able to identify suitable candidates, we may be unable to complete a transaction on terms commercially acceptable to us or finance the transaction. If we fail to identify appropriate candidates or complete the desired transactions, our growth and expansion may be impeded.

We are subject to uncertainties brought by the amended Law on the Promotion of Private Education Law of the PRC.

Our business is regulated by, among others, the Law on the Promotion of Private Education of the PRC. On November 7, 2016, the Standing Committee of the National People’s Congress promulgated the Decision on Amending the Law on the Promotion of Private Education of the PRC, or the Amended Private Education Law, which became effective on September 1, 2017. The Amended Private Education Law classifies private schools into non-profit schools and for-profit schools by whether they are established and operated for profit-making purposes. The sponsors of private schools may at their own discretion choose to establish non-profit or for-profit private schools, but are not allowed to establish for-profit private schools that are engaged in compulsory education.

On December 30, 2016, the Implementation Regulations for Classification Registration of Private Schools, or the Classification Registration Regulations, were promulgated by five PRC government authorities, including the Ministry of Education, or the MOE. According to the Classification Registration Regulations, the existing private schools are required to choose to register as non-profit or for-profit private schools with competent government authorities. If a private school elects to register as for-profit school, it is required to (i) undertake financial liquidation, (ii) clarify the ownership of land, school premises and properties, (iii) pay relevant taxes and duties, and (iv) re-apply for a new private school operation permit and re-register with relevant authorities. See “Regulation—Regulations on Private Education in the PRC—Implementation Regulations for Classification Registration of Private Schools.”

We expect that the Amended Private Education Law, accompanied with its relevant implementation rules and regulations, will bring significant changes to the compliance regime that we are subject to, including but not limited to school registration, student recruitment, premises conditions and qualification requirements for teachers. We plan to register all of our training institutions as for-profit private schools pursuant to the Amended Private Education Law and obtain new licenses and permits or renew existing licenses and permits. However, the local specific requirements and procedures for when and how existing training institutions can be registered as for-profit schools and complete filings for their tutoring branches remain unclear in most cities in China. As of the date of this prospectus, it remains uncertain how the Amended Private Education Law will be interpreted and implemented and impact our business operations. There is no assurance that we will be able to operate our business in full compliance with the Amended Private Education Law or any relevant regulations in a timely manner or at all. Should we fail to fully comply with the Amended Private Education Law or any relevant regulations as interpreted by the relevant government authorities, we may be subject to administrative fines or penalties, an order to suspend the operation and refund the tuition fee or other negative consequences which could materially and adversely affect our brand name and reputation, and our business, financial condition and results of operations.

 

18


Table of Contents

We are required to obtain various operating licenses and permits and to make registrations and filings for our tutoring services in China; failure to comply with these requirements may materially and adversely affect our business operations.

Under PRC laws and regulations, training institutions are required to obtain a number of licenses, permits and approvals from, and make filings or complete registrations with, relevant government authorities in order to provide tutoring services. Pursuant to the Amended Private Education Law which became effective on September 1, 2017 and the Implementing Rules on the Supervision and Administration of For-Profit Private Schools which was published on December 30, 2016, or the Implementing Rules, each training institution that operates for profit shall be registered as a corporate entity and apply for the private school operation permit and obtain a business license. In addition, their tutoring branches are required to complete the required filings for permits or registrations.

On April 20, 2018, the MOE issued a discussion draft of the proposed Implementation Rules for the Law on the Promotion of Private Education of the PRC, or the Amended Draft of the Implementation Rules, for public review and comment. According to the Amended Draft of the Implementation Rules, private training institutions are allowed to establish tutoring branches within the approved cities after completing the filings for registrations with the approval authorities of such private training institutions and the local educational authorities where the tutoring branches are located.

As of the date of this prospectus, we have 106 training institutions which are required to obtain private school operation permits and 294 tutoring branches which are required to complete filings for permits or registrations. Among these training institutions and tutoring branches, 24 training institutions do not possess the private school operation permits and 218 tutoring branches have not completed the required filings with the local education authorities. While we intend to obtain the required permits and licenses pursuant to the Amended Private Education Law and the Implementing Rules, most of local government authorities have not begun to accept applications or issue permits for for-profit training institutions or accept filings for tutoring branches as of the date of this prospectus because the local implementing rules and regulations of the Amended Private Education Law have not been published to the public and the application procedures have not been formulated by local government authorities in most cities. See “Regulations—Regulations on Private Education in the PRC—Law on the Promotion of Private Education of the PRC and Implementation Rules for the Law on the Promotion of Private Education of the PRC” for further details on the license requirements applicable to our training institutions and tutoring branches.

On February 13, 2018, the MOE, together with three other government authorities, jointly promulgated the Circular on Alleviating After-school Burden on Elementary and Middle School Students and Implementing Inspections on After-school Training Institutions, or Circular 3. Pursuant to Circular 3, these government authorities seek to alleviate after-school burden on elementary and middle school students by carrying out a series of inspections on after-school training institutions and order those with material potential safety risks to suspend business for self-inspection and rectification and those without proper establishment licenses or private school operation permits to apply for relevant qualifications and certificates under the guidance of competent government authorities. Circular 3 mandates that the foregoing inspections and rectification be completed by the end of 2018. For more details about Circular 3, see “Regulations—Regulations on Private Education in the PRC—Circular on Alleviating After-school Burden on Elementary and Middle School Students and Implementing Inspections on After-school Training Institutions.” As of the date of this prospectus, two of our tutoring branches providing K-12 tutoring services in Xi’an which do not hold private school operation permits have been requested by local education bureaus to complete rectification within a certain prescribed period. We are in the process of applying for private school operation permits for these two learning centers and expect to complete the required rectification within the timeframe required by the local education bureaus.

Given the significant amount of discretion owned by local PRC authorities in interpreting, implementing and enforcing relevant rules and regulations, as well as other factors beyond our control, we may not be able to

 

19


Table of Contents

obtain and maintain all requisite licenses, permits, approvals and filings or pass all requisite assessments. If any of our current or future training institutions or their tutoring branches fail to receive the requisite licenses, permits and approvals, make the necessary filings, or complete all requisite registrations, such training institutions or their tutoring branches may be subject to penalties. These may include fines, orders to promptly rectify the non-compliance, or if the non-compliance is deemed by the regulators to be serious, the school may be ordered to return tuition and fees collected and pay a multiple of the amount of returned tuition and fees to regulators as a penalty or may even be ordered to cease operations.

We face intense competition in our industry, and if we fail to compete effectively, we may lose our market share and our profitability may be adversely affected.

The private education market in China is highly fragmented and competitive, and we expect competition to persist and intensify. We face competition in each type of services we offer, including in on-line and off-line forms, and in each geographic market in which we operate.

Some of our competitors may have more resources than we do and may be able to devote greater resources than we can to the development, promotion and sale of their programs, services and products and respond more quickly than we can to changes in student needs, exam materials, admission standards, market trends or new technologies. As a result, our student enrollments may decrease due to intense competition. In addition, in contrast to our comprehensive program offerings, some of our competitors focus on a single area of our business, and may be able to devote all of their resources to that business line. These companies may be able to more quickly adapt to changing technology, student preferences and market conditions in these markets than we can. As a result, certain of our competitors may, therefore, have a competitive advantage over us with respect to these business areas.

The increasing use of the Internet and advancement in technologies, such as web video conferencing and online testing simulators, are eliminating geographic and physical facility-related entry barriers to providing private education services. Although we have launched online services for our businesses and plan to expand our online service offerings, the pace at which we promote and expand our online services may not be as fast as our competitors. As a result, many international brands or local smaller service providers may be able to use the Internet to quickly and cost-effectively offer their programs, services and products to a large number of students with less capital expenditure than previously required. Consequently, we may be required to reduce course fees or increase spending in response to competition in order to retain or attract students or pursue new market opportunities, which could result in a decrease in our revenues and profitability. We will also face increased competition as we expand our operations. We cannot assure you that we will be able to compete successfully against current or future competitors. If we are unable to maintain our competitive position or otherwise respond to competitive pressure effectively, we may lose our market share and our profitability may be adversely affected.

We may not be able to continue to recruit, train and retain a sufficient number of qualified teachers and consultants.

Teachers and study-abroad consultants help us maintain the quality of our education and services, as well as our brand and reputation. Our ability to continue to attract teachers and consultants with the necessary experience and qualifications is a key factor in the success of our operations. We seek to hire experienced teachers and consultants who are dedicated to teaching and are able to follow our teaching and consulting service protocols and deliver effective instructions. The market for teacher recruitment in China is competitive, and we must also provide continued training to ensure that our teachers and consultants stay abreast of changes in student demands, teaching methodologies and other necessary changes. Further, the Measures of Punishment for Violation of Professional Ethics of Elementary and Secondary School Teachers, promulgated by the MOE, on January 11, 2014, prohibits teachers of elementary and secondary schools from providing paid tutoring in schools or in out-of-school training institutions. Some of our part-time teachers are teachers of public schools. If such

 

20


Table of Contents

part-time teachers cannot continue to teach courses in our schools due to the foregoing regulation, we may have to recruit full-time teachers to maintain our class offerings. In addition, we hire foreign teachers and we need to apply for work and residence permits for them in China. If we cannot obtain such permits for our foreign teachers, we may have to terminate our employment relationship with them.

In order to recruit experienced full-time teachers, we must provide candidates with competitive compensation packages and offer attractive career development opportunities. Although we have not experienced major difficulties in recruiting or training qualified teachers and consultants in the past, we cannot guarantee we will be able to continue to recruit, train and retain a sufficient number of qualified teachers and consultants in the future, which may have a material adverse effect on our business, financial condition and results of operations.

Our business and financial performance may suffer if we fail to successfully develop and launch new education services.

The future success of our business depends partly on our ability to develop new education services. The planned timing or launch of new education services is subject to risks and uncertainties. Actual timing may differ materially from any originally proposed timeframe. For example, we only recently launched certain web-based and mobile-based services such as Puxin Superior Classes, Puxin Dual-Teacher Classrooms, Recorded Lectures, foreign teacher classes and Puxin Teacher & Student App. While we have not experienced material technological difficulties in these newly launched services, we cannot assure you there will not be system outages or errors for these new online services in the future. Unexpected operational, technical or other issues could delay or prevent the launch of one or more of our new education services or programs. In addition, significant investment of human capital, financial resources and management time and attention may be required to successfully launch features of our new education programs. If we fail to manage the expansion of our portfolio of education services cost-effectively, our business could be negatively affected.

We cannot assure you that any of our new services will achieve market acceptance or generate incremental revenue or that our operation of such new services or programs will comply with our business scope or applicable licensing requirements. If our efforts to develop, market and sell our new education services and programs to the market are not successful, our business, financial position and results of operations could be materially and adversely affected.

We have limited operating history with our study-abroad test preparation courses and study-abroad consulting services. Our newer courses and services may not be as attractive as our K-12 tutoring services.

Prior to the acquisitions of Global Education and ZMN Education in 2017, a significant majority of our revenue and operations was derived from K-12 tutoring services. We have limited operating history with our study-abroad test preparation courses and study-abroad consulting services. As we plan to continue to dedicate resources to integrating and expanding our study-abroad test preparation courses and study-abroad consulting services, our efforts to improve, expand, and promote our study-abroad test preparation courses and study-abroad consulting services may not be successful and we may not achieve comparable profitability to our K-12 tutoring services, or at all.

We may not be able to improve the content of our existing courses or to develop new courses on a timely basis and in a cost-effective manner.

We regularly and constantly update the content of our existing courses and develop new courses to meet students’ demands and the latest market trends. We also closely follow any changes in curriculum, examination systems, testing materials, admission standards and technologies. Admission and assessment tests in China and overseas countries constantly undergo changes and development in terms of tested subjects, skill focus, question types and manners of test administration. For example, most of the major English tests, such as TOEFL and IELTS, are increasingly being offered in a computer-based testing format, and there are certain universities in

 

21


Table of Contents

China that have been allowed to admit a small portion of their students through independently administered examinations and admission procedures. These changes require us to continually update and enhance our course materials and our teaching methods. Furthermore, offering new courses or modifying existing courses may require us to have more input into curriculum and course development, train new teachers or provide continued training to existing teachers, increase marketing efforts and re-allocate resources. We may have limited experience with new course content and may need to modify our systems to incorporate new courses into our existing course offerings. If we cannot respond effectively to changes in market demands or launch new courses on a timely basis and in a cost-effective manner, our results of operations and financial condition could be adversely affected.

Our success depends on the continuing efforts of our senior management team and other key personnel and our business may be harmed if we lose their services.

Our success depends in part on the continued application of services, efforts and motivation of our senior management team and key personnel, in particular, our founder, chairman and chief executive officer, Mr. Yunlong Sha. If one or more of our senior management members or key personnel are unable to continue in their present positions, we may not be able to find suitable replacements, and our business may be disrupted.

We will need to continue to hire additional personnel as our business grows. A shortage in the supply of personnel with requisite skills could negatively impact our ability to manage our existing products and services, launch new services and expand our operations. Competition for experienced management personnel in the private education industry is intense with a small pool of qualified candidates, and we may not be able to retain services of our senior executives, experienced principals of our schools or other key personnel, or attract and retain high-quality senior executives or key personnel in the future. Although we have established an internal training and promotion system to develop good candidates for senior management team and principals, the number of these candidates and the speed of training these candidates to be capable and qualified to their prospective positions may not align with our rapid growth. In addition, if any member of our senior management team, principals or any of our other key personnel joins a competitor or forms a competing company, we may lose teachers, students and staff members. Each of our executive officers and key employees is subject to the duty of confidentiality and non-competition restrictions. However, if any disputes arise between any of our senior executives or key personnel and us, it may be difficult to successfully pursue legal actions against these individuals because of the uncertainties in China’s legal system.

Any damage to the brand and reputation of our learning centers may adversely affect our overall business, prospects, results of operations and financial condition.

We believe that market awareness of our “Puxin,” “Global Education,” “ZMN Education,” and other brands and our solid reputation in the K-12 tutoring and study-abroad tutoring industry have contributed significantly to the success of our business. We also believe that maintaining and promoting our brands are critical to sustaining our competitive advantage. Our brand and reputation could be adversely affected under many circumstances, including the following:

 

    our students are not satisfied with our services and their learning experience;

 

    we fail to maintain the quality and consistency of our service standards as we expand our course offerings into different subjects and extend our geographic or product reach;

 

    our learning center facilities do not meet the standards expected by parents and students;

 

    our teachers, study-abroad consultants or staff fail to provide students and their parents with prompt feedback and adequate attention;

 

    our teachers, study-abroad consultants or staff behave or are perceived to behave inappropriately or illegally;

 

22


Table of Contents
    we lose a license, permit or any other governmental authorization to operate a learning center; and

 

    operators of learning centers with lower quality abuse our brands or those with brand names similar to ours conduct fraudulent activities and create confusion in the market.

The likelihood of any above-mentioned circumstances increases as we expand our network of learning centers. These events could influence the perception of our learning centers not only by our students and their parents, but also by other constituencies in the education sector and the general public.

In addition, Global Education also has franchised schools. Our control over our franchisees is based on the contracts with them and our standardized supervision and monitoring procedures, which may not be as effective as direct ownership. Although we maintain comprehensive and rigorous supervisory procedures, set standards to guide our franchisees on operations of their learning centers and require all teachers and management personnel of our franchise teaching facilities to complete our mandatory trainings, our franchisees manage their businesses independently and are therefore responsible for the day-to-day operation of the franchise facilities. Furthermore, it is the franchisees and their teachers and employees that interact directly with students and their parents. In the event of any unsatisfactory performance or illegal actions by the franchisees or their employees or any incidents or operational issues in the franchise facilities, we may suffer reputational or financial damage which in turn might adversely affect our business as a whole. As we mainly rely on word-of-mouth referrals to attract prospective students, if our brand name or reputation deteriorates, our overall business, prospects, financial condition and results of operations could be materially and adversely affected.

Furthermore, third-party service providers with whom we have a business relationship could damage our reputation and brands due to their unsatisfactory or illegal actions arising from the interactions with our students. We have close cooperation relationships with third-party service providers, such as printers that provide services to print course materials, organizations that host events or organize mathematics or other science competitions, and overseas education service providers that provide overseas study tours and summer and winter camps. These third-party service providers may directly interact with our students in providing their services. Although we selectively establish cooperation relationships with reliable and reputational service providers, we cannot assure you that these third-party service providers will not conduct any unsatisfactory, inappropriate or illegal actions that will damage our reputation and brands, which consequently could cause our business to be harmed.

Accidents or injuries suffered by our students or other people on our premises may adversely affect our reputation, subject us to liability and cause us to incur substantial costs.

In the event of accidents or injuries or other harm to students or other people on our premises, including those caused by or otherwise arising from the actions or negligence of our employees or contractors on our premises, our facilities may be perceived to be unsafe, which may make parents unwilling to allow their children to attend our classes. We could also face negligence claims for inadequate maintenance of our facilities or lack of supervision of our teachers and other employees. Although we have not encountered any injury to our students on our premises that has materially and adversely affected our business or financial condition, we cannot assure you that there will not be any in the future. Our insurance coverage may not be adequate to fully protect us from all kinds of claims. See “—We have limited liability insurance coverage and do not carry business disruption insurance.” A liability claim against us or any of our employees or independent contractors could adversely affect our reputation and ability to attract and retain students. Even if such claim is unsuccessful, it could create unfavorable publicity, cause us to incur substantial expenses and divert the time and attention of our management.

Failure to control rental costs, obtain leases at desired locations at reasonable prices or comply with relevant regulation regarding our leased premises could materially and adversely affect our business.

Substantially all of our offices and learning centers are presently located on leased premises. At the end of each lease term, we must negotiate an extension of the lease. If we are not able to negotiate an extension on terms

 

23


Table of Contents

acceptable to us, we will be forced to move to a different location, or the rent may increase significantly given that the real estate prices in China have kept rising for years. This could disrupt our operations and adversely affect our profitability. We also compete with many other businesses for sites in certain highly desirable locations and some landlords may have entered into long-term leases with our competitors for prime locations. As a result, we may not be able to obtain new leases at desirable locations or renew our existing leases on acceptable terms or at all, which could adversely affect our business.

As of the date of this prospectus, among our 655 lease contracts, we have not been able to receive copies of the valid title certificates or proof of authorization to lease properties to us from the lessors for 104 leased properties. Our use of some of leased properties does not comply with the approved use stipulated in the title certificates of such properties or the lease agreements. As of the date of this prospectus, we are not aware of any actions, claims or investigations threatened against us or our lessors with respect to the defects in our leasehold interests. However, if any of our leases are terminated as a result of challenges by third parties or governmental authorities for lack of title certificates or proof of authorization to lease, we do not expect to be subject to any fines or penalties but we may be forced to relocate the affected learning center and incur additional expenses relating to such relocation. If we fail to find suitable replacement sites in a timely manner or on terms commercially acceptable to us, our business and results of operations could be materially and adversely affected.

In addition, under the applicable PRC laws and regulations, we are required to register and file executed leases with the relevant government authorities, but we have failed to do so in certain instances. While the lack of registration will not affect the validity and enforceability of the lease agreements under the PRC Law, a fine ranging from RMB1,000 to RMB10,000 may be imposed on the parties for each non-registered lease, if the requirement of registration failed to be fulfilled after a period of time demanded by a relevant local authority.

A significant portion of our training institutions are not in compliance with fire safety regulations.

According to the PRC fire safety laws and regulations, construction projects and decoration projects are generally required to obtain fire safety permits or complete fire safety filings except for certain statutory exemptions. See “Regulations—Regulations on Fire Safety” for further details on the fire safety regulations applicable to our business premises. As of the date of this prospectus, we have leased 563 business premises for our training institutions and their tutoring branches, and we have complied with the foregoing fire safety permit and filing requirements for 391 of these premises. We have arranged inspections for 59 premises by local fire control authorities and obtained written records of passing the fire safety inspections. As advised by Tian Yuan Law Firm, our PRC counsel, for these 59 premises, the risk that we will be subject to material administrative penalties imposed by such local fire control authorities for our failure to comply with the fire safety permit or filing requirement is relatively low. Besides, the construction units have obtained the fire safety permits in connection with the construction of the buildings where another 69 premises are located, and we are in the process of completing further fire safety filings with respect to the interior decoration of such premises, which represented 14.1% of our revenues in 2017. However, as of the date of this prospectus, we have neither obtained the fire safety permits or written evidence for passing the fire safety inspection nor made the requisite fire safety filings for the remaining 44 leased business premises, which represented 10.6% of our revenues in 2017. We cannot assure you that we may be able to obtain the fire safety permits, rectify our non-compliance or otherwise fully comply with the relevant fire safety laws and regulations at all of our current locations in a timely manner or at all, and we may be subject to fines and orders to rectify within a specified period of time or to suspend operations for our non-compliance. As a result, we may not be able to occupy certain of our current locations and may be ordered to relocate our operations to other locations that comply with the relevant fire safety laws and regulations, and we cannot assure you that such alternative locations will be available on commercially reasonable terms or at all, which could materially and adversely affect our business, results of operations and financial conditions.

In addition, according to PRC fire safety laws and regulations, venues for children’s activities generally may not be located above the third floor of a building, depending on its fireproof conditions. As of the date of this

 

24


Table of Contents

prospectus, 112 of our business premises for children’s activities, including certain sections of our K-12 and study-abroad programs that target children are located above the third floor of a building. Nevertheless, we have either complied with the fire safety filing requirement or arranged fire safety inspections by the local fire control authorities and obtained written records of passing the fire safety inspections for 62 business premises. We generated approximately 9.0% of our revenues from the remaining 50 business premises in 2017. We may be subject to fines and orders to suspend operations if these 50 business premises are inspected and found to be in violation of the fire safety regulations, which could materially and adversely affect our business, results of operations and financial condition.

Moving training institutions and their tutoring branches in order to comply with fire safety regulations would require us to terminate or break our existing leases and pay any associated termination or breakage costs in addition to the costs of relocation, renovation and decoration, and it may also disrupt our scheduled courses and force us to postpone or cancel some courses and refund the related tuition fees, all of which could materially and adversely affect our financial results.

We may face risks and uncertainties with respect to the licensing requirements for our online platforms.

We may be required to obtain additional licenses or permits for our operations because the interpretation and implementation of current PRC laws and regulations are still evolving, and new laws and regulations may also be promulgated. For example, the content we use on our websites and mobile apps, including course materials and audio-visual content, may be deemed as “Internet cultural products,” and our use of such content may be regarded as “Internet cultural activities.” Thus, our VIE and its subsidiaries may be required to obtain an Internet culture business operating license for provision of such content through our websites or mobile apps as currently there is no further official or publicly available interpretation of whether such content would be deemed “Internet cultural products.” In addition, according to the Amended Draft of the Implementation Rules, the entities which provide online academic training services to children and teenagers are required to apply for the private school operation permits. See “Regulations—Regulations on Private Education in the PRC—Amended Draft of the Implementation Rules for the Law on the Promotion of Private Education of the PRC.”

In addition, we offer certain audio-visual content on our websites as supplementary course materials. If the governmental authorities determine that our relevant activities fall within the definition of “Internet audio-visual program service” under the Administrative Measures Regarding Internet Audio-Visual Program Services, our VIE and its subsidiaries may be required to obtain a license for disseminating audio-visual programs through Internet. Moreover, we may be required to obtain the online publishing services permit for our online educational products, such as Puxin Superior Classes, Puxin Dual-Teacher Classrooms and GEDU online. We are in the process of applying for the Internet Content Provider License, or ICP License. If we are not able to obtain such licenses, we may further be subject to fines, legal sanctions or an order to suspend our on-line courses providing service.

No material fines or other penalties have been imposed on us for non-compliance with licensing requirements for our online platforms in the past. However, if we are not able to comply with all applicable legal requirements, we may be subject to fines, confiscation of the gains derived from our non-compliant operations, suspension of our non-compliant operations or revocation of the operation permits of the non-compliant schools, any of which may materially and adversely affect our business, financial condition and results of operations.

We may need to record a significant charge to earnings if our goodwill or intangible assets arising from acquisitions become impaired, which would adversely affect our results of operations.

In accordance with U.S. GAAP, we account for our acquisitions using the acquisition method of accounting, and such acquisitions have resulted in significant goodwill and intangible assets. These assets may become impaired in the future, which could have a material adverse effect on our results of operations following such acquisitions. We are required under U.S. GAAP to review our amortizable intangible assets for impairment when

 

25


Table of Contents

events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be tested for impairment annually, or more frequently, if facts and circumstances warrant a review. Factors that may be considered a change in circumstances indicating that the carrying value of our amortizable intangible assets may not be recoverable include a decline in stock price and market capitalization and slower or declining growth rates in our industry. In the future, we may be required to record a significant charge to earnings in our financial statements during the period in which any impairment of our goodwill or amortizable intangible assets is determined, which could have a material adverse effect on our results of operations.

In 2016, 2017 and the first quarter of 2018, we did not recognize any impairment loss in relation to goodwill or intangible assets arising from our acquisitions. In the future, we may be required to record a significant charge to earnings in our financial statements during the period in which any impairment of our goodwill or amortizable intangible assets is determined, which could have a material adverse effect on our 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 and Internet domain names invaluable to our ability to continue to develop and enhance our brand recognition. Unauthorized use of our copyrights, trademarks, trade names and domain names may damage our reputation and brand. Our major brand names, logos and domain names are registered in China. Our proprietary curricula and course materials are protected by copyrights. Unauthorized use of any of our intellectual property by third parties may adversely affect our business and reputation. We rely on a combination of copyright, trademark and trade secrets laws and confidentiality agreements with our employees and contractors to protect our intellectual property rights. We also regularly monitor any infringement or misappropriation of our intellectual property rights. Nevertheless, third parties may still obtain and use our intellectual property without due authorization, and enforcement of intellectual property rights by Chinese regulatory agencies involves uncertainty. We may need to resort to litigation and other legal proceedings to enforce our intellectual property rights. Any such action, litigation or other legal proceedings could be difficult, costly and time-consuming and divert our management’s attention and resources. In addition, we cannot assure you that we will be able to enforce our intellectual property rights effectively or otherwise prevent others from the unauthorized use of our intellectual property. If we are unable to adequately protect our trademarks, copyrights and other intellectual property rights in the future, we may lose these rights, our brand name may be harmed and our business, financial condition and results of operations may be adversely affected.

We may encounter disputes from time to time relating to our use of the intellectual property of third parties.

We cannot assure you that our trademarks, logos, trade names, technologies, products, courseware, course materials or any intellectual property developed or used by us do not or will not infringe the intellectual property rights held by third parties. We and our schools have been involved in disputes with third parties claiming infringement of intellectual property rights by us, and we may be subject to such disputes in the future. On July 7, 2017, Beijing Global Education & Technology Co., Ltd., or Beijing Global Education, which we acquired in August 2017, received a letter issued by the legal counsel of IDP Education Limited, The Chancellor Masters and Scholars of the University of Cambridge Acting by the University of Cambridge Local Examination Syndicate and the British Council (collectively the “IDP Claimants”). In such letter, the IDP Claimants alleged that Beijing Global Education infringes their trademark rights and requested Beijing Global Education and all of its schools and learning centers to deregister and stop the use of any trademarks that contain the words of “IELTS,” “YASI,” “ LOGO ” and “ LOGO ” and remove these words from their trade names and logos. On July 24, 2017, Beijing Global Education sent a response letter to the IDP Claimants in which Beijing Global Education raised its arguments against certain of the IDP Claimants’ claims and agreed to conduct investigations on the trademarks used by its schools and learning centers. We are in the process of negotiating with the IDP Claimants to reach an agreement. As of the date of this prospectus, the IDP Claimants have not initiated any litigations or legal proceedings against Beijing Global Education or us. However, there is no assurance that we would eventually be able to reach an agreement with the IDP Claimants to resolve such claims or that the IDP

 

26


Table of Contents

Claimants would not initiate any litigations or legal proceedings against Beijing Global Education or us in the future.

In August 2017, Beijing Global Education received a cease-and-desist letter from Pearson (Beijing) Management Consulting Co., Ltd., or Pearson Beijing, alleging that Beijing Global Education and certain of its franchised schools have infringed the intellectual property of Pearson PLC, including but not limited to “ LOGO /Longman” trademarks and certain other trademarks and brands, and demanding that the infringers immediately cease the infringement. Beijing Global Education has subsequently ceased the alleged infringement and sent a letter to all franchise schools involving the use of the intellectual property of Pearson PLC, requesting them to cease the alleged infringement. We cannot guarantee that these franchise schools will cease the alleged infringement in a timely manner, or at all, or that our corrective measures will prove to be satisfactory to Pearson Beijing or Pearson PLC. As of the date of this prospectus, neither Pearson Beijing nor Pearson PLC has taken any further action, including legal proceedings, against Beijing Global Education or us for the alleged infringement. However, there is no assurance that Pearson Beijing or Pearson PLC would not initiate any legal proceedings against Beijing Global Education or us in the future.

If any of the above-mentioned parties or other third parities initiate litigation against us alleging infringement upon their intellectual property rights, defense against any of these or other claims would be both costly and time-consuming, and could significantly divert the efforts and resources of our management and other personnel. An adverse determination in any such litigation or proceedings to which we may become a party could subject us to significant liability to third parties, require us to seek licenses from third parties, pay ongoing royalties, or subject us to injunctions prohibiting the distribution and marketing of the relevant brand or services. To the extent that licenses are not available to us on commercially reasonable terms or at all, we may be required to spend considerable time and resources sourcing alternative technologies or designing alternative trademarks or brands, if any, or we may be forced to delay or suspend the sale of the relevant services or the promotion of the relevant brand. We may incur substantial expenses and require significant attention of management in defending against these third-party infringement claims, regardless of their merit. Protracted litigation could also result in our customers or potential customers deferring, reducing or canceling their use of our services. In addition, we could face disruptions to our business operations as well as damage to our reputation as a result of such claims, and our business, financial condition, results of operations and prospects could be materially and adversely affected.

Our business is subject to seasonal fluctuations, which may cause our results of operations to fluctuate from quarter to quarter and result in the volatility in the price of our ADSs.

Our industry generally experiences seasonality, primarily due to seasonal changes in service days and student enrollments. Seasonal fluctuations have affected, and are likely to continue to affect, our business. In general, we generate higher revenues during summer breaks as more students are enrolled in our courses. We also generally experience lower revenues in the first quarter as we deliver fewer classes during the winter breaks due to the Chinese New Year holiday and the relatively short length of winter breaks. Because we recognize revenues from K-12 tutoring courses and study-abroad test preparation courses based on the delivery of services, we expect our revenues in certain months to be negatively impacted by such seasonality factors. Our costs and expenses, however, do not necessarily correspond with changes in our student enrollments, service days or net revenues because we incur expenses and costs on marketing and promotion, teacher recruitment, teacher training and course development throughout the year. Overall, although the historical seasonality of our business has been relatively mild, we expect to continue to experience seasonal fluctuations in our results of operations. These fluctuations may result in volatility in and adversely affect the price of our ADSs.

Failure to make adequate contributions to various mandatory social security plans as required by PRC regulations may subject us to penalties.

PRC laws and regulations require us to pay several statutory social welfare benefits for our employees, including pensions, medical insurance, work-related injury insurance, unemployment insurance, maternity

 

27


Table of Contents

insurance and housing provident fund contributions. Local governments usually implement localized requirements as to mandatory social security plans considering differences in economic development in different regions. Our failure in making contributions to various mandatory social security plans and in complying with applicable PRC labor-related laws may subject us to late payment penalties. We may be required to make up the contributions for these plans as well as to pay late fees and fines. If we are subject to late fees or fines in relation to the underpaid employee benefits, our financial condition and results of operations may be adversely affected.

We have limited liability insurance coverage and do not carry business disruption insurance.

We are exposed to various risks associated with our business and operations, and we have limited insurance coverage. See “Business—Insurance” for more information. We are exposed to risks including, among other things, accidents or injuries in our learning centers, loss of key management and personnel, business interruption, natural disasters, terrorist attacks and social instability or any other events beyond our control. The insurance industry in China is still at an early stage of development, and as a result insurance companies in China offer limited business-related insurance products. We do not have any business interruption insurance or key-man life insurance. The coverage of our liability insurance may not be adequate to fully protect us from all kinds of claims, and we cannot guarantee that we will be able to obtain sufficient liability insurance in the future on commercially reasonable terms or at all. Any business disruption, legal proceeding or natural disaster or other events beyond our control could result in substantial costs and diversion of our resources, which may materially and adversely affect our business, financial condition and results of operations.

Any disruption or interruption to our information technology systems or a leak of student data could damage our reputation and disrupt our operations.

The successful development, stable operation and effective maintenance of our systems and information technology infrastructure, such as our CRM system, ERP system, Puxin Teacher & Student App and a variety of cloud-based online products and services, is critical to the attractiveness of our online and offline programs and the management of our business operations. Thus, any material breakdown of our information technology systems, any interruptions or malfunctions to our information technology systems or any loss of the right to use the programs licensed from third parties could cause interruption to our business. In addition, we would suffer economic and reputational damage if a technical failure of our systems causes a leak of student data, including identification or contact information. As of the date of this prospectus, our information systems have not encountered material errors or technical issues and there is no material leak of student data which could damage our reputation and disrupt our operations. If we encounter errors or other service quality or reliability issues, or if we are unable to design, develop, implement and utilize information systems, our ability to realize our strategic objectives and our profitability could be adversely affected, and may harm our reputation and brand names and materially and adversely affect our business and results of operations.

Our relationships with overseas education service providers may deteriorate.

We collaborate with various overseas publishers on content development and overseas schools and institutions to provide overseas study tours and summer and winter camps to students. For example, for our English for Children programs, we cooperated with Macmillan Younger Learners and introduced “Happy Campers” series of American English learning materials to provide memorable and positive learning experience for our students. These relationships allow us to offer more diverse programs and classes and charge a premium for the programs we offer with other overseas education service providers. We can also enhance our brand and reputation and have more exposure to international education methods and experiences through these relationships.

If our relationships with any of these overseas education service providers deteriorate or are otherwise damaged or terminated, or if the benefits we derive from these relationships diminish, whether as a result of our own actions, actions of our partners, actions of any third party, including our competitors, or of regulatory

 

28


Table of Contents

authorities or other entities beyond our control, our business, prospects, financial condition and results of operations could be adversely affected.

We operate schools and provide after-school education services under several brands, which may have a dilutive effect on brand recognition among our students and their parents.

We operate substantially all of our K-12 after-school tutoring schools and a small portion of our study-abroad tutoring schools under the co-brand names, such as “Puxin-YESSAT” and “Puxin-Fubusi.” We operate the majority of our study-abroad tutoring schools under multiple different brands, such as ZMN Education, Global Education and Milestone Education. Maintaining multiple brands may have a dilutive effect on brand recognition among our students and their parents and increase our overall marketing expenses as we need to allocate resources among different brands. In the long term, we intend to promote a unified brand “Puxin” to foster our corporate image, which represents the entire spectrum of education services we offer. We may seek to transition our co-brand names and different brands to “Puxin” in the future if the market responds favorably to our new corporate image. We cannot assure you, however, that our prospective students will embrace our new brand given its limited market exposure and recognition. We may incur significant financial resources for, and divert considerable management attention to, the integration of our existing brands with our new corporate image, which may adversely affect our business, results of operation and financial condition.

We face risks related to natural disasters, health epidemics and other outbreaks, which could significantly disrupt our operations.

The education industry is vulnerable to health epidemics such as the outbreak of avian influenza, severe acute respiratory syndrome, or SARS, Ebola or other epidemics. Additionally, our business could be disrupted or otherwise adversely affected by severe weather conditions, such as snow, storm or hurricane, and natural disasters, such as earthquakes. These occurrences could cause cancelations of student enrollment and require the temporary or long-term closure of our learning centers while we may still remain obligated to pay rent and other expenses for these facilities. We may also face litigation and have to incur extra expenses if we are found negligent in the prevention and control of health epidemics in our facilities. Any outbreak of health epidemics and any occurrence of natural disasters in China therefore may severely disrupt our business operations and materially and adversely affect our liquidity, financial condition and results of operations.

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

Prior to this offering, we were a private company with limited accounting personnel and other resources with which to address our internal controls and procedures. Our management has not completed an assessment of the effectiveness of our internal control over financial reporting, and our independent registered public accounting firm has not conducted an audit of our internal control over financial reporting. In the course of auditing our consolidated financial statements for the year ended December 31, 2017, we and our independent registered public accounting firm identified one material weakness in our internal control over financial reporting as well as other control deficiencies as of December 31, 2017, in accordance with the standards established by the Public Company Accounting Oversight Board of the United States.

The material weakness identified relates to our lack of comprehensive accounting policies and procedures manual in accordance with U.S. GAAP. We have implemented and are continuing to implement a number of measures to remedy this material weakness and the other control deficiencies. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Internal Control Over Financial Reporting.” We have also adopted measures to improve our internal control over financial reporting. We cannot assure you, however, that these measures may fully address these deficiencies in our internal control over financial reporting or that we may conclude that they have been fully remedied.

 

29


Table of Contents

Upon the completion of this offering, we will become 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, will require that we include a report of management on our internal control over financial reporting in our annual report on Form 20-F beginning with our annual report for the year ending December 31, 2018. In addition, once we cease to be an “emerging growth company” as such term is defined in 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, after we become a public company, our reporting obligations 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.

During the course of documenting and testing our internal control procedures, in order to satisfy the requirements of Section 404, we may identify other weaknesses and deficiencies in our internal control over financial reporting. In addition, if we fail to maintain the adequacy of our internal control over financial reporting, as these standards are modified, supplemented or amended from time to time, we may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404. Generally speaking, if we fail to achieve and maintain an effective internal control environment, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information. This could in turn limit our access to capital markets, harm our results of operations, and lead to a decline in the trading price of our 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 have granted and will continue to grant share options and other equity incentives in the future, which may result in increased share-based compensation expenses.

Puxin Education adopted its 2014 Great Talent Share Incentive Plan in December 2014, and granted an aggregate of 142,783,400 options to purchase Puxin Education’s equity interest from 2015 to 2017 under this plan. We refer this plan as the Original Plan. In March 2018, we adopted Puxin Limited 2018 Great Talent Share Incentive Plan to replace the Original Plan and granted options to purchase 6,592,538 ordinary shares of Puxin Limited under this plan to replace the granted and outstanding options under the Original Plan. As of March 31, 2018, there were 6,565,494 options outstanding which entitle their holders to purchase 6,565,494 ordinary shares of Puxin Limited under this plan. In addition, we adopted Puxin Limited 2018 Grand Talent Share Incentive Plan in February 2018, which permits granting of share options to purchase up to 16,400,000 ordinary shares pursuant to all awards under this plan. On March 31, 2018, we granted options to purchase 16,400,000 ordinary shares under this plan.

We are required to account for share based compensation in accordance with Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, 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. In 2016, 2017 and the first quarter of 2018, we incurred share-based compensation expense of RMB51.3 million, RMB55.8 million (US$8.9 million) and RMB285.4 million (US$45.5 million). Expenses associated with share-based compensation awards granted under our share incentive plans may materially reduce our future net income. However, if we limit the size of grants under our share incentive plans to minimize share-based compensation expenses, we may not be able to attract or retain key personnel.

 

30


Table of Contents

Risk Factors Related to Our Corporate Structure

If the PRC government finds that the agreements that establish the structure for operating our business do not comply with applicable PRC laws and regulations, we could be subject to severe penalties.

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 education services outside China. Our Cayman Islands holding company is not an educational institution and does not provide education services. Due to these restrictions, we operate our K-12 tutoring business and study-abroad tutoring business in China primarily through Puxin Education Technology Group Co., Ltd, or Puxin Education or VIE, and its subsidiaries. We entered into a series of contractual arrangements with Puxin Education and its shareholders. Our VIE and its subsidiaries are the entities that hold certain licenses and permits relating to the K-12 tutoring business and study-abroad tutoring business in China. We have been and expect to continue to be dependent on our VIE and its subsidiaries to operate our business. See “Corporate History and Structure—Our Corporate Structure” for more information.

If our ownership structure and contractual arrangements are found to be in violation of any existing or future PRC laws or regulations, or we fail to obtain any of the required licenses and permits, the relevant PRC regulatory authorities including the MOE, which regulates the education industry in the PRC, the Ministry of Commerce, or the MOFCOM, which regulate the foreign investments in China, the Ministry of Civil Affairs, which regulates the registration of non-profit private schools in the PRC after the Amended Private Education Law became effective, and the State Administration for Market Regulation (formerly known as the State Administration for Industry and Commerce), or the SAIC, which regulates the registration and operation of for-profit private schools in the PRC after the Amended Private Education Law became effective, would have broad discretion in dealing with such violations, including:

 

    revoking the business and operating licenses held by our PRC subsidiaries and/or our VIE and its subsidiaries;

 

    discontinuing or restricting the operations of any related-party transactions among our PRC subsidiaries, our VIE and its subsidiaries;

 

    confiscating the income of our VIE and its subsidiaries;

 

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

 

    requiring us to restructure the relevant ownership structure or operations, terminate the contractual arrangements with our VIE or deregister the pledges on the equity interest in our VIE, which in turn would affect our ability to consolidate, derive economic interest from or exert effective control over our VIE;

 

    restricting or prohibiting our use of the proceeds of this offering to finance our business and operations in China; or

 

    restricting the use of financing sources by us or our VIE and its subsidiaries, or otherwise restricting our or their ability to conduct business.

As of the date of this prospectus, similar ownership structure and contractual arrangements have been used by many China-based companies listed overseas, including in the United States. However, we cannot assure you that penalties will not be imposed on any other companies or us in the future. If any of the above fines or punishments is imposed on us, our business, financial condition and results of operations could be materially and adversely affected.

If any of these penalties results in our inability to direct the activities of Puxin Education and its subsidiaries, or results in our failure to receive the economic benefits from Puxin Education and its subsidiaries,

 

31


Table of Contents

we may not be able to consolidate Puxin Education and its subsidiaries in our financial statements in accordance with U.S. GAAP. However, we do not believe that such actions would result in the liquidation or dissolution of our company, our wholly-owned subsidiary in the PRC, Purong Beijing, Puxin Education or its subsidiaries.

We face uncertainties with respect to the interpretation and implementation of the Draft Foreign Investment Law, which proposes significant changes to the PRC foreign investment legal regime and has a material impact on businesses in China controlled by foreign-invested enterprises primarily through contractual arrangements, such as our business.

On January 19, 2015, the MOFCOM published the Draft Foreign Investment Law for public review and comments. At the same time, the MOFCOM published an accompanying explanatory note of the Draft Foreign Investment Law, which contains important information about the Draft Foreign Investment Law, including its drafting philosophy and principles, main content, plans to transition to the new legal regime and treatment of business in China controlled by foreign-invested enterprises, or FIEs, primarily through contractual arrangements. The Draft Foreign Investment Law is intended to replace the current foreign investment legal regime consisting of three laws which are the Sino-Foreign Equity Joint Venture Enterprise Law, the Sino-Foreign Cooperative Joint Venture Enterprise Law and the Foreign Owned Enterprise Law, as well as detailed implementing rules. The Draft Foreign Investment Law proposes significant changes to the PRC foreign investment legal regime and may have a material impact on Chinese companies listed or to be listed overseas. The Draft Foreign Investment Law is to regulate FIEs in the same way as PRC domestic entities, except for those FIEs that operate in industries deemed to be either foreign “restricted” or “prohibited.” The Draft Foreign Investment Law also provides that only FIEs operating in foreign restricted or prohibited industries will require entry clearance and other approvals that are not required of PRC domestic entities. As a result of the entry clearance and approvals, certain FIEs operating in foreign restricted or prohibited industries may not be able to continue their operations through contractual arrangements.

The specifics of the application of the Draft Foreign Investment Law to variable interest entity structures have yet to be proposed, but it is anticipated that the Draft Foreign Investment Law will regulate variable interest entities.

The MOFCOM suggests both registration and approval as potential options for the regulation of variable interest entity structures, depending on whether they are “Chinese” or “foreign-controlled.” One of the core concepts of the Draft Foreign Investment Law is “de facto control,” which emphasizes substance over form in determining whether an entity is “Chinese” or “foreign-controlled.” This determination requires considering the nature of the investors that exercise control over the entity. “Chinese investors” are natural persons who are Chinese nationals, Chinese government agencies and any domestic enterprise controlled by Chinese nationals or government agencies. “Foreign investors” are foreign citizens, foreign governments, international organizations and entities controlled by foreign citizens and entities. In its current form, the Draft Foreign Investment Law will make it difficult for foreign financial investors, including private equity and venture capital firms, to obtain a controlling interest of a Chinese enterprise in a foreign restricted industry.

We face uncertainties with respect to the interpretation and implementation of the Draft Foreign Investment Law, which proposes significant changes to the PRC foreign investment legal regime and has a material impact on businesses in China controlled by foreign-invested enterprises primarily through contractual arrangements, such as our business.

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

We have relied and expect to continue to rely on the contractual arrangements with our VIE and its shareholders to operate our K-12 tutoring and study-abroad tutoring businesses. For a description of these contractual arrangements, see “Corporate History and Structure—Our Corporate Structure.” However, these

 

32


Table of Contents

contractual arrangements may not be as effective as direct equity ownership in providing us with control over our VIE and its subsidiaries. Any failure by our VIE and its shareholders to perform their obligations under the contractual arrangements would have a material adverse effect on the financial position and performance of our company. For example, the contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in the PRC. Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with arbitral procedures as contractually stipulated. The commercial arbitration system in the PRC is not as developed as in some other jurisdictions, such as the United States.

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

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

Our VIE or its shareholders may fail to perform their obligations under the contractual arrangements.

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

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

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

The shareholders of Puxin Education, namely, Mr. Yunlong Sha, Mr. Liang Gao, Mr. Gang Li, Mr. Yun Xiao, Shanghai Trustbridge Investment Management Co., Ltd., or Shanghai Trustbridge, Ningbo Meishan Bonded Port Area Zhimei Phase V Equity Investment Limited Partnership, or Ningbo Zhimei, and Tianjin Puxian Education and Technology Limited Partnership, or Tianjin Puxian, may have actual or potential conflicts of interest with us. These shareholders may refuse to sign or breach, or cause our VIE to breach or refuse to renew the existing contractual arrangements, which would have a material and adverse effect on our ability to effectively control our VIE and its subsidiaries and receive economic benefits from them. For example, these shareholders may be able to cause our agreements with our VIE to be performed in a manner adverse to us by, among other things, failing to remit payments due under the contractual arrangements to us on a timely basis. We

 

33


Table of Contents

cannot assure you that when conflicts of interest arise any or all of these shareholders will act in the best interests of our company or such conflicts will be resolved in our favor. Currently, we do not have any arrangements to address potential conflicts of interest between these shareholders and our company. If we cannot resolve any conflict of interest or dispute between us and these shareholders, we would have to rely on legal proceedings, which could result in disruption of our business and subject us to substantial uncertainty as to the outcome of any such legal proceedings.

We rely on dividends, fees and other distributions paid by our PRC subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our PRC subsidiaries to make payments to us could hinder our ability to conduct our business.

We are a holding company and rely principally on dividends and fees paid by our PRC subsidiaries for our cash needs, including paying dividends and other cash distributions to our shareholders to the extent we choose to do so, servicing any debt we may incur and paying our operating expenses. The income for our PRC subsidiaries in turn depends on the service fees paid by our VIE. Current PRC regulations permit our PRC subsidiaries to pay dividends to us only out of their accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. Under the applicable requirements of PRC law, our PRC subsidiaries may only distribute dividends after they have made allowances to fund certain statutory reserves. These reserves are not distributable as cash dividends. After our schools are registered as for-profit private schools pursuant to the Amended Private Education Law, each of such schools may be required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. And according to the Amended Draft of the Implementation Rules, each of our for-profit private schools is required to set aside no less than 25% of its annual net income to its development fund reserve. Furthermore, if our PRC subsidiaries or our VIE incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments to us. Any such restrictions may materially affect such entities’ ability to make dividends or make payments as service fees or other fees to us, which may materially and adversely affect our business, financial condition and results of operations.

Contractual arrangements between our VIE and us may be subject to scrutiny by the PRC tax authorities who may find that we or our VIE and its subsidiaries owe additional taxes.

Under PRC laws and regulations, transactions between related parties should be conducted on an arm’s-length basis and may be subject to audit or challenge by the PRC tax authorities. We could face material adverse tax consequences if the PRC tax authorities determine that the contractual arrangements among our wholly-owned PRC subsidiary Purong Beijing, our VIE and its shareholders are not conducted on an arm’s-length basis and adjust the income of our VIE through the transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in, for PRC tax purposes, increased tax liabilities of Purong Beijing and our VIE. In addition, the PRC tax authorities may require us to disgorge our prior tax benefits, and require us to pay additional taxes for prior tax years and impose late payment fees and other penalties on Purong Beijing and our VIE for underpayment of prior taxes. To date, similar contractual arrangements have been used by many public companies, including companies listed in the United States, and, to our knowledge, the PRC tax authorities have not imposed any material penalties on those companies. However, we cannot assure you that such penalties will not be imposed on any other companies or us in the future. Our net income may be reduced if the tax liabilities of our VIE materially increase or if they are found to be subject to additional tax obligations, late payment fees or other penalties.

If any of our VIE and its subsidiaries becomes the subject of a bankruptcy or liquidation proceeding, we may lose the ability to use and enjoy assets held by such entity, which could materially and adversely affect our business, financial condition and results of operations.

We currently conduct our operations in the PRC through a series of contractual arrangements among our wholly-owned PRC subsidiary Purong Beijing, our VIE, its shareholders and its subsidiaries. As part of these

 

34


Table of Contents

arrangements, substantially all of our education-related assets that are critical to the operation of our business are held by our VIE and its subsidiaries. If any of these entities goes bankrupt and all or part of their assets become subject to liens or rights of third-party creditors, we may be unable to continue some or all of our business activities, which could materially and adversely affect our business, financial condition and results of operations. If any of our VIE and its subsidiaries undergoes a voluntary or involuntary liquidation proceeding, its equity owner or unrelated third-party creditors may claim rights relating to some or all of these assets, which would hinder our ability to operate our business and could materially and adversely affect our business, our ability to generate revenues and the market price of our ADSs.

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

Under PRC law, legal documents for corporate transactions, including agreements and contracts that our business relies on, are executed using the chop or seal of the signing entity or with the signature of a legal representative whose designation is registered and filed with the relevant PRC industry and commerce authorities.

In order to maintain the physical security of our chops, we generally have them stored in secured locations accessible only to authorized employees. Although we monitor such authorized employees, the procedures may not be sufficient to prevent all instances of abuse or negligence. There is a risk that our employees could abuse their authority, for example, by entering into a contract not approved by us or by seeking to gain control of our subsidiaries, our VIE or any of its subsidiaries. If any employee obtains, misuses or misappropriates our chops and seals or other controlling intangible assets for whatever reason, we could experience disruption to our normal business operations. We may have to take corporate or legal action, which could involve significant time and resources to resolve and divert management from our operations.

PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay us from using the proceeds of this offering to make loans or additional capital contributions to our PRC subsidiaries, our VIE and its subsidiaries, which could harm our liquidity and our ability to fund and expand our business.

In utilizing the proceeds of this offering in the manner described in “Use of Proceeds,” we may (1) make loans to our PRC subsidiaries, our VIE and its subsidiaries, (2) make additional capital contributions to our PRC subsidiaries, (3) establish new PRC subsidiaries and make capital contributions to them, and (4) acquire offshore entities with business operations in the PRC in an offshore transaction. However, most of these uses are subject to PRC regulations and approvals. For example:

 

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

 

    capital contributions to our PRC subsidiaries shall be filed with the MOFCOM or its local counterparts and also be registered with the local banks authorized by the SAFE.

The maximum aggregate amount that we can loan to the PRC subsidiaries, our VIE and its subsidiaries may vary with changes in the relevant entities’ net assets at the time of calculation.

In addition, on March 30, 2015, the SAFE promulgated the Circular on Reforming Management of the Settlement of Foreign Exchange Capital of Foreign-Invested Enterprises, or Circular 19, a regulation regarding the conversion by a foreign-invested company of its capital contribution in foreign currency into Renminbi. Circular 19 launched a nationwide reform of the administration of the settlement of the foreign exchange capital of foreign-invested enterprises and allows foreign-invested enterprises to settle their foreign exchange capital at

 

35


Table of Contents

their discretion, but continues to prohibit foreign-invested enterprises from using the Renminbi fund converted from their foreign exchange capital for expenditures beyond their business scopes. In June 2016, the SAFE promulgated the Notice on Reforming and Standardizing the Administrative Provisions on Capital Account Foreign Exchange Settlement, or Circular 16. Circular 19 and Circular 16 continue to prohibit foreign-invested enterprises from, among other things, using the Renminbi fund converted from its foreign exchange capital for expenditure beyond its business scope, investment and financing (except for security investment or guarantee products issued by bank), providing loans to non-affiliated enterprises or constructing or purchasing real estate not for self-use. As we expect to use the proceeds of this offering in China in the form of RMB, our PRC subsidiaries, our VIE and our VIE’s subsidiaries will need to convert any capital contributions or loans from U.S. dollars to RMB before using such capital contribution or loans. As a result, Circular 19, Circular 16 and relevant foreign exchange rules may significantly limit our ability to convert the net proceeds from this offering in US dollar to RMB and transfer the net proceeds to our VIE and its subsidiaries through our PRC subsidiaries, which may adversely affect our ability to expand our business.

Risk Factors Related to Doing Business in the PRC

PRC economic, political and social conditions, as well as changes in any government policies, laws and regulations, could adversely affect the overall economy in China or the education services market.

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

The PRC economy differs from the economies of most developed countries in many respects. Although the PRC economy has been transitioning from a planned economy to a more market-oriented economy since the late 1970s, the PRC government continues to play a significant role in regulating the industry. The PRC government continues to exercise significant control over China’s economic growth through allocating resources, controlling the incurrence and payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Changes in any of these policies, laws and regulations could adversely affect the economy in China or the market for educational services, which could harm our business. For example, recent policy changes in certain cities indicate that the scope of after-school tutoring services may be further regulated. From June 2017 to January 2018, Shanghai and Chengdu promulgated local regulations and policies, which, among others, prohibit private tutoring service providers from providing elementary education services to pre-school children and from enrolling full-time students at compulsory education stage except during winter and summer breaks.

While the PRC economy has experienced significant growth in the past two to three decades, growth has been uneven, both geographically and among various sectors of the economy. Demand for our educational services depends, in large part, on economic conditions in China. Any significant slowdown in China’s economic growth may cause our potential students to delay or cancel their plans to enroll in our schools, which in turn could reduce our revenue. In addition, any sudden changes to China’s political system or the occurrence of social unrest could have a material and adverse effect on our business, prospects, financial condition and results of operations.

Uncertainties with respect to the PRC legal system could adversely affect us.

The PRC legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions in a civil law system may be cited as reference but have limited precedential value. Since 1979, PRC laws and regulations have significantly enhanced the protections of interest relating to foreign investments in China. However, given the short history of these laws and regulations and the rapid evolvement of the PRC legal system, the interpretations of such laws and regulations may not always be consistent, and the enforcement of these laws and regulations involves significant uncertainties, any of which could limit the available legal

 

36


Table of Contents

protections. Another uncertainty is that the PRC administrative and judicial authorities have significant discretion in interpreting, implementing or enforcing statutory rules and contractual terms, and it may be more difficult to predict the outcome of administrative and judicial proceedings and the level of legal protection we may enjoy in the PRC than under some more developed legal systems. These uncertainties may affect our decisions on the policies and actions to be taken to comply with PRC laws and regulations, and may affect our ability to enforce our rights. In addition, the regulatory uncertainties may be exploited through unmerited legal actions or threats in an attempt to extract payments or benefits from us. Such uncertainties may therefore increase our operating expenses and costs, and materially and adversely affect our business and results of operations.

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

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

Governmental control of currency conversion may limit our ability to utilize our net revenues effectively and affect the value of your investment.

Substantially all of our revenues is denominated in Renminbi. As a result, restrictions on currency exchange may limit our ability to use revenues generated in Renminbi to fund any business activities we may have outside the PRC in the future or to make dividend payments to our shareholders and ADS holders in U.S. dollars. Under current PRC laws and regulations, Renminbi is freely convertible for current account items, such as trade and service-related foreign exchange transactions and dividend distributions. However, Renminbi is not freely convertible for direct investment or loans or investments in securities outside the PRC, unless such use is approved by SAFE. For example, foreign exchange transactions under our PRC subsidiaries’ capital accounts, including principal payments in respect of foreign currency-denominated obligations, are subject to significant foreign exchange controls and the approval requirement of SAFE. These limitations could affect our ability to obtain foreign exchange for capital expenditures.

Our PRC subsidiaries are permitted to declare dividends to our offshore subsidiary holding their equity interest, convert the dividends into a foreign currency and remit to its shareholder outside the PRC. In addition, in the event that our PRC subsidiaries liquidate, proceeds from the liquidation may be converted into foreign currency and distributed outside the PRC to our overseas subsidiary holding its equity interest. Furthermore, in the event that Puxin Education liquidates, Purong Beijing may, pursuant to a power of attorney it has entered into with Mr. Yunlong Sha, Mr. Liang Gao, Mr. Gang Li, Mr. Yun Xiao, Shanghai Trustbridge, Ningbo Zhimei and Tianjin Puxian, respectively, require Mr. Yunlong Sha, Mr. Liang Gao, Mr. Gang Li, Mr. Yun Xiao, Shanghai Trustbridge, Ningbo Zhimei and Tianjin Puxian to transfer all assets they might receive in connection with the liquidation of Puxin Education to Purong Beijing at no consideration or the minimum consideration as permitted under PRC laws. Purong Beijing then may distribute such proceeds to us after converting them into foreign currency and remit them outside the PRC in the form of dividends or other distributions. Once remitted outside the PRC, dividends, distributions or other proceeds from liquidation paid to us will not be subject to restrictions under PRC regulations on its further transfer or use.

Other than the above distributions by and through our PRC subsidiaries which are permitted to be made without the necessity to obtain further approvals, any conversion of the Renminbi-denominated revenues generated by our VIE for direct investment, loan or investment in securities outside the PRC will be subject to

 

37


Table of Contents

the limitations discussed above. To the extent we need to convert and use any Renminbi-denominated revenues generated by our VIE and its subsidiaries not paid to our PRC subsidiaries and revenues generated by our PRC subsidiaries not declared and paid as dividends, the limitations discussed above will restrict the convertibility of, and our ability to directly receive and use such revenues. As a result, our business and financial condition may be adversely affected. In addition, we cannot assure you that the PRC regulatory authorities will not impose more stringent restrictions on the convertibility of Renminbi in the future, especially with respect to foreign exchange transactions.

We may be required to obtain prior approval of the CSRC of the listing and trading of our ADSs on the NYSE.

On August 8, 2006, six PRC regulatory authorities, including the MOFCOM, the State Assets Supervision and Administration Commission, the State Administration of Taxation, or the SAT, China Securities Regulatory Commission, or the CSRC, SAIC and SAFE, jointly issued the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, which were subsequently amended on June 22, 2009. This regulation, among other things, requires that the listing and trading on an overseas stock exchange of securities in an offshore special purpose vehicle formed for purposes of holding direct or indirect equity interests in PRC companies and controlled directly or indirectly by PRC companies or individuals be approved by the CSRC. On September 21, 2006, the CSRC published on its official website the procedures for such approval process. In particular, certain documents are required to be filed with the CSRC as part of the approval procedures and it could take several months to complete the approval process.

While the implementation and interpretation of the M&A Rules and its later amendments remains unclear, we believe, based on the advice of Tian Yuan Law Firm, our PRC counsel, that approval by the CSRC is not required for this offering because we are not a special purpose vehicle formed for listing purpose through acquisition of domestic companies that are controlled by our PRC individual shareholders, as we acquire contractual control rather than equity interests in our VIE in the PRC. However, we cannot assure you that the relevant PRC regulatory authorities, including the CSRC, would reach the same conclusion as our PRC counsel. If the CSRC or other PRC regulatory authority subsequently determines that we need to obtain the CSRC’s approval for this offering, we may face sanctions by the CSRC or other PRC regulatory authorities. In such event, these regulatory authorities may, among other things, impose fines and penalties on or otherwise restrict our operations in the PRC or delay or restrict any remittance of the proceeds from this offering into the PRC. The CSRC or other PRC regulatory agencies may also take actions requiring us, or making it advisable for us, to suspend or terminate this offering before settlement and delivery of the ADSs. Any such or other actions taken could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our ADSs.

Certain PRC regulations, including the M&A Rules and national security regulations, may require a complicated review and approval process which could make it difficult for us to pursue growth through acquisitions in China.

The M&A Rules established additional procedures and requirements that could make merger and acquisition activities in China by foreign investors more time-consuming and complex. For example, the MOFCOM must be notified in the event a foreign investor takes control of a PRC domestic enterprise. Although the amendment to the M&A Rules in 2016 generally eased the restrictions imposed on merger and acquisition activities, certain acquisitions of domestic companies by offshore companies that are related to or affiliated with the same entities or individuals of the domestic companies, are still subject to approval by the MOFCOM. In addition, the Implementing Rules Concerning Security Review on Mergers and Acquisitions by Foreign Investors of Domestic Enterprises, issued by the MOFCOM in August 2011, require that mergers and acquisitions by foreign investors in “any industry with national security concerns” be subject to national security review by the MOFCOM. In addition, any activities attempting to circumvent such review process, including structuring the transaction through a proxy or contractual control arrangement, are strictly prohibited.

 

38


Table of Contents

There is significant uncertainty regarding the interpretation and implementation of these regulations relating to merger and acquisition activities in China. In addition, complying with these requirements could be time-consuming, and the required notification, review or approval process may materially delay or affect our ability to complete merger and acquisition transactions in China. As a result, our ability to seek growth through acquisitions may be materially and adversely affected.

In addition, if the MOFCOM determines that we should have obtained its approval for our entry into contractual arrangements with our VIE and its shareholders, we may be required to file for remedial approvals. We cannot assure you that we would be able to obtain such approval from the MOFCOM. We may also be subject to administrative fines or penalties by the MOFCOM that may require us to limit our business operations in the PRC, delay or restrict the conversion and remittance of our funds in foreign currencies into the PRC or take other actions that could have material and adverse effect on our business, financial condition and results of operations.

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

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

On February 13, 2015, the SAFE promulgated a Notice on Further Simplifying and Improving Foreign Exchange Administration Policy on Direct Investment, or Notice 13, which became effective on June 1, 2015. Under Notice 13, applications for foreign exchange registration of inbound foreign direct investments and outbound overseas direct investments, including those required under Circular 37, will be filed with qualified banks instead of the SAFE. The qualified banks will directly examine the applications and accept registrations under the supervision of the SAFE.

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

As of the date of this prospectus, all PRC residents known to us that currently hold direct or indirect interests in our company have completed the necessary registrations as required by Circular 37. We cannot assure

 

39


Table of Contents

you that any shareholders or beneficial owners of our company who are PRC residents will be able to successfully complete the registration or update the registration of their direct and indirect equity interest as required in the future. If any of them fail to make or update the registration, our PRC subsidiaries could be subject to fines and legal penalties, and the SAFE could restrict our cross-border investment activities and our foreign exchange activities, including restricting our PRC subsidiaries’ ability to distribute dividends to, or obtain loans denominated in foreign currencies from, our company, or prevent us from contributing additional capital into our PRC subsidiaries. As a result, our business operations and our ability to make distributions to you could be materially and adversely affected.

Higher labor costs in the PRC may adversely affect our business, financial conditions and results of operations.

Labor costs in the PRC have increased with the PRC’s economic development. According to the National Bureau of Statistics of China, the average wage of private education institution employees in urban cities in China increased at a CAGR of 10.8% nationwide between 2011 and 2016. We expect that our labor costs, including wages, various statutory employee benefits, including those for full-time and part-time teachers, consultants and administrative staff, will continue to increase. Unless we are able to pass on these increased labor costs to our students by increasing prices for our services, our profitability and results of operations may be materially and adversely affected.

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

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

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

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

The change in value of the Renminbi against the U.S. dollar and other currencies is affected by various factors such as changes in political and economic conditions in the PRC. On July 21, 2005, the PRC government

 

40


Table of Contents

changed its decade-old policy of pegging the value of the Renminbi to the U.S. dollar, and the Renminbi appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the Renminbi and the U.S. dollar remained within a narrow band. Since June 2010, the Renminbi has fluctuated against the U.S. dollar, at times significantly and unpredictably. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and the U.S. dollar in the future.

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

Under the PRC Enterprise Income Tax Law, or the EIT Law, we may be classified as a PRC “resident enterprise,” which could result in unfavorable tax consequences to us and our non-PRC shareholders or ADS holders.

The PRC Enterprise Income Tax Law and its implementing rules provide that enterprises established outside of the PRC whose “de facto management bodies” are located in the PRC are considered “resident enterprises” under PRC tax laws. The implementing rules define the term “de facto management bodies” as a management body which substantially manages, or has control over the business, personnel, finance and assets of an enterprise. On April 22, 2009, the SAT issued Circular 82, which provides that a foreign enterprise controlled by a PRC company or a group of PRC companies will be classified as a “resident enterprise” with its “de facto management body” located within the PRC if all of the following requirements are satisfied: (1) the senior management and core management departments in charge of its daily operations function are mainly in the PRC; (2) its financial and human resources decisions are subject to determination or approval by persons or bodies in the PRC; (3) its major assets, accounting books, company seals, and minutes and files of its board and shareholders’ meetings are located or kept in the PRC; and (4) at least half of the enterprise’s directors with voting right or senior management reside in the PRC. The SAT issued a bulletin on July 27, 2011 to provide more guidance on the implementation of Circular 82. The bulletin clarifies certain matters relating to resident status determination, post-determination administration and competent tax authorities. Although both the circular and the bulletin only apply to offshore enterprises controlled by PRC enterprises and not offshore enterprises controlled by PRC individuals, the determination criteria set forth in the circular and administration clarification made in the bulletin may reflect the general position of the SAT on how the “de facto management body” test should be applied in determining the tax resident status of offshore enterprises and how the administration measures should be implemented, regardless of whether they are controlled by PRC enterprises or PRC individuals.

From the year in which the entity is determined as a “resident enterprise,” any dividend, profit and other equity investment gain shall be taxed in accordance with the PRC Enterprise Income Tax Law and its implementing rules.

We believe we are not a PRC resident enterprise for PRC tax purposes. As the tax resident status of an enterprise is subject to the determination by the PRC tax authorities, if we are deemed as a PRC “resident enterprise,” we will be subject to PRC Enterprise Income Tax on our worldwide income at a uniform tax rate of 25%, although dividends distributed to us from our existing PRC subsidiaries and any other PRC subsidiaries which we may establish from time to time could be exempt from the PRC dividend withholding tax due to our PRC “resident recipient” status. This could have a material adverse effect on our overall effective tax rate, our

 

41


Table of Contents

income tax expenses and our net income. Furthermore, dividends, if any, paid to our shareholders and ADS holders may be decreased as a result of the decrease in distributable profits. In addition, if we were to be considered a PRC “resident enterprise,” dividends we pay with respect to our ADSs or ordinary shares and the gains realized from the transfer of our ADSs or ordinary shares may be considered income derived from sources within the PRC. In such case, we may be required to withhold a 10% tax from dividends we pay to our shareholders that are non-resident enterprises, including the holders of our ADSs. In addition, non-resident enterprise shareholders (including our ADS holders) may be subject to PRC tax at a rate of 10% on gains realized on the sale or other disposition of ADSs or ordinary shares. Furthermore, if we are deemed a PRC resident enterprise, dividends paid to our non-PRC individual shareholders (including our ADS holders) and any gain realized on the transfer of ADSs or ordinary shares by such shareholders may be subject to PRC tax at a rate of 20% (which, in the case of dividends, may be withheld at source). Any PRC tax liability may be reduced by an applicable tax treaty. However, it is unclear whether non-PRC shareholders would be able to claim the benefits of any tax treaties between their country of tax residence and the PRC in the event that we are treated as a PRC resident enterprise. Any such tax may reduce the returns on your investment in the ADSs or ordinary shares.

There are significant uncertainties under the EIT Law relating to the withholding tax liabilities of our PRC subsidiaries, and dividends paid by our PRC subsidiaries to our offshore subsidiaries may not qualify to enjoy certain treaty benefits.

Under the PRC Enterprise Income Tax Law and its implementation rules, the profits of a foreign-invested enterprise generated through operations, which are distributed to its immediate holding company outside the PRC, will be subject to a withholding tax rate of 10%. Pursuant to a special arrangement between Hong Kong and the PRC, such rate may be reduced to 5% if a Hong Kong resident enterprise owns more than 25% of the equity interest in the PRC company. Our PRC subsidiaries are wholly owned by our Hong Kong subsidiary.

Moreover, under the Notice on Issues regarding the Administration of the Dividend Provision in Tax Treaties promulgated by the SAT on February 20, 2009, the taxpayer needs to satisfy certain conditions to enjoy the benefits under a tax treaty. These conditions include: (1) the taxpayer must be the beneficial owner of the relevant dividends, and (2) the corporate shareholder to receive dividends from the PRC subsidiaries must have continuously met the direct ownership thresholds during the 12 consecutive months preceding the receipt of the dividends. Further, the SAT promulgated the Notice on Issues Related to the “Beneficial Owner” in Tax Treaties on February 3, 2018, which sets forth certain detailed factors in determining the “beneficial owner” status.

Entitlement to a lower tax rate on dividends according to tax treaties or arrangements between the PRC central government and governments of other countries or regions is subject to inspection or approval by the relevant tax authorities. As a result, we cannot assure you that we will be entitled to any preferential withholding tax rate under tax treaties for dividends received from our PRC subsidiaries.

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

On February 3, 2015, the SAT issued the Public Notice Regarding Certain Corporate Income Tax Matters on Indirect Transfer of Properties by Non-Tax Resident Enterprises, or Bulletin 7, which partially replaced and supplemented previous rules under the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises, or Circular 698, issued by the SAT on December 10, 2009. Under Bulletin 7, an “indirect transfer” of assets by non-PRC resident enterprises, including transfers of equity interests in a PRC resident enterprise, may be re-characterized and treated as a direct transfer of PRC taxable assets, if such arrangement does not have a reasonable commercial purpose and was established for the purpose of avoiding payment of PRC enterprise income tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax. According to Bulletin 7, “PRC taxable assets” include assets attributed to an establishment in the PRC, immoveable properties in the PRC, and equity investments in PRC resident enterprises. In respect of an indirect offshore transfer of assets of a PRC establishment, the relevant gain is to be

 

42


Table of Contents

regarded as effectively connected with the PRC establishment and therefore included in its enterprise income tax filing, and would consequently be subject to PRC enterprise income tax at a rate of 25%. Where the underlying transfer relates to the immoveable properties in the PRC or equity investments in a PRC resident enterprise, which is not effectively connected to a PRC establishment of a non-resident enterprise, a PRC enterprise income tax at 10% would apply, subject to available preferential tax treatment under applicable tax treaties or similar arrangements, and the party who is obligated to make the transfer payments has the withholding obligation. In addition, Bulletin 7 has introduced safe harbors for internal group restructurings and purchases and sales of equity through a public securities market.

On October 17, 2017, the SAT issued the Announcement on Issues Concerning the Withholding of Non-resident Enterprise Income Tax at Source, or Bulletin 37, which came into effect on December 1, 2017 and abolished Circular 698. The Bulletin 37 further clarifies the practices and procedures for the withholding of the non-PRC resident enterprise income tax.

We face uncertainties as to the reporting and other implications of certain past and future transactions where PRC taxable assets are involved, such as offshore restructurings, sales of the shares in our offshore subsidiaries and investments. Our company may be subject to filing obligations or taxes if our company is transferor in such transactions, and may be subject to withholding obligations if our company is transferee in such transactions, under SAT Bulletin 7 and SAT Bulletin 37. For transfers of shares in our company by investors who are non-PRC resident enterprises, our PRC subsidiaries may be requested to assist in the filings under Bulletin 7 and Bulletin 37. As a result, we may be required to expend valuable resources to comply with Bulletin 7 and Bulletin 37 or to request the relevant transferors from whom we purchase taxable assets to comply with these circulars, or to establish that our company should not be taxed under these circulars, which may have a material adverse effect on our financial conditions and results of operations.

The audit report included in this prospectus is prepared by auditors who are not fully inspected by the Public Company Accounting Oversight Board, and as such, you are deprived of the benefits of such inspection.

Our independent registered public accounting firm issues the audit report included in this prospectus filed with the Securities and Exchange Commission, or the SEC. As auditors of companies that are traded publicly in the United States and a firm registered with the Public Company Accounting Oversight Board (United States), or PCAOB, our independent registered public accounting firm, is required by the laws of the United States to undergo regular inspections by PCAOB to assess its compliance with the laws of the United States and professional standards. Because our auditors are located in China, a jurisdiction where PCAOB is currently unable to conduct full inspections without the approval of the Chinese authorities, our auditors are not currently inspected by PCAOB.

Inspections of other firms that PCAOB has conducted outside China have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. This lack of full PCAOB inspections in China prevents PCAOB from regularly evaluating our auditor’s audits and its quality control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections.

The inability of PCAOB to conduct full inspections of auditors in China makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections. Investors may lose confidence in our reported financial information and procedures and the quality of our financial statements.

 

43


Table of Contents

If additional remedial measures are imposed on the Big Four PRC-based accounting firms, including our independent registered public accounting firm, in administrative proceedings brought by the SEC alleging the firms’ failure to meet specific criteria set by the SEC, we could be unable to timely file future financial statements in compliance with the requirements of the Exchange Act.

Beginning in 2011, the Chinese affiliates of the “big four” accounting firms (including our independent registered public accounting firm) were affected by a conflict between the U.S. and Chinese law. Specifically, for certain U.S.-listed companies operating and audited in China, the SEC and PCAOB sought to obtain access to the audit work papers and related documents of the Chinese affiliates of the “big four” accounting firms. The accounting firms were, however, advised and directed that, under Chinese law, they could not respond directly to the requests of the SEC and PCAOB and that such requests, and similar requests by foreign regulators for access to such papers in China, had to be channeled through the CSRC.

In late 2012, this impasse led the SEC to commence administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley Act of 2002 against the Chinese accounting firms, including our independent registered public accounting firm. In January 2014, the administrative law judge made an initial decision to impose penalties on the firms, including a temporary suspension of their right to practice before the SEC. The accounting firms filed a petition for review of the initial decision. On February 6, 2015, before a review by the commissioners of the SEC took place, the firms reached a settlement with the SEC. Under the settlement, the SEC accepts that future requests by the SEC for the production of documents will normally be made to the CSRC. The firms will receive matching Section 106 requests, and are required to follow a detailed set of procedures with respect to such requests, which in substance require them to facilitate production via the CSRC. If they fail to meet specified criteria, the SEC has authority to impose a variety of additional remedial measures on the firms depending on the nature of the failure. Remedies for any future noncompliance could include, as appropriate, an automatic six-month bar on a single firm’s performance of certain audit work, commencement of a new proceeding against a firm, or in extreme cases the resumption of the current proceeding against all four firms.

In the event that the SEC restarts administrative proceedings, depending upon the final outcome, listed companies in the U.S. with major PRC operations may find it difficult or impossible to retain auditors in respect of their operations in China, which could result in their financial statements being determined to not be in compliance with the requirements of the Exchange Act, including possible delisting. Moreover, any negative news about any such future proceedings against the firms may cause investor uncertainty regarding China-based, U.S.-listed companies, including our company, and the market price of our shares may be adversely affected.

If our independent registered public accounting firm was denied, even temporarily, the ability to practice before the SEC and we were unable to timely find another registered public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be determined not to be in compliance with the requirements of the Exchange Act. Such a determination could ultimately lead to the delisting of our shares from the NYSE or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of our shares in the United States.

Risk Factors Related to Our ADSs and This Offering

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.

 

44


Table of Contents

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.

An active trading market for our ordinary shares or our ADSs may not develop and the trading price for our ADSs may fluctuate significantly.

Prior to this offering, there has been no public market for our ADSs or the ordinary shares underlying our ADSs. We intend to apply for listing our ADSs on the NYSE, but we cannot assure you that a liquid public market for our ADSs will develop. If an active public market for our ADSs does not develop following the completion of this offering, the market price and liquidity of our ADSs may be materially and adversely affected. The initial public offering price for our ADSs was determined by negotiation among us and the underwriters based upon several factors, and the trading price of our ADSs after this offering may decline below the initial public offering price. As a result, investors in our securities may experience a significant decrease in the value of their ADSs due to insufficient or a lack of market liquidity of the ADSs.

The trading price of our ADSs is likely to be volatile, which could result in substantial losses to investors.

The trading price of our ADSs is likely to be volatile and could fluctuate widely due to factors beyond our control. This may happen because of broad market and industry factors, akin to 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. A number of Chinese companies have listed or are in the process of listing their securities on U.S. stock markets. The securities of some of these companies have experienced significant volatility, including price declines in connection with their initial public offerings. The trading performances of these Chinese companies’ securities after their offerings may affect the perception and 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.

In addition to market and industry factors, the price and trading volume for our ADSs may be highly volatile due to a number of factors, including the following:

 

    regulatory developments affecting us or our industry, and customers of our education services;

 

    actual or anticipated fluctuations in our quarterly results of operations and changes or revisions of our expected results;

 

    changes in the market condition, market potential and competition in education services;

 

    announcements by us or our competitors of new education services, expansions, investments, acquisitions, strategic partnerships or joint ventures;

 

    fluctuations in global and Chinese economies;

 

    changes in financial estimates by securities analysts;

 

    adverse publicity about us;

 

    additions or departures of our key personnel and senior management;

 

    release of lockup or other transfer restrictions on our outstanding equity securities or sales of additional equity securities; and

 

    potential litigation or regulatory investigations.

Any of these factors may result in large and sudden changes in the volume and price at which our ADSs will trade.

 

45


Table of Contents

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.

Substantial future sales or perceived potential sales of our ADSs in the public market could cause the price of our ADSs to decline.

Sales of substantial amounts of our ADSs in the public market after the completion of this offering, or the perception that these sales could occur, could adversely affect the market price of our ADSs. In connection with this offering, [we and our officers, directors, shareholders and certain option and warrant holders] have agreed not to sell any ordinary shares or ADSs for 180 days after the date of this prospectus without the prior written consent of the underwriters, subject to certain exceptions. Upon the completion of this offering, we will have              ordinary shares outstanding, including              ordinary shares represented by              ADSs, assuming the underwriters do not exercise their option to purchase additional ADSs. The ADSs sold in this offering will be freely tradable without restriction or further registration under the Securities Act. The remaining ordinary shares outstanding immediately after this offering will be available for sale, upon the expiration of the 180-day lockup period, subject to volume and other restrictions as applicable under Rules 144 and 701 under the Securities Act. In addition, the underwriters may exercise the discretion to release the securities held by the parties subject to the lockup restriction prior to the expiration of the lockup period. If the securities subject to lockup are released before the expiration of the lockup period, their sale or perceived sale into the market may cause the price of our ADSs to decline. Furthermore, certain of our convertible notes holders have the right to elect to convert the convertible notes into our ordinary shares after this offering. 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 the ADSs. See “Underwriting” and “Shares Eligible for Future Sale” for a more detailed description of the restrictions on selling our securities after this offering.

In addition, certain of our shareholders will have the right to cause us to register the sale of their shares under the Securities Act upon the occurrence of certain circumstances. See “Description of Share Capital—Registration Rights.” Registration of these shares under the Securities Act would result in these shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration. Sales of these registered shares in the public market could cause the price of our ADSs to decline.

If securities or industry analysts do not publish research or reports 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 depend in part on the research and reports that securities or industry analysts publish about us or our business. If research analysts do not establish and maintain adequate research coverage or if one or more of the analysts who covers us downgrades 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 coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which, in turn, could cause the market price or trading volume for our ADSs to decline.

Because we do not expect to pay dividends in the foreseeable future after this offering, 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 after this offering to fund the development and growth of our business. As a result, we do not expect to pay any cash

 

46


Table of Contents

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 complete discretion as to whether to distribute dividends, subject to certain requirements of Cayman Islands law. In addition, our shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our directors. Under Cayman Islands law, a Cayman Islands company may pay a dividend out of either profit or share premium account, provided that in no circumstances may a dividend be paid if this would result in the company being unable to pay its debts as they fall due in the ordinary course of business. Even if our board of directors decides to declare and pay dividends, the timing, amount and form of future dividends, if any, will depend on, among other things, our future results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries, our financial condition, contractual restrictions and other factors deemed relevant by our board of directors. Accordingly, the return on your investment in our ADSs will likely depend entirely upon any future price appreciation of our ADSs. We cannot guarantee that our ADSs will appreciate in value after this offering 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.

Because the initial public offering price is substantially higher than the pro forma net tangible book value per share, you will experience immediate and substantial dilution.

If you purchase ADSs in this offering, you will pay more for each ADS on a per share basis than the corresponding amount paid by existing shareholders for their ordinary shares. As a result, you will experience immediate and substantial dilution of approximately US$             per ADS. This number represents the difference between our pro forma net tangible book value US$             per ADS as of March 31, 2018, after giving effect to this offering and the assumed initial public offering price of US$             per ADS, which is the mid-point of the estimated range of the initial public offering price shown on the cover page of this prospectus. See “Dilution” for a more complete description of how the value of your investment in our ADSs will be diluted upon the completion of this offering.

There can be no assurance that we will not be a passive foreign investment company, or PFIC, for 2018 or any other taxable year, which could result in adverse U.S. federal income tax consequences to U.S. investors in our ADSs or ordinary shares.

In general, a non-U.S. corporation is a PFIC for any taxable year in which (i) 75% or more of its gross income consists of passive income or (ii) 50% or more of the average quarterly value of its assets consists of assets that produce, or are held for the production of, passive income. For purposes of the above calculations, a non-U.S. corporation that owns at least 25% by value of the shares of another corporation is treated as if it held its proportionate share of the assets of the other corporation and received directly its proportionate share of the income of the other corporation. Cash is a passive asset for purposes of the PFIC rules. Goodwill that is associated with an active income-producing activity of a non-U.S. corporation is generally an active asset unless, for U.S. federal income tax purposes, the non-U.S. corporation is a controlled foreign corporation, or CFC, which is not publicly traded “for the taxable year.” We were a CFC during a portion of 2018, but do not expect to be a CFC for the remainder of 2018.

Because we were both non-publicly traded and a CFC during a portion of 2018, it is not clear whether we can use the value of our assets rather than their tax basis in determining our PFIC status for 2018. We believe it is reasonable to use our assets’ value for this purpose. Assuming this position is respected, and based upon the nature of our business, the composition of our income and assets and the estimated value of our assets, (which is based on the expected price of our ADSs), we do not expect to be a PFIC for 2018 or in the foreseeable future. However, in light of the uncertainty as to whether the value of our assets (rather than their tax basis) can be taken into account in determining our PFIC status for 2018, and because in any event we have significant cash balances (taking into account the expected proceeds from this offering), it is not clear whether we will be a PFIC for 2018.

 

47


Table of Contents

In addition, our PFIC status for any taxable year is a factual determination that can be made only after the end of such year, and will depend on the composition of our income and assets and the value of our assets for such year. Moreover, because we hold, and may continue to hold, a significant amount of cash, our PFIC status for any taxable year may depend on the value of our goodwill which may be determined, in part, by reference to the market price of our ADSs, which may change from time to time. In addition, it is not entirely clear how the contractual arrangements between us and our VIE will be treated for purposes of the PFIC rules. If it were determined that we are not the owner of the stock of our VIE for U.S. federal income tax purposes, we could be treated as a PFIC. In light of the foregoing, there can be no assurance that we will not be a PFIC for the current or any future taxable year.

If we were a PFIC for any taxable year during which a U.S. investor holds ADSs or ordinary shares, certain adverse U.S. federal income tax consequences could apply to such U.S. investor. See “Taxation—U.S. Federal Income Tax Consequences—Passive Foreign Investment Company Rules.”

Our memorandum and articles of association that will become effective immediately prior to the completion of this offering contain anti-takeover provisions that could have a material adverse effect on the rights of holders of our ordinary shares and ADSs.

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

You may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited, because we 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 memorandum and articles of association, the Companies Law (as amended) of the Cayman Islands and the common law of the Cayman Islands. The rights of our shareholders to take action against our directors, actions by our minority shareholders and the fiduciary duties of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial 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 has a less developed body of securities laws than the United States. Some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States.

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

 

48


Table of Contents

us, in original actions brought in the Cayman Islands, based on certain civil liability provisions of U.S. securities laws that are penal in nature.

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

As a result of all of the above, our public shareholders may have more difficulty in protecting their interests in the face of actions taken by our management, members of our board of directors or our large shareholders than they would as public shareholders of a company incorporated in the United States. For a discussion of certain significant differences between the provisions of the Companies Law (as amended) of the Cayman Islands and the laws applicable to companies incorporated in the United States and their shareholders, see “Description of Share Capital—Differences in Corporate Law.”

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

We are a Cayman Islands company and all of our assets are located outside of the United States. Substantially all of our current operations are conducted in the PRC. In addition, a majority of our current directors and officers are nationals and residents of countries other than the United States. 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 the PRC may render you unable to enforce a judgment against our assets or the assets of our directors and officers. For more information regarding the relevant laws of the Cayman Islands and the PRC, see “Enforceability of Civil Liabilities.”

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

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

 

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

 

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

 

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

 

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

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

 

49


Table of Contents

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

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

The voting rights of holders of ADSs are limited by the terms of the deposit agreement, and you may not be able to exercise your right to vote your ordinary shares.

As a holder of our ADSs, you will only be able to exercise the voting rights with respect to the underlying ordinary shares in accordance with the provisions of the deposit agreement. Under the deposit agreement, you must vote by giving voting instructions to the depositary. Upon receipt of your voting instructions, the depositary will vote the underlying ordinary shares in accordance with these instructions. You will not be able to directly exercise your right to vote with respect to the underlying 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 post-offering amended and restated memorandum and articles of association that will become effective immediately prior to the completion of this offering, the minimum notice period required for convening a general meeting is [ten] days.

When a general meeting is convened, you may not receive sufficient advance notice to withdraw the shares underlying your ADSs to allow you to vote with respect to any specific matter. 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 cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your shares. 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 vote and you may have no legal remedy if the shares underlying your ADSs are not voted as you requested.

 

50


Table of Contents

The depositary for our ADSs will give us a discretionary proxy to vote our ordinary shares underlying your ADSs if you do not vote at shareholders’ meetings, except in limited circumstances, which could adversely affect your interests and the ability of our shareholders as a group to influence the management of our company.

Under the deposit agreement for the ADSs, if you do not give voting instructions to the depositary to direct how the ordinary shares underlying your ADSs are voted, the depositary will give us a discretionary proxy to vote the ordinary shares underlying your ADSs at shareholders’ meetings unless:

 

    we have failed to timely provide the depositary with notice of meeting and related voting materials;

 

    we have instructed the depositary that we do not wish a discretionary proxy to be given;

 

    we have informed the depositary that there is substantial opposition as to a matter to be voted on at the meeting;

 

    a matter to be voted on at the meeting would have a material adverse impact on shareholders; or

 

    the voting at the meeting is to be made on a show of hands.

The effect of this discretionary proxy is that if you do not give voting instructions to the depositary to direct how the ordinary shares underlying your ADSs are voted, you cannot prevent the ordinary shares underlying your ADSs from being voted, except under the circumstances described above. This may make it more difficult for shareholders to influence the management of our company. Holders of our ordinary shares are not subject to this discretionary proxy.

You may not receive dividends or other distributions on our ordinary shares and you may not receive any value for them, if it is illegal or impractical to make them available to you.

The depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on ordinary shares or other deposited securities underlying our ADSs, after deducting its fees and expenses. You will receive these distributions in proportion to the number of ordinary shares your ADSs represent. However, the depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to any holders of ADSs. For example, it would be unlawful to make a distribution to a holder of ADSs if it consists of securities that require registration under the Securities Act but that are not properly registered or distributed under an applicable exemption from registration. The depositary may also determine that it is not feasible to distribute certain property through the mail. Additionally, the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may determine not to distribute such property. We have no obligation to register under U.S. securities laws any ADSs, ordinary shares, rights or other securities received through such distributions. We also have no obligation to take any other action to permit the distribution of ADSs, ordinary shares, rights or anything else to holders of ADSs. This means that you may not receive distributions we make on our ordinary shares or any value for them if it is illegal or impractical for us to make them available to you. These restrictions may cause a material decline in the value of our ADSs.

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.

 

51


Table of Contents

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 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 will incur increased costs as a result of being a public company, particularly after we cease to qualify as an “emerging growth company.”

Upon completion of this offering, we will become a public company and expect to incur significant accounting, legal and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act, as well as rules subsequently implemented by the SEC and the NYSE, have detailed requirements concerning corporate governance practices of public companies. As a company with less than US$1.07 billion in revenues for the year ended December 31, 2017, we qualify as an “emerging growth company” pursuant to the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, in the assessment of the emerging growth company’s internal control over financial reporting. The JOBS Act also permits an emerging growth company to delay adopting new or revised accounting standards until such time as those standards apply to private companies. 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 expect these rules and regulations applicable to public companies to increase our accounting, legal and financial compliance costs and to make certain corporate activities more time-consuming and costly. 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. Our management will be required to devote substantial time and attention to our public company reporting obligations and other compliance matters. We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. Our reporting and other compliance obligations as a public company may place a strain on our management, operational and financial resources and systems for the foreseeable future.

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

 

52


Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to us. All statements other than statements of historical facts are forward-looking statements. The forward-looking statements are contained principally in, but not limited to, the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” These statements relate to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Forward-looking statements include, but are not limited to, statements about:

 

    our goals and strategies;

 

    our ability to retain and increase our student enrollments;

 

    our ability to offer new courses and services;

 

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

 

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

 

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

 

    expected changes in our revenues, costs or expenditures;

 

    growth of and competition trends in our industry;

 

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

 

    our expectation regarding the use of proceeds from this offering;

 

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

 

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

 

    assumptions underlying or related to any of the foregoing.

In some cases, you can identify forward-looking statements by terms such as “may,” “could,” “will,” “should,” “would,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “project” or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions. You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which are, in some cases, beyond our control and which could materially affect results. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under the heading “Risk Factors” and elsewhere in this prospectus. If one or more of these risks or uncertainties occur, or if our underlying assumptions prove to be incorrect, actual events or results may vary significantly from those implied or projected by the forward-looking statements. No forward-looking statement is a guarantee of future performance.

This prospectus also contains certain data and information, which we obtained from various government and private publications. Although we believe that the publications and reports are reliable, we have not independently verified the data. Statistical data in these publications includes projections that are based on a number of assumptions. If any one or more of the assumptions underlying the market data is later found to be incorrect, actual results may differ from the projections based on these assumptions.

The forward-looking statements made in this prospectus relate only to events or information as of the date on which the statements are made in this prospectus. Although we will become a public company after this offering and have ongoing disclosure obligations under United States federal securities laws, we do not intend to update or otherwise revise the forward-looking statements in this prospectus, whether as a result of new information, future events or otherwise.

 

53


Table of Contents

USE OF PROCEEDS

We estimate that we will receive net proceeds from this offering of approximately US$             million if the over-allotment option is not exercised, and US$             million if the over-allotment option is exercised, after deducting underwriting discounts and commissions and the estimated offering expenses payable by us. [We will not receive any of the proceeds from the sale of the ADSs being sold by the selling shareholders.]

We anticipate using the net proceeds of this offering for the following purposes:

 

    approximately [70]%, or US$             million for [financing potential strategic acquisitions and launch of new schools in China];

 

    approximately [15]%, or US$             million for [upgrading our information technology systems and promoting online platforms];

 

    approximately [10]%, or US$             million for [marketing and brand promotion]; and

 

    the remaining amount to fund [working capital and for other general corporate purposes].

The foregoing represents our current intentions with respect to the use and allocation of the net proceeds of this offering based upon our present plans and business conditions, but our management will have significant flexibility and discretion in applying the net proceeds of this offering. The occurrence of unforeseen events or changed business conditions may result in application of the proceeds of this offering in a manner other than as described in this prospectus.

In utilizing the proceeds from this offering, we are permitted under PRC laws and regulations to provide funding to our PRC subsidiaries only through loans or capital contributions, and to our VIE and its subsidiaries only through loans, and only if we satisfy the applicable government registration and approval requirements. Under the PRC laws and regulations, capital contributions to our PRC subsidiaries are required to be filed with the Ministry of Commerce or its local counterparts and also be registered with the local banks authorized by the State Administration of Foreign Exchange of the PRC, or the SAFE. Any loan that we provide our PRC subsidiaries, our VIE and its subsidiaries may not exceed a statutory limit and is required to be filed with the SAFE after the loan agreement is signed and at least three business days prior to any drawdown by the borrower under the loan. Although it usually takes no more than 30 days to complete or receive aforesaid governmental filings, registrations or approvals after submission of all required application documents, we cannot assure you that we will be able to complete or obtain these governmental filings, registrations or approvals on a timely basis, if at all. See “Risk Factors—Risk Factors Related to Our Corporate Structure—PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay us from using the proceeds of this offering to make loans or additional capital contributions to our PRC subsidiaries, our VIE and its subsidiaries, which could harm our liquidity and our ability to fund and expand our business.”

 

54


Table of Contents

DIVIDEND POLICY

We have not previously declared or paid cash dividends and we have no intention to declare or pay any dividends in the near future on our shares or the ADSs representing our ordinary shares. We currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.

Our board of directors has complete discretion in deciding whether to distribute dividends. Even if our board of directors decides to pay dividends, the timing, amount and form of future dividends, if any, will depend on, among other things, our future results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries, our financial condition, contractual restrictions and other factors deemed relevant by our board of directors.

If we pay any dividends, our ADS holders will be entitled to such dividends to the same extent as holders of our ordinary shares, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. See “Description of American Depositary Shares.” Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.

We are a holding company with no material operations of our own. We conduct our operations primarily through our subsidiaries in China. PRC regulations may restrict the ability of our PRC subsidiaries to pay dividends to us. As a result, our ability to pay dividends and to finance any debt we may incur depends upon dividends paid by our subsidiaries. If our existing subsidiaries or any newly formed subsidiaries incur debt on their own behalf in the future, the instruments governing their debt may restrict their ability to pay dividends to us.

 

55


Table of Contents

CAPITALIZATION

The following table sets forth our total capitalization as of March 31, 2018:

 

    on an actual basis; and

 

    on a pro forma basis to reflect (i) the automatic conversion of 11,917,880 Series A preferred shares into ordinary shares on a one-for-one basis, and (ii) the conversion of convertible notes issued to Haitong International Investment Holdings Limited, or Haitong, at the conversion price of US$             per share immediately prior to the completion of this offering; and

 

    on a pro forma as adjusted basis to reflect (i) the automatic conversion of 11,917,880 Series A preferred shares into ordinary shares on a one-for-one basis immediately prior to the completion of this offering, (ii) the automatic conversion of convertible notes issued to Haitong at the conversion price of US$             per share upon completion of this offering, and (iii) the issuance and sale of              ordinary shares in the form of ADSs by us in this offering at an initial public offering price of US$             per ADS, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us (assuming the underwriters do not exercise their option to purchase additional ADSs).

You should read this table together with our consolidated financial statements, the related notes included elsewhere in this prospectus and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

    As of March 31, 2018  
    Actual     Pro Forma     Pro Forma as Adjusted(1)  
    RMB     US$     RMB     US$     RMB     US$  
    (in thousands)  

Debt

           

Convertible notes

    352,520       56,200          

Promissory note

    350,215       55,833          

Derivative liabilities

    17,563       2,800          

Mezzanine equity

           

Convertible redeemable preferred shares

    71,088       11,333          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Shareholders’ deficit

           

Ordinary shares (par value of US$0.00005 per share; 988,082,120, 152,082,120, 126,778,396 shares authorized, issued and outstanding(3) on a pro forma basis and on a pro forma as adjusted basis)

    50       8          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Additional paid-in capital

    545,425       86,954          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Accumulated other comprehensive income

    34,990       5,578          

Accumulated deficit

    (986,321     (157,243        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total shareholders’ deficit of Puxin Limited

    (405,856     (64,703        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-controlling interest

    (48     (8        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Shareholders’ deficit

    (405,904     (64,711        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total mezzanine equity and equity

    (334,816     (53,378        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Pro forma as adjusted information discussed above is illustrative only. Our additional paid-in capital, accumulative deficit, accumulative other comprehensive income, total shareholder’s equity and total capitalization following the completion of this offering are subject to adjustment based on the actual initial public offering price and other terms of this offering determined at pricing.
(2)

Assuming the number of ADSs offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us, a US$1.00 increase (decrease) in the assumed

 

56


Table of Contents
  initial public offering price of US$             per ADS would increase (decrease) each of additional paid-in capital, total shareholders’ equity and total capitalization by US$             million.
(3) We issued 8,200,000 ordinary shares to Long belief Limited and 17,103,724 ordinary shares to Long favor Limited in February 2018. The purpose of issuing these shares to Long belief Limited and Long favor Limited were to establish a reserve pool for share incentive awards to our employees or for future acquisition payments. All shareholder rights of these 25,303,724 ordinary shares, including but not limited to voting rights and dividend rights, are unconditionally waived until the corresponding ordinary shares are transferred to the employees or the shareholders of future acquired entities. These 25,303,724 ordinary shares are excluded from the number of our outstanding ordinary shares in our capitalization table.

 

57


Table of Contents

EXCHANGE RATE INFORMATION

We conduct substantially all of our operations in China. All of our revenue, costs and expenses are denominated in Renminbi. This prospectus contains translations of certain Renminbi amounts into U.S. dollars at specified rates. Unless otherwise stated, the translation of Renminbi into U.S. dollars has been made at the rate of RMB6.2726 to US$1.00, the exchange rate as set forth in the H.10 statistical release of the Federal Reserve Board on March 30, 2018. We make no representation that any Renminbi or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or Renminbi, as the case may be, at any particular rate, the rates stated below, or at all. The PRC government imposes controls over its foreign currency reserves in part through direct regulation of the conversion of Renminbi into foreign exchange and through restrictions on foreign trade. On April 20, 2018, the exchange rate as set forth in the H.10 statistical release of the Federal Reserve Board was RMB6.2945 to US$1.00.

The following table sets forth information concerning the rates of exchange of US$1.00 into RMB for the periods indicated. These rates are provided solely for your convenience and are not necessarily the exchange rates that we used in this prospectus or will use in the preparation of our periodic reports or any other information to be provided to you.

 

     Noon Buying Rate  

Period

   Period End      Average(1)      Low      High  
     (RMB per US$1.00)  

2013

     6.0537        6.1412        6.2438        6.0537  

2014

     6.2046        6.1704        6.2591        6.0402  

2015

     6.4778        6.2869        6.4896        6.1870  

2016

     6.9430        6.6549        6.9580        6.4480  

2017

     6.5063        6.7350        6.9575        6.4773  

October

     6.6328        6.6254        6.6533        6.5712  

November

     6.6090        6.6200        6.6385        6.5967  

December

     6.5063        6.5932        6.6210        6.5063  

2018

           

January

     6.2841        6.4233        6.5263        6.2841  

February

     6.3280        6.3183        6.3471        6.2649  

March

     6.2726        6.3174        6.3565        6.2685  

April (through April 20)

     6.2945        6.2859        6.3045        6.2655  

 

Source: Federal Reserve Statistical Release

Notes:

(1) Annual averages are calculated from month-end rates. Monthly averages are calculated using the average of the daily rates during the relevant period.

 

58


Table of Contents

DILUTION

If you invest in our ADSs, your interest will be diluted to the extent of the difference between the initial public offering price per ADS and our net tangible book value per ADS after this offering. Dilution results from the fact that the assumed initial public offering price per ordinary share is substantially in excess of the net tangible book value per ordinary share attributable to the existing shareholders for our presently outstanding ordinary shares. The total number of outstanding shares that we use in the calculation of per share value does not include 8,200,000 ordinary shares held by Long belief Limited and 17,103,724 ordinary shares held by Long favor Limited which were issued to establish a reserve pool for share incentive awards to our employees or for future acquisition payments. All shareholder rights of these 25,303,724 ordinary shares, including but not limited to voting rights and dividend rights, are unconditionally waived until the corresponding ordinary shares are transferred to the employees or the shareholders of future acquired entities.

Our net tangible book value was approximately US$             million, or US$             per ordinary share and US$             per ADS as of March 31, 2018. Net tangible book value represents the amount of our total consolidated tangible assets, less the amount of our total consolidated liabilities. Dilution is determined by subtracting net tangible book value per ordinary share, after giving effect to the proceeds we will receive from this offering, from the assumed initial public offering price per ordinary share, which is the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

Without taking into account any other changes in net tangible book value after March 31, 2018, other than to give effect to our sale of the ADSs offered in this offering, the midpoint of the estimated range of the initial public offering price, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma net tangible book value as of March 31, 2018 would have been US$             million, or US$             per outstanding ordinary share, and US$             per ADS. This represents an immediate increase in net tangible book value of US$             per ordinary share and US$             per ADS, to the existing shareholders and an immediate dilution in net tangible book value of US$             per ordinary share and US$             per ADS, to investors purchasing ADSs in this offering. The following table illustrates such dilution:    

 

     Per Ordinary Share      Per ADS  

Initial public offering price per ordinary share

   US$               US$           

Net tangible book value

   US$               US$           

Pro forma net tangible book value per ordinary share after giving effect to the automatic conversion of all of our outstanding preferred shares and convertible notes

   US$               US$           

Pro forma net tangible book value per ordinary share as adjusted after giving effect to the automatic conversion of all of our outstanding preferred shares, convertible notes and this offering

   US$               US$           

Amount of dilution in net tangible book value to new investors in this offering

   US$               US$           

A US$1.00 increase (decrease) in the assumed public offering price of US$             per ADS (the mid-point of the estimated initial public offering price range on the cover page of this prospectus) would increase (decrease) our pro forma net tangible book value after giving effect to the offering by US$             million, the pro forma net tangible book value per ordinary share and per ADS after giving effect to this offering by US$             per ordinary share and US$             per ADS and the dilution in pro forma net tangible book value per ordinary share and per ADS to new investors in this offering by US$             per ordinary share and US$             per ADS, assuming no change to the number of ADSs offered by us as set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and other offering expenses payable by us. The pro forma information discussed above is illustrative only. Our net tangible book value following the completion of this offering is subject to adjustment based on the actual initial public offering price of our ADSs and other terms of this offering determined at pricing.

 

59


Table of Contents

The following table summarizes according to the pro forma as adjusted basis described above as of March 31, 2018, the differences between existing shareholders and the new investors with respect to the number of ordinary shares (in the form of ADSs or ordinary shares) purchased from us, the total consideration paid and the average price per ordinary share/ADS paid before deducting estimated underwriting discounts and commissions and the estimated offering expenses. The total number of ordinary shares does not include ordinary shares underlying the ADSs issuable upon the exercise of the over-allotment option granted to the underwriters.

 

     Ordinary Shares
Purchased
     Total Consideration      Average
Price Per
Ordinary
Share
     Average
Price Per
ADS
 
     Number      %      Amount      %        

Existing shareholder

               US$               US$           

New investors

               US$               US$           
  

 

 

    

 

 

    

 

 

    

 

 

       

Total

                 
  

 

 

    

 

 

    

 

 

    

 

 

       

 

(1) Assumes an initial public offering price of US$             per ADS, the midpoint of the estimated range of the initial public offering price.

A US$1.00 increase (decrease) in the assumed public offering price of US$             per ADS (the mid-point of the estimated initial public offering price range on the cover page of this prospectus) would increase (decrease) total consideration paid by new investors by US$             million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same.

The pro forma information discussed above is illustrative only. Our net tangible book value following the completion of this offering is subject to adjustment based on the actual initial public offering price of our ADSs and other terms of this offering determined at pricing.

The discussion and tables above assume no exercise of any outstanding share options and no vesting of any share awards as of March 31, 2018. As of March 31, 2018, there were 22,965,494 ordinary shares issuable upon the exercise of outstanding share options granted to the eligible persons at a weighted average exercise price of US$6.02 per ordinary share. See “Management—Share Incentive Plans.” To the extent that any of these awards are exercised or vested, there will be further dilution to new investors.

 

60


Table of Contents

ENFORCEABILITY OF CIVIL LIABILITIES

Cayman Islands

We are incorporated under the laws of the Cayman Islands as an exempted company with limited liability. We are incorporated in the Cayman Islands because of certain benefits associated with being a Cayman Islands company, such as political and economic stability, an effective judicial system, a favorable tax system, the absence of foreign exchange control or currency restrictions and the availability of professional and support services. However, the Cayman Islands has a less developed body of securities laws as compared to the United States and provides less protection for investors. In addition, Cayman Islands companies may not have standing to sue before the federal courts of the United States.

Our constitutional documents do not contain provisions requiring that disputes, including those arising under the securities laws of the United States, between us, our officers, directors and shareholders, be subject to arbitration.

Substantially all of our assets are located outside the United States. In addition, most of our directors and executive officers are nationals or residents of jurisdictions other than the United States and all or a substantial portion of their assets are located outside the United States. As a result, it may be difficult for investors to effect service of process within the United States upon us or these persons, or to enforce judgments obtained in U.S. courts against us or them, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States. It may also be difficult for you to enforce judgments obtained in U.S. courts based on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors.

We have appointed Cogency Global Inc., as our agent to receive service of process with respect to any action brought against us in the U.S. District Court for the Southern District of New York in connection with this offering under the federal securities laws of the United States or of any State in the United States or any action brought against us in the Supreme Court of the State of New York in the County of New York in connection with this offering under the securities laws of the State of New York.

Walkers, our counsel as to Cayman Islands law, has advised us that there is uncertainty as to whether the courts of the Cayman Islands would (i) recognize or enforce judgments of U.S. courts obtained against us or our directors or officers that are predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States, or (ii) entertain original actions brought in the Cayman Islands against us or our directors or officers that are predicated upon the civil liability provision of the securities laws of the United States or any state in the United States.

Walkers has informed us that although there is no statutory enforcement in the Cayman Islands of judgments obtained in the federal or state courts of the United States (and the Cayman Islands are not a party to any treaties for the reciprocal enforcement or recognition of such judgments), a judgment obtained in the federal or state courts of the United States will be recognized and enforced in the courts of the Cayman Islands without any re-examination of the merits at common law, by an action commenced on the foreign judgment in the courts of the Cayman Islands where the judgment:

 

  (i) is final and conclusive;

 

  (ii) is one in respect of which the foreign court had jurisdiction over the defendant according to Cayman Islands conflict of law rules;

 

  (iii) is either for a liquidated sum not in respect of penalties or taxes or a fine or similar fiscal or revenue obligations or, in certain circumstances, for in personam non-money relief (following Bandone Sdn Bhd v Sol Properties Inc. [2008] CILR 301); and

 

61


Table of Contents
  (iv) was neither obtained in a manner, nor is of a kind enforcement of which is contrary to natural justice or the public policy of the Cayman Islands.

However, the courts of the Cayman Islands are unlikely to enforce a judgment obtained from the U.S. courts under civil liability provisions of the U.S. federal securities law if such judgment is determined by the courts of the Cayman Islands to give rise to obligations to make payments that are penal or punitive in nature.

Because such a determination has not yet been made by a court of the Cayman Islands, it is uncertain whether such civil liability judgments from U.S. courts would be enforceable in the Cayman Islands.

People’s Republic of China

Tian Yuan Law Firm has advised us that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedure Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedure Law based either on treaties between China and the country where the judgment is made or on principles of reciprocity between jurisdictions.

Tian Yuan Law Firm has advised us further that under PRC law, a foreign judgment, which does not otherwise violate basic legal principles, state sovereignty, safety or social public interest, may be recognized and enforced by a PRC court, based either on treaties between China and the country where the judgment is made or on principles of reciprocity between jurisdictions. As there existed no treaty or other form of reciprocity between China and the U.S. or Cayman Islands governing the recognition and enforcement of judgments as of the date of this prospectus, including those predicated upon the liability provisions of the U.S. federal securities laws, there is uncertainty whether and on what basis a PRC court would enforce judgments rendered by United States courts or Cayman Islands courts.

 

62


Table of Contents

CORPORATE HISTORY AND STRUCTURE

Our History

We are an exempted company with limited liability incorporated in the Cayman Islands. In September 2014, Puxin Education Technology Group Co., Ltd. (formerly known as Beijing Puxin Education Technology Co., Ltd.), or Puxin Education, was incorporated in Beijing, China. We operate our business through Puxin Education in China.

Beginning in March 2017, we underwent a series of restructuring in contemplation of this offering. In particular:

 

    Incorporation of the listing entity. In March 2017, we incorporated Puxin Limited under the laws of the Cayman Islands as our proposed listing entity in the Cayman Islands.

 

    Incorporation of Hong Kong and PRC subsidiaries. In April 2017, we established a wholly-owned subsidiary in Hong Kong, Prepshine Holdings Co., Limited, or Prepshine Holdings, to be our intermediate holding company and to facilitate our initial public offering in the United States. In January 2018, we also established a wholly-owned subsidiary in China, Purong (Beijing) Information Technology Co., Ltd., or Purong Beijing, through which we obtained control over Puxin Education based on a series of contractual arrangements entered into on February 5, 2018.

 

    Contractual arrangements. Due to PRC legal restrictions on foreign ownership in education services, we carry out our business in China through Puxin Education and its subsidiaries. On February 5, 2018, we, through our PRC subsidiary, Purong Beijing, entered into a series of contractual arrangements with (i) Puxin Education, and (ii) the shareholders of Puxin Education, to obtain effective control of our VIE. On February 25, 2018, we amended the agreements of the contractual arrangements to reflect the change of Puxin Education’s shareholders.

Subsequent to the establishment of Puxin Education, we acquired and established a number of entities to grow our business. See “—Our Corporate Structure.” From 2015 to 2017, the total number of our learning centers increased from 99 as of December 31, 2015 to 231 as of December 31, 2016, and further increased to 400 as of December 31, 2017. As of March 31, 2018, we had 397 learning centers.

 

63


Table of Contents

Our Corporate Structure

The following diagram illustrates our corporate structure immediately following the completion of this offering, assuming no exercise of the over-allotment option granted to the underwriters:

 

LOGO

 

(1) Mr. Liang Gao, Mr. Gang Li, Mr. Yun Xiao, Tianjin Puxian Education and Technology Limited Partnership, Shanghai Trustbridge Investment Management Co., Ltd. and Ningbo Meishan Bonded Port Area Zhimei Phase V Equity Investment Limited Partnership hold a 5.698%, 3.419%, 1.140%, 18.233%, 3.6335% and 3.6335% equity interest in Puxin Education, respectively.

The following table presents information about Beijing Meitong Education Consulting Co., Ltd. Shanghai Global Career Education & Technology Holdings Limited, ZMN International Education Consulting (Beijing) Co., Ltd. and other 39 directly and wholly-owned subsidiaries of Puxin Education.

 

Name of Wholly-owned Subsidiary  

Time of Acquisition* or
Establishment

 

Brand Name

1   Beijing Meitong Education Consulting Co., Ltd.   Established in July 2015   Meitong

 

64


Table of Contents
Name of Wholly-owned Subsidiary  

Time of Acquisition* or
Establishment

 

Brand Name

2   Shanghai Global Career Education & Technology Holdings Limited   Acquired in August 2017   Global Education
3  

ZMN International Education Consulting (Beijing) Co., Ltd.

  Acquired in July 2017   ZMN Education
4   Beijing Shangxin Education Technology Co., Ltd.   Established in September 2014  

Shangxin

Beijing Hope

Beijing Quakers Education

5   Taiyuan Puxin Culture and Arts Co., Ltd.  

Acquired in April 2015

  Taiyuan Fubusi
6   Guangzhou Yingxun Lixiang Education Information Consulting Co., Ltd.   Acquired in May 2015  

Guangzhou Lixiang

Guangzhou Yingxun

7   Beijing Meikaida Education Technology Co., Ltd.   Established in June 2015   —  
8   Taiyuan Puxin Culture Communication Co., Ltd.   Acquired in June 2015   Taiyuan Mercan Education
9   Tianjin Xinsiyuan Culture Communication Co., Ltd.   Acquired in June 2015  

Tianjin Shengjia

10   Beijing Puda Education Technology Co., Ltd.   Established in August 2015   —  
11   Dalian Puxin Education Technology Co., Ltd.   Acquired in August 2015   Dalian Oriental Magic Arts
12   Shenyang Meitong Education Information Consulting Co., Ltd.   Acquired in August 2015  

Shenyang Oriental Magic Arts

Shenyang Being

13   Beijing Pule Education Technology Co., Ltd.   Established in September 2015   —  
14   Jinan Puxin Education Technology Co., Ltd.   Acquired in October 2015   Jinan Daozhen
15   Beijing Ruibao Tongqu Education Consulting Co., Ltd.   Acquired in November 2015   Beijing Ruibao
16   Guizhou Puxintian Education Technology Co., Ltd.   Acquired in November 2015   Guiyang Tiantian
17   Lighthouse Education Technology Co., Ltd.   Acquired in November 2015   Lighthouse Beijing
18   Beijing Jiameixin Education Consulting Co., Ltd.   Acquired in December 2015   Beijing YESSAT
19   Jinan Pude Education Technology Co., Ltd.   Acquired in December 2015   Jinan Delin
20   Jinan Qifa Education Consulting Co., Ltd.   Acquired in January 2016   Jinan Qiru
21   Nanjing Diyu Investment Management Co., Ltd.   Acquired in January 2016   Nanjing Innovation
22   Shaoxing Puxin Education Information Consulting Co., Ltd.   Acquired in January 2016   Shaoxing Lingxian
23   Yunnan Pude Education Information Consulting Co., Ltd.   Established in January 2016   —  
24   Ningbo Puxin Education Technology Co., Ltd.   Acquired in February 2016   Ningbo Wei’en

 

65


Table of Contents
Name of Wholly-owned Subsidiary  

Time of Acquisition* or
Establishment

 

Brand Name

25   Chengdu Qidi Wanjuan Education Consulting Co., Ltd.   Acquired in March 2016   Chengdu Shucai
26   Nanjing Dreams & Stars Information Consulting Co., Ltd.   Acquired in March 2016   Nanjing Zhumengtang
27   Tianjin Puxing Education Technology Co., Ltd.   Established in March 2016   —  
28   Shenzhen Davis Information Consulting Co., Ltd.   Acquired in April 2016   Shenzhen Daiweisi
29   Shanghai Pukuan Education Technology Co., Ltd.   Acquired in May 2016   Shanghai Xinkebiao
30   Luoyang Pucai Education Technology Co., Ltd.   Acquired in July 2016   Luoyang Caihong
31   Beijing Pule Travel Co., Ltd.   Established in August 2016   —  
32   Dalian Pude Education Consulting Co., Ltd.   Acquired in November 2016   Dalian Tongfang
33   Xi’an Shanghe Culture Development Co., Ltd.   Acquired in November 2016   Xi’an Yangjian
34   Luzhou Puxin Culture Communication Co., Ltd.   Acquired in December 2016   Luzhou Hanlin
35   Beijing Xuezong Tianxia Education Technology Co., Ltd.   Acquired in January 2017   Beijing Puxing
36   Shenyang Puxin Yingcai Education Consulting Co., Ltd.   Established in February 2017   Shenyang Yingcai
37   Chongqing Puxin Technology Co., Ltd.(1)   Acquired in April 2017   Chongqing Wuyou
38   Shenyang Pude Education Technology Co., Ltd.   Acquired in May 2017   Shenyang Zhongying Yulong
39   Jilin Puxin Education Technology Co., Ltd.   Acquired in June 2017   Jilin Shiji Dongfang
40   Yancheng Tiantian Xiangshang Education Training Co., Ltd.(2)   Acquired in June 2017   Yancheng Tiantian Xiangshang
41   Fuzhou Pude Education Technology Co., Ltd.   Acquired in July 2017   Fuzhou Xueyoufang
42   Hangzhou Puxin Technology Co., Ltd.(3)   Acquired in September 2017  

Hangzhou Feiyue

Hangzhou Yulan

 

* Time of acquisition refers to the time when we obtained effective control over the operations and management of the entities acquired.
(1) Puxin Education is in the process of being registered with local government authorities as shareholder of Chongqing Puxin Technology Co., Ltd.
(2) Puxin Education is in the process of being registered with local government authorities as shareholder of Yancheng Tiantian Xiangshang Education Training Co., Ltd.
(3) Puxin Education is in the process of being registered with local government authorities as shareholder of Hangzhou Puxin Technology Co., Ltd.

Contractual Arrangements with Puxin Education

PRC laws and regulations place certain restrictions on foreign investment in and ownership of private education businesses. We conduct our operations in the PRC principally through our VIE, namely Puxin Education, and its subsidiaries. We have effective control over our VIE and its subsidiaries through a series of contractual arrangements among our wholly-owned PRC subsidiary Purong Beijing, our VIE and its shareholders.

 

66


Table of Contents

The contractual arrangements, as described in more detail below, collectively allow us to:

 

    exercise effective control over each of our VIE and its subsidiaries;

 

    receive substantially all of the economic benefits of our VIE and its subsidiaries; and

 

    have an exclusive call option to purchase all or part of the equity interests in and/or assets of each of our VIE and its subsidiaries when and to the extent permitted by PRC laws.

As a result of these contractual arrangements, we are the primary beneficiary of our VIE and its subsidiaries, and, therefore, have consolidated the financial results of our VIE and its subsidiaries in our consolidated financial statements in accordance with U.S. GAAP.

Below is a summary of the currently effective contractual arrangements by and among our wholly-owned subsidiary Purong Beijing, our VIE and its shareholders.

Exclusive Management Services and Business Cooperation Agreement

Pursuant to the exclusive management services and business cooperation agreement among Purong Beijing, our VIE and the shareholders of our VIE, Purong Beijing has the exclusive right to provide or designate any third party to provide, among other things, education management consultancy services, permission of intellectual property rights, technological support and business support to our VIE and its subsidiaries. In exchange, our VIE and its subsidiaries pay service fees to Purong Beijing in an amount at Purong Beijing’s discretion. Without the prior written consent of Purong Beijing, our VIE and its subsidiaries cannot accept services provided by or establish similar cooperation relationship with any third party. Purong Beijing owns the exclusive intellectual property rights created as a result of the performance of this agreement unless otherwise provided by PRC laws or regulations. The agreement was entered into on February 5, 2018 and became effective on February 5, 2018 and will remain effective unless unanimously agreed by the parties concerned or unilaterally terminated by Purong Beijing with a written notice. This agreement was amended on February 25, 2018 because Shanghai Trustbridge Investment Management Co., Ltd., or Shanghai Trustbridge, became a shareholder of Puxin Education. Unless otherwise required by applicable PRC laws, our VIE and its shareholders do not have any right to terminate the exclusive service agreement.

Exclusive Call Option Agreement

Under the exclusive call option agreement among Purong Beijing, our VIE and its shareholders, each of the shareholders of our VIE irrevocably granted Purong Beijing a right to purchase, or designate a third party to purchase, all or any part of their equity interests in our VIE at a purchase price equal to the lowest price permissible by the then-applicable PRC laws and regulations at Purong Beijing’s sole and absolute discretion to the extent permitted by PRC law. The shareholders of our VIE shall promptly give all considerations they received from the exercise of the options to Puxin Education, Purong Beijing or a designated third party of Purong Beijing. Without Purong Beijing’s prior written consent, our VIE and its shareholders shall not enter into any major contract or transfer any equity of our VIE. Without Purong Beijing’s prior written consent, our VIE and its shareholders shall not sell, transfer, license or otherwise dispose of any of our VIE’s assets or allow any encumbrance of any assets, except for the disposal or the encumbrances of the assets that are treated as necessary for their daily business operations with the value of the assets involved in a single transaction not exceeding RMB100,000. Our VIE shall not be dissolved or liquidated without the written consent by Purong Beijing. This agreement was entered into on February 5, 2018 and became effective on February 5, 2018 and shall remain in effect upon expiry or early termination of this agreement. This agreement was amended on February 25, 2018 because Shanghai Trustbridge became a shareholder of Puxin Education.

 

67


Table of Contents

Equity Pledge Agreement

Under the equity interest pledge agreement among Purong Beijing, our VIE and its shareholders, our VIE’s shareholders pledged all of their equity of our VIE to Purong Beijing as security for performance of the obligations of our VIE and its shareholders under the exclusive call option agreement, the exclusive management services and business cooperation agreement, the powers of attorney and the loan agreements. If any of the specified events of default occurs, Purong Beijing may exercise the right to enforce the pledge immediately. Purong Beijing may transfer all or any of its rights and obligations under the equity pledge agreement to its designee(s) at any time. The equity pledge agreement is binding on our VIE’s shareholders and their successors. The equity pledge agreement became effective on February 5, 2018 and the pledge under the equity pledge agreement became effective on February 5, 2018 and will remain in effect until the fulfillment of all the obligations under the exclusive call option agreement, the exclusive management services and business cooperation agreement, the powers of attorney and the loan agreements. This agreement was amended on February 25, 2018 because Shanghai Trustbridge became a shareholder of Puxin Education. The pledge of the equity interests of Shanghai Trustbridge became effective on February 26, 2018.

Powers of Attorney

Pursuant to the powers of attorney executed by our VIE and our VIE’s shareholders, each of them irrevocably authorized Purong Beijing to act on their respective behalf as exclusive agent and attorney, to the extent permitted by law, with respect to all rights of shareholders concerning all the equity interest and sponsor interest held by each of them in our VIE or its subsidiaries, including but not limited to proposing to convene or attend shareholder meetings, board meetings or council meetings, signing the resolutions and minutes of such meetings, exercising all the rights as shareholders or sponsors (including but not limited to voting rights, nomination rights, appointment rights, the right to receive dividends and the right to sell, transfer, pledge or dispose of all the equity or the sponsor interest held in part or in whole).

Spousal Consent Letters

Pursuant to the spousal consent letters executed by the spouses of certain shareholders of our VIE, the signing spouses confirm and agree to the execution of the exclusive call option agreement, the exclusive management services and business cooperation agreement, the powers of attorney and the equity pledge agreement described above by the applicable shareholders. They further undertake not to hinder the disposal of the equity and not to make any assertions in connection with the equity of our VIE held by the applicable shareholders, and confirm that the applicable shareholders can perform the relevant transaction documents described above and further amend or terminate such transaction documents without the authorization or consent from such spouse. The spouse of each applicable shareholder agrees and undertakes that if he/she obtains any equity of our VIE held by the applicable shareholders for any reasons, he/she would be bound by the transaction documents described above.

Letters of Commitment

Pursuant to the letters of commitment executed by the shareholders of Shanghai Trustbridge and the partners of Tianjin Puxian Education Technology Limited Partnership, or Tianjin Puxian, and Ningbo Meishan Bonded Port Area Zhimei Phase V Equity Investment Limited Partnership, or Ningbo Zhimei, which are the shareholders of our VIE, all the shareholders of Shanghai Trustbridge and all the partners of Tianjin Puxian and Ningbo Zhimei irrecoverably promise that they will not pledge, sell or dispose of the equity interest or the partnership interest in Shanghai Trustbridge, Tianjin Puxian or Ningbo Zhimei held by them, respectively, grant a security interest or a priority right in such equity interest or partnership interest to any third party or enter into any transactions with the same economic results that may affect the priority of the equity pledge and the stable implementation of structural contracts, including the exclusive call option agreement, the exclusive management service and business cooperation agreement, the equity pledge agreement, the powers of attorney and the loan agreements.

 

68


Table of Contents

Loan Agreements

Pursuant to the loan agreement among Purong Beijng and Ningbo Zhimei, Purong Beijing has granted an interest-free loan to Ningbo Zhimei, the shareholder of our VIE, which may only be used for the purpose of acquiring its equity interests in the VIE. Purong Beijing may require acceleration of repayment at its absolute discretion. When Ningbo Zhimei makes early repayment of the outstanding amount, Purong Beijing or a third party designated by it may purchase the equity interests held by Ningbo Zhimei in our VIE at a price equal to the outstanding amount of the loan, subject to any applicable PRC laws, rules and regulations. Ningbo Zhimei undertakes not to enter into any prohibited transactions in relation to our VIE, including the transfer of any business, material assets or equity interests in our VIE to any third party.

Pursuant to the loan agreement between Purong Beijing and Mr. Yunlong Sha, Purong Beijing has granted an interest-free loan to Mr. Yunlong Sha, the shareholder of our VIE, which may only be used for acquiring the equity interests in our VIE from certain former shareholders. Purong Beijing may require acceleration of repayment at its absolute discretion. When Mr. Yunlong Sha makes early repayment of the outstanding amount, Purong Beijing or a third party designated by it may purchase the corresponding equity interests held by him in our VIE at a price equal to the outstanding amount of the loan, subject to any applicable PRC laws, rules and regulations. Mr. Yunlong Sha undertakes not to enter into any prohibited transactions in relation to our VIE, including the transfer of any business, material assets or equity interests in our VIE to any third party.

In the opinion of Tian Yuan Law Firm, our PRC legal counsel, the contractual arrangements among Purong Beijing, Puxin Education and its shareholders are valid, binding and enforceable under current PRC law. However, these contractual arrangements may not be as effective in providing control as direct ownership. There are substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations. For a description of the risks related to our corporate structure, please see “Risk Factors—Risk Factors Related to Our Corporate Structure.”

 

69


Table of Contents

SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

We present below our selected consolidated financial data for the periods indicated. The following selected consolidated statements of operations data for the years ended December 31, 2016 and 2017 and the selected consolidated balance sheets data as of December 31, 2016 and 2017 have been derived from the audited consolidated financial statements of Puxin Limited included elsewhere in this prospectus. The selected consolidated statements of operations data for the three months ended March 31, 2017 and 2018 and selected consolidated balance sheet data as of March 31, 2018 have been derived from the unaudited condensed consolidated financial statements of Puxin Limited included elsewhere in this prospectus.

The selected consolidated financial data should be read in conjunction with our consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. The consolidated financial statements are prepared and presented in accordance with U.S. GAAP. Our historical results are not necessarily indicative of our results for any future periods.

Consolidated Statements of Operations Data

 

    For the Year Ended December 31,     For the Three Months
Ended March 31,
 
    2016     2017     2017     2018  
    RMB     RMB     US$     RMB     RMB     US$  
    (in thousands)  

Summary of Consolidated Statements of Operations:

           

Net revenues

    439,181       1,282,562       204,471       198,203       495,708       79,028  

Cost of revenues (including share-based compensation expenses of nil, RMB1,152, RMB46 and RMB976 for the years ended December 31, 2016 and 2017 and for the three months ended March 31, 2017 and 2018, respectively)

    257,995       794,342       126,637       120,075       273,458       43,596  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    181,186       488,220       77,834       78,128       222,250       35,432  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

           

Selling expenses (including share-based compensation expenses of RMB991, RMB3,058, RMB527 and RMB2,236 for the years ended December 31, 2016 and 2017 and for the three months ended March 31, 2017 and 2018, respectively)

    123,370       444,927    

 

70,932

 

    54,920       164,647       26,249  

General and administrative expenses (including share-based compensation expenses of RMB50,272, RMB51,625, RMB8,619 and RMB282,202 for the years ended December 31, 2016 and 2017 and for the three months ended March 31, 2017 and 2018, respectively)

    185,496       362,748       57,831       54,177       383,373       61,119  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    308,866       807,675       128,763       109,097       548,020       87,368  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

70


Table of Contents
    For the Year Ended December 31,     For the Three Months
Ended March 31,
 
    2016     2017     2017     2018  
    RMB     RMB     US$     RMB     RMB     US$  
    (in thousands)  

Operating loss

    (127,680     (319,455     (50,929     (30,969     (325,770     (51,936
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense

    —         5,556       886       —         5,040       803  

Interest income

    464       549       88       346       103       16  

Loss on changes in fair value of convertible notes, derivative liabilities and warrants

    —         70,336       11,213       —         23,665       3,773  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss on extinguishment of convertible notes

    —         —         —         —         900       143  

Loss before income taxes

    (127,216     (394,798     (62,940     (30,623     (355,272     (56,639

Income tax expenses (benefits)

    388       2,436       388       189       (223     (36
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (127,604     (397,234     (63,328     (30,812     (355,049     (56,603
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Less: Net (loss) income attributable to non-controlling interest

    (48     79       13       (16     (25     (4

Net loss attributable to equity shareholders of Puxin Limited

    (127,556     (397,313     (63,341     (30,796     (355,024     (56,599

 

71


Table of Contents

Consolidated Balance Sheets Data

 

     As of December 31,      As of March 31,  
     2016      2017      2018  
     RMB      RMB      US$      RMB      US$  
     (in thousands)  

Current assets

              

Cash and cash equivalents

     100,109        164,684        26,255        66,019        10,525  

Inventories

     —          10,408        1,659        9,522        1,518  

Prepaid expenses and other current assets

     36,262        132,473        21,119        145,435        23,186  

Amounts due from a related party

     9        113        18        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total current assets

     136,380        307,678        49,051        220,976        35,229  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Non-current assets

              

Restricted cash

     5,409        24,478        3,902        28,472        4,539  

Property, plant and equipment, net

     33,723        221,212        35,266        225,605        35,967  

Intangible assets

     55,167        243,927        38,888        235,875        37,604  

Goodwill

     346,972        1,152,913        183,802        1,152,913        183,801  

Deferred tax assets

     637        3,012        480        5,203        829  

Rental deposit

     15,829        55,173        8,796        58,609        9,344  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total non-current assets

     457,737        1,700,715        271,134        1,706,677        272,084  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

     594,117        2,008,393        320,185        1,927,653        307,313  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Accrued expenses and other current liabilities

     173,395        350,446        55,869        383,471        61,134  

Income taxes payable

     2,925        10,022        1,598        11,646        1,857  

Deferred revenue

     318,319        1,035,370        165,062        875,217        139,530  

Amounts due to related parties

     3,048        3,836        612        180,000        28,696  

Deferred tax liabilities

     13,734        77,580        12,368        75,516        12,039  

Franchise deposits

     —          3,856        615        1,221        195  

Convertible notes

     —          499,192        79,583        352,520        56,200  

Promissory note

     —          162,658        25,932        350,215        55,833  

Derivative liabilities

     —          18,218        2,904        17,563        2,800  

Warrants

     —          —          —          15,100        2,407  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

     511,421        2,161,178        344,543        2,262,469        360,691  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mezzanine equity

     120,000        120,000        19,131        71,088        11,333  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Puxin Limited shareholders’ deficit

     (37,202      (272,762      (43,485      (405,856      (64,703
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Non-controlling interests

     (102      (23      (4      (48      (8
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total deficit

     (37,304      (272,785      (43,489      (405,904      (64,711
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities, mezzanine equity and total shareholders’ deficit

     594,117        2,008,393        320,185        1,927,653        307,313  

Non-GAAP Financial Measures

To supplement our consolidated financial statements which are presented in accordance with U.S. GAAP, we also use adjusted EBITDA and adjusted net loss as additional non-GAAP financial measures. We present these non-GAAP financial measures because they are used by our management to evaluate our operating performance. We also believe that these non-GAAP financial measures provide useful information to investors and others in understanding and evaluating our consolidated results of operations in the same manner as our management and in comparing financial results across accounting periods and to those of our peer companies.

 

72


Table of Contents

Adjusted EBITDA and adjusted net loss should not be considered in isolation or construed as an alternative to net loss or any other measure of performance or as an indicator of our operating performance. Investors are encouraged to compare the historical non-GAAP financial measures with the most directly comparable GAAP measures. Adjusted EBITDA and adjusted net loss presented here may not be comparable to similarly titled measures presented by other companies. Other companies may calculate similarly titled measures differently, limiting their usefulness as comparative measures to our data. We encourage investors and others to review our financial information in its entirety and not rely on a single financial measure.

Adjusted EBITDA represents net loss, which excludes depreciation, amortization, interest expense, interest income and income tax expenses (benefits), before share-based compensation expenses, loss on changes in fair value of convertible notes, derivative liabilities and warrants and loss on extinguishment of convertible notes. The table below sets forth a reconciliation of our net loss to adjusted EBITDA for the periods indicated:

 

     For the Year Ended December 31,      For the Three Months
Ended March 31,
 
     2016      2017      2017      2018  
     RMB      RMB      US$      RMB      RMB      US$  
     (in thousands)  

Net loss

     (127,604      (397,234      (63,328      (30,812      (355,049      (56,603

Add:

                 

Income tax expenses (benefits)

     388        2,436        388        189        (223      (36

Depreciation of property, plant and equipment

     3,735        20,545        3,275        2,707        13,347        2,128  

Amortization of intangible assets

     10,158        23,644        3,769        4,241        8,052        1,284  

Interest expense

            5,556        886        —          5,040        803  

Interest income

     (464      (549      (88      (346      (103      (16

EBITDA

     (113,787      (345,602      (55,098      (24,021      (328,936      (52,440

Add:

                 

Share-based compensation expenses

     51,263        55,835        8,901        9,192        285,414        45,502  

Loss on changes in fair value of convertible notes, derivative liabilities and warrants

            70,336        11,213        —          23,665        3,773  

Loss on extinguishment of convertible notes

                                 900        143  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

     (62,524      (219,431      (34,984      (14,829      (18,957      (3,022
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted net loss represents net loss before share-based compensation expenses, loss on changes in fair value of convertible notes, derivative liabilities and warrants and loss on extinguishment of convertible notes. The table below sets forth a reconciliation of our net loss to adjusted net loss for the periods indicated:

 

     For the Year Ended December 31,      For the Three Months
Ended March 31,
 
     2016      2017      2017      2018  
     RMB      RMB      US$      RMB      RMB      US$  
     (in thousands)  

Net loss

     (127,604      (397,234      (63,328      (30,812      (355,049      (56,603

Add:

                 

Share-based compensation expenses,

     51,263        55,835        8,901        9,192        285,414        45,502  

Loss on changes in fair value of convertible notes, derivative liabilities and warrants

            70,336        11,213        —          23,665        3,773  

Loss on extinguishment of convertible notes

                                 900        143  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted net loss

     (76,341      (271,063      (43,214      (21,620      (45,070      (7,185
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

73


Table of Contents

Key Operating Data

The following table presents our key operating data for the periods indicated:

 

    

 

 

For the Year Ended December 31,

    For the Three
months ended
March 31,
2018
 
     2016     2017    

Student enrollments(1)

      

K-12 tutoring services

     451,353       1,238,070       244,638  

Study-abroad tutoring services

     3,592       37,653       16,335  

Number of learning centers(2)

     231       400       397  

K-12 group class student retention rate(3)

     65.1     70.1     78.9

K-12 course withdrawal rate(4)

     4.7     4.7     4.2

 

(1) Refers to the cumulative total number of courses registered and paid for by our students during a given period of time; if one student enrolls in multiple courses, it will be counted as multiple student enrollments.
(2) Refers to the total number of locations of our premises providing educational services.
(3) Refers to the number of students who continue to enroll in K-12 tutoring group class courses (excluding promotional programs) at our schools operating under our management for over 12 months after completing a K-12 tutoring group class course in a particular period as a percentage of the total number of students who complete K-12 tutoring group class courses during the same period.
(4) Refers to the number of students withdrawing from a K-12 course as a percentage of the total number of students enrolled in that course at the beginning.

 

74


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the section entitled “Selected Consolidated Financial Data and Operating Data” and our consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.

Overview

We are a successful consolidator of the after-school education industry in China. We have strong acquisition and integration capabilities to effectively improve education quality and operational performance of acquired schools. Through acquisitions and organic growth, we have grown rapidly and became the third largest after-school education service provider in China in 2017 in terms of student enrollments, according to the Frost & Sullivan report. Since our inception, we have acquired 48 schools and built a nationwide network of 397 learning centers across 35 cities in China as of March 31, 2018. Our total student enrollments increased 180.4% from 454,945 in 2016 to 1,275,723 in 2017, representing the fastest growth among major after-school education service providers in China, according to the Frost & Sullivan report. In the first quarter of 2017 and 2018, our total student enrollments were 185,446 and 260,973, respectively.

We offer a full spectrum of K-12 and study-abroad tutoring programs designed to help students achieve academic excellence, as well as prepare for admission tests and applications for top schools, universities and graduate programs in China and other countries. In addition to classroom-based tutoring, we have also developed online and mobile applications to increase students’ after-class exposure to our services and enhance their learning experience.

Our net revenues increased by 192.0% from RMB439.2 million in 2016 to RMB1,282.6 million (US$204.5 million) in 2017. For the three months ended March 31, 2018, our net revenues reached RMB495.7 million (US$79.0 million), an increase of 150.1% from RMB198.2 million for the same period in 2017. Our net loss was RMB127.6 million, RMB397.2 million (US$63.3 million) and RMB355.0 million (US$56.6 million) in 2016, 2017 and the first quarter of 2018, respectively. As of December 31, 2016 and 2017 and March 31, 2018, our deferred revenue was RMB318.3 million, RMB1,035.4 million (US$165.1 million) and RMB875.2 million (US$139.5 million), respectively. Our adjusted EBITDA was RMB(62.5) million and RMB(219.4) million (US$(35.0) million) in 2016 and 2017, respectively, and for the three months ended March 31, 2017 and 2018, our adjusted EBITDA was RMB(14.8) million and RMB(19.0) million (US$(3.0) million), respectively. For a detailed description of our non-GAAP measures, see “Selected Consolidated Financial and Operating Data — Non-GAAP Financial Measures.”

Effect of Acquisition of ZMN Education

On July 31, 2017, we acquired ZMN International Education Consulting (Beijing) Co., Ltd., or ZMN Education. Since the date of the acquisition, ZMN Education has been our wholly owned subsidiary and has been consolidated into our results of operations.

Prior to the acquisition, ZMN Education had net revenues of RMB197.4 million and RMB136.4 million, operating expenses of RMB144.3 million and RMB91.1 million and net loss of RMB64.4 million and RMB12.7 million in 2016 and for the period from January 1, 2017 to July 31, 2017, respectively, which are not included in our results of operations for the years ended December 31, 2016 and 2017.

ZMN Education contributed RMB39.9 million (US$6.4 million) to our net revenues and RMB43.8 million (US$7.0 million) to our total cost of revenues from July 31, 2017, when we acquired ZMN Education, to

 

75


Table of Contents

December 31, 2017. In the first quarter of 2018, ZMN Education contributed RMB29.0 million (US$4.6 million) to our net revenues and RMB21.8 million (US$3.5 million) to our cost of revenues. For the period from July 31, 2017 to December 31, 2017, ZMN Education had selling expenses of RMB34.4 million (US$5.5 million) and general and administrative expenses of RMB23.2 million (US$3.7 million). For the three months ended March 31, 2018, ZMN Education had selling expenses of RMB15.8 million (US$2.5 million) and general and administrative expenses of RMB13.4 million (US$2.1 million). As a result, ZMN Education incurred operating loss of RMB61.5 million (US$9.8 million) for the period from July 31, 2017 to December 31, 2017 and RMB22.0 million (US$3.5 million) for the three months ended March 31, 2018.

Intangible assets identified in connection with our acquisition of ZMN Education are subject to amortization. Amortization expenses of RMB2.5 million (US$0.4 million) were recognized in 2017. In addition, as of December 31, 2017, we had RMB324.4 million (US$51.7 million) of goodwill in connection with our acquisition of ZMN Education, which represented approximately 16.2% of our total assets. Goodwill is an unidentifiable asset and is not amortized. Goodwill is tested for impairment at the end of the fourth quarter of each year, or earlier if impairment indicators arise. No impairment charge was recognized for the goodwill of ZMN Education for the year ended December 31, 2017 and for the three months ended March 31, 2018.

Effect of Acquisition of Global Education

On August 16, 2017, we acquired Beijing Global Education & Technology Co., Ltd., or Global Education. Since the date of the acquisition, Global Education has been our wholly owned subsidiary and has been consolidated into our results of operations.

Prior to the acquisition, Global Education had net revenues of RMB653.0 million and RMB421.4 million, operating expenses of RMB441.7 million and RMB275.2 million and net loss of RMB82.7 million and RMB48.2 million in 2016 and for the period from January 1, 2017 to August 16, 2017, respectively, which are not included in our results of operations for the years ended December 31, 2016 and 2017.

Global Education contributed RMB197.9 million (US$31.5 million) to our net revenues and RMB117.6 million (US$18.7 million) to our total cost of revenues from August 16, 2017, when we acquired Global Education, to December 31, 2017. For the three months ended March 31, 2018, Global Education contributed RMB156.1 million (US$24.9 million) to our net revenues and RMB69.6 million (US$11.1 million) to our total cost of revenues. For the period from August 16, 2017 to December 31, 2017 and for the three months ended March 31, 2018, Global Education had selling expenses of RMB108.9 million (US$17.4 million) and RMB68.1 million (US$10.9 million), respectively, and general and administrative expenses of RMB46.1 million (US$7.3 million) and RMB27.1 million (US$4.3 million), respectively. As a result, Global Education incurred operating loss of RMB74.7 million (US$11.9 million) for the period from August 16, 2017 to December 31, 2017 and RMB8.7 million (US$1.4 million) for the three months ended March 31, 2018.

Definite intangible assets identified in connection with our acquisition of Global Education are subject to amortization. Amortization expenses of RMB0.7 million (US$0.1 million) and RMB0.5 million (US$0.1 million) were recognized in 2017 and the first quarter of 2018. In addition, as of December 31, 2017, we had RMB323.4 million (US$51.6 million) of goodwill in connection with our acquisition of Global Education, which represented approximately 16.1% of our total assets. No impairment charge was recognized for the goodwill of Global Education for the year ended December 31, 2017 and for the three months ended March 31, 2018.

Major Factors Affecting Our Results of Operations

We operate in China’s after-school education market, and our results of operations and financial condition are significantly affected by general factors driving this market. China’s rapid economic growth and higher per capita disposable income have led to both increased spending on after-school education services and intensified competition for high-quality education resources.

 

76


Table of Contents

Furthermore, we expect to benefit from the positive effect of China’s new population policies. In recent years, China has relaxed its “One-Child Policy.” Starting from 2015, each family is allowed to have two children. We believe in coming years this change in policy will drive the growth of K-12 student population and in turn the demand for after-school education services.

We are also affected by the regulatory environment governing the PRC after-school education industry, including the qualification and licensing requirements for entities providing education services.

In addition to general economic conditions and industry factors, we believe the following company-specific factors have had, and will continue to have, a significant impact on our results of operations.

Number of Student Enrollments

Our revenues primarily consist of tuition from students enrolled in our courses and consulting programs, which is directly driven by the increase in student enrollments. In 2016, 2017 and the first quarter of 2018, our total student enrollments were 454,945, 1,275,723 and 260,973, respectively. Our growth in student enrollments is directly affected by our ability to recruit new students and retain our current students.

Our ability to attract new students is largely dependent on our reputation and brand recognition and the varieties of our courses and service offerings. Our reputation and brand recognition were primarily driven by the proven academic performance of our students and the high-quality of our teaching faculty. Besides, we have expanded our service offerings to a full spectrum of after-school education services to students of all age groups in various class formats since establishment. Currently, our course and service offerings cover all core subjects in China’s school curricula at each grade level of the K-12 system, as well as certain extra-curricular courses, such as painting and calligraphy. We initially offered group class tutoring services and personalized tutoring services in May 2015 and began offering online courses in August 2017. We started study-abroad test preparation courses and study-abroad consulting services in July 2015 and September 2015, respectively. By acquiring Global Education in August 2017, we have further expanded our course and service offerings and strengthened our brand recognition.

In addition, a high K-12 group class student retention rate has also contributed to our total student enrollment growth. In 2016, 2017 and the first quarter of 2018, the K-12 group class student retention rate of our schools operating under our management for over 12 months reached 65.1%, 70.1% and 78.9%, respectively, as a result of our high-quality services and the high satisfaction rate of our current students and their parents. Besides, our expansion of courses and service offerings also allows us to conduct cross-selling, improve student stickiness to realize synergies across business lines and maximize student lifetime value for our long-term growth.

We expect our student enrollments will continue to grow and our net revenues will continue to grow. We believe that the after-school education market is less sensitive to changes in economic conditions, and we therefore do not expect the changes in macro-economic conditions to have any immediate significant impact on our business.

Network of Learning Centers

Our ability to expand our network of learning centers is one of the most important factors affecting our results of operations. We have expanded our network primarily through acquisitions. This approach enables us to acquire large student base in a new market with customer acquisition and marketing costs in a cost-effective manner by leveraging the well-established reputation of the acquired schools in local markets. We also build schools and learning centers by ourselves to expand our network when we identify good opportunities.

Our learning centers grew from 99 as of December 31, 2015 to 231 as of December 31, 2016 and to 400 as of December 31, 2017. The number of our learning centers slightly decreased to 397 as of March 31, 2018,

 

77


Table of Contents

reflecting the combination of 25 learning centers we closed and 22 learning centers we constructed in the first quarter of 2018. We closed the 25 learning centers during our integration process of acquired schools, some of which were combined with other learning centers to improve operational efficiency of our learning centers. The table below sets forth the number of our learning centers in operating throughout the period indicated and the number of our newly acquired and constructed centers during each period:

 

     For the Year Ended December 31,      For the
Three Months
Ended
March 31,
 
     2016      2017      2018  

Learning centers at the beginning of the period

     99        231        400  

Newly acquired learning centers during the period

     119        155        —    

Newly constructed learning centers during the period

     33        46        22  

Closed or suspended learning centers during the period

     (20      (32      (25
  

 

 

    

 

 

    

 

 

 

Learning centers at the end of the period

     231        400        397  
  

 

 

    

 

 

    

 

 

 

The table below sets forth cohort analyses of schools we acquired and constructed in 2015 and 2016 for the periods indicated:

 

     For the Year Ended December 31,  
     2016     2017  

Schools under our management since 2015(1)

    

Student enrollments:

    

Regular-priced K-12 tutoring programs (number of enrollments)

     263,994       319,368  

Study-abroad tutoring programs (number of enrollments)

     1,573       2,404  

Net revenues (in millions of RMB)

     291       419  

Gross margin

     43.3     41.7

Selling expenses as a percentage of net revenues

     25.8     24.9

General and administrative expenses as a percentage of net revenues

     23.0     17.9

Operating margin

     (5.5 )%      (1.2 )% 

Schools under our management since 2016(2)

    

Student enrollments:

    

Regular-priced K-12 tutoring programs (number of enrollments)

     72,809       152,099  

Study-abroad tutoring programs (number of enrollments)

     1,607       3,880  

Net revenues (in millions of RMB)

     120       203  

Gross margin

     38.8     41.7

Selling expenses as a percentage of net revenues

     32.0     26.5

General and administrative expenses as a percentage of net revenues

     22.9     16.0

Operating margin

     (16.1 )%      (0.8 )% 

 

(1) Includes schools we acquired and we built in 2015. The data for schools under our management since 2015 reflect the full-year results of these schools in 2016 and 2017.
(2) Includes schools we acquired and we built in 2016. To make a comparable comparison, the 2016 data for these schools reflect the results for the period from the first full quarter after we started to operate each of such schools to the end of 2016 and the 2017 data reflect the results of each school during the respective corresponding period in 2017.

We plan to continue to grow our network of learning centers primarily through acquisitions, which will enable us to enlarge our nationwide coverage, penetrate target markets where we do not have presence currently and enhance our market position where we already operate in.

 

78


Table of Contents

Pricing

Our revenues and profitability are directly affected by the pricing for our services. For K-12 tutoring and study-abroad test preparation courses, we typically charge students tuition based on the hourly rate of the student’s course type and the total number of class hours the student takes. We set hourly rates for our courses based on a number of factors, including class size, course type, customer segmentation, geographic location of the course offered and our competitors’ fee rates for similar offerings. For study-abroad consulting services, we charge students fees based on the overall services we provide to them, such as preparing application materials based on their target schools and universities, making study plans and preparing visa applications.

In addition to courses we offer at our regular prices, we also offer promotional K-12 tutoring programs to attract new students primarily during the summer and winter breaks, as well as the Labor Day and National Day holidays in China. The prices for such promotional programs are usually at a substantial discount of our regular tuition fees. As a result, the profit margin of our promotional tutoring programs is lower than our regular tutoring programs, and the mix of our regular tutoring programs and promotional tutoring programs affects our profitability.

For each acquired school, we usually continue to follow its tuition fee standards prior to our acquisition to maintain the stable student retention and operations of the school. We may adjust the tuition fees for new contracts when the acquired school’s product and service quality has been improved. The tuition fee levels of our schools remained relatively stable in 2016, 2017 and the first quarter of 2018. In the long run, we seek to gradually increase our tuition fee level without compromising our student enrollments.

Our Ability to Control Costs and Improve Our Operating Efficiency

Our profitability depends significantly on our ability to control our costs and improve our operating efficiency.

Our cost of revenues consists primarily of teaching staff costs, rental and facility maintenance expenses for our learning centers. Teaching staff costs depend on the number of our teaching staff and their level of compensation. We offer attractive compensation to our teachers to attract and retain the best teaching talent. The number of our full-time teachers and consultants increased from 1,914 as of December 31, 2016 to 4,388 as of December 31, 2017, in line with our efforts to enhance our teaching quality, the growth of student enrollments and the expansion of our network and course offerings. As of March 31, 2018, we had 4,233 full-time teachers and consultants. We are able to improve our operating efficiency and operating leverage through increased classroom utilization and increased number of courses that each teacher instructs, which allows us to increase our gross margin.

Our operating expenses consist of sales and marketing expenses, and general and administrative expenses. Historically, we have incurred relatively low sales and marketing expenses primarily because we expanded student base through acquisitions of schools and relied on word-of-mouth referrals to recruit new students.

Going forward, we expect that our total costs and expenses will increase in line with the expansion of our network and education service offerings and additional costs and expenses associated with becoming a public company. However, this increase is likely to be partially offset by our increasing economies of scale and improved operating efficiency.

Key Components of Results of Operations

Net Revenues

Our net revenues primarily consist of revenues generated from (i) K-12 tutoring services, and (ii) study-abroad tutoring services, consisting of study-abroad test preparation services and study-abroad consulting services. In 2016, 2017 and the first quarter of 2018, we derived substantially all of our net revenues from tuition that we charge our students for these services.

 

79


Table of Contents

In 2016, 2017 and the first quarter of 2018, we generated net revenues of RMB439.2 million, RMB1,282.6 million (US$204.5 million) and RMB495.7 million (US$79.0 million), respectively. The following table sets forth the breakdown of our total net revenues, both in absolute amounts and as a percentage of total net revenues, for the periods indicated.

 

    For the Year Ended December 31,     For the Three Months Ended March 31,  
    2016     2017     2017     2018  
    RMB     %     RMB     US$     %     RMB     %     RMB     US$     %  
    (in thousands, except for percentages)  

Net revenues:

                   

K-12 tutoring services

    370,712       84.4       884,148       140,954       68.9       176,112       88.9       276,568       44,091       55.8  

Study-abroad tutoring services(1)

    68,469       15.6       398,414       63,517       31.1       22,091       11.1       219,140       34,937       44.2  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenues

    439,181       100.0       1,282,562       204,471       100.0       198,203       100.0       495,708       79,028       100.0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Consists of study-abroad test preparation services and study-abroad consulting services.

K-12 Tutoring Services

In 2016, 2017 and the first quarter of 2018, our net revenues from K-12 tutoring services were RMB370.7 million, RMB884.1 million (US$141.0 million) and RMB276.6 million (US$44.1 million), representing 84.4%, 68.9% and 55.8% of our total net revenues, respectively. We typically collect tuition from students in advance for the classes that they purchase and record the tuition initially as deferred revenues. We recognize tuition as revenues proportionally as the tutoring services are delivered.

For group class courses, we offer tuition refunds to the students who withdraw from the course after attending the first few classes. For personalized tutoring courses, we offer refunds for undelivered classes to students who withdraw from the courses at any time. Historically, we did not experience material refunds for our K-12 tutoring services. Refunds are deducted from deferred revenues and have no material impact on recognized revenues.

Study-abroad Tutoring Services

Our study-abroad tutoring services consist of study-abroad test preparation services and study-abroad consulting services. In 2016, 2017 and the first quarter of 2018, our net revenues from study-abroad tutoring services were RMB68.5 million, RMB398.4 million (US$63.5 million) and RMB219.1 million (US$34.9 million), representing 15.6%, 31.1% and 44.2% of our total net revenues, respectively.

We collect tuition from students in advance for the study-abroad test preparation classes that they purchase and initially record the tuition as deferred revenues. We recognize tuition as revenue proportionally as the tutoring services are delivered. Our refund policies for study-abroad test preparation services are generally same as those for K-12 tutoring services. Historically, we did not experience material refunds for our study-abroad tutoring services. Refunds are deducted from deferred revenues and have no material impact on recognized revenues.

We charge each student consulting fees in advance based on the scope of study-abroad consulting services requested by the student and recognize such consulting fees as revenue when the consulting services are delivered. Consistent with market practices, we offer refunds of the consulting fees, excluding a small portion to cover the costs in connection with the services we delivered, to the students who fail to gain any admission or obtain the relevant visa. Historically, we did not experience material refunds for our study-abroad consulting services. Refunds are deducted from deferred revenues or refund liabilities, under Topic 606, and have no material impact on recognized revenues.

 

80


Table of Contents

Cost of Revenues

Our cost of revenues consists primarily of (i) teaching staff cost, primarily including salaries, bonuses, social insurance and benefits for our teaching staff, (ii) rental expenses for classroom, (iii) facility maintenance expenses for classroom, and (iv) course material expenses. Our cost of revenues accounted for 58.7%, 61.9% and 55.2%, respectively, of our net revenues in 2016, 2017 and the first quarter of 2018. The following table sets forth the components of cost of revenues, both in absolute amount and as a percentage of net revenues, for the periods indicated.

 

    For the Year Ended December 31,     For the Three Months Ended March 31,  
    2016     2017     2017     2018  
    RMB     %     RMB     US$     %     RMB     %     RMB     US$     %  
    (in thousands, except for percentages)  

Net revenues

    439,181       100.0       1,282,562       204,471       100.0       198,203       100.0       495,708       79,028       100.0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenues:

                   

Teaching staff cost(1)

    178,919       40.7       549,048       87,531       42.8       82,313       41.5       183,924       29,322       37.1  

Rental expenses

    53,663       12.2       159,998       25,507       12.5       23,394       11.8       59,945       9,557       12.1  

Facility maintenance expenses

    10,454       2.4       44,860       7,152       3.5       4,924       2.5       18,988       3,027       3.8  

Others

    14,959       3.4       40,436       6,447       3.1       9,444       4.8       10,601       1,690       2.2  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

    257,995       58.7       794,342       126,637       61.9       120,075       60.6       273,458       43,596       55.2  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes share-based compensation expenses of nil, RMB1,152,000, RMB46,000 and RMB976,000 for the years ended December 31, 2016 and 2017 and for the three months ended March 31, 2017 and 2018, respectively.

Teaching staff cost is the largest component of our cost of revenues. We rely on our teachers to deliver educational services. Our teachers consist of both full-time teachers and part-time teachers. Compensation and benefits of our full-time teachers consist primarily of base salary, teaching fees based on hourly rates, performance-linked bonuses, as well as social insurance and benefits. Compensation of our part-time teachers is comprised of teaching fees based on hourly rates and teaching hours.

The following table sets forth the breakdown of our cost of revenues by our business segments, both in absolute amounts and as a percentage of total net revenues, for the periods indicated.

 

    For the Year Ended December 31,     For the Three Months Ended March 31,  
    2016     2017     2017     2018  
    RMB     %     RMB     US$     %     RMB     %     RMB     US$     %  
    (in thousands, except for percentages)  

Net revenues

    439,181       100.0       1,282,562       204,471       100.0       198,203       100.0       495,708       79,028       100.0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenues:

                   

K-12 tutoring services

    217,797       49.6       555,885       88,621       43.3       105,323       53.1       164,264       26,188       33.1  

Study-abroad tutoring services(1)

    40,198       9.1       238,457       38,016       18.6       14,752       7.5       109,194       17,408       22.1  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

    257,995       58.7       794,342       126,637       61.9       120,075       60.6       273,458       43,596       55.2  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Consists of study-abroad test preparation services and study-abroad consulting services.

We anticipate that our total cost of revenues will continue to increase as we continue to acquire schools to expand our network and hire additional teachers.

 

81


Table of Contents

Gross Profit

As a result of the foregoing, our gross profit was RMB181.2 million, RMB488.2 million (US$77.8 million) and RMB222.3 million (US$35.4 million) and our gross margin was 41.3%, 38.1% and 44.8% in 2016, 2017 and the first quarter of 2018, respectively. The following table sets forth the breakdown of our gross profit by our business segments for the periods indicated.

 

    For the Year Ended December 31,     For the Three Months Ended March 31,  
    2016     2017     2017     2018  
    RMB     RMB     US$     RMB     RMB     US$  
    (in thousands)  

K-12 tutoring services

    152,915       328,263       52,333       70,789       112,304       17,903  

Study-abroad tutoring services(1)

    28,271       159,957       25,501       7,339       109,946       17,529  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    181,186       488,220       77,834       78,128       222,250       35,432  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Consists of study-abroad test preparation services and study-abroad consulting services.

Operating Expenses

Our operating expenses consist of selling expenses and general and administrative expenses. The following table sets forth the components of operating expenses, in absolute amounts and as a percentage of total net revenues, for the periods indicated.

 

    For the Year Ended December 31,     For the Three Months Ended March 31,  
    2016     2017     2017     2018  
    RMB     %     RMB     US$     %     RMB     %     RMB     US$     %  
    (in thousands, except for percentages)  

Net revenues

    439,181       100.0       1,282,562       204,471       100.0       198,203       100.0       495,708       79,028       100.0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

                   

Selling expenses(1)

    123,370       28.1       444,927       70,932       34.7       54,920       27.7       164,647       26,249       33.2  

General and administrative expenses(2)

    185,496       42.2       362,748       57,831       28.3       54,177       27.3       383,373       61,119       77.4  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    308,866       70.3       807,675       128,763       63.0       109,097       55.0       548,020       87,368       110.6  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes share-based compensation expenses of RMB991,000, RMB3,058,000, RMB527,000 and RMB2,236,000 for the years ended December 31, 2016 and 2017 and for the three months ended March 31, 2017 and 2018, respectively.
(2) Includes share-based compensation expenses of RMB50,272,000, RMB51,625,000, RMB8,619,000 and RMB282,202,000 for the years ended December 31, 2016 and 2017 and for the three months ended March 31, 2017 and 2018, respectively.

Selling Expenses

Selling expenses consist primarily of (i) salaries, performance-based bonuses and employee benefits for our sales and marketing personnel, (ii) advertising and promotion expenses, (iii) office rental and general expenses associated with the sales and marketing of our business, and (iv) traveling and communication expenses associated with the sales and marketing. We expect that our selling expenses will continue to increase as we further expand into new geographic locations and enhance our brand recognition.

General and Administrative Expenses

General and administrative expenses consist primarily of (i) salaries, employee benefits and other headcount-related expenses associated with the administration of our business, (ii) office rental and facilities maintenance expenses, (iii) professional service fees, (iv) depreciation and amortization expenses associated with the office space used in our general and administrative activities, (v) traveling and communication expenses associated with office and administrative functions, and (vi) share-based compensation expenses in connection with options we granted our management staff. We expect that our general and administrative expenses will continue to increase in the near term as we hire additional personnel and incur additional costs in connection with the expansion of our business and with being a public company, including costs to enhance our internal controls.

 

82


Table of Contents

Our operating expenses include share-based compensation charges. See “—Critical Accounting Policies—Share-Based Compensation.”

Taxation

Cayman Islands

We are incorporated in the Cayman Islands. Under the current law of the Cayman Islands, we are not subject to income or capital gains tax. In addition, dividend payments are not subject to withholding tax in the Cayman Islands.

Hong Kong

Our wholly-owned subsidiary in Hong Kong, Prepshine Holdings Co., Limited, or Prepshine Holdings, is subject to an income tax rate of 16.5% for taxable income earned in Hong Kong. No Hong Kong profit tax has been levied as we did not have assessable profit that was earned in or derived from our wholly-owned Hong Kong subsidiaries during the period indicated. Hong Kong does not impose a withholding tax on dividends.

PRC

Our subsidiaries and consolidated VIE in China are companies incorporated under PRC law and, as such, are subject to PRC enterprise income tax on their taxable income in accordance with the relevant PRC income tax laws. Pursuant to the EIT Law, which became effective on January 1, 2008, a uniform 25% enterprise income tax rate is generally applicable to both foreign-invested enterprises and domestic enterprises, except where a special preferential rate applies. The enterprise income tax is calculated based on the entity’s global income as determined under PRC tax laws and accounting standards.

We are subject to business tax before May 2016. Since May 2016, VAT was phased in to replace the business tax that was previously applicable to the services we provide. We are subject to VAT at a rate of 6% on the services we provide, less any deductible VAT we have already paid or borne. We are also subject to surcharges on VAT payments in accordance with PRC law. In addition, some of our subsidiaries in China that participate in the non-diploma education service industry choose the simplified method of taxation where the VAT collection rate is 3%.

As a Cayman Islands holding company, we may receive dividends from our PRC subsidiaries through Prepshine Holdings. The PRC Enterprise Income Tax Law and its implementing rules provide that dividends paid by a PRC entity to a non-resident enterprise for income tax purposes is subject to PRC withholding tax at a rate of 10%, subject to reduction by an applicable tax treaty with China. Pursuant to the Arrangement between Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income, the withholding tax rate in respect to the payment of dividends by a PRC enterprise to a Hong Kong enterprise may be reduced to 5% from a standard rate of 10% if the Hong Kong enterprise directly holds at least 25% of the PRC enterprise. Pursuant to the Notice of the State Administration of Taxation on the Issues concerning the Application of the Dividend Clauses of Tax Agreements, or SAT Circular 81, a Hong Kong resident enterprise must meet the following conditions, among others, in order to apply the reduced withholding tax rate: (i) it must be a company; (ii) it must directly own the required percentage of equity interests and voting rights in the PRC resident enterprise; and (iii) it must have directly owned such required percentage in the PRC resident enterprise throughout the 12 months prior to receiving the dividends. In August 2015, the State Administration of Taxation promulgated the Administrative Measures for Non-Resident Taxpayers to Enjoy Treatment under Tax Treaties, or SAT Circular 60, which became effective on November 1, 2015. SAT Circular 60 provides that non-resident enterprises are not required to obtain pre-approval from the relevant tax authority in order to enjoy the reduced withholding tax. Instead, non-resident enterprises and their withholding agents may, by self-assessment and on confirmation that the prescribed criteria to enjoy the tax treaty benefits are met,

 

83


Table of Contents

directly apply the reduced withholding tax rate, and file the necessary forms and supporting documents when performing tax filings, which will be subject to post-tax filing examinations by the relevant tax authorities. Accordingly, Prepshine Holdings may be able to benefit from the 5% withholding tax rate for the dividends it receives from Purong Beijing, if it satisfies the conditions prescribed under SAT Circular 81 and other relevant tax rules and regulations. However, according to SAT Circular 81 and SAT Circular 60, if the relevant tax authorities consider the transactions or arrangements we have are for the primary purpose of enjoying a favorable tax treatment, the relevant tax authorities may adjust the favorable withholding tax in the future.

If our holding company in the Cayman Islands or any of our subsidiaries outside of China were deemed to be a “resident enterprise” under the EIT Law, it would be subject to enterprise income tax on its worldwide income at a rate of 25%, which could result in unfavorable tax consequences to us and our non-PRC shareholders. See “Risk Factors—Risk Factors Related to Doing Business in the PRC—Under the PRC Enterprise Income Tax Law, or the EIT Law, we may be classified as a PRC “resident enterprise,” which could result in unfavorable tax consequences to us and our non-PRC shareholders or ADS holders.”

Internal Control over Financial Reporting

Prior to this offering, we have been a private company with limited accounting personnel and other resources with which to address our internal control over financial reporting. Our independent registered public accounting firm has not conducted an audit of our internal control over financial reporting.

In the course of auditing our consolidated financial statements as of December 31, 2017 and for the year ended December 31, 2017, we and our independent registered public accounting firm identified one material weakness in our internal control over financial reporting and other control deficiencies as of December 31, 2017. As defined in the standards established by the U.S. Public Company Accounting Oversight Board, 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 or interim consolidated financial statements will not be prevented or detected on a timely basis.

The material weakness identified relates to our lack of comprehensive accounting policies and procedures manual in accordance with U.S. GAAP. We do not believe that this material weakness or the other control deficiencies had a significant impact on our financial reporting. To remedy the identified material weakness and the other control deficiencies, we have implemented, and plan to continue to develop, a full set of U.S. GAAP accounting policies and financial reporting procedures as well as related internal control policies, including implementing a comprehensive accounting manual to guide the day-to-day accounting operation and reporting work and measures to improve controls over our information systems. We intend to remediate this material weakness and the other control deficiencies in multiple phases and expect that we will incur certain costs for implementing our remediation measures. The implementation of the measure, however, may not fully address the material weaknesses and the other control deficiencies identified in our internal control over financial reporting, and we cannot conclude that they have been fully remedied. See “Risk Factors—Risk Factors Related to Our Business and Industry—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.”

Critical Accounting Policies and Estimates

We prepare our financial statements in accordance with U.S. GAAP, which requires our management to make judgment, estimates and assumptions. We continually evaluate these judgments, estimates and assumptions 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 various assumptions that we believe to be reasonable, which together form our basis for making judgments about matters that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, our actual

 

84


Table of Contents

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 in this prospectus.

Revenue Recognition

We provide K-12<