new-20f_20191231.htm

Floor 16, Chuangfu Mansion
No. 18 Danling Street, Haidian District
Beijing, 100080
People’s Republic of China
(Address of principal executive offices)

Mr. Yunlong Sha, Chief Executive Officer
Floor 16, Chuangfu Mansion
No. 18 Danling Street, Haidian District
Beijing, 100080, the People’s Republic of China
Tel: +86 10 8260 5578
E-mail: shayunlong@pxjy.com
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

*Not for trading, but only in connection with the listing on the New York Stock Exchange of American depositary shares.

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

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

174,025,810 ordinary shares, par value US$0.00005 per share, as of December 31, 2019

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

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

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

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

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

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

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

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

U.S. GAAP ☒ International Financial Reporting Standards as issued by the International Accounting Standards Board ☐ Other ☐

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

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

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

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

Unless otherwise indicated, in this annual report on Form 20-F, the following terms shall have the meaning set out below:

We present our financial results in Renminbi. 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, or at all. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of Renminbi into foreign exchange and through restrictions on foreign trade. This annual report contains translations of certain foreign currency amounts into U.S. dollars for the convenience of the reader. Unless otherwise stated, all translations of Renminbi into U.S. dollars were made at the rate at RMB6.9618 to US$1.00, the exchange rate as set forth in the H.10 statistical release of the Board of Governors of the Federal Reserve System in effect as of December 31, 2019.

This annual report on Form 20-F 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. 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.

You can identify forward-looking statements by terms such as “may,” “could,” “will,” “should,” “would,” “expect,” “plan,” “aim,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “project” or “continue” or the negative of these terms or other similar expressions. The forward-looking statements include, but are not limited to, statements about:

You should read this annual report and the documents that we refer to in this annual report and have filed as exhibits to this annual report completely and with the understanding that our actual future results may be materially different from what we expect. Factors that may cause actual results to differ materially from current expectations include, among other things, those disclosed in “Item 3. Key Information—3.D. Risk Factors” and elsewhere in this annual report. 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. Moreover, we operate in an evolving environment. New risk factors and uncertainties emerge from time to time and it is not possible for our management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events. The forward-looking statements made in this annual report relate only to events or information as of the date on which the statements are made in this annual report. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. No forward-looking statement is a guarantee of future performance.

The following table presents the selected consolidated financial information of our company. The selected consolidated statements of comprehensive income data and selected consolidated cash flow data for the years ended December 31, 2017, 2018 and 2019 and the selected consolidated balance sheet data as of December 31, 2018 and 2019 are derived from our audited consolidated financial statements included herein, which were prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. The selected consolidated statements of comprehensive income data and selected consolidated cash flow data for the year ended December 31, 2016 and the selected consolidated balance sheet data as of December 31, 2016 and 2017 are derived from our audited consolidated financial statements that have not been included herein and were prepared in accordance with U.S. GAAP.

The selected financial data set forth below should be read in conjunction with “Item 5. Operating and Financial Review and Prospects” and the consolidated financial statements and the notes to those statements included herein. The historical results presented below are not necessarily indicative of financial results to be achieved in future periods.

	For the Year Ended December 31,
	2016			2017			2018			2019
	RMB			RMB			RMB			RMB			US$
	(in thousands, except share and share related data)
Selected Consolidated Statements of Operations Data:
Net revenues		439,181			1,282,562			2,228,117			3,103,958			445,856
Cost of revenues⁽¹⁾		257,995			794,342			1,242,889			1,629,447			234,055
Gross profit		181,186			488,220			985,228			1,474,511			211,801
Operating expenses:
Selling expenses⁽¹⁾		123,370			444,927			848,088			1,083,795			155,677
General and administrative expenses⁽¹⁾		185,496			362,748			775,883			748,259			107,481
Total operating expenses		308,866			807,675			1,623,971			1,832,054			263,158
Operating loss		(127,680	)		(319,455	)		(638,743	)		(357,543	)		(51,357	)
Interest expense		—			5,556			51,901			71,099			10,213
Interest income		464			549			2,826			25,542			3,669
Foreign exchange loss (gain)		—			—			7,621			(243	)		(35	)
Loss on changes in fair value of convertible notes, derivative liabilities and warrants		—			70,336			131,748			104,589			15,023
Loss on extinguishment of convertible notes		—			—			900			—			—
Loss before income taxes		(127,216	)		(394,798	)		(828,087	)		(507,446	)		(72,889	)
Income tax expenses		388			2,436			5,322			12,188			1,751
Net loss		(127,604	)		(397,234	)		(833,409	)		(519,634	)		(74,640	)
Less: Net (loss) income attributable to non-controlling interest		(48	)		79		2				(1,101	)		(158	)
Net loss attributable to ordinary shareholders of Puxin Limited		(127,556	)		(397,313	)		(833,411	)		(518,533	)		(74,482	)
Net loss per share attributable to ordinary shareholders of Puxin Limited
Basic and diluted		(1.29	)		(3.98	)		(5.78	)		(3.03	)		(0.44	)
Net loss per ADS attributable to ordinary shareholders of Puxin Limited
Basic and diluted		(2.58	)		(7.96	)		(11.56	)		(6.06	)		(0.88	)
Weighted average shares used in calculating basic and diluted net loss per share		98,670,361			99,705,361			144,157,947			170,903,317			170,903,317
Weighted average ADS used in calculating basic and diluted net loss per share		49,335,181			49,852,680			72,078,973			85,451,659			85,451,659

On January 1, 2018, we adopted Accounting Standards Updates 2014-09, Revenue from contracts with Customers (Topic 606) issued by Financial Accounting Standards Board applying the modified retrospective method to all contracts that were not completed as of January 1, 2018. We recorded a net reduction to opening accumulated deficit of RMB48.3 million as of January 1, 2018 due to the cumulative impact of adopting Topic 606.

	As of December 31,
	2016			2017			2018		2019
	RMB			RMB			RMB		RMB		US$
	(in thousands, expect for share data)
Selected Consolidated Balance Sheet Data:
Total current assets		136,380			307,678			916,303		927,992		133,297
Total assets		594,117			2,008,393			2,737,019		4,707,055		676,126
Total current liabilities		478,385			1,270,784			1,931,220		3,308,361		475,216
Total liabilities		511,421			2,161,178			2,189,147		4,446,997		638,771
Convertible redeemable preferred shares		120,000			120,000			—		—		—
Ordinary shares (par value of US$0.00005 per share; 100,0000,000, 100,000,000, 1,000,000,000 and 1,000,000,000 shares authorized, 100,000,000, 100,000,000, 188,627,228 and 188,627,228 shares issued and 100,000,000, 100,000,000, 165,038,164 and 174,025,810 shares outstanding as of December 31, 2016, 2017, 2018 and 2019, respectively)		34			34			62		62		9
Total shareholders' (deficit)/equity		(37,304	)		(272,785	)		547,872		260,058		37,355

On January 1, 2019, we adopted Accounting Standards Updates 2016-02, Leases (Topic 842) issued by Financial Accounting Standards Board using the modified retrospective transition approach without adjusting the comparative periods presented. Upon adoption of Topic 842, we recognized both a right-of-use assets and corresponding lease liabilities of RMB1,045.9 million and RMB970.4 million, respectively, on the balance sheet. The difference between the right-of-use assets and lease liabilities was due to prepaid rent.

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.

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:

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

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 2017 and 2018, we had 1,238,070 and 1,765,684 student enrollments in our K-12 courses, respectively, and in 2019, we had 2,799,851 student enrollments in our K-12 courses which included 193,064 student enrollments of online courses offered by Puxin Online School. The student enrollments in our study-abroad tutoring programs were 37,653, 80,665 and 72,174 in 2017, 2018 and 2019, respectively.

Despite the rapid growth in our business size and operation scale in the recent years, we incurred operating loss of RMB319.5 million, RMB638.7 million and RMB357.5 million (US$51.4 million) in 2017, 2018 and 2019, respectively. As of December 31, 2017, 2018 and 2019, we had an accumulated deficit of RMB679.6 million, RMB1,469.3 million and RMB1,991.2 million (US$286.0 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 from 99 as of December 31, 2015 to 446 as of December 31, 2019. 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:

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. Although our acquisition agreements with original sponsors or shareholders of the acquired schools usually provide that 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. We use a variety of marketing and recruiting methods to attract students and increase student enrollments, such as word-of-mouth referrals and promotion efforts on new media. A failure by us to implement sales and marketing strategies in a cost-effective manner could have a material adverse impact on our business, financial condition and results of operations.

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 feel that our services fail to meet their expectations 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 and full-time tutoring 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. For live streaming courses offered at regular prices by Puxin Online School, we usually offer refunds for any remaining classes in a course to students who withdraw from the course. Although we have not experienced any significant refund requests in the past, if an increasing number of students request refunds, our cash flows, 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.

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 through 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. In addition, changes in laws and regulations on private schools and training institutions might affect the number of suitable acquisition targets as the target’s compliance with such laws and regulations is one of the key factors for our acquisitions. 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.

The recent coronavirus outbreak may adversely affect our revenues, results of operations and financial condition.

Since January 2020, the novel coronavirus (“COVID-19”) has spread rapidly to many parts of China and other parts of the world. The severity of the outbreak resulted in the implementation of numerous actions by the PRC government and governmental agencies in an attempt to mitigate the spread of the virus, including restrictions on travel and social gathering, quarantines imposed by local governments and shutdown of primary and middle schools. The outbreak of COVID-19 has caused a disruption to our business. From early February 2020, we closed all of our learning centers in China in response to the measures taken by the PRC government to contain the spread of COVID-19. Constrained by the epidemic, our management and employees have been making every effort to mitigate the impacts of the epidemic by focusing on offering in-progress and new courses online and continuing operations as much as possible. As of the end of February, approximately 93% of student enrollments of group class courses which were to be offered during the 2020 winter break were taught through online platforms. In connection with this switch to online classes, we provided discounts to students at some of our schools, which were typically within a range from 5% to 30% of the tuition fees for their remaining classes. Without taking into account the potential course withdrawals in the second quarter of 2020, our student enrollments for the first quarter of 2020 were approximately 880,000, which remained stable compared to 872,950 student enrollments in the fourth quarter of 2019 and represented an increase compared to 402,061 student enrollments in the first quarter of 2019. However, the school closure has adversely affected our student recruitment for courses to be held in the spring semester, which could in turn adversely affect our business, financial condition and results of operations for the remainder of 2020.

As COVID-19 cases have recently surged outside China, the PRC government may prolong school closure and social gathering restrictions and we may be forced to close our learning centers for a prolonged period of time. In addition, students and parents may postpone or even give up study-abroad plans due to the worldwide outbreak of the virus, which may materially adversely affect the student enrollments of our study-abroad test preparation courses and study-abroad consulting services. The duration and intensity of disruptions resulting from the COVID-19 outbreak is uncertain. It is unclear as to when the outbreak will be contained and when we will be able to reopen our schools and learning centers, and we also cannot predict if the impact will be short-lived or long-lasting. The COVID-19 outbreak may materially adversely affect our results of operations, financial condition and business prospects for the year of 2020, including but not limited to material adverse impact on our revenues due to withdrawal and refund of courses or significant decrease in student enrollments, or significant downward adjustments or impairment to our long-term assets.

The extent to which the COVID-19 impacts our financial results will depend on its future developments. If the outbreak of the COVID-19 is not effectively controlled timely, our business operations and financial condition may be materially and adversely affected as a result of any slowdown in economic growth, operation disruptions or other factors that we cannot predict. Because of the significant uncertainties surrounding the COVID-19 outbreak, the extent of the business disruption and the related financial impact cannot be reasonably estimated at this time.

New legislation or changes in the PRC regulatory requirements regarding private education may affect our business operations and prospects.

Education is a highly regulated industry in the PRC. Relevant laws and regulations are relatively new and evolving, and the interpretation and enforcement of such laws and regulations involve significant uncertainties. As a result, under certain circumstances it may be difficult to determine what actions or omission may be deemed to be violations of or noncompliance with applicable laws and regulations.

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 and was further amended on December 29, 2018. On December 30, 2016, five PRC government authorities, including the Ministry of Education, or the MOE, promulgated the Implementation Regulations for Classification Registration of Private Schools, or the Classification Registration Regulations. 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 “Item 4. Information on the Company ⸻ B. Business Overview ⸻ Regulations—Regulations on Private Education in the PRC—Implementation Regulations for Classification Registration of Private Schools.”

On August 10, 2018, the Ministry of Justice of the PRC issued the Amended Draft (for Approval) of Implementation Rules for the Law on the Promotion of Private Education of the PRC, or the Draft Implementation Rules, to invite public comments. If the Draft Implementation Rules are signed into law, they would have several impacts on our business. For example:

See “Item 4. Information on the Company⸻B. Business Overview⸻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” for a summary of the Draft Implementation Rules. As of March 31, 2020, the Draft Implementation Rules had not come into effect pending for the final approval, and may be subject to further revisions. We expect that the Amended Private Education Law, accompanied with its relevant implementation rules and regulations, will bring significant changes to the compliance regime. 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.

Under the regime of the Amended Private Education Law, the PRC government authorities promulgated a number of regulations and rules governing the education industry and the after-school tutoring service market in 2018 and 2019, including (i) the Circular on Alleviating After-school Burden on Elementary and Middle School Students and Implementing Inspections on After-school Training Institutions, (ii) the Opinion on Supervising After-school Tutoring Institutions, (iii) the Notice on Improving the Specific Governance and Rectification Mechanisms of After-school Education Institutions, (iv) the Implementation Opinions on Regulating Online After-School Training, and (v) Opinions on Guiding and Regulating the Orderly and Healthy Development of Educational Mobile Apps. These new regulations and rules impose a series of requirements on after-school tutoring business. For details, see “Item 4. Information on the Company⸻B. Business Overview⸻Regulation—Regulations on Private Education in the PRC—Opinions on Regulating Development of After-school Education Institutions.” We have been making effort to ensure compliance with these regulations and rules but there is no assurance that our effort will result in full compliance in timely manner given that certain regulations and rules impose new requirements and that PRC government authorities have discretion in interpreting, implementing and enforcing such regulations and rules. If we fail to comply with these regulations and rules in a timely manner, the relevant learning centers may be subject to the order of rectification, fines, confiscation of the gains derived from our noncompliant operations or suspension of our noncompliant operations, which may materially and adversely affect our business and results of operations. In

addition, uncertainties still exist as the regulatory authorities may set further specific and stringent requirements on the operations of after-school tutoring institutions. We may be unable to meet such requirements in a prompt manner or may incur additional costs for compliance with such requirements, which may adversely affect our business, financial conditions and results of operations.

The interpretation and application of existing PRC Laws and policies and possible new Laws or policies relating to the private education industry have created substantial uncertainties regarding the legality of existing and future foreign investments in, and the businesses and activities of, private education businesses in China, including our business. There are also risks that we might be found to be in violations of the existing or future laws and regulations in light of uncertainty and complexity of China’s regulation in private education business.

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 and the Implementing Rules on the Supervision and Administration of For-Profit Private Schools which was published on December 30, 2016, 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. According to the Draft 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. In addition, PRC government authorities may promulgate regulations and rules from time to time to carry out certain inspections on qualification and certificates of after-school training institutions. For example, 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. These government authorities carried out a series of inspections in 2018 on after-school training institutions and ordered 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.

As of December 31, 2019, we had 152 training institutions which are required to obtain private school operation permits and 299 tutoring branches which are required to complete filings for permits or registrations. Among these training institutions and tutoring branches, 22 training institutions do not possess the private school operation permits and 196 tutoring branches have not completed the required filings with the local education authorities.

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 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 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 or national brands or even local 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.

PRC laws and regulations require that the teachers teaching academic subjects in the compulsory education stage and the subjects related to the admission to higher schools must have the relevant teaching qualifications. As of the date of this annual report, certain of our teachers for the above-mentioned subjects have not obtained the relevant teaching qualifications. We have formally notified these teachers of the requirement to obtain the relevant teaching qualifications. Nevertheless, we cannot assure you that our teachers can all apply for and obtain the teaching qualifications in a timely manner, or at all. If our teachers are not able to apply for and obtain the required teaching qualifications on a timely basis, or at all, we may need to rectify such noncompliance, or be subject to penalties or the risk that we may not maintain our private school operation permits.

Furthermore, the Disciplinary Measures for Violation of Professional Ethics of Elementary and Secondary School Teachers, as amended on November 8, 2018, prohibits teachers of elementary and secondary schools from organizing and participating in paid tutoring activities or introducing students to after-school training institutions. If any of our 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 or effectively implement our business initiatives.

The future success of our business depends partly on our ability to develop new education services and carry out business development initiatives. 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 have recently implemented an online-merge-offline strategy under which we enhance our online services to complement our classroom-based K-12 tutoring services, including launching Puxin Online School in November 2018 and offering online tutoring classes on weekdays to students of our group class and personalized tutoring courses since January 2019. 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. In addition, we started to offer full-time tutoring to high school students who are preparing for university entrance exams and art college admission exams in China in April 2019. Unexpected operational, technical or other issues could delay or prevent the launch and operations 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 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.

We are subject to risks relating to litigation, disputes and regulatory investigations which may adversely affect our profitability, financial condition and prospects.

We are, and may in the future be, subject to legal actions, disputes and regulatory investigations in the ordinary course of our business. We are also subject to risks relating to legal and regulatory proceedings and investigations which we, our directors and officers, or our other affiliates may be a party to from time to time, or which could develop in the future, as well as fines or other penalties which may be imposed on us in connection with the lack of any requisite permit, license or other approval for our business and operations or any violation of or non-compliance with laws. Claims arising out of actual or alleged violations of law could be asserted against us, our directors and officers, or our other affiliates by government or regulatory authorities, investors, customers, service providers or competitors, in civil, criminal, or regulatory investigations and proceedings. These claims could be asserted under a variety of laws in different jurisdictions, including but not limited to securities laws, intellectual property laws, data protection and privacy laws, labor and employment laws, torts law and contract laws. For example, on February 6, 2020, the U.S. Securities and Exchange Commission, or the SEC, sent subpoenas to our chairman and chief executive officer, Mr. Yunlong Sha and his wife, requesting documents concerning trading in our company’s securities. On November 26, 2018, we publicly announced that during the

six months starting from that day, members of our senior management team would be using their personal funds to purchase our ADSs, or the senior management share purchase plan. While the subpoenas did not specify the trades that prompted the SEC’s investigation, Mr. Yunlong Sha and his wife have indicated that during the period specified in the senior management share purchase plan, they made numerous purchases in furtherance of that plan through a joint account. The SEC’s investigation is currently ongoing and Mr. Yunlong Sha may be subject to further subpoenas or inquiries. The SEC may also involve us in these inquiries, and we and Mr. Yunlong Sha intend to cooperate fully with the SEC. Furthermore, we are planning to enhance our corporate governance and compliance processes to better address and help us supervise trading activities by our directors, officers and other employees. At this time, we are unable to predict the outcome of the investigation because of its ongoing nature.

Litigations and regulatory proceedings can be costly and time-consuming and may divert management attention and resources from our operations. In the event of any adverse outcome or findings against us in any litigations or regulatory proceedings, we may be required to pay damages to the prevailing party or penalties imposed by government or regulatory authorities, which may adversely affect our results of operations or cash flows. Our reputation may be adversely affected by our involvement or the involvement of our directors and officers or other affiliates in any litigation, regulatory proceedings or investigations.

Any damage to our brands and reputation 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 brands and reputation could be adversely affected under many circumstances, including the following:

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 to traditional media, there has been an increasing use of social media platforms in China, including instant messaging applications, social media websites and other forms of internet-based communications that provide individuals with access to a broad audience of consumers and other interested persons. Information concerning our company, shareholders, affiliates, directors, officers, teaching staff and other employees, may be posted on such platforms at any time. Any negative review, comment or allegation about our company, our learing centers or services, regardless of merits, once disseminated through social media platforms may harm our brands, public image and reputation, which in turn may result in a loss of students and have a material adverse effect on our business, financial condition, results of operations and prospects.

Global Education also has franchised schools. Our control over the 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 reputation or brands deteriorate, 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 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 December 31, 2019, among our 756 lease contracts, we had not been able to receive copies of the valid title certificates or proof of authorization to lease properties to us from the lessors for 133 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 December 31, 2019, we were not aware of any actions, claims or investigations threatened against us or our lessors with respect to the defects in our leasehold interests. However, if any of our leases 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. As of December 31, 2019, we had leased 626 business premises for our training institutions and their tutoring branches, and we have complied with the foregoing fire safety permit and filing requirements for 385 of these premises. We have arranged inspections for 57 premises by local fire control

authorities and obtained written records of passing the fire safety inspections. Besides, the construction units have obtained the fire safety permits in connection with the construction of the buildings where another 98 premises are located, and we are in the process of completing further fire safety filings with respect to the interior decoration of such premises. However, as of December 31, 2019, we had 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 86 leased business premises. 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 December 31, 2019, 90 of our business premises for children’s activities, including certain sections of our K-12 and study-abroad programs that target children were 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 60 business premises. We may be subject to fines and orders to suspend operations if the remaining 30 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.

The internet industry and education industry in China are highly regulated by the PRC government. As we provide online education services and products, we are required to obtain and maintain all necessary approvals, licenses or permits applicable to our business operations and make all necessary registration and filings for our education services in China. We have obtained Internet Content Provider Licenses, or ICP Licenses, for some of our online platforms, and intend to register the remaining online platforms, including Puxin Online School, on our current ICP Licenses or apply for new ICP Licenses for these platforms. We may be required to apply for and obtain additional licenses or permits for our operations as the interpretation and implementation of current PRC laws and regulations are still evolving, and new laws and regulations may also be promulgated.

For example, 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. We may also be required to obtain the Permit for Production and Operation of Radio and TV Programs if the governmental authorities determine that the online courses we offer fall within the definition of “radio and television program” under relevant rules. Puxin Online School has obtained a Permit for Production and Operation of Radio and TV Programs. Moreover, we may be required to obtain the online publishing services permit for our online educational products, such as Puxin Online School, Puxin Dual-Teacher Classrooms, Puxin Superior Classes, foreign teacher classes and GEDU Online. 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 has 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 events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill and intangible assets without determinable useful lives are 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 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 intangible assets is determined, which could have a material adverse effect on our results of operations.

In 2017, 2018 and 2019, 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 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 and administrative penalties 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 continue to be subject to such disputes in the future. For example, in July 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 infringed 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,” “

” and “

” and remove these words from their trade names and logos. From July 2017 to October 2019, we negotiated with the IDP Claimants. In September and October of 2019, we entered into certain cooperation agreements with BC Education Consulting (Beijing) Co., Ltd., or BC Education, which acted on behalf of the British Council, and became a business partner of BC Education. To comply with the cooperation agreements, we stopped using “IELTS” or “

” in our domain names and trade names and instead used “Global Education” in our domain names and trade names. The IDP Claimants other than British Council have not taken any further action against us for the alleged infringement, but we cannot assure you that they would not initiate any legal proceedings against 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 “

/Longman” trademarks and certain other trademarks and brands, and demanding that the infringers immediately cease the infringement. Beijing Global Education 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 December 31, 2019, neither Pearson Beijing nor Pearson PLC had 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 parties 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 copyrights 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 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 “Item 4. Information on the Company⸻B. Business Overview—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 annual report, our information systems had not encountered material errors or technical issues and there was 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.

We collaborate with various overseas schools and institutions, as well as overseas examination agencies, to provide overseas study programs and tests. 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 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 most of our K-12 tutoring schools and a small portion 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, COVID-19, 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 the initial public offering, we were a private company with limited accounting personnel and other resources with which to address our internal controls and procedures. In preparing our consolidated financial statements for the years ended December 31, 2016 and 2017 included in our registration statement on Form F-1 filed in connection with our initial public offering, we and our independent registered public accounting firm identified one material weakness in our internal control over financial reporting, as defined in the standards established by the U.S. Public Company Accounting Oversight Board Standard, or PCAOB, and other control deficiencies. 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. As of December 31, 2018, we determined that the above-mentioned material weakness had been remediated. In preparing our consolidated financial statements for the year ended December 31, 2018, we identified certain control deficiencies in our internal control over financial reporting as of December 31, 2018. As of December 31, 2019, we determined that such control deficiencies had been remediated. 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.

As a public company in the United States, we are subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, requires that we include a report of management on our internal control over financial reporting in our annual report on Form 20-F beginning with this annual report. 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, since we have 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 December 31, 2019, there were 5,929,076 options outstanding which entitle their holders to purchase 5,929,076 ordinary shares of Puxin Limited under this plan. 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. In March 2019, we adopted Puxin Limited 2019 Noble Talent Share Incentive Plan which permits granting of share options to purchase up to 8,879,986 ordinary shares under this plan. On March 6, 2019, we granted options to purchase 8,879,986 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 2017, 2018 and 2019, we incurred share-based compensation expense of RMB55.8 million, RMB375.0 million and RMB230.4 million (US$33.1 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.

Failure to comply with governmental regulation and other legal obligations concerning personal information may adversely affect our business, as we routinely collect, store and use personal information during our business.

We routinely collect, store and use personal information during our business. We are subject to the PRC laws and regulations governing the receiving, storing, sharing, using, processing, disclosure and protection of personal information on the Internet and mobile platforms. See “Item 4. Information on the Company⸻B. Business Overview⸻Regulation⸻Regulations on Protection of Personal Information of Citizens.” The scope of these laws and regulations may change depending on varied interpretations. It is possible that these obligations may be interpreted and applied in a manner that is inconsistent with our practices. In addition, the Office of the Central Cyberspace Affairs Commission, the Ministry of Industry and Information Technology, the Ministry of Public Security and the State Administration for Market Regulation jointly issued an announcement on January 23, 2019 to carry out regulatory inspections on mobile Internet applications which collect and use personal information in violation of laws and regulations. This announcement prohibits business operators from collecting personal information that is irrelevant to their services or forcing users to grant their authorizations by making the user’s authorization as a default setting, bundling a plugin authorization or suspending installation in the event of failure to obtain the user’s authorization. On November 28, 2019, the National Internet Information Office, the Ministry of Industry and Information Technology, the Ministry of Public Security and the State Administration for Market Regulation further jointly issued a notice to classify and identify illegal collection and use of personal information. As the above-mentioned announcement and notice are relatively new, we cannot assure you that we can adapt our operations to the new requirements promptly. If we fail to comply with these laws and regulations, we may be penalized by the relevant authorities and be subject to litigation or negative public statements against us by consumer advocacy groups or others, and our operations or reputation could therefore be adversely affected.

We face risks and uncertainties in printing and providing teaching handouts and other materials to our students.

Certain subsidiaries of our VIE engage in printing and distributing teaching handouts and other materials to our students. According to the Administrative Regulations on Publication, any entity engaging in publishing, printing, copying, importing or distributing of publications is required to obtain relevant permits. See “Item 4. Information on the Company⸻B. Business Overview⸻Regulation⸻Regulation Relating to Publication Distribution.”

According to the prior Measures for the Administration of Internal Informative Publications, entities engaging in printing internal informative publications were allowed to obtain an internal informative publications printing permit instead of the permit of publishing. Such internal informative publications were defined as publications used for the purposes of internal information communication and work guidance without being for sale. In April 2015, the Measures for the Administration of Internal Informative Publications took effect and abolished the prior Measures for the Administration of Internal Informative Publications. Under the new regulation, the internal informative publications printing permit is no longer applicable to printing and publishing of textbooks and teaching materials for primary and secondary school students. In addition, the new regulation prohibits entities which have obtained the internal informative publications printing permits from offering the internal informative publications to its clients or to the public.

Under the new regulation, it is uncertain whether printing and providing teaching handouts and other materials to our students would be deemed as the activities of publishing. If the General Administration of Press and Publication or its local branches or other competent authorities deem such activities as publishing, we may become subject to significant penalties, fines, legal sanctions or an order to suspend our printing and providing of teaching handouts and other materials to our students.

The wide variety of payment methods that we accept subjects us to third-party payment processing-related risks.

We accept payments using a variety of methods, including bank transfers, online payments with credit cards and debit cards issued by major banks in China, and payment through third-party online payment platforms such as Alipay, WeChat Pay and UnionPay. We may be susceptible to fraud and other illegal activities in connection with the various payment methods we offer. We are also subject to various rules, regulations and requirements, regulatory or otherwise, governing electronic funds transfers which could change or be reinterpreted to make it difficult or impossible for us to comply. If we fail to comply with these rules or requirements, we may be subject to fines and higher transaction fees and become unable to accept credit and debit card payments from our students, process electronic funds transfers or facilitate other types of online payments, and our business, financial condition and results of operations could be materially and adversely affected.

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 incorporated 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 “Item 4. Information on the Company—C. Organizational Structure—Organizational 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:

Any of these actions could cause significant disruption to our business operations and severely damage our reputation, which would in turn materially and adversely affect our business, financial condition and results of operations. If any of these occurrences 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, we may not be able to consolidate Puxin Education and its subsidiaries in our financial statements in accordance with U.S. GAAP.

Uncertainties exist with respect to the interpretation and implementation of the Foreign Investment Law and how it may impact the viability of our current corporate structure, corporate governance, business, financial condition and results of operations.

On March 15, 2019, the National People’s Congress promulgated the Foreign Investment Law, which came into effect on January 1, 2020 and replaced the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation rules and ancillary regulations. As it is relatively new, uncertainties still exist in relation to its interpretation and implementation, and failure to take timely and appropriate measures to comply with the Foreign Investment Law and relevant rules could result in material and adverse effects on us. For instance, although the Foreign Investment Law does not explicitly classify contractual arrangements as a form of foreign investment, it contains a catch-all provision under the definition of “foreign investment,” which includes investments made by foreign investors in China through means stipulated by laws or administrative regulations or other methods prescribed by the State Council. Therefore, it still leaves leeway for future laws, administrative regulations or provisions to be promulgated by the State Council to provide for contractual arrangements as a form of foreign investment, at which time it will be uncertain whether our contractual arrangements will be deemed to be in violation of the market access requirements for foreign investment in the PRC and, if so, how our contractual arrangements will be dealt with. In addition, if future laws, administrative regulations or provisions to be prescribed by the State Council mandate further actions to be taken by companies with respect to existing contractual arrangements, we may face substantial uncertainties as to whether we can complete such actions in a timely manner, or at all. In the worst case scenario, we may be required to unwind our existing contractual arrangements and/or dispose of the relevant business operations, which could have a material and adverse effect on our current corporate structure, corporate governance, business, financial condition and results of operations.

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 “Item 4. Information on the Company—C. Organizational Structure—Organizational Structure.” However, these 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 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 Implementation Rules for Approval, 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) Information Technology Co., Ltd., or 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 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 the initial public 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.

Any funds we transfer to our PRC subsidiary, either as a shareholder loan or as an increase in registered capital, are subject to approval by or registration with relevant governmental authorities in China. According to the relevant PRC regulations on foreign-invested enterprises, or FIEs, in China, capital contributions to our PRC subsidiary are subject to the filing of the investment information with the MOFCOM or its local branches and registration with other governmental authorities in China. In addition, (a) any foreign loan procured by our PRC subsidiary is required to be registered with the State Administration of Foreign Exchange, or SAFE, or its local branches, and (b) our PRC subsidiary may not procure loans which exceed the statutory limit. Any medium-or long- term loan to be provided by us to our VIE must be approved by the NDRC and the SAFE or its local branches. We may not obtain these government approvals or complete such registrations on a timely basis, if at all, with respect to future capital contributions or foreign loans by us to our PRC subsidiary. If we fail to receive such approvals or complete such registration, our ability to use the proceeds of our initial public offering and to capitalize our PRC operations may be negatively affected, which could adversely affect our liquidity and our ability to fund and expand our business.

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 an FIE 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 FIEs and allows FIEs to settle their foreign exchange capital at their discretion, but continues to prohibit FIEs 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 FIEs 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 the initial public 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 the initial public 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. On October 23, 2019, the SAFE promulgated the Notice for Further Advancing the Facilitation of Cross-border Trade and Investment, or the SAFE Circular 28, which, among other things, allows all FIEs to use Renminbi converted from foreign currency-denominated capital for equity investments in China, as long as the equity investment is genuine, not in violation of applicable laws, and in compliance with the negative list on foreign investments. However, since the SAFE Circular 28 is newly promulgated, it is unclear how SAFE and competent banks will carry this out in practice.

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. 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.

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 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 annual report based on foreign laws.

We are incorporated in the Cayman Islands as an exempted company with limited liability and conduct substantially all of our operations in China. Substantially all of our assets are located in China. All our executive officers and senior management 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 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 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.

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.

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.

All of our shareholders that we are aware of being subject to the SAFE regulations have completed all necessary registrations as required by Circular 37. We cannot assure you, however, that all of these individuals may continue to make required filings or updates on a timely manner, or at all. We can provide no assurance that we are or will in the future continue to be informed of identities of all PRC residents holding direct or indirect interest in our company. If any of such individuals fails 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. 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 changes in China’s political and economic conditions and by China’s foreign exchange policies, among other things. We cannot assure you that Renminbi will not appreciate or depreciate significantly in value against the U.S. dollar in the future. It is difficult to predict how market forces and PRC or U.S. government policy may impact the exchange rate between 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, 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 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 PRC Enterprise Income Tax 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 an FIE 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 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 reports included in this annual report have been prepared by our independent registered public accounting firm whose work may not be inspected fully by the Public Company Accounting Oversight Board and, as such, you may be deprived of the benefits of such inspection.

Our independent registered public accounting firm that issues the audit reports included in our annual reports filed with the U.S. 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 the PCAOB, is required by the laws of the United States to undergo regular inspections by the PCAOB to assess its compliance with the laws of the United States and professional standards.

Because we have substantial operations within the PRC and the PCAOB is currently unable to conduct inspections of the work of our independent registered public accounting firm as it relates to those operations without the approval of the Chinese authorities, our independent registered public accounting firm is not currently inspected fully by the PCAOB. This lack of PCAOB inspections in the PRC prevents the PCAOB from regularly evaluating our independent registered public accounting firm’s audits and its quality control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections.

On May 24, 2013, PCAOB announced that it had entered into a Memorandum of Understanding on Enforcement Cooperation with the China Securities Regulatory Commission, or the CSRC, and the Ministry of Finance which establishes a cooperative framework between the parties for the production and exchange of audit documents relevant to investigations in the United States and China. On inspection, it appears that the PCAOB continues to be in discussions with the Mainland China regulators to permit inspections of audit firms that are registered with PCAOB in relation to the audit of Chinese companies that trade on U.S. exchanges. On December 7, 2018, the SEC and the PCAOB issued a joint statement highlighting continued challenges faced by the U.S. regulators in their oversight of financial statement audits of U.S.-listed companies with significant operations in China. The joint statement reflects a heightened interest in this issue. However, it remains unclear what further actions the SEC and PCAOB will take and its impact on Chinese companies listed in the United States.

Inspections of other firms that the PCAOB has conducted outside the PRC have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. The inability of the PCAOB to conduct full inspections of auditors in the PRC makes it more difficult to evaluate the effectiveness of our independent registered public accounting firm’s audit procedures or quality control procedures as compared to auditors outside the PRC that are subject to PCAOB inspections. Investors may lose confidence in our reported financial information and procedures and the quality of our financial statements.

If the settlement reached between the SEC and the Big Four PRC-based accounting firms (including the Chinese affiliate of our independent registered public accounting firm), concerning the manner in which the SEC may seek access to audit working papers from audits in China of U.S.-listed companies, is not or cannot be performed in a manner acceptable to authorities in China and the United States, we could be unable to timely file future financial statements in compliance with the requirements of the Securities Exchange Act of 1934.

In late 2012, the SEC commenced administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley Act of 2002 against the mainland Chinese affiliates of the “Big Four” accounting firms (including the mainland Chinese affiliate of our independent registered public accounting firm). A first instance trial of the proceedings in July 2013 in the SEC’s internal administrative court resulted in an adverse judgment against the firms. The administrative law judge proposed penalties on the Chinese accounting firms including a temporary suspension of their right to practice before the SEC, although that proposed penalty did not take effect pending review by the Commissioners of the SEC. On February 6, 2015, before a review by the Commissioner had taken place, the Chinese accounting firms reached a settlement with the SEC whereby the proceedings were stayed. Under the settlement, the SEC accepted that future requests by the SEC for the production of documents would normally be made to the CSRC. The Chinese accounting firms would receive requests matching those under Section 106 of the Sarbanes-Oxley Act of 2002, and would be required to abide by a detailed set of procedures with respect to such requests, which in substance would require them to facilitate production via the CSRC. The CSRC for its part initiated a procedure whereby, under its supervision and subject to its approval, requested classes of documents held by the accounting firms could be sanitized of problematic and sensitive content so as to render them capable of being made available by the CSRC to U.S. regulators.

Under the terms of the settlement, the underlying proceeding against the four PRC-based accounting firms was deemed dismissed with prejudice at the end of four years starting from the settlement date which was on February 6, 2019. Despite the final ending of the proceedings, the presumption is that all parties will continue to apply the same procedures, under which the SEC will continue to make its requests for the production of documents to the CSRC, and the CSRC will normally process those requests applying the sanitization procedure. We cannot predict whether, in cases where the CSRC does not authorize production of requested documents to the SEC, the SEC will further challenge the four PRC-based accounting firms’ compliance with U.S. law. If additional challenges are imposed on the Chinese affiliates of the “big four” accounting firms, we could be unable to timely file future financial statements in compliance with the requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act.

In the event that the SEC restarts the administrative proceedings, depending upon the final outcome listed companies in the United States with major PRC operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in 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 these accounting firms may cause investor uncertainty regarding China-based, United States-listed companies and the market price of our ADSs may be adversely affected.

If the Chinese affiliate of 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 ordinary shares from the New York Stock Exchange, or NYSE, or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of our ADSs in the United States.

We are an emerging growth company within the meaning of the Securities Act and may take advantage of certain reduced reporting requirements.

We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from requirements applicable to other public companies that are not emerging growth companies, including, most significantly, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 for so long as we remain an emerging growth company. As a result, if we elect not to comply with such auditor attestation requirements, our investors may not have access to certain information they may deem important.

The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting standards. However, we have elected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted for public companies. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.

The trading price of our ADSs had ranged from US$5.00 to US$14.04 per ADS in 2019. The last reported trading price on April 9, 2020 was US$4.30 per ADS. The trading price of our ADSs is likely to remain 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 trading performances of these Chinese companies’ securities after their securities 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:

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

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

Future sales or issuances, or perceived future sales or issuances, of substantial amounts of our ordinary shares or ADSs could cause the price of the ADSs to decline significantly.

Sales of substantial amounts of our ordinary shares or ADSs, including those issued upon the exercise of outstanding options, in the public market, or the perception that these sales could occur, could adversely affect the price of our ADSs and could impair our ability to raise capital through the sale of additional shares. Such sales may also make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate. All our ordinary shares represented by ADSs were freely transferable by persons other than our directors, executive officers and other affiliates (as that term is defined in the Securities Act) without restriction or additional registration under the Securities Act. The remaining ordinary shares will be available for sale subject to volume and other restrictions as applicable under Rules 144 and 701 under the Securities Act.

In the future, we may also issue our securities in connection with investments or acquisitions. The amount of our ordinary shares issued in connection with an investment or acquisition could constitute a material portion of our then-outstanding shares of our common shares. Any issuance of additional securities in connection with investments or acquisitions may result in additional dilution to you.

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 depends 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, you must rely on price appreciation of our ADSs for return on your investment.

We currently intend to retain most, if not all, of our available funds and any future earnings to fund the development and growth of our business. As a result, we do not expect to pay any cash dividends in the foreseeable future. Therefore, you should not rely on an investment in our ADSs as a source for any future dividend income.

Our board of directors has discretion as to whether to distribute dividends, subject to certain requirements of Cayman Islands law. In addition, our shareholders may by ordinary resolution declare dividends, but no dividend may exceed the amount recommended by our directors. Under Cayman Islands law, a Cayman Islands company may pay dividends out of profits, retained earnings or share premium, provided that in no circumstances may dividends 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 flows, 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 going forward 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.

There can be no assurance that we were not a passive foreign investment company, or PFIC, for 2019 or that we will not be a PFIC for 2020 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. Based upon the nature of our business, the composition of our income and assets and the value of our assets, including goodwill (which is based on the market price of our ADSs), we believe we were not a PFIC for 2019. However, 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 were not, or will not be, a PFIC for any taxable year.

If we were a PFIC for 2019 or any other 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 “Item 10. Additional Information—E. Taxation—U.S. Federal Income Tax Consequences—Passive Foreign Investment Company Rules.”

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

We adopted the second amended and restated memorandum and articles of association. Our second amended and restated 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 with limited liability incorporated under the laws of the Cayman Islands. Our corporate affairs are governed by our second amended and restated 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.

Shareholders of Cayman Islands exempted companies with limited liability, 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 second amended and restated memorandum and 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.

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

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

As a result of all of the above, our 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.

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

We are a Cayman Islands exempted company with limited liability 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.

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

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

We are required to file an annual report on Form 20-F within four months of the end of each fiscal year. In addition, we intend to publish our results on a quarterly basis through press releases, distributed pursuant to the rules and regulations of the 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.

As an exempted company incorporated in the Cayman Islands with limited liability, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from the 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 exempted company with limited liability 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 (not being directors) of Cayman Islands exempted companies with limited liability 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 second amended and restated memorandum and 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 second amended and restated memorandum and articles of association that became effective immediately prior to the initial public offering, the minimum notice period required for convening a general meeting is ten calendar 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.

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:

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.

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

As a public company, we 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, 2019, 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.

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. In March 2017, we incorporated Puxin Limited under the laws of the Cayman Islands. 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. 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.

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. Since our inception, we have acquired 64 schools in China through equity or assets purchases. The total number of our learning centers increased from 99 as of December 31, 2015 to 386 as of December 31, 2018. As of December 31, 2019, the number of our learning centers was 446, consisting of 334 K-12 learning centers and 112 study-abroad learning centers.

Our principal executive offices are located at Floor 16, Chuangfu Mansion, No. 18 Danling Street, Haidian District, Beijing, 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 Walkers Corporate Limited, Cayman Corporate Centre, 27 Hospital Road, George Town, Grand Cayman KY1-9008, Cayman Islands. 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 annual report.

We are a successful consolidator in 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. Since our inception, we had acquired 64 schools and built a nationwide network of 446 learning centers across 35 cities in China as of December 31, 2019. Our total student enrollments increased from 1,275,723 in 2017 to 1,846,349 in 2018 and further increased to 2,872,025 in 2019.

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. We strive to further expand the breadth of our service offerings. In 2019, we started to offer full-time tutoring to high school students who are preparing for university entrance exams and art college admission exams in China.

Since 2019, we have implemented an online- merge-offline strategy, or OMO strategy, through which we leverage our nationwide network of learning centers to improve students’ learning experience and enhance monetization through online platforms to complement the classroom-based K-12 tutoring services. In November 2018, our Puxin Online School started to offer online courses in a large-class setting targeting students in cities of tier-3 and below in China, which enables us to achieve further market penetration and capture more opportunities in those cities. To complement our classroom-based tutoring courses, we have started to offer online tutoring classes on weekdays to students of K-12 group class and personalized tutoring courses since January 2019, which have increased the time that our students spent with us and thus enhance their stickiness. We offer Puxin Dual-Teach Classrooms which are live streaming classes where a teacher from one of our learning center partners with another teacher located in other learning centers to jointly conduct online lectures to students. In order to leverage our localized course contents and teaching staff, we plan to build learning centers in suburban areas or satellite cities within a reasonable proximity to the cities where we have already operated learning centers and offer Puxin Dual-Teacher Classrooms at these locations. We believe this initiative will enable us to further expand our coverage and penetration in local markets.

Our K-12 tutoring services provide result-oriented educational services in various forms, such as classroom-based after-school tutoring, full-time tutoring for preparation of university entrance exams and art college admission exams, as well as online courses in a large-class setting, to help students enhance their academic results. We provide a study plan tailored to fit a student’s aptitude, grade level, past academic performance, future academic goals, and other pertinent factors. Our curricula cover all K-12 academic subjects, including mathematics, English, Chinese, physics, chemistry, biology, politics science, geography and history, as well as specialized artistic skill trainings for art college admission exams in China. As of December 31, 2019, we had 334 K-12 learning centers, including 309 learning centers for after-school tutoring and 25 learning centers for full-time tutoring. We launched Puxin Online School in November 2018 to offer online K-12 tutoring courses in a large-class setting. For more details about Puxin Online School, see “— Online Platforms — Puxin Online School.”

We offer after-school tutoring services in group class settings and through personalized sessions.

Group class courses are our main form of service offering in terms of the number of student enrollments. We typically enroll a maximum of 50 students for group classes. Group class courses typically range from two to six course hours per week during spring and fall school semesters, and 12 to 16 course hours per week during summer and winter breaks. We charge tuition fees for K-12 group class courses based on the type of the subject, level of sophistication of the course, geographical region and customer segmentation. The average course fee for our regular group class courses of each school range from RMB20 to RMB120 per hour depending on the type of the subject, level of sophistication of the course, customer segmentation and geographical region. We generally allow students to withdraw from courses and refund tuition for undelivered classes.

As of December 31, 2019, we offered group classes at 241 out of our 334 K-12 learning centers. We had 2,528,417 student enrollments in our K-12 group class courses in 2019. For schools operating under our management for over 12 months, the retention rate of our K-12 group class courses reached 72.1% and the K-12 group class utilization rate reached 78.2% in 2019.

For each new student, we evaluate the student’s past and current academic performance and future academic goals, and provide course recommendations based on subjects, grade level, as well as timing and budget, to meet his or her learning need. Many of our courses for the same subject and grade level are offered at different levels of pace and sophistication. For example, we offer K-12 mathematics tutoring at three different levels, including: (1) Standard Courses, which are taught at a pace similar or slightly faster than formal public school curriculum with a focus on solidifying students’ understanding of the fundamental concepts; (2) Advanced Courses, which are taught at a pace significantly faster than formal public school curriculum and include certain contents beyond school curriculum, such as curriculum mixing math competition and formal school materials; and (3) Elite Courses, which are our most advanced courses with a curriculum designed for exceptional students focusing on mathematics competitions. Students are required to pass admission tests to enroll in advanced courses and elite courses. We periodically assess our students’ progress, and based on the results of such assessment, reassign students to different classes on an as-needed basis to help them progress to the best of their ability.

We strive to provide a supportive learning environment to our students by efficient and responsive communications. Our teachers and teaching assistants keep track of each student’s performance and progress and regularly communicate with our students and their parents. Most of our group classes are assigned a teaching assistant who is in close contact with the students and parents to provide comprehensive supporting services, such as class scheduling, homework assignments and collection of feedback on teaching quality. We also seek to involve the parents of our students in each stage of the tutoring process. During the tutoring sessions and throughout our service period, we periodically communicate with the parents, encourage them to provide feedback and suggestions on our courses and update them on the progress that their children have achieved in our courses.

In January 2019, we started to offer online tutoring classes on weekdays to students as an addition to their regular classes in classroom. Our weekday online classes focus on after-class practices, Q&As and error corrections to help students digest and master the course contents which can enhance their learning experience with us. We usually add one online sessions per week for students at grades three to nine. Our online classes have increased the time that our students spent with us and thus enhance students’ stickiness.

In addition to group classes, we also offer personalized K-12 tutoring courses to adapt to each student’s learning pace, pattern and approach. Our personalized tutoring courses typically consist of no more than six students per session to ensure each student can improve their academic performance by, among other things, addressing weaknesses in particular subjects or topics, strengthening test-taking skills and fostering studying habits and incentives. Our students enroll in a personalized tutoring course two to three times per week during each spring and fall school semester and four to five times per week during each winter and summer break, with each class lasting for approximately two hours. Course fees for our regular personalized tutoring courses typically range from RMB150 to RMB600 per course hour, depending on the level of sophistication of the course and geographical region. We generally allow students to withdraw from courses at any time and refund tuition for undelivered classes.

As of December 31, 2019, we offered personalized tutoring services at 195 out of 334 K-12 learning centers, mainly in tier-1 and tier-2 cities in China. In 2019, we had 55,518 student enrollments in our K-12 personalized tutoring classes.

Our personalized tutoring services generally comprise of three main components: (i) assessment and study plan formation, (ii) personalized tutoring and (iii) monitoring and tracking of an individual student’s progress. For each new student, we commence with a consultation followed by a comprehensive assessment designed to evaluate the student’s existing academic knowledge, test-taking skills and learning patterns. Our professional consultants and teachers use the results of the assessment to analyze each student’s academic strengths and weaknesses, and craft customized study plan based on each student’s aptitude and learning needs. Based on the customized study plans, our teachers will provide individualized sessions to the students to enhance their understanding of the subjects and practice test-taking skills. We have a designated team which continuously monitors and tracks an individual student’s progress to ensure personalized tutoring courses are tailored to the pace and learning pattern of each student. We also offer online tutoring classes on weekdays to students of personalized tutoring courses.

To further expand the breadth of our service offerings, in April 2019, we started to offer full-time tutoring to high school students who are preparing for university entrance exams and art college admission exams in China. We provide boarding services and create a closed-door environment for students. Our full-time tutoring programs usually last for six to nine months and we charge students tuition and boarding fees which typically range from RMB40,000 to RMB60,000 per student. As of December 31, 2019, we offered full-time tutoring services at 25 learning centers in Beijing, Xi’an, Jinan and Guangzhou. In 2019, we had 22,852 student enrollments in our K-12 full-time tutoring courses.

We also offer certain extra-curricular courses to students, such as painting, calligraphy, music and science. Our courses are designed to inspire students’ creativity, enhancing their critical thinking and problem-solving abilities and enriching their life experience.

Our study-abroad tutoring services are designed to help students prepare for admission tests and applications for high schools, universities and graduate programs primarily in English-speaking countries. We offer study-abroad test preparation courses and study-abroad consulting services through our learning centers located in 27 cities. In addition to our directly operated learning centers, we also have franchised schools operated under the brand of Global Education.

We offer study-abroad test preparation courses to students taking language and entrance exams used by educational institutions in the United States and Commonwealth countries, such as the United Kingdom, Australia and New Zealand. We offer test preparation courses for major overseas exams, including IELTS, SSAT, SAT, TOEFL, AP, ACT, A-level, GRE and GMAT.

Our test preparation courses focus on quality instruction and test-taking techniques designed to help students achieve high scores on the admissions and assessment tests. Our experienced teachers generally teach in small and medium-sized classes ranging from one to 26 students. Course fees for our test preparation courses typically range from RMB45 to RMB1,500 per course hour, depending on the size of class, level of sophistication of the course and geographical region. In 2019, we had 67,230 student enrollments in our study-abroad test preparation courses.

IELTS preparation courses. Our IELTS preparation courses target students who choose to pursue undergraduate and graduate degrees in countries that predominately refer to IELTS scores for school and university admissions, such as the United Kingdom, Australia and New Zealand. We provide IELTS courses in various forms, such as large classroom lectures, small seminar, one-on-one tutoring, and online tutoring. Our IELTS courses generally range from 10 to 333 course hours. Course fees for our regular IELTS preparation courses typically range from RMB45 to RMB900 per course hour.

TOEFL / SAT / SSAT preparation courses. Our TOEFL, SAT and SSAT preparation courses are targeting middle school, high school and college students who desire to pursue education in the United States or Canada. We offer a range of basic and advanced TOEFL courses, and courses for the SAT and SSAT subject tests. Our TOEFL, SAT and SSAT preparation courses generally range from 12 to 225 course hours. Course fees for our regular TOEFL, SAT and SSAT preparation courses typically range from RMB76 to RMB1,500 per course hour.

Other test preparation courses. We offer test preparation courses for students who take subject-based AP and A-Level exams to supplement their application for universities in the United States and United Kingdom. We also offer preparation courses for GRE and GMAT for students who wish to continue graduate studies in the United States or Canada.

We provide quality guidance for students and working adults who intend to study in United States or Commonwealth countries. In 2019, we had 4,944 student enrollments in our study-abroad consulting services.

We provide one-on-one customized comprehensive one-stop plan for each student, including:

Fees for our study-abroad consulting services vary among our learning centers throughout China as well as among service packages, depending on, among other things, local market conditions, type and length of the service, and consultant costs. Consistent with market practices, our service fees, excluding a small portion to cover our costs incurred, are generally refunded if a student fails to gain any admission or obtain the relevant visa.

In addition to classroom-based educational services and products, we also provide a variety of in-house developed online learning platforms to accommodate our students’ individual learning habits and objectives.

We launched Puxin Online School in November 2018 to offer online courses in a large-class setting for students from grades three through grade 12 in cities of tier-3 and below in China. Our courses are offered in large-class format, which amplifies the benefits of online education and allows us to rapidly expand our student base into the lower tier cities where we have not yet established presence. In 2019, Puxin Online School had a total student enrollments of 193,064 and its regular tuition fees typically ranged from RMB299 to RMB2,400 per course. Puxin Online School also offers promotional courses to attract new students and at the same time attract existing students to subscribe for more subjects. We generated net revenues of RMB16.5 million (US$2.4 million) from the online courses offered by Puxin Online School in 2019.

We have a comprehensive set of course offerings for K-12 courses, covering core K-12 academic subjects, including mathematics, English, Chinese, physics, chemistry and political science. We develop substantially all of our course contents in-house to provide high quality and effective online education experience for students. Our lecturers use our standardized curriculum for each course to ensure a seamless and effective learning experience for students of different grades and background.

We have dedicated teaching staff for the online courses offered by Puxin Online School, consisting of high quality lecturers and professional tutors. We assign one lecturer and one tutor to each class. The lecturer teaches classes and tutor acts as the key contact person for after-class services to students, including Q&A sessions and homework review. As of December 31, 2019, we had 27 lecturers and 87 tutors for Puxin Online School.

In addition to Puxin Online School, we offer a variety of cloud-based products and services for K-12 tutoring and study-abroad tutoring services.

Our Puxin Teacher & Student App is a one-stop mobile platform among students, teachers and parents.

Students can view lecture videos online anytime or download for offline viewing based on their own schedules or studying paces. In addition, Puxin Superior Classes make it convenient for students to communicate with teachers. Students can view assignments online, raise questions or obtain teachers’ review on their coursework. For teachers, our Puxin Teacher & Student App allows them to bring the classroom onto iOS and Android devices. Teachers can use our mobile application to upload their lecture videos and course materials, allocate and collect assignments from students, organize group discussions, provide feedback and track students’ progress.

In addition, our students’ parents can enroll in new courses, track students’ study progress and make payments through Puxin Teacher & Student App, which allows us to allocate our teaching resources in advance according to the data collected online. We update and diversify the functions of our Puxin Teacher & Student App to support our services to students and their parents.

We deliver our educational services to students through an extensive network of directly operated learning centers. Our physical network of learning centers comprises K-12 learning centers, study-abroad test preparation learning centers and study-abroad learning centers. As of December 31, 2019, we had 446 learning centers in 35 cities in China, including 334 K-12 learning centers and 112 study-abroad learning centers.

We provide K-12 tutoring services through directly operated learning centers. Each of our directly operated learning centers is administered by a private school or a corporation. Each school or corporation is managed by a principal, who is responsible for daily operations, sales and marketing, academic support and customer services for all the learning centers of the private school or the corporation.

Most of our learning centers have classroom facilities to serve students who attend our courses. Our K-12 after-school learning centers are generally located near elementary schools, middle schools or residential areas. Our study-abroad test preparation learning centers are generally located near colleges and universities or testing centers. We lease substantially all of our facilities, office and classroom spaces for each learning centers.

For our study-abroad tutoring services, in addition to our directly operated learning centers, we have franchised schools which are franchisees of Global Education. As of December 31, 2019, we had 74 franchised learning centers operated by the franchisees of Global Education. We charge franchise fees every year ranging from RMB120,000 to RMB350,000 as consideration for the right we granted to the franchisees and do not share any revenue that franchised schools generate. After all of the existing franchise agreements expire or are terminated, we do not plan to renew or grant any rights to third parties to conduct the business of educational services under any of our brands or trademarks.

We have implemented centralized and standardized management throughout our school network to consistently manage key aspects of their operations by applying our Puxin Business System, or PBS. PBS is a standard, common collection of business processes and process improvement methodologies. Designed by our core management team, PBS has reflected our management’s accumulated experience in the education industry and incorporated the best practices in the operations and management of our schools.

PBS is the primary methodology that we apply throughout the entire operating process, covering strategy deployment, budget planning and management, internal reporting and communication, execution control, and performance review and management. It covers as many as over 3,000 operation and management processes, including, among others, organizational structure, financial management, operating manuals, product development, student recruitment, teacher management, marketing, human resources and knowledge management. PBS sets forth task lists for each operation and management process and contains more than 10,000 tasks that our schools are required to perform during day-to-day school operations. With PBS, our management can monitor the management and operating performance of each school on a timely manner and ensure our group-wide strategies and principles are implemented effectively.

Our PBS is supported and constantly updated by our knowledge management system. We encourage our management and employees to seek continuous improvement in operations and share their firsthand experience within our group. Our knowledge management system at the headquarters collects experience and knowledge submitted in various forms, including weekly, monthly and quarterly work reports, local market surveys, study and research on specific topics, as well as audio and video materials. The dedicated knowledge management staff at our headquarters and the head of each business line periodically review the information submitted by our schools and identify the good practices which will be incorporated into our PBS and followed by our schools during their operations. Our PBS continually incorporates the best practices and eliminates outdated or inefficient practices throughout our schools, which makes it an ever-evolving system containing industry-leading practices.

We have grown our business through strategic acquisitions of businesses. Since our inception, we have acquired 64 schools in China through equity or assets purchases. We have strong capabilities of and rich experiences in successful acquisitions and integration of schools. Through our acquisitions, we have realized significant economies of scale by increasing student enrollments, enlarging our team of teachers and consultants and expanding our geographic reach. Leveraging our comprehensive product and service offerings, we are able to achieve synergies by cross-selling across business lines, sharing facilities and resources and streamlining management and administrative functions.

We have adopted a systematic approach towards acquisitions by applying our four-stage acquisition target selection funnel process.

Our acquisition team is experienced in designing acquisition transaction structure. Leveraging our effective centralized management model and our management’s strong execution capability, we are able to efficiently complete the acquisitions and effectively integrate the operations and management of the acquired schools.

As early as the pre-acquisition due diligence of a target school, our acquisition project team identifies key operating indicators to be improved and proposes growth plan for the target school. We usually assign the acquired school a principal who has extensive experience in operating other schools in our group. Before starting his or her position, the principal will visit the school to understand the operational status and conduct his or her comprehensive research covering the local market landscape, operations of competitors, as well as economic and demographic conditions of the city where the acquired school is located. All of these lay a solid foundation for effective post-acquisition integration.

We implement our PBS at each acquired school to effectively integrate it into our management system and improve its operating performance. Our senior management conduct on-site training to the acquired schools’ management team and teachers to familiarize them with our culture and operation management system. Based on the methodologies of PBS, we formulate a detailed 100-day execution plan and set forth 21 post-acquisition milestones for each acquired school covering every key operational aspects:

During the entire integration process, our dedicated acquisition team at the headquarters oversees the executions at the acquired schools and provides guidance to the principal. The principal is required to submit daily, weekly and monthly reports about the day-to-day operations of the acquired school to our headquarters for at least three months.

Our systematic integration approach underpins our robust growth achieved by strategic acquisitions and organic growth. Excluding net revenues generated by Puxin Online School, out of our total net revenues of RMB1,181.9 million from K-12 tutoring services in 2018, RMB12.8 million net revenues were contributed by the schools acquired in 2018 and RMB1,169.1 million net revenues were contributed by the existing schools; out of our total net revenues of RMB1,927.4 million in 2019, RMB468.6 million net revenues were contributed by the schools acquired in 2019 and RMB1,458.8 million net revenues were contributed by the existing schools.

We emphasize the quality of our course materials which is crucial to effectiveness of our teaching methodologies. Most of our K-12 tutoring curricula and course materials are developed and updated at the course research and development centers in Beijing and Taiyuan with a focus on the universal academic and examination requirements in the PRC education system. Our schools can adopt these curricula and course materials with modifications to satisfy local requirements and demands. We encourage all teachers and consultants to actively participate in our course materials development activities and contribute their talents and experiences. In addition, we had a dedicated team of 529 as of December 31, 2019, which is responsible for developing, updating and improving our curricula and course materials. All the team members have solid education background, extensive teaching experience and research achievements in the field of a certain subject.

We have devoted significant resources to course material development to ensure that our course offerings are up-to-date, engaging and effective. Our course materials meet the regulatory requirements that the contents of course materials are aligned and consistent with those being taught to the students at schools and are not beyond study scope of the student’s class year. We review and make reference to recent teaching and testing materials of leading public schools’ curriculum. To address different educational requirements and needs of our students at each grade level, we have also developed curricula and course materials tailored for classes of different difficulty levels based on students’ learning ability as well as their strengths and weaknesses.

We update our K-12 tutoring and study-abroad tutoring course materials periodically to keep up with the ongoing changes in the standard K-12 curriculum and admission tests for overseas countries. We also look into each year’s examination papers of Zhongkao and Gaokao and IELTS, TOEFL, SAT and SSAT to update our practice question database and course materials. Our updated course materials are reviewed by an expert group consisting of teachers of public schools, teaching researchers and our own teachers who have significant teaching experience in the subject. At the end of each course’s term, we evaluate, update, and improve course materials based upon feedback from teachers, students and parents as well as student performance in their examinations.

Currently, we offer children’s English courses to children in kindergarten through grade six. Our course materials for the children’s English are largely based on materials originally published by international education content providers and publishers.

Our teachers are critical to maintain the quality of our services and to promote our brand and reputation. We have a team of dedicated and highly qualified teachers with enthusiasm for education, whom we believe are essential to maintaining our consistent and high teaching quality. This commitment is reflected in our highly selective teacher hiring process, our emphasis on continued teacher training and rigorous evaluation, our adoption of a performance-based compensation plan, and our offering of a promising career path.

We recruit K-12 teachers based on their teaching experience, learning ability and commitment to working with us in the long term. We hire teachers for the group classes and the personalized services separately. We routinely recruit teachers graduated from universities in China and experienced teachers with a solid track record and strong reputation from local public schools. We look for candidates who have a strong sense of purpose and possess certain level of sales skills. We had 3,207, 3,154 and 3,934 full-time K-12 teachers as of December 31, 2017, 2018 and 2019, respectively.

We hire highly qualified teachers with strong English and teaching skills for our study-abroad test preparation courses. Our study-abroad test preparation teachers are generally specialized in teaching particular courses, such as reading, writing, speaking or listening for IELTS or TOEFL. We had 976, 1,224 and 1,085 full-time study-abroad test preparation teachers as of December 31, 2017, 2018 and 2019, respectively.

We hire consultants who are familiar with comprehensive study-abroad application procedures for our study-abroad consulting services. We had 205, 214 and 173 full-time consultants as of December 31, 2017 and 2018 and 2019, respectively. The decreases in full-time study-abroad test preparation teachers and consultants in 2019 was primarily because we closed some small-size learning centers to improve the overall operational efficiency of our study-abroad learning centers.

The quality of our educational services is critical to our business and our brand and is key to our continued growth and success. We have developed our “Nine Steps” methodology, which standardizes our teachers’ teaching activities to implement the best practices across our learning centers to ensure consistent teaching quality. We require our teachers to carry out nine steps in their teaching activities, including (i) class preparation, (ii) before-class assessment, (iii) in-class orientation, (iv) in-class lectures, (v) in-class recaps, (vi) in-class quizzes, (vii) after-class review, (viii) checking homework, and (ix) collecting feedback, and set forth standards for each step. The Nine Steps methodology enables our teachers to obtain critical information about students’ learning pattern, aptitude and performance which help them refine their course offering. It also stimulates our students to achieve academic excellence.

Each of our newly hired full-time teachers and consultants is required to undergo rigorous training and must continue to participate in periodic training programs that focus on education content, teaching or consulting skills and techniques as well as our corporate culture and values. Our teachers’ retention, compensation and promotion are to a large extent results oriented. We regularly evaluate the classroom performance and teaching results of our teachers and consultants. Our evaluation takes into consideration various factors, including (i) the K-12 group class utilization rate, (ii) the K-12 group class student retention rate, and (iii) the number of students who enroll additional courses.

We offer our teachers and consultants competitive and performance-based compensation packages and provide them with prospective career development within the company. We have established a remuneration system with clear and detailed performance indicators to evaluate the performance of our teachers, consultants and other staff, which can motivate our employees in a scientific, reasonable and effective manner. We have launched systematic career advancement programs, including “Puxin Star” for top teachers and junior management personnel, “Puxin Talents” for mid-level management and “Puxin Leadership” for senior management to build up a talents reserve for our long-term growth. We provide the participants in these programs with career advice, advanced training and team building activities with a purpose to broadening their access to growth and development opportunities.

We offer comprehensive K-12 tutoring services to students aging from three to 18. Our study-abroad tutoring services are designed to help middle school students, high school students and college students prepare for admission tests and applications for overseas study. Our full K-12 curriculum allows us to maximize the lifetime value of these enrollments by satisfying the entire breadth of our students’ educational needs. In the meantime, with lowering age of students studying abroad, we are able to cross-sell our study-abroad tutoring services to K-12 student base, and vice versa, extending our presence in students’ academic careers.

We focus on retaining existing students who have enrolled in our courses, as well as attracting new students. We recruit new students through both online and offline channels, such as distributing leaflets, organizing seminars and advertising online. We believe that the greatest contributor to our success in student recruitment has been word-of-mouth referrals by our students and their parents who share their learning experiences at our learning centers with others. Students in our learning centers have significantly improved their results on Zhongkao and Gaokao practice exams, SAT, TOEFL or IELTS, which we believe has enhanced our reputation and increased our word-of-mouth referrals in the markets that we participate in.

In addition to courses we offer at our regular prices, we also offer promotional K-12 tutoring programs to attract new students and at the same time attract existing students to subscribe for more subjects, 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 discount of our regular tuition fees. In 2019, 35.6% of students chose to enroll in our regular courses after attending the promotional programs.

We have established “Puxin” as a well-recognized brand among industry participants which has positioned us a leading player with successful integration experience in China’s after-school education sector.

For our acquired K-12 tutoring schools, we generally continue to use their original brand names to assure stable operations of these schools in the local markets. Once these acquired schools are fully integrated into our group, we operate them under a co-brand with our own “Puxin” brand, such as “Puxin-Lingxian.” For our study-abroad tutoring services, we operate under the existing brands of the acquired entities, including Global Education, and manage their brand names as sub-brands within our group.

We use a variety of marketing and recruiting methods to attract students and increase student enrollments of our learning centers. We recruit our students primarily through word-of-mouth referrals. Our learning centers generally enjoy high local reputation which has greatly facilitated our student recruitment. Moreover, we engage in a range of marketing activities to enhance our brand recognition among prospective students and their parents.

We place online and mobile advertisements mainly on major search engines in China. We also cooperate with innovative media platforms and place advertisements or advertorials on education-focused platforms and mobile apps. Furthermore, we have established online WeChat groups with existing and prospective students and their parents. We regularly place our advertisements and share education-related information in our WeChat groups to keep close interactions with potential students and their parents.

In addition to the centralized marketing team working at our headquarters, we also have a sales force in each of our learning centers in different cities. We place outdoor display advertisements or distribute leaflets at public transportation terminals, in schools and in residential areas in selected cities. We distribute informational brochures, posters and flyers to students and parents at locations close to schools and residential areas. We also conduct extensive free information sessions to introduce our programs to our target markets. We regularly conduct information sessions, seminars and workshops to provide prospective students and their parents with opportunities to learn about the products and services that we offer. We also give calls to the parents of our existing students to inform them of our class schedule and relevant promotions.

The private education market in China is highly fragmented and competitive, and we expect competition in this sector to persist and intensify. Our major competitors in K-12 tutoring services include TAL, New Oriental and certain local players. Our major competitors in study-abroad tutoring services include New Oriental. We face competition in each type of services we offer, including in online and offline forms, and in each geographic market in which we operate.

We believe that the principal competitive factors in our markets include the following:

Some of our current or future competitors may have longer operating histories, better brand recognition, or greater financial, technical or marketing resources than we do. For a discussion of risks related to competition, see “Item 3. Key Information—D. Risk Factors—Risk Factors Related to Our Business and Industry—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.”

Our technology is crucial to our ability to support our course delivery, business development, service upgrade, study support, back-office operations and expansion. We currently use a combination of commercially available software and hardware and proprietary technology. To closely cope with evolving market conditions and student needs, we also rely on our in-house research and development for new technology initiatives. We promptly enroll our acquired schools onto our technology platform, which effectively facilitates the post-acquisition integration of such schools.

We have established an ERP system, which is an integrated system combining various management functions, including (i) data management, (ii) student enrollment management, (iii) teaching affairs administration, (iv) financial and accounting management, (v) data mining and analysis, and (v) data backup and security.

As of December 31, 2019, we had an information technology team of 223 engineers with experience and expertise in the fields of computer sciences and software development. We may further expand this team to meet the requirements of our future research and development.

As of December 31, 2019, we had registered 324 trademarks which bolster our strong brand recognition in the PRC, among which, 181 trademarks held by Global Education, 128 trademarks held by Puxin and 15 trademarks held by ZMN Education. As of December 31, 2019, we also held 194 domain names relating to our business, including our www.pxjy.com website, with the Internet Corporation for Assigned Names and Numbers and China Internet Network Information Center, four registered works of art copyrights, 36 unregistered works of art copyrights and 90 registered software copyrights in the PRC. We own copyrights to the course contents we developed in-house.

We rely on a combination of copyright and trademark law, trade secret protection and confidentiality agreements with our employees to protect our intellectual property rights. In addition, under the employment agreements we enter into with our employees, they acknowledge that the intellectual property made by them in connection with their employment with us are our property. We also regularly monitor any infringement or misappropriation of our intellectual property rights.

Global Education maintains group personal accident insurance and supplemental group personal accident insurance for students attending boarding schools, and ZMN Education maintains personal accident insurance for students. In addition, three Puxin-branded learning centers maintain public liability insurance or campus liability insurance for students. We do not maintain any other liability insurance or property insurance policies covering students, equipment and facilities for injuries, death or losses due to fire, earthquake, flood or any other disaster. Consistent with customary industry practice in China, we do not maintain business interruption insurance, nor do we maintain key-man life insurance. We maintain medical insurance for our management in China. Uninsured injury or death to our staff, or damage to any of our equipment or buildings could have a material adverse effect on our results of operations. See “Item 3. Key Information—D. Risk Factors—Risk Factors Related to Our Business and Industry—We have limited liability insurance coverage and do not carry business disruption insurance.”

We operate our business in China under a legal regime created and made by PRC lawmakers consisting of the National People’s Congress, or the NPC, which is the country’s highest legislative body, the State Council, which is the highest authority of the executive branch of the PRC central government, and several ministries and agencies under its authority, including the Ministry of Education, or the MOE, the Ministry of Industry and Information Technology, or the MIIT, the State Administration for Market Regulation (formerly known as the State Administration for Industry and Commerce), or the SAIC, the Ministry of Civil Affairs, or the MCA, and their respective local offices. This section summarizes the principal PRC regulations related to our business.

The Foreign Investment Industries Guidance Catalog (2017 revision), or the 2017 Foreign Investment Catalog, which was promulgated by the National Development and Reform Commission, or the NDRC, and the Ministry of Commerce, or the MOFCOM, amended on June 28, 2017, and effective on July 28, 2017, classifies industries into three categories with regard to foreign investment: (1) “encouraged”, (2) “restricted”, and (3)“prohibited”. The latter two categories are included in a negative list, which was first introduced into the 2017 Foreign Investment Catalog and specified the restrictive measures for the entry of foreign investment. On June 28, 2018, the NDRC and the MOFCOM jointly issued the List of Special Management Measures for the Market Entry of Foreign Investment (2018), or the 2018 Negative List, which became effective on July 28, 2018 and replaced the negative list attached to the 2017 Foreign Investment Catalog. On June 30, 2019, the NDRC and the MOFCOM jointly issued the List of Special Management Measures for the Market Entry of Foreign Investment (2019), or the 2019 Negative List, which became effective and replaced the 2018 Negative List on July 30, 2019. On June 30, 2019, the NDRC and the MOFCOM also jointly issued the Encouraged Foreign Investment Industry Catalog (2019), or the 2019 Encouraged Catalog, which became effective and replaced the “encouraged” category under the 2017 Foreign Investment Catalog on July 30, 2019. Pursuant to the 2019 Encouraged Catalog and the 2019 Negative List, (1) non-academic occupational skill training education is categorized as an encouraged industry for foreign investors, (2) preschool education, high school education and higher education are restricted industries for foreign investors, who foreign investors are only allowed to invest in preschool education, high school education and higher education in cooperative ways with the domestic party playing a dominant role in the cooperation, and (3) compulsory education, i.e. elementary school and middle school education, is a prohibited industry for foreign investors. Other education-related businesses that are not encouraged, restricted or prohibited fall into the allowed industry for foreign investors.

Besides, Sino-foreign cooperation in operating schools is specifically governed by the Regulation on Operating Sino-foreign Schools of the PRC, which was promulgated by the State Council on March 1, 2003, became effective on September 1, 2003 and was last amended on March 2, 2019. Pursuant to this regulation, any foreign entity that invests in the education business in China through Sino-foreign cooperation must be an education institution with relevant qualifications and experience in providing high-quality educational services outside China. Any Sino-foreign cooperative school and cooperative education program shall be approved by the relevant PRC authorities and obtain a permit for Sino-foreign cooperation in operating schools.

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

The provision of value-added telecommunications services falls in the restricted category under the 2019 Negative List and the percentage of foreign ownership cannot exceed 50% (except for e-commerce, domestic multi-party communications, store-and-forward and call center).

The Regulations on Administration of Foreign-Invested Telecommunications Enterprises, or the FITE Regulations, which took effect on January 1, 2002 and last amended on February 6, 2016, are the key regulations for foreign direct investment in telecommunications companies in China. The FITE Regulations stipulate that the foreign investor of a telecommunications enterprise is prohibited from holding more than 50% of the equity interest in a foreign-invested enterprise that provides value-added telecommunications services. In addition, the main foreign investor who invests in a value-added telecommunications enterprise in China must demonstrate a positive track record and experience in providing such services. Moreover, foreign investors that meet these qualification requirements that intend to invest in or establish a value-added telecommunications enterprise operating the value-added telecommunications business must obtain approvals from the Ministry of Industry and Information Technology, or the MIIT and MOFCOM, or their authorized local counterparts, which retain considerable discretion in granting approvals.

On July 13, 2006, the MIIT, issued the Circular on Strengthening the Administration of Foreign Investment in Value-added Telecommunications Services, or the MIIT Circular 2006, which requires that (i) foreign investors can only operate a telecommunications business in China through establishing a telecommunications enterprise with a valid telecommunications business operation license; (ii) domestic license holders are prohibited from leasing, transferring or selling telecommunications business operation licenses to foreign investors in any form, or providing any resource, sites or facilities to foreign investors to facilitate the unlicensed operation of telecommunications business in China; (iii) value-added telecommunications services providers or their shareholders must directly own the domain names and registered trademarks they use in their daily operations; (iv) each value-added telecommunications services provider must have the necessary facilities for its approved business operations and maintain such facilities in the geographic regions covered by its license; and (v) all value-added telecommunications services providers should improve network and information security, enact relevant information safety administration regulations and set up emergency plans to ensure network and information safety. The provincial communications administration bureaus, as local authorities in charge of regulating telecommunications services, may revoke the value-added telecommunications business operation licenses of those who fail to comply with the above requirements or fail to rectify such noncompliance within specified time limits. Due to the lack of any additional interpretation from the regulatory authorities, it remains unclear what impact MIIT Circular 2006 will have on us or the other PRC internet companies with similar corporate structures and contractual arrangements.

As of December 31, 2019, our offline tutoring business falls into the category of allowed industry for foreign investment, while our online tutoring business falls into the category of restricted industry for foreign investment.

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

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

The Law on the Promotion of Private Education of the PRC became effective on September 1, 2003 and was last amended on December 29, 2018, and the Implementation Rules for the Law on the Promotion of Private Education of the PRC became effective on April 1, 2004. Under these law and rules, “private schools” are defined as schools established by social organizations or individuals using non-government funds. Private schools that provide diploma- and degree-oriented education, preschool education, self-taught higher education examination and other categories of educational services shall be subject to approval by the education authorities at or above the county level, while private schools engaging in occupational qualification training and occupational skill training shall be subject to approvals from the authorities in charge of labor and social welfare at or above the county level. A duly approved private school will be granted a private school operation permit, and shall be registered with the MCA or its local counterparts as a private non-enterprise entity and obtain a private non-enterprise entity certificate.

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

On December 29, 2018, 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 came into force on December 29, 2018.

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

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

Amended Draft of the Implementation Rules for the Law on the Promotion of Private Education of the PRC

On August 10, 2018, the Ministry of Justice issued a revised draft of the Implementation Rules for the Law on the Promotion of Private Education of the PRC, or the Draft Implementation Rules, and an explanatory note for public review and comment till September 10, 2018, which specifies the requirements for the for-profit and non-profit private schools under the Amended Private Education Law. As of the date of this annual report, the Draft Implementation Rules was still pending for final approval and was not in effect.

According to the Draft Implementation Rules, certain key requirements for the private training institutions include:

For a detailed discussion on how the Draft Implementation Rules will affect our training institutions, see “Item 3. Key Information—D. Risk Factors—Risk Factors Related to Our Business and Industry—New legislation or changes in the PRC regulatory requirements regarding private education may affect our business operations and prospects.”

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

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

On December 30, 2016, the MOE, the MCA, the SAIC, the Ministry of Human Resources and Social Welfare and the State Commission Office of Public Sectors Reform jointly issued the Implementation Regulations for Classification Registration of Private Schools to reflect the new classification system for private schools as set out in the Amended Private Education Law. Generally, if a private school established before the promulgation of the Amended Private Education Law chooses to register as a non-profit school, it shall amend its articles of association, continue its operation and complete the new registration process. If such private school chooses to register as a for-profit school, it shall conduct financial liquidation process, have the property rights of its assets such as lands, school buildings and net balance authenticated by relevant government authorities, pay up relevant taxes, reapply for a new private school operation permit, reregister as a for-profit school and continue its operation. Specific provisions regarding the above registrations are yet to be introduced by the governments at the provincial level. As of March 31, 2020, some provinces, autonomous regions or municipalities directly under the central government promulgated their respective regulations related to the classification registration of private schools, including Beijing, Shanghai, Tianjin, Chongqing, Guangdong, Jiangsu, Shaanxi, Shandong, Sichuan and Zhejiang, where we have learning centers.

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

On December 30, 2016, the MOE, the SAIC and the Ministry of Human Resources and Social Welfare jointly issued the Implementing Rules on the Supervision and Administration of For-Profit Private Schools, pursuant to which the establishment, division, merger and other material changes of a for-profit private school shall first be approved by the education authorities or the authorities in charge of labor and social welfare, and then be registered with the competent branch of the SAIC.

For a detailed discussion on how the Amended Private Education Law and the above rules will affect our training institutions, see “Item 3. Key Information—D. Risk Factors—Risk Factors Related to Our Business and Industry—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.”

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

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

On August 26, 2018, the State Council issued the Opinions on Supervising After-School Tutoring Institutions, or State Council Circular 80, which provide various guidance on regulating after-school tutoring institutions for primary and secondary school students. State Council Circular 80 reiterates prior guidance that after-school tutoring institutions must obtain a private school operation permit, and further requires such institutions to meet certain minimum requirements. For example, after-school training institutions are required to (i) have a fixed training premise that conforms to specified safety criteria, with an average area per student of no less than three square meters during the applicable training period; (ii) comply with relevant fire safety, environmental protection, hygiene, food operation and other specified requirements; (iii) purchase personal safety insurance for class participants; and (iv) not hire any teachers who are working concurrently in primary or secondary schools, and teachers for tutoring in academic subjects such as Chinese, mathematics, English, physics, chemistry and biology are required to have the corresponding teaching qualifications. After-school tutoring institutions are prohibited from carrying out exam-oriented training, training that goes beyond the school syllabus, training in advance of the corresponding school schedule and any training activities associated with student admission, nor shall they organize any level test, rank examination or competition on academic subjects for primary and secondary students. The training content of after-school tutoring institutions may not exceed the corresponding national curricular standards and training progress may not be more accelerated than the corresponding progress of local schools. According to State Council Circular 80, after-school tutoring institutions are also required to disclose and file relevant information regarding the institution, including their training content, schedule, targeted students and school timetable to the relevant education authority, and their training classes may not end later than 20:30 each day. Course fees can only be collected for courses in three months or shorter installments. Local authorities are required to formulate local standards for after-school tutoring institutions within their administrative area. If an overseas listed after-school tutoring institution publicizes overseas any periodical report, or any interim report on material adverse effect on its operations, it must concurrently publish the information in Chinese on its official website (or on the disclosure platform for securities exchange information in the absence of an official website).In relation to online education service providers, State Council Circular 80 generally provides that regulatory authorities of networking, culture, information technology, radio and television industries shall cooperate with the education department in supervising online education within their relevant industry.

On November 20, 2018, the General Office of the MOE, the General Office of the State Administration for Market Regulation of the PRC and the General Office of the Ministry of Emergency Management of the PRC jointly issued the Notice on Improving the Specific Governance and Rectification Mechanisms of After-school Education Institutions, or the Circular 10, which provides specific requirements for the local people’s governments at all levels to implement the requirements under State Council Circular 80.

The MOE, jointly with certain other PRC government authorities, promulgated the Implementation Opinions on Regulating Online After-School Training, or the Online After-School Training Opinions, effective on July 12, 2019. The Online After-School Training Opinions are intended to regulate academic after-school training involving internet technology provided to students in primary and secondary schools. Among other things, the Online After-School Training Opinions requires that online after-school training institutions shall file with the competent provincial education regulatory authorities before October 31, 2019 and that such education regulatory authorities shall, jointly with other provincial government authorities, review such filings and the qualification of the online after-school training institutions submitting such filings.

With respect to the filing requirements, the Online After-School Training Opinions provides, among others: (i) an online after-school training institution shall file with the competent provincial education regulatory authorities at the place of its domicile after it has obtained the ICP License and the certificate and the grade evaluation report for the graded protection of cyber security, and furthermore, shall file before October 31, 2019 if it has already conducted online after-school training; (ii) the online after-school training institutions shall file, among others, (x) the materials related to the institution itself, including the information on their respective ICP License and other relevant licenses and the materials related to certain management systems regarding the protection of personal information and cyber security, (y) the materials related to the training content, and (z) the materials related to the training personnel; and (iii) the competent provincial education regulatory authorities shall promulgate local implementing rules about the filing requirements, focusing on the training institutions, training content and training personnel.

The Online After-School Training Opinions further provides that the competent provincial education regulatory authorities shall, jointly with other provincial government authorities, review such filings and the qualifications of the online after-school training institutions submitting such filings before the end of December 2019, focusing on the following matters: (i) the training content shall not include online games or other content or links irrelevant with the training, and shall not be beyond the relevant national school syllabus. No illegal publications may be published, printed, reproduced or distributed, and no infringement or piracy activities may be conducted during the training. And the training content and data shall be stored for more than one year, among which, the live streaming teaching videos shall be stored for more than 60 days; (ii) each course shall not last longer than 40 minutes and shall be taken at intervals of not less than 10 minutes, and the training time shall not conflict with the teaching time of primary and secondary schools. Each live-streaming course provided to students receiving compulsory education shall not end later than 9:00 p.m., and shall not leave homework for primary school students in grade 1 and grade 2. The online after-school training platforms shall have eye protection and parental supervision functions; (iii) the online after-school training institutions shall not hire any teacher who is currently working at primary or secondary schools. Training personnel of academic subjects are required to obtain necessary teacher qualification licenses. The online after-school training institutions’ training platforms and course interfaces shall publicize the names, photos and teacher qualification licenses of training personnel, and the learning, working and teaching experiences of foreign training personnel; (iv) with the consent of students and their respective parents, online after-school training institutions shall verify the identification information of each student, and shall not illegally sell or provide such information to third parties. User behavior log must be kept for more than one year; (v) the charge items and standard and refund policy shall be specifically publicized on the training platforms. The prepaid fees can only be used for education and training purpose, and shall not be used for other investment activities; where fees are charged based on the number of classes, fees are not allowed to be collected in a lump sum for more than 60 classes, and where fees are charged based on the length of the course, the fees shall not be collected for a course length of more than three months; and (vi) the online after-school training institutions found to have problems after review by the competent provincial education regulatory authorities shall complete the rectification before the end of June 2020, and will be subject to fines, regulatory order to suspend operations or other regulatory and disciplinary sanctions if they fail to complete the rectification in time.

On August 10, 2019, the MOE, jointly with certain other PRC government authorities, issued Opinions on Guiding and Regulating the Orderly and Healthy Development of Educational Mobile Apps, or the Opinions on Educational Apps, which require, among others, for mobile apps that provide services for school teaching and management, student learning and student life, or home-school interactions, with school faculty, students or parents as the main users, and with education or learning as the main application scenarios (the “Educational Apps”), be filed with competent provincial regulatory authorities for education before the end of 2019. The MOE expects to further promulgate implementation rules with respect to such filing requirements. The Opinions on Educational Apps also require, among others, that: (i) before such filing, the Educational App’s provider shall have obtained ICP License or completed ICP License filing and obtained the certificate and grade evaluation report for graded protection of cybersecurity; (ii) Educational Apps with main users under the age of 18 shall limit the users’ usage time, specify the range of suitable ages, and strictly monitor contents; (iii) before an Educational App is introduced as a mandatory app to students, such Educational App shall be approved by the applicable school through collective decision-making process and be filed with the competent education authority; and (iv) Educational Apps adopted by education authorities and schools as their uniformly used teaching or management tools shall not charge the students or parents any fees, and shall not offer any commercial advertisements or games.

On September 19, 2019, the MOE, jointly with certain other PRC government authorities, issued the Guidance Opinions on Promoting the Healthy Development of Online Education, which provides, among others, that (i) social forces are encouraged to establish online education institutions, develop online education resources, and provide high quality education services; and (ii) an online education negative list shall be promulgated and industries not included in the negative list are open for all types of entities to enter into.

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

MOE promulgated the Disciplinary Measures for Violation of Professional Ethics of Elementary and Secondary School Teachers on January 11, 2014, and amended on November 8, 2018, which prohibits teachers of elementary and secondary schools from providing paid tutoring activities or introducing students and providing relevant information to after-school training institutions or any third party. Some provinces and cities where our schools are located have adopted more stringent regulations which prohibit public school teachers from teaching, on a part-time basis, at private schools or learning centers. For a detailed description of the risk associated with these matters, see “Item 3. Key Information—D. Risk Factors—Risk Factors Related to Our Business and Industry—We may not be able to continue to recruit, train and retain a sufficient number of qualified teachers and consultants.”

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

In addition, the provision of commercial internet information services on mobile internet applications is regulated by the Administrative Provisions on Mobile Internet Applications Information Services, which was promulgated by Cyberspace Administration of China, or the CAC, on June 28, 2016 and came into effect on August 1, 2016. The providers of mobile internet applications are subject to requirements under these provisions, including acquiring the qualifications and complying with other requirements provided by laws and regulations and being responsible for information security.

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

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

According to these regulations, non-state-owned capital or foreign investors are not allowed to engage in the business of transmitting audio-visual programs through information networks. However, the Audio-Visual Measures have been repealed according to the Administrative Provisions on Audio-Visual Program Service through Special Network and Directed Transmission that was promulgated by the SAPPRFT on May 4, 2016, and became effective as of June 1, 2016.

To further regulate the provision of audio-visual program services to the public via the Internet, including through mobile networks, within the territory of the PRC, the SAPPRFT and the MIIT jointly promulgated the Administrative Provisions on Internet Audio-Visual Program Service, or the Audio-Visual Program Provisions, on December 20, 2007, which came into effect on January 31, 2008 and was last amended on August 28, 2015. Under the Audio-Visual Program Provisions, “Internet audio-visual program services” is defined as the activity of producing, redacting and integrating audio-visual programs, providing them to the general public via Internet, and providing services for other people to upload and transmit audio-visual programs; providers of Internet audio-visual program services are required to obtain a License for Online Transmission of Audio-Visual Programs issued by SAPPRFT or to complete certain registration procedures with SAPPRFT. In general, providers of Internet audio-visual program services must be either state-owned or state-controlled entities, and the business to be carried out by such providers must satisfy the overall planning and guidance catalog for Internet audio-visual program service determined by SAPPRFT. In a press conference jointly held by SAPPRFT and MIIT to answer questions relating to the Audio-Visual Program Provisions in February 2008, SAPPRFT and MIIT clarified that providers of Internet audio-visual program services who are engaged in such services prior to the promulgation of the Audio-Visual Program Provisions are eligible to re-register with the relevant authorities and continue their operation of Internet audio-visual program services so long as those providers had not violated relevant laws and regulations in the past. On May 21, 2008, SAPPRFT issued a Notice on Relevant Issues Concerning Application and Approval of License for the Online Transmission of Audio-Visual Programs, as amended on August 28, 2015, which further sets out detailed provisions concerning the application and approval process regarding the License for Online Transmission of Audio-Visual Programs. The notice also states that providers of Internet audio-visual program services that are engaged in such services prior to the promulgation of the Audio-Visual Program Provisions are eligible to apply for the license so long as their violation of the laws and regulations is minor in scope and can be rectified in a timely manner and they have no records of violation during the last three months prior to the promulgation of the Audio-Visual Program Provisions. Further, on March 30, 2009, SAPPRFT promulgated the Notice on Strengthening the Administration of the Content of Internet Audio-Visual Programs, which reiterates the

pre-approval requirements for the audio-visual programs transmitted via the Internet, including through mobile networks, where applicable, and prohibits certain types of Internet audio-visual programs containing violence, pornography, gambling, terrorism, superstition or other similarly prohibited elements.

On March 10, 2017, SAPPRFT issued the Provisional Implementation of the Tentative Categories of Internet Audio-Visual Program Services, or the Categories, which revised the previous version issued on March 17, 2010. According to the Categories, there are four categories of Internet audio and video program services, which are further divided into seventeen sub-categories. The third sub-category under the second category covers the making and editing of certain specialized audio-visual programs concerning, among other things, educational content and broadcasting such content to the general public online.

On March 16, 2018, the SAPPRFT promulgated the Notice on Further Regulating the Transmission Order of Internet Audio-Visual Program Services, providing that the classic literary works, radio, film and television programs, original Internet audio-visual programs shall not be re-edited, re-dubbed, re-subtitled or partly captured and consolidated as a new program without authorizations, and providers of Internet audio-visual program services shall strictly manage and supervise such re-edited programs to be uploaded by the Internet users and shall not provide any transmission channels for those Internet audio-visual programs which have issues in political orientation , copyright or content.

Regulation Related to Production and Distribution of Radio and Television Programs

On July 19, 2004, the SAPPRFT promulgated the Administrative Measures on the Production and Operation of Radio and Television Programs, or the Radio and TV Programs Measures, which became effective on August 20, 2004 and were last amended on October 31, 2018. The Radio and TV Programs Measures are applicable for establishing institutions that produce and distribute radio and television programs or for the production of radio and television programs like programs with a special topic, column programs, variety shows, animated cartoons, radio plays and television dramas and for activities like transactions and agency transactions of program copyrights. Pursuant to the Radio and TV Programs Measures, any entity that intends to produce or operate radio or television programs must first obtain the Permit for Production and Operation of Radio and TV Programs from the SAPPRFT or its local branches.

On May 10, 2003, MOC promulgated the Interim Administrative Provisions on Internet Culture, or the Internet Culture Provisions, which became effective on July 1, 2003 and was last amended on December 15, 2017. The Internet Culture Provisions require ICP service providers engaging in commercial Internet cultural activities to obtain a permit from the appropriate culture authority. Internet cultural activities include (i) the production, duplication, importation, and broadcasting of Internet cultural products; (ii) the online dissemination whereby cultural products are posted on the Internet or transmitted via the Internet to end users, such as computers, fixed-line telephones, mobile phones, television sets and games machines, for online users’ browsing, use or downloading; and (iii) the exhibition and comparison of Internet cultural products. “Internet cultural products” is defined in the Internet Culture Provisions as cultural products produced, broadcasted and disseminated via the Internet, which mainly include Internet cultural products produced specifically for the Internet, such as online music entertainment, online games, online shows and plays, online performances, online works of art and online cartoons, and Internet cultural products produced from cultural products such as music entertainment, games, shows and plays, performances, works of art and cartoons and duplicated for dissemination on the Internet.

On May 14, 2019, the General Office of MOC promulgated the Notice on Adjusting the Scope of Internet Culture Permit and Further Standardize the Approval Work, which provides that online music, online shows and plays, online performances, online works of art, online cartoons, displays and games are the activities that fall in the scope of Internet Culture Permit, and further clarifies that educational live streaming activities are not online performances.

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

The State Council promulgated the Administrative Regulations on Publishing, or the Publishing Regulations, on December 25, 2001, and last amended on February 6, 2016. In accordance with the Publishing Regulations, publishing activities refer to the publishing, printing, copying, importation or distribution of publications, such as books, newspapers, periodicals, audio and video products and electronic publications, and an entity engaging in publishing activities is required to obtain an approval from the relevant publication administrative authorities. Under the Administrative Measures for the Publication Market, or the Publication Market Measures, which was jointly promulgated by the SAPPRFT and the MOFCOM and became effective on March 25, 2011, as amended on May 31, 2016, any enterprise or individual who engages in publication distribution activities shall obtain permission from SAPPRFT or its local counterpart. “Publication” is defined as “books, newspapers, periodicals, audio-visual products, and electronic publications,” and “distributing” is defined as “general distribution, wholesale, retail, rental, exhibition and other activities,” respectively, in the Publication Market Measures. Any enterprise or individual that engages in retail of publications shall obtain a Publication Business Operating License issued by the local counterpart of SAPPRFT at the county level. In addition, any enterprise or individual that holds a Publication Business Operating License shall file with the relevant local counterpart of SAPPRFT that granted such license to it within 15 days since it begins to carry out any online publication distribution business.

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

The Fire Safety Law, promulgated by the Standing Committee of the NPC on April 29, 1998, last amended by the Standing Committee of the NPC on April 23, 2019, and became effective as of April 23, 2019, as well as other relevant detailed fire prevention regulations, require that premises of training institutions and their tutoring branches must either obtain a fire safety assessment permit or complete a fire safety filing. Nevertheless, in accordance with the Provisions on Supervision and Administration of Fire Protection of Construction Projects, which was promulgated by the Ministry of Public Security on July 17, 2012 and became effective on November 1, 2012, a construction project that is not subject to a construction permit is exempted from the fire safety filing requirement. And according to the Provisions on Administration of Construction Permit of Construction Projects, which was promulgated by the Ministry of Housing and Urban-Rural Development, a construction project with an investment amount less than RMB300,000 or a construction area of less than 300 square meters is exempted from the requirement of a construction permit.

Pursuant to these regulations, failure to obtain a fire safety assessment permit shall be subject to: (i) orders to suspend the construction of projects, use of such projects or operation of relevant business; and (ii) a fine of between RMB30,000 and RMB300,000. Failure to complete a fire safety filing shall be subject to: (i) orders to make rectifications within a specified time limit; and (ii) a fine of not more than RMB5,000. See “Item 3. Key Information—D. Risk Factors—Risk Factors Related to Our Business and Industry—A significant portion of our training institutions are not in compliance with fire safety regulations.”

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

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

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

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

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

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

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

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

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

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

Pursuant to the Computer Software Protection Regulations last amended on January 30, 2013, the software copyright owner may go through the registration formalities with a software registration authority recognized by the State Council’s copyright administrative department. The owner of a software copyright may authorize others to exercise that copyright, and shall have the right to receive remuneration. In order to further implement the Computer Software Protection Regulations, the State Copyright Bureau issued the Computer Software Copyright Registration Procedures on February 20, 2002, and amended on June 18, 2004, which applies to software copyright registration, license contract registration and transfer contract registration.

On March 16, 2007, the National People’s Congress enacted the Enterprise Income Tax Law of the PRC, or the PRC EIT Law, which became effective on January 1, 2008 and was last amended on December 29, 2018. The PRC EIT Law applies a uniform 25% enterprise income tax rate to both FIEs and domestic enterprises, except where tax incentives are granted to special industries and projects. Small and micro enterprises meeting certain conditions are entitled to a preferential EIT rate of 20%. Under the PRC EIT Law and its implementation regulations, dividends generated from the business of a PRC subsidiary after January 1, 2008 and payable to its foreign investor may be subject to a withholding tax rate of 10% if the PRC tax authorities determine that the foreign investor is a nonresident enterprise, unless there is a tax treaty with China that provides for a preferential withholding tax rate. Distributions of earnings generated before January 1, 2008 are exempt from PRC withholding tax.

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

Pursuant to the Arrangement between 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 Nonresident Taxpayers to Enjoy Treatment under Tax Treaties, or SAT Circular 60, which became effective on November 1, 2015. SAT Circular 60 provides that nonresident enterprises are not required to obtain pre-approval from the relevant tax authority in order to enjoy the reduced withholding tax. Instead, nonresident enterprises and their withholding agents may, by self-assessment and on confirmation that the prescribed criteria to enjoy the tax treaty benefits are met, directly apply the reduced withholding tax rate, and file necessary forms and supporting documents when performing tax filings, which will be subject to post-tax filing examinations by the relevant tax authorities. Accordingly, Prepshine Holdings Co., Limited 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.

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

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

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

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

On January 1, 2012, the Chinese State Council officially launched a pilot value-added tax (“VAT”) reform program, or Pilot Program, applicable to businesses in selected industries. Businesses in the Pilot Program would pay VAT instead of business tax. Pilot industries in Shanghai include industries involving the leasing of tangible movable property, transportation services, product development and technical services, information technology services, cultural and creative services, logistics and ancillary services, certification and consulting services. According to official announcements made by competent authorities in Beijing and Guangdong province, Beijing launched the same Pilot Program on September 1, 2012, and Guangdong province launched its pilot program on November 1, 2012. On May 24, 2013, the Ministry of Finance and the State Administration of Taxation issued the Circular on Tax Policies in the Nationwide Pilot Collection of Value Added Tax in Lieu of Business Tax in the Transportation Industry and Certain Modern Services Industries, or the Pilot Collection Circular. The scope of certain modern services industries under the Pilot Collection Circular extends to the inclusion of radio and television services. On August 1, 2013, the Pilot Program was implemented throughout China. On December 12, 2013, the Ministry of Finance and the SAT issued the Circular on the Inclusion of the Railway Transport Industry and Postal Service Industry in the Pilot Collection of Value-added Tax in Lieu of Business Tax, or the 2013 VAT Circular. Among the other things, the 2013 VAT Circular abolished the Pilot Collection Circular, and refined the policies for the Pilot Program. On April 29, 2014, the Ministry of Finance and the SAT issued the Circular on the Inclusion of Telecommunications Industry in the Pilot Collection of Value-added Tax in Lieu of Business Tax. On March 23, 2016, the Ministry of Finance and the SAT issued the Circular on the Comprehensive Promotion of the Pilot Program of the Collection of Value-added Tax in Lieu of Business Tax. Effective from May 1, 2016, the PRC tax authorities collect VAT in lieu of Business Tax on a trial basis within the territory of China, and in industries such as construction industries, real estate industries, financial industries and living service industries. Some of our subsidiaries as a small-scale taxpayer will be required to pay VAT at a tax rate of 3% for the services. Pursuant to the Announcement on Policies for Deepening the VAT Reform issued on March 20, 2019 by the MOF, the SAT and General Administration of Customs, which came into effect on April 1, 2019, the tax rates of 16% and 10% applicable to the taxpayers who have VAT taxable sales activities or imported good are further adjusted to 13% and 9%, respectively.

On March 15, 2019, the National People’s Congress promulgated the Foreign Investment Law, which came into effect on January 1, 2020 and replaced the trio of existing laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation rules and ancillary regulations. The existing FIEs established prior to the effectiveness of the Foreign Investment Law may keep their corporate forms within the next five years. Pursuant to the Foreign Investment Law, “foreign investors” means natural person, enterprise, or other organization of a foreign country, “foreign-invested enterprises” means any enterprise established under the PRC law that is wholly or partially invested by foreign investors, and “foreign investment” means any foreign investor’s direct or indirect investment in mainland China, including (i) establishing FIEs in mainland China either individually or jointly with other investors; (ii) obtaining stock shares, stock equity, property shares and other similar interests in Chinese domestic enterprises; (iii) investing in new projects in mainland China either individually or jointly with other investors; and (iv) making investment through other means provided by laws, administrative regulations or State Council provisions.

The Foreign Investment Law stipulates that China implements the management system of pre-establishment national treatment plus a negative list to foreign investment and the government generally will not expropriate foreign investment, except under special circumstances in which case it will provide fair and reasonable compensation to foreign investors. Foreign investors are barred from investing in prohibited industries on the negative list and must comply with the specified requirements when investing in restricted industries on the negative list. When a license is required to enter a certain industry, the foreign investor must apply for one, and the government must treat the application equally as one made by a domestic enterprise, except otherwise provided by laws or regulations. In addition, foreign investors, or FIEs, are required to file information reports and foreign investment shall be subject to the national security review.

On December 26, 2019, the State Council promulgated the Implementation Rules of Foreign Investment Law, and became effective on January 1, 2020. The Implementation Rules of Foreign Investment Law restates certain principles of the Foreign Investment Law and further provides, among others, (1) the “other investors” referred in the Foreign Investment Law include Chinese natural persons; (2) the existing FIEs established pursuant to the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law may, within the five-year period following the implementation of the Foreign Investment Law, adjust their corporate form and complete the change in registration pursuant to the provisions of the PRC Company Law, the PRC Partnership Enterprise Law and relevant laws and regulations, and if it fails to do so, the enterprise registration authority will not process other registration matters of the FIE and may publicize such non-compliance starting from January 1, 2025; (3) if the existing FIE adjusted its corporate form pursuant to the relevant laws and regulations, the provisions regarding transfer of equity interests, distribution of profits and remaining assets as stipulated in the contracts among the joint venture parties of an existing FIE may survive the Foreign Investment Law.

Regulations on Loans to and Direct Investment in the PRC Entities by Offshore Holding Companies

According to the Implementation Rules for the Provisional Regulations on Statistics and Supervision of Foreign Debt promulgated by SAFE on September 24, 1997 and the Interim Provisions on the Management of Foreign Debts promulgated by SAFE, the NDRC and the MOF that became effective from March 1, 2003, loans by foreign companies to their subsidiaries in China, which accordingly are FIEs, are considered foreign debts. Pursuant to the Measures for the Administration of Foreign Debt Registration issued by SAFE on April 28, 2013 and the Notice on Matters concerning the Macro-Prudential Administration of Full-Covered Cross-Border Financing issued by the People’s Bank of China on January 11, 2017, the total amount of accumulated foreign debt borrowed by an FIE is subject to a upper limit calculated based on a statutory formula, and the FIE is required to file with SAFE after entering into relevant foreign debt contract and within at least three business days before drawing any money from the foreign debts.

According to applicable PRC regulations on FIEs, if a foreign holding company makes capital contributions to its PRC subsidiaries, which are considered FIEs, the PRC subsidiaries must file an investment information report with the MOFCOM or its local counterpart in connection with the increase of its registered capital.

Pursuant to the Foreign Exchange Administration Rules, as amended from time to time, and various regulations issued by SAFE and other relevant PRC government authorities, Renminbi is freely convertible to the extent of current account items, such as trade and service-related receipts and payments, interest and dividends. Capital account items, such as direct equity investments, loans and repatriation of investment, unless expressly exempted by laws and regulations, still require prior approval from SAFE or its provincial branch for conversion of Renminbi into a foreign currency, such as U.S. dollars, and remittance of the foreign currency outside of China. Payments for transactions that take place within China shall be made in Renminbi. Foreign currency revenues received by PRC companies may be repatriated into China or retained outside of China in accordance with requirements and terms specified by SAFE.

Under the Foreign Exchange Administration Rules, FIEs in China may, without the approval of SAFE, make a payment from their foreign exchange accounts at designated foreign exchange banks for paying dividends with certain evidencing documents (e.g., board resolutions and tax certificates), or for trade and services-related foreign exchange transactions by providing commercial documents evidencing such transactions. They are also allowed to retain foreign currency (subject to a cap approved by SAFE) to satisfy foreign exchange liabilities. In addition, foreign exchange transactions involving overseas direct investment or investment and trading in securities and derivative products abroad are subject to registration with SAFE or its local counterparts and approval from or filling with other relevant PRC government authorities, if necessary.

On October 23, 2019, the SAFE promulgated the Notice for Further Advancing the Facilitation of Cross-border Trade and Investment, or the SAFE Circular 28, which, among other things, allows all FIEs to use Renminbi converted from foreign currency-denominated capital for equity investments in China, as long as the equity investment is genuine, does not violate applicable laws, and complies with the negative list on foreign investment. However, since the SAFE Circular 28 is newly promulgated, it is unclear how it will be interpreted and implemented by SAFE and competent banks.

Regulations Relating to Foreign Exchange Registration of Overseas Investment by PRC Residents

SAFE Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, issued by SAFE and becoming effective on July 4, 2014, regulates foreign exchange matters in relation to the use of special purpose vehicles, or SPVs, by PRC residents or entities to seek offshore investment and financing and conduct round trip investment in China. Under SAFE Circular 37, an SPV refers to an offshore entity established or controlled, directly or indirectly, by PRC residents or entities for the purpose of seeking offshore financing or making offshore investment, using legitimate domestic or offshore assets or interests, while “round trip investment” refers to the direct investment in China by PRC residents or entities through SPVs, namely, establishing FIEs within the PRC through a new entity, merger or acquisition and other ways to obtain the ownership, control rights and management rights. SAFE Circular 37 requires that, before making contribution into an SPV, PRC residents or entities are required to complete foreign exchange registration with SAFE or its local branch. In the event of any change in the basic information such as the domestic individual shareholder, name, operation term, etc. in connection with such SPV, or if there is a capital increase, decrease, equity transfer or swap, merge, spinoff or other material changes in connection with such SPV, the PRC residents or entities shall complete foreign exchange alteration registration formality for offshore investment. SAFE Circular 37 further provides that option or share-based incentive tool holders of a non-listed SPV can exercise the options or share incentive tools to become a shareholder of such non-listed SPV, subject to registration with SAFE or its local branch. In addition, according to the procedural guidelines as attached to SAFE Circular 37, PRC residents or entities are only required to register the SPV directly established or controlled (first level).

On February 13, 2015, the SAFE further promulgated the Circular on Further Simplifying and Improving the Administration of the Foreign Exchange Concerning Direct Investment ( “SAFE Circular 13”), which took effect on June 1, 2015. SAFE Circular 13 has amended SAFE Circular 37 by requiring PRC residents or entities to register with qualified banks rather than SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing.

Pursuant to the Notice on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Share Incentive Plan of an Overseas Publicly Listed Company, or SAFE Circular 7, which was issued by SAFE in February 2012, the domestic individuals, including PRC citizens and non-PRC citizens residing in China for a continuous period of not less than one year (but excluding the foreign diplomatic personnel and representatives of international organizations), who participate in any share incentive plan of an overseas publicly listed company, such as its employees, directors, supervisors and other senior management, are required to register with SAFE through a domestic qualified agent, which could be a PRC subsidiary of such overseas listed company, and certain other procedures are also required to be completed. Failure to complete the SAFE registrations may result in fines and legal sanctions on such domestic individuals and may also limit their capability to contribute additional capital into the wholly foreign-owned subsidiary in China and further limit such subsidiary’s capability to distribute dividends.

In addition, the State Administration of Taxation has issued certain circulars concerning employee share options or restricted shares. Under these circulars, the employees working in the PRC will be subject to PRC individual income tax when they exercise share options or are granted restricted shares. The PRC subsidiaries of such overseas listed company have the obligations to file documents related to employee share options or restricted shares with relevant tax authorities and to withhold individual income taxes levied on those employees exercising their share options. If the employees fail to pay or the PRC subsidiaries fail to withhold their income taxes according to relevant laws and regulations, the PRC subsidiaries may face sanctions imposed by the tax authorities or other PRC government authorities.

Pursuant to the Law on the Protection of Consumer Rights and Interests, business operators must collect and use personal information of consumers in a lawful and proper manner by following the principle that such information collection or use is genuinely necessary. Business operators must expressly state the purposes, methods and scope of information collection or use, and obtain the consent of the consumers whose information is to be collected. To collect or use the personal information of consumers, business operators must disclose their rules regarding information collection or use, and may not collect or use information in violation of laws or regulations, or in breach of any agreements between the parties concerned. Business operators and their staff members must strictly keep confidential the collected personal information of consumers, and may not divulge, sell or illegally provide others with such information.

Pursuant to the Interpretation of the Supreme People’s Court and the Supreme People’s Procuratorate on Several Issues Concerning the Application of Law in Handling Criminal Cases of Infringing Personal Information of Citizens, if a business operator collects personal information of citizens by purchasing, accepting or exchanging, or collects personal information of citizens in the course of performing their duties and providing services in violation of relevant laws and regulations and meet one of the following standards, such operator will be considered in violation of criminal law and such operator and its responsible personnel must undertake criminal liabilities: (i) illegal acquisition, sale or provision of more than 50 pieces of track information, communication content, credit information or property information; (ii) illegal acquisition, sale, or provision of more than 500 pieces of accommodation information, communication records, health and physiological information, trading information, and other personal information which may affect the safety of personal and property; (iii) illegal acquisition, sale, or provision of more than 5,000 pieces of personal information, other than the information mentioned in the preceding (i) and (ii); (iv) the profits generated from using the illegally collected and acquired personal information is more than RMB50,000; and (v) resell the collected personal information during the course of performing their duties and providing service and the amount of resold personal information reaches 50% of the prescribed standard mentioned in (i), (ii), (iii) or (iv), as applicable.

Provisions on the Merger and Acquisition of Domestic Enterprises by Foreign Investors (Revised in 2009)

Under the Provisions on the Merger and Acquisition of Domestic Enterprises by Foreign Investors (Revised in 2009), or the M&A Rules, a foreign investor is required to obtain necessary approvals when (1) such foreign investor acquires any equity interests or subscribes for any new equity interests in a domestic enterprise whereby such domestic enterprise is converted into an FIE; or (2) such foreign investor establishes an FIE, which then purchases and operates the assets of a domestic enterprise, or such foreign investor purchases the assets of a domestic enterprise and then injects those assets into an FIE. According to Article 11 of the M&A Rules, where a domestic enterprise or a domestic natural person, through an overseas company established or controlled by it/him/her, acquires a domestic company which is related to or connected with it/him/her, approval from the MOFCOM is required.

For a detailed description of the risks associated with the M&A Rules, see “Item 3. Key Information—D. Risk Factors——Risk Factors Related to Doing Business in the PRC—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 following chart sets forth our corporate structure and ownership interest in each of our principal operating subsidiaries as of December 31, 2019.

Puxin Limited (Cayman Island) 100% Prepshine Holdings Co., Limited (Hong Kong) 100% 100% Beijing Global Education & Technology Co., Ltd. (“Global Education”) Purong (Beijing) Information Technology Co., Ltd. (“Purong Beijing”) Mr. Yunlong Sha Other Existing Shareholders(1) 64.243% 35.757% Outside PRC Inside PRC Puxin Education Technology Group Co., Ltd. (“Puxin Education” or “VIE”) 80% 100% 100% Puhe Education Technology Co., Ltd. 51 Directly and Wholly-owned Subsidiaries Beijing Meitong Education Consulting Co., Ltd. 100% 100% ZMN International Education Consulting (Beijing) Co., Ltd. (“ZMN Education”) Shanghai Global Career Education & Technology Holdings Limited 100% 100% 16 Directly and Wholly-owned Subsidiaries 25 Directly and Wholly-owned Subsidiaries Direct ownership Contractual arrangement

The following table sets forth summary information for our subsidiaries as of December 31, 2019.

We operate our businesses in the PRC through Puxin Education, our VIE, and its subsidiaries. The following table sets forth summary information for Puxin Education’s directly-owned subsidiaries as of December 31, 2019.

Subsidiary of Puxin Education	Jurisdiction of Incorporation	Percentage of Ownership Interest
Beijing Meitong Education Consulting Co., Ltd.⁽¹⁾	PRC	100%
Beijing Shangxin Education Technology Co., Ltd.	PRC	100%
Taiyuan Puxin Culture and Arts Co., Ltd.	PRC	100%
Taiyuan Puxin Culture Communication Co., Ltd.	PRC	100%
Guangzhou Yingxun Lixiang Education Information Consulting Co., Ltd.	PRC	100%
Beijing Meikaida Education Technology Co., Ltd.⁽²⁾	PRC	100%
Tianjin Xinsiyuan Culture Communication Co., Ltd.	PRC	100%
Beijing Puda Education Technology Co., Ltd.	PRC	100%
Shenyang Meitong Education Information Consulting Co., Ltd.	PRC	100%
Beijing Pule Education Technology Co., Ltd.	PRC	100%
Beijing Pule Travel Co., Ltd.	PRC	100%
Jinan Puxin Education Technology Co., Ltd.	PRC	100%
Beijing Ruibao Tongqu Education Consulting Co., Ltd.	PRC	100%
Guizhou Puxintian Education Technology Co., Ltd.	PRC	100%
Beijing Jiameixin Education Consulting Co., Ltd.	PRC	100%
Jinan Pude Education Technology Co., Ltd.	PRC	100%
Jinan Qifa Education Consulting Co., Ltd.	PRC	100%
Nanjing Diyu Investment Management Co., Ltd.	PRC	100%
Shaoxing Puxin Education Information Consulting Co., Ltd.	PRC	100%
Yunnan Pude Education Information Consulting Co., Ltd.	PRC	100%
Ningbo Puxin Education Technology Development Co., Ltd.	PRC	100%
Chengdu Puxin Shenglong Education Technology Co., Ltd.	PRC	100%
Nanjing Dreams & Stars Information Consulting Co., Ltd.	PRC	100%
Shenzhen Davis Information Consulting Co., Ltd.	PRC	100%
Shanghai Pukuan Education Technology Co., Ltd.	PRC	100%
Luoyang Pucai Education Technology Co., Ltd.	PRC	100%
Dalian Pude Education Consulting Co., Ltd.	PRC	100%
Xi’an Puxin Shanghe Culture Development Co., Ltd.	PRC	100%
Luzhou Puxin Culture Communication Co., Ltd.	PRC	100%
Beijing Xuezong Tianxia Education Technology Co., Ltd.	PRC	100%
Shenyang Puxin Yingcai Education Consulting Co., Ltd.	PRC	100%
Chongqing Puxin Technology Co., Ltd.⁽³⁾	PRC	100%
Shenyang Pude Education Technology Co., Ltd.	PRC	100%
Jilin Puxin Education Technology Co., Ltd.	PRC	100%
Yancheng Tiantian Xiangshang Puxin Education Technology Co., Ltd.	PRC	100%
Fuzhou Pude Education Technology Co., Ltd.	PRC	100%
Hangzhou Puxin Technology Co., Ltd.	PRC	100%
Shandong Zengyu Trading Co., Ltd.	PRC	100%
Kunming Wuhua Pude Education Training School	PRC	100%
Foshan Mingshi Education Technology Co., Ltd.⁽⁴⁾	PRC	100%
Nanjing Huoyanyan Culture Development Co., Ltd.	PRC	100%
Guangzhou Yishang Arts Education Technology Co., Ltd.	PRC	100%
Xi’an Intest Management Consulting Co., Ltd.	PRC	100%
Beijing Xiaoze Education Technology Co., Ltd.⁽⁵⁾	PRC	100%
Beijing Jiuding Arts Education Technology Co., Ltd.	PRC	100%
Xi'an Qingmei Fengxiang Education Consulting Co., Ltd.	PRC	100%

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

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.

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.

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.

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).

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.

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.

Pursuant to the loan agreement among Purong Beijing 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, see “Item 3. Key Information—D. Risk Factors—Risk Factors Related to Our Corporate Structure.”

We currently lease substantially all of the properties we use to operate our business. We are headquartered in Beijing, and the business premises of our schools and learning centers are located in 35 cities in China. Our leases have terms of one to 12 years.

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included elsewhere in this annual report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Item 3. Key Information—D. Risk Factors” and elsewhere in this annual report on Form 20-F.

We operate in China’s after-school education market, and our results of operations and financial condition are significantly affected by general factors affecting China’s education industry, including China’s overall economic growth, the increase in per capital disposable income, the growth in spending on after-school education services and demographic trends as a result of China’s population policies.

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.

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 2017, 2018 and 2019, our total student enrollments were 1,275,723, 1,846,349 and 2,872,025 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. 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. 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 started study-abroad test preparation courses and study-abroad consulting services in July 2015 and September 2015, respectively. We started to offer online courses in a large-class setting through Puxin Online School in November 2018 with a focus on tier-3 or lower tier cities in China. In April 2019, we started to offer full-time tutoring to high school students who are preparing for university entrance exams and art college admission exams in China.

In addition, a high K-12 group class student retention rate has also contributed to our total student enrollment growth. In 2017, 2018 and 2019, the K-12 group class student retention rate of our schools operating under our management for over 12 months reached 70.1%, 71.5% and 72.1%, 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.

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 increased from 386 as of December 31, 2018 to 446 as of December 31, 2019, reflecting the combination of (i) 41 learning centers we acquired, (ii) 94 learning centers we constructed in 2019, and (iii) 75 learning centers we closed 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 operation throughout the period indicated and the number of our newly acquired and constructed centers during each period:

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.

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 2017, 2018 and 2019. In the long run, we seek to gradually increase our tuition fee level without compromising our student enrollments.

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 4,388 as of December 31, 2017 to 4,592 as of December 31, 2018 and further to 5,932 as of December 31, 2019, in line with our efforts to enhance our teaching quality, the growth of student enrollments and the expansion of our network and course offerings. 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. However, this increase is likely to be partially offset by our increasing economies of scale and improved operating efficiency.

Our net revenues primarily consist of revenues generated from (i) K-12 tutoring services, consisting after-school group class courses, personalized tutoring courses and full-time tutoring courses, and (ii) study-abroad tutoring services, consisting of study-abroad test preparation services and study-abroad consulting services. In 2017, 2018 and 2019, we derived substantially all of our net revenues from tuition that we charge our students for these services. In addition to classroom-based educational services and products, we also provide online learning platforms to accommodate our students’ individual learning habits and objectives since 2018 and launched Puxin Online School in November 2018 to offer online courses in a large-class setting for students.

The net revenues generated from our various online platforms are included in the net revenues from K-12 group class courses, personalized tutoring courses and study-abroad test preparation.

In 2017, 2018 and 2019, we generated net revenues of RMB1,282.6 million, RMB2,228.1 million and RMB3,104.0 million (US$445.9 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,
	2017				2018				2019
	RMB		%		RMB		%		RMB		US$		%
	(in thousands, except for percentages)
K-12 tutoring services:
Group class courses		611,268		47.6		817,843		36.7		1,103,607		158,523		35.6
Personalized tutoring courses		272,880		21.3		364,554		16.4		553,654		79,527		17.8
Full-time tutoring courses		—		—		—		—		286,593		41,167		9.2
Subtotal		884,148		68.9		1,182,397		53.1		1,943,854		279,217		62.6
Study-abroad tutoring services:
Study-abroad test preparation		334,288		26.1		860,687		38.6		941,537		135,244		30.4
Study-abroad consulting		64,126		5.0		185,033		8.3		218,567		31,395		7.0
Subtotal		398,414		31.1		1,045,720		46.9		1,160,104		166,639		37.4
Total net revenues		1,282,562		100.0		2,228,117		100.0		3,103,958		445,856		100.0

In 2017, 2018 and 2019, our net revenues from K-12 tutoring services were RMB884.1 million, RMB1,182.4 million and RMB1,943.9 million (US$279.2 million), representing 68.9%, 53.1% and 62.6% 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 and full-time tutoring 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. We estimate and record refund liabilities based on the historical refund ratio on a portfolio basis using the expected value method.

Our study-abroad tutoring services consist of study-abroad test preparation services and study-abroad consulting services. In 2017, 2018 and 2019, our net revenues from study-abroad tutoring services were RMB398.4 million, RMB1,045.7 million and RMB1,160.1 million (US$166.6 million), representing 31.1%, 46.9% and 37.4% 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 group class courses of our K-12 tutoring services. Historically, we did not experience material refunds for our study-abroad tutoring services.

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.

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, (iv) depreciation and amortization expenses associated with classroom, and (v) other expenses. Our cost of revenues accounted for 61.9%, 55.8% and 52.5%, respectively, of our net revenues in 2017, 2018 and 2019. 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,
	2017				2018				2019
	RMB		%		RMB		%		RMB		US$		%
	(in thousands, except for percentages)
Net revenues		1,282,562		100.0		2,228,117		100.0		3,103,958		445,856		100.0
Cost of revenues:
Teaching staff cost⁽¹⁾		549,048		42.8		824,931		37.0		1,066,892		153,249		34.4
Rental expenses		159,998		12.5		247,534		11.1		287,385		41,280		9.3
Facility maintenance expenses		34,991		2.7		39,478		1.8		50,858		7,305		1.6
Depreciation and amortization expenses		9,869		0.8		38,235		1.7		55,589		7,985		1.8
Others		40,436		3.1		92,711		4.2		168,723		24,236		5.4
Total cost of revenues		794,342		61.9		1,242,889		55.8		1,629,447		234,055		52.5

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.

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.

As a result of the foregoing, our gross profit was RMB488.2 million, RMB985.2 million and RMB1,474.5 million (US$211.8 million) and our gross margin was 38.1%, 44.2% and 47.5% in 2017, 2018 and 2019, respectively. The following table sets forth the breakdown of our gross profit by our business segments for the periods indicated.

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.

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 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.

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

The following table sets forth a summary of our consolidated results of operations for the periods indicated. This information should be read together with our consolidated financial statements and related notes included elsewhere in this annual report. Our limited operating history makes it difficult to predict our future operating results. The operating results in any period are not necessarily indicative of the results that may be expected for any future period.

	For the Year Ended December 31,
	2017			2018			2019
	RMB			RMB			RMB			US$
	(in thousands, except share and share related data)
Net revenues		1,282,562			2,228,117			3,103,958			445,856
Cost of revenues⁽¹⁾		794,342			1,242,889			1,629,447			234,055
Gross profit		488,220			985,228			1,474,511			211,801
Operating expenses:
Selling expenses⁽¹⁾		444,927			848,088			1,083,795			155,677
General and administrative expenses⁽¹⁾		362,748			775,883			748,259			107,481
Total operating expenses		807,675			1,623,971			1,832,054			263,158
Operating loss		(319,455	)		(638,743	)		(357,543	)		(51,357	)
Interest expense		5,556			51,901			71,099			10,213
Interest income		549			2,826			25,542			3,669
Foreign exchange loss (gain)		—			7,621			(243	)		(35	)
Loss on changes in fair value of convertible notes, derivative liabilities and warrants		70,336			131,748			104,589			15,023
Loss on extinguishment of convertible notes		—			900			—			—
Loss before income taxes		(394,798	)		(828,087	)		(507,446	)		(72,889	)
Income tax expenses		2,436			5,322			12,188			1,751
Net loss		(397,234	)		(833,409	)		(519,634	)		(74,640	)
Less: Net income (loss) income attributable to non-controlling interest		79			2			(1,101	)		(158	)
Net loss attributable to ordinary shareholders of Puxin Limited		(397,313	)		(833,411	)		(518,533	)		(74,482	)

Our net revenues increased by 39.3% from RMB2,228.1 million in 2018 to RMB3,104.0 million (US$445.9 million) in 2019, primarily reflecting increases in student enrollments. Student enrollments increased by 55.6% from 1,846,349 in 2018 to 2,872,025 in 2019.

Our cost of revenues increased by 31.1% from RMB1,242.9 million in 2018 to RMB1,629.4 million (US$234.1 million) in 2019, primarily due to the increases in our teaching staff cost, rental expenses, depreciation and amortization expenses and facility maintenance expenses.

Our gross profit increased by 49.7% from RMB985.2 million in 2018 to RMB1,474.5 million (US$211.8 million) in 2019.

Our gross margin increased from 44.2% in 2018 to 47.5% in 2019, reflecting an increase in the gross margin of K-12 tutoring services from 40.2% in 2018 to 45.7% in 2019 and an increase in the gross margin of study-abroad tutoring services from 48.7% in 2018 to 50.5% in 2019. These increases were primarily due to our improved operational efficiency.

Our operating expenses increased by 12.8% from RMB1,624.0 million in 2018 to RMB1,832.1 million (US$263.2 million) in 2019.

Our selling expenses increased by 27.8% from RMB848.1 million in 2018 to RMB1,083.8 million (US$155.7 million) in 2019, primarily due to (i) an increase in salaries and employee benefits for our sales and marketing personnel, attributable to increased performance-based salaries for our sales and marketing team, and (ii) an increase in advertising and promotion expenses of our schools in line with our overall business growth. As a percentage of our net revenues, selling expenses decreased from 38.1% in 2018 to 34.9% in 2019.

Our general and administrative expenses decreased by 3.6% from RMB775.9 million in 2018 to RMB748.3 million (US$107.5 million) in 2019, primarily due to a decrease in share-based compensation expenses relating to the options we granted our management staff in the first quarter of 2019, which was partially offset by (i) an increase in salaries and employee benefits for administrative staff, reflecting the increased headcount as a result of the increase of our learning centers, and (ii) an increase in facilities maintenance expenses attributable to our increased learning centers. As a percentage of our net revenues, general and administrative expenses decreased from 34.8% in 2018 to 24.1% in 2019.

As a result, our operating loss decreased by 44.0% from RMB638.7 million in 2018 to RMB357.5 million (US$51.4 million) in 2019. Our operating margin was (28.7)% and (11.5)% in 2018 and 2019, respectively.

Interest expenses increased by 37.0% from RMB51.9 million in 2018 to RMB71.1 million(US$10.2 million) in 2019, primarily due to the increase in loans from third parties and bank borrowings.

Our interest income increased significantly from RMB2.8 million in 2018 to RMB25.5 million (US$3.7 million) in 2019, primarily due to (i) the interest income from our loans to American Hebrew Academy, Inc., and (ii) an increase in interest income from our short-term deposits with banks.

We incurred foreign exchange loss or gain caused by the changes in foreign exchange rates with respect to the proceeds we raised from our initial public offering. In 2019, we recorded a foreign exchange gain of RMB0.2 million (US$0.03 million). In 2018, we recorded a foreign exchange loss of RMB7.6 million.

Loss on Changes in Fair Value of Convertible Notes, Derivative Liabilities and Warrants

In 2019, we incurred a loss of RMB104.6 million (US$15.0 million) in 2019 due to changes in fair value of the derivative liabilities in connection with the convertible note we issued to CICC ALPHA Eagle Investment Limited, in September 2017.

In 2018, we incurred a loss of RMB131.7 million in 2018 due to changes in fair value of convertible notes, derivative liabilities and warrants in connection with (i) the convertible debt arrangement we entered into with Huazhong in June 2017, (ii) the convertible note we issued to Haitong in August 2017, and (iii) the convertible note we issued to CICC ALPHA Eagle Investment Limited, or CICC ALPHA, in September 2017, before the conversion rights under these securities were exercised or waived.

Our income tax expense increased from RMB5.3 million in 2018 to RMB12.2 million (US$1.8 million) in 2019, primarily due to the increase in our taxable income for certain profit-making schools, which were subject to enterprise income tax in China.

As a result of foregoing, we had net loss of RMB833.4 million and RMB519.6 million (US$74.6 million) in 2018 and 2019, respectively.

Our net revenues increased by 73.7% from RMB1,282.6 million in 2017 to RMB2,228.1 million in 2018, primarily reflecting the increases in net revenues from our K-12 tutoring services and study-abroad tutoring services.

Our cost of revenues increased by 56.5% from RMB794.3 million in 2017 to RMB1,242.9 million in 2018, primarily due to the increases in our teaching staff cost, rental expenses and depreciation and amortization expenses.

Our gross profit increased by 101.8% from RMB488.2 million in 2017 to RMB985.2 million in 2018.

Our gross margin increased from 38.1% in 2017 to 44.2% in 2018, reflecting an increase in the gross margin of K-12 tutoring services from 37.1% in 2017 to 40.2% in 2018 and an increase in the gross margin of study-abroad tutoring services from 40.1% in 2017 to 48.7% in 2018. These increases were primarily due to our improved operational efficiency attributable to upgrading our existing learning centers, the improvement of teachers' utilization and adjustments to teachers' compensation structure.

Our operating expenses increased by 101.1% from RMB807.7 million in 2017 to RMB1,624.0 million in 2018, reflecting the increases in our selling expenses and general and administrative expenses.

Our selling expenses increased by 90.6% from RMB444.9 million in 2017 to RMB848.1 million in 2018, mainly driven by (i) an increase in salaries and employee benefits for our sales and marketing personnel, attributable to increased performance-based salaries for our sales and marketing team, (ii) an increase in advertising and promotion expenses of our schools in line with our overall business growth. As a percentage of our net revenues, selling expenses increased from 34.7% in 2017 to 38.1% in 2018.

Our general and administrative expenses increased by 113.9% from RMB362.7 million in 2017 to RMB775.9 million in 2018, primarily due to (i) a significant increase in share-based compensation expenses relating to the options we granted our management staff in the first quarter of 2018 to attract and retain key employees, (ii) an increase in salaries and employee benefits for administrative staff, reflecting the increased headcount as a result of the increase of our learning centers, and (ii) an increase in office rental and facilities maintenance expenses attributable to our increased learning centers. As a percentage of our net revenues, general and administrative expenses increased from 28.3% in 2017 to 34.8% in 2018.

As a result, our operating loss increased from RMB319.5 million in 2017 to RMB638.7 million in 2018. Our operating margin was (24.9)% and (28.7)% in 2017 and 2018, respectively.

We incurred interest expense of RMB5.6 million in 2017 in connection with the promissory note in the principal amount of US$25 million we issued in August 2017 to Haitong International Investment Holdings Limited, or Haitong.

We incurred interest expense of RMB51.9 million in 2018, primarily due to the interest expenses in connection with (i) our promissory note in the principal amount of US$25 million to Haitong, (ii) our promissory notes in the principal amount of RMB190 million to Jiangyin Huazhong Investment Management Co., Ltd., or Huazhong, as Huazhong waived its conversion right under the convertible debt arrangement with us, and (iii) amount due to Mr. Yunlong Sha of RMB180 million which was paid by Mr. Yunlong Sha on behalf of our group to repurchase an aggregate of 5% equity interest in Puxin Education in connection with our restructuring arrangements.

Our interest income consists primarily of interest on our cash deposit balances with banks. Our interest income amounted to RMB0.5 million in 2017 and RMB2.8 million in 2018.

Loss on Changes in Fair Value of Convertible Notes, Derivative Liabilities and Warrants

In 2017, we incurred a loss of RMB70.3 million due to changes in fair value of convertible notes and derivative liabilities in connection with (i) the convertible debt arrangement we entered into with Huazhong in June 2017, (ii) the convertible note we issued to Haitong in August 2017, and (iii) the convertible note we issued to CICC ALPHA Eagle Investment Limited, or CICC ALPHA, in September 2017.

Our income tax expense increased from RMB2.4 million in 2017 to RMB5.3 million in 2018, primarily due to the increase in our taxable income for certain profit-making schools, which were subject to enterprise income tax in China.

As a result of foregoing, we had net loss of RMB397.2 million and RMB833.4 million in 2017 and 2018, respectively.

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 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 annual report.

We provide K-12 tutoring services, study-abroad test preparation services and study-abroad consulting services to students. Prior to January 1, 2018, we recognized revenues, under FASB Revenue Recognition (Topic 605), when the following four revenue recognition criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the service has been performed and received by the customer, (iii) the amount of fees from the customer is fixed or determinable, and (iv) collectability is reasonably assured.

On January 1, 2018, we adopted Topic 606 applying the modified retrospective method to all contracts that were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period. We recorded a net reduction to opening accumulated deficit of RMB48.3 million as of January 1, 2018 due to the cumulative impact of adopting Topic 606.

Under Topic 606, revenues are recognized when control of the promised goods or services are transferred to the customers, in an amount that reflects the consideration that we expect to receive in exchange for those goods or services.

Our revenues represent amounts received for services provided in the normal course of our business, net of discounts and value added tax and surcharges. The primary sources of our revenues are as follows:

We provide various types of after-school tutoring services to help students ranging from ages three to eighteen to improve their academic performance and enroll in their desired schools and universities. The after-school tutoring services primarily consist of after-school group class courses, personalized tutoring courses and full-time tutoring courses. The K-12 tutoring services are accounted for as a single performance obligation. Tuition fees are generally collected in advance and are initially recorded as deferred revenue. Such deferred revenue is recognized as revenue proportionally as the tutoring sessions are delivered. We usually provide tuition refunds to students if they decide to withdraw from the courses within a trial period. For some K-12 courses, we also offer refunds for the remaining classes to students who withdraw from the courses. The refund is equal to the amount related to the undelivered class. We determine the transaction price to be earned by estimating the refund liability based on historical refund ratio on a portfolio basis using the expected value method.

We provide study-abroad test preparation services to help students prepare for admission tests for high schools, universities and graduate programs primarily in English-speaking countries. Tutoring fees are collected in advance and are initially recorded as deferred revenue which is recognized proportionately as the tutoring sessions are delivered. We provide students with trial classes for the courses that they subscribe and tuition fees are refundable in the full amount if a student decides to withdraw from the course after the trial classes. No refund will be provided to a student who withdraws from a course after the trial period. The study-abroad test preparation services are accounted for as a single performance obligation.

We provide study-abroad consulting services to offer quality advisory guidance for students who intend to study abroad. We charge each student upfront prepaid consulting service fees based on the scope of consulting services requested by the student and

recognize revenue as the services are delivered. A portion of the prepaid services fee are refundable if a student does not successfully gain any admission, which are accounted for as variable consideration under Topic 606. The study-abroad consulting services are accounted for as a single performance obligation. We estimate the variable consideration to be earned and recognize revenues over the service period.

Our contracts with customers may include multiple performance obligations. For such arrangements, we allocate revenues to each performance obligation based on its relative standalone selling price. We generally determine standalone selling prices based on the prices charged to customers.

Our consolidated financial statements include the financial statements of Puxin Limited, its subsidiaries, its VIE and the VIE’s subsidiaries. All profits, transactions and balances among Puxin Limited, its subsidiaries, its VIE and the VIE’s subsidiaries and schools have been eliminated upon consolidation.

Purong Beijing, our wholly-owned PRC subsidiary, holds the power to direct the activities of Puxin Education and its subsidiaries that most significantly affect our economic performance and bears the economic risks and receives the economic benefits of Puxin Education and its subsidiaries through a series of contractual agreements with Puxin Education and/or its nominee shareholders, including:

Based on the advice of our PRC legal counsel, we believe above-mentioned contractual agreements are currently legally enforceable under PRC law and regulations.

As a result of these contractual arrangements, we believe we are entitled to direct the activities that most significantly affect the economic performance of Puxin Education, and receive the economic benefits of Puxin Education. In making the conclusion that we are the primary beneficiary of Puxin Education, we believe our rights under the exclusive call option agreements and powers of attorney have reinforced our abilities to direct the activities most significantly impacting Puxin Education’s economic performance. We also believe that this ability to exercise control ensures that Puxin Education would continue to execute and renew service agreements and pay service fees to us. By charging service fees, and by ensuring that service agreements are executed and renewed indefinitely, we have the rights to receive substantially all of the economic benefits from Puxin Education. Accordingly, as the primary beneficiary of Puxin Education and in accordance with U.S. GAAP, we consolidate its financial results and assets and liabilities in our consolidated financial statements.

As advised by our PRC legal counsel, our corporate structure in China complies with all existing PRC laws and regulations. However, our PRC legal counsel has also advised us that as there are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, and we cannot assure you that the PRC government would agree that our corporate structure or any of the above-mentioned contractual arrangements comply with current or future PRC laws or regulations. PRC laws and regulations governing the validity of these contractual arrangements are uncertain and the relevant government authorities may have broad discretion in interpreting these laws and regulations.

Business combinations are recorded using the acquisition method of accounting. The purchase price of the acquisition is allocated to the tangible assets, liabilities, identifiable intangible assets acquired and non-controlling interest, if any, based on their estimated fair value as of the acquisition date. The excess of the purchase price over those fair values is recorded as goodwill. Acquisition-related expenses and restructuring costs are expensed as incurred.

In order to recognize the fair value of assets acquired and liabilities assumed, mainly consisting of intangible assets, goodwill and warrants granted to the shareholders of the entities acquired as acquisition consideration, we used valuation techniques such as discounted cash flow analysis, ratio analysis in comparison to comparable companies in similar industries under the income approach, market approach and cost approach. Major factors considered include historical financial results and assumptions including future growth rates, an estimate of weighted average cost of capital and the effect of expected changes in regulation. Most of the valuations of our acquired businesses have been performed by independent valuation specialists under our management’s supervision. We believe that the estimated fair value assigned to the assets acquired and liabilities assumed are based on reasonable assumptions and estimates that market participants would use. However, such assumptions are inherently uncertain and actual results could differ from those estimates.

Goodwill represents the excess of the purchase price over the fair value of identifiable net assets of businesses acquired. Intangible assets with finite lives are amortized over their estimated useful lives. The useful life of an intangible asset is the period over which the asset is expected to contribute directly or indirectly to future cash flows.

We test goodwill for impairment annually at the end of the fourth quarter, or sooner if impairment indicators arise. In the evaluation of goodwill for impairment, we may perform a qualitative assessment to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If it is not, no further analysis is required. If it is, a two-step goodwill impairment test is performed to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized for that reporting unit, if any.

The first step compares the fair value of each reporting unit to its carrying amount, including goodwill. If the fair value of each reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and the second step will not be required. If the carrying amount of a reporting unit exceeds its fair value, the second step compares the implied fair value of goodwill to the carrying value of a reporting unit’s goodwill. The implied fair value of goodwill is determined in a manner similar to accounting for a business combination with the allocation of the assessed fair value determined in the first step to the assets and liabilities of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. An impairment loss is recognized for any excess in the carrying value of goodwill over the implied fair value of goodwill.

We performed goodwill impairment analysis as of December 31, 2019. When determining the fair value of reporting units, including K-12 tutoring services and study-abroad tutoring services, we used a discounted cash flow model that included a number of significant unobservable inputs. Key assumptions used to determine the estimated fair value of a reporting unit include: (i) internal cash flow forecasts including expected revenue growth, operating margins and estimated capital needs, (ii) an estimated terminal value using a terminal year long-term future growth rate determined based on the growth prospects of the reporting unit, and (iii) a discount rate that reflects the weighted-average cost of capital adjusted for the relevant risks associated with the reporting unit’s operations and the uncertainty inherent in the our internally developed forecasts.

Based on the results of our annual goodwill impairment tests, as of testing date, the fair value of our reporting unites, namely K-12 tutoring services and study abroad tutoring services, exceeded their respective carrying value and no impairment was identified for all the periods presented.

Acquired intangible assets other than goodwill consist of (i) student base, (ii) trademarks, (iii) relationship with partnership schools, and (iv) franchise agreements, which are carried at cost, less accumulated amortization and impairment.

We have determined that certain trademarks do not have determinable useful lives. Consequently, the carrying amounts of trademarks are not amortized but are tested for impairment annually or more frequently if events or changes in circumstances indicate that the assets might be impaired. Such impairment test consists of a comparison of the fair value of the trademarks with their carrying amounts and an impairment loss is recognized if and when the carrying amounts of the trademarks exceed their fair values. The estimates of fair values of intangible assets not subject to amortization are determined using various discounted cash flow valuation methodologies. Significant assumptions are inherent in this process, including estimates of discount rates. Discount rate assumptions are based on an assessment of the risk inherent in the respective intangible assets. No impairment loss was recorded during the years ended December 31, 2017, 2018 and 2019, respectively.

We lease properties for our offices and schools in different cities in the PRC under operating leases. We determine whether an arrangement constitutes a lease and record lease liabilities and right-of-use assets on our consolidated balance sheets at the lease commencement. We measure our lease liabilities based on the present value of the total lease payments not yet paid discounted based on the more readily determinable of the rate implicit in the lease or its incremental borrowing rate, which is the estimated rate we would be required to pay for a collateralized borrowing equal to the total lease payments over the term of the lease. We estimate our incremental borrowing rate based on an analysis of publicly traded debt securities of companies with credit and financial profiles similar to its own. We measure right-of-use assets based on the corresponding lease liability adjusted for payments made to the lessor at or before the commencement date, and initial direct costs it incurs under the lease. We begin recognizing rent expense when the lessor makes the underlying asset available to us. Our leases have remaining lease terms of up to 10 years. Though under some of our lease agreements we have options to extend the lease terms for an additional period subject to mutual negotiations and agreements with the lessors, we did not include such optional renewal periods in the lease terms as we are not reasonably certain to exercise such renewal options after considering the factors that create an economic incentive.

Current income taxes are provided for in accordance with the laws of the relevant tax authorities. Deferred income taxes are recognized when temporary differences exist between the tax bases of assets and liabilities and their reported amounts in the financial statements. Net operating loss carry forwards and credits are applied using enacted statutory tax rates applicable to future years. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more-likely-than-not that a portion of or all of the deferred tax assets will not be realized. The impact of an uncertain income tax position is recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant tax authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Interest and penalties on income taxes will be classified as a component of the provisions for income taxes.

We measure the cost of employee share options based on the grant date fair value of the award and recognizes compensation cost over the period during which an employee is required to provide services in exchange for the award, which generally is the vesting period. For the graded vesting share options, we recognize the compensation cost over the requisite service period for each separately vesting portion of the award as if the award is, in substance, multiple awards. When no future services are required to be performed by the employee in exchange for an award of equity instruments, the cost of the award is expensed on the grant date.

The following table sets forth certain information regarding the share options granted to our employees at different dates in 2015, 2016, 2017, 2018 and 2019:

Grant Date	Number of Options Granted		Weighted Average Exercise Price per Option		Weighted Average Fair Value per Option at the Grant Dates		Intrinsic Value per Option at the Grant Dates		Type of Valuation
			(RMB)		(RMB)		(RMB)
March 1, 2015		1,156,200		0.244		5.085		5.073	Retrospective
June 30, 2015		8,560,800		0.244		5.091		5.091	Retrospective
September 30, 2015		2,066,400		0.268		12.896		12.884	Retrospective
December 31, 2015		5,805,600		0.262		13.860		13.860	Retrospective
March 31, 2016		803,600		0.305		23.372		23.360	Retrospective
June 30, 2016		483,800		0.512		24.116		24.104	Retrospective
September 30, 2016		499,462		0.585		26.530		26.506	Retrospective
December 31, 2016		739,476		0.610		27.634		27.616	Retrospective
March 31, 2017		1,087,895		8.123		24.119		21.334	Retrospective
June 30, 2017		741,952		18.674		29.027		23.125	Retrospective
September 30, 2017		345,023		27.647		28.236		17.901	Retrospective
December 31, 2017		1,126,270		31.347		29.629		16.964	Retrospective
March 31, 2018		16,400,000		48.780		24.200		0.885	Retrospective
March 6, 2019		8,879,986		0.01		20.560		20.560	Retrospective

The valuation was performed retrospective valuations instead of contemporaneous valuations because, at the time of the valuation dates, the financial and limited human resources were principally focused on business development efforts. This approach is consistent with the guidance prescribed by the AICPA Audit and Accounting Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, or the Practice Aid.

In determining the value of share options, we have used the binomial option pricing model, with assistance from an independent third-party valuation firm. Under this option pricing model, certain assumptions, including the risk-free interest rate, the expected dividends on the underlying ordinary shares, and the expected volatility of the price of the underlying shares for the contractual term of the options are required in order to determine the fair value of our options.

The fair value of an option award is estimated on the date of grant using the binomial option pricing model that uses the following assumptions:

Convertible notes for which the fair value option is elected are carried at fair value, with changes in fair value recognized in earnings. We determine the fair value of convertible notes associated with the issuances of the convertible notes as Level 3 liabilities, with the assistance of an independent third-party appraiser. To determine the fair value of the convertible notes, we used probability expected return method. To determine the fair value of the derivative liabilities, we used binomial model. To determine the fair value of warrants, we used the modified discount cash flow model.

The key assumptions used in valuation of convertible notes are summarized in the table below:

The key assumptions used in valuation of derivative liabilities are summarized in the table below:

The key assumptions used in valuation of warrants are summarized in the table below:

A list of recently issued accounting pronouncements that are relevant to us is included in note 2 to our audited consolidated financial statements included elsewhere in this annual report.

To date, our principal sources of liquidity have been cash generated from operations, loans and borrowings from third parties and banks, proceeds from the issuance of our ordinary shares in our initial public offering and the issuance of notes to certain investors.

As of December 31, 2019, we had RMB256.8 million (US$36.9 million) in cash and cash equivalents and RMB349.5 million (US$50.2 million) in the current portion of restricted cash. The current portion of restricted cash consisted primarily of deposits with Chinese commercial banks as collateral for our bank borrowings within one-year term.

As of December 31, 2019, we had bank borrowings of RMB318.6 million (US$45.8 million) and loans payable to third parties of RMB413.8 million (US$59.4 million). Among the loans payable to third parties, RMB250.9 million (US$36.0 million) was the total balance amount under the directed financing schemes that are debt instruments issued by Puxin Education and registered with competent financial asset exchanges in China. The directed financing schemes outstanding as of December 31, 2019 have an annual interest rate ranging from 7.0% to 9.5% with a term within 12 months. Mr. Yunlong Sha and Ms. Wenjing Song, who is married to Mr. Yunlong Sha, Taiyuan Puxin Culture and Arts Co., Ltd. and Shanghai Global Career Education & Technology Holdings Limited provide joint guarantees for the respective directed financing schemes and the future cash flows from tuition fees of certain schools are pledged for the repayments under these directed financing schemes. As of December 31, 2019, we had promissory notes in an aggregate principal amount of RMB174.0 million (US$25.0 million) as we and Haitong entered into an agreement to amend certain terms of the US$25 million promissory note that we originally issued in August 2017 to Haitong. Pusuant to the amended promissory note, the half of the principal amount in US$12.5 million (RMB87.0 million) will become due on August 4, 2020 and the other half of US$12.5 million will become due on August 4, 2021, bearing a simple annual interest rate of 10% for the extended period of the original promissory note.

In February and March 2020, our subsidiary, Purong (Beijing) Information Technology Co., Ltd., or Purong Beijing, and Mr. Yunlong Sha entered into a credit agreement with two third parties, respectively. Pursuant to these agreements, the two third parties agreed to provide a credit facility in an amount up to RMB350 million and RMB350 million, respectively, to Purong Beijing and Purong Beijing can draw down an amount within the facility with an advance notice. Mr. Yunlong Sha agreed to provide guarantee for all the amounts to be drawn down by Purong Beijing under these two credit agreements.

We believe that our current cash and cash equivalents and anticipated cash flows from operating and financing activities will be sufficient to meet our anticipated cash needs, including our cash needs for working capital and capital expenditures, for at least the next 12 months.

We intend to finance our future working capital requirements and capital expenditures from cash generated from financing activities. We may, however, require additional cash resources due to changing business conditions or other future developments, including acquisitions or investments we may decide to selectively pursue. If our existing cash resources are insufficient to meet our requirements, we may seek to issue equity or debt securities or obtain credit facilities. The issue of additional equity securities, including convertible debt securities, would result in further dilution to our shareholders. The incurrence of indebtedness would result in increased fixed obligations and could result in operating covenants that would restrict our operations. We cannot assure you that financing will be available in the amounts we need or on terms acceptable to us, if at all. If we are unable to obtain additional equity or debt financing as required, our business operations and prospects may suffer.

The following table sets forth a summary of our cash flows for the periods indicated:

We had net cash generated from operating activities of RMB24.7 million (US$3.5 million) in 2019, primarily attributable to an increase in accrued expenses and other current liabilities of RMB138.2 million (US$19.8 million) reflecting increased salary and welfare payable. This was positively adjusted for certain non-cash expenses consisting primarily of the share-based compensation of RMB230.4 million (US$33.1 million), loss on change in fair value of convertible notes, derivatives and warrants of RMB104.6 million (US$15.0 million), and depreciation and amortization of RMB112.8 million (US$16.2 million).

We had net cash used in operating activities of RMB92.9 million in 2018, primarily attributable to (i) the net loss of RMB833.4 million, (ii) an increase in prepaid expenses and other current assets of RMB48.8 million, and (iii) a decrease in deferred revenue of RMB32.1 million primarily attributable to the prohibition on collecting prepaid tuition fees for more than three months by regulations promulgated by the PRC government. This was positively adjusted for (i) certain non-cash expenses consisting primarily of the share-based compensation of RMB375.0 million and loss on change in fair value of convertible notes, derivative liabilities and warrants of RMB131.7 million, and (ii) an increase in the amount due to related parties of RMB230.7 million.

Net cash generated from operating activities amounted to RMB80.3 million in 2017, which was primarily attributable to (i) an increase in deferred revenue of RMB200.6 million as a result of the increased prepayments from our students in line with our increased student enrollments in 2017, and (ii) an increase in accrued expenses and other current liabilities of RMB140.3 million reflecting increase salary and welfare payable, which were partially offset by the net loss of RMB397.2 million. This was positively adjusted for certain non-cash expenses consisting primarily of the share-based compensation of RMB55.8 million, loss on change in fair value of convertible notes and derivatives of RMB70.3 million and amortization of intangible assets of RMB23.6 million.

Net cash used in investing activities amounted to RMB411.3 million (US$59.1 million) in 2019, primarily attributable to (i) payments for the schools and businesses we acquired in the amount of RMB104.5 million (US$15.0 million), (ii) loans that we extended to American Hebrew Academy, Inc., or AHA, in an aggregate amount of RMB191.2 million (US$27.5 million), and (iii) property refurbishment and purchase of teaching equipment in the amount of RMB115.5 million (US$16.6 million) to support our business growth. Our loans to AHA bear an interest rate of 18% per annum and will become due on September 6, 2021.

Net cash used in investing activities amounted to RMB156.9 million in 2018, primarily attributable to (i) installment payments for the schools and businesses we acquired in current and prior years in the amount of RMB73.2 million, and (ii) property refurbishment and purchase of teaching equipment in the amount of RMB83.7 million to support our business growth.

Net cash used in investing activities amounted to RMB629.7 million in 2017, which was primarily attributable to (i) payments for the schools we acquired in 2017 in the amount of RMB565.0 million, including the consideration price we paid for the acquisitions of ZMN Education and Global Education, and (ii) property refurbishment and purchase of teaching equipment in the amount of RMB64.7 million to support our business growth.

Net cash generated from financing activities amounted to RMB204.2 million (US$29.3 million) in 2019, attributable to loans from third parties and borrowings from banks, which were partially offset by repayments to third parties and repayments of bank borrowings and promissory notes.

Net cash generated from financing activities amounted to RMB831.5 million in 2018, attributable to (i) proceeds from IPO, (ii) proceeds from promissory notes we issued to Jiangyin Huazhong Investment Management Co., Ltd. which provided us with credit facilities, (iii) loans from third parties and (iv) borrowings from banks.

Net cash generated from financing activities amounted to RMB629.4 million in 2017, attributable to (i) proceeds from issuances of the convertible note to Haitong in August 2017 and the convertible note to CICC ALPHA in September 2017, and the loan drawn down from the convertible credit facility with Huazhong, and (ii) proceeds from issuance of the promissory note to Haitong in August 2017.

Our capital expenditures are incurred primarily in connection with renovation of facilities, purchase of educational equipment and investment in IT infrastructures. Our capital expenditures were RMB64.7 million in 2017, RMB83.7 million in 2018 and RMB115.5 million (US$16.6 million) in 2019.

Puxin Limited is a holding company with no material operations of its own. We conduct our operations primarily through our subsidiaries (Purong Beijing and Beijing Global Education & Technology Co., Ltd.), our consolidated VIE (Puxin Education) and its subsidiaries in China. As a result, our ability to pay dividends depends upon dividends paid by our subsidiaries and fees paid by our VIE to Purong Beijing. If our 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.

In addition, our subsidiaries in China are permitted to pay dividends to us only out of their retained earnings, if any, as determined in accordance with the Accounting Standards for Business Enterprise as promulgated by the Ministry of Finance of the PRC, or PRC GAAP. Under PRC law, each of our PRC subsidiaries, our VIE and its subsidiaries which is not a private school is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory surplus reserve until such reserve reaches 50% of its registered capital and to further set aside a portion of its after-tax profit to fund the reserve fund at the discretion of our board of directors. Although the statutory reserves can be used, among other ways, to increase the registered capital and eliminate future losses in excess of retained earnings of the respective companies, the reserve funds are not distributable as cash dividends except in the event of liquidation. In addition, prior to the effectiveness of the Amended Private Education Law, at the end of each fiscal year, each of our private schools in China was required to allocate a certain amount out of its annual net income, if any, to its development fund for the construction or maintenance of the school or procurement or upgrade of educational equipment. For our schools which have elected to require reasonable returns, this amount shall be no less than 25% of the annual net income of the school, and for our schools which have elected not to require reasonable returns, this amount shall be equivalent to no less than 25% of the annual increase in the net assets of the school, if any. When 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 Implementation Rules for Approval, 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. Our PRC subsidiaries are permitted to pay dividends to us only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations.

As an offshore holding company, we are permitted under PRC laws and regulations to provide funding from the proceeds of our offshore fund raising activities to our PRC subsidiaries only through loans or capital contributions, and to our VIE only through loans, in each case subject to the satisfaction of the applicable government registration and approval or filing requirements. See “Item 3. Key Information—D. 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 the initial public 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.” As a result, there is uncertainty with respect to our ability to provide prompt financial support to our PRC subsidiaries and consolidated VIE when needed. Notwithstanding the forgoing, our PRC subsidiaries may use its own retained earnings (rather than Renminbi converted from foreign currency denominated capital) to provide financial support to our VIE either through entrustment loans from our PRC subsidiaries to our consolidated VIE or direct loans to the VIE’s nominee shareholders, which would be contributed to the VIE as capital injections. Such direct loans to the nominee shareholders would be eliminated in our consolidated financial statements against the VIE’s share capital.

See “Item 4. Information of the Company—B. Business Overview—Course Material Development.”

In January 2020, novel coronavirus (“ COVID-19”) has spread rapidly to many parts of China and other parts of the world. The epidemic has resulted in quarantines, travel restrictions, and the temporary closure of stores and facilities in China and elsewhere. Substantially all of our revenue and workforce are concentrated in China. Consequently, the COVID-19 outbreak may materially adversely affect our business operations and financial condition and operating results for 2020, including but not limited to material negative impact to our total revenues and significant downward adjustments or impairment to our long-term assets. Because of the significant uncertainties surrounding the COVID-19 outbreak, the extent of the business disruption and the related financial impact cannot be reasonably estimated at this time. See “Item 3. Key Information—4.D. Risk Factors— Risk Factors Related to Our Business and Industry—The recent coronavirus outbreak may adversely affect our revenues, results of operations and financial condition.”

Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events since January 1, 2020 that are reasonably likely to have a material effect on our revenues, income, profitability, liquidity or capital resources, or that caused the disclosed financial information to be not necessarily indicative of future operating results or financial conditions.

We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or product development services with us.

We lease certain offices and schools under non-cancelable operating leases that expire at various dates. In 2018 and 2019, we incurred rental expenses for all operating leases amounted to RMB332.6 million and RMB378.7 million (US$54.4 million), respectively. The following table sets forth our future minimum payments under non-cancelable operating leases related to offices and schools as of December 31, 2019.

The following table sets forth the name, age and position of each of our directors and executive officers as of March 31, 2020.

Mr. Yunlong Sha is the founder of our company and has served as chairman of our board and our chief executive officer since 2014. Prior to starting our business in 2014, Mr. Sha served as senior vice president and held various managerial positions at New Oriental Education & Technology Group Inc. from 2001 to 2014. Mr. Sha received his EMBA degree from Cheung Kong Graduate School of Business and bachelor’s degree in law from Renmin University of China.

Mr. Peng Wang has served as our chief financial officer since 2017. Mr. Wang joined us in 2017. Mr. Wang previously served as senior vice president at China Hi-Tech Group Co., Ltd. from October 2016 to October 2017 and served as principal of a school under New Oriental Education & Technology Group Inc. from March 2010 to October 2016. Mr. Wang received his doctor’s degree in economics from Renmin University of China.

Ms. Ming Hu has served as our director since 2015 and served as our independent director since June 2018. Ms. Hu also has served as director of CITIC Publishing Group Corporation since September 2016. Ms. Hu previously held various managerial positions at Huayi Brothers Media Corporation from May 2005 to February 2016. Ms. Hu received her master’s degree from the University of International Business and Economics.

Mr. Kehai Xie has served as our director since 2014 and served as our independent director since June 2018. Mr. Xie has served as director, president and chief executive officer of Peking University Founder Group Co., Ltd. since 2015 and served as senior vice president of Peking University Founder Group Co., Ltd. from January 2010 to July 2015. Mr. Xie has also served as chairman of PKU Founder IT Group Co. Ltd. since November 2015 and as chairman of PKU Founder Education Investment Group Co. Ltd. from June 2016 to May 2018. Mr. Xie received his master degree in business administration and bachelor’s degree from the University of Science and Technology Beijing.

Mr. Neng Wang has served as our independent director since February 2019. Dr. Wang currently serves as Chong Khoon Lin Professor of Real Estate and Finance at Columbia Business School. Dr. Wang is also the Honorary Dean and Academic Director of the School of Finance, Shanghai University of Finance and Economics (SUFE), and a Research Associate at the National Bureau of Economic Research (NBER). Dr. Wang is a recipient of the “Thousand Talents” Program, one of the most prestigious awards granted by the Chinese government. Prior to joining Columbia University, Dr. Wang taught at the Simon School of Business, University of Rochester and was a visiting professor at Kellogg School of Management, Northwestern University. He was also a special-term professor at Cheung Kong Graduate School of Business (CKGSB), Guanghua School of Management at Peking University, Shanghai Advanced Institute of Finance (SAIF) at Shanghai Jiaotong University (SJTU), and the School of Economics, Zhejiang University. Dr. Wang received B.S. in Physical Chemistry from Nanjing University, China in 1992, M.S. in Chemistry from California Institute of Technology (Caltech) in 1995, M.A. in International Relations and Pacific Studies from University of California, San Diego (UCSD) in 1997, and Ph.D. in Finance from the Graduate School of Business at Stanford University in 2002.

In 2019, the aggregate cash compensation and benefits that we paid to our directors and executive officers was US$0.09 million. No pension, retirement or similar benefits have been set aside or accrued for our executive officers or directors. We have no service contracts with any of our directors providing for benefits upon termination of employment.

We have entered into an employment agreement with each of our executive officers. Each of our executive officers is employed for a specified time period, which will be automatically extended unless either we or the executive officer gives a 30-day prior written notice to terminate such employment. We may terminate the executive officer’s employment for cause, at any time, without advance notice or remuneration, for certain acts of the executive officer, such as conviction or plea of guilty to a felony or any crime involving moral turpitude, negligent or dishonest acts to our detriment, or misconduct or a failure to perform agreed duties.

Each executive officer has agreed not to disclose, use, transfer or sell, except in the course of employment with our company and for the purpose of carrying out his or her duties as an officer of our company, any of our confidential information or proprietary data so long as such information or proprietary data remains confidential and has not been disclosed or is not otherwise in the public domain. Each officer has agreed that we shall own all the intellectual property developed by such officer during his or her employment. In addition, each executive officer has agreed to be bound by non-competition and non-solicitation restrictions during the term of his or her employment and typically for two years following the last date of employment.

We have entered into indemnification agreements with our directors and executive officers, pursuant to which we agree to indemnify our directors and executive officers against certain liabilities and expenses incurred by such persons in connection with claims made by reason of their being such a director or officer.

In December 2014, Puxin Education adopted its 2014 Great Talent Share Incentive Plan. We refer this plan as the Original Plan. Under the Original Plan, the maximum aggregate number of shares of Puxin Education that may be issued will not exceed 158,400,000. The term of the options will not exceed seven years from the date of the grant. We granted 142,783,400 options to purchase Puxin Education’s equity interest from 2015 to 2017. In March 2018, we adopted Puxin Limited 2018 Great Talent Share Incentive Plan to replace the Original Plan. The maximum aggregate number of ordinary shares that may be issued under the 2018 Great Talent Share Incentive Plan is 6,592,538 ordinary shares of Puxin Limited. As of December 31, 2019, there were 5,929,076 options outstanding which entitle their holders to purchase 5,929,076 ordinary shares of Puxin Limited under this plan.

The following paragraphs summarize the terms of the 2018 Great Talent Share Incentive Plan.

Types of Awards. The 2018 Great Talent Share Incentive Plan permits the awards of options, restricted shares, restricted share units, share appreciation rights, rights to dividends, dividend equivalent right and other rights or benefits under the 2018 Great Talent Share Incentive Plan.

Plan Administration. Before the initial public offering, the 2018 Great Talent Share Incentive Plan was administered by the board of directors. After the initial public offering, a committee formed in accordance with applicable stock exchange rules shall administer the 2018 Great Talent Share Incentive Plan, unless otherwise determined by the board of directors.

Conditions of Award. The board of directors or the committee designated by the board of directors to administer the 2018 Great Talent Share Incentive Plan, as the administrator, shall determine the participants, types of awards, numbers of shares to be covered by awards, terms and conditions of each award, and provisions with respect to the vesting schedule, settlement, exercise, cancellation, forfeiture or suspension of awards.

Term of Award. The term of each award shall be fixed by the committee and is stated in the award agreement between recipient of an award and us. No award shall be granted under this 2018 Great Talent Plan after the seventh anniversary of the effective date of the Original Plan.

Transfer Restrictions. Unless otherwise determined by the administrator of the 2018 Great Talent Share Incentive Plan, no award and no right under any such award, shall be assignable, alienable, saleable or transferable by the employee otherwise than by will or by the laws of descent and distribution unless, if so determined by the administrator of the 2018 Great Talent Share Incentive Plan, the recipient of an award may, in the manner established by such administrator, designate a beneficiary or beneficiaries to exercise his or her rights, and to receive any property distributable, with respect to any award upon the death of the recipient.

2018 Grand Talent Share Incentive Plan and 2019 Noble Talent Share Incentive Plan

Our board of directors adopted the 2018 Grand Talent Share Incentive Plan in February 2018 and adopted the 2019 Noble Talent Share Incentive Plan in March 2019. The purpose of these two plans is to enhance our ability to attract and retain highly qualified officers, directors, key employees and other persons, and to motivate such persons to serve us and our affiliates and to expend maximum effort to improve our business results and earnings, by providing such persons an opportunity to acquire or increase a direct interest in our operations and future success.

The maximum aggregate number of ordinary shares that may be issued under the 2018 Grand Talent Share Incentive Plan is 16,400,000. On March 31, 2018, we granted options to purchase a total of 16,400,000 ordinary shares to employees. The maximum aggregate number of ordinary shares that may be issued under the 2019 Noble Talent Share Incentive Plan is 8,879,986. On March 6, 2019, we granted options to purchase a total of 8,879,986 ordinary shares to employees.

The following paragraphs summarize the terms of the 2018 Grand Talent Share Incentive Plan and the 2019 Noble Talent Share Incentive Plan.

Eligibility. Our employees and consultants are eligible to participate in the 2018 Grand Talent Share Incentive Plan and the 2019 Noble Talent Share Incentive Plan.

Types of Awards. The 2018 Grand Talent Share Incentive Plan and the 2019 Noble Talent Share Incentive Plan permit the awards of options, restricted shares, restricted share units, share appreciation rights, rights to dividends, dividend equivalent right and other rights or benefits.

Plan Administration. Before the initial public offering, the 2018 Grand Talent Share Incentive Plan was administered by the board of directors. After the initial public offering, a committee formed in accordance with applicable stock exchange rules shall administer the 2018 Grand Talent Share Incentive Plan and the 2019 Noble Talent Share Incentive Plan, unless otherwise determined by the board of directors.

Conditions of Award. The board of directors or the committee designated by the board of directors to administer the 2018 Grand Talent Share Incentive Plan and the 2019 Noble Talent Share Incentive Plan, as the administrator, shall determine the participants, types of awards, numbers of shares to be covered by awards, terms and conditions of each award, and provisions with respect to the vesting schedule, settlement, exercise, cancellation, forfeiture or suspension of awards.

Term of Award. The term of each award shall be fixed by the committee and is stated in the award agreement between recipient of an award and us, provided that the term shall be no more than ten years from the date of grant thereof.

Transfer Restrictions. Unless otherwise determined by the administrator of the 2018 Grand Talent Share Incentive Plan and the 2019 Noble Talent Share Incentive Plan, no award and no right under any such award, shall be assignable, alienable, saleable or transferable by the employee otherwise than by will or by the laws of descent and distribution unless, if so determined by the administrator of the 2018 Grand Talent Share Incentive Plan and the 2019 Noble Talent Share Incentive Plan, the recipient of an award may, in the manner established by such administrator, designate a beneficiary or beneficiaries to exercise his or her rights, and to receive any property distributable, with respect to any award upon the death of the recipient.

Exercise of Award. Any award granted under the 2018 Grand Talent Share Incentive Plan and the 2019 Noble Talent Share Incentive Plan is exercisable at such times and under such conditions as determined by the administrator under the terms of these two plans and specified in the award agreement. An award is deemed to be exercised when exercise notice has been given to us in accordance with the terms of the award by the person entitled to exercise the award and full payment for the shares with respect to which the award is exercised.

Amendment, Suspension or Termination. The administrator of the 2018 Grand Talent Share Incentive Plan and the 2019 Noble Talent Share Incentive Plan may amend, alter, suspend, discontinue or terminate these two plans, or any award agreement hereunder or any portion hereof or thereof at any time; provided, however, that no such amendment, alteration, suspension, discontinuation or termination shall be made without (i) shareholder approval if such approval is necessary to comply with any tax or regulatory requirement for which or with which the administrator deems it necessary or desirable to qualify or comply, (ii) shareholder approval for any amendment to these two plans that increases the total number of shares reserved for the purposes of the 2018 Grand Talent Share Incentive Plan and the 2019 Noble Talent Share Incentive Plan, and (iii) with respect to any award agreement, the consent of the affected recipient of an award, if such action would materially and adversely affect the rights of such recipient under any outstanding award.

The following table summarizes, as of March 31, 2020, the options granted under our 2018 Great Talent Share Incentive Plan, 2018 Grand Talent Share Incentive Plan and 2019 Noble Talent Share Incentive Plan to our directors and executive officers, excluding awards that were forfeited or cancelled after the relevant grant dates.

As of March 31, 2020, other employees as a group held outstanding options awarded to purchase 20,713,819 ordinary shares of our company, with exercise price of US$0.001 to US$7.78 per share.

In February 2018, we issued 17,103,724 ordinary shares to Long favor Limited, a company incorporated in the British Virgin Islands, to establish an employee shareholding platform to allow our employees to receive share incentives. Mr. Yun Xiao, who is a shareholder of our company, is the sole shareholder of Long favor Limited. Long favor Limited has waived its rights associated with these 17,103,724 ordinary shares including the voting right and dividend right. As such we deem these shares as issued but not outstanding ordinary shares until the waiver is released by us, which will occur when all of these ordinary shares are transferred to the

eligible participants of our share incentive plans. On behalf of our company and subject to approval of our board of directors, Mr. Yun Xiao has the authority and responsibility to transfer these ordinary shares to the eligible participants of our share incentive plans when they exercise their share-based awards, including options and restricted shares, pursuant to the award agreements.

As of March 31, 2020, we did not grant any award to our directors or officers associated with the ordinary shares held by Long favor Limited. As of the same date, the number of ordinary shares subject to the waiver of shareholder rights by Long favor had been reduced to 6,426,764 as certain ordinary shares were transferred to certain employees who exercised their share-based awards.

Our board of directors consists of four directors, including three independent directors, namely Ms. Ming Hu, Mr. Kehai Xie and Mr. Neng Wang. Under our second amended and restated memorandum and articles of association, our board of directors consists of at least three directors. Our directors shall be elected by a resolution of the holders of our ordinary shares, or by a resolution of our directors. There is no shareholding requirement for qualification to serve as a member of our board of directors.

A director may vote in respect of any contract or proposed contract or transaction notwithstanding that he may be interested therein and if he does so his vote shall be counted and he may be counted in the quorum at any meeting of the directors at which any such contract or proposed contract or transaction is considered. Our board of directors may exercise all the powers of the company to borrow money, mortgage or charge its undertaking, property and uncalled capital, and issue debentures, debenture stock and other securities whenever money is borrowed or as security for any debt, liability or obligation of the company or of any third party.

We have established an audit committee, a compensation committee and a nominating and corporate governance committee under our board of directors. We adopted a charter for each of the committees prior to the initial public offering. Each committee’s members and functions are described below.

Our audit committee consists of Ms. Ming Hu, Mr. Kehai Xie and Dr. Neng Wang, and is chaired by Ms. Ming Hu. Our board of directors has determined that Ms. Ming Hu, Mr. Kehai Xie and Dr. Neng Wang satisfy the “independence” requirements of Rule 10A-3 under the Securities Exchange Act of 1934, as amended, and Section 303A of the Corporate Governance Rules of the NYSE. Our audit committee will consist solely of independent directors that satisfy the NYSE and SEC requirements within one year of the completion of the initial public offering. We have determined that Ms. Ming Hu qualifies as an “audit committee financial expert.” The audit committee oversees our accounting and financial reporting processes and the audits of the financial statements of our company. The audit committee is responsible for, among other things:

Our compensation committee consists of Mr. Kehai Xie, Ms. Ming Hu and Mr. Yunlong Sha and is chaired by Mr. Kehai Xie. Our board of directors has determined that Mr. Kehai Xie and Ms. Ming Hu satisfy the “independence” requirements of Section 303A of the Corporate Governance Rules of the NYSE. Our compensation committee assists the board in reviewing and approving the compensation structure, including all forms of compensation, relating to our executive officers. The compensation committee is responsible for, among other things:

Our nominating and corporate governance committee consists of Mr. Yunlong Sha, Mr. Kehai Xie and Mr. Neng Wang, and is chaired by Mr. Yunlong Sha. Our board of directors has determined that Mr. Kehai Xie and Mr. Neng Wang satisfy the “independence” requirements of Section 303A of the Corporate Governance Rules of the NYSE. The nominating and corporate governance committee assists the board in selecting individuals qualified to become our directors and in determining the composition of the board and its committees. The nominating and corporate governance committee is responsible for, among other things:

Under Cayman Islands law, our directors have a fiduciary duty to act honestly, in good faith and with a view to our best interests. Our directors also owe to our company a duty to act with skill and care. It was previously considered that a director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience. However, English and Commonwealth courts have moved towards an objective standard with regard to the required skill and care and these authorities are likely to be followed in the Cayman Islands. In fulfilling their duty of care to us, our directors must ensure

compliance with our second amended and restated memorandum and articles of association, as amended and restated from time to time. Our company has the right to seek damages if a duty owed by our directors is breached.

Our officers are elected by and serve at the discretion of our board of directors. Our directors are not subject to a term of office and hold office until such time as they are removed from office by ordinary resolution of shareholders.

We had a total of 8,882, 8,999 and 11,732 full-time employees as of December 31, 2017, 2018 and 2019, respectively. The following table sets forth the number of our full-time employees, categorized by function, as of December 31, 2019:

As of December 31, 2019, we had a total of 11,732 employees, representing a 30.4% increase from 8,999 as of December 31, 2018, primarily due to increases in our information technology staff, as well as managerial staff and sales and marketing.

We enter into employment contracts with our full-time employees. We also enter into stand-alone confidentiality and non-compete agreements with them. In addition to salaries and benefits, we provide performance-based bonuses for our full-time employees and commission-based compensation for our sales and marketing force.

As required by regulations in China, we participate in various employee social security plans that are organized by municipal and provincial governments for our PRC-based full-time employees, including pension, unemployment insurance, maternity insurance, work-related injury insurance, medical insurance and housing funds. We are required under PRC law to make contributions to statutory employee benefit plans from time to time for our PRC-based full-time employees at specified percentages of the salaries, bonuses and certain allowances of such employees, up to a maximum amount specified by the local governments in China.

Our employees are not covered by any collective bargaining agreement. We believe that we maintain a good working relationship with our employees, and we have not experienced any significant labor disputes.

The following table sets forth information with respect to the beneficial ownership of our ordinary shares, as of March 31, 2020, by:

The calculations in the table below are based on 174,062,932 ordinary shares issued and outstanding as of March 31, 2020.

Beneficial ownership is determined in accordance with the rules and regulations of the SEC and includes voting or investment power with respect to the ordinary shares. Except as indicated below, and subject to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all ordinary shares shown as beneficially owned by them. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, we have included shares that the person has the right to acquire within 60 days, including through the exercise of any option, warrant or other right or the conversion of any other security. These shares, however, are not included in the computation of the percentage ownership of any other person, except with respect to the percentage ownership of all executive officers and directors as a group.

To our knowledge, as of March 31, 2020, a total of 47,707,288 ordinary shares are held by one record holder in the United States, representing approximately 27.4% of our total outstanding shares. The holder is Deutsche Bank Trust Company Americas, the depositary of our ADS program. We are not aware of any arrangement that may, at a subsequent date, result in a change of control of our company.

See “Item 6. Directors, Senior Management and Employees—E. Share Ownership.”

See “Item 4. Information of the Company—C. Organizational Structure— Contractual Arrangements with Puxin Education” for a description of the contractual arrangements between our PRC subsidiaries, our VIE, the shareholders of our VIE and certain subsidiaries of our VIE.

See “Item 6. Directors, Senior Management and Employees— B. Compensation—Employment Agreements and Indemnification Agreements” for a description of the employment agreements we have entered into with our senior executive officers.

See “Item 6. Directors, Senior Management and Employees—B. Compensation—Share Incentive Plans” for a description of share options and stock purchase rights we have granted to our directors, officers and other individuals.

As of December 31, 2017, we had amounts due from Tianjin Puxian Education and Technology Limited Partnership, or Tianjin Puxian, which is one shareholder of Puxin Education, of RMB13,000 for miscellaneous expenses paid by Puxin Education on behalf of Tianjin Puxian, respectively. All such outstanding amounts due from Tianjin Puxian were paid off.

As of December 31, 2017, we had amounts due to Mr. Yunlong Sha of RMB3.8 million for miscellaneous operating expenses paid by Mr. Yunlong Sha on behalf of Puxin Education. All such amounts due to Mr. Yunlong Sha were paid off.

In 2018 and 2019, we had amounts due to Mr. Yunlong Sha and Ms. Wenjing Song, who is married to Mr. Yunlong Sha for miscellaneous operating expenses paid by them on behalf of Puxin Education. As of December 31, 2018, we had amounts due to Mr. Yunlong Sha of RMB44.0 million and Ms. Wenjing Song of RMB10.5 million. As of December 31, 2019, we had amounts due to Mr. Yunlong Sha of RMB1.2 million and Ms. Wenjing Song of RMB0.3 million.

We have appended consolidated financial statements filed as part of this annual report.

From time to time, we may become a party to various legal or administrative proceedings arising in the ordinary course of our business, including actions with respect to intellectual property infringement, violation of third-party licenses or other rights, breach of contract and labor and employment claims. Excepts as otherwise disclosed in this annual report, we are currently not a party to, and we are not aware of any threat of, any legal or administrative proceedings that, in the opinion of our management, are likely to have any material and adverse effect on our business, financial condition, cash flows or results of operations.

We currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business. We do not have any plan to declare or pay any dividends in the near future on our shares or the ADSs representing our ordinary shares.

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 flows, 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.

We are a holding company with no material operations of our own. We conduct our operations primarily through our VIE and its 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.

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 “Item 12. Description of Securities Other Than Equity Securities—D. American Depositary Shares.” Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.

Except as otherwise disclosed in this annual report on Form 20-F, we have not experienced any significant changes since the date of our audited consolidated financial statements included in this annual report.

Our ADSs have been listed on the New York Stock Exchange since June 15, 2018 under the symbol “NEW.” Each ADS represents two ordinary shares, par value US$0.00005 per share.

Our ADSs have been listed on the New York Stock Exchange since June 15, 2018 under the symbol “NEW.”

We are a Cayman Islands exempted company and our affairs are governed by our Second Amended and Restated Memorandum and Articles of Association and the Companies Law (as amended) of the Cayman Islands, or Companies Law, and the common law of the Cayman Islands.

We incorporate by reference into this annual report our Second Amended and Restated Memorandum and Articles of Association, the form of which was filed as Exhibit 3.2 to our registration statement on Form F-1 (File Number 333-225047) filed with the Securities and Exchange Commission on May 18, 2018. Our board of directors adopted our Second Amended and Restated Memorandum and Articles of Association by a special resolution on May 17, 2018, which became effective immediately prior to completion of our initial public offering of ADSs representing our ordinary shares.

The following are summaries of material provisions of our Second Amended and Restated Memorandum and Articles of Association and the Companies Law (as amended) as they relate to the material terms of our ordinary shares.

Our registered office in the Cayman Islands is at the offices of Walkers Corporate Limited, Cayman Corporate Centre, 27 Hospital Road, George Town, Grand Cayman KY1-9008, Cayman Islands or at such other location as the Directors may from time to time determine.

According to Clause 3 of our Second Amended and Restated Memorandum of Association, the objects for which we are established are unrestricted and we have full power and authority to carry out any object not prohibited by any law as provided by the Companies Law (as amended) of the Cayman Islands.

General. Holders of ordinary shares have the same rights. All of our outstanding ordinary shares are fully paid and non-assessable. Our shareholders who are non-residents of the Cayman Islands may freely hold and transfer their ordinary shares.

Dividends. The holders of our ordinary shares are entitled to such dividends as may be declared by our board of directors. Our second amended and restated articles of association provide that dividends may be declared and paid out of the funds legally available. Dividends may also be declared and paid out of share premium account or any other fund or account which can be authorized for this purpose in accordance with the Companies Law (as amended).

Voting Rights. In respect of all matters subject to a shareholders’ vote, each ordinary share is entitled to one vote. Voting at any meeting of shareholders is by show of hands unless a poll is demanded. A poll may be demanded by the chairman of such meeting or any one or more shareholders present in person or by proxy entitled to vote. An ordinary resolution to be passed at a meeting by the shareholders requires the affirmative vote of a simple majority of the votes attaching to the ordinary shares cast at a meeting, while a special resolution requires the affirmative vote of no less than two-thirds of the votes cast attaching to the outstanding ordinary shares at a meeting and includes a unanimous written resolution. A special resolution will be required for important matters such as a change of name, reducing the share capital or making changes to our second amended and restated memorandum and articles of association.

Transfer of Ordinary Shares. Subject to the restrictions contained in our second amended and restated articles of association, any of our shareholders may transfer all or any of his or her ordinary shares by an instrument of transfer in the usual or common form or any other form approved by our board of directors.

Our board of directors may, in its absolute discretion, decline to register any transfer of any ordinary share which is not fully paid up or on which we have a lien. Our board of directors may also decline to register any transfer of any ordinary share unless:

If our directors refuse to register a transfer, they shall, within two months after the date on which the instrument of transfer was lodged, send to each of the transferor and the transferee notice of such refusal.

The registration of transfers may, after compliance with any notice required of the NYSE, be suspended and the register of members closed at such times and for such periods as our board of directors may from time to time determine, provided, however, that the registration of transfers shall not be suspended nor the register of members closed for more than 30 days in any year as our board may determine.

Liquidation. On a return of capital on winding-up or otherwise (other than on conversion, redemption or purchase of ordinary shares), assets available for distribution among the holders of ordinary shares shall be distributed among the holders of the ordinary shares on a pro rata basis. If our assets available for distribution are insufficient to repay all of the paid-up capital, the assets will be distributed so that the losses are borne by our shareholders proportionately.

Calls on Ordinary Shares and Forfeiture of Ordinary Shares. Our board of directors may from time to time make calls upon shareholders for any amounts unpaid on their ordinary shares in a notice served to such shareholders at least 14 days prior to the specified time of payment. The ordinary shares that have been called upon and remain unpaid are subject to forfeiture.

Redemption of Ordinary Shares. The Companies Law (as amended) and our second amended and restated articles of association permit us to purchase our own shares. In accordance with our second amended and restated articles of association and provided the necessary shareholders or board approval have been obtained, we may issue shares on terms that are subject to redemption, at our option or at the option of the holders of these shares, on such terms and in such manner, including out of capital, as may be determined by our board of directors.

Variations of Rights of Shares. All or any of the special rights attached to any class of shares may, subject to the provisions of the Companies Law (as amended), be varied with the consent in writing of the holders of not less than two-thirds of the issued shares of that class, or with the sanction of a resolution passed by at least a two-thirds majority of the holders of shares of the class present in person or by proxy at a separate general meeting of the holders of the shares of that class. The rights conferred upon the holders of the shares of any class issued shall not, unless otherwise expressly provided by the terms of issue of the shares of that class, be deemed to be materially adversely varied by or abrogated by, inter alia, the creation or allotment or issue of further shares ranking pari passu with or subsequent to such existing class of shares.

General Meetings of Shareholders. Shareholders’ meetings may be convened by a majority of our board of directors. Advance notice of at least 10 calendar days is required for the convening of our annual general shareholders’ meeting and any other general meeting of our shareholders, provided that a general meeting of the Company shall be deemed to have been duly convened if it is so agreed:

(i) in the case of an annual general meeting by all the shareholders (or their proxies) entitled to attend and vote thereat; and

(ii) in the case of an extraordinary general meeting by a majority in number of the shareholders (or their proxies) having a right to attend and vote at the meeting, being a majority together holding not less than 95% in par value of the shares giving that right.

Voting Rights Attaching to the Shares. Subject to any rights and restrictions for the time being attached to any Share, on a show of hands every shareholder present in person and every person representing a shareholder by proxy shall, at a shareholders’ meeting, each have one vote and on a poll every shareholder and every person representing a shareholder by proxy shall have one vote for each Share of which he or the person represented by proxy is the holder.

Inspection of Books and Records. Holders of our ordinary shares (not being our directors) will have no general right under Cayman Islands law to inspect or obtain copies of our list of shareholders or our corporate records. However, we will provide our shareholders with the right to inspect our list of shareholders and to receive annual audited financial statements.

We may by special resolution, subject to any confirmation or consent required by the Companies Law (as amended) reduce our share capital or any capital redemption reserve in any manner permitted by law.

We are an exempted company with limited liability incorporated under the Companies Law. The Companies Law in the Cayman Islands distinguishes between ordinary resident companies and exempted companies. Any company that is registered in the Cayman Islands but conducts business mainly outside of the Cayman Islands may apply to be registered as an exempted company. The requirements for an exempted company are essentially the same as for an ordinary company except for the exemptions and privileges listed below:

“Limited liability” means that the liability of each shareholder is limited to the amount unpaid by the shareholder on the shares of the company. We are subject to reporting and other informational requirements of the Exchange Act, as applicable to foreign private issuers. We currently intend to comply with the NYSE rules in lieu of following home country practice after the completion of the initial public offering. The NYSE rules require that every company listed on the NYSE hold an annual general meeting of shareholders. In addition, our second amended and restated articles of association allow directors to call special meeting of shareholders pursuant to the procedures set forth in our articles.

We have not entered into any material contracts other than in the ordinary course of business or other than those described in “Item 4. Information on the Company” and in “Item 7. Major shareholders and Related Party Transactions” or elsewhere in this annual report.

The Cayman Islands currently has no exchange control regulations or currency restrictions. See “Item 4. Information of the Company—B. Business Overview— Regulation⸻PRC Laws and Regulations Relating to Foreign Exchange.”

The following sets forth material Cayman Islands, PRC and U.S. federal income tax consequences of an investment in our ordinary shares or ADSs. It is based upon laws and relevant interpretations thereof as of March 31, 2020, all of which are subject to change possibly with retroactive effect. is summary does not deal with all possible tax consequences relating to an investment in our ADSs or ordinary shares, such as the tax consequences under U.S. state and local tax laws or under the tax laws of jurisdictions other than the Cayman Islands, the People’s Republic of China and the United States.

According to Walkers (Hong Kong), our Cayman counsel, the Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciations and there is no taxation in the nature of inheritance tax or estate duty or withholding tax. There are no other taxes likely to be material to us or holders levied by the Government of the Cayman Islands except for stamp duties which may be applicable on instruments executed in, or brought within the jurisdiction of the Cayman Islands. No stamp duty is payable in the Cayman Islands on transfers of shares of Cayman Islands companies except those which hold interests in land in the Cayman Islands. The Cayman Islands is not a party to any double tax treaties that are applicable to any payments made to or by our company. There are no exchange control regulations or currency restrictions in the Cayman Islands.

Payments of dividends and capital in respect of the ADSs or ordinary shares will not be subject to taxation in the Cayman Islands and no withholding will be required on the payment of a dividend or capital to any holder of the ADSs or ordinary shares, nor will gains derived from the disposal of the ADSs or ordinary shares be subject to Cayman Islands income or corporation tax.

In March 2007, the National People’s Congress of China enacted the Enterprise Income Tax Law, which became effective on January 1, 2008 and was last amended on December 29, 2018. The Enterprise Income Tax Law provides that enterprises organized under the laws of jurisdictions outside China with their “de facto management bodies” located within China may be considered PRC resident enterprises and therefore subject to PRC enterprise income tax at the rate of 25% on their worldwide income. The Implementing Rules of the Enterprise Income Tax Law further defines the term “de facto management body” as the management body that exercises substantial and overall management and control over the business, personnel, accounts and properties of an enterprise.

In addition, SAT Circular 82 issued by SAT in April 2009 specifies that certain offshore incorporated enterprises controlled by PRC enterprises or PRC enterprise groups will be classified as PRC resident enterprises if the following are located or resident in the PRC: (a) senior management personnel and departments responsible for daily production, operation and management; (b) financial and personnel decision making bodies; (c) key properties, accounting books, company seal, minutes of board meetings and shareholders’ meetings; and (d) half or more of the senior management or directors having voting rights. Further to SAT Circular 82, SAT issued SAT Bulletin 45, which took effect in September 2011, to provide more guidance on the implementation of SAT Circular 82. SAT Bulletin 45 provides for procedures and administration details of determination on resident status and administration on post-determination matters.

Our company is a company incorporated outside the PRC. As a holding company, its key assets are its ownership interests in its subsidiaries, and its key assets are located, and its records (including the resolutions of its board of directors and the resolutions of its shareholders) are maintained, outside the PRC. As such, we do not currently consider our company or any of our overseas subsidiaries to be a PRC resident enterprise. However, there is a risk that the PRC tax authorities may deem our company or any of our overseas subsidiaries as a PRC resident enterprise since a substantial majority of the members of our management team as well as the management team of some of our overseas subsidiaries are located in China, in which case we or the overseas subsidiaries, as the case may be, would be subject to the PRC enterprise income tax at the rate of 25% on worldwide income. If the PRC tax authorities determine that our Cayman Islands holding company is a “resident enterprise” for PRC enterprise income tax purposes, a 10% tax may be withheld on dividends we pay to our non-PRC enterprise shareholders and may be imposed with respect to gains derived by our non-PRC enterprise shareholders from transferring our shares or ADSs if such dividends or gains are deemed to be from sources within the PRC. Furthermore, non-PRC resident individual holders of our shares or ADSs may be subject to tax of 20% on dividends and any gains if such amounts are deemed to be derived from sources within the PRC. Any PRC tax liability may be reduced by an applicable tax treaty. However, it is unclear whether, if we are considered a PRC resident enterprise, holders of our shares or ADSs would be able to claim the benefit of income tax treaties or agreements entered into between China and other countries or areas.

The following is a discussion of the material U.S. federal income tax consequences to U.S. Holders (as defined below) of owning and disposing of our ADSs or ordinary shares, but this discussion does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a particular person’s decision to hold ADSs or ordinary shares.

This discussion applies only to a U.S. Holder that holds the ADSs or ordinary shares as capital assets for U.S. federal income tax purposes. In addition, this discussion does not describe all of the tax considerations that may be relevant in light of a U.S. Holder’s particular circumstances, including alternative minimum tax or Medicare contribution tax consequences, or differing tax consequences applicable to U.S. Holders subject to special rules, such as:

If a partnership (or other entity that is classified as a partnership for U.S. federal income tax purposes) owns ADSs or ordinary shares, the U.S. federal income tax treatment of a partner will generally depend on the status of the partner and the activities of the partnership. Partnerships owning ADSs or ordinary shares and partners in such partnerships should consult their tax advisers as to the particular U.S. federal income tax consequences of owning and disposing of ADSs or ordinary shares.

This discussion is based on the Internal Revenue Code of 1986, as amended, or the Code, administrative pronouncements, judicial decisions, final, temporary and proposed Treasury regulations, and the income tax treaty between the United States and the PRC, or the Treaty, all as of the date hereof, any of which is subject to change, possibly with retroactive effect. This discussion is also based, in part, on representations by the Depositary and assumes that each obligation under the deposit agreement and any related agreement will be performed in accordance with its terms.

As used herein, a “U.S. Holder” is a beneficial owner of our ADSs or ordinary shares that is, for U.S. federal income tax purposes:

In general, a U.S. Holder who owns ADSs will be treated as the owner of the underlying shares represented by those ADSs for U.S. federal income tax purposes. Accordingly, no gain or loss will be recognized if a U.S. Holder exchanges ADSs for the underlying shares represented by those ADSs.

U.S. Holders should consult their tax advisers concerning the U.S. federal, state, local and non-U.S. tax consequences of owning and disposing of ADSs or ordinary shares in their particular circumstances.

Subject to the discussion under “—Passive Foreign Investment Company Rules” below, distributions paid on our ADSs or ordinary shares, other than certain pro rata distributions of ADSs or ordinary shares, will be treated as dividends to the extent paid out of our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Because we do not maintain calculations of our earnings and profits under U.S. federal income tax principles, it is expected that distributions generally will be reported to U.S. Holders as dividends. Dividends will not be eligible for the dividends-received deduction generally available to U.S. corporations under the Code. Subject to applicable limitations, dividends paid to certain non-corporate U.S. Holders may be taxable at reduced rates. Non-corporate U.S. Holders should consult their tax advisers regarding the availability of these reduced tax rates in their particular circumstances.

Dividends will generally be included in a U.S. Holder’s income on the date of the U.S. Holder’s (or in the case of ADSs the depositary’s) receipt of the dividends. The amount of any dividend income paid in foreign currency will be the U.S. dollar amount calculated by reference to the spot rate in effect on the date of receipt, regardless of whether the payment is in fact converted into U.S. dollars on such date. If the dividend is converted into U.S. dollars on the date of receipt, a U.S. Holder generally should not be required to recognize foreign currency gain or loss in respect of the amount received. A U.S. Holder may have foreign currency gain or loss if the dividend is converted into U.S. dollars after the date of receipt.

Dividends will be treated as foreign-source income for foreign tax credit purposes. As described in “—PRC Taxation,” dividends paid by the Company may be subject to PRC withholding tax. For U.S. federal income tax purposes, the amount of the dividend income will include amounts withheld in respect of PRC withholding tax if any. Subject to applicable limitations, which vary depending upon the U.S. Holder’s circumstances, any PRC taxes withheld from dividend payments (at a rate not exceeding the applicable rate provided in the Treaty in the case of a U.S. Holder that is eligible for the benefits of the Treaty) generally will be creditable against a U.S. Holder’s U.S. federal income tax liability. The rules governing foreign tax credits are complex and U.S. Holders should consult their tax advisers regarding the creditability of foreign tax credits in their particular circumstances. In lieu of claiming a credit, a U.S. Holder may elect to deduct such PRC taxes in computing its taxable income, subject to applicable limitations. An election to deduct foreign taxes instead of claiming foreign tax credits applies to all foreign taxes paid or accrued in the taxable year.

Subject to the discussion under “—Passive Foreign Investment Company Rules” below, a U.S. Holder will generally recognize capital gain or loss on a sale or other taxable disposition of ADSs or ordinary shares in an amount equal to the difference between the amount realized on the sale or other taxable disposition and the U.S. Holder’s tax basis in such ADSs or ordinary shares disposed of, in each case as determined in U.S. dollars. The gain or loss will be long-term capital gain or loss if, at the time of the sale or disposition, the U.S. Holder has owned the ADSs or ordinary shares for more than one year. Long-term capital gains recognized by non-corporate U.S. Holders may be subject to tax rates that are lower than those applicable to ordinary income. The deductibility of capital losses is subject to limitations.

As described in “—PRC Taxation,” gains on the sale of ADSs or ordinary shares may be subject to PRC taxes. A U.S. Holder is entitled to use foreign tax credits to offset only the portion of its U.S. federal income tax liability that is attributable to foreign-source income. Because under the Code capital gains of U.S. persons are generally treated as U.S.-source income, this limitation may preclude a U.S. Holder from claiming a credit for all or a portion of any PRC taxes imposed on any such gains. However, U.S. Holders that are eligible for the benefits of the Treaty may be able to elect to treat the gain as PRC-source and therefore claim foreign tax credits in respect of PRC taxes on such disposition gains. U.S. Holders should consult their tax advisers regarding their eligibility for the benefits of the Treaty and the creditability of any PRC tax on disposition gains in their particular circumstances.

In general, a non-U.S. corporation will be 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 directly or indirectly 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. Passive income generally includes dividends, interest, certain rents and royalties and gains from assets that produce passive income. 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 (“CFC”) that is not publicly traded “for the taxable year.”

Based upon the nature of our business, the composition of our income and assets and the value of our assets, including goodwill (which is based on the market price of our ADSs), we believe we were not a PFIC for 2019. However, 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 were not, or will not be, a PFIC for any taxable year.

If we were a PFIC for 2019 or any other taxable year during which a U.S. Holder owns ADSs or ordinary shares, we will generally continue to be treated as a PFIC with respect to the U.S. Holder for all succeeding years during which the U.S. Holder owns ADSs or ordinary shares, even if we cease to meet the threshold requirements for PFIC status. U.S. Holders should consult their tax advisers as to whether we were a PFIC for 2019 and the availability of a “deemed sale” election that would allow them to eliminate the continuing PFIC status from 2019 under certain circumstances.

If we were a PFIC for any taxable year and any of our subsidiaries, consolidated affiliated entities or other companies in which we own or are treated as owning equity interests were also a PFIC (any such entity, a “Lower-tier PFIC”), U.S. Holders would be deemed to own a proportionate amount (by value) of the shares of each Lower-tier PFIC and would be subject to U.S. federal income tax according to the rules described in the subsequent paragraph on (i) certain distributions by a Lower-tier PFIC and (ii) dispositions of shares of Lower-tier PFICs, in each case as if the U.S. Holders held such shares directly, even though the U.S. Holders had not received the proceeds of those distributions or dispositions.

Generally, if we are a PFIC for any taxable year during which a U.S. Holder owned our ADSs or ordinary shares, gain recognized upon a disposition (including, under certain circumstances, a pledge) of ADSs or ordinary shares by the U.S. Holder will be allocated ratably over the U.S. Holder’s holding period for the ADSs or ordinary shares. The amounts allocated to the taxable year of disposition and to years before we became a PFIC will be taxed as ordinary income. The amounts allocated to each other taxable year will be subject to tax at the highest rate in effect for that taxable year for individuals or corporations, as appropriate, and an interest charge will be imposed on the tax allocated to each taxable year. Further, to the extent that any distribution received by a U.S. Holder on its ADSs or ordinary shares exceeds 125% of the average of the annual distributions received (or deemed received) during the preceding three years or the U.S. Holder’s holding period, whichever is shorter, the distribution will be subject to taxation in the same manner. In addition, if we were a PFIC or, with respect to a particular U.S. Holder, were treated as a PFIC for the taxable year in which we paid a dividend or the prior taxable year, the preferential dividend rates discussed above with respect to dividends paid to certain non-corporate U.S. Holders would not apply.

Alternatively, if we were a PFIC and if the ADSs were “regularly traded” on a “qualified exchange,” a U.S. Holder could make a mark-to-market election that would result in tax treatment different from the general tax treatment for PFICs described in the preceding paragraph. The ADSs would be treated as “regularly traded” for any calendar year in which more than a de minimis quantity of the ADSs were traded on a qualified exchange on at least 15 days during each calendar quarter. The NYSE, where our ADSs are listed, is a qualified exchange for this purpose. If a U.S. Holder makes the mark-to-market election, the U.S. Holder generally will recognize at the end of each taxable year (i) as ordinary income any excess of the fair market value of the ADSs over their adjusted tax basis, or (ii) as ordinary loss any excess of the adjusted tax basis of the ADSs over their fair market value (but only to the extent of the net amount of income previously included as a result of the mark-to-market election). If a U.S. Holder makes the election, the U.S. Holder’s tax basis in the ADSs will be adjusted to reflect the income or loss amounts recognized. Any gain recognized on the sale or other disposition of ADSs in a year when the Company is a PFIC will be treated as ordinary income and any loss will be treated as an ordinary loss (but only to the extent of the net amount of income previously included as a result of the mark-to-market election, with any excess treated as capital loss). If a U.S. Holder makes the mark-to-market election, distributions paid on ADSs will be treated as discussed under “—Taxation of Distributions” above (except that the preferential tax rates with respect to dividends paid to non-corporate U.S. Holders would not apply). U.S. Holders will not be able to make a mark-to-market election with respect to our ordinary shares or any shares of a Lower-tier PFIC, because such shares will not trade on any stock exchange.

We do not intend to provide the information necessary for U.S. Holders to make qualified electing fund elections, which if available could materially affect the tax consequences of the ownership and disposition of our ADSs or ordinary shares if we were a PFIC for any taxable year. Therefore, U.S. Holders will not be able to make such elections.

If a U.S. Holder owns ADSs or ordinary shares during any year in which we are (or with respect to any U.S. Holder are treated as) a PFIC, the U.S. Holder generally will be required to file annual reports on Internal Revenue Service (“IRS”) Form 8621 (or any successor form) with respect to us, generally with the U.S. Holder’s federal income tax return for that year.

U.S. Holders should consult their tax advisers regarding the potential application of the PFIC rules (including in the case that we were a PFIC for 2019).

Payments of dividends and sales proceeds that are made within the United States or through certain U.S.-related financial intermediaries may be subject to information reporting and backup withholding, unless (i) the U.S. Holder is a corporation or other “exempt recipient” and (ii) in the case of backup withholding, the U.S. Holder provides a correct taxpayer identification number and certifies that it is not subject to backup withholding. The amount of any backup withholding from a payment to a U.S. Holder will be allowed as a credit against the U.S. Holder’s U.S. federal income tax liability and may entitle it to a refund, provided that the required information is timely furnished to the IRS.

Certain U.S. Holders who are individuals (or certain specified entities) may be required to report information relating to their ownership of ADSs or ordinary shares, unless the ADSs or ordinary shares are held in accounts at financial institutions (in which case the accounts may be reportable if maintained by non-U.S. financial institutions). U.S. Holders should consult their tax advisers regarding their reporting obligations with respect to the ADSs or ordinary shares.

We previously filed with the SEC registration statement on Form F-1 (File Number 333-225047), as amended, to register our ordinary shares in relation to our initial public offering. We also filed with the SEC related registration statement on Form F-6 (File Number 333-225351) to register the ADSs representing our ordinary shares.

We are subject to the periodic reporting and other informational requirements of the Exchange Act as applicable to foreign private issuers. Under the Exchange Act, we are required to file reports and other information with the SEC. Specifically, we are required to file annually a Form 20-F within four months after the end of each fiscal year. Copies of reports and other information, when so filed with the SEC, can be inspected and copied at the public reference facilities maintained by the SEC at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You can request copies of these documents, upon payment of a duplicating fee, by writing to the SEC. The public may obtain information regarding the Washington, D.C. Public Reference Room by calling the Commission at 1-800-SEC-0330. The SEC also maintains a web site at www.sec.gov that contains reports, proxy and information statements, and other information regarding registrants that make electronic filings with the SEC using its EDGAR system. As a foreign private issuer, we are exempt from the rules of the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and our executive officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act.

We will furnish Deutsche Bank Trust Company Americas, the depositary of our ADSs, with our annual reports, which will include a review of operations and annual audited consolidated financial statements prepared in conformity with U.S. GAAP, and all notices of shareholders’ meetings and other reports and communications that are made generally available to our shareholders. The depositary will make such notices, reports and communications available to holders of ADSs and, upon our request, will mail to all record holders of ADSs the information contained in any notice of a shareholders’ meeting received by the depositary from us.

Substantially all of our revenue and expenses are denominated in Renminbi, which is the functional currency of our subsidiaries, our VIE and its subsidiaries in the PRC. Therefore, we have limited exposure to foreign exchange risk for operational activity and we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. Although in general, our exposure to foreign exchange risks should be limited, the value of your investment in our ADSs will be affected by the foreign exchange rate between U.S. dollars and Renminbi because the value of our business is effectively denominated in Renminbi, while the ADSs will be traded in U.S. dollars.

The Renminbi is not freely convertible into foreign currencies for capital account transactions. The value of the Renminbi against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economic conditions and China’s foreign exchange policies. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to the U.S. dollar, and the Renminbi appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010, this appreciation 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.

Our exposure to interest rate risk primarily relates to the interest income generated by excess cash, which is mostly held in interest-bearing bank deposits. We have not used any derivative financial instruments to manage our interest risk exposure. Interest-earning instruments carry a degree of interest rate risk. We have not been exposed, nor do we anticipate being exposed, to material risks due to changes in interest rates. However, our future interest income may be lower than expected due to changes in market interest rates.

Since our inception, inflation in China has not materially impacted our results of operations. According to the National Bureau of Statistics of China, the year-over-year percent change in the consumer price index for December 2019 was an increase of 4.5%. Although we have not in the past been materially affected by inflation since our inception, we can provide no assurance that we will not be affected in the future by higher rates of inflation in China.

As an ADS holder, you will be required to pay the following service fees to the depositary bank and certain taxes and governmental charges (in addition to any applicable fees, expenses, taxes and other governmental charges payable on the deposited securities represented by any of your ADSs) under the terms of the deposit agreement:

As an ADS holder, you will also be responsible to pay certain fees and expenses incurred by the depositary bank and certain taxes and governmental charges (in addition to any applicable fees, expenses, taxes and other governmental charges payable on the deposited securities represented by any of your ADSs) such as:

The depositary fees payable upon the issuance and cancellation of ADSs are typically paid to the depositary bank by the brokers (on behalf of their clients) receiving the newly issued ADSs from the depositary bank and by the brokers (on behalf of their clients) delivering the ADSs to the depositary bank for cancellation. The brokers in turn charge these fees to their clients. Depositary fees payable in connection with distributions of cash or securities to ADS holders and the depositary services fee are charged by the depositary bank to the holders of record of ADSs as of the applicable ADS record date.

The depositary fees payable for cash distributions are generally deducted from the cash being distributed or by selling a portion of distributable property to pay the fees. In the case of distributions other than cash (i.e., share dividends, rights), the depositary bank charges the applicable fee to the ADS record date holders concurrent with the distribution. In the case of ADSs registered in the name of the investor (whether certificated or uncertificated in direct registration), the depositary bank sends invoices to the applicable record date ADS holders. In the case of ADSs held in brokerage and custodian accounts (via DTC), the depositary bank generally collects its fees through the systems provided by DTC (whose nominee is the registered holder of the ADSs held in DTC) from the brokers and custodians holding ADSs in their DTC accounts. The brokers and custodians who hold their clients’ ADSs in DTC accounts in turn charge their clients’ accounts the amount of the fees paid to the depositary banks.

In the event of refusal to pay the depositary fees, the depositary bank may, under the terms of the deposit agreement, refuse the requested service until payment is received or may set off the amount of the depositary fees from any distribution to be made to the ADS holder.

The depositary may make payments to us or reimburse us for certain costs and expenses, by making available a portion of the ADS fees collected in respect of the ADR program or otherwise, upon such terms and conditions as we and the depositary bank agree from time to time.

See “Item 10. Additional Information” for a description of the rights of shareholders, which remain unchanged.

The following “Use of Proceeds” information relates to the registration statement on Form F-1, as amended (File Number 333-225047) in relation to our initial public offering of 8,280,000 ADSs representing 16,560,000 ordinary shares, at an initial offering price of US$17.00 per ADS. Our initial public offering closed in June 2018. Citigroup Global Markets Inc. and Deutsche Bank Securities Inc. were the representatives of the underwriters for our initial public offering.

The F-1 Registration Statement was declared effective by the SEC on June 14, 2018. For the period from the effective date of the F-1 Registration Statement to December 31, 2019, the total expenses incurred for our company’s account in connection with our initial public offering was approximately US$15.9 million, which included US$9.9 million in underwriting discounts and commissions for the initial public offering and approximately US$6.0 million in other costs and expenses for our initial public offering. We received net proceeds of approximately US$124.9 million from our initial public offering. None of the transaction expenses included payments to directors or officers of our company or their associates, persons owning more than 10% or more of our equity securities or our affiliates. None of the net proceeds from the initial public offering were paid, directly or indirectly, to any of our directors or officers or their associates, persons owning 10% or more of our equity securities or our affiliates.

For the period from the date that the F-1 Registration Statement was declared effective by the SEC to December 31, 2019, the net proceeds received from our initial public offering were mainly used as follows:

As required by Rule 13a-15(b) under the Exchange Act, our management, with the participation of our chief executive officer and chief financial officer, has performed an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of December 31, 2019, the end of the period covered by this report.

Based upon that evaluation, our management has concluded that, as of December 31, 2019, our disclosure controls and procedures were effective in ensuring that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act was recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15 (f) under the Exchange Act. Our management, with the participation of our chief executive officer and our chief financial officer, evaluated the effectiveness of our internal control over financial reporting based on criteria established in the framework in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management has concluded that our internal control over financial reporting was effective as of December 31, 2019.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

In preparing our consolidated financial statements for the year ended December 31, 2018, we identified certain control deficiencies in our internal control over financial reporting as of December 31, 2018. As of December 31, 2019, we determined that such control deficiencies had been remediated.

Other than as described above, there were no changes in our internal controls over financial reporting that occurred during the year ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Our board of directors has determined that Ms. Ming Hu, an independent director and the chairperson of our audit committee, the qualifies as an “audit committee financial expert” within the meaning of the SEC rules and possesses financial sophistication within the meaning of Listing Rules of the New York Stock Exchange. Ms. Ming Hu satisfy the “independence” requirements of Rule 10A-3 under the Securities Exchange Act of 1934, as amended, and Section 303A of the Corporate Governance Rules of the NYSE.

Our board of directors has adopted a code of business conduct and ethics that applies to all of our directors, officers, employees, including certain provisions that specifically apply to our principal executive officer, principal financial officer, principal accounting officer or controller and any other persons who perform similar functions for us. We have filed our code of business conduct and ethics as Exhibit 99.1 of our registration statement on Form F-1 (file No. 333-225047) filed with the SEC on May 18, 2018 and posted a copy of our code of business conduct and ethics on our website at ir.pxjy.com. We hereby undertake to provide to any person without charge, a copy of our code of business conduct and ethics within ten working days after we receive such person’s written request.

The following table sets forth the aggregate fees by categories specified below in connection with certain professional services rendered by Deloitte Touche Tohmatsu Certified Public Accountants LLP, our independent registered public accounting firm, for the periods indicated.

The policy of our audit committee is to pre-approve all audit and non-audit services provided by Deloitte Touche Tohmatsu Certified Public Accountants LLP, our independent registered public accounting firm, including audit services and tax services as described above, other than those for de minimus services which are approved by the audit committee prior to the completion of the audit.

Neither we nor any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) of the Exchange Act, purchased any of our equity securities during the period covered by this annual report.

As a company listed on the New York Stock Exchange, we are subject to the New York Stock Exchange corporate governance listing standards. However, New York Stock Exchange rules permit a foreign private issuer like us to follow the corporate governance practices of its home country. Certain corporate governance practices in the Cayman Islands, which is our home country, may differ significantly from the New York Stock Exchange corporate governance listing standards. The significant differences between our corporate governance practices and those followed by U.S. companies under the New York Stock Exchange corporate governance rules are summarized as follows.

To the extent we choose to follow home country practices in the future, our shareholders may be afforded less protection than they otherwise would enjoy under New York Stock Exchange corporate governance listing standards applicable to U.S. domestic issuers. See “Item 3. Key Information—4.D. Risk Factors—Risks Relating to Our Ordinary Shares and ADSs—As an exempted company incorporated in the Cayman Islands with limited liability, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from the 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.”

The consolidated financial statements of Puxin Limited are included at the end of this annual report.

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

We have audited the accompanying consolidated balance sheets of Puxin Limited and its subsidiaries (the “Company”) as of December 31, 2018 and 2019, and the related consolidated statements of operations, comprehensive loss, changes in shareholders’ (deficit) equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and the financial statement schedule listed in Schedule I (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2 to the financial statements, the Company has changed its method of accounting for lease on January 1, 2019 using the optional transition method through a cumulative-effect adjustment due to the adoption of Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842).

Our audits also comprehended the translation of Renminbi amounts into United State dollar amounts and, in our opinion, such translation has been made in conformity with the basis stated in Note 2. Such United States dollar amounts are presented solely for the convenience of readers in the United States of America.

	As of December 31,
	2018		2019		2019
	RMB		RMB		USD
					(Note 2)
ASSETS
Current assets
Cash and cash equivalents		778,006		256,763		36,882
Restricted cash, current portion		—		349,540		50,208
Inventories		9,659		13,311		1,912
Prepaid expenses and other current assets		128,638		117,148		16,827
Loan receivable		—		191,230		27,468
Total current assets		916,303		927,992		133,297
Non-current assets
Restricted cash, non-current portion		40,971		36,727		5,276
Operating lease right-of-use assets		—		1,045,941		150,240
Property, plant and equipment, net		248,801		298,719		42,908
Intangible assets		218,978		264,540		37,999
Goodwill		1,243,817		2,055,922		295,315
Deferred tax assets		3,456		2,199		316
Rental deposit		64,693		75,015		10,775
TOTAL ASSETS		2,737,019		4,707,055		676,126
LIABILITIES
Current liabilities
Accrued expenses and other current liabilities (including accrued expenses and other current liabilities of the consolidated VIE without recourse to the Group of RMB411,196 and RMB930,674 as of December 31, 2018 and 2019, respectively)		436,123		983,715		141,302
Income tax payable of the consolidated VIE without recourse to the Group		15,755		21,248		3,052
Deferred revenue, current portion (including deferred revenue, current portion of the consolidated VIE without recourse to the Group of RMB862,043 and RMB1,195,723 as of December 31, 2018 and 2019, respectively)		876,861		1,205,609		173,175
Operating lease liabilities, current portion (including operating lease liabilities, current portion of the consolidated VIE without recourse to the Group of RMB nil and RMB275,893 as of December 31, 2018 and 2019, respectively)		—		276,877		39,771
Amounts due to related parties (including amounts due to related parties of the consolidated VIE without recourse to the Group of RMB3,199 and RMB254 as of December 31, 2018 and 2019, respectively)		54,493		1,451		208
Bank borrowings of the consolidated VIE without recourse to the Group		106,600		318,600		45,764
Loans payable to third parties (including loans payable to third parties of the consolidated VIE without recourse to the Group of RMB79,500 and RMB292,952 as of December 31, 2018 and 2019, respectively)		79,500		413,838		59,444
Promissory notes, current portion (including promissory notes, current portion of the consolidated VIE without recourse to the group of RMB190,000 and RMB nil as of December 31, 2018 and 2019, respectively)		361,888		87,023		12,500
Total current liabilities		1,931,220		3,308,361		475,216

	As of December 31,
		2018			2019			2019
	RMB			RMB			USD
							(Note 2)
Non-current liabilities
Deferred revenue, non-current portion of the consolidated VIE without recourse to the Group		121,191			101,372			14,561
Deferred tax liabilities of the consolidated VIE without recourse to the Group		71,031			81,969			11,774
Franchise deposits of the consolidated VIE without recourse to the Group		1,763			2,533			364
Operating lease liabilities, non-current portion of the consolidated VIE without recourse to the Group		—			693,505			99,616
Promissory note, non-current portion (including promissory note, non-current portion of the consolidated VIE without recourse to the Group of RMB nil and RMB nil as of December 31, 2018 and 2019, respectively)		—			87,022			12,500
Derivative liabilities (including derivative liabilities of the consolidated VIE without recourse to the Group of RMB nil and RMB nil as of December 31, 2018 and 2019, respectively)		63,942			172,235			24,740
TOTAL LIABILITIES		2,189,147			4,446,997			638,771

Commitments and Contingencies (Note 22)

SHAREHOLDERS’ EQUITY

Ordinary shares (par value of USD0.00005 per share; 1,000,000,000 and 1,000,000,000 shares authorized, 188,627,228 and 188,627,228 shares issued and 165,038,164 and 174,025,810 shares outstanding as of December 31, 2018 and 2019, respectively)		62			62			9
Additional paid-in capital		1,944,325			2,175,652			312,513
Statutory reserve		4,595			7,979			1,146
Accumulated other comprehensive income		68,214			68,707			9,869
Accumulated deficit		(1,469,303	)		(1,991,220	)		(286,021	)
Total Puxin Limited shareholders’ equity		547,893			261,180			37,516
Non-controlling interest		(21	)		(1,122	)		(161	)
TOTAL SHAREHOLDERS’ EQUITY		547,872			260,058			37,355
TOTAL LIABILITIES AND TOTAL SHAREHOLDERS’ EQUITY		2,737,019			4,707,055			676,126

The accompanying notes are an integral part of the consolidated financial statements.

	For the years ended December 31,
		2017			2018			2019			2019
	RMB			RMB			RMB			USD
										(Note 2)
Net revenues		1,282,562			2,228,117			3,103,958			445,856
Cost of revenues (including share-based compensation expenses of RMB1,152, RMB6,420 and RMB4,352 for the years ended December 31, 2017, 2018 and 2019, respectively)		794,342			1,242,889			1,629,447			234,055
Gross profit		488,220			985,228			1,474,511			211,801
Operating expenses:
Selling expenses (including share-based compensation expenses of RMB3,058, RMB28,848 and RMB21,870 for the years ended December 31, 2017, 2018 and 2019, respectively)		444,927			848,088			1,083,795			155,677
General and administrative expenses (including share-based compensation expenses of RMB51,625, RMB339,689 and RMB204,218 for the years ended December 31, 2017, 2018 and 2019, respectively)		362,748			775,883			748,259			107,481
Total operating expenses		807,675			1,623,971			1,832,054			263,158
Operating loss		(319,455	)		(638,743	)		(357,543	)		(51,357	)
Interest expense		5,556			51,901			71,099			10,213
Interest income		549			2,826			25,542			3,669
Foreign exchange loss (gain)		—			7,621			(243	)		(35	)
Loss on changes in fair value of convertible notes, derivative liabilities and warrants		70,336			131,748			104,589			15,023
Loss on extinguishment of convertible notes		—			900			—			—
Loss before income taxes		(394,798	)		(828,087	)		(507,446	)		(72,889	)
Income tax expenses		2,436			5,322			12,188			1,751
Net loss		(397,234	)		(833,409	)		(519,634	)		(74,640	)
Less: Net income (loss) attributable to non-controlling interest		79			2			(1,101	)		(158	)
Net loss attributable to ordinary shareholders of Puxin Limited		(397,313	)		(833,411	)		(518,533	)		(74,482	)
Net loss per share attributable to ordinary shareholders of Puxin Limited
Basic and diluted		(3.98	)		(5.78	)		(3.03	)		(0.44	)
Weighted average shares used in calculating basic and diluted net loss per share		99,705,361			144,157,947			170,903,317			170,903,317

The accompanying notes are an integral part of the consolidated financial statements

	Attributable to shareholders of the Company
	Number of ordinary shares		Ordinary shares		Additional paid-in capital			Statutory reserve		Accumulated other comprehensive income		Accumulated deficit			Total Puxin Limited shareholders’ (deficit) equity			Non- controlling interest			Total (deficit) equity
Balance as of January 1, 2017		99,171,800		34		245,064		—		—			(282,300	)		(37,202	)		(102	)		(37,304	)
Net loss for the year		—		—		—			—		—		(397,313	)		(397,313	)		79			(397,234	)
Share-based compensation		—		—		55,835			—		—		—			55,835			—			55,835
Contribution from shareholders		—		—		90,200			—		—		—			90,200			—			90,200
Foreign currency translation adjustments		—		—		—			—		15,718		—			15,718			—			15,718
Option exercised		828,200		—		—			—		—		—			—			—			—
Balance as of December 31, 2017 in RMB		100,000,000		34		391,099		—			15,718		(679,613	)		(272,762	)		(23	)		(272,785	)
Issuance of ordinary shares		26,827,744		16		720			—		—		—			736			—			736
Issuance of ordinary shares upon initial public offering (“IPO”) (net of issuance cost of RMB 38,711)		16,560,000		5		798,825			—		—		—			798,830			—			798,830
Net loss for the year		—		—		—			—		—		(833,411	)		(833,411	)		2			(833,409	)
Provision of statutory reserve		—		—		—			4,595		—		(4,595	)		—			—			—
Share-based compensation		—		—		345,503			—		—		—			345,503			—			345,503
Foreign currency translation adjustments		—		—		—			—		52,496		—			52,496			—			52,496
Repurchase of convertible redeemable preferred shares		—		—		(131,088	)		—		—		—			(131,088	)		—			(131,088	)
Conversion of convertible notes		8,067,228		3		438,717			—		—		—			438,720			—			438,720
Conversion of convertible redeemable preferred shares		11,917,880		4		71,084			—		—		—			71,088			—			71,088
Cumulative effect of adopting Topic 606		—		—		—			—		—		48,316			48,316			—			48,316
Restricted shares granted		1,631,200		—		29,454			—		—		—			29,454			—			29,454
Option exercised		34,112	—			11		—		—		—				11		—				11
Balance as of December 31, 2018 in RMB		165,038,164		62		1,944,325			4,595		68,214		(1,469,303	)		547,893			(21	)		547,872
Net loss for the year		—		—		—			—		—		(518,533	)		(518,533	)		(1,101	)		(519,634	)
Provision of statutory reserve		—		—		—			3,384		—		(3,384	)		—			—			—
Share-based compensation		—		—		230,440			—		—		—			230,440			—			230,440
Foreign currency translation adjustments		—		—		—			—		493		—			493			—			493
Option exercised		8,987,646		—		887			—		—		—			887			—			887
Balance as of December 31, 2019 in RMB		174,025,810		62		2,175,652			7,979		68,707		(1,991,220	)		261,180			(1,122	)		260,058
Balance as of December 31, 2019 in USD		174,025,810		9		312,513			1,146		9,869		(286,021	)		37,516			(161	)		37,355

The accompanying notes are an integral part of the consolidated financial statements.

	For the years ended December 31,
		2017			2018			2019			2019
	RMB			RMB			RMB			USD (Note 2)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss		(397,234	)		(833,409	)		(519,634	)		(74,640	)
Adjustments to reconcile net loss to net cash generated from (used in) operating activities:
Depreciation of property, plant and equipment		20,545			57,696			77,859			11,184
Amortization of intangible assets		23,644			32,749			34,938			5,019
Foreign exchange loss (gain)		—			7,621			(243	)		(35	)
Loss on changes in fair value of convertible notes, derivative liabilities and warrants		70,336			131,748			104,589			15,023
Loss on extinguishment of convertible notes		—			900			—			—
Loss (gain) on disposal of property, plant and equipment		350			(266	)		7,938			1,140
Share-based compensation		55,835			374,957			230,440			33,101
Deferred income taxes		(5,822	)		(8,943	)		(7,930	)		(1,139	)
Changes in operating assets and liabilities:
Inventories		(44	)		723			(2,144	)		(308	)
Prepaid expenses and other current assets		(32,545	)		(48,772	)		23,884			3,431
Amounts due from related parties		(104	)		113			—			—
Deferred revenue		200,647			(32,052	)		(16,407	)		(2,357	)
Accrued expenses and other current liabilities		140,261			(10,267	)		138,173			19,844
Income tax payable		7,097			5,733			5,493			789
Amount due to related parties		788			230,657			(53,042	)		(7,619	)
Franchise deposits		(3,488	)		(2,093	)		770			111
Net cash generated from (used in) operating activities		80,266			(92,905	)		24,684			3,544
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of businesses, net of cash acquired		(564,998	)		(73,208	)		(104,534	)		(15,015	)
Purchase of property, plant and equipment		(64,706	)		(83,709	)		(115,545	)		(16,597	)
Loans to a third party		—			—			(191,230	)		(27,468	)
Net cash used in investing activities		(629,704	)		(156,917	)		(411,309	)		(59,080	)
CASH FLOWS FROM FINANCING ACTIVITIES
Acquisition of businesses		—			—			(147,592	)		(21,200	)
Proceeds from IPO (net of IPO expenses)		—			799,208			—			—
Proceeds from convertible notes		461,206			—			—			—
Proceeds from promissory notes		168,180			50,000			—			—
Repayments of promissory notes		—			—			(190,000	)		(27,292	)
Repurchase of convertible redeemable preferred shares		—			(180,000	)		—			—
Loans from third parties		—			139,500			547,038			78,577
Repayments to third parties loans		—			(83,802	)		(212,700	)		(30,552	)
Borrowings from banks		—			110,873			449,600			64,581
Repayments of bank borrowings		—			(4,273	)		(242,100	)		(34,775	)
Net cash generated from financing activities		629,386			831,506			204,246			29,339
Effect of exchange rate changes		3,696			48,131			6,432			924
Net increase (decrease) in cash and cash equivalents, and restricted cash		83,644			629,815			(175,947	)		(25,273	)
Cash and cash equivalents, and restricted cash at beginning of the year		105,518			189,162			818,977			117,639
Cash and cash equivalents, and restricted cash at end of the year		189,162			818,977			643,030			92,366
Supplemental schedule of cash flow information
Income taxes paid		1,161			8,532			14,625			2,101
Interest paid		2,998			55,098			60,528			8,694
Acquisition consideration payable		68,199			48,128			376,187			54,036
Reconciliation to amounts on consolidated balance sheets
Cash and cash equivalents		164,684			778,006			256,763			36,882
Restricted cash		24,478			40,971			386,267			55,484
Total cash, cash equivalents, and restricted cash		189,162			818,977			643,030			92,366

The accompanying notes are an integral part of the consolidated financial statements.

Puxin Limited (the “Company”) was incorporated under the laws of the Cayman Islands on March 17, 2017. The Company, its subsidiaries, consolidated variable interest entity (“VIE”) and VIE’s subsidiaries and schools (collectively the “Group”) are primarily engaged in providing K-12 tutoring services and study abroad tutoring services in the People’s Republic of China (“PRC”).

Puxin Education Technology Group Co., Ltd. (“Puxin Education” or the “VIE”) was founded in September 2014, as a limited liability company in the PRC, by Mr. Yunlong Sha, Chief Executive Officer (“CEO”) of the Company. Puxin Education, its subsidiaries and schools are primarily engaged in providing K-12 tutoring services and study abroad tutoring services in the PRC.

Puxin Limited was set up to facilitate the Group’s future overseas offering and Puxin Education’s acquisition of Beijing Global Education & Technology Co., Ltd. (“Beijing GEDU”). Immediately after the acquisition of Beijing GEDU, the operating entity of Beijing GEDU became a subsidiary of Puxin Education. In essence, Puxin Limited was a variable interest entity whereas Puxin Education was the primary beneficiary and through which, Puxin Education acquired Beijing GEDU. Accordingly, Puxin Limited was a part of the consolidated Group where Puxin Education was the holding entity.

In contemplating an IPO overseas, in February 2018, the Group undertook a reorganization.

The holder of the equity interest with preferential feature of Puxin Education sold 5% of its holding to Mr. Yunlong Sha and transferred 3.6335% of the holding to a related party of the holder. Puxin Limited then issued an aggregate 52,082,120 ordinary shares to ordinary shareholders and an aggregate 11,917,880 of preferred Series A shares to preferred shareholders. In addition, preferential rights held by investors of Puxin Education were cancelled (“Recapitalization”). Consequently, Puxin Limited became the ultimate holding for the Group.

Due to PRC legal restrictions on foreign ownership and investment in the education business in China, Puxin Limited, through Prepshine Holdings Co., Limited (“Prepshine HK”) and its PRC subsidiary, Purong (Beijing) Information Technology Co., Ltd. (“Purong Information” or “WFOE”), entered into a series of contractual arrangements with Puxin Education and its subsidiaries and schools (collectively, the “VIEs”), and the shareholders of Puxin Education. The series of contractual agreements include Exclusive Management Services and Business Cooperation Agreement, Exclusive Call Option Agreement, Equity Pledge Agreement, Powers of Attorney, Spousal Consent Letters and Letters of Commitment. The Group believes that these contractual arrangements would enable Puxin Limited to (1) have power to direct the activities that most significantly affects the economic performance of the VIEs, and (2) receive the economic benefits of the VIEs that could be significant to the VIEs. Accordingly, Puxin Limited is considered the primary beneficiary of the VIEs.

The reorganization involves steps and entities all within the same consolidated group, and as a result, the accompanying consolidated financial statements have been prepared as if the current corporate structure has been in existence throughout the periods presented. The share and per share data relating to the ordinary shares issued by the Company are presented as if the reorganization occurred at the beginning of the first period presented.

Puxin Limited, through Prepshine HK and its PRC subsidiary, Purong Information, entered into a series of contractual arrangements, on February 5, and as amended on February 25, 2018, with Puxin Education and its subsidiaries and schools, and the shareholders of Puxin Education.

Pursuant to the exclusive management services and business cooperation agreement among Purong Information, the VIE and the shareholders of VIE, Purong Information 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 the VIE and its subsidiaries. In exchange, the VIE and its subsidiaries pay service fees to Purong Information in an amount at Purong Information’s discretion. Without the prior written consent of Purong Information, the VIE and its subsidiaries cannot accept services provided by or establish similar cooperation relationship with any third party. Purong Information 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 will remain effective unless unanimously agreed by the parties concerned or unilaterally terminated by Purong Information with a written notice. Unless otherwise required by applicable PRC laws, the VIE and its shareholders do not have any right to terminate the exclusive service agreement.

Under the equity interest pledge agreement among Purong Information, the VIE and its shareholders, the VIE’s shareholders pledged all of their equity of the VIE to Purong Information as security for performance of the obligations of the 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 agreement. If any of the specified events of default occurs, Purong Information may exercise the right to enforce the pledge immediately. Purong Information 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 the VIE’s shareholders and their successors. The equity pledge agreement 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 agreement.

Under the exclusive call option agreement among Purong Information, the VIE and its shareholders, each of the shareholders of the VIE irrevocably granted Purong Information a right to purchase, or designate a third party to purchase, all or any part of their equity interests in the VIE at a purchase price equal to the lowest price permissible by the then-applicable PRC laws and regulations at Purong Information’s sole and absolute discretion to the extent permitted by PRC law. The shareholders of the VIE shall promptly give all considerations they received from the exercise of the options to Puxin Education, Purong Information or a designated third party of Purong Information. Without Purong Information’s prior written consent, the VIE and its shareholders shall not enter into any major contract or transfer any equity of the VIE. Without Purong Information’s prior written consent, the VIE and its shareholders shall not sell, transfer, license or otherwise dispose of any of the 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. The VIE shall not be dissolved or liquidated without the written consent by Purong Information. This agreement shall remain in effect upon expiry or early termination of this agreement.

Pursuant to the powers of attorney executed by the VIE and the VIE’s shareholders, each of them irrevocably authorized Purong Information 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 the 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).

Pursuant to the spousal consent letters executed by the spouses of certain shareholders of the 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 the 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 the VIE held by the applicable shareholders for any reasons, he/she would be bound by the transaction documents described above.

Pursuant to the letters of commitment executed by the shareholders of Shanghai Trustbridge Investment Management Co., Ltd. (“Shanghai Trustbridge”) and the partners of Tianjin Puxian Education Technology LLP (“Puxian”) and Ningbo Meishan Bonded Port Area Zhimei Phase V Equity Investment Limited Partnership (“Ningbo Zhimei”), which are the shareholders of the VIE, all the shareholders of Shanghai Trustbridge and all the partners of 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, 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 agreement.

The Company believes that the contractual arrangements with Puxin Education and its shareholders are in compliance with existing PRC laws and regulations and are legally enforceable. However, the contractual arrangements are subject to risks and uncertainties, including:

The Group’s ability to conduct its business may be negatively affected if the PRC government were to carry out of any of the aforementioned actions. As a result, the Group may not be able to consolidate Puxin Education and its subsidiaries and schools in the consolidated financial statements as the Group may lose the ability to exert effective control over Puxin Education and its shareholders, and the Group may lose the ability to receive economic benefits from Puxin Education.

The Group’s business has been directly operated by the VIE and its subsidiaries and schools. As of December 31, 2018 and 2019, the VIE and its subsidiaries and schools accounted for an aggregate of 59.4% and 75.8%, respectively, of the Group’s consolidated total assets, and 85.1% and 88.0% respectively of the Group’s consolidated total liabilities.

The following financial information of the VIE and VIE’s subsidiaries and schools after the elimination of inter-company transactions and balances as of December 31, 2018 and 2019 and for the years ended December 31, 2017, 2018 and 2019 was included in the accompanying consolidated financial statements:

There are no consolidated VIE’s assets that are collateral for the VIE’s obligations and which can only be used to settle the VIE’s obligations. No creditors (or beneficial interest holders) of the VIE have recourse to the general credit of the Company or any of its consolidated subsidiaries. No terms in any arrangements, considering both explicit arrangements and implicit variable interests, require the Company or its subsidiaries to provide financial support to the VIE. However, if the VIE ever needs financial support, the Company or its subsidiaries may, at its option and subject to statutory limits and restrictions, provide financial support to the VIE through loans to the shareholders of the VIE or entrustment loans to the VIE.

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). These accounting principles require management to make certain estimates and assumptions that affect the amounts in the accompanying financial statements. Actual results may differ from those estimates. The Group bases its estimates on past experience and various other factors believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.

Significant accounting estimates reflected in the Group’s financial statements include, but are not limited to, valuation allowance for deferred tax assets, useful lives of property, plant and equipment and intangible assets, impairment assessment of long-lived assets and goodwill, valuation of share-based compensation and payments, purchase price allocation for business acquisition and valuation of ordinary shares, convertible notes, derivative liabilities and warrants. Actual results may differ materially from those estimates.

The accompanying consolidated financial statements include the financial information of the Group. All intercompany balances and transactions have been eliminated.

Business combinations are recorded using the acquisition method of accounting. The purchase price of the acquisition is allocated to the tangible assets, liabilities, identifiable intangible assets acquired and non-controlling interest, if any, based on their estimated fair values as of the acquisition date. The excess of the purchase price over those fair values is recorded as goodwill. Acquisition-related expenses and restructuring costs are expensed as incurred.

Fair value is considered to be the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Group considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability.

Authoritative literature provides a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The level in the hierarchy within which the fair value measurement in its entirety falls is based upon the lowest level of input that is significant to the fair value measurement as follows:

Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

Level 2 applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.

Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

The carrying values of financial instruments, which consist of cash and cash equivalents, restricted cash, amounts due from related parties, other receivables, other payables, amounts due to related parties and short-term bank borrowings are recorded at cost which approximates their fair value due to the short-term nature of these instruments.

The Group’s financial instruments consist primarily of cash and cash equivalents, restricted cash, other receivables, loan receivable, other payables, amounts due to related parties, bank borrowings, loans payable to third parties, convertible notes, promissory notes and derivative liabilities and warrants.

Convertible notes for which the fair value option are elected are carried at fair value, with changes in fair value recognized in earnings.

The Group’s business is primarily conducted in China and all of the revenues are denominated in RMB. However, periodic reports made to shareholders will include current period amounts translated into USD using the exchange rate as of balance sheet date, for the convenience of the readers. Translations of balances in the consolidated balance sheets and the related consolidated statements of operations, comprehensive loss, change in equity and cash flows from RMB into USD as of and for the year ended December 31, 2019 are solely for the convenience of the readers and were calculated at the rate of USD1.00=RMB6.9618, representing the noon buying rate set forth in the H.10 statistical release of the U.S. Federal Reserve Board on December 31, 2019. No representation is made that the RMB amounts could have been, or could be, converted, realized or settled into USD at that rate on December 31, 2019, or at any other rate.

Cash and cash equivalents comprise cash at banks and on hand, which have original maturities of three months or less when purchased and are subject to an insignificant risk of changes in value. The carrying value of cash equivalents approximates market value.

Restricted cash represents cash deposits in restricted bank accounts, required by local regulations for operating schools or pledged as collateral for bank borrowings. The deposits in restricted bank accounts cannot be withdrawn until these schools are closed or bank borrowings are fully repaid. Restricted cash is classified as either current or non-current based on when the funds will be released in accordance with the terms of the respective agreement.

Inventories, mainly consisting of textbooks, are stated at the lower of cost or net realizable value. Cost is determined using the weighted average cost method.

Loan receivables are measured at amortized cost with interest accrued based on the contract rate. The Group evaluates the credit risk associated with the loans, and estimates the cash flow expected to be collected over the life of loans on an individual basis based on the Group’s past experiences, the borrowers’ financial position, their financial performance and their ability to continue to generate sufficient cash flows. A valuation allowance will be established for the loans unable to collect. No valuation allowance has been recorded for the years ended December 31, 2017, 2018 and 2019 based on the result of the assessment.

Property, plant and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the assets, as follows:

Repair and maintenance costs are charged to expense as incurred, whereas the cost of renewals and betterment that extends the useful lives of property, plant and equipment are capitalized as additions to the related assets. Retirements, sales and disposals of assets are recorded by removing the cost and accumulated depreciation from the assets and accumulated depreciation accounts with any resulting gain or loss reflected in the consolidated statement of operations.

Goodwill is tested for impairment annually at the end of the fourth quarter, or sooner if impairment indicators arise. In the evaluation of goodwill for impairment, the Group may perform a qualitative assessment to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If it is not, no further analysis is required. If it is, a prescribed two-step goodwill impairment test is performed to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized for that reporting unit, if any.

The first step in the two-step impairment test is to identify if a potential impairment exists by comparing the fair value of a reporting unit with its carrying amount, including goodwill. The fair value of a reporting unit is estimated by applying valuation multiples and/or estimating future discounted cash flows. The selection of multiples is dependent upon assumptions regarding future levels of operating performance as well as business trends and prospects, and industry, market and economic conditions. When estimating future discounted cash flows, the Group considers the assumptions that hypothetical marketplace participants would use in estimating future cash flows. In addition, where applicable, an appropriate discount rate is used, based on an industry-wide average cost of capital or location-specific economic factors. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered to have a potential impairment and the second step of the impairment test is not necessary. However, if the carrying amount of a reporting unit exceeds its fair value, the second step is performed to determine if goodwill is impaired and to measure the amount of impairment loss to recognize, if any.

The second step compares the implied fair value of goodwill with the carrying amount of goodwill. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination (i.e., the fair value of the reporting unit is allocated to all the assets and liabilities, including any unrecognized intangible assets, as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit). If the implied fair value of goodwill exceeds the carrying amount, goodwill is not considered impaired. However, if the carrying amount of goodwill exceeds the implied fair value, an impairment loss is recognized in an amount equal to that excess.

Based on the result of annual goodwill impairment assessment, no impairment charge was recognized for the years ended December 31, 2017, 2018 and 2019.

Acquired intangible assets other than goodwill consist of student base, definite trademark, relationship with partnership school and franchise agreements, which are carried at cost, less accumulated amortization and impairment. The amortization periods are as follows:

The Group has determined that certain trademarks do not have determinable useful lives. Consequently, the carrying amount of trademarks are not amortized but are tested for impairment annually or more frequently if events or changes in circumstances indicate that the assets might be impaired. Such impairment test consists of a comparison of the fair value of the trademarks with their carrying amount and an impairment loss is recognized if and when the carrying amounts of the trademarks exceed their fair values. The estimates of fair values of intangible assets not subject to amortization are determined using various discounted cash flow valuation methodologies. Significant assumptions are inherent in this process, including estimates of discount rates. Discount rate assumptions are based on an assessment of the risk inherent in the respective intangible assets. No impairment loss was recorded during the years ended December 31, 2017, 2018, and 2019.

The Group reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. When these events occur, the Group measures impairment by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flow is less than the carrying amount of the assets, the Group would recognize an impairment loss based on the fair value of the assets. The Group did not record any impairment losses on its long-lived assets during the years ended December 31, 2017, 2018 and 2019.

On January 1, 2018, the Group adopted ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606) applying the modified retrospective method to all contracts that were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period. The Group recorded a net reduction to opening accumulated deficit of RMB48,316 as of January 1, 2018 due to the cumulative impact of adopting Topic 606.

Revenues are recognized when control of the promised goods or services are transferred to the customers, in an amount that reflects the consideration that the Group expects to receive in exchange for those goods or services.

The following table presents the Group’s revenues disaggregated by revenue sources. The Group’s revenue is reported net of discounts, value added tax and surcharges.

The following is a description of principal activities from which the Group generates revenue and related revenue recognition policies.

The Group offers various types of after-school tutoring services to help students improve their academic performance and qualify for their desired schools and universities. The after-school tutoring services primarily consist of after-school group class courses, personalized tutoring courses and full-time tutoring courses. The K-12 tutoring services are accounted for as a single performance obligation. Tuition fees are generally collected in advance and are initially recorded as deferred revenue. Deferred revenue is recognized proportionately as the tutoring sessions are delivered. Tuition refunds are provided to students if they decide within the trial period that they no longer want to take the course. For some K-12 courses, the Group also offers refunds for any remaining classes to students who withdraw from the course. The refund is equal to the amount related to the undelivered class. The Group determines the transaction price to be earned by estimating the refund liability based on historical refund ratio on a portfolio basis using the expected value method.

The Group offers study abroad test preparation services to help students prepare for admission tests for high schools, universities and graduate programs in other countries. Tutoring fees are collected in advance and are initially recorded as deferred revenue which is recognized proportionately as the tutoring sessions are delivered. Students are entitled to certain trial class of the purchased course and course fee is fully refundable if a student decides not to take the remaining course after the trial class. No refund will be provided to a student who withdraws from a course after the trial period. The study-abroad test preparation services are accounted for as a single performance obligation.

The Group offers study abroad consulting services to provide quality advisory guidance for students who intend to study abroad. The Group charges each student an up-front prepaid fee based on the scope of consulting services requested by the student. Portion of the prepaid services fee are refundable if the student does not successfully gain admission, which are accounted for as variable consideration under Topic 606. The study-abroad consulting services are accounted for as a single performance obligation. The Group estimates the variable consideration to be earned and recognizes revenue over the service period.

Remaining performance obligations represents the transaction price of contracts for which service has not been performed under study-abroad consulting services. As of December 31, 2019, the aggregate amount of the transaction price related to the remaining performance obligations was RMB175,486. The Group estimates that revenue RMB118,162 and RMB43,016 on the remaining performance obligations to be recognized over the next 12 and 24 months, respectively, with the remainder, at RMB14,308, recognized thereafter.

The Group’s contracts with customers may include multiple performance obligations. For such arrangements, the Group allocates revenues to each performance obligation based on its relative standalone selling price. The Group generally determines standalone selling prices based on the prices charged to customers.

The Group incurs sales commissions primarily for K-12 tutoring services and study-abroad test preparation services which are expensed when incurred because the amortization period would have been one year or less. These costs are recorded within sales and marketing expenses.

The Group does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which the Group recognizes revenue at the amount to which it has the right to invoice for services performed.

Deferred revenue primarily consists of tuition fees and consulting service fees received from customers for which the Group’s revenue recognition criteria have not been met. The deferred revenue will be recognized as revenue once the criteria for revenue recognition have been met.

On January 1, 2012, the PRC Ministry of Finance and the State Administration of Taxation officially launched a pilot VAT reform program (“Pilot Program”), applicable to businesses in selected industries. Such VAT Pilot Program were phased in Beijing, Jiangsu, Anhui, Fujian, Guangdong, Tianjin, Zhejiang, and Hubei between September and December 2012. Businesses in the Pilot Program would pay VAT instead of business tax. Starting from May 1, 2016, the Pilot Program was promoted nationwide in a comprehensive manner in the PRC. With the implementation of the Pilot Program, the Group’s certain subsidiaries and schools are subject to VAT at the rate of 3%, as small scale VAT payer, and the remaining subsidiaries and schools are subject to VAT at the rate of 6%, as general VAT payer, which were all previously subject to business tax. The net VAT balance between input VAT and output VAT is recorded as accrued expenses and other current liabilities in the Group’s consolidated financial statements.

Since May 2016, in accordance with Cai Shui [2016] No. 68, the nonacademic educational programs and services in short-term training schools are subject to a simple VAT collection method and apply for a 3% VAT rate. Therefore, the Group’s nonacademic educational programs and services in short-term training schools which were previously subject to business tax are now subject to VAT.

The Group leases offices and schools in different cities in the PRC under operating leases. The Group determines whether an arrangement constitutes a lease and records lease liabilities and right-of-use assets on its consolidated balance sheets at the lease commencement. The Group measures its lease liabilities based on the present value of the total lease payments not yet paid discounted based on the more readily determinable of the rate implicit in the lease or its incremental borrowing rate, which is the estimated rate the Group would be required to pay for a collateralized borrowing equal to the total lease payments over the term of the lease. The Group estimates its incremental borrowing rate based on an analysis of publicly traded debt securities of companies with credit and financial profiles similar to its own. The Group measures right-of-use assets based on the corresponding lease liability adjusted for payments made to the lessor at or before the commencement date, and initial direct costs it incurs under the lease. The Group begins recognizing rent expense when the lessor makes the underlying asset available to the Group. The Group’s leases have remaining lease terms of up to ten years, some of which include options to extend the leases for an additional period which has to be agreed with the lessors based on mutual negotiation. After considering the factors that create an economic incentive, the Group did not include renewal option periods in the lease term for which it is not reasonably certain to exercise.

The Group measures the cost of employee share options based on the grant date fair value of the award and recognizes compensation cost over the period during which an employee is required to provide services in exchange for the award, which generally is the vesting period. For the graded vesting share options, the Group recognizes the compensation cost over the requisite service period for each separately vesting portion of the award as if the award is, in substance, multiple awards. When no future services are required to be performed by the employee in exchange for an award of equity instruments, the cost of the award is expensed on the grant date. The Group elects to recognize forfeitures when they occur.

Comprehensive loss includes net loss and foreign currency translation adjustments. Comprehensive loss is reported in the consolidated statements of comprehensive loss.

Net loss per share, basic and diluted, is computed on the basis of the net loss for the period divided by the weighted average number of common shares outstanding during the period. Diluted net loss per share is based upon the weighted average number of common shares and of common share equivalents outstanding when dilutive. Common share equivalents include: (i) outstanding stock options under the Company’s share incentive plan which are included under the treasury share method when dilutive, (ii) common shares to be issued under the assumed conversion of the Company’s outstanding convertible notes, which are included under the if-converted method when dilutive, and (iii) convertible redeemable participating preferred shares, which are included under the if-converted method when dilutive.

The Group’s convertible redeemable participating preferred shares are participating securities as they participate in undistributed earnings on an as-if-converted basis. Accordingly, the Group uses the two-class method whereby undistributed net income is allocated on a pro rata basis to the ordinary shares and preferred shares to the extent that each class may share in income for the period; whereas the undistributed net loss for the period is allocated to ordinary shares only because the convertible redeemable participating preferred shares are not contractually obligated to share the loss.

The computation of diluted net loss per share for the years ended December 31, 2017, 2018 and 2019 does not include common share equivalents, since such inclusion would be anti-dilutive.

The Group is subject to lawsuits, investigations and other claims related to the operation of its schools. The Group is required to assess the likelihood of any adverse judgments or outcomes to these matters, as well as potential ranges of probable losses and fees.

Where it is not probable that an outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow of economic benefits is remote. Possible obligations, whose existence will only be confirmed by the occurrence or non-occurrence of one or more future events, are also disclosed as contingent liabilities unless the probability of outflow of economic benefits is remote.

The RMB is not a freely convertible currency. The State Administration for Foreign Exchange, under the authority of the Peoples Bank of China, controls the conversion of RMB into other currencies. The value of the RMB is subject to changes in central government policies, international economic and political developments affecting supply and demand in the China Foreign Exchange Trading System market. The Group’s cash and cash equivalents and restricted cash denominated in RMB amounted to RMB279,162 and RMB281,450 as of December 31, 2018 and 2019, respectively.

Financial instruments that potentially expose the Group to significant concentration of credit risk primarily consist of cash and cash equivalents and prepayment and other current assets. As of December 31, 2018 and 2019, substantially all of the Group’s cash and cash equivalents were deposited in financial institutions located in the PRC.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326), Measurement of Credit Losses on Financial Statements. This ASU requires a financial asset (or group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. This ASU affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual rights to receive cash. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. All entities may adopt the amendments in this update through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach). In April 25, 2019, ASU 2016-13 was updated with ASU 2019-04, which clarifies certain aspects of accounting for credit losses, hedging activities, and financial instruments. ASU 2019-04 provides certain alternatives for the measurement of the allowance for credit losses (ACL) on accrued interest receivable (AIR). These measurement alternatives include (1) measuring an ACL on AIR separately, (2) electing to provide separate disclosure of the AIR component of amortized cost as a practical expedient, and (3) making accounting policy elections to simplify certain aspects of the presentation and measurement of such AIR. For entities that have adopted ASU 2016-13, the amendments in ASU 2019-04 related to ASU 2016-13 are effective for fiscal years beginning after December 15, 2019, and interim periods therein. An entity may early adopt ASU 2019-04 in any interim period after its issuance if the entity has adopted ASU 2016-13. The Group has evaluated the effect of the adoption of this ASU and does not expect there will be impact on its consolidated financial statements from the adoption of the new guidance.

In January 2017, FASB issued ASU No. 2017-04: Simplifying the Test for Goodwill Impairment. Under the new accounting guidance, an entity will no longer determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Instead, an entity will perform its goodwill impairment tests by comparing the fair value of a reporting unit with its carrying amount. An entity will recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value but not to exceed the total amount of the goodwill of the reporting unit. In addition, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment, if applicable. The provisions of the new accounting guidance are required to be applied prospectively. The new accounting guidance is effective for the Company for goodwill impairment tests performed in fiscal years beginning after December 15, 2019. Early adoption is permitted for goodwill impairment tests performed after January 1, 2017. The Group has evaluated the effect of the adoption of this ASU and does not expect there will be impact on its consolidated financial statements from the adoption of the new guidance.

In October 2018, the FASB issued ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to the Related Party Guidance for Variable Interest Entities. ASU 2018-17 changes how entities evaluate decision-making fees under the variable interest entity guidance. To determine whether decision-making fees represent a variable interest, an entity considers indirect interests held through related parties under common control on a proportional basis, rather than in their entirety. This guidance will be adopted using a retrospective approach and is effective for the Group on January 1, 2020. The Group has evaluated the effect of the adoption of this ASU and does not expect there will be impact on its consolidated financial statements and related disclosures from the adoption of the new guidance.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The guidance supersedes existing guidance on accounting for leases with the main difference being that operating leases are to be recorded in the statement of financial position as right-of-use assets and lease liabilities, initially measured at the present value of the lease payments. For operating leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and liabilities. For public companies, the guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application of the guidance is permitted. In July 2018, ASU 2016-02 was updated with ASU No. 2018-11, Targeted Improvements to ASC 842, which provides entities with relief from the costs of implementing certain aspects of the new leasing standard. Specifically, under the amendments in ASU 2018-11, (1) entities may elect not to recast the comparative periods presented when transitioning to ASC 842 (the “optional transition method”) and (2) lessors may elect not to separate lease and nonlease components when certain conditions are met. Before ASU 2018-11 was issued, transition to the new lease standard required application of the new guidance at the beginning of the earliest comparative period presented in the financial statements.

The Group adopted Topic 842 on January 1, 2019 using the modified retrospective transition approach allowed under ASU 2018-11, without adjusting the comparative periods presented. The Group elected the practical expedients under ASU 2016-02 which includes the use of hindsight in determining the lease term and the practical expedient package to not reassess whether any expired or existing contracts are or contain leases, to not reassess the classification of any expired or existing leases, and to not reassess initial direct costs for any existing leases. Upon adoption of Topic 842, the Group recognized both a right-of-use assets and corresponding lease liabilities of RMB1,045,941 and RMB970,382, respectively, on the balance sheet. The difference between the right-of-use assets and lease liabilities was due to prepaid rent. The adoption did not have a material impact on the Group’s consolidated statements of operations or consolidated statements of cash flows upon adoption as described in Note 21. The adoption of Topic 842 also did not result in a cumulative-effect adjustment to retained earnings.

Acquisition of ZMN International Education Consulting (Beijing) Co., Ltd (“ZMN Education”)

On July 31, 2017, the Group acquired 100% equity interests in ZMN Education. The total consideration for the acquisition of ZMN Education amounted to RMB135,850 which included RMB65,250 in cash and the rest was in the form of warrant. The warrant issued to the sellers which entitle them to purchase the ordinary shares of Long faith Limited, a shareholder of the Company, was recorded at fair value on acquisition date and accounted for as capital contribution to the Company by the Company’s shareholder.

ZMN Education operates study abroad tutoring services in the PRC. The acquisition of ZMN Education’s service centers, with its well-known brand and teaching team, would further enhance the Group’s ability to provide high quality, competitively priced and diversified services to the students.

This transaction was considered a business acquisition and therefore was recorded using the acquisition method of accounting. The acquired assets and liabilities were recorded at their fair values at the date of acquisition. The purchase price for the acquisition was allocated as follows:

The tangible and intangible assets valuation for the acquisition disclosed above was based on a valuation analysis prepared by the management with the assistance from an independent third-party appraiser. The valuation analysis utilizes and considers generally accepted valuation methodologies such as the income, market and cost approach. The Company has incorporated certain assumptions which include projected replacement costs.

The goodwill is attributable to intangible assets that cannot be recognized separately as identifiable assets under U.S. GAAP, and comprise of (a) the assembled work force and (b) the expected but unidentifiable business growth as a result of the synergy resulting from the acquisition.

On August 16, 2017, the Group acquired 100% equity interest in Beijing GEDU for cash consideration of USD72,300 (equivalent to RMB483,687).

Beijing GEDU operates study abroad tutoring services in the PRC. The acquisition of Beijing GEDU’s training centers, with its well-known brand and teaching team, would further enhance the Group’s ability to provide high-quality, competitively priced and diversified services to the students.

In 2017, the Group acquired 100% equity interest in (i) a group of schools wholly owned by Chongqing Shunbo Technology Co., Ltd., (ii) Shenyang Pude Education Technology Co., Ltd., (iii) a school wholly owned by Mr. Bowen Zhang, (iv) Yancheng Tiantianxiangshang Education Training Co., Ltd., (v) Fuzhou Pude Education Technology Co., Ltd., (vi) a group of schools wholly owned by Hangzhou Shoumu Education Technology Co., Ltd., and acquired certain tutoring businesses from third parties (collectively “Other 2017 Acquirees”). The total consideration for the acquisitions of Other 2017 Acquirees amounted to RMB174,770 which included RMB155,170 in cash and the rest was in the form of warrant. The warrant was issued by the major shareholder of the Company to purchase the equity interest of Puxian which was recorded at fair value and accounted for as capital contribution to the Company by the shareholder.

These acquired entities are in the operation of K-12 tutoring services and study abroad tutoring services in the PRC. The acquisitions of Other 2017 Acquirees’ training centers, with its teaching team and student base, allows the Group to provide high-quality, competitively priced and diversified services to the students.

These transactions were considered business acquisitions and therefore were recorded using the acquisition method of accounting. The acquired assets and liabilities were recorded at their fair values at the date of acquisitions. The purchase price for the acquisition was allocated as follows:

The tangible and intangible assets valuation for the acquisitions disclosed above were based on valuation analysis prepared by the management with the assistance from an independent third-party appraiser. The valuation analysis utilizes and considers generally accepted valuation methodologies such as the income, market and cost approach. The Company has incorporated certain assumptions which include projected replacement costs.

On November 1, 2018, the Group acquired 100% equity interests in Shandong Zengyu. The total consideration for the acquisition of Shandong Zengyu amounted to RMB77,000 in cash.

Shandong Zengyu operates K-12 tutoring services in the PRC. The acquisition of Shandong Zengyu’s training centers, with its teaching team and student base, allows the Group to provide high-quality, competitively priced and diversified services to the students.

In 2018, the Group acquired 100% equity interest in Jinan Lixia Wise Tutoring School Ltd and acquired tutoring business from third parties (collectively “Other 2018 Acquirees”). The total consideration for the acquisitions of Other 2018 Acquirees amounted to RMB19,986 which included RMB19,266 in cash and the rest was in the form of warrant. The warrant was issued by Long belief Limited, a shareholder of the Company, to purchase 49,348 ordinary shares of the Company. Long belief Limited is a shareholding platform for acquisitions. Refer to Note 17. The warrant was recorded at fair value and accounted for as shares consideration of the acquisition paid by the Company itself.

These acquired entities are in the operation of K-12 tutoring services and study abroad tutoring services in the PRC. The acquisitions of Other 2018 Acquirees’ training centers, with its teaching team and student base, allows the Group to provide high-quality, competitively priced and diversified services to the students.

Acquisition of Beijing Xiaoze Education Technology Co., Ltd. (“Beijing Xiaoze”)

On July 1, 2019, the Group acquired 100% equity interests in Beijing Xiaoze. The total consideration for the acquisition of Beijing Xiaoze amounted to RMB170,000 in cash.

Beijing Xiaoze operates K-12 tutoring services in the PRC. The acquisition of Beijing Xiaoze’s training centers, with its well-known brand and teaching team, would further enhance the Group’s ability to provide high quality, competitively priced and diversified services to the students.

Acquisition of Xi'an Intest Management Consulting Co., Ltd. (“Xi'an Intest”)

On July 9, 2019, the Group acquired 100% equity interests in Xi'an Intest. The total consideration for the acquisition of Xi'an Intest amounted to RMB113,000 in cash.

Xi'an Intest operates K-12 tutoring services in the PRC. The acquisition of Xi'an Intest’s training centers, with its teaching team and student base, allows the Group to provide high-quality, competitively priced and diversified services to the students.

On November 29, 2019, the Group acquired 100% equity interests in Dalian Keyuan. The total consideration for the acquisition of Dalian Keyuan amounted to RMB171,950 in cash.

Dalian Keyuan operates K-12 tutoring services in the PRC. The acquisition of Dalian Keyuan’s training centers, with its teaching team and student base, allows the Group to provide high-quality, competitively priced and diversified services to the students.

In 2019, the Group acquired 100% equity interests of ten companies and schools from third parties (collectively “Other 2019 Acquirees”). The total consideration for the acquisitions of Other 2019 Acquirees amounted to RMB342,957 in cash.

These acquired entities are in the operation of K-12 tutoring services in the PRC. The acquisitions of Other 2019 Acquirees’ training centers, with its teaching team and student base, allows the Group to provide high-quality, competitively priced and diversified services to the students.

The following information summarizes the results of operations attributable to the acquisitions included in the Group’s consolidated statement of operations since the acquisition date:

The following unaudited pro forma information summarizes the results of operations of the Group for the years ended December 31, 2016 and 2017 assuming that the acquisition of ZMN Education, Beijing GEDU and Other 2017 Acquirees which were completed in 2017 occurred as of January 1, 2016. The following pro forma financial information is not necessarily indicative of the results that would have occurred had the acquisitions been completed at the beginning of the periods as indicated, nor is it indicative of future operating results:

The following unaudited pro forma information summarizes the results of operations of the Group for the years ended December 31, 2017 and 2018 assuming that the acquisition of Shandong Zengyu and Other 2018 Acquirees which were completed in 2018 occurred as of January 1, 2017. The following pro forma financial information is not necessarily indicative of the results that would have occurred had the acquisitions been completed at the beginning of the periods as indicated, nor is it indicative of future operating results:

The following unaudited pro forma information summarizes the results of operations of the Group for the years ended December 31, 2018 and 2019 assuming that the acquisition of Beijing Xiaoze, Xi'an Intest, Dalian Keyuan and Other 2019 Acquirees which were completed in 2019 occurred as of January 1, 2018. The following pro forma financial information is not necessarily indicative of the results that would have occurred had the acquisitions been completed at the beginning of the periods as indicated, nor is it indicative of future operating results:

In 2019, the Group entered into loan agreements amounted to USD27,468 (equivalent to RMB191,230) with American Hebrew Academy, Inc. (“AHA”), a non-for-profit corporation. The annual interest rate was 18.0% and the term of the loan was 12 months. The loan is secured by AHA’s real estate property located in North Carolina, the United States.

Depreciation expenses were RMB20,545, RMB57,696 and RMB77,859 for the years ended December 31, 2017, 2018 and 2019, respectively.

Amortization expenses were RMB23,644, RMB32,749 and RMB34,938 for the years ended December 31, 2017, 2018 and 2019, respectively.

As of December 31, 2019, the Group expects to record amortization expenses related to intangible assets RMB36,072, RMB23,301, RMB17,626, RMB3,786 and RMB55 for the years ended December 31, 2020, 2021, 2022, 2023, 2024, respectively, and RMB nil thereafter.

The Group has two reporting units that carry goodwill. The changes in carrying amount of goodwill for the years ended December 31, 2018 and 2019 were as follows:

The Company performed goodwill impairment analysis as of December 31, 2019. When determining the fair value of reporting units, including K-12 tutoring services and study abroad tutoring services, the Company used a discounted cash flow model that included a number of significant unobservable inputs. Key assumptions used to determine the estimated fair value include: (a) internal cash flows forecasts including expected revenue growth, operating margins and estimated capital needs, (b) an estimated terminal value using a terminal year long-term future growth rate determined based on the growth prospects of the reporting unit; and (c) a discount rate that reflects the weighted-average cost of capital adjusted for the relevant risk associated with the reporting unit’s operations and the uncertainty inherent in the Company’s internally developed forecasts.

Based on the Company’s assessment as of December 31, 2019, the fair value of K-12 tutoring services and study abroad tutoring services reporting units exceeded its carrying value, respectively. The Group did not record impairment of goodwill for the years ended December 31, 2017, 2018 and 2019.

The components of accrued expenses and other current liabilities were as follows:

In April 2018, Dalian Xigang Tongfang Technology Culture Training School (“Dalian Tongfang”) entered into a bank borrowing agreement amounted to RMB10,000 with Shanghai Pudong Development Bank (“SPD Bank”). The annual interest rate was 6.3% and the term of the bank borrowing was 12 months. Puxin Education, Mr. Yunlong Sha and Ms. Wenjing Song were joint guarantors under the bank borrowing agreement. The bank borrowing was fully repaid as of December 31, 2019.

In November 2018, Puxin Education entered into a bank borrowing agreement amounted to RMB96,600 with SPD Bank. The annual interest rate was 4.35% and the term of the bank borrowing was 6 months. Prepshine HK acted as the pledger under the bank borrowings agreement. The bank borrowing was fully repaid as of December 31, 2019.

In 2018, Puxin Education entered into a series of borrowing agreements amounted to RMB4,273 with Bank of Jiangsu. The annual interest rates were 6.525% and the terms of the bank borrowings were 12 months. As of December 31, 2018, all of the borrowing were fully repaid ahead of maturity date.

In April 2019, Puxin Education entered into a bank borrowing agreement amounted to RMB41,000 with Xiamen International Bank. The annual interest rate was 7.0% and the terms of the bank borrowings were 6 months. The buildings of Beijing GEDU were mortgaged as collateral for the borrowing. As of December 31, 2019, the bank borrowing was fully repaid at maturity date.

In 2019, Puxin Education entered into a series of borrowing agreements amounted to RMB408,600 with SPD Bank. The annual interest rate was 4.35% and the term of the bank borrowings were 6-12 months. Deposits amounted to USD50,000 (equivalent to RMB348,090), which were recorded in the current portion of restricted cash, were pledged as collateral for the borrowings. As of December 31, 2019, bank borrowings amounted to RMB94,500 were repaid at the maturity date.

For the years ended December 31, 2018 and 2019, the Group recognized interest expense of RMB1,148 and RMB13,269 for these bank borrowings.

In 2018, Puxin Education issued a debt instrument amounted to RMB29,500 under a directed financing scheme and registered with competent financial asset exchange in PRC, the annual interest rate ranged from 8% to 9% and the term of the debt instrument was 12 months, Taiyuan Puxin Culture and Arts Co., Ltd (“Taiyuan Puxin Arts”) and Mr. Yunlong Sha were joint guarantors under the agreement. Taiyuan Puxin Arts also issued a debt instrument amounted to RMB50,000 under a directed financing scheme and registered with competent financial asset exchange in PRC, the annual interest rate ranged from 8.2% to 8.8% and the term of the debt instrument was 6 months, Puxin Education and Mr. Yunlong Sha were joint guarantors under the agreement. All the debt instruments were fully repaid as of December 31, 2019.

In 2019, Puxin Education issued debt instruments amounted to RMB384,100 under the directed financing schemes and registered with competent financial asset exchanges in PRC, the annual interest rate ranged from 7.0% to 9.5% and the term of the debt instruments was 3-12 months, Taiyuan Puxin Arts, Shanghai Global Career Education & Technology Holdings Limited (“Shanghai GEDU”), Mr. Yunlong Sha and Ms. Wenjing Song were joint guarantors under the agreements, 100% equity interests of certain subsidiary and tuition collection rights of certain schools were pledged for the debt instruments. Debt instruments amounted to RMB133,200 were repaid at maturity date as of December 31, 2019.

Puxin Education entered into four other loan agreements in a total amount of RMB60,000 with third parties in 2018. The annual interest rates ranged from nil to 5.655% and the terms of the loans ranged from 1 month to 3 months. For one of the loans amounted to RMB30,000, Mr. Yunlong Sha was guarantor under the loan agreement. The four loans are fully repaid as of December 31, 2018.

The Group entered into other three loan agreements in a total amount of RMB162,938 with a group of lenders in 2019. The annual interest rates ranged from nil to 14% and the terms of the loans ranged from 6 month to 12 months. Mr. Yunlong Sha was guarantor under the loan agreements, and tuition collection rights of certain schools were pledged for the loans.

For the years ended December 31, 2018 and 2019, the Group recognized interest expense of RMB2,433 and RMB20,451 for the loans.

In June 2017, Puxin Education and Mr. Yunlong Sha entered into a convertible note investment agreement with Jiangyin Huazhong Investment Management Co., Ltd. (“Huazhong”). Pursuant to this agreement, Huazhong provides a credit facility in an amount up to RMB300,000 to Puxin Education and has the right to elect to convert the unpaid and outstanding amount under the credit facility into ordinary shares of Puxin Limited upon its initial public offering. The conversion price per ordinary share will be equal to 90%, 80% and 70% of the public offering price of the ordinary shares if the public offering application is submitted before or by December 31, 2018, between January 1 and December 31, 2019, or between January 1 and December 31, 2020, respectively. If IPO fails to occur before or by December 31, 2020, the note could be converted to shares. In July 2017, November 2017 and February 2018, Puxin Education had drawn down a principal amount totaled at RMB190,000 under the credit facility. The note bears a simple annual interest rate of 12% and has a maturity term of 22 months since the date the issuer received the first proceed and can be extended for another 36 months. Pursuant to the agreement, Puxin Education committed to guarantee Huazhong an Internal Rate of Return (“IRR”) of no less than 18% per annual if Huazhong chooses to withdraw earlier or by the 58th months of investment. Puxin Education is obligated to pay the compensation amount equals to the shortfall to Huazhong. However, if for 20 consecutive trading days, the weighted average trading price provides Huazhong an IRR of above 30%, Puxin Education is no longer liable for the compensation. In the event of (1) certain misconduct by the Company, (2) the Company establishes the planned VIE structure in contemplating a IPO overseas and the Huazhong decided not to convert the note into the shares of the Company, or (3) the total net profits in aggregation of the Company from 2017 to 2019 is less than RMB950,000, Huazhong has the option to demand Puxin Education to redeem the note at a price equal to the principal amount plus any accrued unpaid interest at a rate of 18% per annum. The fair value option was elected for the convertible note. As of December 31, 2017, the fair value of the convertible note was RMB150,200. Changes in fair value of RMB10,200 were recorded in the consolidated statements of operations for the year ended December 31, 2017.

In February 2018, the Company entered into an amendment agreement with Huazhong, Mr. Yunlong Sha, Puxin Education and China Central International Asset Management Co., Ltd. (“China Central International”, Huazhong’s related party company). Pursuant to the amendment agreement, Huazhong waived its conversion rights to the note, in return, the Company issued warrants to China Central International, with the total exercise amount equal to the convertible note of RMB190,000 issued by Puxin Education to Huazhong. The exercise price of warrants is the same as the conversion price stipulated in the original convertible note agreement. These warrants shall be exercisable (i) from the completion of an IPO and the expiration of three months lock-up period that China Central International is subject to; or (ii) after December 31, 2020.

The amendment of the convertible note to Huazhong was accounted for as an extinguishment of the original convertible note, and issuance of a new note and warrants. With the assistance from an independent third party appraiser, as of the amendment date, the fair value of the original convertible note, the new note and the warrants were RMB207,300, RMB193,400 and RMB14,800, respectively. A loss of RMB900 was recorded in the consolidated statements of operations for the year ended December 31, 2018, which was measured as the difference between the reacquisition price of convertible notes (represented by the fair value of the new note and the warrants) and the carrying amount of the extinguished convertible note.

Loss on changes in the convertible note’s fair value of RMB7,100 from January 1, 2018 to the amendment date were recorded in the consolidated statements of operations for the year ended December 31, 2018. Pursuant to the warrants agreement, up until 58 months from the original date of drawdown, if the aggregate profit received by the warrants holder in selling the warrants shares (the “Actual Return”) is less than a minimum return calculated based on certain formula (the “Minimum Return”), the Company shall cause Mr. Yunlong Sha and/or Puxin Education to compensate the warrants holder in cash for the difference between the Actual Return and the Minimum Return.

The warrants were recorded as a liability at fair value on issuance date, and subsequently marked to market at each reporting period end. As of December 31, 2018, the fair value of the warrants were RMB nil. Gain on changes in fair value of RMB14,800 were recorded in the consolidated statements of operations for the year ended December 31, 2018. No warrants were exercised or expired for the year ended December 31, 2018.

As described in Note 13, the warrants were expired in March 2019 and Puxin Education fully repaid the new note of Huazhong in May 2019.

On August 4, 2017, Puxin Limited issued convertible note at the principle amount of USD25,000 (equivalent to RMB168,180) to Haitong International Investment Holdings Limited (“Haitong”). The note has a maturity term of 5 years since the date of the note. The convertible note bears a compound interest rate of 12% per annum. If the Company’s IPO occurs before or by June 30, 2019, the convertible note will be automatically converted into Puxin Limited ordinary shares upon completion of the IPO. The conversion price per ordinary share will be equal to 70%, 65% or 60% of the offering price of the ordinary shares if the IPO is completed before or by December 31, 2018, between January 1 and March 31, 2019, or between April 1 and June 30, 2019, respectively. If IPO fails to occur before or by June 30, 2019, the convertible note will be automatically converted into redeemable and convertible preferred shares on July 1, 2019 except that Haitong notifies the Company of its decision to choose repayment in cash for the principal and accrued interest at least 5 business days prior to June 30, 2019. If the Company contemplates a change-in-control transaction (“trade sale”) prior to full repayment of the note, Haitong shall have the right to (i) declare all indebtedness under this note become immediately due and payable in full on or prior to the closing of the trade sale; (ii) convert all such indebtedness into such number of converted preferred shares calculated by dividing the outstanding principal amount by the applicable preferred share conversion price on or prior to the closing of the trade sale. The Company elected the fair value option for the convertible note.

Upon the completion of the Company’s IPO, the convertible notes issued to Haitong automatically converted into 4,201,681 ordinary shares at the conversion prices of USD5.95, which equal to 70% of the IPO price of the ordinary shares.

Loss on changes in fair value of USD6,714 (equivalent to RMB42,792) and nil were recorded in the consolidated statements of operations for the years ended December 31, 2018 and 2019, respectively.

On September 29, 2017, Puxin Limited issued convertible note at the principle amount of USD23,000 (equivalent to RMB153,026) to CICC ALPHA Eagle Investment Limited (“CICC ALPHA”). The note bears a simple annual interest rate of 15% and has a maturity term of 4 years since the date of the note. If the Company’s IPO occurs before or by June 30, 2020, CICC ALPHA has the right to convert all or any part of the outstanding principal amount into ordinary shares upon completion of the IPO. The conversion price per ordinary share will be equal to 70% or 55% of the public offering price of the ordinary shares if the Company’s IPO is completed before or by June 30, 2019 or between July 1, 2019 and June 30, 2020, respectively. The portion of the outstanding principal amount that CICC ALPHA elects not to be converted into the Company’s ordinary share will be redeemed and repurchased by the Company on the completion of the IPO at a redemption price calculated based on a compound interest rate of 15% per annum. If IPO fails to occur before or by June 30, 2020, CICC ALPHA has the right to convert all or any part of the outstanding amount into preferred shares. In the event of default, CICC ALPHA may request the Company to immediately redeem the convertible note. Pursuant to the agreement, if after IPO, the IRR of the notes holder upon exit is below 25%, the founder, Mr. Yunlong Sha should compensate CICC ALPHA for the shortfall (“Floor Return”). If the IRR of CICC ALPHA exceeds 30%, CICC ALPHA shall pay Mr. Yunlong Sha certain awards (“Founder Awards”). The features of Founder Awards and Floor Return are freestanding derivatives that are required to be separately accounted for as derivative liabilities under ASC 815. The Company elected the fair value option for the convertible note.

Upon the completion of the Company’s IPO, CICC ALPHA exercised its conversion right. The convertible notes issued to CICC ALPHA has been converted into 3,865,547 ordinary shares at the conversion prices of USD5.95 which equal to 70% of the IPO price of the ordinary shares.

The convertible note consideration received were allocated between the convertible notes and two derivatives using the residual value method. As of December 31, 2018 and 2019, the fair value of the derivative liabilities was USD9,300 (equivalent to RMB63,942) and USD24,740 (equivalent to RMB172,235), respectively. Changes in fair value of derivative liabilities were USD6,500 (equivalent to RMB44,288) and USD15,440 (equivalent to RMB104,589) recorded in the consolidated statements of operations for the years ended December 31, 2018 and 2019. Changes in fair value of the convertible note aggregated to USD8,217 (equivalent to RMB52,368) and nil were recorded in the consolidated statements of operations for the years ended December 31, 2018 and 2019.

As part of the agreements with the noteholders, the Company and Puxin Education pledged certain equity interest of themselves and its subsidiaries of the Group as described in Note 22. The convertible notes agreements also contain covenants customary for a financing of this size and nature.

On August 4, 2017, the Company issued promissory note at the principle amount of USD25,000 (equivalent to RMB168,180) to Haitong. The note bears a simple annual interest rate of 8% and has a maturity term of 2 years from the date of issuance. In 2019, the Company entered into an amendment agreement with Haitong, the maturity date for half of the principal amounted to USD12,500 (equivalent to RMB87,023) shall be extended to August 4, 2020, the third anniversary of the issuance date of the original promissory note, and the maturity date for the other half of the principal amounted to USD12,500 (equivalent to RMB87,022) shall be extended to August 4, 2021, the fourth anniversary of the issuance date of the original promissory note. The note bears a simple annual interest rate of 10% for the extension period of the original promissory note.

As disclosed in Note 12, the amendment of the convertible notes to Huazhong was accounted for as an extinguishment of the original convertible notes and issuance of a new note at the same principal amount . For the new note, Puxin Education will repay the principle and interest to Huazhong as stipulated in the amendment agreement. The new note bears a simple annual interest rate of 12% and has a maturity term of 22 months since the original date the issuer received the first proceed and can be extended by Puxin Education for another 36 months. If China Central International exercises the warrant, it should surrender the warrant to the Company and make payment to the Company of an amount equal to exercise price in cash, within 5 business days upon the full payment of the principal and all the interests accrued on the principal, or at the option of China Central International, within 5 business days upon the Company’s receipt of the note of exercise. The warrants were expired in March 2019 and Puxin Education fully repaid the new note of Huazhong in May 2019.

For the years ended December 31, 2018 and 2019, the Group recognized interest expense of RMB32,026 and RMB37,379 for the notes, respectively.

The carrying value of promissory notes approximate its fair value, as interest rate approximates market rate. The fair value of promissory notes was determined as present value of the notes using market interest rate. The promissory notes was categorized in Level 2 of the fair value hierarchy.

As part of the agreements with the noteholders, the Company and Puxin Education pledged certain equity interest of themselves and its subsidiaries of the Group as described in Note 22.

The Group measured its financial assets and liabilities, including cash and cash equivalents, restricted cash, other receivables, loan receivable, other payables, amounts due to related parties, bank borrowings, loans payable to third parties, convertible notes, promissory notes, derivative liabilities and warrants at fair value on a recurring basis as of December 31, 2018 and 2019. Cash and cash equivalents and restricted cash are classified within Level 1 of the fair value hierarchy because they are valued based on the quoted market price in an active market. The Group determines the fair value of derivative liabilities and warrants with the assistance of an independent third-party appraiser, based on Level 3 inputs. To determine the fair value of the convertible notes, the Group used probability expected return method. To determine the fair value of derivative liabilities, the Group used binomial model. To determine the fair value of warrants, the Group used modified discount cash flow model.

The key assumptions used in valuation of convertible notes are summarized in the table below:

The key assumptions used in valuation of derivative liabilities are summarized in the table below:

The key assumptions used in valuation of warrants are summarized in the table below:

The carrying amounts of other receivables, loan receivable, other payables, amounts due to related parties, bank borrowings and loans payable to third parties approximate their fair values due to their short-term maturity.

The following is a reconciliation of the beginning and ending balances for assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the years ended December 31, 2017, 2018 and 2019:

The Group measures goodwill at fair value on a nonrecurring basis when it is annually evaluated or whenever events or changes in circumstances indicate that carrying amount of a reporting unit exceeds its fair value as a result of the impairment assessments. The Group measures purchase price allocation at fair value on a nonrecurring basis as of the acquisition dates. The Group measures long-lived assets at fair value on a nonrecurring basis whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable as a result of the impairment assessments, the Group would recognize an impairment loss based on the fair value of the assets.

In December 2014, Puxin Education approved the 2014 Great Talent Share Incentive Plan (“2014 Great Talent Plan”) which provides for the grant of options to eligible employees of the Group. Under 2014 Great Talent Plan, the maximum aggregate number of units of equity interest of Puxin Education that may be issued shall not exceed 158,400,000. The term of the option shall not exceed 7 years from the date of the grant. The options will vest in accordance with the vesting schedules set out in the respective share option agreements with vesting period ranged from 0 to 5 years.

In conjunction with the reorganization, as disclosed in Note 1, the Company adopted the 2018 Great Talent Share Incentive Plan (“2018 Great Talent Plan”), which was approved by the board of directors of the Company to replace the 2014 Great Talent Plan. To facilitate the share incentive plan, the Company established an employee shareholding platform (the “Share Holding Platform”). The purpose of the Share Holding Platform is to allow employees of the Group to receive vehicle share incentives. Long favor Limited (“Long favor”), a British Virgin Islands company was established as a holding vehicle for the Group’s Share Holding Platform. Mr. Yun Xiao, a shareholder of the Company serves as the sole shareholder of the Share Holding Platform. Long favor has no activities other than administrating the plan and does not have any employees. On behalf of the Group and subject to approval of board of director of the Company, Mr. Yun Xiao, as the sole shareholder of Long favor, has the authority and responsibility to process the eligible participants to whom awards will be granted, number of shares, terms and conditions of such awards. All shares held by the Share Holding Platform are solely for purpose of future issuance of share incentive options to employees once they exercise, and have been treated as treasury shares in the consolidated financial statements.

The terms of the 2018 Great Talent Plan are substantially the same as those under the 2014 Great Talent Plan, except that the number of options and exercise price were adjusted on a diluted basis in accordance to the shares number of the Company upon the reorganization. As a result, none of the options terms were modified.

In February 2018, the Company approved the 2018 Grand Talent Share Incentive Plan (“2018 Grand Talent Plan”) which provides for the grant of options to eligible employees of the Group. Under 2018 Grand Talent Plan, the maximum aggregate number of shares that may be issued shall not exceed 16,400,000.

In March 2018, the Company granted 16,400,000 options under the 2018 Grand Talent Plan for an exercise price of USD7.78 (RMB48.78). The term of the option is fixed and shall not exceed 10 years from the date of the grant. The options will vest in accordance with the vesting schedules set out in the respective share option agreements with vesting period ranged from 0 to 6 years.

In March 2019, the Company approved the 2019 Noble Talent Share Incentive Plan (“2019 Noble Talent Plan”) which provides for the grant of options to eligible employees of the Group. Under 2019 Noble Talent Plan, the maximum aggregate number of shares that may be issued shall not exceed 8,879,986.

In March 2019, the Company granted 8,879,986 options under the 2019 Noble Talent Plan for an exercise price of US$0.001 (RMB0.007). The term of the option is fixed and shall not exceed 7 years from the date of the grant. The options will vest in accordance with the vesting schedules set out in the respective share option agreements with vesting period of 2 months.

The Company determined the estimated fair value of the options on the respective grant dates using the binomial option pricing model with the assistance from an independent valuation firm, with the following assumptions used in the years ended December 31, 2017, 2018 and 2019.

Risk-free interest rate was estimated based on the daily treasury long term rate of the U.S. Treasury Department with a maturity period close to the expected term of the options, plus the country default spread of China.

The volatility of the underlying ordinary shares during the lives of the options was estimated based on the historical stock price volatility of comparable listed companies over a period comparable to the expected term of the options.

The dividend yield was estimated by the Group based on its expected dividend policy over the expected term of the options.

Exercise multiple represents the value of the underlying share as a multiple of exercise price of the option which, if achieved, results in exercise of the option.

Prior to the completion of initial public offering, the estimated fair value of the ordinary shares underlying the options as of the respective grant dates was determined based on a valuation with the assistance of a third party appraiser. The fair value of the underlying ordinary shares is determined based on the closing market price of the share after the completion of initial public offering in June 2018.

The activity in stock options as of December 31, 2019, and changes during the year then ended is presented below:

The weighted average grant date fair value for the years ended December 31, 2017, 2018 and 2019 were RMB27.53, RMB24.20 and RMB20.56. Total intrinsic value of options exercised for the years ended December 31, 2017, 2018 and 2019 were RMB39,716, RMB681 and RMB255,728, respectively. The total fair value of options vested during the years ended December 31, 2017, 2018 and 2019 was RMB29,645, RMB302,331 and RMB220,040, respectively.

For share options that vest on grant date, the cost of award is expensed on the grant date. For the graded vesting share options, the Company recognizes the compensation cost over the requisite service period for each separately vesting portion of the award as if the award is, in substance, multiple awards. The Company recorded share-based compensation expenses of RMB55,835, RMB345,503 and RMB230,440 for the years ended December 31, 2017, 2018 and 2019, respectively. As of December 31, 2019, there was RMB62,498 of share-based compensation related to stock options that is expected to be recognized over a weighted average period of 2.53 years.

In November 2018, the Company granted 1,631,200 restricted shares to certain employees. These shares are fully vested and outstanding shares whose transferability is restricted for 6 months. Before the removal of such restrictions, the holders of the restricted shares shall be entitled to all rights and privileges of those of ordinary shareholders, and shall be entitled to voting rights and dividends. Therefore, these restricted shares are considered participating securities for the purpose of net loss per share calculation.

The grant-date value of a restricted share was USD2.6, which was determined based on the closing price of the Company’s American depositary shares (“ADSs”) on NYSE on November 20, 2018. The Company recorded share-based compensation expenses of USD4,241 (equivalent to RMB29,454) for the year ended December 31, 2018.

The Company is incorporated in the Cayman Islands. Under the current laws of the Cayman Islands, the Company is not subject to income or capital gains taxes. The Company’s subsidiary Prepshine HK is located in Hong Kong and is subject to an income tax rate of 16.5% for assessable profit earned in Hong Kong before or by March 2018, and an income tax rate of 8.25% for the first HK$2,000 of assessable profit while the standard income tax rate of 16.5% remains for profit exceeding HK$2,000 from April 2018 onwards.

The Company’s other subsidiaries, the VIE and the VIE’s subsidiaries and schools, which were entities incorporated in the PRC (the “PRC entities”) are subject to PRC Enterprise Income Tax (“EIT”), on the taxable income in accordance with the relevant PRC income tax laws, which have adopted a unified income tax rate of 25% except for a high and new technology enterprise (“HNTE”, which is subject to a tax rate of 15%) and some small low-profit enterprises (whose income will be counted in the taxable income at the half-reduced or quarter-reduced rate, and the enterprise income tax is calculated and paid at the 20% tax rate). In accordance with GuoKeFaHuo [2016] No.32, HNTE can enjoy a reduced income tax rate of 15%. Beijing Meikaida Education Technology Co., Ltd. began to qualify as HNTE since 2016 and enjoy the tax rate of 15% in 2016, 2017 and 2018. In accordance with Cai Shui [2019] No.13, during the period from January 1, 2019 to December 31, 2021, for small low-profit enterprises, the portion of less than RMB1,000 and the portion of more than RMB1,000 but less than RMB3,000 of the annual taxable income, will be included in the actual taxable income at 25% and 50% respectively, based on which the enterprise income tax payable will be calculated at the reduced tax rate of 20%.

The current and deferred components of the income tax expenses appearing in the consolidated statement of operations were as follows:

As of December 31, 2019, the Group had net operating loss carried forward of RMB890,888 from the Company’s PRC entities, which will expire on various dates from December 31, 2020 to December 31, 2024.

The reconciliation of the effective tax rate and the statutory income tax rate applicable to PRC operations was as follow:

The Group did not identify significant unrecognized tax benefits for the year ended December 31, 2019. The Group did not incur any interest and penalties related to potential underpaid income tax expenses and also does not anticipate any significant increases or decreases in unrecognized tax benefits in the next 12 months from December 31, 2019.

Upon the incorporation of Puxin Limited on March 17, 2017, the Company issued 8,524 ordinary shares to Long bright Limited, 820 ordinary shares to Gao & Tianyi Limited, 492 ordinary shares to Pution Limited and 164 ordinary shares to Prospect Limited for an aggregate consideration of USD0.004.

On August 4, 2017, the Company issued 99,990,000 ordinary shares to its existing shareholders on a proportional basis for an aggregate consideration of USD5. Such issuance was accounted for as a stock split and, accordingly, all references to numbers of ordinary shares and per-share data in the accompanying consolidated financial statements have been adjusted to reflect the stock split and issuance of shares on a retrospective basis.

On February 5, 2018, in connection with the reorganization, the Company issued 21,761,652 ordinary shares to Puxin Nova Limited, 3,336,744 ordinary shares to Stary International Limited, 40,000 ordinary shares to Long wit Limited, 8,200,000 ordinary shares to Long belief Limited, 1,640,000 ordinary shares to Long faith Limited and 17,103,724 ordinary shares to Long favor Limited for an aggregate consideration of USD3.

The ordinary shares of the Company issued to Long favor Limited and Long belief Limited were to establish a reserve pool for future issuance of equity share incentive to the Group’s 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 share are transferred to the employees or the shareholders of future acquiree. While the ordinary shares were issued to Long favor Limited and Long belief Limited, they do not have any of the rights associated with the ordinary shares, and as such the Company accounted for these shares as issued but not outstanding ordinary shares until the waiver is released by the Company, which occurs when the ordinary shares are awarded to the employees or the shareholders of future acquiree. 15,438,412 and 8,150,652, 6,450,766 and 8,150,652 ordinary shares of Long favor Limited and Long belief Limited are issued but not outstanding as of December 31, 2018 and December 31, 2019, respectively.

Upon the completion of the Company’s IPO in June, 2018, the Company offered and issued 8,280,000 ADSs representing 16,560,000 ordinary shares with a par value USD0.00005 per share at the net proceeds, before expense, of USD130,907 (equivalent to RMB837,541). IPO related expense is RMB38,711, out of which RMB38,333 is paid as of December 31, 2018 and the remaining balance is recorded in the accrued expense and other current liabilities.

Immediately upon the completion of the IPO, all of the Company’s convertible redeemable preferred shares automatically converted into an equal number of 11,917,880 ordinary shares; the convertible notes issued to Haitong automatically converted into 4,201,681 ordinary shares at the conversion prices of USD5.95, which equal to 70% of the IPO price of the ordinary shares; CICC ALPHA exercised its conversion right and the convertible notes were converted into 3,865,547 ordinary shares at the conversion prices of USD5.95 which equal to 70% of the IPO price of the ordinary shares.

For the purpose of calculating net loss per share as a result of the reorganization as described in Note 1, the number of ordinary shares used in the calculation reflects the outstanding ordinary shares of the Company as if the reorganization occurred at the beginning of the first period presented.

The following table sets forth the computation of basic and diluted net loss per share for the periods indicated:

For the years ended December 31, 2017, 2018 and 2019, an incremental weighted average number of 4,938,438, 18,420,993 and 21,646,232 ordinary shares from the assumed exercise of share options were not considered in the computation of diluted net loss per share because they would be anti-dilutive given the Company’s loss making position.

Full time employees of the Group in the PRC participate in a government mandated defined contribution plan, pursuant to which certain pension benefits, medical care, employee housing fund, unemployment insurance and other welfare benefits are provided to employees. Chinese labor regulations require that the Group’s PRC entities make contributions to the government for these benefits based on certain percentages of the employees’ salaries. The Group has no legal obligation for the benefits beyond the contributions made. The total amount for such employee benefits, which was expensed as incurred, was RMB104,635, RMB184,525 and RMB210,236 for the years ended December 31, 2017, 2018 and 2019, respectively.

In connection with Purong Information’s repurchase of 5% equity interest with preferential feature which was held by Shanghai Trustbridge, in January 2018, Mr. Yunlong Sha advanced to Purong Information at the amount of RMB180,000. As of December 31, 2018, such balance and the accrued interest, at 9%, were paid back by the Group.

The balances with related parties were interest-free, unsecured and repayable on demand.

The Group’s leases consist of operating leases for offices and schools in different cities in the PRC. The Group determines if an arrangement is a lease at inception. Some lease agreements contain lease and non-lease components, which the Group chooses to account for as separate components. The allocation of the consideration between the lease and the non-lease components is based on the relative stand-alone prices of lease components included in the lease contracts. As of December 31, 2019, the Group had no long-term leases that were classified as a financing lease. As of December 31, 2019, the Group did not have additional operating leases that have not yet commenced.

Total operating lease expenses for the year ended December 31, 2019 was RMB378,691, and was recorded in cost of revenues, selling expenses and general and administrative expense on the consolidated statements of operations.

The following is a maturity analysis of the annual undiscounted cash flows for the annual periods ended December 31:

Future minimum payments under non-cancelable operating leases related to offices and schools consisted of the following at December 31, 2018:

Payments under operating leases are expensed on a straight-line basis over the periods of their respective leases. The terms of the leases do not contain rent escalation or contingent rents. For the years ended December 31, 2017 and 2018, total rental expense for all operating leases amounted to RMB215,432 and RMB332,574, respectively.

On August 4, 2017, Puxin Limited issued a convertible note and a promissory note at the principle amount of USD25,000 and USD25,000, respectively, to Haitong. In conjunction with the note purchase agreement, an offshore share mortgage agreement was entered into amongst Haitong, Puxin Limited and Long bright Limited (a shareholder of Puxin Limited solely owned by Mr. Yunlong Sha). Pursuant to the offshore share mortgage agreement, Long bright Limited mortgaged its 18% equity interests of Puxin Limited in favor of Haitong. Meanwhile, a domestic equity pledge agreement was entered into amongst a related party of Haitong, Puxin Education, Dalian Pude Education Consulting Co., Ltd. (“Dalian Pude”) and Guizhou Puxintian Education Technology Co., Ltd. (“Guizhou Puxintian”). Puxin Education pledged its 100% equity interests of Dalian Pude and Guizhou Puxintian in favor of a related party of Haitong. Mr. Yunlong Sha, Ms. Wenjing Song and Long bright Limited are joint guarantors under the offshore share mortgage agreement and domestic equity pledge agreement.

On September 29, 2017, Puxin Limited issued convertible note at the principle amount of USD23,000 to CICC ALPHA. In conjunction with the note purchase agreement, an offshore share mortgage agreement was entered into amongst CICC ALPHA, Puxin Limited and Long bright Limited. Pursuant to the offshore share mortgage agreement, Long bright Limited mortgaged its 8.3% equity interests of Puxin Limited in favor of CICC ALPHA. Meanwhile, a domestic equity pledge agreement was entered into amongst a related party of CICC ALPHA, Mr. Yunlong Sha and Puxin Education, Mr. Yunlong Sha pledged its 4.15% equity interests of Puxin Education in favor of a related party of CICC ALPHA. Mr. Yunlong Sha and Long bright Limited are joint guarantors under the offshore share mortgage agreement and domestic equity pledge agreement.

The equity interests pledged under the domestic equity pledge agreements with Haitong and CICC ALPHA were released in February 2018 in connection with the reorganization. As of December 31, 2019, all the mortgaged shares of Puxin Limited were released except for 9,589,566 shares which were still mortgaged to Haitong.

In 2019, Puxin Education entered into a series of borrowing agreements amounted to RMB408,600 with SPD Bank. Deposits amounted to USD50,000 (equivalent to RMB348,090), which were recorded in the current portion of restricted cash, were pledged as collateral for the borrowings.

In 2019, Puxin Education issued debt instruments amounted to RMB384,100 under the directed financing schemes and registered with competent financial asset exchanges in PRC. Taiyuan Puxin Arts, Shanghai GEDU, Mr. Yunlong Sha and Ms. Wenjing Song were joint guarantors under the agreements, 100% equity interests of certain subsidiary and tuition collection rights of certain schools were pledged for the debt instruments.

The Group entered into four other loan agreements in a total amount of RMB162,938 with a group of lenders in 2019. Mr. Yunlong Sha was guarantor under the loan agreements, and tuition collection rights of certain schools were pledged for the loans.

The Group is in the process of applying for permits and preparing filings for certain training institutions and tutoring branches. The contingent liability incurred by failing to meet the permit or filing requirements cannot be reasonably estimated, pending on authoritative interpretation and implementation guidance, the Group did not record any liabilities pertaining to this.

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 (the “Amended Private Education Law”), which became effective on September 1, 2017 and was further amended on December 29, 2018. On August 10, 2018, the Ministry of Justice of the PRC issued the Amended Draft of Implementation Rules for the Law on the Promotion Private Education of the PRC for Approval (the “Implementation Rules for Approval”) to invite public comment. Due to the lack of authoritative interpretation and implementation guidance, the potential impact related to the Group not fully complying with the Amended Private Education Law or any relevant regulations cannot be reasonably estimated at the issuance of this report. As a result, the Group did not account for any liabilities pertaining to this.

The Group’s chief operating decision maker (“CODM”) has been identified as the CEO who reviews financial information of operating segments based on U.S. GAAP amounts when making decisions about allocating resources and assessing performance of the Group. The Group identified two operating segments, including K-12 tutoring services and study abroad tutoring services. All these two operating segments are identified as reportable segments.

The Group primary operates in the PRC and all of the Group’s long-lived assets are located in the PRC. The Group’s CODM evaluates performance based on the operating segment’s revenue and gross profit. The revenue and gross profit by segments were as follows:

The total assets for the two reportable segments were shared and indistinguishable for reporting purposes.

Relevant PRC statutory laws and regulations permit payments of dividends by the Group’s PRC entities only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. The results of operations reflected in the financial statements prepared in accordance with U.S. GAAP differ from those reflected in the statutory financial statements of the Company’s entities.

Prior to payment of dividends, pursuant to the PRC laws and regulations, enterprises incorporated in the PRC must make appropriations from after-tax profit to non-distributable reserve funds as determined by the Board of Directors of each company. These reserves include (i) general reserve, and (ii) other reserves at the discretion of the Board of Director.

Subject to certain cumulative limits, the general reserve requires annual appropriations of 10% of after-tax profits as determined under PRC laws and regulations at each year-end until the balance reaches 50% of the PRC entity registered capital; the other reserve appropriations are at the Company’s discretion. These reserves can only be used for specific purposes of enterprise expansion and are not distributable as cash dividends. The Company’s subsidiaries contributed RMB nil, RMB1,443 and RMB510 to the general reserve during the years ended December 31, 2017, 2018 and 2019.

Prior to the effectiveness of Amended Private Education Law, PRC laws and regulations required private schools that require reasonable returns to contribute 25% of after-tax income before payments of dividend to a fund to be used for the construction or maintenance of the school or procurement or upgrading of educational facility. For private schools that do not require reasonable returns, this amount should be equivalent to no less than 25% of the annual increase of its net assets as determined in accordance with generally accepted accounting principles in the PRC. For the Group’s private schools, amount contributed to the reserve of RMB260, RMB3,152 and RMB2,874 for the years ended December 31, 2017, 2018 and 2019.

The statutory reserves cannot be transferred to the Company in the form of loans or advances and are not distributable as cash dividends except in the event of liquidation.

Because the Group’s entities in the PRC can only be paid out of distributable profits reported in accordance with PRC accounting standards, the Group’s entities in the PRC are restricted from transferring a portion of their net assets to the Company. The restricted amounts include the paid-in capital and statutory reserves of the Group’s entities in the PRC. The aggregate amount of paid-in capital and statutory reserves, which represented the amount of net assets of the Group’s entities in the PRC not available for distribution, was RMB464,399 as of December 31, 2019.

In January 2020, novel coronavirus (“ COVID-19”) has spread rapidly to many parts of China and other parts of the world. The epidemic has resulted in quarantines, travel restrictions, and the temporary closure of stores and facilities in China and elsewhere. Substantially all of the Group’s revenue and workforce are concentrated in China. Consequently, the COVID-19 outbreak may materially adversely affect the Group’s business operations and its financial condition and operating results for 2020, including but not limited to material negative impact to the Group’s total revenues and significant downward adjustments or impairment to the Group’s long-term assets. Because of the significant uncertainties surrounding the COVID-19 outbreak, the extent of the business disruption and the related financial impact cannot be reasonably estimated at this time.

In February 2020, Puxin Limited entered into an amendment agreement with AHA. Pursuant to the agreement, the maturity date of the loans to AHA shall be extended to September 6, 2021.

In February and March 2020, Purong Information and Mr. Yunlong Sha jointly entered into credit agreements with two different third parties. Each agreement will provide credit facility at RMB350,000 to Purong Information. Purong Information, with an advance notice, can draw down amounts within the credit facility and Purong Information's obligations under these credit agreements are guaranteed by Mr. Yunlong Sha.

	As of December 31,
	2018			2019			2019
	RMB			RMB			USD
							(Note 3)
ASSETS
Current assets
Cash and cash equivalents		437,613			3,103			446
Amounts due from subsidiaries and VIEs		867,467			1,099,759			157,970
Prepaid expenses and other current assets		—			11,448			1,644
Loan receivable		—			191,230			27,468
Total current assets		1,305,080			1,305,540			187,528
TOTAL ASSETS		1,305,080			1,305,540			187,528
LIABILITIES
Current liabilities
Accrued expenses and other current liabilities		5,767			7,258			1,042
Promissory notes, current portion		171,888			87,023			12,500
Total current liabilities		177,655			94,281			13,542
Non-current liabilities
Promissory note, non-current portion		—			87,022			12,500
Derivative liabilities		63,942			172,235			24,740
Investments deficit in subsidiaries and VIEs		515,590			690,822			99,230
TOTAL LIABILITIES		757,187			1,044,360			150,012
SHAREHOLDERS’ EQUITY
Ordinary shares (par value of USD0.00005 per share; 1,000,000,000 and 1,000,000,000 shares authorized, 188,627,228 and 188,627,228 shares issued and 165,038,164 and 174,025,810 shares outstanding as of December 31, 2018 and 2019, respectively)		62			62			9
Additional paid-in capital		1,944,325			2,175,652			312,513
Statutory reserve		4,595			7,979			1,146
Accumulated other comprehensive income		68,214			68,707			9,869
Accumulated deficit		(1,469,303	)		(1,991,220	)		(286,021	)
TOTAL SHAREHOLDERS’ EQUITY		547,893			261,180			37,516
TOTAL LIABILITIES AND TOTAL SHAREHOLDERS’ EQUITY		1,305,080			1,305,540			187,528

	For the years ended December 31,
	2017			2018			2019			2019
	RMB			RMB			RMB			USD
										(Note 3)
General and administrative expenses		—			8,728			12,102			1,738
Total operating expenses		—			8,728			12,102			1,738
Interest expense		5,556			13,218			15,250			2,191
Interest income		—			2,104			10,985			1,578
Foreign exchange loss		—			10,358			3,753			539
Loss on changes in fair value of convertible notes, derivative liabilities and warrants		60,136			124,648			104,589			15,023
Equity in loss of subsidiaries and VIEs		331,621			678,563			393,824			56,569
Loss before income taxes		(397,313	)		(833,411	)		(518,533	)		(74,482	)
Income tax expenses		—			—			—			—
Net loss		(397,313	)		(833,411	)		(518,533	)		(74,482	)

	For the years ended December 31,
	2017			2018			2019			2019
	RMB			RMB			RMB			USD
										(Note 3)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss		(397,313	)		(833,411	)		(518,533	)		(74,482	)
Adjustments to reconcile net loss to net cash generated from operating activities:
Equity in loss of subsidiaries and VIEs		331,621			678,563			393,824			56,569
Foreign exchange loss		—			10,358			3,753			539
Loss on changes in fair value of convertible notes, derivative liabilities and warrants		60,136			124,648			104,589			15,023
Changes in operating assets and liabilities:
Prepaid expenses and other current assets		—			—			(10,449	)		(1,501	)
Accrued expenses and other current liabilities		5,556			(5,230	)		1,409			202
Net cash used in operating activities		—			(25,072	)		(25,407	)		(3,650	)
CASH FLOWS FROM INVESTING ACTIVITIES
Loans to subsidiaries and VIEs		(488,676	)		(396,495	)		(221,418	)		(31,805	)
Loans to a third party		—			—			(191,230	)		(27,468	)
Net cash used in investing activities		(488,676	)		(396,495	)		(412,648	)		(59,273	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from IPO (net of IPO expenses)	—				811,001			—			—
Proceeds from convertible notes		321,206		—				—			—
Proceeds from promissory note		168,180		—				—			—
Net cash generated from financing activities		489,386			811,001			—			—
Effect of exchange rate changes		3,696			43,773			3,545			510
Net increase in cash and cash equivalents, and restricted cash		4,406			433,207			(434,510	)		(62,413	)
Cash and cash equivalents, and restricted cash at beginning of the year		—			4,406			437,613			62,859
Cash and cash equivalents, and restricted cash at end of the year		4,406			437,613			3,103			446

The condensed financial information of the Parent Company has been prepared using the same accounting policies as set out in the Group’s consolidated financial statements except that the Parent Company used the equity method to account for investments in its subsidiaries.

In its consolidated financial statements, the Parent Company consolidates the results of operations and assets and liabilities of its subsidiaries and schools, and inter-company balances and transactions were eliminated upon consolidation. For the purpose of the Parent Company’s standalone financial statements, its investments in subsidiaries are reported using the equity method of accounting as a single line item and the Parent Company’s share of loss from its subsidiaries and VIEs are reported as the single line item of equity in loss of subsidiaries and VIEs.

The Group’s business is primarily conducted in China and all of the revenues are denominated in RMB. However, periodic reports made to shareholders will include current period amounts translated into USD using the exchange rate as of balance sheet date, for the convenience of the readers. Translations of balances in the balance sheet, and the related statement of operations and cash flows from RMB into USD as of and for the year ended December 31, 2019 are solely for the convenience of the readers and were calculated at the rate of USD1.00=RMB6.9618, representing the noon buying rate set forth in the H.10 statistical release of the U.S. Federal Reserve Board on December 31, 2019. No representation is made that the RMB amounts could have been, or could be, converted, realized or settled into USD at that rate on December 31, 2019, or at any other rate.


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
American depositary shares (each ADS representing two ordinary shares, par value US$0.00005 per share)	NEW	New York Stock Exchange
Ordinary shares, par value US$0.00005 per share*		New York Stock Exchange

		Page
INTRODUCTION		2
FORWARD-LOOKING STATEMENTS		3
PART I		4
ITEM 1.	IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS	4
ITEM 2.	OFFER STATISTICS AND EXPECTED TIMETABLE	4
ITEM 3.	KEY INFORMATION	4
ITEM 4.	INFORMATION ON THE COMPANY	36
ITEM 4A.	UNRESOLVED STAFF COMMENTS	68
ITEM 5.	OPERATING AND FINANCIAL REVIEW AND PROSPECTS	68
ITEM 6.	DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES	86
ITEM 7.	MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS	93
ITEM 8.	FINANCIAL INFORMATION	94
ITEM 9.	THE OFFER AND LISTING	95
ITEM 10.	ADDITIONAL INFORMATION	95
ITEM 11.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	103
ITEM 12.	DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES	104
PART II		106
ITEM 13.	ITEM DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES	106
ITEM 14.	MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS	106
ITEM 15.	CONTROLS AND PROCEDURES	106
ITEM 16.	[RESERVED]	107
ITEM 16A.	AUDIT COMMITTEE FINANCIAL EXPERT	107
ITEM 16B.	CODE OF ETHICS	107
ITEM 16C.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	107
ITEM 16D.	EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES	107
ITEM 16E.	PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS	108
ITEM 16F.	CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT	108
ITEM 16G.	CORPORATE GOVERNANCE	108
ITEM 16H.	MINE SAFETY DISCLOSURE	108
PART III		109
ITEM 17.	FINANCIAL STATEMENTS	109
ITEM 18.	FINANCIAL STATEMENTS	109
ITEM 19.	EXHIBITS	109
SIGNATURES		111

	2017	2018	2019
Probability for conversion	80%	100%	100%
Exit period	June 30, 2018 - June 30, 2019	June 30, 2018 - June 30, 2019	December 31, 2019 - December 31, 2020
Volatility	40%	54%	77%

Function	Number of Full- Time Employees
Teachers, consultants and instructors		5,932
Managerial staff		1,043
Sales and marketing		3,065
Administrative staff		940
Information technology		223
Courses research and development		529
Total		11,732

	Ordinary Shares Beneficially Owned		Percentage of Total Voting Power held
	Number		%⁽¹⁾
Directors and Executive Officers:
Yunlong Sha⁽²⁾		78,096,522		44.9
Ming Hu		—		—
Kehai Xie		—		—
Neng Wang		—		—
Peng Wang	*		*
All directors and executive officers as a group		78,777,384	45.2
Principal Shareholders:
Long bright Limited⁽³⁾		77,584,202		44.6
Puxin Nova Limited⁽⁴⁾		11,625,662		6.7

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

2019
Acquisitions⁽¹⁾	Principal office location	Service offerings	Time of acquisitions⁽²⁾
Luzhou Longmatan	Luzhou	K-12 tutoring	January 2019
Xi’an Qingzhuo*	Xi’an	K-12 tutoring	April 2019
Beijing Qiushi	Beijing	K-12 tutoring	May 2019
Foshan Mingshi*	Foshan	K-12 tutoring	May 2019
Beijing Xiaoze⁽³⁾	Beijing	K-12 tutoring	July 2019
Beijing Jiuding	Beijing	K-12 tutoring	July 2019
Xi’an Intest	Xi’an	K-12 tutoring	July 2019
Wuhan Haoyuan	Wuhan	Study-abroad tutoring	July 2019
Nanjing Huoyanyan	Nanjing	K-12 tutoring	August 2019
Guangzhou Yishang	Guangzhou	K-12 tutoring	August 2019
Xi’an Qingmei	Xi’an	K-12 tutoring	August 2019
Xi’an Renmin*	Xi’an	K-12 tutoring	August 2019
Dalian Keyuan*	Dalian	K-12 tutoring	November 2019

Subsidiary	Jurisdiction of Incorporation	Percentage of Ownership Interest
Prepshine Holdings Co., Limited	Hong Kong	100%
Beijing Global Education & Technology Co., Ltd.	PRC	100%
Purong (Beijing) Information Technology Co., Ltd.	PRC	100%

Xi’an Pumin Education Technology Co., Ltd.	PRC	100%
Xi’an Pude Qingzhuo Education Technology Co., Ltd.	PRC	100%
Dalian Keyuan Culture Consulting Co., Ltd.⁽⁶⁾	PRC	100%
Changchun Chaoyang Puxin Training School Co., Ltd.	PRC	100%
Pude Education Technology Co., Ltd.	PRC	100%
Shanghai Puyou Information Technology Co., Ltd.	PRC	100%
Puhe Education Technology Co., Ltd.	PRC	80%

	Grant Date
	2015		2016		2017		2018		2019
Risk-free rate of interest⁽¹⁾	2.37%-2.68%		1.94%-2.92%		2.84%-2.97%		3.40%		2.51%
Volatility⁽²⁾	48%-53%		47%		45%-47%		46%		55%
Dividend yield⁽³⁾		—		—		—		—		—
Exercise multiples⁽⁴⁾	2.2-2.8		2.2-2.8		2.2-2.8		2.2-2.8		2.8
Life of options (years)⁽⁵⁾		7.0		7.0		7.0		7.0		7.0

	2018
Probability for conversion		—
Conversion price discount rate	90%

Name	Age	Position/Title
Yunlong Sha	44	Founder, Chairman, Chief Executive Officer
Peng Wang	43	Chief Financial Officer
Ming Hu	48	Independent Director
Kehai Xie	54	Independent Director
Neng Wang	47	Independent Director

Name	Ordinary Shares Underlying Options Awarded	Exercise Price per Ordinary Share (in US$)	Date of Grant	Date of Expiration
Yunlong Sha	—	—	—	—
Peng Wang	*	7.78	March 31, 2018	March 31, 2025
Ming Hu	—	—	—	—
Kehai Xie	—	—	—	—
Neng Wang	—	—	—	—

Service		Fees
• To any person to which ADSs are issued or to any person to which a distribution is made in respect of ADS distributions pursuant to stock dividends or other free distributions of stock, bonus distributions, stock splits or other distributions (except where converted to cash)		Up to US$0.05 per ADS issued
• Cancellation of ADSs, including the case of termination of the deposit agreement		Up to US$0.05 per ADS cancelled
• Distribution of cash dividends		Up to US$0.05 per ADS held
• Distribution of cash entitlements (other than cash dividends) and/or cash proceeds from the sale of rights, securities and other entitlements		Up to US$0.05 per ADS held
• Distribution of ADSs pursuant to exercise of rights.		Up to US$0.05 per ADS held
• Distribution of securities other than ADSs or rights to purchase additional ADSs		Up to US$0.05 per ADS held
• Depositary services		Up to US$0.05 per ADS held on the applicable record date(s) established by the depositary bank

	Year Ended December 31,
Services	2018		2019
	RMB		RMB
	（in thousands）
Audit fees⁽¹⁾		14,787		11,676
Tax fees⁽²⁾		1,028		806

Exhibit Number		Description of Document
1.1		Second Amended and Restated Memorandum and Articles of Association (incorporated by reference to Exhibit 3.2 from our registration statement on Form F-1 (File No. 333-225047) filed publicly with the SEC on May 18, 2018)
2.1		Form of Registrant’s Specimen American Depositary Receipt (included herein by reference to Exhibit 4.3 to the registration statement on Form F-1 (File No. 333-225047) filed publicly with the SEC on June 1, 2018)
2.2		Registrant’s Specimen Certificate for Ordinary shares (incorporated by reference to Exhibit 4.2 from our registration statement on Amendment No. 1 to Form F-1 (File No. 333-225047) filed publicly with the SEC on June 1, 2018)
2.3		Form of Deposit Agreement, among the Registrant, the Depositary and holders of the American Depositary Receipts (incorporated by reference to Exhibit 4.3 from our registration statement on Amendment No. 1 to Form F-1 (File No. 333-225047) filed publicly with the SEC on June 1, 2018)
2.4*		Description of Securities
4.1		Puxin Limited 2018 Grand Talent Share Incentive Plan (incorporated by reference to Exhibit 10.19 from our registration statement on Form F-1 (File No. 333-225047) filed publicly with the SEC on May 18, 2018)
4.2		Puxin Limited 2018 Great Talent Share Incentive Plan (incorporated by reference to Exhibit 10.20 from our registration statement on Form F-1 (File No. 333-225047) filed publicly with the SEC on May 18, 2018)
4.3		Form of Indemnification Agreement with the Registrant’s directors (incorporated by reference to Exhibit 10.1 from our registration statement on Form F-1 (File No. 333-225047) filed publicly with the SEC on May 18, 2018)
4.4		Form of Employment Agreement between the Registrant and an executive officer of the Registrant (incorporated by reference to Exhibit 10.2 from our registration statement on Form F-1 (File No. 333-225047) filed publicly with the SEC on May 18, 2018)
4.5		English translation of Exclusive Management Services and Business Cooperation Agreement among Purong Beijing, Puxin Education and the shareholders of Puxin Education dated February 5, 2018 (incorporated by reference to Exhibit 10.3 from our registration statement on Form F-1 (File No. 333-225047) filed publicly with the SEC on May 18, 2018)
4.6		English translation of Exclusive Call Option Agreement among Purong Beijing, Puxin Education and the shareholders of Puxin Education dated February 5, 2018 (incorporated by reference to Exhibit 10.4 from our registration statement on Form F-1 (File No. 333-225047) filed publicly with the SEC on May 18, 2018)
4.7		English translation of Equity Pledge Agreement among Purong Beijing, Puxin Education and the shareholders of Puxin Education dated February 5, 2018 (incorporated by reference to Exhibit 10.5 from our registration statement on Form F-1 (File No. 333-225047) filed publicly with the SEC on May 18, 2018)
4.8		English translation of Loan Agreement between Ningbo Zhimei and Purong Beijing dated February 5, 2018 (incorporated by reference to Exhibit 10.6 from our registration statement on Form F-1 (File No. 333-225047) filed publicly with the SEC on May 18, 2018)
4.9		English translation of Loan Agreement between Yunlong Sha and Purong Beijing dated February 5, 2018 (incorporated by reference to Exhibit 10.7 from our registration statement on Form F-1 (File No. 333-225047) filed publicly with the SEC on May 18, 2018)
4.10		English translations of Powers of Attorney granted by Puxin Education and its shareholders dated February 5, 2018 (incorporated by reference to Exhibit 10.8 from our registration statement on Form F-1 (File No. 333-225047) filed publicly with the SEC on May 18, 2018)
4.11		English translations of Letters of Consent granted by the spouse of each of Yunlong Sha, Liang Gao, Gang Li and Yun Xiao dated February 5, 2018 (incorporated by reference to Exhibit 10.9 from our registration statement on Form F-1 (File No. 333-225047) filed publicly with the SEC on May 18, 2018)
4.12		English translations of Letters of Commitment granted by the partners of Ningbo Zhimei and Tianjin Puxian dated February 5, 2018 (incorporated by reference to Exhibit 10.10 from our registration statement on Form F-1 (File No. 333-225047) filed publicly with the SEC on May 18, 2018)

Exhibit Number		Description of Document
4.13		English translation of Amended Exclusive Management Services and Business Cooperation Agreement among Purong Beijing, Puxin Education and the shareholders of Puxin Education dated February 25, 2018 (incorporated by reference to Exhibit 10.11 from our registration statement on Form F-1 (File No. 333-225047) filed publicly with the SEC on May 18, 2018)
4.14		English translation of Amended Exclusive Call Option Agreement among Purong Beijing, Puxin Education and the shareholders of Puxin Education dated February 25, 2018 (incorporated by reference to Exhibit 10.12 from our registration statement on Form F-1 (File No. 333-225047) filed publicly with the SEC on May 18, 2018)
4.15		English translation of Amended Equity Pledge Agreement among Purong Beijing, Puxin Education and the shareholders of Puxin Education dated February 25, 2018 (incorporated by reference to Exhibit 10.13 from our registration statement on Form F-1 (File No. 333-225047) filed publicly with the SEC on May 18, 2018)
4.16		English translations of Powers of Attorney granted by Puxin Education and its shareholders dated February 25, 2018 (incorporated by reference to Exhibit 10.14 from our registration statement on Form F-1 (File No. 333-225047) filed publicly with the SEC on May 18, 2018)
4.17		English translations of Letters of Consent granted by the spouse of each of Yunlong Sha, Liang Gao, Gang Li and Yun Xiao dated February 25, 2018 (incorporated by reference to Exhibit 10.15 from our registration statement on Form F-1 (File No. 333-225047) filed publicly with the SEC on May 18, 2018)
4.18		English translations of Letters of Commitment granted by the shareholders of Shanghai Trustbridge and partners of Ningbo Zhimei and Tianjin Puxian dated February 25, 2018 (incorporated by reference to Exhibit 10.16 from our registration statement on Form F-1 (File No. 333-225047) filed publicly with the SEC on May 18, 2018)
8.1*		Principal Subsidiaries and Affiliated Entities of the Registrant
10.1		2019 Noble Talent Share Incentive Plan (incorporated by reference to Exhibit 10.1 from our annual report on Form 20-F (File No. 001-38514) filed publicly with the SEC on April 25, 2019)
11.1		Code of Business Conduct and Ethics of the Registrant (incorporated by reference to Exhibit 99.1 from our registration statement on Form F-1 (File No. 333-225047) filed publicly with the SEC on May 18, 2018)
12.1*		Certification by the Group Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
12.2*		Certification by the Group Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
13.1**		Certification by the Group Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
13.2**		Certification by the Group Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
15.1*		Consent of Deloitte Touche Tohmatsu Certified Public Accountants LLP, Independent Registered Public Accounting Firm
15.2*		Consent of Walkers (Hong Kong)
15.3*		Consent of Tian Yuan Law Firm regarding certain PRC law matters
101.INS*		XBRL Instance Document
101.SCH*		XBRL Taxonomy Extension Schema Document
101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*		XBRL Taxonomy Extension Label Linkbase Document
101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document

PUXIN LIMITED
By:	/s/ Yunlong Sha
Name:	Yunlong Sha
Title:	Chairman and Chief Executive Officer

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF PUXIN LIMITED	Pages

Report of independent registered public accounting firm	F-2

Consolidated balance sheets as of December 31, 2018 and 2019	F-3

Consolidated statements of operations for the years ended December 31, 2017, 2018 and 2019	F-5

Consolidated statements of comprehensive loss for the years ended December 31, 2017, 2018 and 2019	F-6

Consolidated statements of changes in shareholders’ (deficit) equity for the years ended December 31, 2017, 2018 and 2019	F-7

Consolidated statements of cash flows for the years ended December 31, 2017, 2018 and 2019	F-8

Notes to consolidated financial statements	F-9

Additional information-financial statement schedule I	F-56

	For the years ended December 31,
	2017			2018			2019
	RMB			RMB			RMB
Net revenues		1,282,562			2,219,638			3,094,044
Net loss		(331,621	)		(254,754	)		(31,712	)
Net cash generated from (used in) operating activities		80,266			(81,041	)		142,437
Net cash used in investing activities		(141,025	)		(156,917	)		(219,186	)
Net cash generated from financing activities		140,000			20,505			83,361

Category		Estimated useful life
Buildings		37 years
Electronic equipment		3 years
Motor vehicles		5 years
Furniture and education equipment		5 years
Leasehold improvement		Shorter of lease term or estimated economic life

Category		Amortization periods
Student base		2.2 - 7 years
Trademark		5.4 years & Indefinite
Relationship with partnership school		6.4 years
Franchise agreement		3.4 years

	Amount			Depreciation or amortization period
	RMB
Cash and cash equivalents		21,407
Prepaid expenses and other current assets		13,266
Restricted cash		1,008
Property, plant and equipment, net		9,723		3-5 years
Rental deposits		7,285
Deferred revenue		(208,345	)
Account payables		(564	)
Accrued expenses and other current liabilities		(32,857	)
Loans from third parties		(23,802	)
Intangible assets-trademark		32,400		5.4 years
Deferred tax liabilities		(8,100	)
Goodwill		324,429
Total		135,850

	Amount			Amortization period
	RMB
Prepaid expenses and other current assets		37,169
Property, plant and equipment, net		1,241		3-5 years
Rental deposits		290
Accrued expenses and other current liabilities		(2,219	)
Deferred revenue		(35,534	)
Intangible assets-student base		6,700		2.2 years
Deferred tax liabilities		(1,675	)
Goodwill		71,028
Total		77,000

	For the year ended December 31, 2017
	ZMN Education			Beijing GEDU			Others
	RMB			RMB			RMB
Net revenues		39,867			197,853			114,601
Net (loss)		(59,169	)		(74,370	)		(13,096	)

	For the year ended December 31, 2018
	Shandong Zengyu			Others
	RMB			RMB
Net revenues		8,074			4,495
Net (loss)		(1,362	)		(27	)

	For the year ended December 31,2019
	Beijing Xiaoze		Xi'an Intest			Dalian Keyuan		Others
	RMB		RMB			RMB		RMB
Net revenues		116,355		61,194			11,697		174,149
Net income (loss)		11,300		(1,740	)		758		33,460

	Fair Value Measurement as of December 31, 2019
	Quoted Prices in Active Market for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Cash and cash equivalents		256,763	—		—			256,763
Restricted cash		386,267	—		—			386,267
Promissory notes	—			174,045	—			174,045
Derivative liabilities	—		—			172,235		172,235
Total		643,030		174,045		172,235		989,310

	Convertible notes			Derivative liabilities		Warrants
Balance as of January 1, 2018		499,192			18,218	—
Issuance of convertible notes		50,000		—		—
Extinguishment of convertible notes		(207,300	)	—		—
Issuance of warrants	—			—			14,800
Conversion to ordinary shares		(438,720	)	—		—
Changes in fair value		102,260			44,288		(14,800	)
Exchange rate effect		(5,432	)		1,436	—
Balance as of December 31, 2018	—				63,942	—
Changes in fair value	—				104,589	—
Exchange rate effect	—				3,704	—
Balance as of December 31, 2019	—				172,235	—

	Outstanding options
	Number of options		Weighted average exercise price		Weighted average remaining contractual term (years)		Aggregate intrinsic value
Options outstanding at January 1, 2019		22,467,373		37.77
Granted		8,879,986		0.01
Exercised		8,987,646		0.10
Forfeited		713,481		38.52
Options outstanding at December 31, 2019		21,646,232		37.78		4.77		123,239
Options vested and expected to vest as of December 31, 2019		21,646,232		37.78		4.77		123,239
Option exercisable as of December 31, 2019		15,841,720		38.13		4.77		91,607

Name of related parties	Relationship with the Group
Mr. Yunlong Sha	The CEO and the Chairman of the Board of Directors of the Company
Ms. Wenjing Song	Spouse of Mr. Yunlong Sha

	For the year ended
	December 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows used in operating leases		373,230
Right-of-use assets obtained in exchange for new lease obligations:
Operating leases		643,722
Weighted average remaining lease term
Operating leases	4.59 years
Weighted average discount rate
Operating leases		7.46	%

Years ending December 31,
2020			347,647
2021			283,836
2022			194,472
2023			137,684
2024			73,986
Thereafter			159,095
Less imputed interest			226,338
Total			970,382

Years ending December 31,
2019			303,126
2020			217,290
2021			148,625
2022			90,340
2023			20,052
Thereafter			74,954
			854,387

	For the year ended December 31, 2017
	K-12		Study abroad
	tutoring services		tutoring services		Consolidated
Net revenues		884,148		398,414		1,282,562
Cost of revenues		555,885		238,457		794,342
Gross profit		328,263		159,957		488,220