F-4/A 1 ff42020a1_metenedtechx.htm AMENDMENT NO. 1 TO FORM F-4

As filed with the Securities and Exchange Commission on February 12, 2020

Registration No. 333-235859

 

 

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

AMENDMENT NO. 1

TO

FORM F-4

 

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

 

METEN EDTECHX EDUCATION GROUP LTD.

(Exact Name of Each Registrant as Specified in its Charter)

 

Cayman Islands        
(State or other jurisdiction of
Incorporation or organization)
  (Primary standard industrial
classification code number)
  (I.R.S. Employer
Identification Number)

 

c/o Meten International Education Group

3rd Floor, Tower A, Tagen Knowledge & Innovation Center

2nd Shenyun West Road, Nanshan District

Shenzhen, Guangdong Province 518045

The People’s Republic of China

+86 755 8294 5250

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

 

Puglisi & Associates

850 Library Avenue, Suite 204

Newark, Delaware 19711

+1 302-738-6680

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

 

Copies to:

 

David Alan Miller, Esq.

Brian L. Ross, Esq.
Jeffrey M. Gallant, Esq.
Graubard Miller
The Chrysler Building
405 Lexington Avenue
New York, New York 10174
Telephone: (212) 818-8800

Ning Zhang, Esq.

Yile Gao, Esq.

Morgan, Lewis & Bockius LLP

c/o Suites 1902-09, 19th Floor

Edinburgh Tower, The Landmark

15 Queen’s Road Central

Hong Kong

+852 3551 8500

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective and all other conditions to the Mergers contemplated by the Merger Agreement described in the included proxy statement/prospectus have been satisfied or waived.

 

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

 

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

 

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

 

Large accelerated filer ☐ Accelerated filer ☐

Non-accelerated filer ☒

Smaller reporting company ☒
      Emerging growth company ☒

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐

 

If applicable, place an X in the box to designate the appropriate rule provision relied upon in conducting this transaction:

 

Exchange Act Rule 13e-4(i) (Cross-Border Issuer Tender Offer) ☐

 

Exchange Act Rule 14d-1(d) (Cross-Border Third-Party Tender Offer) ☐

 

 

 

 

CALCULATION OF REGISTRATION FEE

 

Title of each Class of Security being registered   Amount being Registered (1)     Proposed Maximum Offering Price Per Security (2)     Proposed
Maximum
Aggregate
Offering
Price (2)
    Amount of Registration Fee  
Ordinary shares (3)     59,391,607     $ 10.27     $ 609,951,803.89     $ 79,171.74  
Ordinary shares (4)     7,906,250     $ 10.27     $ 81,197,187.50     $ 10,539.39  
Ordinary shares (5)     10,355,000     $ 11.50     $ 119,082,500.00     $ 15,456.91  
Ordinary shares (6)     250,000     $ 10.27     $ 2,567,500.00     $ 333.26  
Warrants (7)     10,355,000       -       -       -  
Holdco Units, consisting of one Ordinary share, US$0.0001 par value and one Warrant to purchase an Ordinary share.(8)     250,000       -       -       -  
Total                   $ 812,798,991.39     $ 105,501.30 (9)

 

(1)All ordinary shares being registered are issued by Meten EdtechX Education Group Ltd., a Cayman Islands exempted company (“Holdco”), in connection with the proposed business combination by and among EdtechX Holdings Acquisition Corp. (“EdtechX”), a publicly-traded Delaware corporation, Holdco, Meten Education Inc., a Delaware corporation and wholly owned subsidiary of Holdco (“EdtechX Merger Sub”), Meten Education Group Ltd., a Cayman Islands exempted company and wholly owned subsidiary of Holdco (“Meten Merger Sub”, and together with EdtechX Merger Sub, the “Merger Subs”), and Meten International Education Group, a Cayman Islands exempted company (the “Company” or “Meten”), as described in the proxy statement/prospectus forming a part of this registration statement. As a result of the transactions described in the proxy statement/prospectus forming a part of this registration statement, Holdco will become a publicly-traded company and EdtechX and Meten will become wholly owned subsidiaries of Holdco.
(2)Estimated solely for the purpose of calculating the registration fee, based on the average of the high and low prices of common stock of EdtechX on the Capital Market of The Nasdaq Stock Market LLC on December 31, 2019 ($10.27 per share). This calculation is in accordance with Rule 457(f)(1) of the Securities Act of 1933, as amended.
(3)Represents Holdco ordinary shares to be issued to shareholders of Meten upon consummation of the business combination and if certain earnout conditions are met, as described in the proxy statement/prospectus forming a part of this registration statement.
(4)Represents Holdco ordinary shares to be issued to holders of common stock of EdtechX upon consummation of the business combination. Includes ordinary shares issuable in exchange for outstanding units of EdtechX, each such unit consisting of one share of common stock and one warrant.
(5)Represents Holdco ordinary shares issuable upon exercise of outstanding EdtechX warrants, including the warrants issuable upon the exercise of outstanding EdtechX unit purchase options, each warrant entitling the holder to purchase one share of common stock of EdtechX at a price of $11.50 per share commencing after EdtechX’s successful completion of a business combination. Pursuant to the terms of the warrants, each such warrant will automatically entitle the holder thereof to purchase one ordinary share of Holdco in lieu of one share of common stock of EdtechX upon consummation of the business combination.
(6)Represents Holdco ordinary shares issuable upon the exercise of outstanding EdtechX unit purchase options to purchase up to 250,000 units of EdtechX.
(7)Represents warrants of Holdco to be issued in exchange for outstanding EdtechX warrants upon consummation of the Mergers and also includes warrants issuable upon the exercise of unit purchase options. Pursuant to Rule 457(g), no separate fee is required.
(8)Represents the units of Holdco to be issuable upon the excersie of outstanding EdtechX unit purchase options. Pursuant to Rule 457(g), no separate fee is required.

(9) Previously paid.

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

 

 

 

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

 

PRELIMINARY — SUBJECT TO COMPLETION, DATED FEBRUARY 12, 2020

 

PROXY STATEMENT FOR ANNUAL MEETING OF STOCKHOLDERS
OF
EDTECHX HOLDINGS ACQUISITION CORP.

 

PROSPECTUS FOR UP TO 77,902,857 ORDINARY SHARES
10,355,000 WARRANTS, AND 250,000 UNITS

OF
METEN EDTECHX EDUCATION GROUP LTD.

 

The board of directors of each of EdtechX Holdings Acquisition Corp., a Delaware corporation (“EdtechX”), Meten EdtechX Education Group Ltd., a Cayman Islands exempted company (“Holdco”), Meten Education Inc., a Delaware corporation and wholly owned subsidiary of Holdco (“EdtechX Merger Sub”), Meten Education Group Ltd., a Cayman Islands exempted company and wholly owned subsidiary of Holdco (“Meten Merger Sub”, and together with EdtechX Merger Sub, the “Merger Subs”), and Meten International Education Group, a Cayman Islands exempted company (“Meten” or “Company”) has unanimously approved the mergers contemplated by the Agreement and Plan of Reorganization, dated as of December 12, 2019 (as the same may be amended, the “Merger Agreement”), by and among EdtechX, Meten, Holdco and the Merger Subs.

 

Pursuant to the Merger Agreement, (i) Meten Merger Sub will merge with and into the Company, with the Company being the surviving entity of such merger (the “Meten Merger”) and becoming a wholly-owned subsidiary of Holdco (“Surviving Cayman Islands Company”) and (ii) EdtechX Merger Sub will merge with and into EdtechX, with EdtechX being the surviving entity of the merger (the “EdtechX Merger” and together with the Meten Merger, the “Mergers”) and becoming a wholly-owned subsidiary of Holdco (“Surviving Delaware Corporation”).

 

As a result of the Mergers, Meten and EdtechX will become wholly owned subsidiaries of Holdco and the securityholders of Meten and EdtechX will become the securityholders of Holdco.

 

Upon consummation of the Meten Merger, the shareholders of Meten will receive their pro rata portion of an aggregate of up to 48,391,607 Holdco Ordinary Shares (“Holdco Ordinary Shares”). EdtechX will be required to pay cash to electing Meten shareholders, in an amount equal to 50% of the excess of EdtechX’s remaining cash at closing over $30 million (after taking into account conversions elected by EdtechX’s public stockholders and together with the proceeds arising from private placements) up to an aggregate of $10 million (“Cash Election”). Cash consideration paid will reduce the Holdco Ordinary Shares issuable to the Meten shareholders upon closing of the Mergers. Additionally, the shareholders of Meten who continue to hold Holdco Ordinary Shares through certain earnout measurement dates will also have the right to receive their pro rata portion of up to an additional 11,000,000 Holdco Ordinary Shares (“Contingent Shares”) as follows: (i) 4,000,000 Contingent Shares if the reported closing sale price of the Holdco Ordinary Shares equals or exceeds $12.50 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations or other similar actions) for any 20 consecutive trading days at any time before December 31, 2022, and (ii) 7,000,000 Contingent Shares if the reported closing sale price of the Holdco Ordinary Shares equals or exceeds $15.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations or other similar actions) for any 20 consecutive trading days during the fiscal year ending December 31, 2023. The earnout conditions operate independently. There is no “catch up” mechanism; Contingent Shares not earned in a prior earnout period will not be earnable in a subsequent period.

 

Upon consummation of the EdtechX Merger, (i) each share of EdtechX common stock outstanding on the closing date will be exchanged for the right to receive one Holdco Ordinary Share, except that holders of shares of EdtechX common stock sold in EdtechX’s initial public offering will be entitled to elect instead to receive a pro rata portion of EdtechX’s trust account, as provided in EdtechX’s charter documents, (ii) each outstanding warrant of EdtechX will convert into a warrant of Holdco (“Holdco Warrants”), with each Holdco Warrant entitling the holder to purchase one Holdco Ordinary Share at a price of $11.50 per share, and (iii) each outstanding unit purchase option will remain outstanding but each will be deemed to have been converted to one unit of Holdco (“Holdco Unit”), with each Holdco Unit representing the right to purchase one Holdco Ordinary Share and one Holdco Warrant.

 

Accordingly, this prospectus covers an aggregate of 77,902,857 Holdco Ordinary Shares, 10,355,000 Holdco Warrants and 250,000 Holdco Units.

 

 

 

 

We estimate that, immediately following completion of the Mergers contemplated by the Merger Agreement, the Holdco Ordinary Shares issued to the shareholders of Meten will constitute approximately 86% of the issued and outstanding Holdco Ordinary Shares and the Holdco Ordinary Shares issued to the EdtechX stockholders will constitute approximately 14% of the issued and outstanding Holdco Ordinary Shares, assuming no conversions of EdtechX public shares, no Cash Election is made, and without taking into effect securities which may be issued pursuant to the Azimut Investment (defined below) or in a Financing (defined below). All of the Holdco Ordinary Shares to be issued and outstanding at the completion of the Mergers will be of a single class with equal rights with each Holdco Ordinary Share having one vote per share.

 

Proposals to approve the Merger Agreement and the other matters discussed in this proxy statement/prospectus will be presented at the annual meeting of stockholders of EdtechX scheduled to be held on [●], 2020.

 

EdtechX’s units, common stock and warrants are currently listed on the Capital Market of The Nasdaq Stock Market LLC (together with “Global Market of The Nasdaq Stock Market LLC”, the “Nasdaq”) under the symbols “EDTXU,” “EDTX,” and “EDTXW,” respectively. Following the Mergers, all EdtechX units, common stock and warrants will be de-listed from Nasdaq and de-registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). On [●], the latest practicable date before the printing of this proxy statement/prospectus, the closing sale price of EdtechX units, common stock, and warrants were $[●] $[●], and $[●], respectively.

 

Although Holdco is not currently a public company, following the effectiveness of the registration statement of which this proxy statement/prospectus is a part and the closing of the Mergers, Holdco will become subject to the reporting requirements of the Exchange Act. Holdco intends to apply for listing, to be effective at the time of the consummation of the Mergers contemplated by the Merger Agreement, of the Holdco Ordinary Shares and Holdco Warrants on Nasdaq under the symbols “[●]” and “[●],” respectively, and Holdco is expected to be publicly traded on Nasdaq under these symbols following the completion of the Mergers, subject to receipt of Nasdaq’s approval and official notice of issuance. It is a condition of the consummation of the Mergers that Holdco receive confirmation from Nasdaq that the Holdco Ordinary Shares and Holdco Warrants have been approved for listing. While trading on Nasdaq is expected to begin on the first business day following the date of completion of the Mergers, there can be no assurance that a viable and active trading market will develop.

 

Holdco will be an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, and is therefore eligible to take advantage of certain reduced reporting requirements otherwise applicable to other public companies.

 

Holdco will also be a “foreign private issuer” as defined in the Exchange Act and will be exempt from certain rules under the Exchange Act that impose certain disclosure obligations and procedural requirements for proxy solicitations under Section 14 of the Exchange Act. In addition, Holdco’s officers, directors and principal shareholders will be exempt from the reporting and "short-swing" profit recovery provisions under Section 16 of the Exchange Act. Moreover, Holdco will not be required to file periodic reports and financial statements with the U.S. Securities and Exchange Commission as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act.

 

This proxy statement/prospectus provides you with detailed information about the Merger Agreement and other matters to be considered at the annual meeting of EdtechX’s stockholders. We encourage you to carefully read this entire document. You should also carefully consider the risk factors described in “Risk Factors” beginning on page 26 of this proxy statement/prospectus.

 

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

 

This proxy statement/prospectus is dated [●] and is first being mailed to holders on or about [●].

 

 

 

 

EDTECHX HOLDINGS ACQUISITION CORP.
c/o IBIS Capital Limited
22 Soho Square
London W1D 4NS

United Kingdom

+44 207 070 7080

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON [●], 2020

 

Dear EdtechX Holdings Acquisition Corp. Stockholders:

 

You are cordially invited to attend the annual meeting of stockholders of EdtechX Holdings Acquisition Corp. (“EdtechX”) at [●] a.m. local time on [●], 2020, at the offices of Graubard Miller, EdtechX’s U.S. counsel, located at The Chrysler Building, 405 Lexington Avenue, 11th Floor, New York, New York 10174.

 

The annual meeting will be held for the following purposes:

 

(1)to consider and vote upon a proposal to adopt the Agreement and Plan of Reorganization, dated as of December 12, 2019 (“Merger Agreement”), by and among EdtechX, Meten EdtechX Education Group Ltd., a Cayman Islands exempted company (“Holdco”), Meten Education Inc., a Delaware corporation and wholly owned subsidiary of Holdco (“EdtechX Merger Sub”), Meten Education Group Ltd., a Cayman Islands exempted company and wholly owned subsidiary of Holdco (“Meten Merger Sub”, and together with EdtechX Merger Sub, the “Merger Subs”), and Meten International Education Group, a Cayman Islands exempted company (“Company”) which, among other things, provides for (i) Meten Merger Sub to merge with and into the Company, with the Company being the surviving entity of such merger (the “Meten Merger”) and becoming a wholly-owned subsidiary of Holdco (“Surviving Cayman Islands Company”) and (ii) EdtechX Merger Sub to merge with and into EdtechX, with EdtechX being the surviving entity of the merger (the “EdtechX Merger” and together with the Meten Merger, the “Mergers”) and becoming a wholly-owned subsidiary of Holdco (“Surviving Delaware Corporation”), and to approve the Mergers contemplated by the Merger Agreement as described in this proxy statement/prospectus — we refer to this proposal as the “merger proposal”;

 

(2)to consider and vote upon a proposal to elect nine (9) directors to the board of directors of Holdco to serve until their successors are duly elected and qualified — we refer to this proposal as the “director proposal”;

 

(3)to approve the following material differences between EdtechX’s amended and restated certificate of incorporation and Holdco’s agreement and memorandum of association to be effective upon the consummation of the business combination: (i) the name of the new public entity will be “Meten EdtechX Education Group Ltd.” as opposed to “EdtechX Holdings Acquisition Corp.”; (ii) Holdco has 500,000,000 ordinary shares authorized, as opposed to EdtechX having 25,000,000 authorized shares of common stock and 1,000,000 authorized shares of preferred stock; (iii) Holdco’s corporate existence is perpetual as opposed to EdtechX’s corporate existence terminating if a business combination is not consummated by EdtechX within a specified period of time; and (iv) Holdco’s constitutional documents do not include the various provisions applicable only to special purpose acquisition corporations that EdtechX’s charter contains — we refer to these proposals as the “charter proposals

 

(4)to consider and vote upon a proposal to adjourn the annual meeting to a later date or dates, if necessary, if the parties are not otherwise able to consummate the Mergers contemplated by the Merger Agreement — we refer to this proposal as the “adjournment proposal”; and

 

(5)to transact any and all other business that may properly come before the annual meeting or any continuation, postponement, or adjournment thereof.

 

These items of business are described in the attached proxy statement/prospectus, which we encourage you to read in its entirety before voting. Only holders of record of EdtechX common stock at the close of business on [●] (the “record date”) are entitled to notice of the annual meeting and to vote and have their votes counted at the annual meeting and any adjournments or postponements of the annual meeting.

 

After careful consideration, EdtechX’s board of directors has determined that each of the proposals outlined above is fair to and in the best interests of EdtechX and its stockholders and recommends that you vote or give instruction to vote “FOR” each proposal. Consummation of the Mergers contemplated by the Merger Agreement is conditional on approval of each of the merger proposal, director proposal and charter proposals.

 

 

 

 

All EdtechX stockholders are cordially invited to attend the annual meeting in person. To ensure your representation at the annual meeting, however, you are urged to complete, sign, date and return the enclosed proxy card as soon as possible. If you are a holder of record of EdtechX common stock, you may also cast your vote in person at the annual meeting. If your shares are held in an account at a brokerage firm or bank, you must instruct your broker or bank on how to vote your shares or, if you wish to attend the annual meeting and vote in person, obtain a proxy from your broker or bank.

 

A complete list of EdtechX stockholders of record entitled to vote at the annual meeting will be available for ten days before the annual meeting at the principal executive offices of EdtechX for inspection by stockholders during ordinary business hours for any purpose germane to the annual meeting.

 

Your vote is important regardless of the number of shares you own. Whether you plan to attend the annual meeting or not, please sign, date and return the enclosed proxy card as soon as possible in the envelope provided. If your shares are held in “street name” or are in a margin or similar account, you should contact your broker to ensure that votes related to the shares you beneficially own are properly counted.

 

  By Order of the Board of Directors
   
  /s/ Benjamin Vedrenne-Cloquet
  Benjamin Vedrenne-Cloquet
  Chief Executive Officer

 

IF YOU RETURN YOUR PROXY CARD WITHOUT AN INDICATION OF HOW YOU WISH TO VOTE, YOUR SHARES WILL BE VOTED IN FAVOR OF EACH OF THE PROPOSALS. PUBLIC SHAREHOLDERS ARE NOT REQUIRED TO AFFIRMATIVELY VOTE FOR OR AGAINST THE MERGER PROPOSAL IN ORDER TO HAVE THEIR SHARES CONVERTED INTO CASH. THIS MEANS THAT ANY PUBLIC SHAREHOLDER HOLDING SHARES OF EDTECHX COMMON STOCK MAY EXERCISE CONVERSION RIGHTS REGARDLESS OF WHETHER THEY VOTE ON THE BUSINESS COMBINATION PROPOSALS OR IF THEY ARE A HOLDER OF RECORD ON THE RECORD DATE. TO EXERCISE CONVERSION RIGHTS, HOLDERS MUST TENDER THEIR SHARES TO CONTINENTAL STOCK TRANSFER & TRUST COMPANY, EDTECHX’S TRANSFER AGENT, NO LATER THAN TWO (2) DAYS PRIOR TO THE ANNUAL MEETING. YOU MAY TENDER YOUR SHARES BY EITHER DELIVERING YOUR SHARE CERTIFICATE TO THE TRANSFER AGENT OR BY DELIVERING YOUR SHARES ELECTRONICALLY USING CONTINENTAL STOCK TRANSFER & TRUST COMPANY’S DWAC (DEPOSIT WITHDRAWAL AT CUSTODIAN) SYSTEM. IF THE MERGERS ARE NOT COMPLETED, THEN THESE SHARES WILL NOT BE CONVERTED INTO CASH. IF YOU HOLD THE SHARES IN STREET NAME, YOU WILL NEED TO INSTRUCT THE ACCOUNT EXECUTIVE AT YOUR BANK OR BROKER TO WITHDRAW THE SHARES FROM YOUR ACCOUNT IN ORDER TO EXERCISE YOUR CONVERSION RIGHTS. SEE “ANNUAL MEETING OF EDTECHX STOCKHOLDERS — CONVERSION RIGHTS” FOR MORE SPECIFIC INSTRUCTIONS.

 

This proxy statement/prospectus is dated [●] and is first being mailed to EdtechX Holdings Acquisition Corp. stockholders on or about [●].

 

 

 

 

TABLE OF CONTENTS

 

  Page
   
SUMMARY OF THE MATERIAL TERMS OF THE MERGERS 1
QUESTIONS AND ANSWERS ABOUT THE PROPOSALS 3
SUMMARY OF THE PROXY STATEMENT/PROSPECTUS 8
SELECTED HISTORICAL FINANCIAL INFORMATION 19
SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION 24
COMPARATIVE PER SHARE INFORMATION 25
RISK FACTORS 26
FORWARD-LOOKING STATEMENTS 70
ANNUAL MEETING OF EDTECHX STOCKHOLDERS 71
THE MERGER PROPOSAL 74
THE MERGER AGREEMENT 88
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS  94
THE DIRECTOR PROPOSAL 102
EXECUTIVE COMPENSATION 108
THE CHARTER PROPOSALS 111
COMPARISON OF CORPORATE GOVERNANCE AND SHAREHOLDER RIGHTS 112
THE ADJOURNMENT PROPOSAL 118
INFORMATION RELATED TO EDTECHX 119
EDTECHX’S MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 127
BUSINESS OF METEN 129
METEN’S MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 154
INDUSTRY OVERVIEW 184
REGULATIONS APPLICABLE TO METEN 189
BENEFICIAL OWNERSHIP OF SECURITIES 205
CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS 208
DESCRIPTION OF HOLDCO SECURITIES 212
DISSENTER’S RIGHTS 215
SHAREHOLDER PROPOSALS 215
OTHER STOCKHOLDER COMMUNICATIONS 215
EXPERTS 215
DELIVERY OF DOCUMENTS TO STOCKHOLDERS 215
WHERE YOU CAN FIND MORE INFORMATION 216
INDEX TO FINANCIAL STATEMENTS F-1

 

Annexes:

Annex A – Agreement and Plan of Reorganization

Annex B – Holdco’s amended and restated memorandum and articles of association

 

 

 

 

Frequently Used Terms

 

As used in this proxy statement/prospectus:

 

“Business Combination” or “business combination” means the transactions contemplated by the Merger Agreement and related agreements;

 

“China” or the “PRC” means the People’s Republic of China, excluding, for the purposes of this proxy statement/prospectus only, Taiwan and the special administrative regions of Hong Kong and Macau;

 

“Code” means the U.S. Internal Revenue Code of 1986, as amended;

 

“ELT” means English language training;

 

“gross billings” means the total amount of cash received for the sales of Meten’s products and services during a specific period of time, net of the total amount of refunds for that period, which is not a standard measure under U.S. GAAP;

 

“learning center” means the physical establishment of an education facility providing general adult ELT, junior ELT and international standardized test preparation under Meten’s overseas training services at a specific geographic location in the PRC, directly operated by VIEs and their respective subsidiaries or operated by franchise partners;

 

“offline ELT” means Meten’s offline services, which include general adult ELT, junior ELT and overseas training services;

 

“RMB” and “Renminbi” are the legal currency of China;

 

“student enrollments” or “student enrollment” mean the number of actual new sales contracts entered into between Meten and its students, excluding the number of refunded contracts and contracts with no revenue generated during a specified period of time;

 

“tier one cities” are Beijing, Shanghai, Guangzhou and Shenzhen;

 

“tier two cities” are provincial capitals, regional centers or economically developed cities in China, including, among others, Chengdu, Hangzhou, Chongqing, Wuhan and Tianjin;

 

“tier three cities” and “tier four cities” are small- to mid-sized cities in China that are strategically located or have relatively developed or large local economy;

 

“dollars,” “US$” and “U.S. dollars” are the legal currency of the United States;

 

“U.S. GAAP” means generally accepted accounting principles in the United States;

 

“variable interest entities” or “VIEs” means Shenzhen Meten International Education Co., Ltd. and Shenzhen Likeshuo Education Co., Ltd., which are PRC companies in which Meten does not have equity interests but whose financial results have been consolidated by Meten in accordance with U.S. GAAP due to Meten having effective control over, and being the primary beneficiary of, these companies; and “affiliated entities” refers to VIEs, the VIEs’ direct and indirect subsidiaries, and the VIEs’ affiliated entities that are registered as private non-enterprise institutions under the PRC laws;

 

“sponsors” means IBIS Capital Sponsor LLC and IBIS Capital Sponsor II LLC, each a Delaware limited liability company affiliated with Benjamin Vedrenne-Cloquet and Charles McIntyre.

 

The translations from RMB to U.S. dollars and from U.S. dollars to RMB in this proxy statement/prospectus were made at a rate of RMB7.1477 to US$1.00, the exchange rates set forth in the H.10 statistical release of the Federal Reserve Board on September 30, 2019. We make no representation that the RMB or U.S. dollar amounts referred to in this proxy statement/prospectus could have been or could be converted into U.S. dollars or RMB, as the case may be, at any particular rate or at all. On January 31, 2020, the noon buying rate as set forth in the H.10 statistical release of the Federal Reserve Board for RMB was RMB6.9161 to US$1.00.

 

 

 

 

SUMMARY OF THE MATERIAL TERMS OF THE MERGERS

 

EdtechX Holdings Acquisition Corp., a Delaware corporation (“EdtechX”), Meten EdtechX Education Group Ltd., a Cayman Islands exempted company (“Holdco”), Meten Education Inc., a Delaware corporation and wholly owned subsidiary of Holdco (“EdtechX Merger Sub”), Meten Education Group Ltd., a Cayman Islands exempted company and wholly owned subsidiary of Holdco (“Meten Merger Sub”, and together with EdtechX Merger Sub, the “Merger Subs”), and Meten International Education Group, a Cayman Islands exempted company (the “Company” or “Meten”), are parties to an Agreement and Plan of Reorganization (as amended or supplemented from time to time, the “Merger Agreement”), dated as of December 12, 2019.

 

Meten, headquartered in Shenzhen, Guangdong Province, China, which is considered the Chinese Silicon Valley, is a market leader in English language training (“ELT”) in China, with a number one ranked position in the general adult ELT segment in terms of revenue in 2018, according to Frost & Sullivan. Meten focuses on providing industry leading English language and future skills training for a growing market of Chinese students and young professionals. Meten operates an omnichannel (retail and digital) business comprising a nationwide network of 149 learning centers (covering 36 cities in 18 provinces) under the brands Meten (adult and junior ELT services) and ABC (primarily junior ELT services), as well as the popular English language digital tutoring platform for students and young professionals, “Likeshuo”. Meten’s business plans include pursuing market consolidation in China and rolling out Meten’s existing omnichannel distribution platform, combining digital delivery and strategic retail presence, across a total addressable market of more than 600 cities in China. See the section of this proxy statement/prospectus titled “Business of Meten.”

 

Holdco was formed to serve as a holding company for Meten and EdtechX after consummation of the Mergers contemplated by the Merger Agreement. Each of the Merger Subs was formed solely as a vehicle for consummating the Mergers, and currently is a wholly owned subsidiary of Holdco. See the section of this proxy statement/prospectus titled “Summary of the Proxy Statement/Prospectus – The Parties.

 

Pursuant to the Merger Agreement, (i) Meten Merger Sub will merge with and into the Company, with the Company being the surviving entity of such merger (the “Meten Merger”) and becoming a wholly-owned subsidiary of Holdco (“Surviving Cayman Islands Company”) and (ii) EdtechX Merger Sub will merge with and into EdtechX, with EdtechX being the surviving entity of the merger (the “EdtechX Merger” and together with the Meten Merger, the “Mergers”) and becoming a wholly-owned subsidiary of Holdco (“Surviving Delaware Corporation”). See the section of this proxy statement/prospectus titled “The Merger Proposal — General - Structure of the Mergers.

 

Upon consummation of the Meten Merger, the shareholders of Meten will receive their pro rata portion of an aggregate of up to 48,391,607 Holdco Ordinary Shares. EdtechX will be required to pay cash to electing Meten shareholders, in an amount equal to 50% of the excess of the remaining cash at closing over $30 million (after taking into account conversions elected by EdtechX’s public stockholders and together with the proceeds arising from private placements) up to an aggregate of $10 million (“Cash Election”). Cash consideration paid will reduce the Holdco Ordinary Shares issuable to the Meten shareholders. See the section of this proxy statement/prospectus titled “The Merger Proposal — General - Consideration to Meten Shareholders”.

 

The shareholders of Meten who continue to hold Holdco Ordinary Shares through certain earnout measurement dates will also have the right to receive their pro rata portion of up to an additional 11,000,000 Holdco Ordinary Shares (“Contingent Shares”) as follows: (i) 4,000,000 Contingent Shares if the reported closing sale price of Holdco’s ordinary shares equals or exceeds $12.50 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations or other similar actions) for any 20 consecutive trading days at any time before December 31, 2022, and (ii) 7,000,000 Contingent Shares if the reported closing sale price of the Holdco Ordinary Shares equals or exceeds $15.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations or other similar actions) for any 20 consecutive trading days during the fiscal year ending December 31, 2023. The earnout conditions operate independently. There is no “catch up” mechanism; Contingent Shares not earned in a prior earnout period will not be earnable in a subsequent period. See the section of this proxy statement/prospectus titled “The Merger Proposal — General - Consideration to Meten Shareholders”.

 

Upon consummation of the EdtechX Merger, (i) each share of EdtechX common stock outstanding on the closing date will be exchanged for the right to receive one Holdco Ordinary Share, except that holders of shares of EdtechX common stock sold in EdtechX’s initial public offering will be entitled to elect instead to receive a pro rata portion of EdtechX’s trust account, as provided in EdtechX’s charter documents, (ii) each outstanding warrant of EdtechX will entitle the holder to purchase one Holdco Ordinary Share at a price of $11.50 per share, and (iii) each outstanding unit purchase option will remain outstanding but will be deemed to have been converted to represent the right to purchase ordinary shares and warrants of Holdco. See the section of this proxy statement/prospectus titled “The Merger Proposal — General - Consideration to EdtechX Stockholders”.

 

Immediately following the consummation of the Mergers, without giving effect to any conversions of EdtechX public shares and cash payments to Meten shareholders in lieu of Holdco Ordinary Shares, we estimate that the EdtechX stockholders will hold approximately 14% of the issued and outstanding Holdco Ordinary Shares (assuming no conversions of EdtechX public shares, no Cash Election is made, and without taking into effect securities which may be issued pursuant to the Azimut Investment or in a Financing) and the shareholders of Meten will hold approximately 86% of the issued and outstanding Holdco Ordinary Shares (assuming no conversions of EdtechX public shares, no Cash Election is made, and without taking into effect securities which may be issued pursuant to the Azimut Investment or in a Financing). All of the Holdco Ordinary Shares to be issued and outstanding at the completion of the Mergers will be of a single class with equal rights with each Holdco Ordinary Share having one vote per share.

 

1

 

 

Certain of the Meten shareholders will enter into lock-up agreements with Holdco (“Lock-up Agreements”) pursuant to which they will agree not to transfer the Holdco Ordinary Shares received as consideration in the Meten Merger (including any Contingent Shares, if and when issued), until, with respect to 50% of such Holdco Ordinary Shares, six months after the closing of the Mergers, and with respect to the remaining 50% of such Holdco Ordinary Shares, one year after the closing of the Mergers, subject in each case to earlier release of the shares if certain conditions are met. All other Meten shareholders will agree not to transfer the Holdco Ordinary Shares received by them as consideration in the Meten Merger (including any Contingent Shares, if and when issued) until the date that is at least three months after the closing. See the section of this proxy statement/prospectus titled “The Merger Proposal – Related Agreements or Arrangements - Restrictions on Transfer”.

 

Certain shareholders of EdtechX, including affiliates of Benjamin Vedrenne-Cloquet and Charles McIntyre, will enter into an amended stock escrow agreement (“Amended Stock Escrow Agreement”) pursuant to which the Holdco Ordinary Shares to be issued to them will remain subject to the escrow and transfer restrictions as set forth in the existing stock escrow agreement entered into by such persons in connection with EdtechX’s initial public offering, which restrictions are substantially the same as those provided for in the Lock-up Agreements. See the section of this proxy statement/prospectus titled “The Merger Proposal –Related Agreements or Arrangements - Restrictions on Transfer”.

 

At the closing of the Mergers, Holdco will enter into a Registration Rights Agreement providing the shareholders of Meten with certain demand registration rights and piggy-back registration rights with respect to registration statements filed by Holdco after the closing. Additionally, EdtechX and Holdco will amend any existing registration rights agreements to which it is a party or similar agreements or instruments to which it is a party providing for registration rights with respect to EdtechX’s securities held by any person such that, after giving effect to the Mergers, the Holdco securities held by former EdtechX securityholders will have the same registration rights as they currently have. See the section of this proxy statement/prospectus titled “The Merger Proposal – Related Agreements or Arrangements - Registration Rights”.

 

In connection with EdtechX’s initial public offering, Azimut Enterprises Holdings S.r.l. (the “Azimut Investor”) entered into a contingent forward purchase agreement (the “Forward Purchase Contract”) with EdtechX to purchase, in a private placement to occur concurrently with the consummation of the Mergers, up to 2,000,000 units at $10.00 per unit (or up to an aggregate purchase price of $20,000,000), on substantially the same terms as the sale of units in EdtechX’s initial public offering. In connection with the execution of the Merger Agreement, the Azimut Investor irrevocably consented to purchase up to 2,000,000 units for $20,000,000 at the closing of the transactions contemplated by the Merger Agreement (the “Azimut Investment”). The exact number of units to be purchased by the Azimut Investor will be determined by EdtechX and Holdco based on the capital needs in connection with the Mergers. See the section of this proxy statement/prospectus titled “The Merger Proposal – Related Agreements or Arrangements - Forward Purchase Contract”.

 

EdtechX and Meten agreed to use their commercially reasonable efforts to arrange and obtain financing in the range of $20,000,000 and $100,000,000 (which does not include the Azimut Investment) from the sale of equity securities of Holdco (a “Financing”). See the section of this proxy statement/prospectus titled “The Merger Proposal – Related Agreements or Arrangements - Financing Cooperation”.

 

At closing of the Mergers, EdtechX, Holdco, Meten and certain shareholders of Meten and stockholders of EdtechX will enter into a voting agreement (“Voting Agreement”) pursuant to which they will agree to nominate nine members to the board of directors of Holdco, including Benjamin Vedrenne-Cloquet and Charles McIntyre, EdtechX’s Chief Executive Officer and Chairman of the Board, respectively, and Jishuang Zhao, Siguang Peng and Yupeng Guo, the founders of Meten, and Yongchao Chen, and to take all actions necessary to vote all Holdco ordinary shares beneficially owned by them for the election of such persons until the third anniversary of the closing. Relatedly, the Merger Agreement provides that Messrs. Vedrenne-Cloquet and McIntyre will each be paid the following compensation annually for their board service through 2023: (i) $120,000 in cash, and (ii) 20,000 Holdco Ordinary Shares. The first year’s installment of the foregoing board of director fees will be paid to Messrs. Vedrenne-Cloquet and McIntyre upon closing of the Mergers. The following years’ board fees will be paid on the anniversary of the closing date. See the section of this proxy statement/prospectus titled “The Merger Proposal – Related Agreements or Arrangements - Voting Agreement”.

 

The Agreement provides for mutual indemnification by EdtechX and Meten for breaches of their respective representations, warranties, and covenants. Claims for indemnification are subject to a de minimus per-claim threshold, an aggregate threshold, and a cap. See the section of this proxy statement/prospectus titled “Summary of the Proxy Statement/Prospectus - The Merger Proposal”.

 

In addition to voting on a proposal to adopt the Merger Agreement and approve the Mergers contemplated thereby as described in this proxy statement/prospectus (the “merger proposal”), the stockholders of EdtechX will also vote on proposals to elect nine (9) directors to the board of directors of Holdco (the “director proposal”), approve various material differences between EdtechX’s amended and restated certificate of incorporation and Holdco’s agreement and memorandum of association to be effective upon the consummation of the business combination (the “charter proposals”), and, if necessary, an adjournment of the annual meeting if EdtechX is unable to consummate the Mergers for any reason (the “adjournment proposal”). See the sections of this proxy statement/prospectus titled “The Director Proposal,” “The Charter Proposals,” and “The Adjournment Proposal.”

 

Upon completion of the Mergers, assuming election by the stockholders of EdtechX, the directors of Holdco will be Benjamin Vedrenne-Cloquet and Charles McIntyre, EdtechX’s Chief Executive Officer and Chairman of the Board, respectively, Jishuang Zhao, Siguang Peng and Yupeng Guo, the founders of Meten, Yongchao Chen, Yanli Chen, Zhiyi Xie, and Ying Chen. The executive officers of Holdco will be Mr. Siguang Peng as the chief executive officer and Mr. Ng Kwok Yin as the chief financial officer. See the section of this proxy statement/prospectus titled “The Director Proposal.”

 

2

 

 

QUESTIONS AND ANSWERS ABOUT THE PROPOSALS

 

Q.   Why am I receiving this proxy statement/prospectus?   A. EdtechX and Meten have agreed to a business combination under the terms of the Merger Agreement that is described in this proxy statement/prospectus. A copy of the Merger Agreement is attached to this proxy statement/prospectus as Annex A, and EdtechX encourages its stockholders to read it in its entirety. EdtechX’s stockholders are being asked to consider and vote upon a proposal to adopt the Merger Agreement, which, among other things, provides for (i) the Meten Merger, whereby Meten Merger Sub will merge with and into Meten, with Meten being the surviving entity of such merger and (ii) the EdtechX Merger, whereby EdtechX Merger Sub will merge with and into EdtechX, with EdtechX being the surviving entity of such merger. Immediately after the Mergers, each of EdtechX and Meten will be wholly-owned subsidiaries of Holdco.
           
         

In addition to voting on the Mergers, the stockholders of EdtechX will also consider and vote on the following matters:

 

●     a proposal to elect nine (9) directors to the board of directors of Holdco to serve until their successors are duly elected and qualified. See the section of this proxy statement/prospectus titled “The Director Proposal.

 

●     to approve the following material differences between EdtechX’s amended and restated certificate of incorporation and Holdco’s agreement and memorandum of association to be effective upon the consummation of the business combination: (i) the name of the new public entity will be “Meten EdtechX Education Group Ltd.” as opposed to “EdtechX Holdings Acquisition Corp.”; (ii) Holdco has 500,000,000 ordinary shares authorized, as opposed to EdtechX having 25,000,000 authorized shares of common stock and 1,000,000 authorized shares of preferred stock; (iii) Holdco’s corporate existence is perpetual as opposed to EdtechX’s corporate existence terminating if a business combination is not consummated by EdtechX within a specified period of time; and (iv) Holdco’s constitutional documents do not include the various provisions applicable only to special purpose acquisition corporations that EdtechX’s charter contains. See the section of this proxy statement/prospectus titled “The Charter Proposals.

 

●     to consider and vote upon a proposal to adjourn the annual meeting to a later date or dates, if necessary, if EdtechX is not able to consummate the Mergers contemplated by the Merger Agreement for any reason. See the section of this proxy statement/prospectus titled “The Adjournment Proposal.

           
          EdtechX will hold the annual meeting of its stockholders to consider and vote upon these proposals. This proxy statement/prospectus contains important information about the proposed Mergers and the other matters to be acted upon at the annual meeting. Stockholders should read it carefully.
           
          The vote of stockholders is important. Stockholders are encouraged to vote as soon as possible after carefully reviewing this proxy statement/prospectus.

 

3

 

 

Q.   Why is EdtechX proposing the business combination?   A.

EdtechX was organized to effect a merger, capital stock exchange, asset acquisition or other similar business combination with one or more businesses or entities.

 

EdtechX completed its initial public offering of 5,500,000 units, with each unit consisting of one share of common stock and one warrant to purchase one share of common stock at a price of $11.50 per share upon the completion of its initial business combination, on October 10, 2018. On October 17, 2018, EdtechX consummated the closing of an additional 825,000 Units sold pursuant to the underwriters’ over-allotment option. Simultaneously with the closing of the initial public offering and the over-allotment option, EdtechX consummated the private placement of an aggregate of 3,780,000 warrants. Approximately $64.2 million of the net proceeds of the sale of the units in the initial public offering, over-allotment and the sale of the warrants in the private placement, was placed in a trust account for the benefit of the purchasers of the units in EdtechX’s initial public offering. Since the completion of the initial public offering, EdtechX’s activity has been limited to the evaluation of business combination candidates.

 

Meten, headquartered in Shenzhen, Guangdong Province, China, which is considered the Chinese Silicon Valley, is a market leader in ELT in China, with a number one ranked position in the general adult ELT segment in terms of revenue in 2018, according to Frost & Sullivan. Meten focuses on providing industry leading English language and future skills training for a growing market of Chinese students and young professionals. Meten operates an omnichannel (retail and digital) business comprising a nationwide network of 149 learning centers (covering 36 cities in 18 provinces) under the brands Meten (adult and junior ELT services) and ABC (primarily junior ELT services), as well as the popular English language digital tutoring platform for students and young professionals, “Likeshuo”. Meten’s business plans include pursuing market consolidation in China and rolling out Meten’s existing omnichannel distribution platform, combining digital delivery and strategic retail presence, across a total addressable market of more than 600 cities in China.

           
          Based on its due diligence investigations of Meten, including the financial and other information provided by Meten in the course of their negotiations, EdtechX believes that a business combination with Meten will provide several significant benefits to both EdtechX and Meten. However, there is no assurance of this. See the section entitled “The Merger Proposal — EdtechX’s Board of Directors’ Reasons for Approval of the Mergers.”

 

Q.   I am an EdtechX warrant holder.
Why am I receiving this proxy statement/prospectus?
  A. As a holder of EdtechX warrants, upon consummation of the Mergers, you will be entitled to purchase one Holdco Ordinary Share in lieu of one share of common stock of EdtechX at a purchase price of $11.50. This proxy statement/prospectus includes important information about Holdco and the business of Holdco and its subsidiaries following consummation of the Mergers. Since holders of EdtechX warrants may become holders of Holdco Ordinary Shares after the consummation of the business combination, we urge you to read the information contained in this proxy statement/prospectus carefully.

 

4

 

 

Q.   I am an EdtechX stockholder.
Do I have conversion rights?
  A.

If you are a holder of public shares, you have the right to demand that EdtechX convert such shares into cash notwithstanding whether you vote for or against the merger proposal or whether you are a stockholder of record on the record date. We sometimes refer to these rights to demand conversion of the public shares into a pro rata portion of the cash held in EdtechX’s trust account as “conversion rights.”

 

Notwithstanding the foregoing, a holder of public shares, together with any affiliate of his or any other person with whom he is acting in concert or as a “group” (as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, or the “Exchange Act”) will be restricted from seeking conversion rights with respect to 20% or more of the public shares. Accordingly, all public shares in excess of 20% held by a public shareholder, together with any affiliate of his or any other person with whom he is acting in concert or as a “group” will not be converted to cash.

 

Under EdtechX’s amended and restated certificate of incorporation, the Mergers may only be consummated if, upon consummation of the Mergers, EdtechX has at least $5,000,001 of net tangible assets.

           
Q.   How do I exercise my conversion rights as an EdtechX shareholder?   A.

If you are a holder of public shares and wish to exercise your conversion rights, you must demand that EdtechX convert your shares to cash no later than two business days prior to the close of the vote on the merger proposal and deliver your shares to EdtechX’s transfer agent physically or electronically using Depository Trust Company’s DWAC (Deposit Withdrawal at Custodian) System prior to the vote at the meeting. Any holder of public shares will be entitled to demand that his shares be converted for a full pro rata portion of the amount then in the trust account (which was $[●], or $[●] per share, as of [●], 2020, the record date), regardless of whether such holder votes in connection with the merger proposal or is a holder of record on the record date. Such amount, less any owed but unpaid taxes on the funds in the trust account, will be paid promptly after consummation of the Mergers. Your vote on any proposal other than the merger proposal will have no impact on the amount you will receive upon exercise of your conversion rights.

 

Any request for conversion, once made by a holder of public shares, may be withdrawn at any time up to the time the vote is taken with respect to the merger proposal at the annual meeting. If you deliver your shares for conversion to EdtechX’s transfer agent and later decide prior to the annual meeting not to elect conversion, you may request that EdtechX’s transfer agent return the shares (physically or electronically). You may make such request by contacting EdtechX’s transfer agent at the address listed at the end of this section.

 

If a holder of public shares properly demands conversion as described above, then, if the Mergers are consummated, EdtechX will convert these shares into a pro rata portion of funds deposited in the trust account. If you exercise your conversion rights, then you will be exchanging your shares of common stock of EdtechX for cash and will not be entitled to Holdco Ordinary Shares upon consummation of the Mergers.

 

If you are a holder of public shares and you exercise your conversion rights, it will not result in the loss of any EdtechX warrants that you may hold. Your warrants will become exercisable to purchase one Holdco Ordinary Share in lieu of one share of common stock of EdtechX for a purchase price of $11.50 per Holdco Ordinary Share upon consummation of the Mergers.

 

5

 

 

Q.   What happens to the funds deposited in the trust account after consummation of the Mergers?   A. After consummation of the Mergers, the funds then held in the trust account will be released and used to pay holders of the public shares who exercise conversion rights, to pay the cash merger consideration if the Cash Election is made, to pay fees and expenses incurred in connection with the business combination (including fees of an aggregate of approximately $1.225 million to various investment bankers in connection with the business combination and to the underwriters from EdtechX’s initial public offering for deferred underwriting commissions), and for working capital and general corporate purposes.
           
Q.   What happens if a substantial number of public shareholders vote in favor of the merger proposal and exercise their conversion rights?   A.

EdtechX’s public shareholders may vote in favor of the business combination and still exercise their conversion rights. Accordingly, the business combination may be consummated even though the funds available from the trust account and the number of public shareholders are substantially reduced as a result of conversions by public shareholders. However, with fewer public shares and public shareholders, the trading market for the Holdco Ordinary Shares may be less liquid than the market for EdtechX’s shares of common stock were prior to the Mergers and Holdco may not be able to meet the listing standards for Nasdaq, or another national securities exchange. In addition, with fewer funds available from the trust account, the working capital infusion from the trust account into Meten’s business will be reduced.

 

Further, one of the conditions to Meten’s obligation to consummate the Mergers is that EdtechX have at least $30 million in the trust account after taking into account conversions by public shareholders and the proceeds from the Azimut Investment and the Financing (subject to adjustment to $20 million in the event that the parties elect to raise less than $10 million in the Financing), which we refer to as the “Minimum Cash Closing Condition”. Accordingly, conversions by public shareholders may prevent EdtechX from meeting the Minimum Cash Closing Condition, or may cause EdtechX to seek additional financing from the Azimut Investors or other third parties.

           
Q.   What happens if the Mergers are not consummated?   A. If EdtechX does not complete the Mergers with Meten or consummate another business combination by April 10, 2020 (or such later date as EdtechX shareholders may approve), it will trigger EdtechX’s automatic winding up, dissolution and liquidation pursuant to the terms of its amended and restated certificate of incorporation. There is no limit on the number of extensions of time to complete a business combination that EdtechX may take (although Meten would have the right to terminate the merger agreement if the Mergers are not consummated on or before April 1, 2020).
           
Q.   Do I have dissenter’s rights if I object to the proposed Mergers?    A. No. EdtechX stockholders do not have dissenter's rights under Delaware law in connection with the Mergers.

 

Q.  

When do you expect the Mergers to be completed?

  A. It is currently anticipated that the Mergers will be consummated promptly following the completion of the EdtechX annual meeting, which is scheduled for [●], 2020, and any postponements or adjournments thereof. For a description of the conditions for the completion of the Mergers, see the section entitled “The Merger Agreement — Conditions to Closing.”
           
Q.  

What do I need to do now?

  A. EdtechX urges you to read carefully and consider the information contained in this proxy statement/prospectus, including the annexes, and to consider how the Mergers will affect you as a stockholder of EdtechX. Stockholders should then vote as soon as possible in accordance with the instructions provided in this proxy statement/prospectus and on the enclosed proxy cards.

 

Q.  

How do I vote?

  A. If you are a holder of record of EdtechX common stock on the record date, you may vote in person at the annual meeting or by submitting a proxy for the annual meeting. You may submit your proxy by completing, signing, dating and returning the enclosed proxy card in the accompanying pre-addressed postage paid envelope. If you hold your shares in “street name,” which means your shares are held of record by a broker, bank or nominee, you should contact your broker to ensure that votes related to the shares you beneficially own are properly counted. In this regard, you must provide the broker, bank or nominee with instructions on how to vote your shares or, if you wish to attend the meeting and vote in person, obtain a proxy from your broker, bank or nominee.

 

6

 

 

Q.   If my shares are held in “street name,” will my broker, bank or nominee automatically vote my shares for me?   A. No. Under applicable self-regulatory organization rules, your broker may not exercise discretionary authority to vote your shares of EdtechX common stock on “non-routine” proposals, such as the merger proposal. Accordingly, your broker, bank or nominee cannot vote your shares unless you provide it with instructions on how to vote. If you do not provide instructions on how to vote on a “non-routine” matter, the bank, broker or other nominee will inform us that it does not have the authority to vote on this matter with respect to your shares. This is generally referred to as a “broker non-vote.”
           
Q.   May I change my vote after I have mailed my signed proxy card or given instructions to my broker, bank or other nominee?   A. Yes. Stockholders of record may send a later-dated, signed proxy card to EdtechX’s secretary at the address set forth below so that it is received prior to the vote at the annual meeting or attend the annual meeting in person and vote. Stockholders of record also may revoke their proxy by sending a notice of revocation to EdtechX’s secretary, which must be received by EdtechX’s secretary prior to the vote at the annual meeting. Stockholders who hold their shares in “street name” must follow the instructions provided by their broker, bank or other nominee in order to change or revoke their voting instructions.
           
Q.   What happens if I fail to take any action with respect to the meeting?   A. If you are a stockholder and you fail to take any action with respect to the stockholder meeting and the Mergers are approved by stockholders and consummated, you will become a shareholder of Holdco. If you fail to take any action with respect to the stockholder meeting and the Mergers are not approved, you will continue to be a stockholder of EdtechX.
           
Q.   What should I do with my share and warrant certificates?   A. EdtechX stockholders should not submit their certificates now. After the consummation of the Mergers, Holdco will send instructions to EdtechX stockholders and warrant holders regarding the exchange of their securities for Holdco securities.
           
Q.   What should I do if I receive more than one set of voting materials?   A. You may receive more than one set of voting materials, including multiple copies of this proxy statement/prospectus. For example, if you are a holder of record and your shares are registered in more than one name, you will receive more than one proxy card. If you hold your shares in more than one brokerage account, you will receive voting materials for each brokerage account in which you hold shares. Please complete, sign, date and return each proxy card you receive and provide instructions on how to vote your shares with respect to each brokerage account for which you receive proxy materials, in order to be sure you cast a vote with respect to all of your shares of EdtechX common stock.

 

Q.   Who can help answer my questions?   A. If you have questions about the Mergers or if you need additional copies of the proxy statement/prospectus or the enclosed proxy card you should contact:
           
         

EdtechX Holdings Acquisition Corp.

c/o IBIS Capital Limited

22 Soho Square

London, W1D 4NS

United Kingdom

Attn: Secretary
Tel: +44 207 070 7080

Email: [●]

 

or:

 

[●]

           
         

You may also obtain additional information about EdtechX from documents filed with the SEC by following the instructions in the section entitled “Where You Can Find More Information.”

 

If you are a holder of public shares and you intend to seek conversion of your shares, you will need to deliver your shares (either physically or electronically) to EdtechX’s transfer agent at the address below at least two business days prior to the vote at the annual meeting. If you have questions regarding the certification of your position or delivery of your stock, please contact:

 

Mr. Mark Zimkind
Continental Stock Transfer & Trust Company
1 State Street, 30th Floor
New York, New York 10004

E-mail: mzimkind@continentalstock.com

 

7

 

 

SUMMARY OF THE PROXY STATEMENT/PROSPECTUS

 

This summary highlights selected information from this proxy statement/prospectus and does not contain all of the information that may be important to you. To better understand the proposals to be submitted for a vote at the annual meeting, including the Mergers, you should read this entire document carefully, including the Merger Agreement attached as Annex A to this proxy statement/prospectus. The Merger Agreement is the legal document that governs the Mergers that will be undertaken. It is also described in detail in this proxy statement/prospectus in the section entitled “The Merger Agreement.”

 

The Parties

 

EdtechX

 

EdtechX is a blank check company incorporated in Delaware on May 15, 2018 for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses or entities.

 

On October 10, 2018, EdtechX consummated the initial public offering of 5,500,000 units and on October 17, 2018, EdtechX consummated the closing of an additional 825,000 units sold pursuant to the underwriters’ over-allotment option. Each unit consists of one share of common stock and one redeemable warrant. Each warrant entitles the holder to purchase one share of common stock at a price of $11.50 per share, subject to adjustment, upon consummation of EdtechX’s initial business combination. The units from the initial public offering were sold at an offering price of $10.00 per unit, generating total gross proceeds of $63,250,000. Simultaneously with the closing of the initial public offering and the over-allotment option, EdtechX consummated the private placement of an aggregate of 3,780,000 warrants at a price of $1.00 per warrant, generating gross proceeds of $3.78 million. Approximately $64.2 million ($10.15 per public share) of the net proceeds of the sale of the units in the initial public offering and over-allotment and the sale of the private warrants, is held in a trust account for the benefit of the public shareholders.

 

EdtechX’s units, common stock and warrants are listed on Nasdaq under the symbols EDTXU, EDTX and EDTXW, respectively.

 

EdtechX’s principal executive office is located at 22 Soho Square, London W1D 4NS, United Kingdom and its telephone number is +44 207 070 7080. After the consummation of the Mergers, EdtechX will become a wholly owned subsidiary of Holdco.

 

Meten

 

Meten, headquartered in Shenzhen, Guangdong Province, China, which is considered the Chinese Silicon Valley, is a market leader in ELT in China, with a number one ranked position in the general adult ELT segment in terms of revenue in 2018, according to Frost & Sullivan. Meten focuses on providing industry leading English language and future skills training for a growing market of Chinese students and young professionals. Meten operates an omnichannel (retail and digital) business comprising a nationwide network of 149 learning centers (covering 36 cities in 18 provinces) under the brands Meten (adult and junior ELT services) and ABC (primarily junior ELT services), as well as the popular English language digital tutoring platform for students and young professionals, “Likeshuo”. Meten’s business plans include pursuing market consolidation in China and rolling out Meten’s existing omnichannel distribution platform, combining digital delivery and strategic retail presence, across a total addressable market of more than 600 cities in China.

 

Meten, a Cayman Islands exempted company, was formed in July 10, 2018. Meten’s principal executive office is located at 3rd Floor, Tower A, Tagen Knowledge & Innovation Center, 2nd Shenyun West Road, Nanshan District, Shenzhen, Guangdong Province 518045, The People’s Republic of China. Meten’s telephone number is +86 755 8294 5250. After the consummation of the Mergers, Meten will become a wholly owned subsidiary of Holdco.

 

Holdco

 

Holdco was formed to serve as a holding company for Meten and EdtechX after consummation of the Mergers.

 

Holdco, a Cayman Islands exempted company, was formed on September 27, 2019. Holdco’s principal executive office is located at 3rd Floor, Tower A, Tagen Knowledge & Innovation Center, 2nd Shenyun West Road, Nanshan District, Shenzhen, Guangdong Province 518045, The People’s Republic of China. Holdco’s telephone number is +86 755 8294 5250. After the consummation of the Mergers, Holdco will become the continuing public company.

 

Meten Merger Sub

 

Meten Merger Sub was formed solely as a vehicle for consummating the Meten Merger, and currently is a wholly owned subsidiary of Holdco.

 

Meten Merger Sub, a Cayman Islands exempted company, was formed on October 15, 2019. Meten Merger Sub’s principal executive office is located at 3rd Floor, Tower A, Tagen Knowledge & Innovation Center, 2nd Shenyun West Road, Nanshan District, Shenzhen, Guangdong Province 518045, The People’s Republic of China. Meten Merger Sub’s telephone number is +86 755 8294 5250. After the consummation of the Mergers, it will cease to exist.

 

8

 

 

EdtechX Merger Sub

 

EdtechX Merger Sub was formed solely as a vehicle for consummating the EdtechX Merger, and currently is a wholly owned subsidiary of Holdco.

 

EdtechX Merger Sub, a Delaware corporation, was formed on November 26, 2019. EdtechX Merger Sub’s principal executive office is located at 3rd Floor, Tower A, Tagen Knowledge & Innovation Center, 2nd Shenyun West Road, Nanshan District, Shenzhen, Guangdong Province 518045, The People’s Republic of China. EdtechX Merger Sub’s telephone number is +86 755 8294 5250. After the consummation of the Mergers, it will cease to exist.

 

Emerging Growth Company

 

Each of EdtechX and Holdco is an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act (or JOBS Act). As an emerging growth company, each of EdtechX and Holdco is eligible, and has elected, to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. These include, but are not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and reduced disclosure obligations regarding executive compensation (to the extent applicable to a foreign private issuer in Holdco’s case).

 

Holdco could remain an emerging growth company until the last day of Holdco’s fiscal year following the fifth anniversary of the consummation of the Mergers. However, if Holdco’s annual gross revenue is $1.07 billion or more, if its non-convertible debt issued within a three year period exceeds $1 billion or the market value of its ordinary shares that are held by non-affiliates exceeds $700 million on the last day of the second fiscal quarter of any given fiscal year, Holdco would cease to be an emerging growth company as of the following fiscal year.

 

Foreign Private Issuer

 

Holdco will be a “foreign private issuer” as defined under the Exchange Act. As a foreign private issuer under the Exchange Act, Holdco will be exempt from certain rules under the Exchange Act, including the proxy rules, which impose certain disclosure and procedural requirements for proxy solicitations. Moreover, Holdco will not be required to file periodic reports and financial statements with the SEC as frequently or as promptly as domestic U.S. companies with securities registered under the Exchange Act, and Holdco will not be required to comply with Regulation FD, which imposes certain restrictions on the selective disclosure of material information. In addition, Holdco’s officers, directors and principal shareholders will be exempt from the reporting and "short-swing" profit recovery provisions of Section 16 of the Exchange Act and the rules under the Exchange Act with respect to their purchases and sales of Holdco Ordinary Shares.

 

As a foreign private issuer, Holdco will also be permitted, and intends, to follow certain home country corporate governance practices instead of those otherwise required under the applicable rules of Nasdaq for domestic U.S. issuers. In order to rely on this exception, we are required to disclose Nasdaq rule that we do not intend to follow and describe the home country practice that we will follow in lieu thereof. Accordingly, Holdco intends to follow Cayman Islands corporate governance practices in lieu of the following Nasdaq corporate governance rules:

 

(a) a majority of directors being independent – Cayman Islands law and generally accepted business practices in the Cayman Islands do not require that a majority of Holdco’s board of directors be independent and, accordingly, Holdco will claim the exemption for foreign private issuers with respect to the Nasdaq requirement to have a majority of independent directors;

 

(b) a nominating and corporate governance committee composed entirely of independent directors – Cayman Islands law and generally accepted business practices in the Cayman Islands do not require that Holdco’s nominating and corporate governance committee be composed entirely of independent directors and, accordingly, Holdco will claim the exemption for foreign private issuers with respect to the Nasdaq requirement with respect to the composition of the nominating and corporate governance committee; 

 

(c) a compensation committee composed entirely of independent directors – Cayman Islands law and generally accepted business practices in the Cayman Islands do not require that Holdco’s compensation committee be composed entirely of independent directors and, accordingly, Holdco will claim the exemption for foreign private issuers with respect to the Nasdaq requirement with respect to the composition of the compensation committee; 

 

9

 

 

(d) we will not provide an annual certification by our chief executive officer that he or she is not aware of any non-compliance with any corporate governance rules of the Nasdaq, as such certification is not required under Cayman Islands law; 

 

(e) have regularly scheduled executive sessions with only non-management directors – Cayman Islands law and generally accepted business practices in the Cayman Islands do not require that Holdco’s board of directors hold regularly scheduled executive sessions with only non-management directors and, accordingly, Holdco will claim the exemption for foreign private issuers with respect to the Nasdaq requirement with respect to executive sessions; or

 

(f) shareholder approval – Cayman Islands law and generally accepted business practices in the Cayman Islands do not require Holdco to seek shareholder approval for (i) the establishment, implementation and material revisions of the terms of share incentive plans, (ii) the issuance of more than 1% of our outstanding ordinary shares or more than 1% of our outstanding voting power to a related party, (iii) the issuance of more than 20% of our outstanding ordinary shares or voting power, (iv) an issuance in connection with an acquisition, and (iv) an issuance that would result in a change of control. Accordingly, Holdco will claim the exemption for foreign private issuers with respect to the Nasdaq shareholder approval requirements.

 

The Merger Proposal

 

The Merger Agreement provides for (i) the Meten Merger, pursuant to which all of the shareholders of Meten will exchange all the outstanding Meten share capital for Holdco Ordinary Shares, and (ii) immediately thereafter, the EdtechX Merger, pursuant to which (x) each share of EdtechX common stock outstanding on the closing date will be exchanged for one Holdco Ordinary Share, except that holders of public shares will be entitled to elect instead to receive a pro rata portion of EdtechX’s trust account, as provided in EdtechX’s charter documents, (y) each outstanding warrant of EdtechX will entitle the holder to purchase one Holdco Ordinary Share at a price of $11.50 per share, and (z) each outstanding unit purchase option will remain outstanding but will be deemed to have been converted to represent the right to purchase Holdco Ordinary Shares and warrants of Holdco.

 

As a result of the Mergers, Meten and EdtechX will become wholly owned subsidiaries of Holdco and the securityholders of Meten and EdtechX will become the securityholders of Holdco. We estimate that, immediately following the consummation of the Mergers, without giving effect to any conversions of EdtechX public shares and cash payments to Meten shareholders in lieu of Holdco Ordinary Shares, the shares issued to the shareholders of Meten will constitute approximately 86% of the issued and outstanding Holdco Ordinary Shares (assuming no conversions of EdtechX public shares, no Cash Election is made, and without taking into effect securities which may be issued pursuant to the Azimut Investment or in a Financing) and the shares issued to the EdtechX stockholders will constitute approximately 14% of the issued and outstanding Holdco Ordinary Shares (assuming no conversions of EdtechX public shares, no Cash Election is made, and without taking into effect securities which may be issued pursuant to the Azimut Investment or in a Financing). All of the Holdco Ordinary Shares to be issued and outstanding at the completion of the Mergers will be of a single class with equal rights with each Holdco Ordinary Share having one vote per share.

 

The shareholders of Meten who continue to hold Holdco Ordinary Shares through certain earnout measurement dates will also have the right to receive their pro rata portion of up to an additional 11,000,000 Contingent Shares as follows: (i) 4,000,000 Contingent Shares if the reported closing sale price of the Holdco Ordinary Shares equals or exceeds $12.50 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations or other similar actions) for any 20 consecutive trading days at any time before December 31, 2022, and (ii) 7,000,000 Contingent Shares if the reported closing sale price of the Holdco Ordinary Shares equals or exceeds $15.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations or other similar actions) for any 20 consecutive trading days during the fiscal year ending December 31, 2023. The earnout conditions operate independently. There is no “catch up” mechanism; Contingent Shares not earned in a prior earnout period will not be earnable in a subsequent period.

 

Certain of the Meten shareholders will enter into Lock-up Agreements pursuant to which they will agree not to transfer the Holdco Ordinary Shares received as consideration in the Meten Merger (including any Contingent Shares, if and when issued), until (i) with respect to 50% of such Holdco ordinary shares, the earlier of the date that is six months after the closing of the Mergers and the date on which the closing price of the Holdco Ordinary Shares equals or exceeds $12.50 per share (as adjusted for share splits, share capitalizations, reorganizations and recapitalizations) for any 20 trading days within any 30-trading day period after closing and (ii) with respect to the remaining 50% of such Holdco ordinary shares, one year after closing of the Mergers, or earlier, in either case, if, subsequent to the closing, Holdco consummates a liquidation, merger, stock exchange or other similar transaction which results in all holders of Holdco Ordinary Shares ceasing to hold more than fifty percent (50%) of the then outstanding Holdco Ordinary Shares or having the right to exchange their Holdco Ordinary Shares for cash or freely tradable securities.

 

10

 

 

All other Meten shareholders will agree not to transfer the Holdco Ordinary Shares received by them as consideration in the Meten Merger (including any Contingent Shares, if and when issued) until the date that is at least three months after the closing.

 

Certain shareholders of EdtechX, including affiliates of Benjamin Vedrenne-Cloquet and Charles McIntyre, will enter into an Amended Stock Escrow Agreement pursuant to which the Holdco Ordinary Shares to be issued to them will remain subject to the escrow and transfer restrictions as set forth in the existing stock escrow agreement entered into by such persons in connection with EdtechX’s initial public offering, which restrictions are substantially the same as those provided for in the Lock-up Agreements.

 

The Agreement provides for mutual indemnification by EdtechX and Meten for breaches of their respective representations, warranties, and covenants. Claims for indemnification must be brought after the consummation of the Mergers and before the date that is one year after the consummation of the Mergers. Claims for indemnification may be asserted once damages exceed a $5 million threshold, and will be reimbursable to the extent such damages exceed the threshold. Claims for damages below a de minimus threshold of $200,000 will not count toward satisfying the $5 million deductible. The indemnification obligation of Meten will be capped at 3.5% of the aggregate Holdco Ordinary Shares issuable to the Meten shareholders in the transactions and the indemnification obligation of EdtechX will be capped at an aggregate of 1,693,706 Holdco Shares. The Merger Agreement does not provide for an escrow of shares which may be payable to EdtechX for indemnification, but requires that Meten shareholders either forfeit and return to Holdco for cancellation the number of Holdco Ordinary Shares equal to their pro rata portion of the indemnifiable damages or, if the shareholder has sold the Holdco Ordinary Shares, to pay cash in value of the related shares in an amount equal to their pro rata portion of the indemnifiable damages. Holdco will be required to reserve for issuance additional Holdco ordinary shares sufficient to cover indemnification of the Meten shareholders. The foregoing indemnification will provide the sole means of recovering damages arising from breaches of representations, warranties, or covenants.

 

As described in the final prospectus for EdtechX’s initial public offering, the Azimut Investor entered into a Forward Purchase Contract with EdtechX to purchase, in a private placement to occur concurrently with the consummation of the Mergers, up to 2,000,000 of units at $10.00 per unit (or up to an aggregate purchase price of $20,000,000), on substantially the same terms as the sale of units in EdtechX’s initial public offering. In connection with the execution of the Merger Agreement, the Azimut Investor irrevocably consented to purchase up to 2,000,000 units at $10.00 per unit at the closing of the transactions contemplated by the Merger Agreement. The exact number of units to be purchased by the Azimut Investor will be determined by EdtechX and Holdco based on the capital needs in connection with the Mergers.

 

At the closing of the Mergers, Holdco will enter into a Registration Rights Agreement providing the shareholders of Meten with certain demand registration rights and piggy-back registration rights with respect to registration statements filed by Holdco after the closing. Additionally, EdtechX and Holdco will amend any existing registration rights agreements to which it is a party or similar agreements or instruments to which it is a party providing for registration rights with respect to EdtechX’s securities held by any person such that, after giving effect to the Mergers, the Holdco securities held by former EdtechX securityholders will have the same registration rights as they currently have.

 

EdtechX and Meten plan to complete the Mergers promptly after the EdtechX annual meeting, provided that:

 

EdtechX’s stockholders have approved the merger proposal, director proposal, and charter proposals;

 

EdtechX has net tangible assets of at least $5,000,001 upon consummation of the Mergers;

 

Holdco has received confirmation from Nasdaq that it meets all of the requirements for listing of the Holdco ordinary shares and warrants on such exchange, other than the requirement to have a sufficient number of round lot holders; and

 

the other conditions specified in the Merger Agreement have been satisfied or waived.

 

After consideration of the factors identified and discussed in the section entitled “The Merger Proposal — EdtechX’s Board of Directors’ Reasons for Approval of the Mergers,” EdtechX’s board of directors concluded that the Mergers are in the best interests of the EdtechX stockholders.

 

11

 

 

As a result of the Mergers, assuming that no shareholders of EdtechX elect to convert their public shares into cash in connection with the Mergers as permitted by EdtechX’s amended and restated certificate of incorporation, no Cash Election is made, and without taking into effect securities which may be issued pursuant to the Azimut Investment or in a Financing, the former shareholders of EdtechX will own approximately 14% of the Holdco Ordinary Shares to be outstanding immediately after the Mergers and the former Meten shareholders will own approximately 86% of the Holdco Ordinary Shares. If the maximum number of EdtechX public shares is converted into cash, assuming no Cash Election is made, and without taking into effect securities which may be issued pursuant to the Azimut Investment or in a Financing, such percentages will be approximately 10% and 90%, respectively. The foregoing does not take into account any adjustments to the merger consideration.

  

If the merger proposal is not approved by EdtechX’s stockholders at the annual meeting, the director proposal and charter proposals will not be presented at the annual meeting for a vote.

 

The Director Proposal

 

The stockholders of EdtechX will also vote on a proposal to elect nine (9) directors to the Holdco board of directors until their successors are duly elected and qualified. If management’s nominees are elected, the directors of Holdco will be Benjamin Vedrenne-Cloquet and Charles McIntyre, EdtechX’s Chief Executive Officer and Chairman of the Board, respectively, Jishuang Zhao, Siguang Peng and Yupeng Guo, the founders of Meten, Yongchao Chen, Yanli Chen, Zhiyi Xie, and Ying Cheng. See the section of this proxy statement/prospectus titled “The Director Proposal.

 

At closing of the Mergers, EdtechX, Holdco, Meten and certain shareholders of Meten and stockholders of EdtechX will enter into a Voting Agreement pursuant to which they will agree to nominate the above-referenced nine members to the board of directors of Holdco, and to take all actions necessary to vote all Holdco Ordinary Shares beneficially owned by them for the election of such persons until the third anniversary of the closing.

 

The Charter Proposals

 

The stockholders of EdtechX will vote on separate proposals to approve the following material differences between the constitutional documents of Holdco and EdtechX’s current amended and restated certificate of incorporation: (i) the name of the new public entity will be “Meten EdtechX Education Group Ltd.” as opposed to “EdtechX Holdings Acquisition Corp.”; (ii) Holdco has 500,000,000 authorized ordinary shares, as opposed to EdtechX having 25,000,000 authorized shares of common stock and 1,000,000 authorized shares of preferred stock; (iii) Holdco’s corporate existence is perpetual as opposed to EdtechX’s corporate existence terminating if a business combination is not consummated by EdtechX within a specified period of time; and (iv) Holdco’s constitutional documents do not include the various provisions applicable only to special purpose acquisition corporations that EdtechX’s amended charter contains. Holdco’s amended and restated memorandum and articles of association to be in effect upon consummation of the Mergers are attached as Annex B to this proxy statement/prospectus. See the section of this proxy statement/prospectus titled “The Charter Proposals.”

 

The Adjournment Proposal

 

If EdtechX is unable to consummate the business combination at the time of the meeting for any reason, EdtechX’s board of directors may submit a proposal to adjourn the annual meeting to a later date or dates, if necessary. See the section of this proxy statement/prospectus titled “The Adjournment Proposal.”

 

EdtechX Initial Stockholders

 

As of [●], 2020, the record date for the annual meeting, EdtechX’s shareholders prior to its initial public offering (the “initial stockholders”) beneficially owned and were entitled to vote an aggregate of 1,581,250 shares of EdtechX common stock (“initial shares”) that were issued prior to EdtechX’s initial public offering. The initial shares currently constitute approximately 20% of the outstanding EdtechX common stock.

 

12

 

 

In connection with the initial public offering, each EdtechX initial stockholder agreed to vote the initial shares, as well as any shares of EdtechX common stock acquired in the aftermarket, in favor of the merger proposal. The EdtechX initial stockholders have also indicated that they intend to vote their shares of EdtechX in favor of all other proposals being presented at the meeting. The initial shares have no conversion rights in the event a business combination is not effected in the required time period and will be worthless if no business combination is effected by EdtechX. In connection with the initial public offering, the initial stockholders entered into an escrow agreement pursuant to which their initial shares of EdtechX are held in escrow and may not be transferred (subject to limited exceptions) until, with respect to 50% of such initial shares, the earlier of six months after the date of the consummation of an initial business combination and the date on which the closing price of EdtechX’s common stock exceeds $12.50 per share for any 20 trading days within a 30-trading day period following the consummation of an initial business combination and, with respect to the remaining 50% of such initial shares, six months after the date of the consummation of an initial business combination, or earlier in each case if, subsequent to EdtechX’s initial business combination, it consummates a subsequent liquidation, merger, stock exchange or other similar transaction which results in all of its shareholders having the right to exchange their shares of common stock for cash, securities or other property. The Holdco Ordinary Shares the initial stockholders will receive upon consummation of the Mergers will be placed in escrow with the same terms as described above.

 

Date, Time and Place of Annual Meeting of EdtechX’s Stockholders

 

The annual meeting of the stockholders of EdtechX will be held at [●] a.m., local time, on [●], 2020, at the offices of Graubard Miller, EdtechX’s U.S. counsel, The Chrysler Building, 405 Lexington Avenue, 11th Floor, New York, NY 10174, or such other date, time and place to which such meeting may be adjourned or postponed.

 

Voting Power; Record Date

 

EdtechX has fixed the close of business on [●], as the “record date” for determining EdtechX stockholders entitled to notice of and to attend and vote at the annual meeting. As of the close of business on the record date, there were 7,906,250 shares of EdtechX common stock outstanding and entitled to vote. Each share of EdtechX common stock is entitled to one vote per share at the annual meeting. If your shares are held in “street name” or are in a margin or similar account, you should contact your broker to ensure that votes related to the shares you beneficially own are properly counted.

 

Quorum and Vote for the Annual Meeting of Stockholders

 

A quorum of EdtechX stockholders is necessary to hold a valid meeting of stockholders. The presence in person or by proxy of the holders of a majority of the issued and outstanding shares of EdtechX common stock constitutes a quorum. Abstentions and broker non-votes will count as present for the purposes of establishing a quorum, but will not count towards the voting thresholds. The proposals presented at the annual meeting will require the following votes:

 

The approval of the merger proposal, each of the charter proposals and the adjournment proposal will require the affirmative vote of holders of a majority of the shares present in person or by proxy and entitled to vote at the annual meeting. Abstentions will count as votes “against” these proposals. Broker non-votes will have no effect on the proposals because brokers are not entitled to vote on the matter absent voting instructions from the beneficial holder.

 

The approval of the director proposal will require the affirmative vote of a plurality of the votes cast on the matter. A “withhold vote” will have no effect on the vote’s outcome, because the candidates who receive the highest number of “for” votes are elected, and if candidates run unopposed they only need a single “for” vote to be elected.  Broker non-votes will have no effect on the outcome of the vote because they are typically not considered “votes cast”.

 

Consummation of the Mergers is conditional on approval of the merger proposal, director proposal and charter proposals.

 

Conversion Rights

 

Pursuant to EdtechX’s amended and restated certificate of incorporation, a holder of public shares may demand that EdtechX convert such shares into cash if the Mergers are consummated regardless of whether such holder votes in favor or against the Mergers or does not vote at all or is not a holder of record on the record date. Holders of public shares will be entitled to receive cash for these shares if they demand that EdtechX convert their shares into cash no later than two business days prior to the close of the vote on the merger proposal and deliver their shares to EdtechX’s transfer agent prior to the vote at the meeting. If the Mergers are not completed, these shares will not be converted into cash. If a holder of public shares properly demands conversion, EdtechX will convert each public share into a full pro rata portion of the trust account, calculated as of two business days prior to the anticipated consummation of the Mergers. As of [●], 2020, the record date, this would amount to approximately $[●] per share. If a holder of public shares exercises its conversion rights, then it will be exchanging its ordinary shares of EdtechX for cash and will no longer own the shares. See the section of this proxy statement/prospectus titled “Annual Meeting of EdtechX Stockholders — Conversion Rights” for a detailed description of the procedures to be followed if you wish to convert your shares into cash.

 

13

 

 

Notwithstanding the foregoing, a holder of public shares, together with any affiliate of his or any other person with whom he is acting in concert or as a “group” (as defined in Section 13(d)(3) of the Exchange Act) will be restricted from seeking conversion rights with respect to 20% or more of the public shares. Accordingly, all public shares in excess of 20% held by a public shareholder will not be converted to cash.

 

The Mergers will not be consummated if EdtechX has net tangible assets of less than $5,000,001 upon consummation of the Mergers.

 

Holders of EdtechX warrants will not have conversion rights with respect to such securities.

 

Dissenter’s Rights

 

EdtechX stockholders do not have dissenter's rights under Delaware law in connection with the Mergers.

 

Proxy Solicitation

 

EdtechX is soliciting proxies on behalf of its board of directors. EdtechX will bear all of the costs of the solicitation. Proxies may be solicited by mail, telephone or in person. EdtechX has engaged [●] to assist in the solicitation of proxies and will pay [●] the fees described elsewhere in this proxy statement/prospectus.

 

If you grant a proxy, you may still vote your shares of EdtechX common stock in person at the annual meeting. You may also change you vote by submitting a later-dated proxy or by revoking your proxy as described in the section of this proxy statement/prospectus titled “Annual Meeting of EdtechX Stockholders — Revoking Your Proxy.”

 

Interests of EdtechX’s Directors and Officers in the Mergers

 

When you consider the recommendation of EdtechX’s board of directors in favor of approval of the merger proposal, you should keep in mind that certain of EdtechX’s directors and executive officers have interests in such proposal that are different from, or in addition to, your interests as an EdtechX stockholder. These interests include, among other things:

 

If the business combination with Meten or another business combination is not consummated by April 10, 2020 (or such later date as EdtechX shareholders may approve), EdtechX will cease all operations except for the purpose of winding up, dissolving and liquidating. In such event, the shares of EdtechX common stock held by the initial stockholders, including EdtechX’s directors and officers, which were acquired for an aggregate purchase price of $25,000 prior to EdtechX’s initial public offering, would be worthless because the initial stockholders are not entitled to participate in any redemption or distribution with respect to such shares. Such shares had an aggregate market value of $[●] based upon the closing price of $[●] per share on Nasdaq on the record date.

 

Certain of EdtechX’s initial stockholders, including its directors and officers and their affiliates, purchased an aggregate of 3,780,000 warrants in a private placement from EdtechX for an aggregate purchase price of $3,780,000 (or $1.00 per private warrant). These purchases took place on a private placement basis simultaneously with the consummation of the initial public offering. All of the proceeds EdtechX received from these purchases were placed in the trust account. Such warrants had an aggregate market value of $[●] based upon the closing price of $[●] per unit on Nasdaq on the record date. The private warrants will become worthless if EdtechX does not consummate a business combination by April 10, 2020 (or such later date as EdtechX shareholders may approve).

 

The transactions contemplated by the Merger Agreement provide that Benjamin Vedrenne-Cloquet and Charles McIntyre, EdtechX’s Chief Executive Officer and Chairman of the Board, respectively, will be directors of Holdco after the closing of the Mergers through 2023, and that they will each be paid annually for their board service as follows: (i) $120,000 in cash, and (ii) 20,000 Holdco Ordinary Shares. The first year’s installment of the foregoing board of director fees will be paid to Messrs. Vedrenne-Cloquet and McIntyre upon closing of the Mergers. The following years’ board fees will be paid on the anniversary of the closing date.

 

The initial stockholders, officers, and directors of EdtechX and their affiliates are entitled to reimbursement of out-of-pocket expenses incurred by them in connection with certain activities on EdtechX’s behalf, such as identifying and investigating possible business targets and business combinations. However, if EdtechX fails to consummate a business combination within the required period, they will not have any claim against the trust account for reimbursement. Accordingly, EdtechX may not be able to reimburse these expenses if the business combination with Meten or another business combination, is not completed by April 10, 2020 (or such later date as EdtechX shareholders may approve). As of [●], 2020, the record date, EdtechX’s initial stockholders and their affiliates had incurred approximately $[●] of unpaid reimbursable expenses.

 

14

 

 

Since EdtechX’s inception, the sponsors, which are affiliates of Benjamin Vedrenne-Cloquet and Charles McIntyre, have made loans from time to time to EdtechX to fund certain capital requirements. The working capital loans will be repaid upon closing of the Mergers. If the Mergers are not consummated and EdtechX does not consummate another business combination within the required time period, the notes will not be repaid and will be forgiven unless EdtechX has funds outside of the trust account then available to it to repay such notes. As of the date of this proxy statement/prospectus, an aggregate of $[●] principal amount of these loans is outstanding.

 

If EdtechX is unable to complete a business combination within the required time period, the sponsors will be liable to ensure that the proceeds in the trust account are not reduced by the claims of target businesses or claims of vendors or other entities that are owed money by EdtechX for services rendered or contracted for or products sold to EdtechX, but only if such a vendor or target business has not executed such a waiver.

 

If EdtechX is required to be liquidated and there are no funds remaining to pay the costs associated with the implementation and completion of such liquidation, the sponsors have agreed to advance the funds necessary to pay such costs and complete such liquidation (currently anticipated to be no more than approximately $15,000) and not to seek repayment for such expenses.

 

At any time prior to the annual meeting, during a period when they are not then aware of any material nonpublic information regarding EdtechX or its securities, EdtechX, the initial stockholders, Meten, Meten’s shareholders and/or their respective affiliates may purchase shares of EdtechX common stock from institutional and other investors who vote, or indicate an intention to vote, against the merger proposal, or execute agreements to purchase such shares from such investors in the future, or they may enter into transactions with such investors and others to provide them with incentives to acquire shares of common stock of EdtechX or vote their shares of EdtechX common stock in favor of the merger proposal. The purpose of such share purchases and other transactions would be to increase the likelihood of satisfaction of the requirements that the holders of a majority of the shares of EdtechX common stock present and entitled to vote at the annual meeting to approve the merger proposal vote in its favor and that EdtechX have in excess of the required amount of closing cash to consummate the Mergers under the Merger Agreement, where it appears that such requirements would otherwise not be met. While the exact nature of any such incentives has not been determined as of the date of this proxy statement/prospectus, they might include, without limitation, arrangements to protect such investors or holders against potential loss in value of their shares of EdtechX, including the granting of put options and the transfer to such investors or holders of shares or warrants owned by the EdtechX initial stockholders for nominal value.

 

Entering into any such arrangements may have a depressive effect on EdtechX’s common stock. For example, as a result of these arrangements, an investor or holder may have the ability to effectively purchase shares of EdtechX at a price lower than market and may therefore be more likely to sell the EdtechX common stock he owns, either prior to or immediately after the annual meeting.

 

If such transactions are effected, the consequence could be to cause the Mergers to be approved in circumstances where such approval could not otherwise be obtained. Purchases of shares of EdtechX common stock by the persons described above would allow them to exert more influence over the approval of the merger proposal and other proposals to be presented at the annual meeting and would likely increase the chances that such proposals would be approved. Moreover, any such purchases may make it more likely that EdtechX will have in excess of the required amount of cash available to consummate the Mergers as described above.

 

As of the date of this proxy statement/prospectus, there have been no such discussions and no agreements to such effect have been entered into with any such investor or holder. EdtechX will file a Current Report on Form 8-K to disclose any arrangements entered into or significant purchases made by any of the aforementioned persons that would affect the vote on the merger proposal or the satisfaction of any closing conditions. Any such report will include descriptions of any arrangements entered into or significant purchases by any of the aforementioned persons.

 

Recommendation to Stockholders

 

EdtechX’s board of directors has unanimously determined that each of the proposals outlined above is fair to and in the best interests of EdtechX and its stockholders and recommended that EdtechX stockholders vote “FOR” the merger proposal, “FOR” the election of all of the persons nominated by management for election as directors, “FOR” each of the charter proposals, and “FOR” the adjournment proposal, if presented.

 

15

 

 

Conditions to Closing the Mergers

 

General Conditions

 

Consummation of the Mergers is conditioned on approval of the Merger Agreement and contemplated transactions by EdtechX’s stockholders and by Meten’s shareholders. In addition, the consummation of the Mergers is conditioned upon, among other things:

 

  all waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended shall have expired and no order, judgment, injunction, decree, writ, stipulation, determination or award, in each case, entered by or with any governmental authority or statute, rule or regulation that is in effect and prohibits or enjoins the consummation of the Transactions;
     
  EdtechX having at least $5,000,001 of net tangible assets remaining immediately prior to, or upon the closing of, the business combination, after taking into account payments to holders of shares of EdtechX’s common stock that properly demanded that EdtechX convert their common stock for their pro rata share of the trust account;
     
  no material adverse effect with respect to EdtechX or Meten shall have occurred between the date of the Merger Agreement and the closing of the transactions;
     
  the Registration Statement shall have been declared effective by the Securities and Exchange Commission; and
     
  no action, suit or proceeding shall be pending or threatened by any Governmental Entity which is reasonably likely to (i) prevent consummation of any of the transactions contemplated by the Merger Agreement, (ii) cause any of the transactions contemplated by the Merger Agreement to be rescinded following consummation or (iii) affect materially and adversely or otherwise encumber the title of the Holdco Shares to be issued by Holdco in connection with the Mergers and no order, judgment, decree, stipulation or injunction to any such effect shall be in effect.

 

Meten’s, Holdco’s and the Merger Subs’ Conditions to Closing

 

The obligations of Meten, Holdco, and the Merger Subs to consummate the Mergers are also conditioned upon, among other things:

 

the accuracy of the representations and warranties of EdtechX (subject to certain bring-down standards);

 

performance of the covenants of EdtechX required by the Agreement to be performed on or prior to the closing;

 

the common stock and warrants of EdtechX continuing to be listed on the Nasdaq Capital Market up to the closing;

 

the Azimut Investment having closed and EdtechX having at least $30,000,000 in cash, net of disbursements to EdtechX public shareholders who elect to have their shares of common stock converted to cash, and together with any funds in connection with the Azimut Investment and the Financing, which amount shall be reduced to $20,000,000 in the event that the parties raise less than $10 million in the Financing (the “Minimum Cash Closing Condition”);

 

resignations and appointments of certain officers and directors as specified in the Merger Agreement;

 

the execution and delivery of the Voting Agreement by EdtechX and certain EdtechX stockholders;

 

the execution and delivery of the Amended Stock Escrow Agreement;

 

the execution and delivery of the Amended Registration Rights Agreement;

 

the execution and delivery of the Support Agreement by EdtechX and certain stockholders of EdtechX; and

 

the approval for listing of the Holdco ordinary shares on the Nasdaq Capital Market or the New York Stock Exchange, subject to official notice of approval and satisfaction of public holder requirements;.

 

EdtechX shall be in compliance with the reporting requirements under the Securities Act and Exchange Act.

 

16

 

 

EdtechX’s Conditions to Closing

 

The obligations of EdtechX to consummate the Mergers are also conditioned upon, among other things:

 

the accuracy of the representations and warranties of Meten, Holdco, and the Merger Subs (subject to certain bring-down standards);

 

performance of the covenants of Meten, Holdco, and the Merger Subs required by the Merger Agreement to be performed on or prior to the closing;

 

the execution and delivery of the Voting Agreement by Meten and certain shareholders of Meten; and

 

the execution and delivery of the Lock-up Agreements by certain shareholders of Meten.

 

Waivers

 

EdtechX, Meten, Holdco or the Merger Subs may waive any inaccuracies in the representations and warranties made to such party contained in the Merger Agreement or in any document delivered pursuant to the Merger Agreement and waive compliance with any agreements or conditions for the benefit of itself or such party contained in the Merger Agreement or in any document delivered pursuant to the Agreement. Notwithstanding the foregoing, pursuant to EdtechX’s current amended and restated certificate of incorporation, EdtechX cannot consummate the business combination if it has less than $5,000,001 of net tangible assets upon the consummation of the business combination.

 

Termination

 

The Merger Agreement may be terminated as follows:

 

  by mutual written consent of EdtechX and Meten;

 

  by either EdtechX or Meten if the business combination is not consummated on or before April 1, 2020, provided that the right to terminate the Merger Agreement will not be available to any party whose action or failure to act has been a principal cause of or primarily resulted in the failure of the business combination to occur on or before such date and such action or failure to act constitutes a breach of the Merger Agreement;

 

  by either EdtechX or Meten if a governmental entity shall have issued an order, decree or ruling or taken any other action, in any case having the effect of permanently restraining, enjoining or otherwise prohibiting the Mergers, which order, decree, judgment, ruling or other action is final and non-appealable;
     
  by either EdtechX or Meten if, at the EdtechX shareholder meeting called to approve the Mergers, the Mergers fail to be approved by the required vote (subject to any adjournment or recess of the meeting);
     
  by either EdtechX or Meten if EdtechX has less than $5,000,001 of net tangible assets remaining immediately prior to, or upon the closing of, the transactions, after taking into account payments to holders of EdtechX common stock that properly demanded that EdtechX convert their common stock for their pro rata share of the trust account;
     
  by either EdtechX or Meten if the other party has breached any of its covenants or representations and warranties in any material respect which cannot be cured or, if curable, and has not been cured within thirty days of the notice of an intent to terminate, provided that the terminating party is itself not in material breach;
     
  by Meten if the Minimum Cash Closing Condition is not met; or
     
  by either EdtechX or Meten upon a breach of the exclusivity covenants contained in the Merger Agreement.

 

In the event of the termination of the Merger Agreement by EdtechX due to Meten’s failure to materially comply with any applicable legal requirements, then Meten will pay EdtechX within two business days after such termination a termination fee equal to $125,000. In the event of the termination of the Merger Agreement by EdtechX due to Meten’s breach of the exclusivity covenants contained in the Merger Agreement, then Meten will pay EdtechX within two business days after such termination a termination fee equal to $350,000. In the event of the termination of the Merger Agreement by Meten due to EdtechX’s failure to materially comply with any applicable legal requirements, then EdtechX will pay Meten within two business days after such termination a termination fee equal to $125,000. In the event of the termination of the Merger Agreement by Meten due to EdtechX’s breach of the exclusivity covenants contained in the Merger Agreement, then EdtechX will pay Meten within two business days after such termination a termination fee equal to $350,000.

 

17

 

 

Anticipated Tax Consequences of the Mergers

 

The parties to the Merger Agreement intend that the Mergers, taken together, qualify as an integrated exchange for U.S. federal income tax purposes under Section 351 of the Code, and the Merger Agreement provides that all parties to the Merger agreement shall report the Mergers consistent with such tax treatment unless otherwise required by a final determination under applicable tax law. However, there is no guidance directly on point on how the provisions of Section 351 of the Code apply in the case of a merger of corporations with no active business and only investment-type assets. Furthermore, there is absence of guidance directly on point as to whether Section 367 of the Code applies in connection with transactions involving a merger with a non-U.S. corporation, followed by a merger with a U.S. corporation. Accordingly, due to the absence of such guidance, it is not possible to predict whether the IRS or a court considering the issue would take or sustain a position indicating the transaction qualifies as a tax free transaction under either section.

 

If the Mergers qualify as an integrated exchange under Section 351 of the Code and are not subject to Section 367, a U.S. Holder of EdtechX common stock should not recognize gain or loss upon the exchange of its EdtechX common stock solely for Holdco Shares pursuant to the EdtechX Merger. A U.S. Holder’s aggregate tax basis in the Holdco Shares received in connection with the EdtechX Merger should be the same as his aggregate tax basis in the EdtechX common stock surrendered in the transaction. In addition, the U.S. Holder’s holding period of the Holdco Shares received in the EdtechX Merger generally should include his holding period of the EdtechX common stock surrendered in the EdtechX Merger.

 

We anticipate that a U.S. Holder whose EdtechX warrant automatically converts into a warrant to purchase Holdco Shares will recognize gain or loss upon such exchange equal to the difference between the fair market value of the Holdco Warrant received and such U.S. Holder’s adjusted basis in its EdtechX warrant. A U.S. Holder’s basis in its Holdco Warrant deemed received in the Merger will equal the fair market value of such warrant. A U.S. Holder’s holding period in its Holdco Warrant will begin on the day after the Merger. However, due to lack of clear authority, the issue is not free from doubt, and U.S. Holders should seek the advice of their tax advisors.

 

For a more detailed description of the material U.S. federal income tax consequences of the Mergers, please see the information set forth in “The Merger Proposal — Anticipated Material Federal Income Tax Consequences of the Mergers to EdtechX and Its Stockholders.”

 

Anticipated Accounting Treatment of the Mergers

 

The Business Combination will be accounted for as a “reverse merger” in accordance with U.S. GAAP. Under this method of accounting EdtechX will be treated as the “acquired” company for financial reporting purposes. Accordingly, for accounting purposes, the Business Combination will be treated as the equivalent of Meten issuing stock for the net assets of EdtechX, accompanied by a recapitalization. The net assets of EdtechX will be stated at fair value which approximates historical costs as EdtechX has only cash and short-term liabilities. No goodwill or other intangible assets relating to the Mergers will be recorded. Operations prior to the business combination will be those of Meten.

 

Regulatory Matters

 

The Mergers and the transactions contemplated by the merger agreement are not subject to any additional federal or state regulatory requirement or approval, except for the filing of required notifications and the expiration or termination of the required waiting periods under the HSR Act and filings with the Cayman Islands and the State of Delaware necessary to effectuate the transactions contemplated by the Merger Agreement.

 

Risk Factors

 

In evaluating the proposals to be presented at the annual meeting, a stockholder should carefully read this proxy statement/prospectus and especially consider the factors discussed in the section entitled “Risk Factors.”

 

18

 

 

SELECTED HISTORICAL FINANCIAL INFORMATION

 

Meten and EdtechX are providing the following selected historical financial information to assist you in your analysis of the financial aspects of the Mergers.

 

EdtechX’s balance sheet data as of September 30, 2019 and income statement data for the three and nine months ended September 30, 2019 are derived from EdtechX’s unaudited financial statements, included elsewhere in this proxy statement/prospectus.

 

EdtechX’s balance sheet data as of December 31, 2018 and income statement data for the period from May 15, 2018 (inception) through December 31, 2018 are derived from EdtechX’s audited financial statements included elsewhere in this proxy statement/prospectus.

 

Balance Sheet Data:  September 30,
2019
   December 31,
2018
 
Trust account  $65,412,193   $64,516,435 
Total assets  $65,790,958   $65,247,452 
Total liabilities  $1,617,749   $1,456,370 
Value of common stock subject to possible redemption  $59,173,204   $58,791,078 
Stockholders’ equity  $5,000,005   $5,000,004 

 

Income Statement Data:  Three Months Ended
September 30,
2019
   Nine Months Ended September 30,
2019
   For the Period from
May 15,
2018
(inception) through
December 31,
2018
 
Loss from operations  $(170,903)  $(507,902)  $(210,484)
Interest earned on marketable securities held in trust  $355,212   $1,214,150   $327,511 
Unrealized loss on marketable securities held in trust  $(32,977)  $(83,455)  $(9,826)
Net income  $81,169   $382,127   $51,867 
Basic and diluted net loss per share  $(0.06)  $(0.17)  $(0.08)
Weighted average shares outstanding, basic and diluted   2,158,094    2,144,682    1,635,292 

 

Meten presents below its summary consolidated financial and operating data for the periods indicated. The following summary consolidated statements of comprehensive income/(loss) data for the years ended December 31, 2016, 2017 and 2018, summary consolidated balance sheets data as of December 31, 2017 and 2018, and summary consolidated cash flow data for the years ended December 31, 2016, 2017 and 2018 have been derived from Meten’s audited consolidated financial statements included elsewhere in this proxy statement/prospectus. In addition, the following summary consolidated statements of comprehensive income/(loss) data for the nine months ended September 30, 2018 and 2019, summary consolidated balance sheets data as of September 30, 2019, and summary consolidated cash flow data for the nine months ended September 30, 2018 and 2019 have been derived from Meten’s unaudited condensed consolidated financial statements included elsewhere in this prospectus. Meten has prepared the unaudited condensed consolidated financial statements on the same basis as Meten’s audited consolidated financial statements, except for the adoption of ASU No. 2016-02, “Leases” on January 1, 2019, as mentioned in note 3 to Meten’s unaudited condensed consolidated financial statements included elsewhere in this prospectus. The summary consolidated financial data should be read in conjunction with Meten’s consolidated financial statements and related notes and “Meten’s Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this proxy statement/prospectus. The consolidated financial statements are prepared and presented in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. Meten’s historical results are not necessarily indicative of its results for any future periods.

 

19

 

 

   For the Year Ended December 31,   For the Nine Months Ended
September 30,
 
   2016   2017   2018   2018   2019 
   RMB   RMB   RMB   US$   RMB   RMB   US$ 
   (in thousands) 
               Unaudited   Unaudited   Unaudited   Unaudited 
Summary Consolidated Statements of Comprehensive (Loss)/Income Data:                            
Revenues   801,545    1,149,721    1,424,234    199,258    1,064,617    1,094,967    153,192 
General adult ELT(1)   572,135    785,480    903,756    126,440    687,235    600,460    84,007 
Junior ELT           65,490    9,162    36,369    129,480    18,115 
Overseas training services   180,606    228,294    223,601    31,283    174,313    151,804    21,238 
Online ELT   46,915    121,196    212,302    29,702    152,933    188,690    26,399 
Other English language-related services(2)   1,889    14,751    19,085    2,671    13,767    24,533    3,433 
Cost of revenues   (344,810)   (467,967)   (627,996)   (87,860)   (457,881)   (558,775)   (78,175)
Gross profit   456,735    681,754    796,238    111,398    606,736    536,192    75,017 
Operating expenses                                   
Selling and marketing expenses   (268,643)   (373,065)   (425,217)   (59,490)   (315,586)   (323,254)   (45,225)
General and administrative expenses   (198,431)   (237,509)   (293,157)   (41,014)   (208,944)   (256,382)   (35,869)
Research and development expenses   (18,187)   (21,217)   (26,178)   (3,662)   (20,075)   (25,365)   (3,550)
(Loss)/income from operations   (28,526)   49,963    51,686    7,232    62,131    (68,809)   (9,627)
Other income (expenses):                                   
Interest income   2,578    4,103    1,150    161    836    677    95 
Interest expenses   (769)   (9)   (8)   (1)   (7)   (1,541)   (216)
Foreign exchange gain/(loss), net   67    (184)   21    3    48    (25)   (3)
Gains on disposal of subsidiaries                       583    82 
Gains on available-for-sale investments   890    2,485    3,916    548    3,909         
Government grants   4,434    4,046    7,817    1,094    5,832    5,184    725 
Equity in income /(loss) on equity method investments   (842)   (150)   1,668    233    2,913    3,590    502 
Others, net   2,890    (373)   1,649    231    (555)   3,085    432 
(Loss)/income before income tax   (19,278)   59,881    67,899    9,501    75,107    (57,256)   (8,010)
Income tax expense   (7,869)   (19,539)   (14,454)   (2,022)   (13,187)   (2,296)   (321)
Net (loss)/income   (27,147)   40,342    53,445    7,479    61,920    (59,552)   (8,331)
Less: Net loss attributable to non-controlling interests   (2,862)   (218)   (3,809)   (533)   (664)   (1,796)   (251)
Net (loss)/income attributable to shareholders of the Company   (24,285)   40,560    57,254    8,012    62,584    (57,756)   (8,080)
Less: Accretion of redeemable owners’ investment   10,577    19,000    9,814    1,373    9,814         
Net (loss)/income available to shareholders of the Company   (34,862)   21,560    47,440    6,639    52,770    (57,756)   (8,080)
Unaudited Non-GAAP Financial Measures:                                   
Adjusted net (loss)/income(3)   (20,590)   48,228    75,859    10,615    75,029    (37,976)   (5,313)
Adjusted net (loss)/income margin(4)   (2.6)%   4.2%   5.3%   5.3%   7.0%   (3.5)%   (3.5)%
Adjusted EBITDA(3)   17,129    100,441    144,115    20,164    121,536    8,623    1,206 
Adjusted EBITDA margin(5)   2.1%   8.7%   10.1%   10.1%   11.4%   0.8%   0.8%

 

 

(1)Includes revenue from the sales of goods, such as education materials and food and beverages sold at Meten’s self-operated learning centers.

 

20

 

 

(2)Comprise primarily of (i) revenue from Meten’s “Shuangge English” App, which had over 24,600, 26,787, 9,859 and 814 paying users for the year ended December 31, 2016, 2017 and 2018, and the nine months ended September 30, 2019, respectively; and (ii) franchise fees Meten received from its franchised learning centers under the “Meten” brand and the “ABC” brand.

 

(3)To supplement Meten’s consolidated financial statements which are presented in accordance with U.S. GAAP, Meten also uses adjusted net income and adjusted EBITDA as additional non-GAAP financial measures. Meten presents these non-GAAP financial measures because they are used by its management to evaluate its operating performance. Meten also believes that such non-GAAP financial measures provide useful information to investors and others in understanding and evaluating its consolidated results of operations in the same manner as its management and in comparing financial results across accounting periods and to those of its peer companies.

 

Adjusted net income and adjusted EBITDA should not be considered in isolation or construed as alternatives to net income/(loss) or any other measure of performance or as indicators of Meten’s operating performance. Investors are encouraged to compare the historical non-GAAP financial measures with the most directly comparable GAAP measures. Adjusted net income and adjusted EBITDA 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 Meten’s data. We encourage investors and others to review Meten’s financial information in its entirety and not rely on a single financial measure.

 

Adjusted net income represents net income/(loss) before share-based compensation and offering expenses. The table below sets forth a reconciliation of Meten’s adjusted net income for the periods indicated:

 

   For the Year Ended
December 31,
   For the Nine Months Ended
September 30,
 
   2016   2017   2018   2018   2019 
   RMB   RMB   RMB   US$   RMB   RMB   US$ 
Net (loss)/income   (27,147)   40,342    53,445    7,479    61,920    (59,552)   (8,331)
Add:                                   
Share-based compensation expenses   6,557    7,886    7,648    1,070    5,825    5,364    750 
Offering expenses           14,766    2,066    7,284    16,212    2,268 
Adjusted net (loss)/income   (20,590)   48,228    75,859    10,615    75,029    (37,976)   (5,313)

 

21

 

 

In addition, adjusted EBITDA represents net income/(loss), which excludes depreciation and amortization and income tax expenses, before share-based compensation expenses and offering expenses. The table below sets forth a reconciliation of our adjusted EBITDA for the periods indicated:

 

   For the Year Ended
December 31,
   For the Nine Months Ended
September 30,
 
   2016   2017   2018   2018   2019 
   RMB   RMB   RMB   US$   RMB   RMB   US$ 
   (in thousands) 
Net (loss)/income   (27,147)   40,342    53,445    7,479    61,920    (59,552)   (8,331)
Subtract:                                   
Net interest income/(loss)   1,809    4,094    1,142    160    829    (864)   (121)
Add:                                   
Income tax expense   7,869    19,539    14,454    2,022    13,187    2,296    321 
Depreciation and amortization   31,659    36,768    54,944    7,687    34,149    43,439    6,077 
EBITDA   10,572    92,555    121,701    17,028    108,427    (12,953)   (1,812)
Add:                                   
Share-based compensation expenses   6,557    7,886    7,648    1,070    5,825    5,364    750 
Offering expenses           14,766    2,066    7,284    16,212    2,268 
Adjusted EBITDA   17,129    100,441    144,115    20,164    121,536    8,623    1,206 

 

(4)Adjusted net (loss)/income margin is calculated by dividing adjusted net (loss)/income by revenues.

 

(5)Adjusted EBITDA margin is calculated by dividing adjusted EBITDA by revenues.

 

22

 

 

   As of December 31,   As of September 30, 
   2017   2018   2019 
   RMB   RMB   US$   RMB   US$ 
   (in thousands) 
           Unaudited   Unaudited   Unaudited 
Summary Consolidated Balance Sheets Data:                    
Cash and cash equivalents   321,776    174,679    24,438    144,173    20,171 
Operating lease right-of-use assets(1)               495,681    69,348 
Total assets   905,514    1,006,746    140,849    1,504,538    210,494 
Deferred revenue (current)   341,328    432,083    60,451    408,829    57,197 
Deferred revenue (non-current)   42,707    52,169    7,299    39,220    5,487 
Financial liabilities from contract with customers   437,027    423,163    59,203    520,855    72,870 
Operating lease liabilities (current)               154,293    21,586 
Operating lease liabilities (non-current)               332,304    46,491 
Total liabilities   958,870    1,121,349    156,883    1,673,258    234,097 
Total mezzanine equity   219,619                 
Total shareholders’ deficit   (272,975)   (114,603)   (16,034)   (168,720)   (23,603)
Total liabilities, mezzanine equity and shareholders’ deficit   905,514    1,006,746    140,849    1,504,538    210,494 

 

 

Note:

 

(1)In February 2016, the FASB issued ASU No. 2016-02, ‘‘Leases’’ (‘‘ASU 2016-02’’). The guidance requires a lessee to recognize right-of-use (‘‘ROU’’) assets and lease liabilities on the balance sheet for all lease obligations and disclose key information about leasing arrangements, such as the amount, timing, and uncertainty of cash flows arising from leases. The guidance requires modified retrospective application and is effective for fiscal years beginning after December 15, 2018 for public companies; however, early adoption is permitted. Meten adopted this standard as of January 1, 2019.

 

   For the Year Ended
December 31,
   For the Nine Months Ended
September 30,
 
   2016   2017   2018   2018   2019 
   RMB   RMB   RMB   US$   RMB   RMB   US$ 
   (in thousands) 
               Unaudited   Unaudited   Unaudited   Unaudited 
Summary Consolidated Cash Flow Data:                            
Net cash flow generated from/operating activities   92,624    259,708    78,535    10,987    12,685    7,627    1,068 
Net cash used in investing activities   (110,586)   (128,629)   (74,793)   (10,464)   (83,624)   (71,954)   (10,066)
Net cash generated from/(used in) financing activities   123,636    6,021    (142,633)   (19,955)   (96,238)   33,177    4,641 
Net increase/(decrease) in cash and cash equivalents and restricted cash   105,674    137,100    (138,891)   (19,432)   (167,177)   (31,150)   (4,357)
Cash and cash equivalents and restricted cash at the beginning of the year/period   85,583    191,257    328,357    45,939    328,357    189,466    26,507 
Cash and cash equivalents and restricted cash at the end of the year/period   191,257    328,357    189,466    26,507    161,180    158,316    22,150 

 

The information is only a summary and should be read in conjunction with each of EdtechX’s and Meten’s financial statements and related notes and “Other Information Related to EdtechX — EdtechX’s Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Meten’s Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained elsewhere herein. The historical results included above and elsewhere in this proxy statement/prospectus are not indicative of the future performance of Meten or EdtechX.

 

Key Operating Data of Meten

 

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

 

    As of/for the Year Ended
December 31,
             
    2016     2017     2018     As of/for the
Nine
Months
Ended
September 30,
2018
    As of/for the
Nine
Months
Ended
September 30,
2019
 
Student enrollment     55,758       82,728       118,277       85,839       95,352  
Gross billings (RMB’000)     974,878       1,318,690       1,424,026       1,016,198       1,160,350  
Number of self-operated learning centers     85       94       119       119       134  
Number of franchised learning centers     2       8       16       14       15  
Course withdrawal rate(1) (%)     6.9       9.1       10.2       10.1       10.1  

  

 

(1) Refers to the amount of refunds we issued in a specific period of time as a percentage of the sum of the amount of gross billings and the amount of refunds for such period.

 

 

23

 

 

SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

 

Meten and EdtechX are providing the following selected unaudited pro forma condensed combined financial information to aid you in your analysis of the financial aspects of the Mergers. The unaudited pro forma financial statements are not necessarily indicative of the financial position or results of operations that may have actually occurred had the Mergers taken place on the dates noted, or the future financial position or operating results of Meten.

 

The unaudited pro forma condensed combined balance sheet as of September 30, 2019 combines the historical balance sheet of EdtechX and the historical balance sheet of Meten on a pro forma basis as if the merger and the other transactions contemplated by the merger agreement, summarized below, had been consummated on September 30, 2019. The unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2019 and the year ended December 31, 2018 combine the historical statements of operations of EdtechX and Meten for such periods on a pro forma basis as if the Mergers and the other transactions contemplated by the Merger Agreement, summarized below, had been consummated on January 1, 2018.

 

Pursuant to the Merger Agreement, (i) the Meten Merger will occur, whereby Meten Merger Sub will merge with and into Meten, with Meten being the surviving entity of such merger and (ii) thereafter the EdtechX Merger will occur, whereby EdtechX Merger Sub will merge with and into EdtechX, with EdtechX being the surviving entity of such merger. Immediately after the Mergers, each of EdtechX and Meten will be wholly-owned subsidiaries of Holdco.

 

This selected unaudited pro forma information is only a summary and should be read together with Meten’s and EdtechX’s financial statements and related notes, “Unaudited Pro Forma Condensed Combined Financial Statements,” “Meten’s Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “EdtechX’s Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other financial information included elsewhere in this proxy statement/prospectus.

 

The unaudited pro forma combined earnings per share information below present three conversion scenarios as follows:

 

Assuming No Conversions: This scenario assumes that no shares of EdtechX common stock are converted into a pro rata portion of the trust account;

 

Assuming Maximum Conversions Condition: This scenario assumes that 2,593,547 shares of EdtechX common stock are converted for an aggregate payment of approximately $26.8 million (based on the estimated per share redemption price of approximately $10.34 per share based on the fair value of cash and cash equivalents held in the Trust Account as of September 30, 2019 of approximately $65.4 million) from the Trust Account, which is the maximum amount of conversions that would allow EdtechX to satisfy the Minimum Cash Closing Condition set forth in the merger agreement; and

 

Assuming Maximum Possible Conversions: This scenario assumes that 5,010,917 shares of EdtechX common stock are converted for an aggregate payment of approximately $51.8 million, which is the maximum amount of conversions that would satisfy EdtechX having at least $5,000,001 of net tangible assets (as determined in accordance with Rule 3a51-1(g)(1) of the Exchange Act) upon consummation of the business combination.

 

   Scenario 1   Scenario 2   Scenario 3 
       Assuming Maximum   Assuming Maximum 
in thousands, except share and per share data  Assuming No Conversions   Conversions Condition   Possible Conversions 
             
Selected Unaudited Pro Forma Condensed Combined Statement of Operations - Year Ended December 31, 2018            
Total revenue   199,258    199,258    199,258 
Net income   7,269    7,269    7,269 
Net income attributable to stockholders of the Company   7,802    7,802    7,802 
Net income available to stockholders of the Company   6,429    6,429    6,429 
Earnings per share - basic    0.11    0.12    0.13 
Earnings per share - diluted   0.11    0.11    0.12 
Weighted average shares outstanding - basic   56,297,857    53,704,310    51,286,940 
Weighted average shares outstanding - diluted   58,600,119   56,006,572    53,589,202 
                
                
Selected Unaudited Pro Forma Condensed Combined Statement of Operations - Nine Months Ended September 30, 2019                        
Total revenue   153,192    153,192    153,192 
Net loss   (8,839)   (8,839)   (8,839)
Net loss attributable to stockholders of the Company   (8,588)   (8,588)   (8,588)
Loss per share - basic and diluted   (0.15)   (0.16)   (0.17)
Weighted average shares outstanding - basic and diluted   56,297,857    53,704,310    51,286,940 
                
Selected Unaudited Pro Forma Condensed Combined Statement of Financial Position as of September 30, 2019                                                
Total current assets   103,467    76,645    51,645 
Total assets   267,392    240,570    215,570 
Total current liabilities   178,887    178,887    178,887 
Total liabilities   234,097    234,097    234,097 
Total stockholders' equity   33,295    6,473    (18,527)

24

 

 

COMPARATIVE PER SHARE INFORMATION

 

The following table sets forth the per share data of each of EdtechX and Meten on a stand-alone basis and the unaudited pro forma condensed combined per share data for the nine months ended September 30, 2019 after giving effect to the Mergers, (1) assuming no conversion of EdtechX public shares, (2) assuming maximum conversion of EdtechX public shares and (3) assuming maximum possible conversion. The pro forma book value per share information was computed as if the Mergers had been completed on September 30, 2019. The pro forma earnings information for the nine months ended September 30, 2019 and the year ended December 31, 2018 was computed as if the Mergers had been completed on January 1, 2018.

 

The historical book value per share is computed by dividing total common shareholders’ equity by the number of shares of common stock of EdtechX and ordinary shares of Meten outstanding, respectively, at the end of the period. The pro forma combined book value per share is computed by dividing total pro forma common shareholders’ equity by the pro forma number of shares outstanding at the end of the period for each of EdtechX and Meten, respectively. The pro forma earnings per share of the combined company is computed by dividing the pro forma income available to the combined company’s common shareholders by the pro forma weighted-average number of shares of EdtechX common stock outstanding over the period.

 

You should read the information in the following table in conjunction with the selected historical financial information summary included elsewhere in this proxy statement/prospectus, and the historical financial statements of EdtechX and Meten and related notes that are included elsewhere in this proxy statement/prospectus. The unaudited EdtechX and Meten pro forma combined per share information is derived from, and should be read in conjunction with, the unaudited pro forma condensed combined financial statements and related notes included elsewhere in this proxy statement/prospectus.

 

The unaudited pro forma combined earnings per share information below does not purport to represent the earnings per share which would have occurred had the companies been combined during the periods presented, nor earnings per share for any future date or period. The unaudited pro forma combined book value per share information below does not purport to represent what the value of EdtechX and Meten would have been had the companies been combined during the periods presented.

 

The unaudited pro forma combined earnings per share information below present three conversion scenarios as follows:

 

Assuming No Conversions: This scenario assumes that no shares of EdtechX common stock are converted into a pro rata portion of the trust account;

 

Assuming Maximum Conversions Condition: This scenario assumes that 2,593,547 shares of EdtechX common stock are converted for an aggregate payment of approximately $26.8 million (based on the estimated per share redemption price of approximately $10.34 per share based on the fair value of cash and cash equivalents held in the Trust Account as of September 30, 2019 of approximately $65.4 million) from the Trust Account, which is the maximum amount of conversions that would allow EdtechX to satisfy the Minimum Cash Closing Condition set forth in the merger agreement; and

 

Assuming Maximum Possible Conversions: This scenario assumes that 5,010,917 shares of EdtechX common stock are converted for an aggregate payment of approximately $51.8 million, which is the maximum amount of conversions that would satisfy EdtechX having at least $5,000,001 of net tangible assets (as determined in accordance with Rule 3a51-1(g)(1) of the Exchange Act) upon consummation of the business combination.

 

           Scenario 1   Scenario 2   Scenario 3 
               Assuming Maximum   Assuming Maximum 
   EdtechX(b)   Meten   Assuming No Conversions   Conversions Condition   Possible Conversions 
September 30, 2019 book value per share(a)  $0.63   $(0.07)  $0.59   $0.12   $(0.36)
Cash dividends declared per share:                         
Nine months ended September 30, 2019   -    -    -    -    - 
Year ended December 31, 2018   -    -    -    -    - 
                          
Net income (loss) attributable to stockholders of the Company                         
Nine months ended September 30, 2019                         
Basic   (0.17)   (0.03)   (0.15)   (0.16)   (0.17)
Diluted   (0.17)   (0.03)   (0.15)   (0.16)   (0.17)
                          
Net income (loss) available to stockholders of the Company                         
Year ended December 31, 2018                         
Basic   (0.08)   0.02    0.11    0.12    0.13 
Diluted   (0.08)   0.02    0.11    0.11    0.12 

 

(a)Book value per share is calculated using the formula: Total stockholder's equity divided by shares outstanding (which includes shares subject to redemption).
(b)Net income (loss) was reduced for income attributable to common stock subject to redemption of $746,503 and $190,632 in the nine months ended September 30, 2019 and the year ended December 31, 2018 net income (loss) per share calculations, respectively.

 

25

 

 

RISK FACTORS

 

Shareholders should carefully consider the following risk factors, together with all of the other information included in this proxy statement/prospectus, before they decide whether to vote or instruct their vote to be cast to approve the proposals described in this proxy statement/prospectus.

 

The value of your investment in Holdco following consummation of the Mergers will be subject to the significant risks affecting Holdco and inherent in the English language education and training industry and the Chinese market. You should carefully consider the risks and uncertainties described below and other information included in this proxy statement/prospectus. If any of the events described below occur, the business and financial results of the combined company could be adversely affected in a material way. This could cause the trading price of the Holdco Ordinary Shares to decline, perhaps significantly, and you therefore may lose all or part of your investment.

 

Risks Related to Meten’s Business and Operations

 

As used in the risks described in this subsection, references to “we,” “us” and “our” are intended to refer to Meten and its subsidiaries unless the context clearly indicates otherwise.

 

Failure to attract and retain students to enroll in our courses would have a material adverse impact on our business and prospects.

 

The success of our business depends primarily on the number of student enrollments in the offline courses we offer at our learning centers, the number of paying users on our “Likeshuo” online platform, and the amount of our course fees. As a result, our ability to attract students to enroll in our courses is critical to the continued success and growth of our business. This, in turn, will depend on several factors, including, among others, our ability to develop new educational programs and enhance existing educational programs to respond to the changes in market trends, student demands and government policies, to maintain our consistent and high teaching quality, to market our programs to a broader prospective student base, to develop additional high-quality educational content, sites and availability of our learning centers and to respond effectively to competitive market pressures.

 

If our students perceive that our education quality deteriorated due to unsatisfying learning experiences, which may be subject to a number of subjective judgments that we have limited or no influence over, our overall market reputation may diminish, which in turn may affect our word-of-mouth referrals and ultimately our student enrollment. In addition, the expansion of our offering of courses and services may not succeed due to competition, our failure to effectively market our new courses and services, maintain the quality of our courses and services, or other factors. We may be unable to develop and offer additional educational content on commercially reasonable terms and in a timely manner, or at all, to keep pace with changes in market trends and student demands. Moreover, we cannot assure you that we will always be able to maintain or increase our course fee levels without compromising our student enrollment, which may materially and adversely affect our revenues and profitability. In addition, international relations and policies related to overseas study of Chinese students may become volatile or unfavorable to our existing and prospective students who plan to study abroad due to various factors that are beyond our control, which could materially and adversely affect our business, results of operations, financial condition and prospects.

 

If we are unable to continue to attract students to enroll in our courses, our revenue may decline, which would have a material adverse effect on our business, financial condition and results of operations.

 

Our business depends on the market recognition of our brands and if we are not able to maintain our reputation and enhance our brand recognition, our business and operating results would be harmed.

 

We believe that our success is heavily dependent on the market recognition of our brand names, including our “Meten” and “Likeshuo” brands, as well as the “ABC” brand associated with ABC Education Group, which we acquired in June 2018. Our ability to maintain our brand recognition and reputation depends on a number of factors, some of which are beyond our control. It may become difficult to maintain the quality and consistency of the services we offer while we continue to grow in size and expand our business and services, which in turn may lead to diminishing confidence in our brand names.

 

Our ability to maintain and enhance our brand recognition and reputation depends primarily on the following factors:

 

the perceived effectiveness and quality of our courses, services and teaching staff;

 

the quality and coverage of our course portfolio, value of courses, services and functions and the quality, variety and appeal of content available of the courses and services offered at our learning centers and on our “Likeshuo” platform;

 

26

 

 

the reliability of the courses offered at our learning centers and through our “Likeshuo” platform, as well as the commitment to high levels of service, reliability, security and data protection by the merchants, our franchised learning centers and other participants in our ecosystem; and

 

the effectiveness of our operational system governing the courses and services offered at our learning centers and on our “Likeshuo” platform.

 

We have developed our student base primarily through word-of-mouth referrals. We have also invested significantly in brand promotion initiatives by conducting certain marketing activities, including, but not limited to, advertisement through our cost per sale merchants, which are generally publishers and website owners that are paid by us on the basis of the number of sales that are directly generated by an advertisement, and major search engines, as well as on social media platforms. However, we cannot assure you that these or our other marketing efforts will be successful in promoting our brands to remain competitive. If we are unable to further enhance our brand recognition and increase awareness of our services, or if we incur excessive sales and marketing expenses or if we are required to incur excessive sales and marketing expenses in order to remain competitive, our business and results of operations would be materially and adversely affected. The sales and marketing expense may also increase as we further develop and expand our business. In addition, any negative publicity relating to the general ELT market in China, our Company or services, regardless of its veracity, could damage our reputation and in turn cause material and adverse harm to our business and results of operations. Furthermore, certain enterprises in various industries in China have brand names that are similar to ours and may result in name confusion to our existing and prospective customers. Any negative publicity associated with these enterprises may have an adverse impact on our reputation and brand recognition, which is beyond our control, and could cause harm to our business, results of operations, financial condition and prospects.

 

We are subject to uncertainties brought by the Amended Private Education Promotion Law and other rules, regulations and opinions promulgated by the PRC government from time to time.

 

Our business is regulated by certain rules and regulations, including the Amended Private Education Promotion Law, which became effective on September 1, 2017. The Amended Private Education Promotion Law classifies private schools into non-profit schools and for-profit schools by whether they are established and operated for profit-making purposes. The sponsors of private schools may at their own discretion choose to establish non-profit or for-profit private schools, but the Amended Private Education Promotion Law does not allow sponsors to establish for-profit private schools that engage in compulsory education. According to the Amended Private Education Promotion Law, for-profit private training institutions, such as our learning centers, are classified as private schools and are required to obtain private school operating permits.

 

According to the Several Opinions of the State Council on Encouraging Social Resources to Invest in Education and Promote Sound Development of Private Education, after the Amended Private Education Promotion Law came into force, the provincial government authorities must issue their own implementation opinions and licensing measures in relation to the specific implementation methods and operative approaches of the amended law based on local conditions. However, whether and how educational authorities regulate private training institutions vary from region to region, especially after the Ministry of Education, or the MOE, issued the Draft Implementation Rules of the Private Education Promotion Law on April 20, 2018, and requested public comment. On August 10, 2018, the Ministry of Justice of the PRC published the committee draft of the Regulations on the Implementation of the Law on Promoting Private Education in the PRC (Revised Draft), or the Committee Draft Implementation Rules of the Private Education Promotion Law, and requested public comment. According to the Committee Draft Implementation Rules of the Private Education Promotion Law, which further classifies private training institutions, a private training institution for language, art, sports, science and technology teaching and a private training institution for cultural education or non-academic continuing education for adults can directly apply for the registration to the local administrative departments for industry and commerce. As advised by Commerce & Finance Law Offices, or our PRC counsel, if the abovementioned Committee Draft Implementation Rules of the Private Education Promotion Law is enacted as proposed and our learning centers are deemed to be private training institutions for language teaching by the relevant authorities under clause 15 of the Committee Draft Implementation Rules of the Private Education Promotion Law, our learning centers will not be required to obtain private school operating permits from the PRC education authorities. However, as the Committee Draft Implementation Rules of the Private Education Promotion Law is still in its draft form, there can be no assurance that it will be enacted as proposed or at all, and there are also uncertainties as to the interpretation and implementation of the regulations by the relevant authorities. We cannot assure you that we will be successful in complying with the newly promulgated regulations. If we cannot fully comply with such regulations, our business, results of operations and reputation could be materially and adversely affected.

 

27

 

 

On November 20, 2018, the General Office of MOE, the General Office of the State Administration for Market Regulation and the General Office of Ministry of Emergency Management jointly issued the Notice on Improving Several Working Mechanisms for Special Governance and Rectification of After-School Training Institutions, or Circular 10, which became effective on the same date. For details of the requirements of Circular 10, see “Regulations Applicable To Meten—Regulations on Private Education in the PRC.” According to Circular 10, for institutions that carry out academic training activities without permits, non-academic training institutions that carry out academic training activities and other institutions that carry out illegal training activities, the education authorities, in collaboration with other relevant government departments, shall order them to cease their business, restrict their legal representatives to engage in training activities for primary and secondary school students and refer to the market supervision authority to revoke their business licenses. By the end of 2018, there should be no training institutions that are still carrying out training activities without permits or licenses. The local government authorities may propose a practical rectification plan to ensure that the rectification could be completed by the end of the year. As of the date of this proxy statement/prospectus, a majority of our self-operated learning centers did not have the relevant private school operating permits. As of September 30, 2019, except for four of our learning centers in Xi’an, Guangzhou, Shenzhen and Hefei, no other learning centers of our Group that did not have the relevant private school operating permits have been ordered by the government authorities to suspend their operations for rectification, cease business operations or revoke their business licenses. However, we cannot assure you that the PRC government authorities will not extend the rectification period. In addition, we cannot assure you that the training services we offer, including general adult ELT (which is designed for students aged 15 and above) and junior ELT (which is designed for students aged six to 18), will be deemed “non-academic” in nature by the relevant PRC education authorities. If such training services are deemed “academic,” the government authorities could order the learning centers which are deemed to be “non-academic” providing such training services to cease their business operations and revoke their business licenses. If any of the above occurs, our business, results of operations, business prospects and reputation could be materially and adversely affected.

 

Uncertainties exist with respect to the interpretation and enforcement of the new and existing laws and regulations that may be applicable to us. While we intend to comply with all new and existing laws and regulations, we cannot assure you that we will always be deemed to be in compliance with such laws and regulations, nor can we assure you that we will always be able to change our business practice successfully to adapt to the changing regulatory environment. Any such failure could materially and adversely affect our business, results of operations, financial condition and prospects.

 

Uncertainties exist in relation to the Opinions of the General Office of the State Council on Regulating the Development of After-school Training Institutions, which may materially and adversely affect our business, results of operations, financial condition and prospects.

 

On August 22, 2018, the General Office of the State Council issued the Opinions of the General Office of the State Council on Regulating the Development of After-school Training Institutions, or Circular 80, which came into effect on the same date. Pursuant to Circular 80, the after-school training institutions for the primary and secondary school students must obtain relevant school operating permits and business licenses (either corporate legal person certificates or private non-enterprise unit registration certificates) for carrying out the training business and shall meet certain standards in respect of tuition fees, sites, teachers and management. Circular 80 provides, among other things, that (i) the average available-for-use area per student must be no less than three square meters within the same training hours; (ii) private school shall purchase safety insurance for training participants; (iii) no in-service primary and secondary teachers may be concurrently employed in an after-school training institution, and any teachers employed by an after-school institution for primary and secondary school subjects shall hold relevant teaching qualifications; (iv) the content, classes and subject enrollment, progress and school hours information in connection with training of traditional disciplines shall be filed with the local education authorities and be made public; (v) no training courses shall be given after 8:30 p.m., and no homework from after-school institutions can be given; and (vi) no advance tuition fees of more than three months may be collected. The approval and registration of after-school training institutions shall be subject to local government authorities. Education departments at the county level are responsible for the issuance of private school operating permits upon examination and approval.

 

Circular 80 only sets out the general guidance on regulating after-school education institutions targeting primary and secondary school students. Without the approval by the relevant education department, no after-school training institution shall provide training for primary and secondary school students in the name of consulting and cultural transmission, among others. However, detailed rules of implementation of Circular 80 have yet to be introduced by the competent authorities, such as whether Circular 80 should apply to our learning centers providing junior ELT services, which mainly focus on promoting and developing language competence, rather than providing supplementary tutoring services relating to school cultural and educational curriculums, admission into schools of a higher grade or examinations. In 2018, we introduced offline junior ELT services to students aged six through 18 at our existing self-operated learning centers. Our offline junior ELT business may be subject to the requirements of Circular 80, which may potentially increase our compliance costs. For instance, Circular 80 provides that personal safety insurance shall be purchased for students to mitigate risks, but is silent as to the specific type, amount and coverage of such required personal safety insurance. In addition, Circular 80 does not provide any guidance on how online education institutions should comply with the requirements contained in Circular 80, and we cannot assure you whether any further interpretations, new regulations or policies will require online training institutions to conduct self-inspections and rectification procedures under Circular 80 for providing online junior ELT services.

 

28

 

 

Further, there are potential conflicts between Circular 80 and previously published government policies and there is no clear guidance on which regulation shall take precedence, which require further interpretation and clarification. For example, pursuant to Circular 80, opening branches or learning centers by any after-school education institution within the same county level city shall also be subject to approval, whereas the Committee Draft Implementation Rules of the Private Education Promotion Law provides that opening branches or learning centers within the same municipality directly under the central government or the same city with districts where such after-school education institution is located does not need to seek approval but shall file for record with both the authorities granting the operation permit to such after-school education institution and the relevant authorities where the branches or learning centers are located.

 

While we intend to comply with all applicable laws and regulations, due to existing uncertainties, we cannot assure you that we will be able to meet the relevant regulatory requirements in a timely manner, any more specific and stringent requirements in relation to our operations to be established by the relevant local government authorities in particular. Also, additional compliance costs may be incurred. As a result, our business, results of operations, financial condition and prospect may be adversely and materially affected.

 

Our development of new courses, services and technologies or innovation and upgrades made to existing courses, services and technologies may not adequately respond to the expectations of our students, changes in market demands and standards of school admission or standardized tests, may fail to achieve the expected satisfactory results, or may compete with our pre-existing courses, as a result of which, our competitive position, ability to generate revenue and growth prospects would be materially and adversely affected.

 

We constantly update and improve the content of our existing courses and develop new courses or services to meet changing market demands or requirements from related government authorities. Revisions to our existing courses and development of our new courses or services may not be well received by existing or prospective students and online users. We may have limited experience in developing the content of new courses or services and may need to adjust our systems and strategies to incorporate new courses or services into our existing offerings. If we cannot respond timely and cost-effectively to changes in market demands or requirements from related government authorities, our business would be adversely affected. Even if we are able to develop new courses or services that are well received, we may not be able to introduce them in an effective manner. If we do not respond adequately to changes in market demands, our ability to attract and retain students may be impaired and our financial results could suffer. For example, we introduced the new “Explore Curriculum” for our general adult ELT business beginning in 2018. We did not complete the implementation of such new curriculum across our national learning center network until May 2019. This adversely affected the number of course hours delivered and segment revenue recognized during the period of implementation as we focused on providing relevant training to our teaching staff and delivering such new course in a small-class setting during the transition period.

 

The offline and online English language training services we provide and the technologies we use are subject to continuous development, update and enhancement in terms of content and functionality, driven by the demand for innovative skills, evolving course content and changes in overseas admission and standardized tests. In particular, admission and standardized tests undergo continuous changes, in terms of the focus of the questions tested, test formats and the manner in which the tests are administered. In the past, certain admission and standardized tests overseas have undergone changes in test questions and formats. Authorities in overseas jurisdictions may also promote policies that encourage schools to make admission decisions based less on entrance exam scores and more on a combination of other factors. There is no assurance that overseas colleges, universities and other higher education institutions will not reduce or eliminate their reliance on considering the international standardized test results as important standards to make admission decisions. Furthermore, changes in test standards for professional qualifications, or changes in employers’ preferences to hire staff with select qualifications, may particularly affect sales of our international standardized test preparation courses designed for relevant qualifications.

 

We believe that the internet-based ELT market is characterized by the rapid changes and innovation of technologies, unpredictable product life cycles and online user preferences. We have gained limited experience in generating revenue from our online training services and our investment in research and development may not result in satisfactory outcomes. The flexibility of taking internet-based ELT courses may increase the amount of online training services. We must quickly modify our services to adapt to the change in needs and preferences of our students, technological advances and evolving internet practices. However, ongoing enhancement of our online course offerings and related technologies may entail significant expenses and technical risks. In addition, the technologies used on the internet and value-added telecommunication services and products in general, and in ELT services in particular, may evolve and change over time. We may fail to anticipate and adapt to such technological development, or address any of the risks related to such new courses and services using such technologies, which in turn could have a material and adverse effect on our business development, financial condition and results of operations. If our improvement to our online offerings and the related technologies is delayed, which causes systems interruptions or is not aligned with the prevalent market expectations or preferences, we may lose market share and our business would be adversely affected.

 

29

 

 

We face significant competition in major programs we offer and geographic markets in which we operate, and if we fail to compete effectively, we would lose our market share and our profitability would be adversely affected.

 

The ELT industry in China is rapidly evolving, highly fragmented and competitive, and we expect competition in this industry to continue to persist and intensify. We face competition in the major courses and/or training programs we offer and the geographic markets where we operate. For example, we face nationwide competition for our international standardized test preparation courses from other relevant services provided by some of our competitors. We face competition from several ELT service providers that focus on providing general adult English language training in specific regions in China. We also face competition from companies that focus on providing overseas college application services.

 

Our student enrollment may decrease due to intense competition. Some of our competitors may adopt similar curricula and marketing approaches, with different pricing and service packages that may be deemed more attractive than our offerings. In addition, some of our competitors may have more resources than we do and may be able to devote greater resources than we can to promote and develop their services. These competitors may be able to respond more promptly than we can to the changes in student preferences, new technologies or market demands. In addition, the increasing use of the internet and advances in internet- and computer-related technologies, such as web video conferencing and online testing simulators, are eliminating geographic and entry barriers to providing private education services. As a result, many of our international competitors that offer online test preparation and language training courses may be able to penetrate the China market more effectively.

 

We may need to reduce course fees or increase spending in response to competition in order to retain or attract students or pursue new market opportunities. We cannot assure you that we will be able to compete successfully against existing or future competitors. If we are unable to successfully compete for new students, maintain or increase our fee level, attract and retain competent teachers or other key personnel and enhance our competitiveness in terms of the quality of our education courses and services in a cost-effective manner, our business, financial condition and results of operations would be materially and adversely affected.

 

We may not be able to continue to recruit, train and retain dedicated and qualified teaching staff, who are critical to the success of our business and the effective delivery of our ELT services to students.

 

We rely heavily on our teaching staff, which generally comprises our teachers and study advisors, to deliver high-quality education services to our students. Our teaching staff is vital for the maintenance of our reputation. We seek to hire qualified and dedicated teaching staff with the necessary experience and language proficiency, who are able to deliver effective and inspirational instructions. There is a limited pool of teaching staff with these attributes and we implement a highly selective hiring process to ensure that the new hires possess the skills commensurate with our knowledge requirements. As a result, we must provide competitive compensation packages to attract and retain such teaching staff. We may not be able to recruit, train and retain a sufficient number of qualified teaching staff in the future to keep pace with our growth while maintaining consistent teaching quality in the different markets we serve. A shortage of qualified teaching staff or decreases in terms of the quality of our teaching staff’s instructions, whether actual or perceived, in one or more of our markets, or a significant increase in compensation needed to attract and retain qualified teaching staff, would have a material adverse effect on our business, financial condition and results of operations.

 

Failure to comply with applicable laws and regulations in relation to the employment of foreign employees may subject us to fines and penalties, and our business and operations may be adversely affected if we are not able to retain foreign teachers due to non-compliance with such laws and regulations.

 

The foreign teachers we employ are required to apply for and obtain work visas and residence permits to be able to work in China. We hired certain foreign teachers without them obtaining the necessary work visas and residence permits. Under the PRC laws, if we hire foreign employees without work visas and residence permits, we may be fined RMB10,000 for each illegally employed foreign employees, with a cap of RMB100,000 in the aggregate and any illegal gains, which are not well-defined under the PRC laws, may be confiscated. We have been fined for an immaterial amount of penalties relating to our hiring of foreign teachers without them obtaining the necessary work visas and residence permits, and we cannot assure you that we will not face additional penalties or fines for any past or future violations. Additionally, in the event we hire foreign employees without work visas or residence permits, we may have to terminate our employment relationship with them. In such event, we may need to hire qualified replacements, which could be difficult and/or time consuming. We may also face the risk of insufficient number of available foreign employees in the ELT market in China due to various factors beyond our control. If we are unable to retain foreign employees, including our foreign teachers, the teaching quality of our courses and services could be negatively impacted, which in turn, could materially and adversely affect our business, results of operations, reputation and prospects.

 

For our online English language training, we match students with foreign teachers who reside in foreign countries. While we are not required to obtain PRC work visas and residence permits for our foreign teachers who conduct online ELT courses on our “Likeshuo” platform under the existing PRC laws and regulations, we cannot assure you that the PRC government will not impose any restriction or other qualification requirement in the future, which we may not be able to comply with on a timely manner or at all, and due to which we may incur substantial compliance costs. In the event this occurs, our business and results of operations may be materially and adversely affected.

 

30

 

 

The continuing efforts of our senior management team and other key personnel are important to our success, and our business may be harmed if we lose their services.

 

Our future success depends heavily upon our senior management for their smooth and efficient operations of our learning centers and online platform as well as their execution of our overall business plans. There is intense competition for hiring experienced management personnel in the ELT industry, and the pool of qualified candidates is very limited. If any member of our senior management team is unable to continue his/her employment with us and we fail to effectively manage a transition to new personnel in the future, or if we fail to attract and retain qualified and experienced professionals on commercially acceptable terms, our business, financial condition and results of operations could be adversely affected.

 

Our success also depends on having highly trained financial, technical, human resources, sales and marketing staff, management personnel and qualified and dedicated domestic and foreign teachers. We will need to continue to hire additional personnel as our business grows. In the event we lose their services, we may not be able to attract experienced senior management or other key personnel in the future, and we may, in turn, lose our students, teaching staff and other personnel. In addition, a shortage in the supply of personnel with requisite skills or our failure to recruit them could impede our ability to increase revenue from our existing services, launch new course offerings and expand our operations, and could pose an adverse effect on our business and financial results.

 

We derive a majority of our revenue from a limited number of cities. Any event negatively affecting the private education market in these cities, or any increase in the level of competition for the types of services we offer in these cities, could have a material adverse effect on our overall business and results of operations.

 

For the nine months ended September 30, 2019, we derived approximately 58.5% of the total student enrollment in our offline ELT courses and services from our self-operated learning centers in Shenzhen, Guangzhou and Dongguan in Guangdong Province, Chengdu in Sichuan Province, and Nanjing and Suzhou in Jiangsu Province, and we expect these cities to continue to be important sources of our student enrollment and revenue. If any of these cities experiences any event that would negatively affect its private education market, such as a serious economic downturn, natural disaster or outbreak of contagious disease, or that the governments of which adopt regulations relating to and affecting the private education market that place additional restrictions or burdens on us, or experiences an increase in the level of competition for the types of services we offer, our overall business and results of operations may be materially and adversely affected.

 

Failure to effectively and efficiently manage the expansion of our service network may materially and adversely affect our ability to capitalize on new business opportunities.

 

We have recently experienced steady growth and expansion. The number of our self-operated learning centers increased organically from 70 as of January 1, 2016 to 98 as of December 31, 2018, and further to 112 as of September 30, 2019. As of September 30, 2019, we had 11 franchised learning centers under our “Meten” brand, which we jointly manage with our franchised partners. We may continue to expand our operations in different regions in China through organic growth and strategic acquisitions. The establishment of new learning centers and acquisitions of existing learning centers pose challenges to us and require us to make investments in management, capital expenditures, marketing expenses and other resources. As part of our expansion, we acquired ABC Education Group in June 2018, which had 21 self-operated learning centers and four franchised learning centers under the “ABC” brand at that time. The expansion has also resulted, and will continue to result, in substantial demands on our management and staff as well as our financial, operational, technological and other resources. Our expansion will also largely require us to maintain teaching quality and consistent standards, controls, policies and our culture to ensure that our brands and reputation do not suffer as a result of any acquisition. To manage and support our growth, we will continue to improve our existing operational, administrative and technological systems and our financial and management controls, and recruit, train and retain additional qualified teaching staff, management personnel and other administrative and sales and marketing personnel.

 

31

 

 

In addition, the geographic dispersion of our operations requires significant management resources. We cannot assure you that our current and planned personnel, systems, procedures and controls will be adequate to support our future operations, or that we will be able to effectively and efficiently manage the growth of our operations or recruit and retain qualified personnel to support our expansion. Our future success will depend in part upon the ability of our senior management to manage our business growth effectively. In particular, our management may face the following challenges:

 

controlling our costs and expenses and maintaining or increasing our margins and profitability;

 

acquiring and retaining students;

 

managing our key relationships with governmental agencies and responding to changes in the regulatory and policy environment;

 

attracting training and retaining qualified personnel;

 

improving our operational, administrative and financial systems and internal controls and maintaining close cooperation between management members and department heads;

 

increasing the awareness of our brands and protecting our reputation;

 

keeping up with evolving industry standards technologies and market developments; or

 

integrating any acquired business into our business operations and realizing the potential benefits of our acquisition.

 

We cannot assure you that we will be able to effectively and efficiently manage the growth of our operations, maintain or accelerate our current growth rate, maintain or increase our gross and operating profit margins, recruit and retain qualified teaching staff and management personnel, successfully integrate new learning centers into our operations and otherwise effectively manage our growth. Any failure to effectively and efficiently manage our expansion may materially and adversely affect our ability to capitalize on new business opportunities, which in turn may have a material adverse impact on our financial condition and results of operations.

 

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

 

Under the PRC laws and regulations, our learning centers are required to obtain a number of licenses, permits and approvals from, and make filings or complete registrations with the relevant government authorities. Certain of our learning centers that are registered with the State Administration for Market Regulation (formerly known as the State Administration for Industry and Commerce, or the SAIC), or the SAMR, are required to obtain business licenses, and our other learning centers registered with the Ministry of Civil Affairs, or the MCA, are required to obtain non-enterprise entity registration certificates.

 

According to the Amended Private Education Promotion Law and Circular 10, our learning centers are required to obtain private school operating permits. However, according to the Committee Draft Implementation Rules of the Private Education Law, which further classifies private training institutions, a private training institution for language, arts, sports, science and technology teaching and a private training institution for adults for cultural education or non-academic continuing education can directly apply for registration with the local administrative departments for industry and commerce. As advised by our PRC counsel, if the abovementioned Committee Draft Implementation Rules of the Private Education Law is enacted as proposed and our learning centers are recognized as private training institutions for language teaching by the relevant authorities under clause 15 of Committee Draft Implementation Rules of the Private Education Promotion Law, our learning centers will not be required to obtain private school operating permits from the PRC education authorities. However, as the Committee Draft Implementation Rules of the Private Education Law is still in draft form, there can be no assurance that it will be enacted as proposed or at all, and there are also uncertainties as to the interpretation and implementation by the relevant authorities. In addition, on July 24, 2019, the General Office of the MOE, the General Office of the MOC and the General Office of the State Administration for Market Regulation jointly issued the Notice on Proper Handling of Approval and Registration of Foreign Invested For-Profit Non-Academic Language Training Institutions, or the Notice 75, which required foreign-invested language training institutions to apply for the private school operating permit. As of the date of this proxy statement/prospectus, no detailed supporting rules and regulations regarding the relevant procedure, approval process and transitional period involving the applications by foreign-invested language training institutions have been promulgated.

 

The business licenses of certain of our learning centers did not include “English language training” or “language-related training.” We were not able to include “English language training” or “language related training” in the authorized business scope of these learning centers mainly because the industry and commerce administration authorities in the areas where such learning centers are located have a general policy prohibiting the inclusion of “English language training” or “language-related training” in the business scope of any company before such company obtains relevant private school operating permits or before the Committee Draft Implementation Rules of the Private Education Promotion Law is implemented. As of the date of this proxy statement/prospectus, some of our learning centers were operating beyond their authorized business scope. For these learning centers, we have been communicating, and will continue to communicate, with the competent industry and commerce administration authorities to expand the authorized business scope of the relevant learning centers to include “language related training” or similar statements. However, we cannot assure you that our efforts to expand the business scope or include the statements above in the business license of these learning centers will be successful. While we have not been subject to any penalties or disciplinary action in the past relating to the business scope of our learning centers, the relevant PRC government authorities may determine that these learning centers have been or are operating beyond their authorized business scope and may subject these learning centers to warning, fine, confiscation of illegal earnings, suspension of business for rectification, or revoking the business license for current or past non-compliant learning centers, which may materially and adversely affect our business and results of operation.

 

32

 

 

Given the significant amount of discretion held by the local PRC authorities in interpreting, implementing and enforcing the relevant rules and regulations, as well as other factors beyond our control, we may not be able to obtain and maintain all requisite licenses, permits, approvals and filings or pass all requisite assessments.

 

Among our self-operated learning centers in operation as of September 30, 2019, 89 learning centers did not have private school operating permits or business licenses, or were operating beyond their authorized business scope. Based on the interviews we conducted in March 2019 and November 2019 with officials of the local educational authorities in the areas where we have learning centers in operation, excluding certain learning centers that we believe were not required to obtain the relevant private school operating permits, we had 53 learning centers without the requisite private school operating permits or business licenses, or were operating beyond their authorized business scope, which contributed in the aggregate to approximately 15.0% of our total gross billings for the nine months ended September 30, 2019. Some of the local education authorities we interviewed informed us that they had imposed, or expect to impose, sanctions against some of these 53 learning centers. In particular, four of our learning centers in Xi’an, Shaanxi Province, Guangzhou, Guangdong Province, Shenzhen, Guangdong Province, and Hefei, Anhui Province, that did not have the relevant private school operating permits have been ordered to suspend their operations for rectification by the relevant education authorities until they obtain the required private school operating permits:

 

With respect to the learning center in Xi’an, the local education authority issued a public notice in July 2018 ordering the cessation of business operations of 734 local training institutions, which included our learning center. On January 18, 2019, this learning center received a notice from the local education authority ordering it to cease operations due to a lack of the private school operating permit. As of the date of this proxy statement/prospectus, we were in the process of applying for the private school operating permit for this learning center.

 

On December 28, 2018, one of our learning centers in Guangzhou received a notification to obtain the required private school operating permit. We have obtained the private school operating permit for this learning center on April 4, 2019.

 

One of our learning centers in Shenzhen received a notification to obtain the required private school operating permit. However, as of the date of this proxy statement/prospectus, the local education authority in Shenzhen has temporarily suspended its acceptance of applications for private school operating permits. We will timely apply for such permit once the education authority begins to accept new applications.

 

On May 13, 2019, one of our learning centers in Hefei, Anhui Province (which had been one of our franchised learning centers before June 1, 2019) received a notification to cease operation of the business of primary and secondary school academic training at this learning center. However, as of the date of this proxy statement/prospectus the local education authority in Hefei has temporarily suspended its acceptance of applications for private school operating permits of the adult ELT business. We will timely apply for such permit once the education authority begins to accept new applications. We entered into an equity transfer agreement with the third-party owners to acquire this learning center on May 31, 2019. Based on such equity transfer agreement, we could claim the relevant losses from them if this notification and the lack of the private school operating permit have a material and adverse effect on this learning center. In addition, this learning center contributed an insignificant portion of our total gross billings for the nine months ended September 30, 2019. As a result of above, we believe this notification will not have any materially and adversely effect on our Group’s business.

 

The four learning centers discussed above contributed an aggregate of approximately 2.2% of our total gross billings for the nine months ended September 30, 2019. We have continued to operate these learning centers and have not received any further notice or sanction from the relevant government authorities as of the date of this proxy statement/prospectus. If we cannot obtain the private school operating permits after submitting the applications, we may be forced to cease operations at this learning center, subject to fines, be ordered to return the course and service fees collected and pay a multiple of the amount of returned course and/or service fees to the regulators as a penalty.

 

We cannot assure you that our other learning centers without requisite permits or licenses will not be subject to similar penalties. In addition, if any of our current or future learning centers fails to receive or renew the requisite licenses, permits and approvals, make the necessary filings, or complete all requisite registrations, such learning center may also be subject to various penalties. These may include fines, orders to promptly rectify the non-compliance, or if the non-compliance is deemed serious by the regulators, the learning center may be ordered to return course and service fees collected and pay a multiple of the amount of returned course and/or service fees to regulators as a penalty or may even be ordered to cease operations. If this occurs, our business, results of operations and financial condition could be materially and adversely affected.

 

33

 

 

Our failure to obtain permits/licenses which may be required for the operation of our online platform could result in fines, confiscation of the gains derived from non-compliant operations, or suspension of non-compliant operations.

 

Under the PRC laws and regulations, we may be required to obtain an Internet Content Provider permit, or ICP license, an audio or video program transmission license, an internet culture permit, an online publishing services permit and a radio or television programs producing and distributing permit for the operation of our online education products. We have obtained the relevant ICP license but we have not obtained the audio or video program transmission license, the internet culture permit, the online publishing services permit or the radio or television programs producing and distributing permit. Although we have not received any material fines or other penalties from the relevant government authorities for such non-compliance in the past, if we are not able to comply with all applicable requirements, we may be subject to fines, confiscation of the gains derived from our non-compliant operations, suspension of our non-compliant operations, any of which may materially and adversely affect our business, financial condition and results of operations.

 

We face risks associated with our franchised learning centers.

 

A relatively small portion of our offline ELT business is operated through franchisees. These franchisees are located in the PRC and have learning centers which are operated under our brands. These franchised learning centers account for a relatively small percentage of our overall business and financial performance. However, we are still subject to risks inherent to the franchise model and we have limited experience in operating the franchise model and dealing with such risks.

 

Our control over the franchised learning centers is based on the contractual agreements we entered with our franchisees, which may not be as effective as direct ownership and potentially makes it difficult for us to manage the franchised learning centers. While we have some control over the operation of our franchised learning centers, nevertheless, we may not be able to fully and successfully monitor, maintain and improve the performance of the management and other staff at the franchised learning centers as these teaching staff carry out the training services and directly interact with students. In the event of any delinquent performance by the franchisees and their employees, we may suffer from business reduction as well as reputational damage. If the franchisees and/or their employees commit any unlawful or unethical conduct, we may suffer financial losses, incur liabilities and suffer reputation damage. We may also face the risk that our prospective franchisees may not want to adopt our stringent centralized management system, which may affect our franchise business development. For details on the expansion of our learning center network, see “Risk Factors—Risk Related to Our Business and Industry—Failure to effectively and efficiently manage the expansion of our service network may materially and adversely affect our ability to capitalize on new business opportunities.” Meanwhile, a franchisee may suspend or terminate its cooperation with us voluntarily or involuntarily due to various reasons, including, but not limited to, disagreement or dispute with us, or failure to maintain requisite approvals, licenses or permits or to comply with governmental regulations. A franchisee might also choose not to continue to cooperate with us after the expiration of the existing cooperation arrangement. We may not be able to find alternative ways to continue to provide the training services formerly covered by such franchisee, and our customer satisfaction, brand reputation and financial performance may be adversely affected.

 

We are dependent on our information systems, and if we fail to further develop our technologies, or if our systems, software, applications, database or source code contain “bugs” or other undetected errors, or encounter unexpected network interruptions, security breaches or computer virus attacks, our operations may be seriously distracted.

 

The successful development and maintenance of our systems, software, applications and database, such as our management software and systems and student database, is crucial to the attractiveness of our education services and the management of our business operations. In order to achieve our strategic objectives and to remain competitive, we must continue to develop and enhance our technology. However, our efforts may prove to be unsuccessful. The performance and reliability of our online platform infrastructure, including our “Likeshuo” platform and other online systems we use for our business operations, are critical to our reputation and ability to retain students and increase student enrollment. Any system error or failure, or a sudden and significant increase in traffic, could result in the difficulty or unavailability of accessing our websites and/or online courses by our students. In addition, our technology platform upon which our management systems and online programs operate, and our other databases, products, systems and source codes could contain undetected errors or “bugs” that could adversely affect their performance.

 

Our computer networks may also be vulnerable to unauthorized access, hacking, computer viruses and other security breaches. A user who circumvents our security measures could misappropriate proprietary information or cause interruptions or malfunctions in operations. Any interruption to our computer systems or operations could have a material adverse effect on our ability to retain students and increase student enrollment. Moreover, we may be required to expend significant resources to protect against the threat of security breaches or to alleviate problems caused by these breaches.

 

34

 

 

Major risks involving our network infrastructure include:

 

breakdowns or system failures resulting in a prolonged shutdown of our servers, including those attributable to power shutdowns, or attempts to get an unauthorized access to our systems, which may cause any loss or corruption of data and malfunctions of the software or hardware;

 

disruption or failure in the national backbone network, which would make it impossible for visitors and students to log onto our websites;

 

damages from fire, flood, power loss and telecommunications failures; and

 

any infection by or spread of computer viruses.

 

Any network interruption or inadequacy that causes interruptions in the availability of our websites, applications or other online platforms or deterioration in the quality of access to our websites, applications or other online platforms could reduce customer satisfaction and results in a reduction in the number of students using our services. If sustained or repeated, these performance issues could reduce the attractiveness of our websites, applications, other online platforms and course offerings. In China, almost all access to the internet is maintained through state-controlled telecommunication operators. In many parts of China, the internet infrastructure is relatively underdeveloped, and internet connections are generally slower and less stable than in more developed countries. We cannot assure you that the internet infrastructure in China will remain sufficiently reliable for our needs or ever develop and make available more reliable internet access to our students and teachers.

 

In addition, any security breach caused by hackings, which involve attempts to gain unauthorized access of or to cause intentional malfunctions of the information or systems, or to cause intentional malfunctions or loss or corruption of data, software, hardware or other computer equipment could cause a disruption in our services and leakage of personal data of our teaching staff and students. Inadvertent transmission of computer viruses could expose us to a material risk of loss of our course files or a litigation and possible liability, as well as damage to our reputation.

 

Furthermore, increases in the volume of traffic on our websites could also strain the capacity of our existing computer systems, which could lead to slow responses or system failures. This would cause a disruption or suspension in our course offerings, which would damage our brands and reputation, and thus negatively affect our revenue growth. We may need to incur additional costs to upgrade our computer systems in order to accommodate increased demand if we anticipate that our systems cannot handle higher volumes of traffic in the future.

 

To date, our information systems have not encountered any material error or technical issue that could have adversely affected or disrupted our operations. If we encounter errors or other service quality or reliability issues, or if we are unable to design, develop, implement and utilize information systems and the data derived from these systems, our ability to realize our strategic objectives and our profitability could be adversely affected, which, in turn may cause us to lose market share, harm our reputation and brand names, and materially adversely affect our business and results of operations.

 

Our historical financial and operating results are not indicative of our future performance and our financial and operating results may fluctuate.

 

Our past results may not be indicative of future performance mainly due to the new businesses developed or acquired by us. Moreover, the results of operations of our Company may vary from period to period in response to a variety of other factors beyond our control, including general economic conditions and regulations or government actions pertaining to the private education service sector and the ELT sector in China, changes in consumers’ spending on private education as well as non-recurring charges incurred under unexpected circumstances or in connection with acquisitions, equity investments or other extraordinary transactions. Due to these and other factors, our historical financial and operating results, growth rates and profitability as well as quarter-to-quarter comparisons of our operating results may not be indicative of our future performance and you should not rely on them to predict our future performance.

 

Our business and results of operations depend on our ability to maintain and/or raise the level of the course and service fees we charge.

 

One of the most significant factors affecting our profitability is the course and service fees we charge. For the years ended December 31, 2016, 2017 and 2018 and the nine months ended September 30, 2019, course and service fees derived from our business at our headquarters and self-operated learning centers, including revenue from the sale of goods, as well as our online ELT courses delivered on the “Likeshuo” platform, constituted approximately 99.8%, 98.7%, 98.7% and 97.8% of our total revenue, respectively. The amounts of those fees we charge are primarily determined based on the demand of our offline students and online users for our ELT services, our operating costs, our competitors’ pricing level, our pricing strategy to gain market share and the general economic conditions in China. However, there can be no assurance that we will be able to maintain or raise the course fees and/or other fees we charge for our services in the future. Even if we are able to maintain or raise course fees and/or other fees we charge for our services, we cannot assure you that we will be able to attract prospective students to enroll in our courses at such increased fee rates. Our business, financial condition and operation results may be materially and adversely affected if we fail to maintain or raise the fee level or attract sufficient prospective students.

 

35

 

 

If we are unable to conduct our sales and marketing activities in a cost-effective manner, our results of operations and financial condition may be materially and adversely affected.

 

In 2016, 2017 and 2018 and the nine months ended September 30, 2019, our selling and marketing expenses amounted to RMB268.6 million, RMB373.1 million, RMB425.2 million (US$59.5 million) and RMB323.3 million (US$45.2 million), respectively, representing approximately 55.4%, 59.0%, 57.1% and 53.4%, respectively, of our total operating expenses, which consist of selling and marketing expenses, general and administrative expenses and research and development expenses. Our selling and marketing expenses mainly included advertising and promotion expenses and employee benefit expenses for our sales and marketing staff. There is no assurance that our sales and marketing activities will always be well received by students or result in the levels of sales that we anticipate. Furthermore, we cannot guarantee that we will always be able to improve the operational efficiency of our sales and marketing staff or we will be able to retain or recruit experienced sales staff, or efficiently train junior sales staff. In addition, marketing and branding approaches and tools in the ELT market in China are evolving, especially for mobile platforms. This further requires us to enhance our marketing and branding approaches and experiment with new methods to keep pace with industry development and student preferences. Failure to refine our existing marketing and branding approaches in order to introduce new marketing and branding approaches in a cost-effective manner could reduce our market share, cause our revenue to decline and negatively impact our profitability. In addition, we utilize a broad mix of marketing and public relations programs, including social media platforms, to promote our products and services to prospective students. If advertising rates increase or if we become concerned that our customers deem certain marketing activity less appealing, or more intrusive or damaging to our brands, we may limit or discontinue the use or support of certain marketing sources or activities. Further, companies that promote our services may decide that we negatively impact their business or may make business decisions that in turn adversely impact us. For instance, if they decide that they want to compete directly with us, enter a similar business or exclusively support our competitors, we may no longer have access to their marketing channels.

 

There is no assurance that our branding efforts will be successful or we are not inadvertently negatively impacting our brand recognition and reputation. If we are unable to maintain and further enhance our brand recognition and reputation and promote awareness of our platform and courses, we may not be able to expand or even maintain our current level of student base and fees as well as engage qualified teachers, and our results of operations may be materially and adversely affected. Furthermore, any negative publicity relating to our Company, our management, our courses, teachers and our other staff, regardless of its veracity, could harm our brand image and in turn materially and adversely affect our business and results of operations.

 

If we fail to conduct our marketing activities in compliance with the advertisement regulations in China, our results of operations and financial condition may be materially and adversely affected.

 

Under the Advertisement Law of the PRC, an advertisement for education or training shall not contain any of the following items: (i) any promise relating to progression, passing examinations, or obtaining a degree or qualification certificate, or any express or implied guaranteed promise relating to education or training results; (ii) express or implied statement that the relevant examination agency or its personnel or any examination test designer will be involved in the education or training; and (iii) the use of the names or images of research institutes, academic institutions, education institutions, industry associations, professionals or beneficiaries for recommendation or as proof. Publishing advertisements for education and training in violation of the provisions may be subject to order to cessation of the publishing of advertisements, eliminate the ill-effects within the corresponding and a fine of one to five times of the advertising fees, or may revoke the business licenses and approval documents for advertisement review.

 

The PRC government has turned its attention toward greater regulation of advertising, and more recently of online advertising and issued the SAIC Interim Measures for the Administration of Internet Advertising, which came into effect on September 1, 2016. The new regulation clarifies what content is considered “internet advertising,” lays down rules for “publishers” of online advertisements, and outlines investigation measures and penalties for violators. In practice, any digital content placed on any online platform with the intent of promoting a product or service could be subject to the regulation. Given the ubiquity of online advertising in China, the regulations may have a widespread impact on the actions of advertisers and platform operators. The regulation identifies individual or corporate publishers who hold the responsibility of complying with the online advertising rules and are subject to penalties when in violation.

 

36

 

 

The market recognition of our “Meten” brand has significantly contributed to our success. Maintaining and enhancing the reputation of our brands is critical to sustaining our competitive advantage. Our ability to maintain and enhance our brand recognition primarily depends on the perceived effectiveness and quality of our course offerings as well as the success of our marketing efforts. We have devoted significant resources to promoting our courses and brands in recent years, including marketing and advertising in both offline and online media channels. On April 23, 2018, Shenzhen Qianhai Meten Technology Co., Ltd., or Shenzhen Qianhai Meten, received a Decision on Administrative Penalty issued by the Shenzhen Market and Quality Supervision Committee Longgang Market Supervision Administration, according to which Shenzhen Qianhai Meten has been given a warning and a fine of RMB200 for express or implied guaranteed promise relating to education or training results on its Tmall.com shop. We have taken various remedial measures as required by the authorities, such as deleting relevant advertisement and paying the fine on time. On April 23, 2018, Nanjing Meten Foreign Language Training Co., Ltd., or Nanjing Meten, received a Decision on Administrative Penalty issued by the Jiangsu Market Supervision and Administration, according to which Nanjing Meten has been given a fine of RMB200,000 and an order to cease publishing the advertisements and eliminate impact for publishing of false advertisements. Considering that we had actively cooperated in the law enforcement and had rectified in a timely manner, the Jiangsu Market Supervision and Administration confirmed in writing that this penalty was a lighter administrative penalty. However, we cannot assure you we will not be subject to any other penalties or legal sanctions in the future for our advertisements. Our marketing efforts may not be successful or may negatively impact our brand recognition and reputation inadvertently if any government authority or competitor publicly alleges that any of our advertisements are misleading.

 

Our brand image, reputations, business and results of operations may be adversely impacted by our students’ and teaching staff’s misuse of our websites, applications and other online platforms, and in misconducts or other illegal or improper activities of our students, teachers, franchise partners, management personnel and other employees.

 

Our websites, applications and other online platforms allow our teaching staff and students to engage in real-time communication. Because we do not have full control over how our teaching staff and students will use these platforms to communicate, our online platforms may from time to time be misused by individuals or groups of individuals to engage in immoral, disrespectful, fraudulent or illegal activities. Although we are not aware of any material incidents on our platform and such incidents have not been covered by media reports or internet forums, any such exposure or coverage could generate negative publicity about our brands and platform. We have implemented control procedures, such as training and sample auditing, and require our teaching staff not to distribute any illegal or inappropriate content and conduct any illegal or fraudulent activities on our platforms, but such procedures may not prevent all such content or activities from being posted or carried out. Moreover, as we have limited control over the real-time and offline behavior of our students and teaching staff, to the extent such behavior is associated with our platforms, our ability to protect our brand image and reputation may be limited. Our business and the public perception of our brands may be materially and adversely affected by misuse of our platform. In addition, if any of our students or teaching staff suffers or alleges to have suffered physical, financial or emotional harm following contact initiated on our platform, we may face civil lawsuits or other liabilities initiated by the affected student or teaching staff, or governmental or regulatory actions against us. In response to allegations of illegal or inappropriate activities conducted on our platform or any negative media coverage about us, the PRC government authorities may intervene and hold us liable for non-compliance with the applicable PRC laws and regulations concerning the dissemination of information on the internet and subject us to administrative penalties or other sanctions, such as requiring us to restrict or discontinue some of the features and services provided on our platform. As a result, our business may suffer and our brand image, student base, results of operations and financial condition may be materially and adversely affected.

 

Our brand image, reputation, business and results of operations may also be adversely affected by various misconducts and other illegal or improper activities of our franchisees, management personnel and other employees, such as intentionally failing to comply with government regulations, engaging in unauthorized activities and misrepresentation to our potential students during marketing activities, improper use of our students’ and teaching staff’s sensitive or classified information, making payments to government officials or third parties that would expose us to being in violation of laws. We cannot assure you that we will always be able to deter such misconducts, and the precautions we take to prevent and detect such activities may not be effective in preventing these activities or controlling the relevant risks or losses. Moreover, even if some of these misconducts and illegal or improper activities are not related to our business or the services provided by our franchisees, management personnel or other employees to us, they may nevertheless cause negative publicity about us and thereby, harm our brands and reputation.

 

We may not be able to achieve the benefits we expect from recent and future acquisitions, and recent and future acquisitions may have an adverse effect on our ability to manage our business.

 

As part of our business strategy, we have pursued and intend to continue to pursue selective strategic acquisitions of businesses that complement our existing businesses. For example, in June 2018, we acquired 80% equity interest in ABC Education Group, an English language training service provider. Acquisitions expose us to potential risks, including risks associated with the diversion of resources from our existing businesses, difficulties in successfully integrating the acquired businesses, failure to achieve expected growth by the acquired businesses and an inability to generate sufficient revenue to offset the costs and expenses of acquisitions. If the revenue and cost synergies that we expect to achieve from our acquisitions do not materialize, we may have to recognize impairment charges.

 

37

 

 

In addition, we may be unable to identify appropriate acquisition or strategic investment targets when it is necessary or desirable to make such acquisition or investment to remain competitive or to expand our business. Even if we identify an appropriate acquisition or investment target, we may not be able to negotiate the terms of the acquisition or investment successfully, finance the proposed transaction or integrate the relevant businesses into our existing business and operations. Furthermore, as we often do not have control over the companies in which we only have minority stake, we cannot ensure that these companies always will comply with the applicable laws and regulations in their business operations. Material non-compliance by our investees may cause substantial harm to our reputation and the value of our investments.

 

If any one or more of the aforementioned risks associated with acquisitions or investments materialize, our acquisitions or investments may not be beneficial to us and may have a material adverse effect on our business, financial condition and results of operations.

 

Failure to control rental costs, obtain leases at desired locations at reasonable prices or failure to comply with the applicable PRC property laws and regulations regarding certain of our leased and owned premises could materially and adversely affect our business.

 

We lease a significant number of properties from third parties. As of the date of this proxy statement/prospectus, we entered into 180 leases (three leases are in the process of renewal) for our premises with a total gross floor area of approximately 118,783.05 square meters, which were or will be primarily used by our self-operated learning centers, and owned 18 properties with a total gross floor area of approximately 1,537.1 square meters, which were primarily used as one of our self-operated learning centers. The leased properties were maintained by our landlords. Accordingly, we are not in a position to effectively control the quality, maintenance and management of these buildings. In the event the quality of the buildings deteriorates, or if any or all of our landlords fail to properly maintain and renovate such buildings in a timely manner or at all, our business operations could be materially and adversely affected. In addition, if any of our landlords terminates the existing lease agreements, refuses to renew the lease agreements when such lease agreements expire, or increase the rent to a level that is unacceptable to us, we will be forced to look for alternative locations for our self-operated learning centers. We may not be able to find suitable premises for such relocation without incurring significant time and costs, and there is no guarantee that we may be able to find suitable premises for relocation or at all. If we fail to find suitable replacement sites in a timely manner or on terms acceptable to us, our business and results of operations could be materially and adversely affected. Moreover, if our use of the leased premise is challenged by the relevant government authorities for lack of fire inspection, we may be further subject to fines and also be forced to relocate the affected learning centers and incur additional expenses. If any of the above events occurs, our business, results of operations and financial condition could be materially and adversely affected.

 

We have not been able to receive from the lessors of some of our leased properties copies of the title certificates or proof of authorization to lease the properties to us. As of the date of this proxy statement/prospectus, we were not aware of any actions, claims or investigations threatened against us or our lessors with respect to the defects in our leasehold interests. However, if any of our leases is terminated as a result of challenges by third parties or government authorities for lack of title certificates or proof of authorization to lease, while we do not expect to be subject to any fines or penalties, we may be forced to relocate the affected learning centers and incur additional expenses relating to such relocation, or we may not be able to find suitable premises for relocation at all.

 

Under the applicable PRC laws and regulations, the parties to a lease agreement are required to register and file the executed lease agreement with the relevant government authorities. As of the date of this proxy statement/prospectus, most of the lease agreements for the leased properties that we occupy had not been registered or filed. While the failure to complete the lease registration will not affect the legal effectiveness of the lease agreements according to PRC law, the relevant real estate administrative authorities may require the parties to the lease agreements to complete lease registration within a prescribed period of time and the failure to do so may subject the parties to fines from RMB1,000 to RMB10,000. While we have not been subject to any penalties or disciplinary action related to the failure to register our lease agreements, we cannot assure you that we will not be subjected to penalties or other disciplinary actions for our past and future non-compliance.

 

We currently and may in the future occupy premises for which we have paid the purchase price but have not obtained titles. If we are unable to obtain titles to the properties, we may not be able to get a full refund on our purchase price and may have to relocate and incur additional expenses relating to such relocation, or we may not be able to find suitable premises for relocation at all.

 

Therefore, the failure to comply with the applicable PRC property laws and regulations regarding certain of our leased and owned premises may cause us to make relocations and be subject to fines and suspension of business, which may materially and adversely affect our business, financial condition and results of operations.

 

38

 

 

Higher labor costs may adversely affect our business and our profitability.

 

Labor costs in China have risen in recent years as a result of social development, and increasing inflation in China. As of September 30, 2019, we employed 5,604 full-time staff. Staff costs constituted a major portion of our total cost of revenues, reaching 60.2%, 62.9%, 63.1%, and 63.5% of our total cost of revenues in 2016, 2017 and 2018, and the nine months ended September 30, 2019, respectively. The increase in labor cost may erode our profitability and materially harm our business, financial condition and results of operations. As our businesses have been continuing to expand in recent years, the absolute amounts of our labor costs in the regions where we operate have also been increasing and could continue to increase. If labor costs in these regions continue to increase, our operating costs will increase. We may not be able to pass on these increased costs to our customers by increasing the fees of our courses in light of competitive pressure in the market. In such circumstances, our profit margin may decrease, which could have an adverse effect on our business, financial condition and results of operations.

 

We have limited experience in operating some of our newer service offerings.

 

We currently offer a comprehensive service portfolio, including our offline general adult ELT, junior ELT, overseas training services and online ELT. We are constantly upgrading and plan to develop new services to expand our business and student base. For example, we have started to offer our offline junior ELT in 2018. We have expanded our offerings through internal development and external investments. However, some of our new service offerings have not generated significant or any profit to date, as we have limited experience responding quickly to changes and competing successfully for certain of these new areas. In addition, newer offerings may require more financial and managerial resources than what is available. Furthermore, there is limited operating history on which you can base your evaluation of the business and prospects of these relatively more recent offerings. The operation results of new services may also vary from period to period in response to a variety of factors beyond our control, and we may not be able to achieve our expected profitability and performance of these new service offerings.

 

Course and service fee refunds or potential refund disputes may negatively affect our cash flow, financial condition, and reputation.

 

We have different course and service fee refund policies for our students depending on the time of their enrollment and we are subject to certain conditions and restrictions in the service contract between us and each of our students. For details of our refund policies, see “Business of Meten —Pricing and Refund Policies.” When calculating gross billings for a specific period, we deduct the total amount of refunds from the total amount of cash received for the sale of course packages for such period.

 

In 2016, 2017 and 2018, and the nine months ended September 30, 2019, we had made RMB71.7 million, RMB131.2 million, RMB154.1 million (US$21.6 million) and RMB130.8 million (US$18.3 million) of refund payments, respectively. For the same periods, our course withdrawal rate, which is determined as the amount of refunds we issued as a percentage of the total amount of gross billings for the relevant period, was 6.9%, 9.1%, 10.2% and 10.1%, respectively. Our course withdrawal rate increased in 2017 and 2018, mainly due to our implementation of a new refund policy that allowed students to request refunds unconditionally during the first 20 days of enrolling in an offline general adult ELT program (such unconditional refund period had been changed to 10 days since September 2019), and partially because we introduced new curriculums at certain of our learning centers in 2018, which led to an initially adverse student reception. We believe the implementation of the unconditional refund period for the general adult ELT business will improve our students’ overall experience with our services. Additionally, the number of refund requests and the amount of refunds could be affected by a number of factors, many of which are beyond our control. These factors include, without limitation, student dissatisfaction with our teaching quality and our course and educational content offerings, privacy concerns relating to our online platforms, negative publicity regarding us or online ELT in general, and any change or development in the PRC laws and regulations with respect to course fees charged by online education providers like us. Any refund payments that we may be required to make to our students, as well as the expenses we could incur for processing refunds and resolving refund disputes, could be substantial and could adversely affect our gross billings, net revenue, liquidity and financial condition. A high volume of refund applications and refund disputes may also generate negative publicity that could harm our reputation. We have experienced in the past, and may experience in the future, negative publicity in relation to refund disputes between us and our students, which may significantly harm our brand names and divert our attention from operating our business.

 

39

 

 

We offer an installment payment arrangement to our students, which may adversely affect our business, results of operations and operating cash flow if students participating in such scheme decide not to complete the course(s) they have registered and request refund from us, or if such arrangement is found to be in violation of any existing or future laws and regulations in China or otherwise subject to negative publicity.

 

In order to provide a more convenient and flexible payment method for students, we have cooperated with accredited third-party financial institutions in China to set up an installment payment arrangement through which students can pay for the courses and/or services we offer in several pre-determined installments during the course of the contract period. Under such arrangement, a third-party financial institution provides an interest-free loan to a student and remits the course/service fee to us on behalf of the borrowing student to complete his/her purchase of the relevant course. The borrowing student is obligated to repay the loan in pre-agreed installments over a period ranging from six months to 24 months to the financial institution. A transaction fee associated with the installment payment arrangement typically ranges from 4.4% to 10.8% of the total amount of such loan, depending on the length of the installment period, which was generally withheld by such financial institution prior to remitting the course/service fee to us. For the year ended December 31, 2018 and the nine months ended September 30, 2019, approximately 42.2% and 39.9% of our total gross billings, respectively, have been paid through such installment payment arrangement. There is an inherent uncertainty relating to such arrangement compared to a lump sum upfront payment scheme as students under the installment payment arrangement are more prone to cease to continue to take classes during the contract period that they had initially registered. For the nine months ended September 30, 2019, the course withdrawal rate, which is equal to the amount of refunds we issued in a specific period of time as a percentage of the sum of the amount of gross billings and the amount of refunds for such period, of the students who participated in such installment arrangement was approximately 14.7%, and the course withdrawal rate of the students who provided lump sum upfront payments was approximately 7.8%, which we acquired in June 2018. When we receive refund requests from our students, we typically determine the eligibility of and amounts of refund entitled by such students in accordance with our existing refund policies. Once we determine a student to be eligible for refund, we generally provide the entire amount of refund to him/her directly. For details of our refund policies, please see “Business of Meten—Pricing and Refund Policies.” In the event more students who participate in the installment payment arrangement decide not to complete their registered course(s) for any reason, we may be required to provide large sums of refund to these students, which may materially and adversely impact our business, results of operations and operating cash flow. Thus, our business and results of operations could be materially and adversely affected.

 

In addition, the PRC government has tightened the regulation of consumer credit transactions in recent years. For example, the PRC government has prohibited any entity that is not a licensed commercial bank or policy bank in China to provide any loan to students registered in universities in China. The Notice on Regulating and Rectifying “Cash Loan” Business, or Circular 141, also prohibits online lending information intermediaries from facilitating loans with no designated purpose. While we did not provide any loan to our students directly, we cannot assure you that the relevant PRC government authorities will not impose additional restrictions on consumer credit transactions in the future that will render our existing installment payment arrangement illegal. In such case, we may have to cease such arrangement, which could adversely affect our student recruitment efforts, and we may be subject to penalties. In addition, there has been negative publicity about similar arrangement offered by other ELT service providers in China, and we cannot assure you that we will not be subject to similar negative publicity regarding our installment payment arrangement in the future, which may materially and adversely affect our brands, reputation and business.

 

In addition, since students who participate in the installment payment arrangement generally enter into separate financing arrangements with certain third-party financial institutions whom we have no control over, we may not be able to ensure that these students will have a pleasant or satisfactory experience dealing with such financial institutions. In the event the students are dissatisfied with any aspect of the services provided by such financial institutions, our reputation and business prospects could be adversely affected.

 

Our results of operations are subject to seasonal fluctuations.

 

The PRC offline ELT industry generally experiences seasonality, reflecting a combination of traditional education industry patterns and new patterns associated with the online platform in particular. Seasonal fluctuations have affected, and are likely to continue to affect, our business. In general, the offline ELT industry experiences lower growth of gross billings in the first quarter of each calendar year due to the Chinese New Year holiday, and our industry enjoys higher growth of gross billings in the third quarter during the summer months as some of our students are generally on summer holiday and have more time to take English language training courses. Overall, the historical seasonality of our business has been relatively mild due to our rapid growth. Our financial condition and results of operations for future periods may continue to fluctuate due to seasonality of our business.

 

Failure to protect confidential information of our students and teaching staff against security breaches could damage our reputation and brands and substantially harm our business and results of operations.

 

A significant challenge to the offline and online ELT industry is the secure storage of confidential information and its secure transmission over public networks. All purchases of our course packages are made by our students and/or their parents through our learning centers, websites and mobile applications. In addition, online payments for our course packages are settled through third-party online payment services. Maintaining complete security for the storage and transmission of confidential information on our technology platform, such as student names, personal information and billing addresses, is essential to maintaining student confidence.

 

40

 

 

We have adopted security policies and measures to protect our proprietary data and student information. However, advances in technology, the expertise of hackers, new discoveries in the field of cryptography or other events or developments could result in a compromise or breach of the technology that we use to protect confidential information. We may not be able to prevent third parties, especially hackers or other individuals or entities engaging in similar activities, from illegally obtaining such confidential or private information we hold as a result of our students’ visits to our website and use of our mobile applications. Such individuals or entities obtaining our students’ confidential or private information may further engage in various other illegal activities using such information. Any negative publicity on our website’s or mobile applications’ safety or privacy protection mechanisms and policies, and any claim asserted against us or fine imposed upon us as a result of actual or perceived failures, could have a material and adverse effect on our public image, reputation, financial condition and results of operations.

 

Practices regarding the collection, use, storage, transmission and security of personal information by companies operating over the internet and mobile platforms have recently come under increased public scrutiny. Increased regulation by the PRC government of data privacy on the internet is likely and we may become subject to new laws and regulations applying to the solicitation, collection, processing or use of personal or consumer information that could affect how we store and process the data of our teaching staff and students. We generally comply with industry standards and are subject to the terms of our own privacy policies. Compliance with any additional laws could be expensive, and may place restrictions on the conduct of our business and the manner in which we interact with our students. Any failure to comply with applicable regulations could also result in regulatory enforcement actions against us.

 

Significant capital and other resources may be required to protect against information security breaches or to alleviate problems caused by such breaches or to comply with our privacy policies or privacy-related legal obligations. The resources required may increase over time as the methods used by hackers and others engaged in online criminal activities are increasingly sophisticated and constantly evolving. Any failure or perceived failure by us to prevent information security breaches or to comply with privacy policies or privacy-related legal obligations, or any compromise of security that results in the unauthorized release or transfer of personally identifiable information or other student data, could cause our students to lose trust in us and could expose us to legal claims and liabilities. Any perception by the public that online transactions or the privacy of user information are becoming increasingly unsafe or vulnerable to attacks could inhibit the growth of online education services generally, which may negatively impact our business prospects.

 

If we fail to develop or adopt new technologies to effectively meet challenges from changing consumer requirements, emerging standards in the industry or mobile operating systems, or if our efforts to invest in the development of new technologies are unsuccessful our business may be materially and adversely affected.

 

The ELT industry is characterized by rapid technological changes in the teachers’ and students’ requirements and preferences, frequent introduction of new courses or services utilizing new technologies and the emergence of new standards and practices, any of which could render our existing technologies and systems obsolete. Our success will depend in part on our ability to identify, develop, acquire or license leading technologies useful to our business, and respond to technological advances and emerging industry standards and practices, such as mobile internet, in a cost-effective and timely way. The development of websites, mobile applications and other proprietary technologies entails significant technical and business risks. We cannot assure you that our existing technologies will remain competitive or that we will be able to successfully develop or effectively use new technologies, recoup the costs of developing new technologies or adapt our websites, mobile applications, proprietary technologies and systems to meet customer requirements or emerging industry standards. If we are unable to develop technologies successfully or adapt in a cost-effective and timely manner in response to changing technological standards, market conditions or customer requirements, whether for technical, financial or other reasons, our business, prospects, financial condition and results of operations may be materially and adversely affected.

 

In addition, purchases using mobile devices by consumers generally, and by our customers specifically, have increased, and we expect this trend to continue. To optimize the mobile shopping experience, we are somewhat dependent on our customers downloading our specific mobile applications for their particular devices as opposed to accessing our websites from an internet browser on their mobile devices. As new mobile devices and platforms are released, it is difficult to predict the problems we may encounter in developing applications for their alternative devices and platforms, and we may need to devote significant resources to the development, support and maintenance of such applications. In addition, our future growth and results of operations could suffer if we experience difficulties in integrating our mobile applications into mobile devices in the future, if problems arise with our relationships with providers of mobile operating systems or mobile applications download stores, if our applications receive unfavorable treatment compared to competing applications on the download stores, or if we face increased costs to distribute or have customers using our mobile applications. We are further dependent on the interoperability of our websites with popular mobile operating systems that we do not control, such as iOS and Android operating systems, and any changes in search systems that degrade the functionality of our websites or give preferential treatment to competitive products could adversely affect the usage of our websites on mobile devices. In the event that this is more difficult for our customers to access and use our website on their mobile devices, or if our customers choose not to access or to use our websites on their mobile devices or to use mobile products that do not offer access to our websites or mobile applications, our business, financial condition and results of operations may be adversely affected.

 

41

 

 

Accidents or injuries suffered by our students and other people on our premises may adversely affect our reputation, business operation and financial performance.

 

We do not have any insurance for our students or other people at our learning centers. In the event of accidents, injuries or other harm to students or other people on our premises, including those caused by and arising from the actions of our employees at our learning centers and/or our other premises, our facilities may be perceived to be unsafe, which may discourage prospective students from attending our courses and we may face lawsuits. Our students may also hurt themselves or other persons due to psychological pressure. We could also face claims alleging that we were negligent or provided inadequate supervision to our employees and therefore should be held jointly liable for harm caused by then or are otherwise liable for injuries suffered by our students or other people on our premises. A liability claim, even if unsuccessful, against us or any of our employees could adversely affect our reputation, enrollment and revenue, causing us to incur substantial expenses and divert the time and attention of our management.

 

We may not maintain adequate insurance, which could expose us to significant costs and business disruption.

 

The insurance industry in China is still at an early stage of development. In particular, PRC insurance companies offer limited business insurance products to education service providers. We do not have key employee insurance, business liability insurance or business disruption insurance to cover our operations, which we believe is consistent with customary industry practice in China. We have determined that the costs of insuring for these risks and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance. In addition, we do not maintain any insurance policies covering risks including loss and theft of and damages to our servers or other technology infrastructure. Any uninsured occurrence of business disruption, litigation or natural disaster, or significant damages to our uninsured equipment or technology infrastructure could result in substantial costs and diversion of resources for us and could adversely affect our financial condition and results of operations.

 

If we fail to prevent the loss or misappropriation of, or disputes over, our intellectual property rights, our brands and business may suffer.

 

We consider our copyrights, trademarks, trade names, internet domain names, patents and other intellectual property rights invaluable to our ability to continue to develop and enhance our brand recognition. Unauthorized use of our intellectual property rights may damage our reputation and brands. We rely on a combination of copyright, trademark and trade secrets laws to protect our intellectual property rights. Nevertheless, the measures we take to protect our intellectual property rights may not be adequate to prevent unauthorized uses. In addition, preventing infringement on or misuse of intellectual property rights could be difficult, costly and time-consuming in China. The practice of intellectual property rights enforcement action by the PRC regulatory authorities is in its early stage of development and is subject to significant uncertainty. For example, third parties may obtain and use our intellectual property without due authorization, particularly in China. We may also need to resort to litigation and other legal proceedings to enforce our intellectual property rights. Any such action, litigation or other legal proceedings could result in substantial costs and diversion of our management’s attention and resources and could disrupt our business. There is no assurance that we will be able to enforce our intellectual property rights effectively or otherwise prevent others from the unauthorized use of our intellectual property. Failure to adequately protect our intellectual property could materially and adversely affect our brand names and reputation, and our business, financial condition and results of operations.

 

We may encounter infringement disputes from time to time relating to our use of intellectual properties of third parties.

 

We cannot assure you that our offline ELT courses and marketing materials, online ELT courses, products, platforms and applications or other intellectual property developed or used by us do not or will not infringe upon valid copyrights or other intellectual property rights held by third parties. We may encounter disputes from time to time over rights and obligations concerning intellectual property, and we may not prevail in those disputes. We have adopted policies and procedures to prohibit our employees and contractors from infringing upon third-party copyright or intellectual property rights. However, we cannot assure you that our teachers or other personnel will not, against our policies, use third-party copyrighted materials or intellectual property without proper authorization in our classes, on our websites, at any of our locations or via any medium through which we provide our programs. Our users may also post unauthorized third-party content on our websites. We may incur liability for unauthorized duplication or distribution of the materials posted on our websites or used in our classes. We have been involved in claims against us alleging our infringement of third-party intellectual property rights and we may be subject to such claims in the future. Any such intellectual property infringement claim could result in costly litigation, harm our reputation, divert our management attention and resources and subject us to substantial financial harm.

 

42

 

 

A certain number of our self-operated learning centers and our owned properties are not in compliance with fire safety regulations.

 

Our self-operated learning centers are mainly located on properties leased by us from third parties. We generally make decoration work to the leased properties to meet our business operational needs. According to the relevant PRC laws and regulations, our decoration work falls within the scope of construction work. If the investment amount of such construction work exceeds RMB300,000 and the gross floor area is more than 300 square meters, the records of the fire safety design and the completion inspection must be filed with the competent fire safety authorities after the decoration work obtains the relevant construction permit and passes the completion inspection. See “Regulations Applicable to Meten —Regulations on Fire Safety” for further details on the fire safety regulations applicable to our business. As of the date of this proxy statement/prospectus, we entered into 156 leases for our premises, all of which have been put into use for our self-operated learning centers, and we have complied with the foregoing fire safety design and filing requirements with respect to 138 of these premises. As of September 30, 2019, 17 of our self-operated learning centers currently in use had not completed the filing of fire protection design and completion inspection record. Additionally, we owned premises that were used as space for one of our self-operated learning centers with a total gross floor area of approximately 1,289.98 square meters, and we have not completed the filing of fire protection design and completion inspection record for such properties as of the date of this proxy statement/prospectus. The 17 self-operated learning centers contributed to approximately 7.2% to our gross billings for the nine months ended September 30, 2019.

 

In case of failure to complete the foregoing procedures, the competent fire safety authorities in the PRC can order rectifications within a specified period of time, impose a fine of less than RMB5,000 per property, and order the stoppage of use. We have been fined for such violations in the past for an immaterial amount, and we cannot assure you that we will not be fined in the future for past and future violations. In the case of failure to rectify, such authorities can order stoppage of construction and use and suspension of business, and impose a fine of more than RMB30,000 and less than RMB300,000. If we cannot complete the filing of fire protection design and completion inspection according to the relevant requirements, we may be subject to a fine or may be ordered to make rectification within a specified period of time or suspend our operation on the affected properties. In addition, according to Circular 10, if we cannot meet the requirements of the fire safety standards, the relevant training qualifications could be revoked by the government authorities. If complying with fire safety regulations would require us to terminate or break our existing leases, we may be liable for any associated termination or breakage costs in addition to the costs of relocation, renovation and decoration. It may also disrupt our scheduled courses and force us to postpone or cancel some courses and refund the related course fees, all of which could materially and adversely affect our business, financial condition and results of operations.

 

Failure to make adequate contributions to various employee benefits plans as required by PRC regulations may subject us to penalties.

 

Pursuant to the PRC laws and regulations, we are required to participate in various social insurance benefit plans for our employees, whether PRC nationals or foreign citizens, including pension insurance, unemployment insurance, medical insurance, work-related injury insurance and maternity insurance. We are also required to participate in housing provident fund plan for our PRC national employees. We are required to contribute to the plans in amounts equal to certain percentages of the salaries, including bonuses and allowances, of our employees up to a maximum amount specified by the local government from time to time at locations where we operate our business. The requirement of employee benefit plans has not been implemented consistently by the local governments in China given the different levels of economic development in various locations. In some locations where we operate, consistent with local practices, we did not strictly follow the laws and regulations relating to participating in various social insurance benefit plans for our PRC national employees, including housing provident fund. We also did not make full contribution of our foreign employees’ social insurance, which was mainly due to an administrative oversight and unfamiliarity with the relevant laws and regulations of our staff in charge. While we have not faced any penalty or disciplinary action in the past, our failure in making contributions to various employee benefit plans and in complying with the applicable PRC labor-related laws may subject us to late payment penalties. We may be required to make up the contributions for these plans as well as to pay late fees and fines. If we are subject to late fees or fines in relation to the underpaid employee benefits, our financial condition and results of operations may be adversely affected.

 

We cannot assure you that our employees will not complain to the relevant authorities by reporting our failure to make contributions to the social insurance plans. Moreover, we cannot assure you that the relevant local government authorities will not require us to pay the outstanding amount within a prescribed time or impose penalties or overdue fines on us, which may in turn adversely affect our financial condition and results of operations.

 

43

 

 

Certain of our teachers do not possess teaching qualifications, which may be subject to penalty under the relevant PRC laws and regulations. Our failure to comply with these requirements may result in material and adverse effect on our business, results of operations and prospects.

 

Under the relevant PRC laws and regulations, teachers of all types of schools and other education institutions are required to obtain teacher qualification certificates or other relevant professional skill qualifications, although the definition or scope of the relevant professional skill qualifications is not explicitly stated in the relevant PRC laws and regulations. If teachers are employed in violation of such regulations, the examination and approval authorities or other relevant government departments will order the schools and other education institutions to make corrections within a specified period of time and give a warning in accordance with the applicable laws and regulations. If there is income generated from teachers without teaching qualifications, the illegal income will be confiscated. In the event the circumstances are deemed serious by the relevant government authorities, student enrollment will be ordered to stop and the school license will be revoked. As of the date of this proxy statement/prospectus, a substantial majority of our teachers did not possess any teaching qualifications or relevant professional skill qualifications. As of the date of this proxy statement/prospectus, we have not received any notice or warning or been subject to any penalties or disciplinary action from government authorities due to the lack of teaching licenses of our teachers. As advised by our PRC counsel, the current PRC laws and regulations remain unclear as to whether our teachers are required to obtain and hold teaching qualifications. However, we cannot assure you that the relevant PRC government authorities will not take a contrary view and impose penalties, fines or other disciplinary action for our past or future non-compliance.

 

We cannot assure you that we will not be subject to liability claims for any inaccurate or inappropriate content in our training programs, which could cause us to incur legal costs and damage our reputation.

 

We develop the content for our ELT programs ourselves or through partnerships with third parties. We cannot assure you that there will be no inaccurate or inappropriate materials included in our training programs or the materials we obtain from our third-party partners. In addition, our mock examination questions designed internally based on our understanding of the relevant examination requirements may be investigated by the regulatory authorities. Therefore, we may face civil, administrative or criminal liability if an individual or corporate, governmental or other entity believes that the content of any of our training programs violets any laws, regulations or governmental policies or infringes upon its legal rights. Even if such claim were not successful, defending it may cause us to incur substantial costs including the time and attention of our management. Moreover, any accusation of an accurate so inappropriate conduct could lift to significant negative publicity, which could harm our reputation and future business prospects.

 

We may be involved in legal and other disputes and claims arising out of our operations from time to time.

 

We may, from time to time, be involved in disputes with and subject to claims by parents and students, teachers and other school personnel, and other parties involved in our business. We cannot assure you that when legal actions arise in the ordinary course of our business, any of the legal actions will be resolved in our favor. We are subject to uncertainties as to the outcome of such legal proceedings and our business operations may be disrupted. Legal or other proceedings involving us may, among others, result in us incurring significant costs, divert management’s attention and other resources, negatively affect our business operations, cause negative publicity against us or damage our reputation, regardless whether we are successful in defending such claims or proceedings. Our business, financial condition and results of operations may be materially and adversely affected as a result.

 

We may be adversely affected by any negative publicity concerning us, our business, founders, shareholders, affiliates, directors, senior management and employees, as well as our third-party commercial partners and the industry in which we operate, regardless of its accuracy, that could harm our reputation and business.

 

Negative publicity about us, our business, founders, shareholders, affiliates, directors, senior management, teachers and other employees, as well as our third-party commercial partners and the industry in which we operate, can harm our operations. We have been exposed to negative publicity concerning, among other things, refund disputes, administrative penalties, alleged improper or misleading statements made in our sales and marketing activities in the past and actions of our founders and directors and members of our senior management. Negative publicity concerning these parties could be related to a wide variety of matters, including, but are not limited to:

 

  misconduct, alleged or otherwise, or other improper activities committed by our founders, students or our directors, shareholders, senior management, affiliates, teaching staff and other employees, including misrepresentation made by our employees to prospective students during sales and marketing activities;

 

  false or malicious allegations or rumors about us or our founders, directors, shareholders, senior management, affiliates, teaching staff and other employees, as well as our students;

 

44

 

 

  complaints by our students about our education services and sales and marketing activities;

 

  course fee refund disputes between us and our students or administrative penalties;

 

  security breaches of our student’s or employee’s confidential information;

 

  employment-related claims relating to alleged employment discrimination, wage and hour violations; and

 

  governmental and regulatory investigations or penalties resulting from our failure to comply with applicable laws and regulations.

 

We may also be exposed the risk of any misconduct of our third party commercial partners that any negative publicity and claims asserted against our third party commercial partners or fines imposed upon them as a result of actual or perceived failures, could have a material and adverse effect on our public image, reputation, financial condition and results of operations. In addition, negative publicity of the industry in which we operate, including, but not limited to, bankruptcy and cessation of business operations of any of our major competitors, may materially and adversely affect our business prospects and results of operations.

 

In addition to traditional media, there has been an increasing use of social media and similar platforms in China, including instant messaging applications, such as WeChat, social media websites and other forms of internet -based communications that provide individuals with access to a broad audience of consumers and other interested persons. The availability of information on instant messaging applications and social media platforms is virtually immediate as is its impact without affording us an opportunity for redress or correction. The opportunity for dissemination of information, including inaccurate information, is seemingly limitless and readily available. Information concerning our company, shareholders, directors, officers and employees may be posted on such platforms at any time. The risks associated with any such negative publicity or incorrect information cannot be completely eliminated or mitigated and may materially harm our reputation, business, financial condition and results of operations.

 

We are subject to regulatory inspections, examinations, inquiries and audits, and future sanctions, fines and other administrative penalties resulting from such inspections and audits could materially and adversely affect our business, financial condition and results of operations.

 

We are subject to certain regulation and supervision from the PRC government authorities. These relevant regulatory authorities have broad powers to adopt regulations and other requirements affecting or restricting our operations, including tax policies. Moreover, these relevant regulatory authorities possess significant powers to enforce applicable regulatory requirements in the event of our non-compliance, including the imposition of fines, sanctions or the revocation of licenses or permits to operate our business. We have in the past been subject to tax penalties concerning certain of our subsidiaries, and we cannot assure you that we will not face similar or other administrative fines or penalties concerning our operations or our subsidiaries.

 

Any natural catastrophes, severe weather conditions, health epidemics and other extraordinary events could severely disrupt our business operations.

 

The occurrence of natural catastrophes such as earthquakes, floods, typhoons, tsunamis or any acts of terrorism may result in significant property damages as well as loss of revenue due to interactions in our business operations. As we store books and course materials at our premises, there is a risk that these products and our promises may be damaged or destroyed by fire and other natural calamities. Any disruption of electricity supply or any outbreaks of fire or similar calamities at our premises may result in the breakdown of our facilities and the disruption to our business. Health epidemics such as outbreaks of avian influenza, severe acute respiratory syndrome (SARS), coronavirus disease in 2019 (COVID-19), swine flu (H1N1) or the influenza A virus, and severe weather conditions such as snowstorm and hazardous air pollution, as well as the government measures adopted in response to these events, could significantly impact our operations. For example, the recent outbreak of COVID-19 epidemic has endangered the health of many people residing in China and significantly disrupted travel and the local economy across the country. These events may also materially impact our industry and cause a temporary closure of our learning centers, which would severely disrupt our operations and have a material and adverse effect on our business, financial condition and results of operations. Our students, teachers and staff may also be negatively affected by such events. For instance, our operations could be further disrupted if any of our students, teachers and staff were suspected of contracting a contagious disease, since this could require us to quarantine some or or all of our employees or students and disinfect the learning centers used in our business operations. In addition, any occurrences of such natural catastrophes, severe weather conditions, health epidemics and other extraordinary events may result in the postponement or rescheduling of examinations for which we provide courses, which may in turn have an adverse impact on our revenue and performance.

 

Furthermore, our ability to conduct live-streaming lectures and provide other online education services depends on the continuing operation of our technology systems, which is vulnerable to damage or interruption from natural catastrophes and other extraordinary events. In addition, any fire or other calamity at the facilities of our third-party service providers that host our servers could severely disrupt our ability to deliver our online courses. Our disaster recovery planning cannot account for every conceivable possibility. Any damage or failure of our technology system could result in interruptions in our services, and our brands could be damaged if students believe our systems are unreliable. Such disruptions could severely interfere with our business operation and adversely affect our results of operations.

 

45

 

 

Risks Related to Meten’s Corporate Structure

 

If the PRC government finds that the contractual arrangements that establish the structure for operating our business do not comply with applicable PRC laws and regulations, we could be subject to severe penalties or be forced to relinquish our interests in those operations.

 

Currently, the PRC laws and regulations do not explicitly impose restrictions on foreign investment in ELT services in the PRC. However, some local government authorities in the PRC have adopted different approaches in granting licenses and permits (particularly, imposing more stringent restrictions on foreign-invested entities) for entities providing ELT services. In the areas where we operate our ELT service business, most local government authorities do not allow foreign-invested entities to establish private schools to engage in the ELT services, other than in the forms of Sino-foreign cooperative schools, and the domestic party shall play a dominant role in such cooperation. According to the relevant regulations, foreign investors of Sino-foreign cooperative institutions must be foreign educational institutions with relevant qualifications and experiences. As a foreign company, we are not qualified to run Sino-foreign cooperative schools in the PRC. In addition, according to Notice 75, foreign-invested language training institutions are required to apply for the private school operating permit. However, based on the interviews we conducted in November 2019 with the officials of the local educational authorities in the areas where we have learning centers in operation, most of the local educational authorities provided oral confirmations that due to the fact that the Notice 75 has just been issued for a short period of time and that no detailed supporting rules and regulations have been promulgated, the relevant procedure, approval process and transitional period regarding the application by the foreign-invested language training institutions for the private school operating permit are not yet clear and the relevant government authorities have not yet begun to accept applications. In addition, the PRC laws and regulations restrict foreign ownership in value-added telecommunication services and require that a foreign investor who invests in a value-added telecommunications business in the PRC must possess prior experience in operating value-added telecommunications businesses and a proven track record of business operations overseas.Due to these restrictions, we operate our offline and online ELT business in the PRC primarily through our affiliated entities. We entered into a series of contractual arrangements with Shenzhen Meten and Shenzhen Likeshuo and their shareholders, respectively. Our affiliated entities are the entities that hold certain licenses and permits relating to the offline and online ELT business in the PRC. We have been and expect to continue to be dependent on our affiliated entities to operate our business. See “Business of Meten - Our Corporate and Shareholding Structure” for more information.

 

As advised by our PRC counsel, there are substantial uncertainties regarding the interpretation and application of the PRC laws and regulations, and we cannot assure you that the PRC government would agree that our corporate structure or any of the above-mentioned contractual arrangements comply with the current or future PRC laws or regulations. The PRC laws and regulations governing the validity of these contractual arrangements are uncertain and the relevant government authorities may have broad discretion in interpreting these laws and regulations. If our ownership structure and contractual arrangements are found to be in violation of any existing or future PRC laws or regulations, or we fail to obtain any of the required licenses and permits, the relevant PRC regulatory authorities including the MOE, which regulates the education industry in the PRC, the Ministry of Commerce, or the MOFCOM, which regulate the foreign investments in the PRC, the MCA, which regulates the registration of non-profit private schools in the PRC after the Amended Private Education Promotion Law became effective, and the SAIC, which regulates the registration and operation of for-profit private schools in the PRC after the Amended Private Education Promotion Law became effective, would have broad discretion in dealing with such violations, including:

 

  revoking the business licenses and operating permits held by Zhuhai Meten and Zhuhai Likeshuo and their respective subsidiaries, or our other PRC subsidiaries, and/or our affiliated entities;

 

  discontinuing or restricting the operations of any related-party transactions among our PRC subsidiaries and our affiliated entities;

 

  limiting our business expansion in the PRC by way of entering into contractual arrangements;

 

  confiscating the income of our affiliated entities;

 

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

 

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

 

  restricting the use of financing sources by us or our affiliated entities, or otherwise restricting our or their ability to conduct business.

 

46

 

 

As of the date of this proxy statement/prospectus, similar ownership structure and contractual arrangements have been used by many China-based companies listed overseas, including in the United States. However, we cannot assure you that penalties will not be imposed on any other companies or us in the future. If any of the above fines or punishments is imposed on us, our business, financial condition and results of operations could be materially and adversely affected. If any of these penalties results in our inability to direct the activities of our affiliated entities or results in our failure to receive the economic benefits from our affiliated entities, we may not be able to consolidate our affiliated entities in our financial statements in accordance with U.S. GAAP. However, we do not believe that such actions would result in the liquidation or dissolution of our Company, our wholly-owned subsidiaries in the PRC.

 

Substantial uncertainties exist with respect to the interpretation and implementation of any new PRC laws, rules and regulations relating to foreign investment and how it may impact the viability of our current corporate structure, corporate governance and business operations.

 

On March 15, 2019, the National People’s Congress promulgated the Foreign Investment Law, which came into effect on January 1, 2020 and replaced the three existing laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation rules and ancillary regulations. The existing foreign-invested enterprises, or FIEs, established prior to the effectiveness of the Foreign Investment Law may keep their corporate forms within five years. The Foreign Investment Law stipulates that China implements the management system of pre-establishment national treatment plus a negative list to foreign investment, and the government generally will not expropriate foreign investment, except under certain special circumstances, in which case it will provide fair and reasonable compensation to foreign investors. Foreign investors are barred from investing in prohibited industries on the negative list and must comply with the specified requirements when investing in restricted industries on such list. On December 26, 2019, the State Council promulgated the Implementing Regulations of the Foreign Investment Law, which came into effect on January 1, 2020 and further requires that FIEs and domestic enterprises be treated equally with respect to policy making and implementation.

 

Pursuant to the Foreign Investment Law, “foreign investment” means any foreign investor’s direct or indirect investment in the PRC, including: (i) establishing FIEs in the PRC either individually or jointly with other investors; (ii) obtaining stock shares, stock equity, property shares, other similar interests in Chinese domestic enterprises; (iii) investing in new project in the PRC either individually or jointly with other investors; and (iv) making investment through other means provided by laws, administrative regulations or State Council provisions. Although the Foreign Investment Law does not explicitly classify the contractual arrangements, such as our contractual arrangement described in “Business of Meten - Our Corporate and Shareholding Structure,” as a form of foreign investment, it contains a catch-all provision under the definition of “foreign investment”, which includes investments made by foreign investors in China through other means stipulated by laws or administrative regulations or other methods prescribed by the State Council without elaboration on the meaning of “other means”. However, the Implementing Regulations of the Foreign Investment Law still does not specify whether foreign investment includes contractual arrangements.

 

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

 

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

 

We have relied and expect to continue to rely on the contractual arrangements with our ELT businesses in China. For a description of these contractual arrangements, see “Business of Meten – Our Corporate and Shareholding Structure—Contractual Arrangements with Our VIEs and Their Respective Shareholders.” However, these contractual arrangements may not be as effective as direct equity ownership in providing us with control over our affiliated entities. Any failure by our VIEs and their shareholders to perform their obligations under the contractual arrangements would have a material adverse effect on the financial position and performance of our Company. For example, the contractual arrangements are governed by the PRC law and provide for the resolution of disputes through arbitration in the PRC. Accordingly, these contracts would be interpreted in accordance with the PRC law and any disputes would be resolved in accordance with arbitral procedures as contractually stipulated. The commercial arbitration system in the PRC is not as developed as in some other jurisdictions, such as the United States.

 

47

 

 

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

 

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

 

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

 

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

 

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

 

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

 

Our control over affiliated entities is based upon the contractual arrangements with our affiliated entities, the VIEs and their shareholders and the directors of our affiliated entities. The shareholders of the VIEs may potentially have conflicts of interest with us and breach their contracts or undertaking with if it would further their own interest or if they otherwise act in bad faith. These shareholders may refuse to sign or breach, or cause our VIEs to breach or refuse to renew the existing contractual arrangements, which would have a material and adverse effect on our ability to effectively control our affiliated entities and receive economic benefits from them. For example, these shareholders may be able to cause our agreements with our VIEs to be performed in a manner adverse to us by, among other things, failing to remit payments due under the contractual arrangements to us on a timely basis. When conflicts of interest arise any or all of these shareholders will act in the best interests of our Company or such conflicts will be resolved in our favor. Currently, we do not have any arrangements to address potential conflicts of interest between these shareholders and our Company. If we cannot resolve any conflict of interest or dispute between us and these shareholders, we would have to rely on legal proceedings, which could result in disruption of our business and subject us to substantial uncertainty as to the outcome of any such legal proceedings. If we are unable to resolve such conflicts, including where the shareholders of our VIEs breached their contracts or undertakings with us and as a result or otherwise subject us to claims from third parties, our business, financial condition and operations could be materially and adversely affected.

 

The contractual arrangements may be subject to the scrutiny of the PRC tax authorities and additional tax may be imposed, which may materially and adversely affect our results of operation and value of your investment.

 

Under the PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities. We could face material and adverse tax consequences if the PRC tax authorities determine that the Exclusive Management Cooperation Agreement we have with our affiliated entities does not represent an arm’s length price and determines to adjust any of those entities’ income in the form of a transfer pricing adjustment. A transfer pricing adjustment could increase our tax liabilities. In addition, the PRC tax authorities may have reason to believe that our subsidiaries or our affiliated entities are dodging their tax obligations, and we may not be able to rectify such incident within the limited timeline required by the PRC tax authorities. As a result, the PRC tax authorities may impose late payment fees and other penalties on us for underpaid taxes, which could materially and adversely affect our business, financial condition and results of operations.

 

48

 

 

If any of our affiliated entities becomes subject to winding up or liquidation proceedings, we may lose the ability to make use of certain important assets, which could negatively impact our business and materially and adversely affect our ability to generate revenue.

 

We currently conduct our operations in China through contractual arrangements. As part of these arrangements, substantially all of our education-related assets, permits and licenses that are important to the operation of our business are held by our affiliated entities. If any of these affiliated entities is wound up, and all or part of their assets become subject to liens or rights of third-party creditors, we may be unable to continue some or all of our business activities, which would materially and adversely affect our business, financial condition and results of operations. If any of our affiliated entities undergoes a voluntary or involuntary liquidation proceeding, its equity owner or unrelated third-party creditors may claim rights relating to some or all of these assets, which would hinder our ability to operate our business and could materially and adversely affect our business and our ability to generate revenue. As a result, we may not be able to exercise our rights in a timely manner and our business, financial condition and operations may be materially and adversely affected.

 

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

 

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

 

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

 

The PRC regulation of loans and direct investments in PRC subsidiaries by offshore holding companies and governmental control of currency conversion may delay us from using working capital to make loan or additional capital contributions to our PRC subsidiaries, our affiliated entities, which could harm our liquidity and our ability to fund and expand our business.

 

From time to time in the ordinary course of our business, we may (i) make loans to our PRC subsidiaries; (ii) make additional capital contributions to our PRC subsidiaries; (iii) establish new PRC subsidiaries and make capital contributions to them; and (iv) acquire offshore entities with business operations in the PRC in an offshore transaction. However, most of these uses are subject to PRC regulations and approvals. For example:

 

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

 

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

 

Currently, there is no statutory limit to the amount of funding we can provide to our PRC subsidiaries through capital contributions. However, the maximum amount we can loan to our PRC subsidiaries is subject to statutory limits. According to the current PRC laws and regulations, we can provide funding to our PRC subsidiaries through loans of up to either (i) the amount of the difference between the respective registered total investment amount and the registered capital of each of our PRC subsidiaries, or the Total Investment and Registered Capital Balance; or (ii) two times, or the then applicable statutory multiple, of the amount of their respective net assets, calculated in accordance with PRC GAAP, or the Net Assets Limit, at our election. If we choose to make a loan to a PRC subsidiary based on the Total Investment and Registered Capital Balance as of the date of this proxy statement/prospectus, subject to the completion of statutory procedures with the relevant government authorities and banks, we may extend a loan with an estimated aggregate maximum amount of approximately RMB180.0 million to our PRC subsidiaries. We may increase the Total Investment and Registered Capital Balance of our PRC subsidiaries, which is subject to governmental procedures and may require a PRC subsidiary to increase its registered capital at the same time. If we choose to make a loan to a PRC entity based on its Net Assets Limit, the maximum amount we would be able to loan to the relevant PRC entity would depend on the relevant entity’s net assets and the applicable statutory multiple at the time of calculation. As of the date of this proxy statement/prospectus, our PRC subsidiaries have negative net assets, and we cannot provide loans to them using the Net Assets Limit method.

 

49

 

 

In addition, on March 30, 2015, the SAFE promulgated the Circular on Reforming Management of the Settlement of Foreign Exchange Capital of Foreign-Invested Enterprises, or Circular 19, a regulation regarding the conversion by a foreign-invested company of its capital contribution in foreign currency into Renminbi. Circular 19 launched a nationwide reform of the administration of the settlement of the foreign exchange capital of foreign-invested enterprises and allows foreign-invested enterprises to settle their foreign exchange capital at their discretion, but continues to prohibit foreign-invested enterprises from using the Renminbi fund converted from their foreign exchange capital for expenditures beyond their business scopes. In June 2016, the SAFE promulgated the Notice on Reforming and Standardizing the Administrative Provisions on Capital Account Foreign Exchange Settlement, or Circular 16. Circular 19 and Circular 16 continue to prohibit foreign-invested enterprises from, among other things, using the Renminbi fund converted from its foreign exchange capital for expenditure beyond its business scope, investment and financing (except for security investment or guarantee products issued by bank), providing loans to non-affiliated enterprises or constructing or purchasing real estate not for self-use. On October 23, 2019, the SAFE issued the Notice of the State Administration of Foreign Exchange on Further Facilitating Cross-border Trade and Investment, which, among other things, expanded the use of foreign exchange capital to domestic equity investment area. Non-investment foreign-funded enterprises are allowed to lawfully make domestic equity investments by using their capital on the premise of no violation of prevailing special administrative measures for access of foreign investments (negative list) and the authenticity and compliance with the regulations of domestic investment projects.

 

We expect that the PRC laws and regulations may continue to limit our use of our working capital. We cannot assure you that we will be able to obtain these government registrations or approvals on a timely basis, if at all, with respect to future loans or capital contributions by us to our entities in the PRC. If we fail to receive such registrations or approvals, our ability to capitalize our PRC operations may be negatively affected, which could adversely affect our liquidity and our ability to fund and expand our business

 

Risks Related to Doing Business in China

 

Adverse changes in the PRC economic, political and social conditions as well as laws and government policies, may materially and adversely affect our business, financial condition, results of operations and growth prospects.

 

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

 

The economic, political and social conditions in the PRC differ from those in more developed countries in many respects, including structure, government involvement, level of development, growth rate, control of foreign exchange, capital reinvestment, allocation of resources, rate of inflation and trade balance position. Before the adoption of its reform and opening up policies in 1978, the PRC was primarily a planned economy. In recent years, the PRC government has been reforming the PRC economic system and government structure. For example, the PRC government has implemented economic reforms and measures emphasizing the utilization of market forces in the development of the PRC economy in the past three decades. These reforms have resulted in significant economic growth and social prospects. Economic reform measures, however, may be adjusted, modified or applied inconsistently from industry to industry or across different regions of the country.

 

We cannot predict whether the resulting changes will have any adverse effect on our current or future business, financial condition or results of operations. Despite these economic reforms and measures, the PRC government continues to play a significant role in regulating industrial development, allocation of natural and other resources, production, pricing and management of currency, and there can be no assurance that the PRC government will continue to pursue a policy of economic reform or that the direction of reform will continue to be market friendly.

 

Our ability to successfully expand our business operations in the PRC depends on a number of factors, including macro-economic and other market conditions, and credit availability from lending institutions. Stricter credit or lending policies in the PRC may affect our customers’ consumer credit or consumer banking business, and may also affect our ability to obtain external financing, which may reduce our ability to implement our expansion strategies. We cannot assure you that the PRC government will not implement any additional measures to tighten credit or lending standards, or that, if any such measure is implemented, it will not adversely affect our future results of operations or profitability.

 

Demand for our services and our business, financial condition and results of operations may be materially and adversely affected by the following factors:

 

  political instability or changes in social conditions of the PRC;

 

  changes in laws, regulations, and administrative directives or the interpretation thereof;

 

50

 

 

  measures which may be introduced to control inflation or deflation; and

 

  measures changes in the rate or method of taxation.

 

These factors are affected by a number of variables, which are beyond our control.

 

The legal system of the PRC is not fully developed and there are inherent uncertainties that may affect the protection afforded to our business and our shareholders.

 

Our business and operations in the PRC are governed by the PRC legal system that is based on written statutes. Prior court decisions may be cited for reference but have limited precedential value. Since the late 1970s, the PRC government has promulgated laws and regulations dealing with economic matters such as foreign investment, corporate organization and governance, commerce, taxation and trade. However, as these laws and regulations are relatively new and continue to evolve, interpretation and enforcement of these laws and regulations involve significant uncertainties and different degrees of inconsistency. Some of the laws and regulations are still in the developmental stage and are therefore subject to policy changes. Many laws, regulations, policies and legal requirements have only been recently adopted by PRC central or local government agencies, and their implementation, interpretation and enforcement may involve uncertainty due to the lack of established practice available for reference. We cannot predict the effect of future legal developments in the PRC, including the promulgation of new laws, changes in existing laws or their interpretation or enforcement, or the pre-emption of local regulations by national laws. As a result, there is substantial uncertainty as to the legal protection available to us and our shareholders. Moreover, due to the limited volume of published cases and the non-binding nature of prior court decisions, the outcome of dispute resolution may not be as consistent or predictable as in other more developed jurisdictions, which may limit the legal protection available to us. In addition, any litigation in the PRC may be protracted and result in substantial costs and the diversion of resources and management attention.

 

PRC governmental control and restrictions on the convertibility of Renminbi may materially and adversely affect the value of your investments.

 

The PRC government imposes controls and restrictions on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of currency out of the PRC. The majority of our income is received in Renminbi and shortages in the availability of foreign currencies may restrict our ability to pay dividends or other payments, or otherwise satisfy their foreign currency denominated obligations, if any. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related transactions, can be made in foreign currencies without prior approval from SAFE, by complying with certain procedural requirements. Approval from appropriate government authorities is required where Renminbi is to be converted into foreign currency and remitted out of the PRC to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may, at its discretion, impose restrictions on access to foreign currencies for current account transactions and if this occurs in the future, we may not be able to pay dividends in foreign currencies to our shareholders.

 

We may be required to obtain prior approval of the CSRC of the listing and trading of Holdco’s securities.

 

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

 

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

 

51

 

 

The enforcement of the PRC Labor Contract Law and other labor-related regulations in the PRC may adversely affect our business and our results of operations.

 

The PRC Labor Contract Law became effective and was implemented on January 1, 2008, which was amended on December 28, 2012. It has reinforced the protection of employees who, under the PRC Labor Contract Law, have the right, among others, to have written labor contracts, to enter into labor contracts with no fixed terms under certain circumstances, to receive overtime wages and to terminate or alter terms in labor contracts. According to the PRC Social Insurance Law, which became effective on July 1, 2011 and was amended on December 29, 2018, and the Administrative Regulations on the Housing Funds, which became effective on April 3, 1999 and was amended on March 24, 2002 and March 24, 2019, companies operating in China are required to participate in pension insurance, work-related injury insurance, medical insurance, unemployment insurance, maternity insurance and housing funds plans, and the employers must pay all or a portion of the social insurance premiums and housing funds for their employees.

 

As these laws and regulations designed to enhance labor protection, we expect our labor costs will continue to increase. In addition, since the interpretation and implementation of these laws and regulations are still evolving, our employment practice may not at all times be deemed in compliance with the new laws and regulations. If we are subject to severe penalties or incur significant liabilities in connection with labor disputes or investigations, our business and results of operations may be adversely affected.

 

Regulation and censorship of information disseminated over the internet in China may adversely affect our business and reputation and subject us to liability for information displayed on our website.

 

The PRC government has adopted regulations governing internet access and the distribution of news and other information over the internet. Under these regulations, internet content providers are prohibited from posting or displaying over the internet content that, among other things, violates PRC laws and regulations, impairs the national dignity of China, or is reactionary, obscene, superstitious, fraudulent or defamatory. Failure to comply with these requirements may result in the revocation of licenses to provide Internet content and other licenses, and the closure of the concerned websites. The website operator may also be held liable for such censored information displayed on or linked to the websites. If our websites are found to be in violation of any such requirements, we may be penalized by relevant authorities, and our operations or reputation could be adversely affected.

 

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 joint meeting composed of relevant departments of the State Council, national trade associations, enterprises in the same industry, and upstream and downstream enterprises. 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 the 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 VIEs and their 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.

 

52

 

 

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

 

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

 

On February 13, 2015, the SAFE promulgated a Notice on Further Simplifying and Improving Foreign Exchange Administration Policy on Direct Investment, or Notice 13, which became effective on June 1, 2015. Under Notice 13, applications for foreign exchange registration of inbound foreign direct investments and outbound overseas direct investments, including those required under Circular 37 will be directly reviewed and handled by banks, and the SAFE and its branches shall perform indirect regulation over the direct investment-related foreign exchange registration via banks.

 

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

 

As of the date of this proxy statement/prospectus, all PRC residents known to us that currently hold direct or indirect interests in our company have completed the necessary registrations as required by Circular 37. We cannot assure you that any shareholders or beneficial owners of our company who are PRC residents will be able to successfully complete the registration or update the registration of their direct and indirect equity interest as required in the future. If any of them fail to make or update the registration, our PRC subsidiaries could be subject to fines and legal penalties, and the SAFE could restrict our cross-border investment activities and our foreign exchange activities, including restricting our PRC subsidiaries’ ability to distribute dividends to, or obtain loans denominated in foreign currencies from, our company, or prevent us from contributing additional capital into our PRC subsidiaries. As a result, our business operations and our ability to make distributions to you could be materially and adversely affected.

 

If we are classified as a PRC “resident enterprise,” we could be subject to PRC income tax at the rate of 25% on our worldwide income, and holders of Holdco ordinary shares may be subject to a PRC withholding tax upon the dividends payable and upon gain from the sale of Holdco ordinary shares.

 

Under the Enterprise Income Tax Law, or EIT Law, and its implementation rules, if an enterprise incorporated outside the PRC has its “de facto management body” located within the PRC, such enterprise may be recognized as a PRC tax resident enterprise and be subject to the unified enterprise income tax rate of 25% on its worldwide income. Under the implementation rules for the EIT Law, “de facto management body” is defined as the body that has material and overall management control over the business, personnel, accounts and properties of an enterprise. The SAT issued the Notice regarding the Determination of Chinese-Controlled Overseas Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, or SAT Circular 82, on April 22, 2009. SAT Circular 82 provides certain specific criteria for determining whether the “de facto management body” of a Chinese-controlled offshore incorporated enterprise is located inside China, stating that only a company meeting all the criteria would be deemed having its de facto management body within China. One of the criteria is that a company’s major assets, accounting books and minutes and files of its board and shareholders’ meetings are located or kept in the PRC. In addition, the SAT issued a bulletin on July 27, 2011, effective from September 1, 2011, providing further guidance on the implementation of SAT Circular 82. This bulletin clarifies matters including residence status determination, post-determination administration and competent tax authorities. Although both SAT Circular 82 and the bulletin only apply to offshore enterprises controlled by PRC enterprises and there are currently no further detailed rules or precedents governing the procedures and specific criteria for determining “de facto management body” for companies like us controlled by PRC individuals, the determination criteria set forth in SAT Circular 82 and the bulletin may reflect the SAT’s general position on how the “de facto management body” test should be applied in determining the tax residency status of offshore enterprises and how the administration measures should be implemented with respect to such enterprises, regardless of whether they are controlled by PRC enterprises or PRC individuals.

 

53

 

 

Since all of Holdco’s senior management members after consummation of the Mergers will reside in the PRC, Holdco may be recognized as a PRC tax resident enterprise for the purpose of the EIT Law and therefore would be subject to PRC income tax at the rate of 25% on Holdco’s worldwide income. In such event, Holdco’s income tax expenses may increase significantly and its net profit and profit margin could be materially and adversely affected.

 

Under the EIT Law, foreign enterprise shareholders of a PRC resident enterprise will be subject to a 10% (or 20% for an individual) withholding tax upon dividends received from the PRC resident enterprise and on gain recognized with respect to the sale of shares of the resident enterprise, if such amounts are deemed to be derived from sources within the PRC. Accordingly, if we are treated as a PRC resident enterprise, holders of Holdco ordinary shares may be subject to a 10% (or 20% for an individual) withholding tax upon dividends received from Holdco and on gain recognized with respect to the sale of Holdco ordinary shares, unless such withholding tax is reduced by an applicable income tax treaty between China and the jurisdiction of the holder. Any such tax may reduce the returns on your investment in Holdco ordinary shares.

 

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

 

On February 3, 2015, the SAT issued the Announcement on Several Issues Concerning the Enterprise Income Tax on Indirect Transfer of Assets by Non-Resident Enterprises, or the SAT Bulletin 7. The SAT Bulletin 7 extends its tax jurisdiction to transactions involving the transfer of taxable assets through offshore transfer of a foreign intermediate holding company. In addition, SAT Bulletin 7 has introduced safe harbors for internal group restructurings and the purchase and sale of equity through a public securities market. SAT Bulletin 7 also brings challenges to both foreign transferor and transferee (or other person who is obligated to pay for the transfer) of taxable assets. On October 17, 2017, the SAT issued the Announcement on Issues Relating to Withholding at Source of Income Tax of Non-resident Enterprises, or the SAT Bulletin 37, which came into effect on December 1, 2017. The SAT Bulletin 37 further clarifies the practice and procedure of the withholding of non-resident enterprise income tax.

 

Where a non-resident enterprise transfers taxable assets indirectly by disposing of the equity interests of an overseas holding company, which is an Indirect Transfer, the non-resident enterprise as either transferor or transferee, or the PRC entity that directly owns the taxable assets, may report such Indirect Transfer to the relevant tax authority. Using a “substance over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such Indirect Transfer may be subject to PRC enterprise income tax, and the transferee or other person who is obligated to pay for the transfer is obligated to withhold the applicable taxes, currently at a rate of 10% for the transfer of equity interests in a PRC resident enterprise. Both the transferor and the transferee may be subject to penalties under PRC tax laws if the transferee fails to withhold the taxes and the transferor fails to pay the taxes.

 

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

 

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

 

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

 

54

 

 

From time to time, Holdco will need to apply for or update its registration with the SAFE or its local branches on behalf of employees who receive options or other equity-based incentive grants under Holdco’s share incentive plans or material changes in Holdco’s share incentive plans. However, Holdco may not always be able to make applications or update its registration on behalf of employees in compliance with Circular 7, nor can we ensure you that such applications or update of registration will be successful. If Holdco or the participants of its share incentive plans who are PRC citizens fail to comply with Circular 7, Holdco 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 Holdco may be prevented from further granting share incentive awards under its share incentive plans to employees who are PRC citizens.

 

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

 

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

 

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

 

The change in value of the Renminbi against the U.S. dollar and other currencies is affected by various factors such as changes in political and economic conditions in the PRC. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to the U.S. dollar, and the Renminbi appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010, this appreciation was halted and the exchange rate between the Renminbi and the U.S. dollar remained within a narrow band. Since June 2010, the Renminbi has fluctuated against the U.S. dollar, at times significantly and unpredictably. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and the U.S. dollar in the future.

 

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

 

Risks Related to the Business Combination

 

Future resales of the Holdco Ordinary Shares issued in connection with the Mergers may cause the market price of Holdco’s securities to drop significantly, even if Holdco’s business is doing well.

 

Under the Merger Agreement, the shareholders of Meten will receive their pro rata portion of an aggregate of 48,391,607 Holdco Ordinary Shares, less cash paid to electing shareholders. The shareholders of Meten who continue to hold Holdco Ordinary Shares through certain earnout measurement dates will also have the right to receive their pro rata portion of up to an additional 11,000,000 Holdco Ordinary Shares if certain earnout conditions are met. EdtechX’s securities will be exchanged for securities of Holdco in the Mergers, as follows: (i) each share of EdtechX common stock outstanding on the closing date will be exchanged for the right to receive one ordinary share of Holdco, except that holders of shares of EdtechX common stock sold in EdtechX’s initial public offering will be entitled to elect instead to receive a pro rata portion of EdtechX’s trust account, as provided in EdtechX’s charter documents, (ii) each outstanding warrant of EdtechX will entitle the holder to purchase one ordinary share of Holdco at a price of $11.50 per share, and (iii) each outstanding unit purchase option will remain outstanding but will be deemed to have been converted to represent the right to purchase ordinary shares and warrants of Holdco. Additionally, Holdco will establish a new incentive equity plan (the “Holdco ESOP Plan”), and each outstanding option of Meten will be automatically converted into an option to purchase Holdco Ordinary Shares, with the number of shares issuable upon exercise of the option and the option exercise price to be determined in accordance with a formula set forth in the Merger Agreement. A further number of Holdco ordinary shares equal to one percent (1%) per annum (for five years) of the total outstanding Holdco ordinary shares upon the closing of the Mergers will be reserved under the new incentive equity plan. See the sections of this proxy statement/prospectus titled “The Merger Proposal – Structure of the Mergers” and “The Merger Proposal – Consideration to Meten Shareholders”.

 

55

 

 

Pursuant to the Merger Agreement, certain of the Meten shareholders will be subject to lock-up agreements for up to six months, for 50% of the Holdco ordinary shares received, and up to one year, for the remaining 50% of the Holdco ordinary shares received in the Meten Merger. All other Meten shareholders will be subject to a three month lock-up with respect to the Holdco ordinary shares received in the Mergers. The initial stockholders of EdtechX will enter into an Amended Stock Escrow Agreement pursuant to which the Holdco Ordinary Shares to be issued to them will remain subject to the escrow and transfer restrictions as set forth in the existing stock escrow agreement. See the section of this proxy statement/prospectus titled “The Merger Proposal — Restrictions on Transfer.”

 

Subject to these restrictions, Holdco will enter into a registration rights agreement at the closing of the business combination providing the shareholders of Meten with certain demand registration rights and piggy-back registration rights with respect to registration statements filed by Holdco after the closing. Additionally, EdtechX and Holdco will amend any existing registration rights agreements to which it is a party or similar agreements or instruments to which it is a party providing for registration rights with respect to EdtechX’s securities held by any person such that, after giving effect to the Mergers, the Holdco securities held by former EdtechX securityholders will have the same registration rights as they currently have. See the section of this proxy statement/prospectus titled “The Merger Proposal – Registration Rights.”

 

Furthermore, the shareholders of Holdco may sell Holdco Ordinary Shares pursuant to Rule 144 under the Securities Act, if available, rather than under a registration statement. In these cases, the resales must meet the criteria and conform to the requirements of that rule, including, because EdtechX and Holdco are currently shell companies, waiting until one year after Holdco’s filing with the SEC of a Current Report on Form 20-F containing Form 10 type information reflecting the Mergers.

 

Upon expiration of the applicable lock-up periods, and upon effectiveness of any registration statement Holdco files pursuant to the above-referenced registration rights or upon satisfaction of the requirements of Rule 144 under the Securities Act, the Meten shareholders and initial stockholders of EdtechX may sell large amounts of Holdco Ordinary Shares in the open market or in privately negotiated transactions, which could have the effect of increasing the volatility in Holdco’s share price or putting significant downward pressure on the price of Holdco’s ordinary shares.

 

Holdco may issue additional ordinary shares or other equity securities without your approval, which would dilute your ownership interests and may depress the market price of Holdco’s ordinary shares.

 

Upon consummation of the Mergers, Holdco will have warrants outstanding to purchase up to an aggregate of 10,335,000 ordinary shares and may issue an aggregate of up to an additional 11,000,000 ordinary shares to the former Meten shareholders upon achievement of milestone targets as described in this proxy statement/prospectus. Holdco may also issue units or other securities of Holdco in connection with the Financing and the Azimut Investment. Holdco will also have the ability to issue additional shares under the Holdco ESOP Plan. Holdco may also issue additional ordinary shares or other equity securities of equal or senior rank in the future for any reason or in connection with, among other things, future acquisitions or repayment of outstanding indebtedness, without shareholder approval, in a number of circumstances.

 

Holdco’s issuance of additional ordinary shares or other equity securities of equal or senior rank would have the following effects:

 

  Holdco’s existing shareholders’ proportionate ownership interest in Holdco will decrease;

 

  the amount of cash available per share, including for payment of dividends in the future, may decrease;

 

  the relative voting strength of each previously outstanding share may be diminished; and

 

  the market price of Holdco’s ordinary shares may decline.

 

If EdtechX stockholders fail to properly demand conversion rights, they will not be entitled to convert their EdtechX common stock into a pro rata portion of the trust account.

 

EdtechX stockholders holding public shares may demand that EdtechX convert their shares of EdtechX common stock into a pro rata portion of the trust account, calculated as of two business days prior to the anticipated consummation of the Mergers. EdtechX stockholders who seek to exercise this conversion right must deliver their shares of EdtechX common stock (either physically or electronically) to EdtechX’s transfer agent at least two (2) business days prior to the vote at the meeting. Any EdtechX stockholder who fails to properly demand conversion rights will not be entitled to convert his, her, or its shares into a pro rata portion of the trust account for conversion. See the section of this proxy statement/prospectus titled “Annual Meeting of EdtechX Stockholders — Conversion Rights” for the procedures to be followed if you wish to convert your shares to cash.

 

56

 

 

Public stockholders, together with any affiliates of theirs or any other person with whom they are acting in concert or as a “group,” will be restricted from seeking conversion rights with respect to more than 20% of the public shares.

 

A public stockholder, together with any affiliate of his or any other person with whom he is acting in concert or as a “group,” will be restricted from seeking conversion rights with respect to more than 20% of the public shares. Accordingly, if you hold more than 20% of the public shares and the merger proposal is approved, you will not be able to seek conversion rights with respect to the full amount of your public shares and may be forced to hold the public shares in excess of 20% or sell them in the open market. EdtechX cannot assure you that the value of such excess public shares will appreciate over time following a business combination or that the market price of EdtechX’s ordinary shares will exceed the per-share conversion price.

 

Holdco’s securities may not be listed on a national securities exchange, which could limit investors’ ability to make transactions in Holdco’s securities and subject Holdco to additional trading restrictions.

 

Holdco intends to apply to have its securities listed on Nasdaq upon consummation of the Mergers. Holdco will be required to meet the initial listing requirements of either such exchange to be listed. Holdco may not be able to meet those initial listing requirements. Even if Holdco’s securities are so listed, Holdco may be unable to maintain the listing of its securities in the future.

 

If Holdco fails to meet the initial listing requirements of Nasdaq, and if Holdco’s securities are not listed on a national securities exchange, Holdco could face significant material adverse consequences, including:

 

  a limited availability of market quotations for its securities;
     
  a limited amount of news and analyst coverage for the company; and
     
  a decreased ability to issue additional securities or obtain additional financing in the future.

 

The ability of Holdco, the Surviving Delaware Corporation, or shareholders or affiliates of EdtechX to request indemnification from Meten and the Meten shareholders for damages arising out of the business combination are limited in certain instances to those claims above a $200,000 de minimus threshold per claim and an aggregate threshold of $5 million.

 

The Agreement provides for mutual indemnification by EdtechX and Meten for breaches of their respective representations, warranties, and covenants. Claims for indemnification must be brought before the date that is one year after the consummation of the Mergers. Claims for indemnification may be asserted once damages exceed a $5 million threshold, and will be reimbursable to the extend such damages exceed the threshold. Claims for damages below a de minimus threshold of $200,000 will not count toward satisfying the $5 million deductible. The indemnification obligation of Meten will be capped at 3.5% of the aggregate Holdco Ordinary Shares issuable to the Meten shareholders in the transactions and the indemnification obligation of EdtechX will be capped at an aggregate of 1,693,706 Holdco Shares. Accordingly, it is possible that Holdco, the Surviving Delaware Corporation, or shareholders or affiliates of EdtechX will not be entitled to indemnification even if Meten is found to have breached certain of its representations, warranties and covenants contained in the Merger Agreement if either the individual breaches do not exceed the de minimus threshold of $200,000 or the aggregate damages caused by Meten’s breaches does not exceed $5,000,000. Also, the right to seek indemnification from Meten or the Meten shareholders expires one year from the closing date of the Mergers.

 

The Merger Agreement does not provide for an indemnification escrow fund and, consequently, Holdco, the Surviving Delaware Corporation, or shareholders or affiliates of EdtechX may not be able to recover any indemnification amounts from Meten shareholders.

 

The Merger Agreement does not provide for an escrow of shares which may be payable to Holdco, the Surviving Delaware Corporation, or shareholders or affiliates of EdtechX for indemnification, but requires that Meten shareholders either forfeit and return to Holdco for cancellation the number of Holdco Ordinary Shares equal to their pro rata portion of the indemnifiable damages or, if the shareholder has sold the Holdco Ordinary Shares, to pay cash in value of the related shares in an amount equal to their pro rata portion of the indemnifiable damages. Because the Merger Agreement does not establish a fund for the payment of indemnification claims, it is possible that to Holdco, the Surviving Delaware Corporation, or shareholders or affiliates of EdtechX may not be able to recover losses for which they are required to be indemnified.

 

57

 

 

EdtechX has not obtained an opinion from an unaffiliated third party that the consideration being delivered to the Meten shareholders in the Meten Merger is fair to EdtechX or EdtechX’s shareholders from a financial point of view.

 

In analyzing the transaction with Meten, the EdtechX board, with the assistance from its financial advisors, conducted significant business and financial due diligence on Meten. EdtechX did not obtain an opinion from an unaffiliated third party indicating that the consideration being paid in the Meten Merger to the Meten shareholders is fair to EdtechX’s public shareholders from a financial point of view since it was not required to do so. The EdtechX board of directors believes that, because of the financial skills and background of its officers and directors, it was qualified to conclude that the business combination was fair from a financial perspective to its shareholders. However, since no opinion has been obtained, EdtechX’s shareholders will be relying solely on the judgment of EdtechX’s board of directors with respect to the Merger Agreement and the Mergers contemplated thereby. EdtechX’s board of directors may be incorrect in its assessment of the transaction.

 

EdtechX’s sponsors and its current directors and executive officers own common stock and warrants that will be worthless and have made loans and incurred reimbursable expenses that may not be reimbursed or repaid if the Mergers are not consummated. Such interests may have influenced the decisions of the EdtechX directors to approve the Mergers.

 

EdtechX’s officers and directors and/or their affiliates beneficially own insider shares of EdtechX and warrants that they purchased prior to, or simultaneously with, EdtechX’s initial public offering. EdtechX’s executive officers and directors and their affiliates have no conversion rights with respect to these securities in the event a business combination is not effected in the required time period. Therefore, if the Mergers or another business combination are not approved within the required time period, such securities held by such persons will be worthless. Such securities had an aggregate market value of $[●] based upon the closing prices of the shares and warrants on Nasdaq on [●], 2020, the record date.

 

Furthermore, the sponsors have loaned EdtechX an aggregate of $[●] as of the record date and the sponsors and EdtechX’s officers and directors and their affiliates are entitled to reimbursement of out-of-pocket expenses incurred by them in connection with certain activities on EdtechX’s behalf, such as identifying and investigating possible business targets and business combinations. These loans and expenses are payable upon completion of the Mergers. However, if EdtechX fails to consummate the Mergers, the sponsors, officers, directors, and their affiliates will not have any claim against the trust account for repayment or reimbursement of the loans and expenses. Accordingly, EdtechX may not be able to repay or reimburse these amounts if the Mergers are not completed. 

 

These financial interests may have influenced the decision of EdtechX’s directors to approve the Mergers and to continue to pursue such business combination. In considering the recommendations of EdtechX’s board of directors to vote for the merger proposal and other proposals, EdtechX shareholders should consider these interests. See the section of this proxy statement/prospectus titled “The Merger Proposal — Interests of EdtechX’s Directors and Officers in the Mergers.”

 

EdtechX’s sponsors are liable to ensure that proceeds of the trust are not reduced by vendor claims in the event the Mergers are not consummated. Such liability may have influenced his decision to approve the Mergers.

 

If the Mergers or another business combination is not consummated by EdtechX within the required time period, EdtechX’s sponsors, who are affiliates of Charles McIntyre and Benjamin Vedrenne-Cloquet, will be liable to ensure that the proceeds in the trust account are not reduced by the claims of target businesses or claims of vendors or other entities that are owed money by EdtechX for services rendered or contracted for or products sold to EdtechX, but only if such a vendor or target business has not executed a waiver agreement. If EdtechX consummates a business combination, on the other hand, EdtechX will be liable for all such claims. See the section of this proxy statement/prospectus titled “Information Related to EdtechX — Liquidation if No Business Combination” for further information.

 

These obligations of the sponsors may have influenced EdtechX’s board of directors’ decision to approve the business combination with Meten and to continue to pursue such business combination. In considering the recommendations of EdtechX’s board of directors to vote for the merger proposal and other proposals, EdtechX’s shareholders should consider these interests. See the section of this proxy statement/prospectus titled “The Merger Proposal — Interests of EdtechX’s Directors and Officers in the Mergers.”

 

The exercise of EdtechX’s directors’ and officers’ discretion in agreeing to changes or waivers in the terms of the Mergers may result in a conflict of interest when determining whether such changes to the terms of the Mergers or waivers of conditions are appropriate and in EdtechX’s shareholders’ best interest.

 

In the period leading up to the closing of the Mergers, events may occur that, pursuant to the Merger Agreement, would require EdtechX to agree to amend the Merger Agreement, to consent to certain actions taken by Meten or to waive rights that EdtechX is entitled to under the Merger Agreement. Such events could arise because of changes in the course of Meten’s business, a request by Meten to undertake actions that would otherwise be prohibited by the terms of the Merger Agreement or the occurrence of other events that would have a material adverse effect on Meten’s business and would entitle EdtechX to terminate the Merger Agreement. In any of such circumstances, it would be at EdtechX’s discretion, acting through its board of directors, to grant its consent or waive those rights. The existence of the financial and personal interests of the directors described in the preceding risk factors may result in a conflict of interest on the part of one or more of the directors between what he or they may believe is best for EdtechX and what he or they may believe is best for himself or themselves in determining whether or not to take the requested action. As of the date of this proxy statement/prospectus, EdtechX does not believe there will be any changes or waivers that EdtechX’s directors and officers would be likely to make after shareholder approval of the merger proposal has been obtained. While certain changes could be made without further shareholder approval, EdtechX will circulate a new or amended proxy statement/prospectus and resolicit EdtechX’s shareholders if changes to the terms of the transaction that would have a material impact on its shareholders are required prior to the vote on the merger proposal.

 

58

 

 

If EdtechX is unable to complete the business combination with Meten or another business combination by April 10, 2020 (or such later date as EdtechX shareholders may approve), EdtechX will cease all operations except for the purpose of winding up, dissolving and liquidating. In such event, third parties may bring claims against EdtechX and, as a result, the proceeds held in the trust account could be reduced and the per-share liquidation price received by shareholders could be less than $[●] per share.

 

Under the terms of EdtechX’s amended and restated certificate of incorporation, EdtechX must complete the Mergers with Meten or another business combination by April 10, 2020 (or such later date as EdtechX shareholders may approve), or EdtechX must cease all operations except for the purpose of winding up, converting 100% of the outstanding public shares and, subject to the approval of its remaining shareholders and its board of directors, dissolving and liquidating. In such event, third parties may bring claims against EdtechX. Although EdtechX has obtained waiver agreements from certain vendors and service providers it has engaged and owes money to, and the prospective target businesses it has negotiated with, whereby such parties have waived any right, title, interest or claim of any kind they may have in or to any monies held in the trust account, there is no guarantee that they or other vendors who did not execute such waivers will not seek recourse against the trust account notwithstanding such agreements. Furthermore, there is no guarantee that a court will uphold the validity of such agreements. Accordingly, the proceeds held in the trust account could be subject to claims which could take priority over those of EdtechX’s public shareholders. If EdtechX is unable to complete a business combination within the required time period, the sponsors have agreed they will be liable to ensure that the proceeds in the trust account are not reduced by the claims of target businesses or claims of vendors or other entities that are owed money by EdtechX for services rendered or contracted for or products sold to EdtechX, but only if such a vendor or prospective target business does not execute such a waiver. However, the sponsors may not be able to meet such obligation. Therefore, the per-share distribution from the trust account in such a situation may be less than $[●] due to such claims.

 

Additionally, if EdtechX is forced to file a bankruptcy case or an involuntary bankruptcy case is filed against it which is not dismissed, or if EdtechX otherwise enters compulsory or court supervised liquidation, the proceeds held in the trust account could be subject to applicable bankruptcy law, and may be included in its bankruptcy estate and subject to the claims of third parties with priority over the claims of its shareholders. To the extent any bankruptcy claims deplete the trust account, EdtechX may not be able to return to its public shareholders at least $[●].

 

EdtechX’s shareholders may be held liable for claims by third parties against EdtechX to the extent of distributions received by them.

 

If EdtechX is unable to complete the Mergers or another business combination within the required time period, EdtechX will cease all operations except for the purpose of winding up, liquidating and dissolving, subject to its obligations under Delaware law to provide for claims of creditors and the requirements of other applicable law. EdtechX cannot assure you that it will properly assess all claims that may be potentially brought against EdtechX. As such, EdtechX’s shareholders could potentially be liable for any claims to the extent of distributions received by them (but no more) and any liability of its shareholders may extend well beyond the third anniversary of the date of distribution. Accordingly, EdtechX cannot assure you that third parties will not seek to recover from its shareholders amounts owed to them by EdtechX.

 

If EdtechX is forced to file a bankruptcy case or an involuntary bankruptcy case is filed against it which is not dismissed, any distributions received by shareholders could be viewed under applicable debtor/ creditor and/or bankruptcy laws as either a “preferential transfer” or a “fraudulent conveyance.” As a result, a bankruptcy court could seek to recover all amounts received by EdtechX’s shareholders. Furthermore, because EdtechX intends to distribute the proceeds held in the trust account to its public shareholders promptly after the expiration of the time period to complete a business combination, this may be viewed or interpreted as giving preference to its public shareholders over any potential creditors with respect to access to or distributions from its assets. Furthermore, EdtechX’s board of directors may be viewed as having breached their fiduciary duties to its creditors and/or may have acted in bad faith, and thereby exposing itself and the company to claims of punitive damages, by paying public shareholders from the trust account prior to addressing the claims of creditors. EdtechX cannot assure you that claims will not be brought against it for these reasons.

 

59

 

 

Activities taken by existing EdtechX shareholders to increase the likelihood of approval of the merger proposal and other proposals could have a depressive effect on EdtechX’s common stock.

 

At any time prior to the annual meeting, during a period when they are not then aware of any material nonpublic information regarding EdtechX or its securities, EdtechX, EdtechX’s initial stockholders, officers, directors, Meten or Meten shareholders and/or their respective affiliates may purchase shares of EdtechX common stock from institutional and other investors who vote, or indicate an intention to vote, against the merger proposal, or execute agreements to purchase such shares from such investors in the future, or they may enter into transactions with such investors and others to provide them with incentives to acquire shares of common stock of EdtechX or vote their shares in favor of the merger proposal. The purpose of such share purchases and other transactions would be to increase the likelihood of satisfaction of the requirements to consummate the Mergers where it appears that such requirements would otherwise not be met. Entering into any such arrangements may have a depressive effect on EdtechX’s common stock. For example, as a result of these arrangements, an investor or holder may have the ability to effectively purchase shares of EdtechX common stock at a price lower than market and may therefore be more likely to sell the shares of EdtechX common stock he owns, either prior to or immediately after the annual meeting.

 

The Meten founders and the EdtechX sponsors will enter into a voting agreement pursuant to which they will agree to vote for six members of Holdco’s board of directors. As a result, these holders may influence the composition of the board of directors of Holdco and future actions taken by the board of directors of Holdco.

 

At closing of the Mergers, EdtechX, Holdco, Meten and certain shareholders of Meten and stockholders of EdtechX will enter into the Voting Agreement pursuant to which they will agree to nominate nine members to the board of directors of Holdco, including Benjamin Vedrenne-Cloquet and Charles McIntyre, EdtechX’s Chief Executive Officer and Chairman of the Board, respectively, and Jishuang Zhao, Siguang Peng and Yupeng Guo, the founders of Meten, and Yongchao Chen, and to take all actions necessary to vote all Holdco ordinary shares beneficially owned by them for the election of such persons until the third anniversary of the closing. As a result, the parties to the Voting Agreement will be able influence the composition of the board and, in turn, potentially influence and impact future actions taken by the board of directors of Holdco.

 

Holdco’s shares may not be listed on a securities exchange. Even if listed, Holdco may be unable to maintain the listing of its securities in the future.

 

A condition of the Merger Agreement is that Holdco Ordinary Shares be listed on Nasdaq or the New York Stock Exchange upon consummation of the Mergers. Holdco will be required to meet the initial listing requirements of any such exchange to be listed. Holdco may not be able to meet those initial listing requirements. Even if the Holdco Ordinary Shares are so listed, Holdco may be unable to meet the continued listing requirements in the future and accordingly may be unable to maintain the listing of its securities.

 

If Holdco meets the initial listing requirements, but is unable to meet the continued listing requirements and the Holdco Ordinary Shares are subsequently delisted, Holdco could face significant material adverse consequences, including:

 

  a limited availability of market quotations for its securities;

 

  a limited amount of news and analyst coverage for the company; and

 

  a decreased ability to issue additional securities or obtain additional financing in the future.

 

Holdco has never previously been a US reporting company.

 

Holdco has never previously been a reporting company in the United States subject to U.S. federal and state securities laws, including the reporting obligations of the Exchange Act and other requirements of the Sarbanes-Oxley Act. Holdco will be required to incur significant costs in connection with complying with public company requirements under U.S. federal and state securities laws. The attention of management may be diverted on a frequent basis in order to carry out public company reporting and related obligations, rather than directing their full time and attention to the operation and growth of the business. Employees and members of the management team have had limited experience working for a US reporting company, increasing the risk of non-compliance. Holdco’s disclosure controls and procedures may not prevent or detect all errors or acts of fraud or misconduct by persons inside or outside Holdco. Similarly, if Holdco fails to maintain an effective system of internal control over financial reporting, Holdco may not be able to accurately report its financial condition, results of operations or cash flows. Noncompliance with U.S. federal and state securities laws and other regulatory requirements could result in administrative or other penalties or civil or criminal judgments against Holdco or harm to Holdco’s reputation. These consequences could affect investor confidence in Holdco and cause the price of the stock to decline, result in the delisting of Holdco’s shares from the Nasdaq, require the payment of fines or other amounts, distract management’s time and attention to the business or result in the loss of customer or supplier relationships.

 

60

 

 

Holdco has no operating history. The unaudited pro forma financial information and the historical combined financial information included elsewhere in this proxy statement/prospectus may not be representative of actual results as a combined company, and accordingly, you have limited financial information on which to evaluate Holdco and your investment decision.

 

Meten and EdtechX have no prior history as a combined entity and their operations have not previously been managed on a combined basis. As a result, the pro forma financial information for the combined company and the combined audited financial statements of Meten and EdtechX giving effect to the Mergers included elsewhere in this proxy statement/prospectus as presented are not necessarily indicative of the financial position or results of operations of the combined company that would have actually occurred had the Mergers been completed at or as of the dates indicated, nor are they indicative of the future operating or financial position of the combined company. The pro forma financial information for the combined company does not consider potential impacts of current market conditions on revenues or expense efficiencies. The pro forma financial information presented in this proxy statement/prospectus is based in part on certain assumptions regarding the Mergers that Meten and EdtechX believe are reasonable under the circumstances. However, assumptions used in preparing such financial information may not prove to be accurate over time. Investors should not place any undue reliance on the pro forma financial information of the combined company.

 

Meten and EdtechX will incur substantial transaction fees and costs in connection with the Mergers.

 

Meten and EdtechX expect to incur material non-recurring expenses in connection with the Merger and consummation of the Mergers contemplated by the Merger Agreement. Additional unanticipated costs may be incurred in the course of the integration of the businesses of Meten and EdtechX. The parties cannot be certain that the elimination of duplicative costs or the realization of other efficiencies related to the integration of the two businesses will offset the transaction and integration costs in the near term, or at all.

 

The Mergers may be completed even though material adverse changes may result from the announcement of the Mergers, industry-wide changes and other causes.

 

In general, either EdtechX or Holdco can refuse to complete the Mergers if there is a material adverse change affecting the other party between the signing date of the Merger Agreement and the planned closing. However, certain types of changes do not permit either party to refuse to complete the Mergers, even if such change could be said to have a material adverse effect on EdtechX or Holdco, including the following events (except, in some cases, where the change has a disproportionate effect on a party):

 

  changes generally affecting the economy, financial or securities markets;

 

  the outbreak or escalation of war or any act of terrorism, civil unrest or natural disasters;

 

  changes (including changes in law) or general conditions in the industry in which the party operates; or

 

  changes in GAAP (or the authoritative interpretation of GAAP).

 

If adverse changes occur and the parties still complete the Mergers, Holdco’s stock price may suffer. This in turn may reduce the value of the Mergers to the stockholders of EdtechX.

 

Current EdtechX stockholders will have a reduced ownership and voting interest in Holdco after the Mergers.

 

As a result of the Mergers, assuming no conversions of EdtechX public shares, no Cash Election is made, and without taking into effect securities which may be issued pursuant to the Azimut Investment or in a Financing, EdtechX stockholders are expected to hold approximately 14% of Holdco’s outstanding ordinary shares immediately following completion of the Mergers on a fully diluted basis. When the Merger occurs, each EdtechX stockholder that receives Holdco Ordinary Shares will hold a percentage ownership of Holdco that will be significantly smaller than the stockholder’s current percentage ownership of EdtechX. All of the Holdco Ordinary Shares to be issued and outstanding at the completion of the Mergers will be of a single class with equal rights with each Holdco Ordinary Share having one vote per share. Accordingly, at the consummation of the Mergers, the Meten founders will own shares representing approximately 49.5% of the aggregate voting power of the Holdco Ordinary Shares (assuming no conversions of EdtexhX public shares, no Cash Election is made, and without taking into effect securities which may be issued pursuant to the Azimut Investment or in a Financing). The Meten founders will therefore be able to exercise significant influence over Holdco’s business policies and affairs due to their large voting percentage. Former EdtechX stockholders will have less voting power in Holdco than they now have with respect to EdtechX.

 

Shareholders of Meten and their affiliates will exercise significant influence over Holdco, and their interests in Holdco may be different than yours.

 

Following the completion of the Mergers, assuming no conversions of EdtechX public shares, no Cash Election is made, and without taking into effect securities which may be issued pursuant to the Azimut Investment or in a Financing, Meten’s shareholders and their affiliates will beneficially own approximately 86% of the outstanding Holdco Ordinary Shares calculated on a fully diluted basis. Accordingly, Meten’s shareholders and their affiliates will be able to exercise significant influence over Holdco’s business policies and affairs. The interests of Meten’s shareholders and their affiliates may conflict with your interests. For example, these shareholders may support certain long-term strategies or objectives for Holdco which may not be accretive to shareholders in the short term. The concentration of ownership may also delay, defer or even prevent a change in control of Holdco, even if such a change in control would benefit other shareholders, and may make some mergers more difficult or impossible without the support of these parties. This significant concentration of share ownership may adversely affect the trading price for Holdco’s ordinary shares because investors often perceive disadvantages in owning shares in companies with shareholders who own significant percentages of a company’s outstanding shares.

 

61

 

 

Some of the EdtechX officers and directors have interests in the Mergers that are different from yours and that may influence them to support or approve the Merger without regard to your interests.

 

Certain officers and directors of EdtechX have interests in the Mergers that are different from yours, including, among others, Messrs. Vedrenne-Cloquet’s and McIntyre’s continued service as a director of Holdco and the annual cash and equity compensation they will receive in connection with such service, and the right to continued indemnification for directors and former directors and executive officers following the completion of the Mergers. See the section of this proxy statement/prospectus titled “The Merger Proposal – Interests of EdtechX’s Officers and Directors.”

 

The Holdco Ordinary Shares to be received by EdtechX stockholders as a result of the Mergers will have different rights from the shares of EdtechX common stock

 

Upon completion of the Mergers, EdtechX stockholders will become shareholders of Holdco and their rights as shareholders will be governed by Holdco’s amended and restated memorandum and articles of association. Holdco will be a Cayman Islands exempted company and certain of the rights associated with the Holdco ordinary shares will be different from the rights associated with EdtechX common stock under Delaware law. See the section of this proxy statement/prospectus titled “Comparison of Corporate Governance and Shareholder Rights.”

 

If the conditions to the completion of the Merger are not met, the Merger will not occur.

 

Even if the Merger is approved by the stockholders of EdtechX, additional specific conditions must be satisfied or waived (to the extent permitted under applicable law) in order to complete the Mergers, including, among others:

 

  Holdco’s Registration Statement on Form F-4 shall have become effective, and no stop order suspending effectiveness shall have been issued and remain in effect,

 

  the Holdco ordinary shares issuable in accordance with the Merger Agreement will have been authorized for listing on the Nasdaq or the New York Stock Exchange,

 

  no governmental entity shall have enacted any law or order which is in effect and which has the effect of making the Mergers illegal or otherwise prohibiting consummation of the Mergers contemplated by the Merger Agreement,

 

  EdtechX having at least $5,000,001 of net tangible assets remaining immediately prior to, or upon the closing of, the business combination, after taking into account payments to holders of shares of EdtechX’s common stock that properly demanded that EdtechX convert their common stock for their pro rata share of the trust account;

 

  the satisfaction or waiver of the Minimum Cash Closing Condition;

 

  the representations and warranties of each party to the Merger Agreement shall be true and correct subject to certain materiality qualifiers, and

 

  each party shall have performed or complied with all agreements and covenants required by the Merger Agreement to be performed or complied with by it at or prior to the closing date.

 

These and other conditions are described in detail in the Merger Agreement. We cannot assure you that all of the conditions to the Mergers will be satisfied. If the conditions to the Mergers are not satisfied or waived (to the extent permitted under applicable law), the Mergers will not occur or will be delayed, and EdtechX may lose some or all of the intended benefits of the Mergers.

 

Delays in completing the Mergers may substantially reduce the expected benefits of the Mergers.

 

Satisfying the conditions to, and completion of, the Mergers may take longer than, and could cost more than, EdtechX expects. Any delay in completing or any additional conditions imposed in order to complete the Mergers may materially adversely affect the benefits that EdtechX expects to achieve from the acquisition of Meten’s business.

 

62

 

 

If the Mergers do not qualify as a tax-free exchange, for U.S. federal income tax purposes, EdtechX stockholders and Holdco may recognize income, gain or loss in connection with the Mergers.

 

The parties to the Merger Agreement intend that the Mergers, taken together, qualify as an integrated exchange for U.S. federal income tax purposes under Section 351 of the Code, and the Merger Agreement provides that all parties to the Merger agreement shall report the Mergers consistent with such tax treatment unless otherwise required by a final determination under applicable tax law. The parties, however, did not and will not seek a ruling from the IRS regarding the tax consequences of the Mergers. The failure of the Mergers to qualify as a tax-free exchange or being subject to Section 367 of the Code for U.S. federal income tax purposes could result in an EdtechX stockholder recognizing income, gain, or loss with respect to the shares of EdtechX common stock surrendered by such stockholder. See the section of this proxy statement/prospectus titled “The Merger Proposal – Anticipated Material Federal Income Tax Consequences of the Mergers to EdtechX and its Stockholders.

 

We may become a passive foreign investment company, which could result in adverse United States federal income tax consequences to United States investors.

 

Based on the projected composition of our income and valuation of our assets, including goodwill, Holdco is not expect to be a passive foreign investment company (“PFIC”), for its current taxable year, and Holdco does not expect to become one in the future, although there can be no assurance in this regard. Although Holdco does not expect to be a PFIC, it is not entirely clear how the contractual arrangements between Holdco and the VIEs will be treated for purposes of the PFIC rules. If it were determined that Holdco does not own the stock of the VIEs for U.S. federal income tax purposes (for instance, because the relevant PRC authorities do not respect these arrangements), Holdco may be treated as a PFIC. See “Anticipated Material Federal Income Tax Consequences of the Mergers to EdtechX and Its Stockholders – U.S. Holders — Passive Foreign Investment Company.” If Holdco is or were to become a PFIC, such characterization could result in adverse United States federal income tax consequences to you if you are a U.S. investor. For example, if Holdco is a PFIC, its U.S. investors will become subject to increased tax liabilities under U.S. federal income tax laws and regulations and will become subject to burdensome reporting requirements. Holdco cannot assure you that we will not be a PFIC for our current taxable year or any future taxable year. See “Anticipated Material Federal Income Tax Consequences of the Mergers to EdtechX and Its Stockholders – U.S. Holders — Passive Foreign Investment Company.”

 

Failure or delay in obtaining any necessary regulatory approvals could cause the Mergers not to be completed or to be postponed.

 

To complete the Mergers, Holdco must comply with applicable federal and state securities laws and the rules and regulations of Nasdaq in connection with the issuance and listing of shares of Holdco ordinary shares and the filing of this proxy statement/prospectus with the SEC. Failure or delay in obtaining any necessary approvals could cause the Mergers not to be completed or to be postponed, which may materially adversely affect the benefits that Meten and EdtechX expect to achieve from the Mergers.

 

EdtechX stockholders will not be entitled to appraisal rights in the Mergers.

 

Current holders of EdtechX common stock will not be entitled to dissenters’ or appraisal rights in the Mergers with respect to their shares of EdtechX common stock under Delaware law. Pursuant to the terms of the Merger Agreement, at the Second Effective Time (as defined in the Merger Agreement), each share of EdtechX common stock issued and outstanding immediately prior to the Second Effective Time (other than shares owned by EdtechX, which will be cancelled at the Second Effective Time without further consideration) will be automatically cancelled and extinguished and converted into the right to receive one Holdco Ordinary Share.

 

Holdco is not expected to pay dividends on its shares of ordinary shares in the foreseeable future.

 

Holdco is not expected to pay dividends on its shares of ordinary shares in the foreseeable future. Instead, for the foreseeable future, it is expected that Holdco will continue to retain any earnings to finance the development and expansion of its business, and not to pay any cash dividends on its ordinary shares. Consequently, your only opportunity to achieve a return on your investment in Holdco will be if the market price of the ordinary shares appreciates and you sell your shares at a profit. There is no guarantee that the price of Holdco’s ordinary shares that will prevail in the market after the Mergers will ever exceed the value of the Holdco ordinary shares exchanged in the Mergers.

 

63

 

 

There may be less publicly available information concerning Holdco than there is for issuers that are not foreign private issuers because it is anticipated that Holdco will be considered a foreign private issuer and will be exempt from a number of rules under the Exchange Act and will be permitted to file less information with the SEC than issuers that are not foreign private issuers and Holdco, as a foreign private issuer, will be permitted to follow home country practice in lieu of the listing requirements of the Nasdaq, subject to certain exceptions.

 

A foreign private issuer under the Exchange Act is exempt from certain rules under the Exchange Act, and is not required to file periodic reports and financial statements with the SEC as frequently or as promptly as companies whose securities are registered under the Exchange Act but are not foreign private issuers, or to comply with Regulation FD, which restricts the selective disclosure of material non-public information. It is anticipated that Holdco will be exempt from certain disclosure and procedural requirements applicable to proxy solicitations under Section 14 of the Exchange Act. The members of Holdco’s management board, officers and principal shareholders will be exempt from the reporting and "short-swing" profit recovery provisions of Section 16 of the Exchange Act. Accordingly, there may be less publicly available information concerning Holdco than there is for companies whose securities are registered under the Exchange Act but are not foreign private issuers, and such information may not be provided as promptly as it is provided by such companies. In addition, certain information may be provided by Holdco in accordance with Cayman Islands law, which may differ in substance or timing from such disclosure requirements under the Exchange Act. Further, as a foreign private issuer, under the Nasdaq rules Holdco will be subject to less stringent corporate governance requirements. Subject to certain exceptions, the rules of Nasdaq permit a foreign private issuer to follow its home country practice in lieu of the listing requirements of Nasdaq, including, for example, certain internal controls as well as board, committee and director independence requirements. In accordance with this exception, Holdco follows Cayman Islands corporate governance practices in lieu of certain of the Nasdaq corporate governance standards, as more fully described elsewhere herein. In particular, Holdco follows Cayman Islands law and corporate governance practices with respect to the composition of the board and the compensation and nominating and corporate governance committees, the requirement to hold regular executive sessions of the board of directors, and the requirement to obtain shareholder approval prior to the issuance of securities in connection with a change of control, certain acquisitions, private placements of securities, or the establishment or amendment of certain stock option, purchase, or other equity compensation plans or arrangements. These differences may result in less shareholder oversight and requisite approvals for certain acquisition or financing related decisions and certain compensation related decisions, and may result in management controlling officer and director compensation and nominations to our board of directors. The Cayman Islands home country practices that we follow may afford less protection to holders of our securities than that provided under the Nasdaq rules.

 

Holdco may lose its foreign private issuer status in the future, which could result in significant additional costs and expenses.

 

As a foreign private issuer, Holdco would not be required to comply with all the periodic disclosure and current reporting requirements of the Exchange Act and related rules and regulations. The determination of foreign private issuer status is made annually. There is a risk that Holdco will lose our foreign private issuer status in the future.

 

Holdco would lose its foreign private issuer status if, for example, more than 50% of its assets are located in the United States and Holdco’s continue to fail to meet additional requirements necessary to maintain our foreign private issuer status. The regulatory and compliance costs to Holdco under U.S. securities laws as a U.S. domestic issuer may be significantly greater than the costs Holdco will incur as a foreign private issuer. If Holdco is not a foreign private issuer, it will be required to file periodic reports and registration statements on U.S. domestic issuer forms with the SEC, which are more detailed and extensive in certain respects than the forms available to a foreign private issuer. Holdco would be required under current SEC rules to prepare our financial statements in accordance with U.S. GAAP and modify certain of its policies to comply with corporate governance practices associated with U.S. domestic issuers. Such conversion and modifications would involve additional costs. In addition, Holdco may lose its ability to rely upon exemptions from certain corporate governance requirements on U.S. stock exchanges that are available to foreign private issuers, which could also increase Holdco’s costs.

 

Risks Related to an Investment in Holdco Ordinary Shares

 

Currently, there is no public market for Holdco Ordinary Shares. EdtechX stockholders cannot be sure that an active trading market will develop for or of the market price of the Holdco Ordinary Shares they will receive or that Holdco will successfully obtain authorization for listing on the Nasdaq.

 

Upon the consummation of the Mergers, each share of EdtechX Common Stock will be converted into the right to receive one Holdco Ordinary Share, each outstanding EdtechX warrant will represent a warrant to purchase one Holdco Ordinary Share (in lieu of a warrant to purchase a share of common stock of EdtechX), and each unit purchase option of EdtechX will be deemed to have been converted and to represent a unit purchase option to purchase units of Holdco, with each such unit consisting of one Holdco Share and one Holdco Warrant. Holdco is newly formed entity and prior to this transaction it has not issued any securities in the U.S. markets or elsewhere nor has there been extensive information about it, its businesses, or its operations publicly available. EdtechX, Meten and Holdco have agreed to use their best efforts to cause the Holdco Ordinary Shares to be issued in the Merger to be approved for listing on the Nasdaq prior to the effective time of the Merger and the approval of the listing on the Nasdaq of the Holdco Ordinary Shares to be issued in the Mergers is a condition to the closing of the Mergers. However, the listing of shares on the Nasdaq does not ensure that a market for the Holdco Ordinary Shares will develop or the price at which the shares will trade. No assurance can be provided as to the demand for or trading price of Holdco Ordinary Shares following the closing of the Mergers and the Holdco Ordinary Shares may trade at a price less than the current market price of EdtechX Common Stock.

 

Even if Holdco is successful in developing a public market, there may not be enough liquidity in such market to enable shareholders to sell their ordinary shares. If a public market for the combined Holdco’s ordinary shares does not develop, investors may not be able to re-sell their ordinary shares, rendering their shares illiquid and possibly resulting in a complete loss of their investment. Holdco cannot predict the extent to which investor interest in Holdco will lead to the development of an active, liquid trading market. The trading price of and demand for Holdco Ordinary Shares following completion of the Mergers and the development and continued existence of a market and favorable price for the Holdco Ordinary Shares will depend on a number of conditions, including the development of a market following, including by analysts and other investment professionals, the businesses, operations, results and prospects of Holdco, general market and economic conditions, governmental actions, regulatory considerations, legal proceedings and developments or other factors. These and other factors may impair the development of a liquid market and the ability of investors to sell shares at an attractive price. These factors also could cause the market price and demand for Holdco Ordinary Shares to fluctuate substantially, which may limit or prevent investors from readily selling their shares and may otherwise affect negatively the price and liquidity of Holdco Ordinary Shares. Many of these factors and conditions are beyond the control of Holdco or Holdco shareholders.

64

 

 

Holdco’s share price may be volatile and could decline substantially.

 

The market price of Holdco’s ordinary shares may be volatile, both because of actual and perceived changes in the company’s financial results and prospects, and because of general volatility in the stock market. The factors that could cause fluctuations in Holdco’s share price may include, among other factors discussed in this section, the following:

 

  actual or anticipated variations in the financial results and prospects of the company or other companies in the retail business;

 

  changes in financial estimates by research analysts;

 

  changes in the market valuations of other education technology companies;

 

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

 

  mergers or other business combinations involving Holdco;

 

  additions and departures of key personnel and senior management;

 

  changes in accounting principles;

 

  the passage of legislation or other developments affecting Holdco or its industry;

 

  the trading volume of Holdco’s ordinary shares in the public market;

 

  the release of lockup, escrow or other transfer restrictions on our outstanding equity securities or sales of additional equity securities;

 

  potential litigation or regulatory investigations;

 

  changes in economic conditions, including fluctuations in global and Chinese economies;

 

  financial market conditions;

 

  natural disasters, terrorist acts, acts of war or periods of civil unrest; and

 

  the realization of some or all of the risks described in this section.

 

In addition, the stock markets have experienced significant price and trading volume fluctuations from time to time, and the market prices of the equity securities of retailers have been extremely volatile and are sometimes subject to sharp price and trading volume changes. These broad market fluctuations may materially and adversely affect the market price of Holdco’s ordinary shares.

 

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about Holdco or its business, its ordinary shares price and trading volume could decline.

 

The trading market for the Holdco’s ordinary shares will depend in part on the research and reports that securities or industry analysts publish about Holdco or its business. Securities and industry analysts do not currently, and may never, publish research on Holdco. If no securities or industry analysts commence coverage of Holdco, the trading price for its ordinary shares would likely be negatively impacted. In the event securities or industry analysts initiate coverage, if one or more of the analysts who cover Holdco downgrade its securities or publish inaccurate or unfavorable research about its business, its stock price would likely decline. If one or more of these analysts cease coverage of Holdco or fail to publish reports on Holdco, demand for its ordinary shares could decrease, which might cause its ordinary share price and trading volume to decline.

  

65

 

  

Holdco’s amended and restated memorandum and articles of association that will become effective immediately prior to the completion of the Mergers contains anti-takeover provisions that could have a material adverse effect on the rights of holders of Holdco Ordinary Shares.

 

In connection with the Mergers, Holdco will adopt an amended and restated memorandum and articles of association that will become effective immediately prior to the consummation of the Mergers. Holdco’s post-closing memorandum and articles of association will contain provisions to limit the ability of others to acquire control of Holdco or cause Holdco to engage in change-of-control transactions. These provisions could have the effect of depriving Holdco 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 Holdco in a tender offer or similar transaction. For example, Holdco’s board of directors will have the authority, subject to any resolution of the shareholders to the contrary, to issue preference shares in one or more series and to fix their designations, powers, preferences, privileges, and relative participating, optional or special rights and the qualifications, limitations or restrictions, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights associated with Holdco’s ordinary shares. Preference shares could be issued quickly with terms calculated to delay or prevent a change in control of Holdco or make removal of management more difficult. If Holdco’s board of directors decides to issue preference shares, the price of Holdco Ordinary Shares may fall and the voting and other rights of the holders of Holdco Ordinary Shares may be materially and adversely affected.

 

You may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited, because Holdco was formed under Cayman Islands law.

 

Holdco is an exempted company incorporated under the laws of the Cayman Islands. Holdco’s corporate affairs are governed by Holdco’s memorandum and articles of association, the Companies Law of the Cayman Islands and the common law of the Cayman Islands. The rights of our shareholders to take action against our directors, actions by our minority shareholders and the fiduciary duties of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedents in the Cayman Islands as well as from the common law of England, the decisions of whose courts are of persuasive authority, but are not binding, on a court in the Cayman Islands. The rights of Holdco shareholders and the fiduciary duties of Holdco’s directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedents in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States. Some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States.

 

Shareholders of Cayman Islands exempted companies have no general rights under the Cayman Islands law to inspect corporate records or to obtain copies of lists of shareholders of these companies. Holdco’s directors have the discretion under Holdco’s amended and restated memorandum and articles of association that will become effective immediately prior to the consummation of the Mergers to determine whether or not, and under what conditions, Holdco’s corporate records may be inspected by shareholders, but are not obliged to make them available to shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.

 

66

 

 

Certain corporate governance practices in the Cayman Islands differ significantly from requirements for companies incorporated in other jurisdictions such as the U.S. To the extent Holdco chooses to follow home country practice, shareholders may be afforded less protection than they otherwise would have under rules and regulations applicable to U.S. domestic issuers.

 

The Cayman Islands courts are also unlikely (i) to recognize or enforce against Holdco judgments of courts of the United States based on certain civil liability provisions of U.S. securities laws, or (ii) to impose liabilities against Holdco, 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, Holdco shareholders may have more difficulty in protecting their interests in the face of actions taken by our management, members of Holdco’s board of directors or shareholders than they would as 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 Delaware law applicable to EdtechX, see the section of this proxy statement/prospectus titled “Comparison of Corporate Governance and Shareholder Rights.”

 

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

 

Holdco is a Cayman Islands company and all of its assets are located outside of the United States. All of Meten’s current operations are conducted in the PRC. In addition, the majority of Holdco’s officers and directors after consummation of the Mergers will be nationals and residents of countries other than the United States and all of their assets are located outside the United States. As a result, it may be difficult or impossible for you to bring an action against Holdco or against these individuals in the United States in the event that you believe that your rights have been infringed under the U.S. federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of the PRC may render you unable to enforce a judgment against our assets or the assets of our directors and officers. For more information regarding the relevant laws of the Cayman Islands and the PRC, see “Comparison of Corporate Governance and Shareholder Rights - Enforceability of Civil Liabilities.”

 

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 Holdco’s securities may be materially and adversely affected.

 

Prior to the consummation of the Mergers, Meten was a private company with limited accounting personnel and other resources with which to address its internal controls and procedures. Meten’s management has not completed an assessment of the effectiveness of its internal control over financial reporting, and Meten’s independent registered public accounting firm has not conducted an audit of our internal control over financial reporting. In the course of auditing Meten’s consolidated financial statements included elsewhere in this proxy statement/prospectus, Meten and its independent registered public accounting firm identified two material weaknesses and other control deficiencies in Meten’s internal control over financial reporting.

 

The material weaknesses identified relate to (i) Meten’s lack of a sufficient number of finance and accounting personnel or sufficiently trained finance and accounting personnel, as well as comprehensive accounting policies in accordance with U.S. GAAP financial reporting; and (ii) Meten’s internal control policy does not have a proper approval mechanism, and Meten’s lack of internal controls on performing periodic reviews of user accounts and their level of authorization in the financial systems. Holdco and Meten plan to implement a number of measures to remedy these material weaknesses. See “Meten’s Management’s Discussion and Analysis of Financial Condition and Results of Operations—Internal Control Over Financial Reporting.” Meten has also adopted measures to improve its internal control over financial reporting. We cannot assure you, however, that these measures may fully address these deficiencies in Meten’s internal control over financial reporting or that we may conclude that they have been fully remedied.

 

If we fail to establish and maintain adequate internal controls, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information. This could limit our access to capital markets, adversely affect our results of operations and lead to a decline in the trading price of Holdco’s securities. Additionally, ineffective internal controls could expose us to an increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we list or to other regulatory investigations and civil or criminal sanctions.

 

As a public company, Holdco will be subject to the Sarbanes-Oxley Act. Section 404 of the Sarbanes-Oxley Act, or Section 404, will require that Holdco include a report of management on our internal control over financial reporting in Holdco’s annual report on Form 20-F beginning with the annual report for the year ending December 31, 2020. Management may conclude that Holdco’s internal control over financial reporting is not effective. Moreover, even if management concludes that Holdco’s internal control over financial reporting is effective, Holdco’s independent registered public accounting firm, after conducting its own independent testing, may issue a report that is qualified if it is not satisfied with Holdco’s internal controls or the level at which Holdco controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from Holdco. In addition, after Holdco becomes a public company, Holdco’s reporting obligations may place a significant strain on its 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 of Meten’s prior deficiencies in its internal control over financial reporting.

 

67

 

 

During the course of documenting and testing Meten’s internal control procedures, Holdco may identify other weaknesses and deficiencies in its internal control over financial reporting. In addition, if we fail to maintain the adequacy of our internal control over financial reporting, as these standards are modified, supplemented or amended from time to time, we may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404. Generally speaking, if we fail to achieve and maintain an effective internal control environment, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information. This could in turn limit our access to capital markets, harm our results of operations, and lead to a decline in the trading price of our securities. Additionally, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we list, regulatory investigations and civil or criminal sanctions.

 

The audit report of Meten’s financial statements included in this proxy statement/prospectus is prepared by auditors who are not fully inspected by the Public Company Accounting Oversight Board, and as such, you are deprived of the benefits of such inspection and Holdco may not be approved for initial or continued listing on a United States national securities exchange.

 

Meten’s independent registered public accounting firm issued an audit report with respect to Meten’s historical financial statements which is included in this proxy statement/prospectus. As auditors of companies that are traded publicly in the United States and a firm registered with the PCAOB, Meten’s independent registered public accounting firm 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 Meten’s auditors are located in China, a jurisdiction where PCAOB is currently unable to conduct full inspections without the approval of the Chinese authorities, Meten’s auditors are not currently inspected by the PCAOB.

 

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

 

The inability of PCAOB to conduct full inspections of auditors in China makes it more difficult to evaluate the effectiveness of Meten’s auditor’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections. Investors may lose confidence in our reported financial information and procedures and the quality of our financial statements. Additionally, Nasdaq may exercise their discretion under their respective listing standards to deny initial or continued listing to Holdco based on PACOB’s inability to conduct full inspections of Meten’s auditors. If such event occurs, the Company may face difficulties or be unable to list on a national securities exchange.

 

Beginning in 2011, “big four” PRC-based accounting firms, including affiliates of Meten’s independent registered public accounting firm, were affected by a conflict between U.S. and Chinese law, and an administrative law judge in the U.S. imposed penalties on the firms and the firms were temporarily suspended from practicing before the SEC. If additional remedial measures are imposed, we could be unable to timely file future financial statements in compliance with the requirements of the Exchange Act.

 

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

 

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

 

68

 

 

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

 

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

 

Risks If the Adjournment Proposal Is Not Approved

 

If the adjournment proposal is not approved, and EdtechX is unable to consummate the Mergers for any reason, EdtechX’s board of directors will not have the ability to adjourn the annual meeting to a later date, and, therefore, the Mergers will not be approved.

 

EdtechX’s board of directors is seeking approval to adjourn the annual meeting to a later date or dates if, at the annual meeting, EdtechX is unable to consummate the Mergers for any reason. If the adjournment proposal is not approved, EdtechX’s board of directors will not have the ability to adjourn the annual meeting to a later date and, therefore, will not have more time to consummate the Mergers. In such event, the Mergers would not be completed.

 

69

 

 

FORWARD-LOOKING STATEMENTS

 

Some of the information in this proxy statement/prospectus constitutes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. However, because EdtechX is a “blank check” company, the safe-harbor provisions of that act do not apply to statements made in this proxy statement/prospectus. All statements, other than statements of historical facts, included in or incorporated by reference into this proxy statement/prospectus regarding strategy, future operations, future Mergers, future financial position, future revenue, projected expenses, prospects, plans and objectives of management are forward-looking statements. You can identify these statements by forward-looking words such as “may,” “expect,” “anticipate,” “contemplate,” “believe,” “estimate,” “forecast,” “intends,” and “continue” or similar words. You should read statements that contain these words carefully because they:

 

  discuss future expectations;

 

  contain projections of future results of operations or financial condition; or

 

  otherwise include “forward-looking” information.

 

There may be events in the future that EdtechX and Meten are not able to predict accurately or over which they have no control. The risk factors and cautionary language discussed in this proxy statement/prospectus provide examples of risks, uncertainties and events that may cause actual results to differ materially from the expectations described by EdtechX or Meten in such forward-looking statements, including among other things:

 

  the number of EdtechX stockholders voting against the merger proposal and/or seeking conversion;

 

  the occurrence of any event, change or other circumstances that could give rise to the termination of the Merger Agreement;

 

  the ability to maintain the listing of Holdco Ordinary Shares on a national securities exchange following the business combination;

 

  changes adversely affecting the businesses in which Meten is engaged;

 

  Meten’s ability to retain and increase student enrollment, offer new courses and services, engage, train and retain new teachers and consultants, and maintain and improve technology infrastructure necessary to operate Meten’s online platform;

 

  management of growth;

 

  general economic conditions;

 

  Meten’s business strategy and plans; and

 

  the result of future financing efforts.

 

You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this proxy statement/prospectus.

 

All forward-looking statements included herein attributable to any of Meten, EdtechX, Holdco or any person acting on their behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section and the risks and uncertainties set forth in the “Risk Factors” section. Except to the extent required by applicable laws and regulations, Meten, EdtechX and Holdco undertake no obligations to update these forward-looking statements to reflect events or circumstances after the date of this proxy statement/prospectus or to reflect the occurrence of unanticipated events.

 

Before a stockholder grants its proxy or instructs how its vote should be cast or vote on the merger proposal or the adjournment proposal, it should be aware that the occurrence of the events described in the “Risk Factors” section and in the risks and uncertainties set forth elsewhere in this proxy statement/prospectus may adversely affect Meten, EdtechX and/or Holdco.

 

70

 

 

ANNUAL MEETING OF EDTECHX STOCKHOLDERS

 

General

 

EdtechX is furnishing this proxy statement/prospectus to its stockholders as part of the solicitation of proxies by its board of directors for use at the annual meeting of EdtechX stockholders to be held on [●], and at any adjournment or postponement thereof. This proxy statement/prospectus provides you with information you need to know to be able to vote or instruct your vote to be cast at the annual meeting.

 

Date, Time and Place

 

The annual meeting of stockholders of EdtechX will be held on [●], at [●] a.m., local time, at the offices of Graubard Miller, EdtechX’s U.S. counsel, located at The Chrysler Building, 405 Lexington Avenue, 11th Floor, New York, NY 10174, or such other date, time and place to which such meeting may be adjourned or postponed.

 

Purpose of the Annual Meeting of Stockholders

 

At the annual meeting, EdtechX is asking holders of its common stock:

 

  to consider and vote upon a proposal to adopt the Merger Agreement and approve the Mergers contemplated by the Merger Agreement (the merger proposal);

 

  to elect nine (9) directors to the board of directors of Holdco, to serve until their successors are duly elected and qualified (the director proposal);

 

  to approve the following material differences between EdtechX’s amended and restated certificate of incorporation and Holdco’s agreement and memorandum of association to be effective upon the consummation of the business combination: (i) the name of the new public entity will be “Meten EdtechX Education Group Ltd.” as opposed to “EdtechX Holdings Acquisition Corp.”; (ii) Holdco has 500,000,000 ordinary shares authorized, as opposed to EdtechX having 25,000,000 authorized shares of common stock and 1,000,000 authorized shares of preferred stock; (iii) Holdco’s corporate existence is perpetual as opposed to EdtechX’s corporate existence terminating if a business combination is not consummated by EdtechX within a specified period of time; and (iv) Holdco’s constitutional documents do not include the various provisions applicable only to special purpose acquisition corporations that EdtechX’s charter contains (the charter proposals); and

 

  to consider and vote upon a proposal to approve, if necessary, an adjournment of the annual meeting to permit further solicitation and vote of proxies or to otherwise permit EdtechX to consummate the business combination contemplated by the Merger Agreement (the adjournment proposal).

 

Recommendation of EdtechX’s Board of Directors

 

EdtechX’s board of directors has determined that the Mergers are fair to and in the best interests of EdtechX and its stockholders, approved the Merger Agreement and recommended that stockholders vote “FOR” the merger proposal, “FOR” the director proposal, “FOR” each of the charter proposals, and “FOR” an adjournment proposal, if presented.

 

Voting Power; Record Date

 

EdtechX has fixed the close of business on [●] as the “record date” for determining EdtechX stockholders entitled to notice of and to attend and vote at the annual meeting. As of the close of business on the record date, there were 7,906,250 shares of EdtechX common stock outstanding. Each share of EdtechX common stock is entitled to one vote per share at the annual meeting. If your shares are held in “street name” or are in a margin or similar account, you should contact your broker to ensure that votes related to the shares you beneficially own are properly counted.

 

Quorum; Vote Required

 

A quorum of EdtechX stockholders is necessary to hold a valid meeting of stockholders. The presence in person or by proxy of the holders of a majority of the issued and outstanding shares of EdtechX common stock constitutes a quorum. Abstentions and broker non-votes will count as present for the purposes of establishing a quorum, but will not count towards the voting thresholds.

 

Abstentions occur when an EdtechX stockholder marks “abstain” with respect to a particular proposal. Broker non-votes occur when a stockholder that holds its shares in “street name” does not give its broker, bank or other nominee instructions on how to vote its shares on a “non-routine” matter, such as the merger proposal.

 

The proposals presented at the annual meeting will require the following votes:

 

  The approval of the merger proposal, each of the charter proposals and the adjournment proposal will require the affirmative vote of holders of a majority of the shares present in person or by proxy and entitled to vote at the annual meeting. Abstentions will count as votes “against” these proposals. Broker non-votes will have no effect on the proposals because brokers are not entitled to vote on the matters absent voting instructions from the beneficial holder.

 

71

 

 

  The approval of the director proposal will require the affirmative vote of a plurality of the votes cast on the matter. A “withhold vote” will have no effect on the vote’s outcome, because the candidates who receive the highest number of “for” votes are elected, and if candidates run unopposed they only need a single “for” vote to be elected.  Broker non-votes will have no effect on the outcome of the vote because they are typically not considered “votes cast”.

 

Voting Your Shares

 

If you are a holder of record of EdtechX common stock, there are two ways to vote your EdtechX shares at the annual meeting:

 

  By Mail.  You may vote by proxy by completing the enclosed proxy card and returning it in the postage-paid return envelope. If you vote by proxy card, your “proxy,” whose name is listed on the proxy card, will vote your shares as you instruct on the proxy card. If you sign and return the proxy card but do not give instructions on how to vote your shares, your shares will be voted, as recommended by EdtechX’s board, “FOR” all of the proposals in accordance with the recommendation of the EdtechX board of directors. Proxy cards received after a matter has been voted upon at the annual meeting will not be counted.

 

  In Person.  You may attend the annual meeting and vote in person using the ballot provided to you at the annual meeting.

 

If you hold your shares of EdtechX common stock in “street name,” you should follow the instructions sent to you by your bank, broker or other nominee in order to vote your shares. If you wish to vote shares held in “street name” in person at the annual meeting, you must contact their bank, broker or other nominee and request a document called a “legal proxy.” Requesting a legal proxy will automatically cancel any voting directions previously given to such bank, broker or other nominee.

 

If you do not give instructions to such bank, broker or other nominee, such bank, broker or other nominee can vote your shares of EdtechX common stock with respect to “discretionary” items but not with respect to “non-discretionary” items. Discretionary items are proposals considered routine under the rules of the Nasdaq for which your broker or other agent may vote shares held in “street name” in the absence of your voting instructions. On non-discretionary items for which you do not give your broker or other agent instructions, the shares of EdtechX common stock will be treated as broker non-votes. It is anticipated that all proposals other than the adjournment proposal will be non-discretionary items.

 

You may receive more than one set of voting materials. For example, if you are a holder of record and your shares are registered in more than one name, you will receive more than one proxy card. If you hold your shares in “street name” in more than one brokerage account, you will receive voting materials for each brokerage account in which you hold shares. Please complete, sign, date and return each proxy card you receive and provide instructions on how to vote your shares with respect to each brokerage account for which you receive proxy materials, in order to be sure you cast a vote with respect to all of your shares of EdtechX common stock.

 

Revoking Your Proxy

 

If you are a holder of record of EdtechX common stock and you give a proxy, you may revoke it at any time before it is exercised by doing any one of the following:

 

  you may send another proxy card to EdtechX’s secretary with a later date so that it is received prior to the vote at the annual meeting or attend the annual meeting in person and vote;

 

  you may notify EdtechX’s secretary in writing, prior to the vote at the annual meeting, that you have revoked your proxy; or

 

  you may attend the annual meeting and vote in person or revoke your proxy in person, although your attendance alone will not revoke any proxy that you have previously given.

 

If you hold your shares of EdtechX common stock in in “street name,” you may submit new instructions on how to vote your shares by contacting your broker, bank or other nominee.

 

Who Can Answer Your Questions About Voting Your Shares

 

If you are a stockholder and have any questions about how to vote or direct a vote in respect of your shares, you may call [●], EdtechX’s proxy solicitor, at [●].

 

72

 

 

Conversion Rights

 

At the annual meeting, public stockholders may seek to convert their shares, regardless of whether they vote for or against the proposed business combination or whether they are a stockholder of record on the record date, into their pro rata share of the aggregate amount then on deposit in the trust account as of two business days prior to the consummation of the initial business combination, less any taxes then due but not yet paid.  

 

Notwithstanding the foregoing, a public stockholder, together with any affiliate of his or any other person with whom he is acting in concert or as a “group” (as defined in Section 13(d)(3) of the Exchange Act) will be restricted from seeking conversion rights with respect to 20% or more of the shares sold in EdtechX’s initial public offering. Such a public stockholder would still be entitled to vote against a proposed business combination with respect to all shares owned by him or his affiliates. We believe this restriction will prevent stockholders from accumulating large blocks of shares before the vote held to approve a proposed business combination and attempt to use the conversion right as a means to force us or our management to purchase their shares at a significant premium to the then current market price. By limiting a stockholder’s ability to convert no more than 20% of the shares sold in EdtechX’s initial public offering, we believe we have limited the ability of a small group of stockholders to unreasonably attempt to block a transaction which is favored by our other public stockholders.

 

Our initial stockholders, officers and directors will not have conversion rights with respect to any shares of common stock owned by them, directly or indirectly.

 

We also require public stockholders, whether they are a record holder or hold their shares in “street name,” to either tender their certificates to our transfer agent at any time through the vote on the business combination or to deliver their shares to the transfer agent electronically using Depository Trust Company’s DWAC (Deposit/Withdrawal At Custodian) System, at the holder’s option. There is a nominal cost associated with this tendering process and the act of certificating the shares or delivering them through the DWAC system. The transfer agent will typically charge the tendering broker a nominal amount and it would be up to the broker whether or not to pass this cost on to the converting holder.

 

Any request to convert such shares once made, may be withdrawn at any time up to the vote on the proposed business combination. Furthermore, if a holder of a public share delivered his certificate in connection with an election of their conversion and subsequently decides prior to the vote on the business combination not to elect to exercise such rights, he may simply request that the transfer agent return the certificate (physically or electronically).

 

If the Mergers are not approved or completed for any reason, then our public stockholders who elected to exercise their conversion rights would not be entitled to convert their shares for the applicable pro rata share of the trust account. In such case, we will promptly return any shares delivered by public holders.

 

Dissenter’s Rights

 

EdtechX stockholders do not have dissenter's rights under Delaware law in connection with the Mergers.

 

Proxy Solicitation

 

EdtechX is soliciting proxies on behalf of its board of directors. EdtechX will bear all of the costs of the solicitation.

 

This solicitation is being made by mail but also may be made by telephone or in person. EdtechX and its directors, officers and employees may also solicit proxies in person, by telephone or by other electronic means. EdtechX also has engaged [●] to assist in the proxy solicitation process. EdtechX will pay that firm a fee of $[●] plus disbursements.

 

EdtechX will ask banks, brokers and other institutions, nominees and fiduciaries to forward the proxy materials to their principals and to obtain their authority to execute proxies and voting instructions. EdtechX will reimburse them for their reasonable expenses.

 

Other Matters

 

As of the date of this proxy statement/prospectus, the EdtechX board of directors does not know of any business to be presented at the annual meeting other than as set forth in the notice accompanying this proxy statement/prospectus. If any other matters should properly come before the annual meeting, it is intended that the shares represented by proxies will be voted with respect to such matters in accordance with the judgment of the persons voting the proxies.

 

73

 

 

THE MERGER PROPOSAL

 

The discussion in this proxy statement/prospectus of the Mergers and the principal terms of the Merger Agreement is subject to, and is qualified in its entirety by reference to, the Merger Agreement. A copy of the Merger Agreement is attached as Annex A to this proxy statement/prospectus.

 

General

 

Structure of the Mergers

 

Pursuant to the Merger Agreement, Meten and EdtechX will enter into a business combination transaction by means of (i) the Meten Merger, pursuant to which Meten Merger Sub will merge with and into Meten, with Meten being the surviving entity of such merger, and (ii) immediately thereafter, the EdtechX Merger, pursuant to which EdtechX Merger Sub will merge with and into EdtechX, with EdtechX being the surviving entity of such merger. As a result of the Mergers, Meten and EdtechX will become wholly owned subsidiaries of Holdco and the securityholders of Meten and EdtechX will become the securityholders of Holdco.

 

Consideration to Meten Shareholders

 

Upon consummation of the Meten Merger, the shareholders of Meten will receive their pro rata portion of an aggregate of 48,391,607 Holdco Ordinary Shares. EdtechX will be required to pay cash to electing Meten shareholders, in an amount equal to 50% of the excess of the remaining cash at closing over $30 million (after taking into account conversions elected by EdtechX’s public stockholders and together with the proceeds arising from private placements) up to an aggregate of $10 million. Cash consideration paid will reduce the Holdco Ordinary Shares issuable to the Meten shareholders.

 

The shareholders of Meten who continue to hold Holdco Ordinary Shares through certain earnout measurement dates will also have the right to receive their pro rata portion of up to an additional 11,000,000 Contingent Shares as follows: (i) 4,000,000 Contingent Shares if the reported closing sale price of the Holdco Ordinary Shares equals or exceeds $12.50 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations or other similar actions) for any 20 consecutive trading days at any time before December 31, 2022, and (ii) 7,000,000 Contingent Shares if the reported closing sale price of the Holdco Ordinary Shares equals or exceeds $15.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations or other similar actions) for any 20 consecutive trading days during the fiscal year ending December 31, 2023. The earnout conditions operate independently. There is no “catch up” mechanism; Contingent Shares not earned in a prior earnout period will not be earnable in a subsequent period.

 

Holdco will establish the Holdco ESOP Plan and each outstanding option of Meten will be automatically converted into an option to purchase Holdco Ordinary Shares, with the number of shares issuable upon exercise of the option and the option exercise price to be determined in accordance with a formula set forth in the Merger Agreement. A further number of Holdco ordinary shares equal to one percent (1%) per annum (for five years) of the total outstanding Holdco ordinary shares upon the closing of the Mergers will be reserved under the new incentive equity plan.

 

Consideration to EdtechX Stockholders

 

Upon consummation of the EdtechX Merger, (i) each share of EdtechX common stock outstanding on the closing date will be exchanged for the right to receive one Holdco Ordinary Share, except that holders of shares of EdtechX common stock sold in EdtechX’s initial public offering will be entitled to elect instead to receive a pro rata portion of EdtechX’s trust account, as provided in EdtechX’s charter documents, (ii) each outstanding warrant of EdtechX will entitle the holder to purchase one Holdco Ordinary Share at a price of $11.50 per share, and (iii) each outstanding unit purchase option will remain outstanding but will be deemed to have been converted to represent the right to purchase Holdco Ordinary Shares and warrants of Holdco.

 

Pro Forma Ownership

 

Immediately following the consummation of the Mergers, assuming no conversions of EdtechX public shares, no Cash Election is made, and without taking into effect securities which may be issued pursuant to the Azimut Investment or in a Financing, we estimate that the EdtechX stockholders will hold approximately 14% of the issued and outstanding Holdco Ordinary Shares and the shareholders of Meten will hold approximately 86% of the issued and outstanding Holdco Ordinary Shares.

 

74

 

 

Related Agreements or Arrangements

 

Forward Purchase Contract

 

As described in the final prospectus for EdtechX’s initial public offering, the Azimut Investor entered into Forward Purchase Contract with EdtechX to purchase, in a private placement to occur concurrently with the consummation of the Mergers, up to 2,000,000 of units at $10.00 per unit (or up to an aggregate purchase price of $20,000,000), on substantially the same terms as the sale of units in EdtechX’s initial public offering. In connection with the execution of the Merger Agreement, the Azimut Investor irrevocably consented to purchase up to 2,000,000 units at the closing of the transactions contemplated by the Merger Agreement. The exact number of units to be purchased by the Azimut Investor will be determined by EdtechX and Holdco based on the capital needs in connection with the Mergers.

 

Support Agreement

 

Concurrently with the execution of the Merger Agreement, certain shareholders of Meten and certain stockholders of EdtechX have entered into a Support Agreement with Holdco and EdtechX, pursuant to which each such person has agreed, among other things, to vote all of the Meten ordinary shares or EdtechX common stock, as applicable, beneficially owned by such person in favor of the Mergers, and to not take any action to solicit, knowingly encourage, initiate, engage in or otherwise knowingly facilitate discussions or negotiations with, provide any information to, or enter into any agreement with any person (other than the parties to the Merger Agreement) concerning any merger, sale of a significant portion of assets or similar transaction involving Meten or EdtechX until such time as the Mergers close or the Merger Agreement is terminated in accordance with its terms.

 

Voting Agreement

 

At closing of the Mergers, EdtechX, Holdco, Meten and certain shareholders of Meten and stockholders of EdtechX will enter into a Voting Agreement pursuant to which they will agree to nominate nine members to the board of directors of Holdco, including Benjamin Vedrenne-Cloquet and Charles McIntyre, EdtechX’s Chief Executive Officer and Chairman of the Board, respectively, and Jishuang Zhao, Siguang Peng and Yupeng Guo, the founders of Meten, and Yongchao Chen, and to take all actions necessary to vote all Holdco ordinary shares beneficially owned by them for the election of such persons until the third anniversary of the closing.

 

The Merger Agreement provides that Messrs. Vedrenne-Cloquet and McIntyre will each be paid the following annual compensation for their board service through 2023: (i) $120,000 in cash, and (ii) 20,000 Holdco Ordinary Shares. The first year’s installment of the foregoing board of director fees will be paid to Messrs. Vedrenne-Cloquet and McIntyre upon closing of the Mergers. The following years’ board fees will be paid on the anniversary of the closing date. The ordinary shares to be issued to Messrs. Vedrenne-Cloquet and McIntyre pursuant to the Merger Agreement will be issued pursuant to the terms and conditions of the incentive equity plan of Holdco, but will be unrestricted and fully vested and will not be subject to further approval of the Holdco board of directors or compensation committee thereof.

 

Restrictions on Transfer

 

Certain of the Meten shareholders will enter into Lock-up Agreements with Holdco pursuant to which they will agree not to transfer the Holdco Ordinary Shares received as consideration in the Meten Merger (including any Contingent Shares, if and when issued), until (i) with respect to 50% of such Holdco ordinary shares, the earlier of the date that is six months after the closing and the date on which the closing price of Holdco’s ordinary shares equals or exceeds $12.50 per share (as adjusted for share splits, share capitalizations, reorganizations and recapitalizations) for any 20 trading days within any 30-trading day period after closing and (ii) with respect to the remaining 50% of such Holdco ordinary shares, one year after closing, or earlier, in either case, if, subsequent to the closing, Holdco consummates a liquidation, merger, stock exchange or other similar transaction which results in all holders of Holdco ordinary shares ceasing to hold more than fifty percent (50%) of the then outstanding Holdco ordinary shares or having the right to exchange their Holdco ordinary shares for cash or freely tradable securities.

 

All other Meten shareholders will agree not to transfer the Holdco Ordinary Shares received by them as consideration in the Meten Merger (including any Contingent Shares, if and when issued) until the date that is at least three months after the closing.

 

Certain shareholders of EdtechX, including affiliates of Benjamin Vedrenne-Cloquet and Charles McIntyre, will enter into an Amended Stock Escrow Agreement pursuant to which the Holdco Ordinary Shares to be issued to them will remain subject to the escrow and transfer restrictions as set forth in the existing stock escrow agreement entered into by such persons in connection with EdtechX’s initial public offering, which restrictions are substantially the same as those provided for in the Lock-up Agreements.

 

Registration Rights

 

At the closing of the Mergers, Holdco will enter into a Registration Rights Agreement providing the shareholders of Meten with certain demand registration rights and piggy-back registration rights with respect to registration statements filed by Holdco after the closing. Additionally, EdtechX and Holdco will amend any existing registration rights agreements to which it is a party or similar agreements or instruments to which it is a party providing for registration rights with respect to EdtechX’s securities held by any person such that, after giving effect to the Mergers, the Holdco securities held by former EdtechX securityholders will have the same registration rights as they currently have.

 

Financing Cooperation

 

EdtechX and Meten agreed to use their commercially reasonable efforts to arrange and obtain financing in the range of $20,000,000 and $100,000,000 (which does not include the Azimut Investment) from the sale of equity securities of Holdco (a “Financing”).

 

75

 

 

Investor Relations Budget

 

EdtechX and Meten have agreed to an investor relations budget for Holdco of no less than $250,000 per year.

 

Headquarters; Trading Symbol

 

After completion of the Mergers:

 

  the corporate headquarters and principal executive offices of Holdco will be located at 3rd Floor, Tower A, Tagen Knowledge & Innovation Center, 2nd Shenyun West Road, Nanshan District, Shenzhen, Guangdong Province 518045, The People’s Republic of China, which is Meten’s current corporate headquarters; and

 

  if Holdco’s application for listing is approved, Holdco’s ordinary shares will be traded on Nasdaq under the symbol “[●].”

  

Background of the Mergers

 

On October 10, 2018, EdtechX completed its initial public offering of 5,500,000 units, with each unit consisting of one share of common stock and one warrant to purchase one share of common stock at a price of $11.50 per share upon the completion of its initial business combination. On October 17, 2018, EdtechX consummated the closing of an additional 825,000 Units sold pursuant to the underwriters’ over-allotment option. Simultaneously with the closing of the initial public offering and the over-allotment option, EdtechX consummated the private placement of an aggregate of 3,780,000 warrants. Approximately $64.2 million of the net proceeds of the sale of the units in the initial public offering, over-allotment and the sale of the warrants in the private placement, is held in a trust account for the benefit of the purchasers in EdtechX’s initial public offering.

 

Promptly following EdtechX’s initial public offering, EdtechX began considering potential target businesses with the objective of consummating a business combination. EdtechX sought out potential target businesses based on internal research and through the networks of relationships of EdtechX’s management, board of directors and with professional service providers (lawyers, accountants, consultants, finders and investment bankers). EdtechX educated these parties on its structure as a special purpose acquisition company and its criteria for an acquisition. EdtechX also responded to inquiries from investment bankers or other similar professionals who represented companies engaged in a sale or financing process. On a regular basis, EdtechX’s directors were updated with respect to the status of the business combination search. Input received from EdtechX’s directors was material to EdtechX’s management’s evaluation of a potential business combination.

 

In evaluating potential business combination targets, EdtechX used certain criteria, which included the opportunity to increase revenues through organic growth and acquisitions, the potential for strong free cash flow generation, the experience and motivation of the management team and the competitive position of the target and its industry’s dynamics. EdtechX narrowed its focus based on the interest expressed by potential targets and the suitability of each potential target as a potential acquisition candidate.

 

Based on initial screening efforts and criteria evaluation, EdtechX compiled a pipeline of priority potential targets and updated and supplemented such pipeline from time to time. This pipeline and related developments were discussed periodically with EdtechX’s board of directors. During this period, EdtechX and its representatives:

 

  Identified and preliminarily evaluated more than 92 potential acquisition targets;
     
  Conducted initial business and financial due diligence or had meaningful discussions with representatives, and sent non-binding letters of intent or indications of interest to 11 potential acquisition targets; and
     
  Executed a letter of intent and commenced further diligence with respect to 2 potential acquisition targets.

 

Of the two potential acquisition targets:

 

One was a global family owned English Learning Training (“ELT”) business headquartered in Europe. The proposed transaction called for EdtechX to acquire 100% of the target using debt leverage with a 30% equity roll over from management shareholders and a 70% cash exit for remaining non-management shareholders. The transaction also provided for the target shareholders to receive additional consideration based on the operating performance of the combined company and the performance of its share price post transaction. It was contemplated that the target would form the basis of a platform to further consolidate the ELT market through subsequent acquisitions and to strengthen market presence in North Asia and South East Asia. After several rounds of negotiations and detailed due diligence, EdtechX management and the target company determined to cease negotiations to allow the target company to focus on the integration of a recently acquired ELT business and to get better visibility on its trading performance post integration and the materialization of cost synergies.

 

One was a private equity owned corporate training company focused on the maritime industry with operations in Northern Europe and Asia and serving the maritime industry globally via digital delivery. The contemplated transaction called for EdtechX to acquire 100% of the target through a partial roll over from management shareholders and a 80% cash buy out of the private equity owners and other shareholders. In order to align interests, the proposed transaction was structured so that the higher the equity roll over from management, the higher the consideration. It was contemplated that the company would be used as a platform to consolidate the market and expand its product offering to the oil and gas industry. However, the target company attracted interest from another private equity backed competitor who was able to make a significantly better offer and offered ample scope for cost synergies. EdtechX was not in a position to match this competing offer and so aborted the transaction process.

 

In early July 2019, EdtechX contacted Macquarie Capital (USA) Inc., or “Macquarie”, after learning that Meten was pursuing an alternative way to go public other than through an initial public offering. Thereafter, the parties executed a confidentiality agreement and began discussions on a potential transaction between the parties. EdtechX considered Meten as a suitable target and preferable to others where letters of intent had been executed due to the established market position and the strong growth opportunities that were available to Meten.

 

76

 

 

On August 19, 2019, Messrs. Vedrenne-Cloquet and McIntyre had an introductory call with Mr. Ng Kwok Yin and Mr. Siguang Peng, the Chief Financial Officer and Chief Executive Officer, respectively, of Meten. Representatives of Macquarie participated in the call. The call was held to introduce the parties to each other and give preliminary information about each company to the other party.

 

On September 5, 2019, Messrs. Vedrenne-Cloquet and McIntyre, along with Rory Henson, Chief Financial Officer and Lydia Ong, Associate, of EdtechX had a call with Mr. Ng Kwok Yin of Meten, and representatives of Macquarie and Chardan Capital Markets LLC (“Chardan”), respectively. The parties discussed valuation of Meten and entering into a non-binding letter of intent with respect to a potential business combination. The representatives of EdtechX indicated an interest in touring Meten’s classroom and office sites. During these discussions, the representatives of Meten and Macquarie insisted on the importance of preserving Meten’s dual-class share structure that was contemplated during its previous initial public offering efforts and guaranteeing a minimum level of cash at close to provide Meten with capital to accelerate its expansion. The parties also discussed valuation of the proposed transaction in comparison to Meten’s competitors and similarly structured companies. To ensure broad market support and alignment of interest, EdtechX raised the concept of deferred stock based consideration subject the performance of certain metrics and the payment of additional consideration to Meten shareholders who did not sell their interest in the company for a certain period of time following closing of the transaction.

 

On September 10, 2019, a further call was had among Messrs. Vedrenne-Cloquet and McIntyre of EdtechX, Mr. Ng Kwok Yin of Meten, representatives of Macquarie, Graubard Miller, counsel to EdtechX, and Morgan, Lewis & Bockius LLP, counsel to Meten. The parties discussed valuation of Meten. The parties also discussed the structure and terms of warrants to potentially be issued as consideration to Meten’s shareholders in a potential transaction. The terms of a letter of intent were negotiated. Particular areas of negotiations and discussion were (i) the amount of stock consideration to be paid for 100% of Meten and the milestones triggering the deferred stock consideration, (ii) the ability to get a firm commitment from Azimut at the time of signing the definitive agreement to commit to make its purchase under the forward purchase agreement, (iii) exclusivity and break up provisions, (iv) the importance for the company to commit to invest in an investor relation program in Europe and North America post-closing and (v) the opportunity to leverage the experience of Messrs. Vedrenne-Cloquet and McIntyre in the ELT and education technology sectors.

 

On September 12, 2019, EdtechX and Meten executed a non-binding letter of intent with respect to a potential business combination. Following execution of the non-binding letter of intent, the parties agreed to organize a site visit as quickly as possible for further due diligence.

 

On September 18, 2019, Messrs. Vedrenne-Cloquet and McIntyre of EdtechX and representatives of Macquarie visited Meten offices, met the Meten founders, Mr. Jishuang Zhao, Mr. Yupeng Guo, and Mr. Siguang Peng, and management of Meten, including Mr. Ng Kwok Yin, Mr. Wei Li, Ms. Yingying Chen, Ms. Pingxiang Chen, and Ms.Mei Zheng in the meeting room on the third floor, Tower A. Tagen Knowledge & Innovation Center, 2nd Shenyun West Road, Nanshan District, Shenzhen, China to conduct a site visit of Meten’s operations. The representatives of EdtechX and Macquarie interviewed directors, teachers, and principals of Meten’s schools and conducted financial and business due diligence. The parties discussed the timeline of a potential business combination transaction and had further discussions concerning the impact of the change of curriculum on the Q1-Q2 trading performance.

 

On September 19, 2019, a call was had between Messrs. Vedrenne-Cloquet and McIntyre of EdtechX, Messrs. Yupeng Guo, Siguang Peng, Ng Kwok Yin, Wei Li and Ms. Yingying Chen of Meten, representatives of Macquarie, Chardan, Graubard Miller, and Morgan, Lewis & Bockius LLP for the purpose of discussing the timeline of a potential business combination transaction and issues relating to required audited financial statements of Meten.

 

On September 27, 2019, EdtechX held a telephonic board meeting to provide an update on the Meten opportunity and other potential transactions. At this meeting, Messrs. McIntyre and Vedrenne-Cloquet provided an update on EdtechX’s search for a proposed target business, including the proposed transaction with Meten. They answered questions from the independent directors in relation to the papers that had been circulated and agreed to keep the board apprised of further developments with Meten.

 

On September 30, 2019, Jingtian & Gongcheng, PRC counsel to EdtechX, began its legal due diligence review of Meten.

 

On October 4, 2019, Messrs. Vedrenne-Cloquet and McIntyre of EdtechX, Messrs. Siguang Peng and Ng Kwok Yin of Meten, and representatives of Macquarie discussed the potential business combination with representatives of Azimut Enterprises Holdings S.r.l., a substantial securityholder of EdtechX. The Azimut representatives present included Patrick Perra, Marco Rognoni, Marcello di Rosa, and Giancarlo Maestrini. Following this meeting, Messrs. Vedrenne-Cloquet and McIntyre requested the Azimut representatives to confirm they would be supportive of the deal and would be willing to make their commitment irrevocable. The Azimut representatives confirmed that they were supportive of the deal and that they would initiate the internal review approval process in order to make their commitment irrevocable.

 

On October 9, 2019, Benjamin Vedrenne-Cloquet sent a first draft of the Merger Agreement to Meten and Morgan, Lewis & Bockius LLP.

 

On October 11, 2019, Messrs. Vedrenne-Cloquet and McIntyre had a call with Mr. Ng Kwok Yin and representatives of Macquarie to discuss the ongoing due diligence of Meten and the general process of entering into a business combination.

 

On November 11, 2019, Messrs. Vedrenne-Cloquet and McIntyre had a call with Messrs. Ng Kwok Yin, Siguang Peng and Yupeng Guo of Meten and representatives of Macquarie to discuss the results of due diligence concerning demand for Meten’s products and services. The parties also discussed Macquarie’s confidential marketing of a potential transaction and how Meten would likely trade as a public company after closing of a proposed transaction.

 

On November 18, 2019, Messrs. Vedrenne-Cloquet and McIntyre had a call with Messrs. Ng Kwok Yin, Siguang Peng and Yupeng Guo of Meten and representatives of Macquarie to discuss Meten’s previously planned initial public offering and demand for Meten’s securities in the Chinese market.

 

On November 20, 2019, Messrs. Vedrenne-Cloquet and McIntyre had a call with Messrs. Ng Kwok Yin, Siguang Peng and Yupeng Guo of Meten and representatives of Macquarie to negotiate the terms of a potential merger between EdtechX and Meten. The parties discussed various potential structures of the contemplated transaction following the input of their respective financial advisors. These included a slightly lower base stock consideration and increased deferred stock consideration with an extended timeline to reach the milestones. The parties also set the minimum cash condition at close the transaction at $30 million including the $20 million Azimut forward purchase. The parties also agreed to cap the maximum amount of cash to be used to cash out Meten shareholders to maximize alignment of interests between parties and ensure the use of proceeds was predominantly for expanding the Meten business.

  

77

 

 

On November 21, 2019, Meten and Macquarie provided high-level business comments to the draft Merger Agreement. On November 23, 2019, Mr. Vedrenne-Cloquet sent a revised draft of the Merger Agreement to Meten, Morgan, Lewis & Bockius LLP, and Macquarie.

 

From November 21 to December 2, 2019, representatives of EdtechX, Meten, and Macquarie conducted a series of conference calls to continue addressing EdtechX’s diligence requirements, prepare for upcoming investor discussions, negotiate the terms of the transaction, and the parties’ respective legal counsel continued to draft and negotiate the terms of the Merger Agreement and other related agreements. During this same period, EdtechX and its advisors continued to conduct business, financial, legal, tax, and accounting diligence of Meten. EdtechX also obtained the confirmation from Azimut during this period that it would commit to purchase the full $20 million under the forward purchase agreement.

 

On December 3, 2019, EdtechX’s board of directors met via teleconference. The entire board was present at the meeting. Also participating by invitation was Mr. Henson, Chief Financial Officer of EdtechX. Mr. McIntyre gave an extensive presentation about the proposed business combination. After considerable review and discussion of the transaction, including the post-merger structure, the Merger Agreement and related documents were unanimously approved, subject to final negotiations and modifications, and the board determined to recommend the approval of the merger transaction. The board also concluded that the fair market value of Meten was equal to at least 80% of the funds held in EdtechX’s trust account (excluding any deferred underwriters’ fees and taxes payable on the income earned on the trust account).

 

On December 4, 2019, representatives of EdtechX, Meten, Macquarie, and Morgan, Lewis & Bockius LLP had a call to discuss the requirement for and drafting of a proxy statement to solicit the votes of EdtechX stockholders.

 

A further call on December 4, 2019 was had among EdtechX, Meten, Macquarie, Chardan, Morgan, Lewis & Bockius LLP, and Graubard Miller to negotiate and finalize remaining commercial and legal terms in the definitive documentation for the transaction.

 

On December 11, 2019, representatives of EdtechX, Meten, and Macquarie had a conference call to finalize the Merger Agreement and discuss marketing the transaction to investors and potential investors in EdtechX.

 

The Merger Agreement was signed on December 12, 2019. On that day, EdtechX issued a press release announcing the signing of the Merger Agreement. On December 16, 2019, EdtechX filed a Current Report on Form 8-K announcing the execution of the Merger Agreement and discussing the key terms of the Merger Agreement in detail.

 

Following the execution of the Merger Agreement, the parties have decided to cease the pursuit of the dual-class share structure in light of the proposed timetable of the business combination and to better protect interests of the minority shareholders.

 

EdtechX’s Board of Directors’ Reasons for Approval of the Mergers

 

In evaluating the business combination, EdtechX’s board of directors consulted with EdtechX’s management and legal and financial advisors, including Chardan. Chardan assisted EdtechX’s board in reviewing the business of Meten and the proposed terms and conditions of the business combination. Chardan was the representative of the underwriters for EdtechX’s initial public offering and regularly advises special purpose acquisition companies in connection with their business combinations. In reaching its unanimous resolution (i) that the terms and conditions of the Merger Agreement, including the proposed business combination, are advisable, fair to, and in the best interests of EdtechX and its stockholders and (ii) to recommend that stockholders adopt and approve the Merger Agreement and approve the Mergers contemplated therein, EdtechX’s board considered a range of factors, including but not limited to, the factors discussed below. In light of the number and wide variety of factors, the EdtechX board did not consider it practicable to and did not attempt to quantify or otherwise assign relative weights to the specific factors it considered in reaching its determination. The EdtechX board viewed its position as being based on all of the information available and the factors presented to and considered by it. In addition, individual directors may have given different weight to different factors. This explanation of EdtechX’s reasons for the business combination and all other information presented in this section is forward-looking in nature and, therefore, should be read in light of the factors discussed under “Forward-Looking Statements.”

 

In approving the Mergers, the EdtechX board determined not to obtain a fairness opinion. The officers and directors of EdtechX have substantial experience in evaluating the operating and financial merits of companies from a wide range of industries and concluded that their experience and backgrounds, together with the experience and education technology sector expertise of EdtechX’s management and advisors enabled them to make the necessary analyses and determinations regarding the business combination with Meten. In addition, EdtechX’s officers and directors and EdtechX’s advisors have substantial experience with mergers and acquisitions. Further, the EdtechX board sought input from Chardan with respect to the business of Meten in relation to comparable companies whose securities are traded on US stock markets.

 

In considering the business combination, the EdtechX board of directors gave considerable weight to the following factors:

 

  Meten’s leading market position, as the largest omnichannel adult general ELT in the PRC. The board believed that a strong market position provided increased brand recognition for customer acquisition and through scale created improved operating efficiencies;

 

  Meten’s experienced management team, who have in large part worked for Meten since its inception. As such, the management team has been able to demonstrate an ability to manage strong growth over an extended period of time. In particular, the three co-founders who hold key senior management functions have worked together for more than 20 years, demonstrating the stability of the core leadership team;

 

  Meten’s scaleable business model, particularly through its “Likeshuo” digital platform, which provides flexible online courses and content. The digital online learning platform allows Meten to reach a wider audience and provides the audience with the opportunity to learn at a time and location of its choice. EdtechX’s board believed that Meten’s business, which also includes an artificial intelligence-driven teaching management system, is well-positioned to efficiently scale its operations through the use of its digital platforms both for operational management and content delivery;

 

  The potential opportunity to expand into Tier 3 and Tier 4 cities, located primarily in the surrounding areas of Meten’s existing operations in Tier 1 cities. Meten’s management team believes such expansion into Tier 3 and Tier 4 cities will be cost-effective as staff costs and marketing expenses are typically lower as compared to Tier 1 cities;

 

78

 

 

  Decreasing customer acquisition costs was an important metric for EdtechX’s board of directors to evaluate the ability of Meten to scale the business while improving operating margins. From 2016 to 2018, Meten’s student enrollment grew approximately 112.1%, while the percentage of selling and marketing expenses in Meten’s revenue decreased by approximately 3.7%;

 

  Potential opportunities resulting from Meten’s recent licensing deal with National Geographic which is the first adult English language curriculum to introduce project-based English language learning methods in China and focus on training students’ comprehension and practical English language abilities. EdtechX’s board of directors believed that association with National Geographic together with an improved pedagogical approach to teaching using project-based learning will further enhance Meten’s position in the PRC market; and

 

  Potential acquisition opportunities to further expand Meten’s business within the Chinese market is expected to allow Meten to scale more quickly. Meten has previously successfully acquired businesses, such as ABC Education Group, and integrated them into the group.

 

The EdtechX board also considered a variety of uncertainties and risks and other potentially negative factors concerning the business combination, including, but not limited to, the following:

 

  Macroeconomic Risks. Macroeconomic uncertainty and the effects it could have on the combined company’s revenues;

 

  Benefits Not Achieved. The risk that the potential benefits of the Mergers may not be fully achieved or may not be achieved within the expected timeframe; and

 

  Other Risks. Various other risks associated with the business of Meten, as described in the section entitled “Risk Factors” appearing elsewhere in this proxy statement/prospectus.

 

The EdtechX board concluded that the potential benefits that it expected EdtechX and its shareholders to achieve as a result of the Mergers outweighed the potentially negative factors associated with the Mergers. In particular, the EdtechX board considered the opportunity to increase revenues through organic growth and acquisitions, the potential for strong free cash flow generation, the experience and motivation of the management team and the competitive position of Meten within the PRC market. Accordingly, the board unanimously determined that the Merger Agreement and the Mergers contemplated therein, were advisable, fair to, and in the best interests of EdtechX and its stockholders.

 

Certain Forecasted Financial Information of Meten

 

Meten provided EdtechX with its internally prepared forecasts for each of the years in the three-year period ending December 31, 2021. This prospective financial information was not prepared with a view toward compliance with guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of prospective financial information. The forecasts were prepared solely for internal use and capital budgeting and other management purposes, are subjective in many respects and therefore susceptible to varying interpretations and the need for periodic revision based on actual experience and business developments, and were not intended for third-party use, including by investors or holders. You are cautioned not to rely on the forecasts in making a decision regarding the transaction, as the forecasts may be materially different than actual results.

 

The forecasts are based on information as of the date thereof and reflect numerous assumptions including assumptions with respect to general business, economic, market, regulatory and financial conditions and various other factors, all of which are difficult to predict and many of which are beyond Meten’s control, such as the risks and uncertainties contained in the section titled “Risk Factors.” The most significant assumptions upon which Meten’s management based its projections and the reasonable and supportable basis for those assumptions are, among other things, the assumption that revenue from each of the eight new self-operated learning centers that Meten opened in 2018 and 13 new self-operated learning centers that Meten opened in 2019 is expected to grow rapidly after the initial ramp-up period. Furthermore, Meten plans to open 30 to 45 new learning centers in 2020 and 38 to 50 new learning centers in 2021. Based on Meten’s past experience, generally, the initial investment to open a learning center is approximately RMB2.0 million (US$279,810), while the payback period of such newly established learning center is approximately three months and the breakeven period is approximately 15 months. Meten is expected to acquire additional market share resulting from the winding down of one of its major competitors in 2019. In addition, Meten’s “Likeshuo” and junior ELT business are currently expected to reach profitability in 2020. There will also be expected increases in Meten’s operating efficiency, including cost saving activities in administration and more cross-selling between online and offline businesses to reduce marketing expenses.

 

Meten believes that the assumptions used to derive the projections are both reasonable and supportable for their intended purposes. Meten’s management derived its forecasts based on modeling revenue growth assumptions and normalization of certain one-off events in 2019, including curriculum upgrades across its nationwide network, the integration of ABC Education Group and a one-off accrued expense from accepting students from one of Meten’s major competitors that experienced a winding down in 2019. In preparing the models, Meten’s management relied on a number of factors, including the executive team’s significant experience in the online and offline English language training sectors as well as the actual performance of Meten and its various businesses.

 

Although the assumptions and estimates on which the forecasts are based are believed by Meten’s management to be reasonable and based on the best then-currently available information, the financial forecasts are forward-looking statements that are based on assumptions that are inherently subject to significant uncertainties and contingencies, many of which are beyond Meten’s control. While all forecasts are necessarily speculative, Meten believes that the prospective financial information covering periods beyond twelve months from its date of preparation carries increasingly higher levels of uncertainty and should be read in that context. There will be differences between actual and forecasted results, and actual results may be materially greater or materially less than those contained in the forecasts. The inclusion of the forecasted financial information in this proxy statement/prospectus should not be regarded as an indication that Meten or its representatives considered or consider the forecasts to be a reliable prediction of future events, and reliance should not be placed on the forecasts.

 

79

 

 

The forecasts were requested by, and disclosed to, EdtechX for use as a component in its overall evaluation of Meten, and are included in this proxy statement/prospectus on that account. Meten has not warranted the accuracy, reliability, appropriateness or completeness of the forecasts to anyone, including to EdtechX. Neither Meten’s management nor any of its representatives has made or makes any representation to any person regarding the ultimate performance of Meten compared to the information contained in the forecasts, and none of them intends to or undertakes any obligation to update or otherwise revise the forecasts to reflect circumstances existing after the date when made or to reflect the occurrence of future events in the event that any or all of the assumptions underlying the forecasts are shown to be in error. Accordingly, they should not be looked upon as “guidance” of any sort. Holdco will not refer back to these forecasts in its future periodic reports filed under the Exchange Act.

 

Meten does not as a matter of course make public projections as to future sales, earnings or other results. However, the management of Meten has prepared the prospective financial information set forth below to present the key elements of the forecasts provided to EdtechX. The accompanying prospective financial information was not prepared with a view toward public disclosure or with a view toward complying with the guidelines established by the American Institute of Certified Public Accountants with respect to prospective financial information, but, in the view of Meten’s management, was prepared on a reasonable basis, reflects the best currently available estimates and judgments, and presents, to the best of management's knowledge and belief, the expected course of action and the expected future financial performance of Meten. However, this information is not fact and should not be relied upon as being necessarily indicative of future results, and readers of this proxy statement/prospectus are cautioned not to place undue reliance on the prospective financial information. Neither Meten’s independent auditors, nor any other independent accountants, have compiled, examined or performed any procedures with respect to the prospective financial information contained herein, nor have they expressed any opinion or any other form of assurance on such information or its achievability, and assume no responsibility for, and disclaim any association with, the prospective financial information.

 

The key elements of the forecasts provided to EdtechX are summarized below:

 

Meten’s adjusted EBITDA and adjusted net income for 2019 are expected to be adversely affected by the following one-off events in 2019, which can be normalized as follows:

 

  Curriculum upgrade: Approximately RMB54.0 million impact on projected 2019 adjusted EBITDA and approximately RMB49.0 million impact on projected 2019 adjusted net income;

 

  ABC integration: Approximately RMB50.0 million impact on projected 2019 adjusted EBITDA and approximately RMB45.0 million impact on projected 2019 adjusted net income; and

 

  Winding down of a major player in the ELT market, one of Meten's major competitors: Approximately RMB20.0 million impact on projected 2019 adjusted EBITDA (including (i) accrued expenses from providing free courses to certain number of students from such competitor to continue their classes; (ii) a decrease of student enrollment and the resulting decrease in our revenue as compared with 2018; and (iii) a decrease in course hours delivered and the resulting decrease in our revenue as compared with 2018) and approximately RMB18.0 million impact on projected 2019 adjusted net income

 

The following table sets forth the projected normalized adjusted EBITDA and adjusted net income of 2019:

 

    For the year ended December 31, 2019  
    RMB in millions     USD in millions  
Projected normalized adjusted EBITDA     135.0       19.0  
Projected normalized adjusted net income     64.0       9.0  

 

The above projected normalized adjusted EBITDA and projected normalized adjusted net income were prepared by Meten based on the facts known to it when the Merger Agreement was entered into on December 12, 2019, and they do not take into account any circumstances or events occurring after the date they were prepared. However, Meten, in its course of finalizing its preliminary management accounts for the year ended December 31, 2019, has determined that while its gross billings and revenue for the year ended December 31, 2019 were largely within reasonable range of the management’s estimated projections, adjustments need to be made to certain costs and expenses pursuant to Meten’s review of its 2019 financial results, which could result in downward adjustments to its projected normalized adjusted EBITDA and projected normalized adjusted net income for the year ended December 31, 2019.

 

80

 

 

Satisfaction of 80% Test

 

It is a requirement under EdtechX’s amended and restated certificate of incorporation that any business acquired by EdtechX has a fair market value equal to at least 80% of the balance of the funds in the trust account (excluding any deferred underwriters’ fees and taxes payable on the income earned on the trust account) at the time of the execution of a definitive agreement for an initial business combination. Based on management’s financial analysis, the EdtechX board of directors determined that this requirement was met. EdtechX’s board of directors determined that consideration being paid to Meten shareholders in the Meten Merger was fair to and in the best interests of EdtechX and its stockholders and appropriately reflected Meten’s value. EdtechX’s board of directors believes that the financial skills and background of its members qualify it to conclude that the acquisition of Meten met this requirement.

 

Interests of EdtechX’s Directors and Officers in the Mergers

 

When you consider the recommendation of EdtechX’s board of directors in favor of approval of the merger proposal, you should keep in mind that certain of EdtechX’s directors and executive officers have interests in such proposal that are different from, or in addition to, your interests as an EdtechX stockholder. These interests include, among other things:

 

  If the business combination with Meten or another business combination is not consummated by April 10, 2020 (or such later date as EdtechX shareholders may approve), EdtechX will cease all operations except for the purpose of winding up, dissolving and liquidating. In such event, the shares of EdtechX common stock held by the initial stockholders, including EdtechX’s directors and officers, which were acquired for an aggregate purchase price of $25,000 prior to EdtechX’s initial public offering, would be worthless because the initial stockholders are not entitled to participate in any conversion or distribution with respect to such shares. Such shares had an aggregate market value of $[●] based upon the closing price of $[●] per share on Nasdaq on the record date.

 

  Certain of EdtechX’s initial stockholders, including its directors and officers and their affiliates purchased an aggregate of 3,780,000 warrants in a private placement from EdtechX for an aggregate purchase price of $3,780,000 (or $1.00 per private warrant). These purchases took place on a private placement basis simultaneously with the consummation of the initial public offering. All of the proceeds EdtechX received from these purchases were placed in the trust account. Such units had an aggregate market value of $[●] based upon the closing price of $[●] per unit on Nasdaq on the record date. The private warrants will become worthless if EdtechX does not consummate a business combination by April 10, 2020 (or such later date as EdtechX shareholders may approve).

 

  The transactions contemplated by the Merger Agreement provide that Benjamin Vedrenne-Cloquet and Charles McIntyre, EdtechX’s Chief Executive Officer and Chairman of the Board, respectively, will be directors of Holdco after the closing of the Mergers through 2023, and that they will each be paid annually for their board service as follows: (i) $120,000 in cash, and (ii) 20,000 Holdco Ordinary Shares. The first year’s installment of the foregoing board of director fees will be paid to Messrs. Vedrenne-Cloquet and McIntyre upon closing of the Mergers. The following years’ board fees will be paid on the anniversary of the closing date.

 

  The initial stockholders, officers, and directors of EdtechX and their affiliates are entitled to reimbursement of out-of-pocket expenses incurred by them in connection with certain activities on EdtechX’s behalf, such as identifying and investigating possible business targets and business combinations. However, if EdtechX fails to consummate a business combination within the required period, they will not have any claim against the trust account for reimbursement. Accordingly, EdtechX may not be able to reimburse these expenses if the business combination with Meten or another business combination, is not completed by April 10, 2020 (or such later date as EdtechX shareholders may approve). As of [●], 2020, the record date, EdtechX’s initial stockholders and their affiliates had incurred approximately $[●] of unpaid reimbursable expenses.

 

  Since EdtechX’s inception, the EdtechX sponsors, who are affiliates of Benjamin Vedrenne-Cloquet and Charles McIntyre, have made loans from time to time to EdtechX to fund certain capital requirements.  The working capital loans will be repaid upon closing of the Mergers. If the Mergers are not consummated and EdtechX does not consummate another business combination within the required time period, the notes will not be repaid and will be forgiven unless EdtechX has funds outside of the trust account then available to it to repay such notes. As of the date of this proxy statement/prospectus, an aggregate of $[●] principal amount of these loans is outstanding.

 

81

 

 

  If EdtechX is unable to complete a business combination within the required time period, the sponsors will be liable to ensure that the proceeds in the trust account are not reduced by the claims of target businesses or claims of vendors or other entities that are owed money by EdtechX for services rendered or contracted for or products sold to EdtechX, but only if such a vendor or target business has not executed such a waiver.

 

  If EdtechX is required to be liquidated and there are no funds remaining to pay the costs associated with the implementation and completion of such liquidation, the sponsors have agreed to advance the funds necessary to pay such costs and complete such liquidation (currently anticipated to be no more than approximately $15,000) and not to seek repayment for such expenses.

 

Recommendation of EdtechX’s Board of Directors

 

After careful consideration of the matters described above, EdtechX’s board of directors determined unanimously that the merger proposal is fair to and in the best interests of EdtechX and its shareholders. EdtechX’s board of directors has approved and declared advisable and unanimously recommend that you vote or give instructions to vote “FOR” the merger proposal.

 

The foregoing discussion of the information and factors considered by the EdtechX board of directors is not meant to be exhaustive, but includes the material information and factors considered by the EdtechX board of directors.

 

Anticipated Material Federal Income Tax Consequences of the Mergers to EdtechX and Its Stockholders

 

General

 

The following is a summary of the anticipated material U.S. federal income tax consequences to the U.S. Holders (as defined below) of EdtechX common stock and warrants, of (i) the conversion of EdtechX common stock into Holdco Shares, (ii) the conversion of EdtechX common stock into a pro rata portion of the EdtechX trust account if a U.S. Holder elects to exercise of its conversion right, and (iii) the ownership and disposition of Holdco Shares following the Mergers.

 

Because the components of an EdtechX unit are separable at the option of the holder, the holder of an EdtechX unit generally should be treated, for U.S. federal income tax purposes, as the owner of the underlying common stock and warrants. As a result, the discussion below of the U.S. federal income tax consequences with respect to actual holders of EdtechX common stock should also apply to the holders of EdtechX units (as the deemed owners of the EdtechX common stock underlying the EdtechX units) with respect to the share of EdtechX common stock.

 

Unless otherwise specifically indicated, this discussion does not address the U.S. federal income tax consequences of transactions effectuated prior or subsequent to, or concurrently with, the Mergers including, without limitation, the conversion of the EdtechX warrants into warrants to purchase Holdco Shares (“Holdco Warrants”), or the holding, exercise or disposition of such Holdco Warrants. Holders of the EdtechX warrants should consult with their own tax advisors regarding the particular tax consequences to them of the conversion of the EdtechX warrants into Holdco Warrants and the holding, exercise or disposition of the Holdco Warrants.

 

The discussion below of the U.S. federal income tax consequences to “U.S. Holders” will apply to a beneficial owner of securities that is for U.S. federal income tax purposes:

 

  an individual citizen or resident of the United States;
     
  a corporation (or other entity treated as a corporation) that is created or organized (or treated as created or organized) in or under the laws of the United States, any state thereof or the District of Columbia;
     
  an estate whose income is includible in gross income for U.S. federal income tax purposes regardless of its source; or
     
  a trust if (i) a U.S. court can exercise primary supervision over the trust’s administration and one or more U.S. persons are authorized to control all substantial decisions of the trust, or (ii) it has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.

 

If a beneficial owner of securities is not described as a U.S. Holder and is not an entity or arrangement treated as a partnership or other pass-through entity for U.S. federal income tax purposes, such owner will be considered a “Non-U.S. Holder.” The material U.S. federal income tax consequences applicable specifically to Non-U.S. Holders of the ownership and disposition of Holdco securities following the EdtechX Merger are described below under the heading “Non-U.S. Holders.”

 

82

 

 

This discussion is based upon existing provisions of the Internal Revenue Code of 1986, as amended, or the “Code,” Treasury regulations promulgated thereunder, published revenue rulings and procedures from the U.S. Internal Revenue Service, or the “IRS,” and judicial decisions, all as currently in effect. These authorities are subject to change or differing interpretations, possibly on a retroactive basis.

 

This discussion does not address all aspects of U.S. federal income taxation that may be relevant to any particular holder based on such holder’s individual circumstances. In particular, this discussion considers only holders that own and hold securities, and that will own and hold securities as a result of owning the corresponding EdtechX securities, as capital assets within the meaning of Section 1221 of the Code. This discussion does not address the alternative minimum tax or the U.S. federal income tax consequences to holders that are subject to special rules, including:

 

 

  financial institutions or financial services entities;
     
  broker-dealers;
     
  persons that are subject to the mark-to-market accounting rules under Section 475 of the Code;
     
  tax-exempt entities;

 

  governments or agencies or instrumentalities thereof;
     
  insurance companies;
     
  regulated investment companies;
     
  real estate investment trusts;
     
  certain expatriates or former long-term residents of the United States;
     
  Non-U.S. Holders (except as specifically provided below);
     
  persons that actually or constructively own five percent (5%) or more of EdtechX’s securities or Holdco’s securities (except as specifically provided below);
     
  persons that acquired EdtechX securities or Holdco securities pursuant to an exercise of employee options, in connection with employee incentive plans or otherwise as compensation;
     
  persons that hold EdtechX securities or Holdco securities as part of a straddle, constructive sale, hedging, redemption or other integrated transaction;
     
  persons whose functional currency is not the U.S. dollar; or
     
  controlled foreign corporations.

 

This discussion does not address any aspect of U.S. federal non-income tax laws, such as gift or estate tax laws, state, local or non-U.S. tax laws or, except as discussed herein, any tax reporting obligations of a holder of EdtechX securities or Holdco securities. Additionally, this discussion does not consider the tax treatment of partnerships or other pass-through entities or persons who hold EdtechX securities, or will hold Holdco securities, through such entities. If a partnership (or other entity or arrangement classified as a partnership for U.S. federal income tax purposes) is the beneficial owner of EdtechX securities (or Holdco securities), the U.S. federal income tax treatment of a partner in the partnership will generally depend on the status of the partner and the activities of the partnership. This discussion also assumes that any distribution made (or deemed made) on EdtechX securities (or Holdco securities) and any consideration received (or deemed received) by a holder in consideration for the sale or other disposition of EdtechX securities (or Holdco securities) will be in U.S. dollars.

 

83

 

 

Neither EdtechX nor Holdco have sought, and neither will seek, a ruling from the IRS as to any U.S. federal income tax consequence described herein. The IRS may disagree with the description herein, and its determination may be upheld by a court. Moreover, there can be no assurance that future legislation, regulations, administrative rulings or court decisions will not adversely affect the accuracy of the statements in this discussion.

 

BECAUSE OF THE COMPLEXITY OF THE TAX LAWS AND BECAUSE THE TAX CONSEQUENCES TO ANY PARTICULAR HOLDER OF EDTECHX SECURITIES OR HOLDCO SECURITIES IN CONNECTION WITH OR FOLLOWING THE MERGERS MAY BE AFFECTED BY MATTERS NOT DISCUSSED HEREIN, EACH HOLDER OF EDTECHX SECURITIES AND HOLDCO SECURITIES IS URGED TO CONSULT WITH ITS OWN TAX ADVISOR WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES TO SUCH HOLDER OF THE MERGERS, AND THE OWNERSHIP AND DISPOSITION OF EDTECHX SECURITIES OR HOLDCO SECURITIES, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL, AND NON-U.S. TAX LAWS, AS WELL AS U.S. FEDERAL TAX LAWS AND ANY APPLICABLE TAX TREATIES.

 

U.S. Holders

 

Tax Consequences of the Mergers

 

The parties to the Merger Agreement intend that the Mergers, taken together, qualify as an integrated exchange for U.S. federal income tax purposes under Section 351 of the Code, and the Merger Agreement provides that all parties to the Merger agreement shall report the Mergers consistent with such tax treatment unless otherwise required by a final determination under applicable tax law. However, there is no guidance directly on point on how the provisions of Section 351 of the Code apply in the case of a merger of corporations with no active business and only investment-type assets. Furthermore, there is absence of guidance directly on point as to whether Section 367 of the Code applies in connection with transactions involving a merger with a non-U.S. corporation, followed by a merger with a U.S. corporation. Accordingly, due to the absence of such guidance, it is not possible to predict whether the IRS or a court considering the issue would take or sustain a position indicating the transaction qualifies as a tax free transaction under either section.

 

If the Mergers were to qualify as an integrated exchange under Section 351, and are not subject to Section 367, it is anticipated that a U.S. Holder of EdtechX stock should not recognize gain or loss upon the exchange of its EdtechX stock solely for Holdco stock pursuant to the EdtechX Merger. A U.S. Holder’s aggregate tax basis in the Holdco stock received in connection with the EdtechX Merger should be the same as his aggregate tax basis in the EdtechX stock surrendered in the transaction. In addition, the U.S. Holder’s holding period of the Holdco stock received in the EdtechX Merger generally should include his holding period of the EdtechX stock surrendered in the EdtechX Merger.

 

We anticipate that a U.S. Holder whose EdtechX warrant automatically converts into a warrant to purchase Holdco Shares will recognize gain or loss upon such exchange equal to the difference between the fair market value of the Holdco Warrant received and such U.S. Holder’s adjusted basis in its EdtechX warrant. A U.S. Holder’s basis in its Holdco Warrant deemed received in the Merger will equal the fair market value of such warrant. A U.S. Holder’s holding period in its Holdco Warrant will begin on the day after the Merger.

 

Taxation on the Conversion of EdtechX ordinary shares

 

In the event that a U.S. Holder of EdtechX common stock elects to convert its common stock into its pro rata portion of the EdtechX trust account, the amount received on any such conversion generally will be treated for U.S. federal income tax purposes as a payment in consideration for the sale of the EdtechX common stock rather than as a distribution. Such amounts, however, will be treated as a distribution for U.S. federal income tax purposes if (i) the conversion is “essentially equivalent to a dividend” (generally meaning that the U.S. Holder’s percentage ownership in EdtechX, including EdtechX common stock the U.S. Holder is deemed to own under certain constructive ownership rules, after the conversion is not meaningfully reduced from what its percentage ownership in EdtechX, including constructive ownership was prior to the conversion), (ii) the conversion is not “substantially disproportionate” as to that U.S. Holder (“substantially disproportionate” requiring, among other things, that the percentage of EdtechX outstanding voting shares owned (including constructive ownership) immediately following the conversion is less than 80% of that percentage owned (including constructive ownership) by such holder immediately before the conversion) and (iii) the conversion does not result in a “complete termination” of the U.S. Holder’s interest in EdtechX (generally taking into account certain constructive ownership rules). If the U.S. Holder had a relatively minimal interest in EdtechX common stock and, taking into account the effect of conversions by other holders, its percentage ownership (including constructive ownership) in EdtechX is reduced as a result of the conversion, such holder generally should be regarded as having a meaningful reduction in interest. For example, the IRS has indicated in a published ruling that even a small reduction in the proportionate interest of a small minority shareholder in a publicly held corporation who exercises no control over corporate affairs may constitute such a “meaningful reduction.” A U.S. Holder should consult with its own tax advisors as to the tax consequences to it of any conversion of its EdtechX common stock.

 

84

 

 

Taxation of Cash Distributions Paid on Holdco Shares

 

Subject to the passive foreign investment company rules discussed below, a U.S. Holder of Holdco Shares generally will be required to include in gross income as ordinary income the amount of any cash dividend paid on the Holdco Shares. A cash distribution on such securities generally will be treated as a dividend for U.S. federal income tax purposes to the extent the distribution is paid out of Holdco’s current or accumulated earnings and profits (as determined under U.S. federal income tax principles). The portion of such distribution, if any, in excess of such earnings and profits generally will constitute a return of capital that will be applied against and reduce (but not below zero) the U.S. Holder’s adjusted tax basis in its Holdco Shares. Any remaining excess generally will be treated as gain from the sale or other disposition of the Holdco securities and will be treated as described under “— Taxation on the Disposition of Holdco Securities” below. With respect to non-corporate U.S. Holders, including individual U.S. Holders, dividends will be taxed at the lower capital gains rate applicable to qualified dividend income, provided that (1) the Holdco Shares are readily tradable on an established securities market in the United States, or Holdco is eligible for the benefits of an approved qualifying income tax treaty with the United States that includes an exchange of information program, (2) Holdco is not a passive foreign investment company (as discussed below) for either the taxable year in which the dividend is paid or the preceding taxable year, and (3) certain holding period requirements are met. You are urged to consult your tax advisors regarding the availability of the lower rate for dividends paid with respect to Holdco Shares.

 

Taxation on the Disposition of Holdco Securities

 

Upon a sale or other taxable disposition of Holdco securities (which, in general, would include a distribution in connection with Holdco’s liquidation), a U.S. Holder of such securities generally will recognize capital gain or loss in an amount equal to the difference between the amount realized and the U.S. Holder’s adjusted tax basis in such securities.

 

Subject to the passive foreign investment company rules discussed below, you will recognize taxable gain or loss on any sale, exchange or other taxable disposition of Holdco Shares equal to the difference between the amount realized (in U.S. dollars) for the Shares and your tax basis (in U.S. dollars) in the Holdco Shares. The gain or loss will be capital gain or loss. If you are a non-corporate U.S. Holder, including an individual U.S. Holder, who has held the Holdco Shares for more than one year, you may be eligible for reduced tax rates on any such capital gains. The deductibility of capital losses is subject to various limitations.

 

Passive Foreign Investment Company (“PFIC”)

 

A non-U.S. corporation is considered a PFIC for any taxable year if either:

 

at least 75% of its gross income for such taxable year is passive income; or

 

at least 50% of the value of its assets (based on an average of the quarterly values of the assets during a taxable year) is attributable to assets that produce or are held for the production of passive income (the “asset test”).

 

Passive income generally includes dividends, interest, rents and royalties (other than rents or royalties derived from the active conduct of a trade or business) and gains from the disposition of passive assets. Holdco will be treated as owning its proportionate share of the assets and earning its proportionate share of the income of any other corporation in which it owns, directly or indirectly, at least 25% (by value) of the stock. In determining the value and composition of its assets for purposes of the PFIC asset test, (1) the cash Holdco owns at any time will generally be considered to be held for the production of passive income and (2) the value of Holdco’s assets must be determined based on the market value of Holdco Shares from time to time, which could cause the value of its non-passive assets to be less than 50% of the value of all of its assets (including cash) on any particular quarterly testing date for purposes of the asset test. Although Holdco does not expect to be a PFIC, it is not entirely clear how the contractual arrangements between us and our VIEs will be treated for purposes of the PFIC rules. If it were determined that Holdco does not own the stock of our VIEs for United States federal income tax purposes (for instance, because the relevant PRC authorities do not respect these arrangements), Holdco may be treated as a PFIC. Holdco must make a separate determination each year as to whether it is a PFIC. Holdco will make this determination following the end of any particular tax year. If Holdco is a PFIC for any year during which you hold Holdco Shares, it will continue to be treated as a PFIC for all succeeding years during which you hold Holdco Shares. However, if Holdco ceases to be a PFIC and you did not previously make a timely “mark-to-market” election as described below, you may avoid some of the adverse effects of the PFIC regime by making a “purging election” (as described below) with respect to the Holdco Shares.

 

If Holdco is a PFIC for any taxable year(s) during which you hold Holdco Shares, you will be subject to special tax rules with respect to any “excess distribution” that you receive and any gain you realize from a sale or other disposition (including a pledge) of the Holdco Shares, unless you make a “mark-to-market” election as discussed below. Distributions you receive in a taxable year that are greater than 125% of the average annual distributions you received during the shorter of the three preceding taxable years or your holding period for the ordinary shares will be treated as an excess distribution. Under these special tax rules:

 

the excess distribution or gain will be allocated ratably over your holding period for the Holdco Shares;

 

85

 

 

the amount allocated to your current taxable year, and any amount allocated to any of your taxable year(s) prior to the first taxable year in which Holdco was a PFIC, will be treated as ordinary income, and

 

the amount allocated to each of your other taxable year(s) will be subject to the highest tax rate in effect for that year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year.

 

The tax liability for amounts allocated to years prior to the year of disposition or “excess distribution” cannot be offset by any net operating losses for such years, and gains (but not losses) realized on the sale of the Holdco Shares cannot be treated as capital, even if you hold the Holdco Shares as capital assets.

 

A U.S. Holder of “marketable stock” (as defined below) in a PFIC may make a mark-to-market election for such stock to elect out of the tax treatment discussed above. If you make a mark-to-market election for first taxable year which you hold (or are deemed to hold) Holdco Shares and for which Holdco is determined to be a PFIC, you will include in your income each year an amount equal to the excess, if any, of the fair market value of the Holdco Shares as of the close of such taxable year over your adjusted basis in such Holdco Shares, which excess will be treated as ordinary income and not capital gain. You are allowed an ordinary loss for the excess, if any, of the adjusted basis of the Holdco Shares over their fair market value as of the close of the taxable year. However, such ordinary loss is allowable only to the extent of any net mark-to-market gains on the Holdco Shares included in your income for prior taxable years. Amounts included in your income under a mark-to-market election, as well as gain on the actual sale