F-1 1 d116044df1.htm FORM F-1 Form F-1
Table of Contents

As filed with the Securities and Exchange Commission on June 21, 2021.

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Spark Education Limited

(Exact name of Registrant as specified in its charter)

 

 

Not Applicable

(Translation of Registrant’s name into English)

 

 

 

Cayman Islands   8200   Not Applicable

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

Block A, No.101 Wangjing Lize

Zhongyuan, Chaoyang District, Beijing,

People’s Republic of China

+86 010-8414-8552

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

COGENCY GLOBAL INC.

122 East 42nd Street, 18th Floor New York, NY

10168

+1 800-221-0102

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

 

 

Copies to:

 

Li He, Esq.

James C. Lin, Esq.

Davis Polk & Wardwell LLP

c/o 18th Floor, The Hong Kong

Club Building

3A Chater Road, Central

Hong Kong

+852 2533-3300

 

Benjamin Su, Esq.

Tingfei Fan, Esq.

Latham & Watkins LLP

18th Floor, One Exchange Square

8 Connaught Place, Central

Hong Kong

+852 2912-2500

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

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

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

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

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

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

Emerging growth company  

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

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

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of securities to be registered  

Proposed

maximum

aggregate
offering price(2)(3)

 

Amount of

registration fee

Class A Ordinary shares, par value US$0.0001 per share(1)(2)

  US$100,000,000   US$10,910

 

 

(1)

American depositary shares issuable upon deposit of Class A ordinary shares registered hereby will be registered under a separate registration statement on Form F-6 (Registration No. 333-                    ). Each American depositary share represents                     Class A ordinary shares.

(2)

Includes Class A ordinary shares initially offered and sold outside the United States that may be resold from time to time in the United States either as part of their distribution or within 40 days after the later of the effective date of this registration statement and the date the shares are first bona fide offered to the public, and also includes Class A ordinary shares that are issuable upon the exercise of the underwriters’ over-allotment option. These Class A ordinary shares are not being registered for the purpose of sales outside the United States.

(3)

Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933.

 

 

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 United States Securities and Exchange Commission, acting pursuant to such Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This 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.

 

Subject to Completion

Preliminary Prospectus Dated                     , 2021

American Depositary Shares

 

 

LOGO

Spark Education Limited

Representing                      Class A Ordinary Shares

 

 

This is an initial public offering of American depositary shares, or ADSs, representing Class A ordinary shares of Spark Education Limited. We are offering a total of                      ADSs, each representing                      of our Class A ordinary shares, par value US$0.0001 per share. The underwriters may also purchase up to an additional                      Class A ordinary shares within 30 days to cover over-allotments, if any.

Prior to this offering, there has been no public market for the ADSs. We expect the initial public offering price will be between US$            and US$            per ADS. We intend to apply to list the ADSs representing our Class A ordinary shares on the Nasdaq Global Market under the symbol “SPRK.”

Following the completion of this offering, our issued and outstanding share capital will consist of Class A ordinary shares and Class B ordinary shares. Mr. Jian (Mark) Luo, our founder, chairman of the Board and Chief Executive Officer, and Mr. Zebing Shan, our co-founder, director and Chief Technology Officer, will collectively beneficially own all of our issued Class B ordinary shares and will collectively be able to exercise             % of the total voting power of our issued and outstanding share capital immediately following the completion of this offering, assuming the underwriters do not exercise their option to purchase additional ADSs. Holders of Class A ordinary shares and Class B ordinary shares have the same rights except for voting and conversion rights. Each Class A ordinary share is entitled to one vote and each Class B ordinary share is entitled to 12 votes. Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof, while Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. Upon any sale, transfer, assignment or disposition of any Class B ordinary share by a holder thereof to any non-affiliate to such holder, each of such Class B ordinary share will be automatically and immediately converted into one Class A ordinary share. See “Description of Share Capital.”

Neither the United States Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

We are an “emerging growth company” under the US federal securities laws and will be subject to reduced public company reporting requirements. Investing in our Class  A ordinary shares and ADSs involves risks. See “Risk Factors” beginning on page 21 of this prospectus.

 

     Per ADS    Total

Public offering price

   US$                US$            

Underwriting discounts and commissions(1)

   US$    US$

Proceeds, before expenses, to us

   US$    US$

 

(1)

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

The underwriters expect to deliver the ADSs against payment in U.S. dollars in New York, New York on                     , 2021.

 

 

 

Credit Suisse   Citigroup   CICC

 

 

 

FUTU    Tiger Brokers

(in alphabetical order)

 

 

The date of this prospectus is                    , 2021.


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Table of Contents

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Table of Contents

TABLE OF CONTENTS

 

 

 

     Page  

Prospectus Summary

     1  

Implications of Being an Emerging Growth Company

     9  

Conventions Which Apply to This Prospectus

     9  

The Offering

     12  

Our Summary Consolidated Financial Data and Operating Data

     15  

Risk Factors

     21  

Cautionary Statement Regarding Forward-Looking Statements

     72  

Use of Proceeds

     73  

Dividend Policy

     74  

Capitalization

     75  

Dilution

     78  

Enforceability of Civil Liabilities

     80  

Our History and Corporate Structure

     82  

Selected Consolidated Financial Data

     86  

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

     92  

Industry Overview

     122  

Letter From Our Founder

     130  

Business

     132  

Regulation

     156  

Management

     178  

Principal Shareholders

     186  

Related Party Transactions

     191  

Description of Share Capital

     192  

Description of American Depositary Shares

     209  

Shares Eligible for Future Sale

     222  

Taxation

     224  

Underwriting

     231  

Expenses Relating to this Offering

     241  

Legal Matters

     242  

Experts

     243  

Where You Can Find Additional Information

     244  

Index to the Consolidated Financial Statements

     F-1  

Unless otherwise indicated or the context otherwise requires, all references in this prospectus to “Spark Education Limited” or the “Company,” “we,” “our,” “ours,” “us” or similar terms refer to Spark Education Limited, together with its subsidiaries and, in the context of describing its operations and consolidated financial information, its consolidated variable interest entity, or VIE.

We have not authorized anyone to provide any information other than that contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we may have referred you. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We and the underwriters have not authorized any other person to provide you with different or additional information. Neither we nor the underwriters are making an offer to sell the Class A ordinary shares in any jurisdiction where the offer or sale is not permitted. This offering is being made in the United States and elsewhere solely on the basis of the information contained in this prospectus. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus, regardless of the time of delivery of this prospectus or any sale of the ADSs representing our Class A ordinary shares. Our business, financial condition, results of operations and prospects may have changed since the date on the front cover of this prospectus.

 

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Until                    , 2021 (the 25th day after the date of this prospectus), all dealers that buy, sell or trade the ADSs, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

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PROSPECTUS SUMMARY

The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements and the related notes appearing elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, especially the risks of investing in the ADSs discussed under “Risk Factors,” “Business,” and information contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” before deciding whether to buy the ADSs. This prospectus contains certain estimates and information from four industry reports commissioned by us and prepared respectively by China Insights Industry Consultancy Limited, or CIC, an independent market research firm, regarding our industries and our market positions in China. We refer to this report as the “CIC Report” and the survey as the “CIC Consumer Survey.”

Mission

Spark passion for learning, ignite lifelong growth.

Vision

To become a global pioneer and industry leader in foundational learning.

Overview

Who We Are

We are a pioneer and innovator in China’s K-12 after-school tutoring, or AST, market, offering foundational learning services to K-12 students. According to CIC, we are the first online education company to develop and offer online small-class foundational learning courses on a large scale. As a result of our unique approach to learning, we have become China’s largest online small-class education company in terms of gross billings in 2020 and the number of students as of December 31, 2020, according to CIC.

We named our company “Huohua,” which means “Spark” in English, because we aspire to spark students’ passion for learning. Our foundational learning approach is designed to help students not only learn subject knowledge but also develop a comprehensive set of lifelong skills and capabilities, such as creativity, critical thinking and problem solving, in an engaging, interactive environment. This innovative approach is fundamentally different from the exam-oriented rote learning approach that is common in China. There is a large and rapidly increasing demand for foundational learning in China, as more families come to appreciate its benefits for students of all ages. According to CIC, parents of young children today are generally better educated and more cognizant of the importance of a well-rounded education, which, combined with greater spending power, has created a large, rapidly increasing demand for foundational learning. We believe we are fulfilling an important market need that has not been effectively addressed by existing K-12 AST offerings.

We deliver our courses primarily through online small classes with four to eight students per class. According to CIC, online small-class is the most effective format for providing students with an engaging, interactive and personalized learning experience. We currently offer online small-class courses to students in three main subjects: mathematical thinking, which is our flagship course, Chinese, and English. We also offer AI-enhanced courses to supplement our offerings. Our business is powered by technology. We have invested extensively in research and development, which supports



 

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each and every aspect of our operation and enables us to build a strong brand with high satisfaction among students and parents while in the meantime achieving significant operational efficiency. In terms of NPS, a widely known survey methodology used to measure overall customer satisfaction, we achieved the highest score among China’s online K-12 AST companies, according to a March 2021 survey conducted by CIC.

We have experienced rapid growth within a relatively short period of time. We had 370,530 students as of March 31, 2021, representing a significant increase from 133,902 as of March 31, 2020. Our net revenues increased by 501.0% from RMB195.4 million in 2019 to RMB1,174.4 million (US$179.2 million) in 2020, and increased by 203.3% from RMB149.6 million in the three months ended March 31, 2020 to RMB453.7 million (US$69.2 million) in the three months ended March 31, 2021. Our gross billings almost quadrupled from RMB513.5 million in 2019 to RMB1,908.1 million (US$291.2 million) in 2020, and increased by 142.2% from RMB269.8 million in the three months ended March 31, 2020 to RMB653.5 million (US$99.7 million) in the three months ended March 31, 2021. We recorded a gross profit of RMB322.0 million (US$49.2 million) and a net loss of RMB951.7 million (US$145.3 million) in 2020, as compared to a gross loss of RMB166.5 million and a net loss of RMB771.1 million in 2019. We recorded a gross profit of RMB169.2 million (US$25.8 million) and a net loss of RMB373.7million (US$57.0 million) in the three months ended March 31, 2021, as compared to a gross loss of RMB0.7 million and a net loss of RMB209.2 million in the three months ended March 31, 2020. For a reconciliation of gross billings to net revenues, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures.”

Challenges Facing China’s K-12 AST Market

We believe China’s K-12 AST market is faced with the following major challenges:

 

   

Limitations of the rote learning approach. The exam-oriented rote learning approach that is common in China relies heavily on memorization and repetitive drills, and is generally one-size-fits-all as it uses test scores as the primary criteria to evaluate students. This approach may inhibit them from developing core skillsets, such as critical thinking, creativity and problem solving.

 

   

Disparity of access to quality education resources. The distribution of quality education resources varies widely across different regions in China. Access to quality teachers and K-12 AST services remains limited, especially in less economically developed regions.

 

   

Lack of effective online education products. While there has been a rapid increase in the adoption of online K-12 AST courses, many of the products currently on the market do not provide a high quality student experience or effective learning outcomes. According to CIC, many companies have simply ported an offline learning offering to an online format through live webcasting platforms and online class platforms provided by educational SaaS providers without considering the real needs of students and parents, and have not fully taken advantage of the power of technology to deliver a differentiated, enhanced learning experience. Furthermore, according to CIC, many online K-12 AST companies spend a significant amount of their capital on promotion and advertising activities, rather than investing in developing quality products.



 

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Our Solutions

Dedication to Foundational Learning

We are dedicated to foundational learning as it provides students the foundation for future success. Unlike the one-size-fits-all exam-oriented rote learning model that simply focuses on standardized tests, foundational learning teaches students subject knowledge while also sparking students’ overall interest in learning and helping them develop fundamental capabilities, such as critical thinking, creativity and problem solving, and social competencies, such as self-confidence and teamwork, that they need to excel in school and become well-rounded human beings. In order to deliver the best foundational learning experiences for students, we have invested heavily in technology and pedagogical research. These investments enable us to provide our students with an engaging and effective learning experience that will have a significant impact on their academic and overall development.

An increasing number of parents, particularly those of a younger age demographic who have experienced the frustration of the exam-oriented rote learning approach themselves, are recognizing the power of foundational learning. These young parents want their children to develop a comprehensive set of skills that will benefit them throughout their lives, while also helping them succeed academically. They are also increasingly willing to invest in quality education. We believe this increased demand for foundational learning is just the beginning of a major long-term trend, and that, given our existing leadership and dedicated focus, we are well positioned to capture the tremendous and fast-growing market that it creates.

Focus on Online Small-class

We are China’s largest online small-class education company in terms of gross billings in 2020 and number of students as of December 31, 2020, according to CIC. According to the same source, online small-class is generally defined in China’s K-12 AST industry as an online course delivered live with a class size of anywhere between 2 and 25 students. We distinguish our small-class courses from competing offerings with technology-driven innovations, including animated interactive courseware, multi-dimensional in-class interactions and optimized learning experiences.

According to CIC, the online small-class format is the most effective format for providing students with an engaging, interactive and personalized learning experience. Compared to one-on-one tutoring, the small-class format offers students better opportunities to socialize with their peers and develop intrinsic motivation to learn. In contrast to the large-class format, the small-class format provides students with significantly higher level of personalization and interaction and therefore delivers better learning results. According to a March 2021 survey conducted by CIC, over 75% of the parents interviewed ranked online small-class format as their top choice when choosing online K-12 AST options for their children.

The online small-class format is known for certain inherent operational challenges, including course scheduling and the recruitment, empowerment and retention of a large number of qualified teachers. Through our focused research and development efforts, extensive operational know-how and deep insights from learning data, we have developed the operational sophistication and technologies needed to overcome these challenges and deliver quality online small-class courses at scale.

Commitment to “Back-End Driven” Operating Model

Unlike many of our peers who spend aggressively on student acquisition, we have instead invested extensively in pedagogical research, technology, product development and operational



 

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infrastructure—which we collectively refer to as our “back-end”—to drive our long-term success. This “back-end driven” operating model enables us to deliver a better learning experience while maintaining high operational efficiencies. Through our investments, we have developed a rich set of technology-enabled, interactive courseware and educational content and have greatly improved our teaching quality in an effort to provide the best possible experience for our students. As a result, we have built a strong brand with high satisfaction among students and parents, according to CIC, which enables us to boost sales through word-of-mouth referrals and organic traffic and achieve high renewal rates. In addition, our “back-end driven” model improves our operating efficiency and allows us to scale up our course offerings without compromising teaching quality. We support our teachers, tutors and course consultants with proprietary technology-driven operating systems to provide effective teaching, tutoring and services efficiently. We believe our early adoption and relentless focus on this “back-end driven” approach gives us a significant competitive advantage that is hard for our peers to replicate.

Our Technology Platform

 

LOGO

Our Competitive Strengths

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

 

   

Pioneer and innovator of foundational learning;

 

   

Industry-leading online small-class offerings;

 

   

Innovative, state-of-the-art pedagogy, courseware and educational content;



 

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High-quality teaching at scale;

 

   

Operational digitalization driven by cutting-edge technology;

 

   

Strong brand recognition; and

 

   

Visionary, entrepreneurial and seasoned management team with diverse expertise.

Our Growth Strategies

We intend to focus on the following key strategies to solidify our market leadership and achieve sustainable growth:

 

   

Continue to invest in our pedagogy, courseware and educational content;

 

   

Enrich our course offerings;

 

   

Expand our student base;

 

   

Further invest in technology and data capabilities; and

 

   

Enhance our brand recognition and awareness.

Market Opportunities

China’s K-12 AST market has experienced remarkable growth in recent years and has become the largest in the world in terms of gross billings in 2020, according to CIC. According to the same source, China’s K-12 AST market will reach RMB1,454.2 billion (US$222.0 billion) in 2025, representing a CAGR of 13.1% between 2020 and 2025. In recent years, China’s K-12 AST market has seen a large and rapidly growing demand for foundational learning. According to a March 2021 survey conducted by CIC, over 95% of parents interviewed believe that foundational learning can better prepare their children to become lifelong learners.

The small-class format is gaining popularity partly due to its advantages in terms of personalization, interaction and affordability. It is also particularly effective in delivering foundational learning for K-12 students. According to CIC, China’s online small-class K-12 AST market has reached RMB11.9 billion (US$1.8 billion) in terms of gross billings in 2020, and is expected to reach RMB101.2 billion (US$15.4 billion) by 2025, representing a CAGR of 53.3% between 2020 and 2025.

Despite the advantages of the format, there are a number of barriers to entry in providing small-class courses at scale, including operational complexity, content development, data and technology capabilities, teacher training and management, and brand recognition. We believe these factors make it very difficult for other companies to enter and successfully compete with the early movers in the online small-class course segment.

Our History and Corporate Structure

We launched our first online course through Beijing Xingengyuan Technology Ltd., or Xingengyuan, in March 2018. Our ultimate holding company, previously named Wan Duoduo Limited, was incorporated in July 2016 in the Cayman Islands to facilitate financing and offshore listing. In November 2019, Wan Duoduo Limited was renamed as Spark Education Limited.

In July 2016, Spark Education (Hongkong) Limited, or Spark Hong Kong, our wholly-owned subsidiary, was incorporated in Hong Kong. In December 2016, Beijing Spark Education and



 

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Technology Co., Ltd., or Beijing Spark Education, our wholly-owned subsidiary, was incorporated in the PRC. Between January 2017 and February 2021, Beijing Spark Education entered into a series of contractual arrangements with Xingengyuan and its shareholders, through which Beijing Spark Education, our wholly owned subsidiary, effectively controls Xingengyuan.

As part of our business expansion, in 2020, a number of wholly-owned subsidiaries, including Tianjin Spark Education and Technology Co., Ltd., or Tianjin Spark Education, Chengdu Spark Education and Technology Co., Ltd., or Chengdu Spark Education, and Chengdu Juli Education Consulting Co., Ltd., or Chengdu Juli, were incorporated in the PRC. In January 2021, Wuhan Spark Education and Technology Co., Ltd. was incorporated as our wholly-owned subsidiary in the PRC.

Our Corporate Structure

The following chart illustrates our corporate structure, including our significant subsidiaries as that term is defined under Section 1-02 of Regulation S-X under the Securities Act, our VIE and certain other subsidiaries, as of the date of this prospectus:

 

 

LOGO

 

LOGO

   Equity interest

LOGO

   Contractual arrangements, including the exclusive business cooperation agreement, the equity pledge agreement, the exclusive purchase option agreement, the powers of attorney and the spousal consent letters. See “Our History and Corporate Structure—Contractual Arrangements with Our VIE and Its Shareholders.”

 

Note:

(1)

Shareholders of Xingengyuan are Mr. Luo, our founder, chairman of the board and chief executive officer, and Mr. Shan, our co-founder, director and chief technology officer, holding 86.9% and 13.1% of Xingengyuan’s equity interests, respectively.

Current PRC laws and regulations impose certain restrictions or prohibitions on foreign ownership of companies that engage in value-added telecommunication services and certain other businesses.



 

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We are a company registered in the Cayman Islands. Beijing Spark Education, our PRC subsidiary, is considered a foreign-invested enterprise. To comply with PRC laws and regulations, we primarily conduct our business in China through Xingengyuan, our VIE in the PRC, based on a series of contractual arrangements. As a result of these contractual arrangements, we exert effective control over, and are considered the primary beneficiary of, Xingengyuan, our VIE and consolidate its and its subsidiaries’ operating results in our financial statements prepared under U.S. GAAP. For more details and risks related to our VIE structure, please see “Our History and Corporate Structure—Contractual Arrangements with Our VIE and Its Shareholders” and “Risk Factors—Risks Related to Our Corporate Structure.”

Summary of Risk Factors

Investing in the ADSs involves significant risks. You should carefully consider all of the information in this prospectus before making an investment in the ADSs. Below please find a summary of the principal risks and uncertainties we face, organized under relevant headings. These risks are discussed more fully in the section titled “Risk factors.”

Risks Related to Our Business and Industry

Risks and uncertainties relating to our business and industry include, but are not limited to, the following:

 

   

We have a limited history in operating our foundational learning services. This may make it difficult to evaluate our future prospects and the risks and uncertainties associated with our services;

 

   

The success and future growth of our business will be affected by the acceptance of foundational learning;

 

   

If we are not able to continue to attract and retain students, our business and prospects will be materially and adversely affected;

 

   

We may not be able to continue to successfully address the risks and challenges in running a small-class model;

 

   

Our business depends on the continued success of our brand, and if we fail to maintain and enhance recognition of our brand, our reputation and operating results may be harmed;

 

   

We face intense competition, which could lead to a loss of market share and materially and adversely affect our business, financial condition and results of operations;

 

   

We may not be able to continue to recruit, train and retain a sufficient number of qualified faculty members and content development employees; and

 

   

We are subject to the risks relating to significant uncertainties in the interpretation and implementation of, or proposed changes to, the PRC laws and regulations regarding the private education industry in general, and the online K-12 AST market in particular. Additionally, certain aspects of our current business operations may be deemed not to be in full compliance with these laws and regulations.



 

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Risks Related to Our Corporate Structure

Risks and uncertainties relating to our corporate structure include, but are not limited to, the following:

 

   

If the PRC government finds that the agreements that establish the structure for operating certain of our operations in China do not comply with PRC regulations relating to the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations;

 

   

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

 

   

Any failure by Xingengyuan or its shareholders to perform their obligations under our contractual arrangements with them would have a material and adverse effect on our business.

Risks Related to Doing Business in China

We are also subject to risks and uncertainties relating to doing business in China in general, including, but not limited to, the following:

 

   

Changes in China’s economic, political or social conditions or government policies could have a material adverse effect on our business and operations;

 

   

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

 

   

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

 

   

The ADSs may be delisted under the Holding Foreign Companies Accountable Act if the PCAOB is unable to inspect auditors who are located in China. The delisting of the ADSs, or the threat of their being delisted, may materially and adversely affect the value of your investment. Additionally, the inability of the PCAOB to conduct inspections deprives our investors with the benefits of such inspections.

Risks Related to the ADS and this Offering

In addition to the risks described above, we are subject to risks relating to the ADS and this offering, including, but not limited to, the following:

 

   

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

 

   

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

 

   

If securities or industry analysts do not publish research or reports about our business, or if they adversely change their recommendations regarding the ADSs, the market price for the ADSs and trading volume could decline; and

 

   

Our dual-class voting structure will limit your ability to influence corporate matters and could discourage others from pursuing any change of control transactions that holders of our Class A ordinary shares and ADSs may view as beneficial.



 

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See “Risk Factors” and other information included in this prospectus for a discussion of these and other risks and uncertainties that we face.

OUR CORPORATE INFORMATION

Our principal executive offices are located at Block A, No.101 Wangjing Lizezhongyuan, Chaoyang District, Beijing, the People’s Republic China. Our telephone number at this address is +86 010-8414-8552. Our registered office in the Cayman Islands is located at PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands. Our agent for service of process in the United States is Cogency Global Inc. located at 122 East 42nd Street, 18th Floor New York, NY, the United States.

Investors should contact us for any inquiries through the address and telephone number of our principal executive office. Our principal website is www.huohua.cn. The information contained on our website is not a part of this prospectus.

IMPLICATIONS OF BEING AN EMERGING GROWTH COMPANY

As a company with less than US$1.07 billion in revenue for the last fiscal year, we qualify as an “emerging growth company” pursuant to the Jumpstart Our Business Startups Act of 2012 (as amended by the Fixing America’s Surface Transportation Act of 2015), or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, in the assessment of the emerging growth company’s internal control over financial reporting. The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting standards. However, we have elected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted for public companies. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.

We will remain an emerging growth company until the earliest of (i) the last day of our fiscal year during which we have total annual gross revenues of at least US$1.07 billion; (ii) the last day of our fiscal year following the fifth anniversary of the completion of this offering; (iii) the date on which we have, during the previous three-year period, issued more than US$1.0 billion in non-convertible debt; or (iv) the date on which we are deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended, or the Exchange Act, which would occur if the market value of the ADSs that are held by non-affiliates exceeds US$700 million as of the last business day of our most recently completed second fiscal quarter. Once we cease to be an emerging growth company, we will not be entitled to the exemptions provided in the JOBS Act discussed above. See “Risk Factors—Risks Related to the ADSs and This Offering—We are an emerging growth company within the meaning of the Securities Act and may take advantage of certain reduced reporting requirements.”

CONVENTIONS WHICH APPLY TO THIS PROSPECTUS

Unless we indicate otherwise, all information in this prospectus reflects the following:

 

   

no exercise by the underwriters of their over-allotment option to purchase up to                     additional ADSs representing                     Class A ordinary shares from us; and



 

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Except where the context otherwise requires and for purposes of this prospectus only:

 

   

”ADSs” refers to the American depositary shares, each representing                    Class A ordinary shares;

 

   

“AST” refers to after-school tutoring;

 

   

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

 

   

“Class A ordinary share” refers to our Class A ordinary shares, par value US$0.0001 per share;

 

   

“Class B ordinary share” refers to our Class B ordinary shares, par value US$0.0001 per share;

 

   

“course units” refers to the units in each course package, which are consumed when students take classes with us. The tuition fee we charge for our online courses is calculated on a per-course-package basis.

 

   

“gross billings” for a specific period refers to the total amount of cash received in respect of sales of courses in such period, net of the total amount of refunds in such period. Gross billings is a widely used measurement in China’s K-12 AST industry;

 

   

“Huohua,” “we,” “us,” “our company,” and “our” refer to Spark Education Limited, a Cayman Islands company and its subsidiaries and, in the context of describing our operations and consolidated financial information, its consolidated variable interest entity, or VIE;

 

   

“K-12 education” generally refers to the education provided to students aged between 3 and 18;

 

   

“K-12 AST” refers to tutoring covering academic subjects such as mathematics, Chinese and English, and other interest-based subjects;

 

   

“RMB” or “Renminbi” refers to the legal currency of the People’s Republic of China;

 

   

“average voluntary attrition rate” of employees for a specific period refers to the proportion of our employees who voluntarily terminated the employment during such period;

 

   

“new tier-1 cities” refers to the relatively developed cities following the tier-1 cities, namely Chengdu, Hangzhou, Nanjing, Qingdao, Kunming, Shenyang, Tianjin, Wuhan, Xi’an, Changsha, Chongqing, Suzhou, Ningbo, Zhengzhou, and Dongguan;

 

   

“NPS” or “Net Promoter Score,” refers to a widely known survey methodology used to measure overall customer satisfaction;

 

   

“number of students” at a given date refers to the total number of students who have valid course units as of that date; a student who takes multiple courses is counted as one student. Number of students is a widely used measurement in China’s K-12 AST industry;

 

   

“ordinary share” refers to our Class A ordinary shares and Class B ordinary shares;

 

   

“Spark Coins” refers to digital points that can be redeemed for course units, merchandise and cash vouchers for third-party e-commerce platforms;

 

   

“tier-1 cities” refers to the most developed cities in the PRC, namely Beijing, Shanghai, Guangzhou and Shenzhen;

 

   

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



 

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“variable interest entity” or “VIE” refers to the PRC entity of which we have power to control the management, and financial and operating policies and have the right to recognize and receive substantially all the economic benefits and in which we have an exclusive option to purchase all or part of the equity interests at the minimum price possible to the extent permitted by PRC law.

Unless otherwise noted, all translations from Renminbi to U.S. dollars and from U.S. dollars to Renminbi in this prospectus are made at RMB6.5518 to US1.00, the exchange rate set forth in the H.10 statistical release of the Federal Reserve Board on March 31, 2021. We make no representation that any Renminbi or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or Renminbi, as the case may be, at any particular rate, the rates stated below, or at all.

This prospectus contains information derived from various public sources and certain information from an industry report commissioned by us and prepared by China Insights Industry Consultancy Limited, or CIC, a third-party industry research firm, to provide information regarding our industry and market position. Such information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to these estimates. We have not independently verified the accuracy or completeness of the data contained in these industry publications and reports. The industry in which we operate is subject to a high degree of uncertainty and risk due to variety of factors, including those described in the “Risk Factors” section. These and other factors could cause results to differ materially from those expressed in these publications and reports.

Due to rounding, numbers presented throughout this prospectus may not add up precisely to the totals provided and percentages may not precisely reflect the absolute figures.



 

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THE OFFERING

 

Offering price range

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

 

ADSs offered by us

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

 

The ADSs

Each ADS represents                      Class A ordinary shares, par value US$0.0001 per share. The depositary will hold the Class A ordinary shares underlying the ADSs. You will have rights as provided in the deposit agreement.

 

  We do not expect to pay dividends in the foreseeable future. If, however, we declare dividends on our Class A ordinary shares, the depositary will pay you the cash dividends and other distributions it receives on our Class A ordinary shares, after deducting its fees and expenses in accordance with the terms set forth in the deposit agreement.

 

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

 

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

 

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

 

Ordinary shares

We will issue                      Class A ordinary shares represented by the ADSs in this offering (assuming the underwriters do not exercise their option to purchase additional ADSs).

 

 

Our ordinary shares will be divided into Class A ordinary shares and Class B ordinary shares immediately prior to the completion of this offering. Holders of Class A ordinary shares and Class B ordinary shares will have the same rights except for voting and conversion rights. In respect of matters requiring a shareholder vote, each Class A ordinary share will be entitled to one vote, and each Class B ordinary share will be entitled to 12 votes. Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof. Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. Upon any sale, transfer,



 

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assignment or disposition of any Class B ordinary shares by a holder thereof to any non-affiliate to such holder, each of such Class B ordinary shares will be automatically and immediately converted into one Class A ordinary share.

 

  All options, regardless of grant dates, will entitle holders to the equivalent number of Class A ordinary shares once the vesting and exercising conditions on such share-based compensation awards are met.

 

  See “Description of Share Capital.”

 

Class A Ordinary shares outstanding immediately after this offering

             Class A ordinary shares, par value US$0.0001 per share (or                      Class A ordinary shares if the underwriters exercise their option to purchase additional ADSs in full).

 

Over-allotment option

We have granted the underwriters the right to purchase up to an additional                      Class A ordinary shares from us within 30 days of the date of this prospectus, to cover over-allotments, if any, in connection with the offering.

 

Listing

We intend to apply to list the ADSs representing our Class A ordinary shares on the Nasdaq Global Market, or Nasdaq under the symbol “SPRK”.

 

Use of proceeds

We estimate that the net proceeds to us from the offering will be approximately US$             (or approximately US$             million if the underwriters exercise their over-allotment option to purchase additional ADSs in full), assuming an initial public offering price of US$             per ADS, which is the midpoint of the estimated initial public offering price range set forth on the front cover of this prospectus, after deducting underwriting discounts and commissions and the estimated offering expenses payable by us.

 

  We plan to use the net proceeds from this offering to (i) improve our pedagogy, courseware and educational content and further broaden our course offerings; (ii) improve our technology and infrastructure; (iii) expand our marketing and brand efforts; and (iv) fund working capital and for other general corporate purposes. See “Use of Proceeds.”

 

Lock-up

We, our directors, executive officers and existing shareholders have agreed with the underwriters, subject to certain exceptions, not to offer, sell, or dispose of any shares of our share capital or securities convertible into or exchangeable or exercisable for any shares of our share capital during the



 

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[180]-day period following the date of this prospectus. See “Shares Eligible for Future Sale” and “Underwriting” for more information.

 

Payment and settlement

The underwriters expect to deliver the ADSs against payment therefor through the facilities of The Depository Trust Company on                    , 2021.

 

Depositary

Citibank, N.A.

 

[Directed share program

At our request, the underwriters have reserved for sale, at the initial public offering price, up to an aggregate of                      ADSs offered in this offering to our directors, officers, employees, business associates and related persons.]

 

Taxation

For Cayman, PRC and U.S. federal income tax considerations with respect to the ownership and disposition of the ADSs, see “Taxation.”

Unless otherwise indicated, all information contained in this prospectus assumes no exercise of the option granted to the underwriters to purchase up to                      additional Class A ordinary shares to cover over-allotments, if any, in connection with the offering.



 

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OUR SUMMARY CONSOLIDATED FINANCIAL DATA AND OPERATING DATA

The following summary consolidated statements of operations and comprehensive loss for the years ended December 31, 2019 and 2020, summary consolidated balance sheet data as of December 31, 2019 and 2020 and summary consolidated statements of cash flows data for the years ended December 31, 2019 and 2020 have been derived from audited consolidated financial statements included elsewhere in this prospectus. The following summary consolidated statements of operations and comprehensive loss for the three months ended March 31, 2020 and 2021, summary consolidated balance sheet data as of March 31, 2021 and summary consolidated statements of cash flows data for the three months ended March 31, 2020 and 2021 have been derived from unaudited interim condensed consolidated financial statements included elsewhere in this prospectus. Our consolidated financial statements are prepared and presented in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. Our historical results are not necessarily indicative of results expected for future periods. You should read this Summary Consolidated Financial Data and Operating Data section together with our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

 

    For the Year Ended December 31,     For the Three Months Ended March 31,  
    2019     2020     2020     2021  
    RMB     % of
total net
revenues
    RMB     US$     % of
total net
revenues
    RMB     % of
total net
revenues
    RMB     US$     % of
total net
revenues
 
    (in thousands, except for share, per share data and percentage)  

Summary Consolidated Statements of Operations:

                   

Net revenues

    195,412       100.0       1,174,359       179,242       100.0       149,644       100.0       453,661       69,242       100.0  

Cost of revenues(1)

    (361,873     (185.2     (852,332     (130,091     (72.6     (150,340     (100.5     (284,509     (43,425     (62.7
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross (loss)/profit

    (166,461     (85.2     322,027       49,151       27.4       (696     (0.5     169,152       25,817       37.3  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

                   

Sales and marketing expenses(1)

    (235,769     (120.7     (798,356     (121,853     (68.0     (112,940     (75.5     (342,552     (52,284     (75.5

Research and development expenses(1)

    (239,941     (122.8     (327,349     (49,963     (27.9     (69,083     (46.2     (143,533     (21,907     (31.6

General and administrative expenses(1)

    (128,203     (65.6     (177,960     (27,162     (15.2     (34,378     (23.0     (72,442     (11,057     (16.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    (603,913     (309.1     (1,303,665     (198,978     (111.1     (216,401     (144.7     (558,527     (85,248     (123.1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income

    2,163       1.1       21,866       3,337       1.9       7,154       4.8       11,530       1,760       2.5  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (768,211     (393.2     (959,772     (146,490     (81.8     (209,943     (140.4     (377,845     (57,671     (83.3

Interest income

    1,953       1.0       11,749       1,793       1.0       1,246       0.8       3,259       499       0.7  

Interest expenses

    (926     (0.5     (822     (125     (0.1     (241     (0.2     (187     (29     (0.0

Others, net

    (3,939     (2.0     (2,850     (435     (0.2     (305     (0.2     1,064       162       0.2  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax expense

    (771,123     (394.7     (951,695     (145,257     (81.1     (209,243     (140.0     (373,709     (57,039     (82.4

Income tax expense

    —         —         —         —         —         —         —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (771,123     (394.7     (951,695     (145,257     (81.1     (209,243     (140.0     (373,709     (57,039     (82.4

Accretion of convertible redeemable preferred shares to redemption value

    (40,788     (20.9     (100,895     (15,400     (8.6     (15,858     (10.6     (51,929     (7,925     (11.4

Deemed dividends due to extinguishment of preferred shares

    —         —         (13,415     (2,047     (1.1     —         —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 


 

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    For the Year Ended December 31,     For the Three Months Ended March 31,  
    2019     2020     2020     2021  
    RMB     % of
total net
revenues
    RMB     US$     % of
total net
revenues
    RMB     % of
total net
revenues
    RMB     US$     % of
total net
revenues
 
    (in thousands, except for share, per share data and percentage)  

Net loss attributable to ordinary shareholders of Spark Education Limited

    (811,911     (415.6     (1,066,005     (162,704     (90.8     (225,101     (150.6     (425,638     (64,964     (93.8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of ordinary shares used in computing net loss per share

                   

Basic and diluted

    24,770,658         29,605,885       29,605,885         24,475,239         37,153,734       37,153,734    

Net loss per share attributable to ordinary shareholders

                   

Basic and diluted

    (32.78       (36.01     (5.50       (9.20       (11.46     (1.75  

Unaudited Pro Forma Data(2):

                   

Pro forma effect of conversion of preferred shares

        285,694,432       285,694,432             285,694,432       285,694,432    

Pro forma effect of vesting of founders’ restricted shares

        33,942,041       33,942,041             26,277,709       26,277,709    

Pro forma weighted average number of shares used in computing net loss per share:

                   

Basic and diluted

        349,242,358      
349,242,358
 
          349,125,875       349,125,875    

Pro forma net loss per share:

                   

Basic and diluted

        (2.90     (0.44           (1.17     (0.18  

 

Notes:

(1)

Share-based compensation expenses included in:

 

     For the Year Ended December 31,      For the Three Months Ended
March 31,
 
     2019      2020      2020      2021  
     RMB      RMB      US$      RMB      RMB      US$  
     (in thousands)  

Cost of revenues

     774        1,873        286        267        819        125  

Sales and marketing expenses

     1,150        3,338        509        380        1,632        249  

Research and development expenses

     3,318        10,761        1,642        1,769        5,164        788  

General and administrative expenses

     51,514        30,838        4,708        6,689        11,844        1,808  

 

(2)

Pro forma basic and diluted net loss per share gives effect to the assumption that all preferred shares have been converted into ordinary shares as of January 1, 2020, at the conversion ratio of one for one, and that all of our founders’ unvested restricted shares have been vested as of the beginning of the period. See Note 11(b) to the Consolidated Financial Statements for more information regarding our founders’ restricted shares.



 

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The following table presents our summary consolidated balance sheet data as of December 31, 2019 and 2020 and March 31, 2021.

 

     As of December 31,     As of March 31,  
     2019     2020     2021  
                       Actual     Pro forma(1)  
     RMB     RMB     US$     RMB     US$     RMB      US$  
     (in thousands)  

Summary Consolidated Balance Sheet Data:

                                           

Cash and cash equivalents

     506,145       1,926,289       294,009       2,542,140       388,006       2,542,140        388,006  

Total current assets

     567,422       2,086,550       318,470       3,017,938       460,628       3,017,938        460,628  

Total assets

     784,581       2,462,056       375,783       3,417,567       521,623       3,417,567        521,623  

Deferred revenues

     410,930       1,216,756       185,713       1,423,142       217,214       1,423,142        217,214  

Total current liabilities

     680,973       1,815,463       277,094       2,075,006       316,708       2,075,006        316,708  

Total liabilities

     749,345       1,860,430       283,958       2,119,671       323,525       2,119,671        323,525  

Total mezzanine equity

     992,021       2,722,314       415,505       3,800,746       580,107       —          —    

Total shareholders’ deficit

     (956,785     (2,120,688     (323,680     (2,502,850     (382,009     1,297,896        198,098  

Total liabilities, mezzanine equity and shareholders’ deficit

     784,581       2,462,056       375,783       3,417,567       521,623       3,417,567        521,623  

 

(1)

On a pro forma basis to reflect the conversion of all of our outstanding preferred shares on a one-for-one basis into ordinary shares, as if such conversion had occurred as of March 31, 2021.

The following table presents our summary consolidated statement of cash flows data for the year ended December 31, 2019 and 2020 and for the three months ended March 31, 2020 and 2021.

 

     For the Year Ended December 31,     For the Three Months Ended
March 31,
 
     2019     2020     2020     2021  
     RMB     RMB     US$     RMB     RMB     US$  
     (in thousands)  

Summary Consolidated Statement of Cash Flows Data:

            

Net cash (used in) / provided by operating activities

     (228,999     204,359       31,191       (9,853     (75,613     (11,541

Net cash used in investing activities

     (79,564     (213,840     (32,638     (20,696     (354,348     (54,084

Net cash provided by / (used in) financing activities

     475,800       1,542,945       235,499       (4,157     1,021,471       155,907  

Effect of exchange rate changes on cash and cash equivalents

     26,726       (113,320     (17,296     2,694       24,341       3,715  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase / (decrease) in cash and cash equivalents

     193,963       1,420,144       216,756       (32,012     615,851       93,997  

Cash and cash equivalents at beginning of the period

     312,182       506,145       77,253       506,145       1,926,289       294,009  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of the period

     506,145       1,926,289       294,009       474,133       2,542,140       388,006  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 


 

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Non-GAAP Financial Measures

In evaluating our business, we consider and use gross billings and adjusted net loss, both non-GAAP measures, as supplemental measures to review and assess our operating performance. We present these non-GAAP measures because they are used by our management to evaluate our operating performance and formulate business plans.

We define gross billings for a specific period as the total amount of cash received in respect of sales of courses in such period, net of the total amount of refunds in such period. For a more detailed discussion of our refund policy, see “Business—Pricing and Refund Policy.”

We generally charge tuition fees for the online small-class courses we sell to students upfront. Upon payment of the tuition fees, students are given a specified number of course units that they can consume to attend our course sessions. The tuition fees for our online small-class courses are initially recorded as deferred revenues. Because our students generally attend online small-class courses on pre-determined schedules and deferred revenues are recognized proportionally as course units are consumed, we have better visibility into our future revenues. We collect the tuition fees upfront for our AI-enhanced courses which are initially recorded as deferred revenues and recognized proportionally as these courses are “unlocked,” i.e. become available for viewing by students, on pre-determined schedules. We believe gross billings provide valuable insights into the sales of our online courses and the performance of our business.

This non-GAAP financial measure should not be considered in isolation from, or as a substitute for, its most directly comparable financial measure prepared in accordance with GAAP. A reconciliation of the historical non-GAAP financial measure to its most directly comparable GAAP measure has been provided in the tables included below. Investors are encouraged to review the reconciliation of the historical non-GAAP financial measure to its most directly comparable GAAP financial measure. As gross billings have material limitations as an analytical metric and may not be calculated in the same manner by all companies, it may not be comparable to other similarly titled measures used by other companies. In light of the foregoing limitations, you should not consider gross billings as a substitute for, or superior to, net revenues prepared in accordance with GAAP. We encourage investors and others to review our financial information in its entirety and not rely on a single financial measure.

We compensate for these limitations by relying primarily on our GAAP results and using gross billings only as a supplemental measure. The table below sets forth a reconciliation of our gross billings to net revenues for the periods indicated:

 

     For the Year Ended December 31,     For the Three Months Ended
March 31,
 
     2019     2020     2020     2021  
     RMB     RMB     US$     RMB     RMB     US$  
     (in thousands)  

Net revenues

     195,412       1,174,359       179,242       149,644       453,661       69,242  

Add: tax and surcharges

     11,764       70,787       10,804       9,025       27,582       4,210  

Add: ending deferred revenues

     410,930       1,216,756       185,713       560,152       1,423,142       217,214  

Less: beginning deferred revenues

     (43,418     (410,930     (62,720     (410,930     (1,216,756     (185,713

Less: Nonmonetary consideration awarded for promotion services(1)

     (61,194     (142,859     (21,805     (38,074     (34,143     (5,211
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross billings (non-GAAP)

     513,494       1,908,113       291,234       269,817       653,486       99,742  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 


 

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Note:

(1)

Represent the Spark Coins and free course units awarded to parents of our students in return for the distinct promotion services they perform for us; for more information, see “Business—Branding, Sales and Marketing—Channels—Referrals and Organic Traffic.”

Adjusted net loss represents net loss before share-based compensation expenses. Although share-based compensation is an important aspect of the compensation of our employees, we exclude share-based compensation expenses from adjusted net loss primarily because they are non-cash expenses and are partially discretionary in nature. Further, share-based compensation expenses are based on valuations with many underlying assumptions beyond our control that vary over time. Share-based compensation expenses may also include modifications that may not occur on a predictable cycle. Neither such assumptions nor modifications are necessarily indicative of our ongoing business performance. We believe that it would be useful to exclude share-based compensation expense for investors to better understand the long-term underlying performance of our core operations and to facilitate comparison of our results to our prior periods and to our peer companies, which may use share-based compensation to a greater or less degree than us. This non-GAAP financial measure should not be considered in isolation from, or as a substitute for, its most directly comparable financial measure prepared in accordance with GAAP. As adjusted net loss has limitations as an analytical metric and may not be calculated in the same manner by all companies, it may not be comparable to other similarly titled measures used by other companies. In light of the foregoing limitations, you should not consider adjusted net loss as a substitute for, or superior to, net loss prepared in accordance with GAAP. We encourage investors and others to review our financial information in its entirety and not rely on a single financial measure. The table below sets forth a reconciliation of our net loss and adjusted net loss for the periods indicated:

 

     For the Year Ended December 31,     For the Three Months Ended
March 31,
 
     2019     2020     2020     2021  
     RMB     RMB     US$     RMB     RMB     US$  
     (in thousands)  

Net loss

     (771,123     (951,695     (145,257     (209,243     (373,709     (57,039

Add: Share-based compensation expenses

     56,756       46,810       7,145       9,105       19,459       2,970  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted net loss (non-GAAP)

     (714,367     (904,885     (138,112     (200,138     (354,250     (54,069
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 


 

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Key Performance Metrics

The following table presents certain operating metrics of our online small-class courses for the periods indicated. Our management continually reviews these metrics to evaluate the overall performance and growth trends of our business, since we have historically generated the vast majority of our net revenues through online small-class courses.

 

     For the Year Ended December 31,      For the Three Months Ended
March 31,
 
     2019      2020      2020      2021  

Number of course units consumed (in thousands)

     2,844        15,168        2,071        5,465  

Average net revenues per course unit consumed (in RMB)

     68.2        74.1        70.5        76.6  

See “—Conventions Which Apply to This Prospectus” for the definition of course units.



 

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RISK FACTORS

An investment in the ADSs involves significant risks. You should carefully consider all of the information in this prospectus, including the risks and uncertainties described below, before making an investment in the ADSs. Any of the following risks could have a material adverse effect on our business, financial condition and results of operations. In any such case, the market price of our ADSs could decline, and you may lose all or part of your investment.

Risks Related to Our Business and Industry

We have a limited history in operating our foundational learning services. This may make it difficult to evaluate our future prospects and risks and uncertainties associated with our services.

We have a limited history of operating our foundational learning services. We introduced our mathematical thinking courses, which currently account for a significant majority of our gross billings, in early 2018. We introduced our Chinese and English courses in 2019 and 2020, respectively. Our AI-enhanced courses were launched as a standalone product in July 2020. Our limited history of operating these and potential new offerings may make it difficult for us to evaluate our future prospects and risks and uncertainties associated with our business. We have encountered, and may continue to encounter in the future, risks, challenges and uncertainties associated with operating our foundational learning services, as well as those typically encountered by companies in their early stage of development. These include, for example, the risks and difficulties relating to our ability to recruit, support and retain a sufficient number of qualified faculty members; continuously provide effective foundational learning products and service offerings; to build and manage reliable and secure IT systems and infrastructure; and to address regulatory and compliance uncertainties, among other things. Our experience in tackling these risks and uncertainties is limited. If we are unable to successfully address these risks and uncertainties, our business, financial condition and results of operations could be materially and adversely affected.

As a result of our limited operating history, our ability to forecast our future operating results, including our ability to plan for future growth, is limited and subject to a number of uncertainties. In particular, we may not be able to accurately predict demand for our offerings given the rapidly evolving market for online K-12 AST services and other factors. We operate a “back-end driven” operating model that we believe benefits us in the long run. However, our ability to achieve profits in the future may be lower than it would be if our strategy was to maximize short-term profitability. Significant expenditures on course and content development efforts, and expenditures on growing our technology and portfolio of course offerings, each of which we intend to continue to invest in, may not ultimately grow our business or contribute to long-term profitability. If we are not able to manage our growth or execute our strategies effectively, our expansion may not be successful and our business, financial condition and results of operations may be materially and adversely affected.

The success and future growth of our business will be affected by the acceptance of foundational learning.

We are dedicated to foundational learning. Unlike the exam-oriented one-size-fits-all educational model that relies heavily on memorization and repetitive drills and uses test scores as the primary measurement, foundational learning is designed to inspire students to develop an overall interest in learning and critical lifelong skills and capabilities, in addition to learning the subject knowledge, in an engaging and interactive environment. Foundational learning product offerings are relatively new to the market, and there are limited proven methods to project market demand or preference or available industry standards on which we can rely. Additionally, there is considerable uncertainty over the size

 

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and rate at which the market for foundational learning services will grow, as well as whether foundational learning as an emerging approach to education will be widely adopted. While we believe foundational learning delivers long-term benefits to students, some students and their parents may be inclined to choose the traditional, exam-oriented courses over foundational learning courses as they may find the former to be more effective in improving the students’ performance in standardized tests and for other reasons. In addition, while we intend to continue to expand our course offerings to cover more subjects and age groups, there is no guarantee that the foundational learning approach is suitable and is able to deliver effective outcomes for these courses. We cannot assure you that our offerings will continue to be attractive to our students and their parents in the future. If our foundational learning courses become less appealing to students and their parents, our business, financial condition and results of operations could be materially and adversely affected.

If we are not able to continue to attract and retain students, our business and prospects will be materially and adversely affected.

We generate revenues primarily from students paying for our online foundational learning courses. Our ability to continue to attract and retain students to purchase our online foundational learning courses is critical to the continued success and growth of our business. This in turn will depend on several factors, including our ability to recruit, train and retain high-quality faculty members; develop, adapt or enhance the quality of our course offerings; and effectively engage in branding, sales and marketing activities, among other things. Developing an enduring business model to serve this population is particularly challenging. Attracting new students depends not only on investment in our brand and our marketing efforts, but also on the perceived value of our offerings versus alternatives. If our efforts to satisfy our existing student base are not successful or become less effective, or if the cost of such efforts were to significantly increase, we may not be able to retain existing students as successfully or efficiently and, as a result, our business, results of operations, and financial condition could be adversely affected. The success of our business also depends on our ability to deliver tangible results to our students which, in turn, depends on a number of factors that are beyond our control, such as the time and resource commitments of the students themselves, as well as their parents. Our offerings may not be able to meet the expectation of all of our students and parents from time to time. For example, they may believe that our course offerings do not efficiently help students achieve their goals. If students or their parents feel that we are not providing them with the learning experience they expect, they may choose to drop out from or not to renew our courses. These factors may, in turn, contribute to reduced student satisfaction and increased challenges in attracting prospective students, all of which may materially and adversely affect our business, financial condition and results of operations. If we are unable to continue to attract and retain students, our gross billings and revenues may decline, which may have a material adverse effect on our business, financial condition and results of operations.

We may not be able to continue to successfully address the risks and challenges in running a small-class model.

We deliver a significant majority of our courses in an online small-class format. While we believe that the online small-class format is the most effective format for delivering foundational learning and for providing students with a personalized, interactive and engaging learning experience, it also comes with a set of inherent operational challenges. To provide consistently high-quality courses to our growing student base, we need to manage a large number of teachers and tutors, assess and assign students into the most suitable class levels with a high degree of accuracy and timeliness, and closely track each student’s learning process. While we have developed robust operational workflows and technological capabilities needed to ensure smooth operation of our online small-class model, we may not be able to continue to operate these courses smoothly and efficiently as our student base and course offerings continue to grow. If we fail to address any of the inherent operational challenges

 

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discussed above, the quality of our courses and student satisfaction rate may drop, which may in turn cause our business, financial condition and results of operations to suffer.

Our business depends on the continued success of our brand, and if we fail to maintain and enhance recognition of our brand, our reputation and operating results may be materially and adversely affected.

We believe that market awareness of our “Huohua” brand has contributed significantly to our success. Maintaining and enhancing our brand are critical to our efforts to scale our business and attract and retain students. Failure to maintain and enhance our brand recognition could have a material and adverse effect on our business, financial condition and results of operations. We have devoted significant resources to maintaining and promoting our brand through quality foundational learning services, but we cannot assure you that our efforts will be successful. If we are unable to further enhance our brand recognition, or if our brand image is negatively impacted by any negative publicity relating to our company, products, courses or faculties, regardless of its veracity, we may not be able to maintain and enhance recognition of our brand or attract students and parents to our online foundational learning courses successfully or efficiently, and our business and results of operations may be materially and adversely affected.

We face intense competition, which could lead to a loss of market share and materially and adversely affect our business, financial condition and results of operations.

We operate in the competitive online education industry and are faced with intense competition in every aspect of our business, including competition for students, licenses, technology and talents. For example, we face competition from online and offline providers of K-12 AST services, especially those offering foundational learning services and courses in online small-class format. We compete with these companies across a range of factors, including, among others, teaching quality, the ability to deliver an interactive, engaging learning experience through technology, and the effectiveness of sales and marketing efforts. Our competitors may adopt similar teaching approaches and courses, with different pricing and packages that may have greater appeal than our offerings. In addition, some of our current and future competitors may have more resources than we do and may be able to devote greater resources than we do to the development and promotion of their product and services, and respond more quickly than we do to the changes in the rapidly evolving student preferences, market dynamics and the regulatory landscape. They may also have greater brand recognition and financial and other resources than we do, which may make it harder for us to maintain or gain market share. If we are not able to effectively compete against current or future competitors, our business, financial condition and results of operations could suffer. Increased competition may result in pricing pressure, reducing our ability to charge higher prices for our foundational learning services. The increasingly competitive landscape may also result in longer and more complex sales cycles and cause us to lose market share to our competitors, any of which could materially and negatively affect our business, financial condition and results of operations.

We may not be able to continue to recruit, train and retain a sufficient number of qualified faculty members and content development employees.

Our faculty members, including teachers and tutors, and our content development employees are key factors that affect the quality of the student-centric learning experience that we deliver for our students. If we lose any of our high-quality faculty members and content development employees to our competitors, the attractiveness of our offerings may be adversely affected, which could have a material adverse effect on our business, financial condition and results of operations.

 

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Given the interactive nature of our online courses, we tend to attract teachers and tutors with strong education backgrounds and good communication skills. Our students’ learning experiences are also affected by the quality of our course content and design, which relies heavily on our ability to recruit, train and retain skilled content development employees. The market for qualified teachers, tutors and content development employees in China is competitive. In order to attract and retain qualified teachers, tutors and content development employees, we should provide candidates with competitive compensation packages and offer attractive career development opportunities. Although we have not experienced major difficulties in attracting and retaining qualified teachers, tutors and content development employees in the past, we cannot guarantee we will be able to continue to attract, train and retain a sufficient number of qualified teachers, tutors and content development employees in the future as our business grows, which may have a material adverse effect on our business, financial condition and results of operations.

We are subject to the risks relating to significant uncertainties in the interpretation and implementation of, or proposed changes to, the PRC laws and regulations regarding the private education industry in general, and the online K-12 AST market in particular. Additionally, certain aspects of our current business operations may be deemed not to be in full compliance with these laws and regulations.

The private education industry in general, and the online K-12 AST market in particular, in the PRC are subject to various laws and regulations that are relatively new and rapidly evolving.

 

   

Pursuant to the amended Law for Promoting Private Education of the PRC, or the amended Private Education Law, a private school must obtain a private school operating permit. On April 7, 2021, the State Council promulgated the amended Regulations on the Implementation of the Law for Promoting Private Education of the PRC, or the Implementation Regulations of Private Education Law, which will become effective on September 1, 2021. The Implementation Regulations of Private Education Law provide that a private school engaging in online education activities using internet technology will be required to obtain an appropriate private school operating permit. The Implementation Regulations of Private Education Law, however, do not specify the requirements that an online tutoring service provider like us need to satisfy in order to obtain a private school operating permit, nor do they specify which level of government authority has the authority to accept and review our application for the private school operating permit. The Implementation Regulations of Private Education Law also requires that private schools using internet technology to provide online educational courses will need to establish and implement internet security management systems and adopt technical security measures. See “Regulations—Regulation Relating to Private Education.” According to our consultation with relevant government authorities, they are in the process of promulgating detailed rules that will specify standards and procedures for the online tutoring service providers to apply for the private school operating permits, as well as the level of government authorities that will be in charge of reviewing and issuing such permits. The foregoing detailed rules may not come into force before the effectiveness of the Implementation Regulations of Private Education Law in September 2021, and, according to our consultation with relevant government authorities, we may continue our current operation until the effectiveness of the detailed rules since we have made relevant required filings under the Opinions on Educational Apps. We intend to apply for the private school operating permit once the government authorities start to accept applications. However, since the Implementation Regulations of Private Education Law are newly published and have not become effective, the interpretation and implementation of these regulations still remain uncertain. We cannot assure you that we will be able to obtain a private school operating permit and comply with other regulatory requirements under the Implementation Regulations of Private Education Law and its related rules, if any, in a timely manner, or at all. If we fail to meet these requirements in a timely manner, or at all, we may be subject to fines, confiscation of the gains derived from our

 

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non-compliant operations, mandatory modifications to our business practices, suspension of our non-compliant operations or claims for compensation of any economic loss suffered by our students or other relevant parties.

 

   

In addition, certain official media in the PRC has reported recently that the Comprehensive Deepening Reform Committee of the PRC government had approved the Opinions on Alleviating the Burden of Homework and After-School Training for Primary and Secondary School Students, or the Opinions, the full context of which is yet to be published. According to these reports, the most recent meeting held by the Comprehensive Deepening Reform Committee discussed measures needed to reduce the after-school academic burden on primary and secondary school students. Such proposed measures include (i) strictly enforcing regulations against AST institutions that fail to meet the relevant qualifications or requirements, operate under disorganized management systems, utilize unscrupulous tactics to make profits, publish false or misleading advertisement or collude with schools for inappropriate profit; (ii) establishing appropriate fees standards to be followed by AST institutions and strengthening the supervision of pre-payments by students; (iv) prohibiting inappropriate capital activities and profiteering in the AST industry; and (iv) improving legislation to regulate the AST institutions.

On June 2, 2021, the PRC government issued an article, which provides that Double Burden Reduction Special Work Office of the Ministry of Education will work with relevant government authorities to implement the Opinions in various aspects, including (i) improving the teaching quality in schools and controlling the total amount of written homework; (ii) increasing the quantity and quality of after-school services and enriching the content of such after-school services provided by schools to meet market demands; and (iii) strengthening the governance of AST institutions by reviewing and approving the required qualifications of AST institutions before they can be established, strengthening the supervision of training content, innovating methods of tuition fee management, standardizing the after-school training activities, investigating and penalizing illegal after-school training activities and safeguarding the rights and interests of parents and students.

Furthermore, the Minors Protection Law, as amended in October 2020, which took effect on June 1, 2021, provides, among others, that (i) schools may not organize collective remedial lessons for primary and secondary school students during national statutory holidays, weekends, winter and summer vacations to aggravate their academic burden; and (ii) after-school training institutions may not provide primary school curriculum education to minors who are not yet school age. See “Regulation—Regulation—Regulation Relating to After-School Tutoring.”

As the Minors Protection Law is relatively new and the full context of the Opinions have not yet been published, there is significant uncertainty with respect to its interpretation and implementation, as well as its potential impact on AST service providers like us. We cannot preclude the risk that our tutoring services, including services to primary school students and students who are not yet school age, may be considered by the regulatory authorities as aggravating the after-school academic burden on students, nor can we assure you that our services to students who are not yet school age will not be deemed as providing primary school curriculum education to such students. Regulatory uncertainly may also dampen parents’ and students’ interest in our services or their commitment to a long-term relationship with us. Failure to comply with these laws, regulations and administrative measures may subject us to fines, penalties or regulatory orders, including orders to suspend our operations or to adjust or substantially limit our operations in various aspects (including course schedules and content, advertising or fee standards), we may also incur additional costs in complying with such laws, regulations or administrative measures, which may materially and adversely affect our business, financial conditions and results of operations.

 

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Moreover, the Ministry of Education, or MOE, jointly with certain other PRC government authorities, promulgated the Implementation Opinions on Regulating Online After-School Tutoring, or the Online Academic AST Opinions, effective on July 12, 2019. The Online Academic AST Opinions are intended to regulate the provision of “academic” AST services through the internet to students in primary and secondary schools. Among other things, the Online Academic AST Opinions require that providers of online academic AST services shall make filings with the competent provincial education regulatory authorities with respect to such services. The Online Academic AST Opinions also impose a number of requirements and restrictions, including, among other things, that (i) each class shall not last longer than 40 minutes and the intervals between classes shall not be less than 10 minutes; (ii) tuition fees shall not be collected in a lump sum for more than 60 course sessions when charged based on the number of classes, or for a course length of more than three months when charged based on the length of the course; (iii) live streaming courses provided to students receiving compulsory education shall not end later than 9:00 p.m.; and (iv) teachers are required to obtain the necessary teacher qualification licenses. Additionally, on March 23, 2021, the State Council’s Office of Education Steering Committee released an article warning parents of K-12 students about AST service providers’ collection of tuition fees in ways that are in violation of the Online Academic AST Opinions.

The Online Academic AST Opinions do not explicitly define the term “academic after-school tutoring services.” Additionally, in October 2019, Beijing Municipal Education Commission, the competent education regulatory authority in Beijing, the city where our headquarters is located, published a Q&A on its official website in which it takes the position that “logical thinking tutoring” is not subject to the filing requirements under the Online Academic AST Opinions, without giving a clear definition of “logical thinking tutoring”. We have made anonymous inquiries with the competent education authorities and were informed that there are currently no specific, bright-line rules as to the definition of “academic after-school tutoring services” or “logical thinking tutoring” and the determination of whether an online course would fall within the scope of these terms is subject to the discretion of the competent education regulatory authorities. We believe our foundational learning courses which are focused on cultivating students’ thinking and other skills, differ from the “academic after-school tutoring services” designed to improve students’ academic performance that the Online Academic AST Opinions are intended to regulate. However, given the aforesaid regulatory uncertainties, we cannot assure you that the regulatory authorities would not take a view that our online courses fall within the scope of “academic after-school tutoring services” and thus subject us to the various requirements, such as the teacher qualification license requirement, under the Online Academic AST Opinions. There is also no assurance that the government authorities will not promulgate additional regulations, guidance or interpretations to bring our foundational learning courses under the jurisdiction of Online Academic AST Opinions. If the government authorities take the position that we will be required to comply with the Online Academic AST Opinions, we cannot assure you that we are in full compliance with the requirements thereunder, or that we will be able to timely complete or maintain all the filings required by the Online Academic AST Opinions. For example, currently some of our teachers have not obtained teacher qualification licenses, and we collect fees for some of our courses in a lump sum for more than 60 classes. If the Online Academic AST Opinions were determined to be applicable to us and we were not able to meet any of those requirements thereunder in time, or at all, we may be subject to fines, regulatory orders to suspend our operations or other regulatory and disciplinary sanctions. See “Regulation—Regulation Relating to the Online After-School Training and Educational Apps.”

 

   

Moreover, the MOE, jointly with certain other PRC government authorities, issued the Opinions on Guiding and Regulating the Orderly and Healthy Development of Educational

 

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Mobile Apps on August 10, 2019, or the Opinions on Educational Apps, which require, among others, mobile apps that offer services for school teaching and management, student learning and student life, or home-school interactions, with school faculty, students or parents as the main users, and with education or learning as the main application scenarios, be filed with the competent provincial regulatory authorities for education. As of the date of this prospectus, we have completed the filings for all of our online tutoring apps as required under the Opinions on Educational Apps. As the Opinions on Educational Apps are relatively new and evolving, we cannot assure you that we are in full compliance with all relevant rules and will be able to complete or maintain all necessary filings and comply with other regulatory requirements under the Opinions on Educational Apps and their related rules and regulations in a timely manner, or at all. If we fail to promptly complete or maintain any such filings and comply with other applicable regulatory requirements, we may be subject to fines, regulatory orders to suspend our apps or other regulatory and disciplinary sanctions.

In addition to the existing regulatory regime, it is uncertain whether and how the PRC government would promulgate additional laws and regulations regarding the private education industry, particularly the online K-12 AST industry, and there is no assurance that we can comply with any such newly promulgated laws and regulations in a timely manner, or at all. In recent years, the PRC regulatory authorities have taken steps to strengthen the regulation on K-12 AST services including by promulgating new rules, guidance and interpretations relating to various aspects including, among others, licensing requirements, protection of children, collection of tuition fees, prepaid tuitions under supervision, prohibition of teaching courses ahead of curriculum, myopia prevention. See “Regulation—Regulation Relating to After-School Tutoring” and “Regulation—Regulation Relating to the Online After-School Training and Educational Apps.” In addition, MOE has recently decided to set up a new supervising department which is specialized in regulating K-12 AST services. Since the PRC regulatory authorities have significant discretion in interpreting and implementing laws and regulations, it may be difficult to evaluate with certainty whether our business operations will fully comply with existing and future applicable laws and regulations. Our failure to fully comply with these existing and future laws and regulations on K-12 AST services may materially and adversely affect our business, financial condition and results of operations. As we continue to grow in scale and significance, we expect to face increased scrutiny from regulators, which may require us to increase our investment in regulatory compliance and related capabilities. As we continue to grow we could be subject to regulatory risks, including increased compliance costs and potential liabilities such as governmental fines and penalties, restrictions on our business, and we could be forced to cease conducting certain aspects of our business or be forced to change our business practices. We might also be required to obtain certain licenses or regulatory approvals which we may have difficulty to obtain, or may not be able to obtain at all, or to meet other compliance requirements. There can be no assurance that we will be able to obtain all the required licenses, permits and approvals, and, even if we were able to do so, there could be substantial costs and potential changes to our business involved in maintaining such licenses, which could have a material and adverse effect on our business. All of the above may affect market demand for our course offerings, and thus adversely affect our business, financial condition and results of operations.

If we fail to protect our intellectual property rights, our brand and business may suffer.

We rely on a combination of patent, copyright, trademark and trade secret laws and contractual restrictions on disclosure to protect our intellectual property rights. Although we seek to obtain copyright, patent or other appropriate protection for our intellectual property when applicable, it is possible that we may not be able to do so successfully or that the protections we have obtained may not be sufficient to protect all of our intellectual property rights. Currently, substantially all of the courses and other educational content, such as the courseware and textbooks, that we offer are developed in-house. Despite our efforts to protect our intellectual property rights, unauthorized parties may attempt to copy or duplicate our intellectual property or otherwise use our intellectual properties

 

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without obtaining our consent. Monitoring unauthorized use of our intellectual property is difficult and costly, and we cannot be certain that the steps we have taken will effectively prevent misappropriation of our intellectual properties. If we are not successful in protecting our intellectual property rights, our business and results of operations may be adversely affected.

We may from time to time be subject to infringement claims relating to intellectual properties of third parties.

We cannot assure you that our course and other educational content offerings, our technologies and other aspects of our operations do not or will not infringe upon copyrights or other intellectual property rights (including but not limited to trademarks, patents and know-how) held by third parties. We have encountered, and may encounter in the future, disputes over rights and obligations concerning intellectual properties, and we cannot guarantee that we will prevail in those disputes.

We have adopted policies and procedures to prohibit our students and faculty members and other employees from infringing upon third-party copyright or other intellectual property rights. However, we cannot assure you that they will not, against our policies, use third-party copyrighted materials or intellectual property without proper authorization in our online courses or via any medium through which we deliver our services. To the extent that our students and faculty members and other employees use intellectual property rights or copyrights owned by others, disputes may arise as to the rights in related know-how and inventions and other proprietary assets. In addition, we may incur liability for unauthorized duplication or distribution of materials used as part of the delivery of our online courses. Although we have in place rules and procedures designed to enable copyright owners to provide us with notice of alleged infringement, given the scale of our business operations and the volume of educational content that we offer, it is extremely challenging for us to identify and remove or disable all potentially infringing content that may exist, and we may encounter intellectual property claims. If any third-party infringement claims are brought against us, we may be forced to divert management’s time and other resources from our business and operations to defend against these claims, or may be prohibited from using such intellectual property or relevant contents, and we may incur licensing or usage fees or be forced to develop alternatives of our own. As a result, our reputation may be harmed and our business and financial performance may be materially and adversely affected.

We may not be able to improve or expand our offerings in a timely and cost-effective manner.

We currently offer courses in mathematical thinking, Chinese and English. We regularly and constantly update our existing offerings and develop new courses in more subjects or delivery formats and for more age groups. New courses may not be accepted by our students and their parents as we expect, and we may not be able to introduce them as quickly as our competitors introduce competing offerings. The development of new courses could be costly and time-consuming and requires us to make significant investments in research and course development, developing new technologies, and attracting, training and retaining a sufficient number of faculty members and content development employees, all of which may not be successful. If we are unsuccessful in improving or expanding our offerings due to these reasons, our business, financial condition and results of operations could suffer.

We require a significant amount of capital to fund our operations and respond to business opportunities. If we cannot obtain sufficient capital on acceptable terms, or at all, our business, financial condition and results of operations may be materially and adversely affected.

We may make investments from time to time in content and product development, technologies, branding, sales and marketing to remain competitive. Our ability to obtain additional financing in the future is subject to a number of uncertainties, including those relating to, among other things, (i) our

 

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future business development, financial condition and results of operations; (ii) general market conditions for financing activities; and (iii) macro-economic and other conditions in China and elsewhere. Although we expect to rely increasingly on net cash provided by operating activities and financing through capital markets for our liquidity needs as our business continues to grow, we cannot assure you that we will be successful in our efforts to diversify our sources of capital. If we cannot obtain sufficient capital, we may not be able to implement our growth strategies, and our business, financial condition and results of operations may be materially and adversely affected.

We have significant working capital requirements and have historically experienced working capital deficits. If we continue to experience working capital deficits in the future, our business, liquidity, financial condition and results of operations may be materially and adversely affected.

We had negative working capital (which is the difference between current assets and current liabilities) of RMB113.6 million as of December 31, 2019. The major factor for our negative working capital position was attributable to net cash outflows from operating activities. There is no assurance that we will generate sufficient net income or operating cash flows to meet our working capital requirements and repay our liabilities as they become due, due to a variety of factors. We intend to take a number of actions in order to address our working capital deficit, including prudently managing our working capital or raising additional equity or debt financing on terms that are acceptable to us. However, there can be no assurance that we will be able to successfully take any of these actions in a timely manner, or at all. Our inability to take these actions as and when necessary could materially adversely affect our liquidity, results of operations, financial condition and ability to operate.

We have a history of net losses and we may not achieve profitability in the future.

We incurred net losses of RMB771.1 million, RMB951.7 million (US$145.3 million) and RMB373.7 million (US$57.0 million), respectively, in 2019, 2020 and the three months ended March 31, 2021. We cannot assure you that we will be able to generate net profits in the future. We intend to continue to invest heavily in the foreseeable future in enhancing our course offerings, improving our technologies, and hiring qualified faculty and course and content development personnel. These efforts may be more costly than we expect and our net revenues may not increase sufficiently to offset the expenses. We may continue to take actions and make investments that do not generate optimal financial results and may even result in significantly increased operating and net losses in the short term with no assurance that we will eventually achieve our intended long-term benefits or profitability.

Any change, disruption, discontinuity in the features and functions of our major marketing channels could severely limit our ability to continue growing our student base, and our business may be materially and adversely affected.

Our success depends on our ability to attract new students and retain existing students. We leverage a variety of marketing channels, including social networks in China, as a tool to acquire leads and convert them into student enrollments. For example, we leverage Weixin/WeChat to enable students and their parents to browse our course offerings, share their experience with our courses, and communicate with our course consultants. To the extent that we fail to leverage such channels, our ability to attract or retain students may be severely harmed. If any of these channels makes changes to its functions or support unfavorable to us, or stops offering its functions or support to us, we may not be able to locate alternative platforms of similar scale to provide similar functions or support on commercially reasonable terms in a timely manner, or at all. Furthermore, we may fail to establish or maintain relationships with additional channels to support the growth of our business on economically viable terms, or at all. Any interruption to or discontinuation of our relationships with major channels

 

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may severely and negatively impact our ability to continue growing our student base, and any occurrence of the circumstances mentioned above may have a material adverse effect on our business, financial condition and results of operations.

We face uncertainties with respect to the development of regulatory requirements on our businesses. Our failure to obtain, maintain or renew other licenses, approvals, permits, registrations or filings necessary to conduct our operations in China could have a material adverse impact on our business, financial condition and results of operations.

Due to the uncertainties as to the interpretation of certain laws and regulations, we may be required to obtain and maintain necessary licenses, approvals, permits, registrations and filings that are applicable to our business operations in China, and we may be required to apply for and obtain additional licenses or permits for our current operations as the interpretation and implementation of current PRC laws and regulations are still evolving, and new laws and regulations may also be promulgated.

We print physical teaching materials and hand-outs, and distribute them to our students as part of their course packages. If the government authorities deem our printing and provision to students of such physical education materials as “publication of books” under Administrative Regulations on Publishing, we may be required to entrust qualified publishers to publish such physical education materials, failure of which may subject us to penalties, including orders to cease illegal activities, discontinuation of operations, correction order, fines and other regulatory, civil or criminal liabilities, and we may be ordered by the competent government authorities to cease to distribute printed materials to our students, which could materially and adversely affect our business operations. See “Regulation—Regulation Relating to Publishing.”

We may be required to apply for and obtain additional licenses, permits or recordation, given the significant uncertainties of the interpretation and implementation of certain regulatory requirements applicable to the online education business. As of the date of this prospectus, online education institutions are not explicitly required to obtain the License for Online Transmission of Audio-Visual Programs or to complete filings as an internet live-streaming platform primarily because there are no implementation rules, explicit interpretation from government authorities or prevailing enforcement practice deeming online education services to be “internet audio-visual programs” and “internet live-streaming services” as defined in relevant rules and regulations promulgated by relevant government authorities. In addition, as of the date of this prospectus, there are no implementation rules, explicit interpretation from government authorities or prevailing enforcement practice deeming the provision of our educational content to students and teachers through our apps and online platforms as “online publishing” which requires an Online Publishing Service Permit. See “Regulation—Regulation Relating to Online Publishing.” However, there is no assurance that local government authorities will not adopt different enforcement practices, or that any government authorities will not issue more explicit interpretation and rules or promulgate new laws and regulations from time to time to further regulate the online education industry, which may subject us to additional licensing requirements to continue to operate our business. Failure to obtain or maintain such licenses may subject us to fines, confiscation of relevant gains, suspension of the operations of our apps and online platforms and other liabilities. As of the date of this prospectus, no material fines or other penalties have been imposed on us for failure to obtain such additional licenses, permits or filings.

In addition, there can be no assurance that we will be able to maintain our existing licenses, approvals, registrations or permits necessary to provide our current online services in China, renew any of them when their current term expires, or update existing licenses or obtain additional licenses, approvals, permits, registrations or filings necessary for our business expansion from time to time. If we fail to do so, our business, financial condition and operational results may be materially and adversely affected.

 

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We may not be able to maintain or increase our tuition fee levels without adversely affecting the demand for our offerings.

Our results of operations are affected by the pricing of our online course offerings. We determine the tuition fees for our online courses primarily based on the market demand for our course offerings, the cost of our operations, the pricing charged by our competitors, and the general economic conditions, among other things. We cannot guarantee that we will be able to maintain or increase our tuition fee levels in the future without adversely affecting the demand for our online course offerings.

Refunds or potential refund disputes of our tuition fees may negatively affect our business, financial condition and results of operations.

For our online small-class courses and AI-enhanced courses, we offer students a full and unconditional refund within a certain number of course units. After the expiration of the full-refund period, students may still receive a pro-rata unconditional refund for the course units that have not been taken. For more information, see “Business—Pricing and Refund Policy.” 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 the quality of our online course offerings, a perceived decline in our teaching quality, privacy concerns relating to our services, negative publicity regarding us or online course providers in general, and any change or development in PRC laws and regulations with respect to fees and tuitions charged by online courses 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 materially and adversely affect our business, financial condition and results of operations. A high volume of refunds and refund disputes may also generate negative publicity that could harm our reputation.

If we are unable to manage our growth or execute our strategies effectively, our business and prospects may be materially and adversely affected.

Our business has grown substantially in recent years. We had 370,530 students as of March 31, 2021, representing a significant increase from 133,902 as of March 31, 2020. Our net revenues increased by 501.0% from RMB195.4 million in 2019 to RMB1,174.4 million (US$179.2 million) in 2020 and increased by 203.3% from RMB149.6 million in the three months ended March 31, 2020 to RMB453.7 million (US$69.2 million) in the three months ended March 31, 2021. Our gross billings almost quadrupled from RMB513.5 million in 2019 to RMB1,908.1 million (US$291.2 million) in 2020, and increased by 142.2% from RMB269.8 million in the three months ended March 31, 2020 to RMB653.5 million (US$99.7 million) in the three months ended March 31, 2021. We recorded a gross profit of RMB322.0 million (US$49.2 million) in 2020, compared to a gross loss of RMB166.5 million 2019. We recorded a gross profit of RMB169.2 million (US$25.8 million) and a net loss of RMB373.7 million (US$57.0 million) in the three months ended March 31, 2021, as compared to a gross loss of RMB0.7 million and a net loss of RMB209.2 million in the three months ended March 31, 2020. For a reconciliation of gross billings to net revenues, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures.” However, our historical performance may not be indicative of our future growth or financial results. We cannot assure you that we will be able to manage our growth at the same rate as we did in the past, or avoid any decline in the future. Additionally, as a result of our limited operating history, our ability to forecast our future operating results is limited and subject to a number of uncertainties. If we are not able to manage our growth or execute our strategies effectively, our expansion may not be successful and our business, financial condition and results of operations may be materially and adversely affected. See “—We have a limited history in operating our foundational learning services. This may make it difficult to evaluate our future prospects and the risks and uncertainties associated with our services.”

 

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Any significant disruption in our technology infrastructure or our failure to maintain the satisfactory performance, security and integrity of our technology infrastructure would hurt our students’ learning experiences and may materially and adversely affect our business, reputation, financial condition and results of operations.

The proper functioning of our technology infrastructure is essential to our business. We may encounter problems when upgrading our technology infrastructure including our online platform, mobile apps, systems and software. The development, upgrades and implementation of our technology infrastructure are complex processes. Issues not identified during pre-launch testing of new services may only become evident when such services are made available to our entire student base. Therefore, our technology infrastructure may not function properly if we fail to detect or solve technical errors in a timely manner. In addition, our systems are potentially vulnerable to damage or interruption as a result of natural disasters, power or telecommunications failures, environmental conditions, computer viruses or attempts to harm our systems, criminal acts and similar events. These and other events may lead to the interruption of our online course delivery and the unavailability of our mobile apps, or other events which would affect our operations. We have experienced system failure and downtime in the past, and there is no assurance that we will not experience similar events in the future to the extent they cause disruption to our business operations. If we experience frequent or persistent service disruptions, our reputation may be damaged and our students and their parents may switch to our competitors, which may have a material adverse effect on our business, financial condition and results of operations.

If we fail to develop and apply our technologies to support our business or if we fail to timely respond to the rapid changes in industry and technology trends, we may lose market share and our business may be materially and adversely affected.

We believe our technologies are critical to our business. The online education industry is subject to rapid technological changes and innovations and could be affected by unpredictable product lifecycles and user preferences. If we fail to develop new products that satisfy students and their parents and provide enhancements and new features for existing products that keep pace with rapid technological and industry change, our business, operating results and financial condition could be adversely affected. If new technologies emerge that are able to deliver competitive products and services at lower prices, more efficiently, more conveniently or more securely, such technologies could adversely impact our ability to compete effectively. Our technologies may become obsolete or insufficient, and we may have difficulties in following and adapting to technological changes in a timely and cost-effective manner. New technologies and solutions developed and introduced by our competitors could render our offerings less attractive or obsolete thus materially affecting our business and prospects. In addition, our substantial investments in technology may not produce expected results. If we fail to continue to develop, innovate and utilize our technologies or if our competitors develop or apply more advanced technologies, our business, financial condition and results of operations could be materially and adversely affected.

If our data analytics algorithms, especially those relating to the use of student and learning data, are flawed or ineffective, our business and reputation could be harmed.

We rely on our proprietary algorithms to analyze massive amounts of students’ learning data to deliver a more personalized learning experience, and generate insights to inform our course development efforts. Although we have invested substantially in the development and continued improvement of our algorithms, we cannot assure you that our algorithms do not and will not carry any flaw or defect that could compromise our data analysis results. Particularly, some of these flaws or defects may not become evident until the algorithm is put to actual usage or after its continued failure to accurately generate insights with the anticipated level of relevance. Even if the algorithm is properly

 

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designed, its performance may be affected by the quality and volume of data we aggregated. We also expect to experience significant growth in the amount of data we need to process as we continue to develop our business and enlarge our student base. As the amount of data increases, the likelihood of any defect or error may increase accordingly. We may incur significant expenses to remediate any defects in our algorithms, or may not be able to correct them at all. Although we have not experienced any material defects to date, we cannot assure you that our algorithms are flawless. If any incidents of material defects took place, our students’ learning experiences would be significantly compromised, which, in turn, harms our brand and may have a negative impact on our business operations.

The COVID-19 pandemic has caused interruptions to our business and operations and it, or any future health epidemic or other adverse public health developments, may continue to do so.

During the COVID-19 pandemic, government authorities in China and around the world have ordered businesses to close and people to stay at home while imposing stringent restrictions on traveling and social gatherings. The COVID-19 pandemic has affected our business in both negative and positive ways. On one hand, COVID-19 has caused temporary interruptions to our business operations in the first quarter of 2020 as we implemented internal protocols to keep our faculty members and other employees safe by closing our offices in Beijing and several other cities in China. During the same period, COVID-19 has caused us to incur additional costs and expenses to modify our business practices (including employee travel, mandatory work-from-home policies and cancellation and rescheduling of physical interviews with teacher and tutor candidates). On the other hand, as K-12 students continued to learn from home, the market acceptance of virtual learning and online education has also rapidly increased, which is expected to drive demand for online AST services, including ours, in the long run. While we do not consider our business to have been materially and adversely affected by the COVID-19 pandemic to date, the COVID-19 pandemic may still have a material adverse impact on our business and result of operations in the near future. There continues to be significant uncertainties associated with the COVID-19 pandemic, including with respect to the ultimate spread of the virus, the severity of the disease, the duration of the outbreak, the possibility of successive waves of outbreaks, further actions that may be taken by governmental authorities around the world to contain the virus or to treat its impact, and the scope and length of the resulting economic downturn. Failure to contain the further spread of COVID-19 will prolong and exacerbate the general economic downturn. In addition, the continuing pandemic may further impact our ability to maintain and expand our network infrastructure, which could severely interrupt our business and operations and adversely affect our operating results and financial condition. Any future health epidemic or other adverse public health developments may have similar negative effects. To the extent the COVID-19 pandemic adversely affects our business and financial results, it may also heighten other risks described in this “Risk Factors” section, such as our ability to raise additional capital as needed on acceptable terms.

We may be adversely affected by any negative publicity concerning us and our shareholders, affiliates, directors, officers, faculty members and other employees and business partners, and the industry in which we operate, regardless of its accuracy, that could harm our reputation and business.

Negative publicity about us and our shareholders, affiliates, directors, officers, faculty members and other employees, business partners, as well as the industry in which we operate, can harm our brand and reputation. Negative publicity concerning these parties could be related to a wide variety of matters, including, but are not limited to:

 

   

alleged misconduct or other improper activities committed by our directors, officers and faculty member and other employees, including misrepresentations made by our employees to prospective students during sales and marketing activities;

 

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false or malicious allegations or rumors about us or our directors, shareholders, affiliates, officers and faculty members and other employees;

 

   

complaints by our students and their parents about our products and services;

 

   

security breaches of data;

 

   

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

 

   

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

In addition to traditional media, there has been an increasing use of social media platforms and similar devices in China, including instant messaging applications, social media websites and other forms of internet-based communications that provide individuals with access to a broad audience. 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, faculty members and other employees may be posted on such platforms at any time. The risks associated with any such negative publicity or false information cannot be completely eliminated or mitigated and may materially harm our reputation, business, financial condition and results of operations.

Our reputation and business may be adversely impacted by our students’, faculty members’ and other employees’ misconduct, improper activities and misuse of our content and services, many of which are beyond our control.

Our courses undergo multiple rounds of internal review before being broadly released. We regularly and actively monitor our live courses and other content and communications to ensure that we are able to identify content that may be deemed inappropriate or violation of laws, regulations and government policies. However, since we have limited control over the real-time and offline behavior of our students, faculty members and other employees, to the extent any improper behavior is associated with our content and services, our ability to protect our reputation may be limited. In addition, if any of our students and faculty members suffer or allege to have suffered financial or emotional harm following contact initiated through our offerings, we may face civil lawsuits or other liabilities. In response to allegations of illegal or inappropriate activities, PRC government authorities may intervene and hold us liable for non-compliance with 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 our content, products or services. As a result, our business may suffer and our reputation, business, financial condition and results of operations may be materially and adversely affected.

We are also exposed to the risk of other types of fraud or other misconduct committed by our faculty members and other employees, and other third parties. Such misconduct includes intentionally failing to comply with government regulations; engaging in unauthorized activities and misrepresentation to our prospective students during sales and marketing activities; unauthorized use or misuse of our systems, mobile apps and websites to disseminate illegal or inappropriate information; or sharing their users’ data with us without such users’ authorization, among other things. It is not always possible to deter such misconduct, and the precautions we take to prevent and detect these activities may not be effective in controlling unknown or unmanaged risks or losses, which could harm our business, financial condition and results of operations.

 

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We track, process, and store significant amounts of data, and the improper use, collection or disclosure of such data could subject us to significant reputational, financial, legal and operational consequences.

We track, process, and store significant amounts of data, including personal and learning data involving our students, and generate insights to inform our teaching and content development activities. To ensure the confidentiality and integrity of our data, we maintain a comprehensive and rigorous data security program and have implemented data encryption measures to ensure secured storage and transmission of data and prevent any unauthorized access or use of such data. Despite our continued efforts in confidentiality and data protection, techniques used to gain unauthorized access to data and systems, disable or degrade service, or sabotage systems, are constantly evolving, and we may be unable to anticipate, deter, or prevent such techniques or otherwise implement adequate preventative measures to avoid unauthorized access to such data or our systems. Like all internet services, our services are vulnerable to software bugs, computer viruses, internet worms, break-ins, phishing attacks, attempts to overload servers with denial-of-service, and similar attacks and disruptions from the unauthorized use of our and third-party computer systems, any of which could lead to system interruptions, delays, or shutdowns and cause the loss of critical data or the unauthorized access to our data. Computer malware, viruses, and computer hacking and phishing attacks are becoming increasingly prevalent. Any functions that we use to facilitate interactivity with other internet platforms have the potential to increase the scope of access that hackers may have to our data systems. Though it is difficult to determine what, if any, harm may directly result from any specific interruption or attack, our failure to maintain performance, reliability, security and availability of our foundational learning services and technical infrastructure to the satisfaction of our students may harm our reputation and ability to retain existing students and attract new students. We may incur significant costs in protecting against cyber-attacks, and if an actual or perceived breach of security occurs to our systems or a third party’s systems, we could be required to expend significant resources to mitigate the breach of security and to address matters related to any such breach, including notifying students or regulators.

We are subject to a variety of laws and other obligations regarding data protection, any failure to comply with applicable laws and obligations or any compromise of our cybersecurity could have a material adverse effect on our business, financial condition and results of operations.

We are subject to various regulatory requirements relating to the security and privacy of data, including restrictions on the collection, storage and use of personal information and requirements to take steps to prevent personal data from being divulged, stolen, or tampered with. See “Regulation—Regulation Relating to Internet Information Security and Privacy Protection.” Regulatory requirements regarding the protection of data are constantly evolving and can be subject to differing interpretations or significant change, making the extent of our responsibilities in that regard uncertain. For example, the Cybersecurity Law of the PRC became effective in June 2017, but there are significant uncertainties as to the interpretation and application of the law. It is possible that those regulatory requirements may be interpreted and applied in a manner that is inconsistent with our practices. In addition, the Office of the Central Cyberspace Affairs Commission, the Ministry of Industry and Information Technology, or the MIIT, the Ministry of Public Security, and the State Administration for Market Regulation, or SAMR, jointly issued an announcement on January 23, 2019 regarding carrying out special campaigns against mobile internet application programs collecting and using personal information in violation of applicable laws and regulations, which prohibits business operators from collecting personal information irrelevant to their services, or forcing users to give authorization in disguised manner. Further, the Cyberspace Administration of China issued the Provisions on the Cyber Protection of Children’s Personal Information on August 22, 2019, which took effect on October 1, 2019. The Provisions on the Cyber Protection of Children’s Personal Information requires, among

 

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others, that network operators who collect, store, use, transfer and disclose personal information of children under the age of 14 shall establish special rules and user agreements for the protection of children’s personal information, inform the children’s guardians in a noticeable and clear manner, and shall obtain the consent of the children’s guardians. In addition, the PRC regulatory authorities have recently taken steps to strengthen the regulation on data protection and conducted several rounds of relevant inspections. We have been taking and will continue to take reasonable measures to comply with such announcements, provisions and inspection requirements. However, as these announcements and provisions are relatively new, and the related implementation rules have yet been promulgated, it remains uncertain how these announcements and provisions will be implemented. We cannot assure you we can adapt our operations to it in a timely manner.

Any failure, or perceived failure by us to maintain the security of our students’ data and other confidential information or to comply with applicable privacy, data security and personal information protection laws, regulations, policies, contractual provisions, industry standards, and other requirements, may result in civil or regulatory liability, including governmental or data protection authority enforcement actions and investigations, fines, penalties, enforcement orders requiring us to cease operating in a certain way, litigation, or adverse publicity, and may require us to expend significant resources in responding to and defending allegations and claims. Furthermore, PRC regulatory and enforcement regime with regard to privacy, data security and personal information protection is still evolving. PRC regulators have been increasingly focused on regulation in the areas of data security and data protection. We cannot assure you that relevant regulators will not interpret or implement these laws or regulations in ways that negatively affect us. It is possible that we may become subject to additional or new laws and regulations, which may result in additional expenses to us and subject us to potential liability and negative publicity. We expect that these areas will receive greater attention and focus from regulators, and attract continued or greater public scrutiny and attention going forward, which could increase our compliance costs and subject us to heightened risks and challenges associated with data security and protection. If we are unable to manage these risks, we could become subject to penalties, fines, suspension of business and revocation of required licenses, and our reputation business, financial condition and results of operations could be materially and adversely affected.

Our offerings involve the storage and analysis of data from our students, and security breaches or vulnerabilities affecting our or our vendors’ technology, services and systems could expose us to a risk of loss of the data, litigation and potential liability. We cannot assure you that we will not experience cyber-attacks in the future. We use third-party technologies and systems for a variety of reasons, such as data storage and transmission, cloud services and other functions. We cannot assure you that these technologies and systems will not experience security breaches in the future.

Our business may be subject to the risks of international operations.

We may expand our presence in overseas markets and regions. We may have to adapt our business models to the local market due to various legal requirements and market conditions. Our international operations and expansion efforts may result in increased costs and be subject to a variety of risks, including increased competition, uncertain enforcement of our intellectual property rights, changes and evolutions in overseas market conditions and user preferences, the complexity of compliance with foreign laws and regulations and political or social unrest or economic instability.

Our future international operations may also be negatively affected by any deterioration of the political and economic relations between China and other countries and sanctions and export controls administered by the government authorities in the foreign countries in which we operate, and other geopolitical challenges. In addition, compliance with applicable Chinese and foreign laws and regulations, such as import and export requirements, anti-corruption laws, tax laws, foreign exchange

 

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controls and cash repatriation restrictions, cyber security, data privacy and protection, labor laws, restrictions on foreign investment, and anti-competition regulations, increases the costs and risk exposure of doing business in foreign jurisdictions. Although we intend to implement policies and procedures to comply with these laws and regulations, a violation of these laws and regulations by us or our employees, contractors or agents could nevertheless occur. In some cases, compliance with the laws and regulations of one country could result in violations of the laws and regulations of another country. Violations of these laws and regulations could materially and adversely affect our brand, international growth efforts and business.

We may not be successful in developing or maintaining relationships with key participants in the mobile industry or in developing or offering products and services that operate effectively with these operating systems, networks, devices and standards.

We make our mobile apps available on both iOS and Android systems across a variety of mobile devices. We depend on the interoperability of our mobile apps with popular devices and mobile operating systems that we do not control. Any changes in devices or their systems that degrade the functionality of our mobile apps or give preferential treatment to competitive mobile apps could adversely affect usage of our mobile apps. We may not be successful in developing relationships with key participants in the mobile industry or in developing products and services that operate effectively with their operating systems, networks, devices and standards. If we cannot maintain such relationships at reasonable costs or at all, we may not get sufficient exposure on their respective platforms, which will impair our ability to acquire traffic. Moreover, we are subject to the terms, policies and conditions of the app stores. If any of the key participants finds us to be in violation of the terms, policies and conditions of its app store, it may seek economic damages from us or remove our mobile apps from its app store. Such incident would also harm our relationship with the key participant. Further, if the number of systems, networks and devices for which we develop our mobile apps increases, it will result in an increase in our costs and expenses, and adversely affect our net margin and results of operations.

We use the streaming technology from a third-party provider to deliver courses to our students. Any interruption to or discontinuities of our cooperative relationship with the provider may severely and negatively impact our ability to deliver our course content to students.

We use the technology of a leading audio and video streaming service provider in China to deliver course to our students. Their technology is important to our ongoing ability to operate our online small-class courses. Licensed technology and intellectual property rights from third parties, including the streaming service provider with whom we are working, may not continue to be available on commercially reasonable terms, or at all. Our agreement with the streaming service provider is terminable and provide limited recourse for service interruptions. Any loss of the right to use any of this technology could result in delays in delivering our lessons until equivalent technology is identified and integrated, which could harm our business. Any interruption to or discontinuation of our cooperative relationship with our streaming service provider, despite our in-house technology development efforts, may severely and adversely impact our ability to deliver our courses to students. In this situation we would be required to either redesign our solutions to function with technology available from other parties or to develop these components ourselves more quickly, which would result in increased costs or interruption of our platform, which could harm our students’ learning experiences and our reputation. If we fail to maintain or renegotiate any of these technology or intellectual property licenses, we could face significant delays and the diversion of resources in attempting to develop similar or replacement technology, or to license and integrate a functional equivalent of the technology we use from our current streaming service provider.

 

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The use of third-party manufacturers to manufacture products and the cooperation with other business partners present risks to our business. Failure to maintain product quality control or business relationships may adversely affect our business.

We use third-party manufacturers to manufacture the physical learning kits that we distribute to our students, and the loss or unavailability of these manufacturers, even temporarily, could have a negative impact on our business, financial condition and results of operations. We have implemented quality control over these manufacturers in relation to the raw materials and production process, and require them to be responsible for the manufacturing process to satisfy our selection criteria. However, we may not have effective control over whether our suppliers would strictly follow our specifications. Additionally, the use of third-party manufacturers may expose us to product liability claims, penalties, confiscation or destruction of certain products and their revenue, the revocation of business license, or the imposition of other administrative or the criminal liabilities. If defective products are manufactured and sold, it would result in damage to our reputation, product recall, consumer litigation and others that could materially and adversely affect our business. We also cooperate with various other business partners in the ordinary course of our business. For example, we partner with leading cloud service providers in China to host our servers. Maintaining strong relationships with these cloud service providers is critical to the results of operations and prospects of business. There can be no assurance that the business partners we currently cooperate with will continue to cooperate with us on commercially acceptable terms, or at all, after the terms of our current agreements with them expire. If we are unable to maintain our relationships with existing business partners or develop relationships with new business partners, our operations may be materially and adversely affected.

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

Our sales and marketing efforts help drive the growth of our student base. Our sales and marketing activities may not be well received by the market and may not result in the levels of sales that we anticipate. We also may not be able to retain or recruit a sufficient number of experienced sales and marketing personnel, or to train newly hired sales and marketing personnel, which we believe is critical to implementing our sales and marketing strategies cost-effectively. Further, sales and marketing approaches and tools in China’s online education industry are evolving rapidly. This requires us to continually enhance our sales and marketing approaches and experiment with new methods to keep pace with industry developments and student and parent preferences. Failure to engage in sales and marketing activities in a cost-effective manner may reduce our market share, cause our revenues to decline, negatively impact our profitability, and materially harm our business, financial condition and results of operations.

Our success depends on the continuing efforts of our senior management team and other key employees.

We depend on the continued contributions of our senior management and other key employees. The loss of the services of any of our senior management or other key employees could harm our business. Competition for qualified talents in China is intense. If one or more of our senior management or other key employees are unable or unwilling to continue in their present positions, we may not be able to find replacements in a timely manner, or at all, and our business may be disrupted. Moreover, if any member of our senior management team or any of our other key personnel joins a competitor or forms or invests in a competing business, we may lose know-how, key professionals and other valuable resources, which in turn may cause our customers to choose to use the products or services of that competitor instead of ours. Our future success is also dependent on our ability to attract a significant number of qualified employees and retain existing key employees. If we are unable to do so, our business and growth may be materially and adversely affected. Our need to significantly

 

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increase the number of our qualified employees and retain key employees may cause us to materially increase compensation-related costs, including share-based compensation.

We may be the subject of detrimental conduct by third parties such as our competitors, including complaints to regulatory agencies and the public dissemination of malicious assessments of our business, which could have a negative impact on our reputation.

We have been, and in the future may be, the target of anti-competitive, harassing or other detrimental conduct by third parties including our competitors. Such conduct may include complaints, anonymous or otherwise, to regulatory agencies regarding our operations, accounting, business relationships, business prospects and business ethics. Additionally, allegations, directly or indirectly against us, may be posted online by anyone, whether or not related to us, on an anonymous basis. We may be subject to government or regulatory investigation as a result of such third-party conduct and may be required to expend significant time and incur substantial costs to address such third-party conduct, and there is no assurance that we will be able to conclusively refute each of the allegations within a reasonable period of time, or at all. Our reputation may also be materially negatively affected as a result of the public dissemination of anonymous allegations or malicious statements about our business.

We may be subject to litigations, allegations, complains and investigations from time to time arising out of our operations, and our reputation and operations may be adversely affected.

We have been and may continue to be involved in legal and other disputes in the ordinary course of our business, including allegations against us for potential infringement of third party’s copyrights or other intellectual property rights, as well as customer complaints in relation to our refund policy, course content and data security and other dissatisfactions. Any claims against us, with or without merit, could be time consuming and costly to defend or litigate, divert our management’s attention and resources or harm our brand equity. If a lawsuit or governmental proceeding against us is successful, we may be required to pay substantial damages or fines and/or enter into royalty or license agreements that may not be based upon commercially reasonable terms, or we may be unable to enter into such agreements at all. We may also lose, or be limited in, the rights to offer some of our content, products and services or be required to make changes to our course offerings or business model. As a result, the scope of our content, product and service offerings could be reduced, which could adversely affect our ability to attract new students and parents, harm our reputation and have a material adverse effect on our business, financial condition and results of operations.

Our advertising content may subject us to penalties and other administrative actions.

Under PRC advertising laws and regulations, we are obligated to monitor our advertising content to ensure that such content is true and accurate and in full compliance with applicable laws and regulations. In addition, education or training advertisement are further prohibited from containing content such as guarantee for passing of examination or the effect of education or training, recommendation and/or endorsement by scientific research institutes, academic institutions, educational organizations, industry associations, professionals or beneficiaries using their name or image. Violation of these laws and regulations may subject us to penalties, including fines, orders to cease dissemination of the advertisements and orders to publish an announcement correcting the misleading information. In circumstances involving serious violations by us, PRC government authorities may force us to terminate our advertising operations or revoke our licenses.

While we have made significant efforts to ensure that our advertisements are in full compliance with applicable PRC laws and regulations, we cannot assure you that all the content contained in our advertisements is true and accurate as required by, and complies in all aspects with, the advertising

 

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laws and regulations, especially given the uncertainty in the interpretation of these PRC laws and regulations. If we are found to be in violation of applicable PRC advertising laws and regulations, we may be subject to penalties and our reputation may be harmed, which may negatively affect our business, financial condition, results of operations and prospects.

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

Prior to this offering, we were a private company with limited accounting personnel and other resources with which to address our internal controls and procedures. Our management has not completed an assessment of the effectiveness of our internal control over financial reporting, and our independent registered public accounting firm has not conducted an audit of our internal control over financial reporting. In the course of preparing and auditing our consolidated financial statements as of and for the years ended December 31, 2019 and 2020, we and our independent registered public accounting firm identified a material weakness in our internal control over financial reporting. According to the U.S. Public Company Accounting Oversight Board, a “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our company’s annual or interim consolidated financial statements will not be prevented or detected on a timely basis. The material weakness identified relates to the lack of sufficient financial reporting and accounting personnel with sufficient knowledge and experience to (i) address complex technical U.S. GAAP accounting issues, and (ii) establish and implement formal period end reporting policies and procedures for the purposes of U.S. GAAP and SEC reporting requirements. We have taken measures and plan to continue to take measures to remedy this material weakness. For details, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Internal Control over Financial Reporting.” The implementation of these measures may not fully address the material weakness in our internal control over financial reporting, and we cannot conclude that it has been fully remedied. Our failure to correct this material weakness or our failure to discover and address any other material weaknesses could result in inaccuracies in our financial statements and could also impair our ability to comply with applicable financial reporting requirements and related regulatory filings on a timely basis.

Upon the completion of this offering, we will become a public company in the United States subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, will require that we include a report from management on our internal control over financial reporting in our annual report on Form 20-F beginning with our annual report for the fiscal year ending December 31, 2022. In addition, once we cease to be an “emerging growth company” as such term is defined in the JOBS Act, our independent registered public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting. Our management may conclude that our internal control over financial reporting is not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm, after conducting its own independent testing, may issue a report that is qualified if it is not satisfied with our internal controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. In addition, after we become a public company, our reporting obligations may place a significant strain on our management, operational and financial resources and systems for the foreseeable future. We may be unable to timely complete our evaluation testing and any required remediation.

During the course of documenting and testing our internal control procedures, in order to satisfy the requirements of Section 404, we may identify weaknesses and deficiencies in our internal control over financial reporting. In addition, if we fail to maintain the adequacy of our internal control over

 

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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 the ADSs. Additionally, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we list, regulatory investigations and civil or criminal sanctions.

We have granted, and may continue to grant, share incentives, which may result in increased share-based compensation expenses.

We adopted an equity incentive plan in November 2019, or the 2019 Plan, for the purpose of granting share-based compensation awards to management executives, employees, officers, directors and consultants to incentivize their performance and promote the success of our business. We account for compensation costs for share-based awards granted under the 2019 Plan using a fair-value based method and recognize expenses in our consolidated statements of operations and comprehensive loss in accordance with U.S. GAAP. As of the date of this prospectus, options to purchase a total of 42,131,429 ordinary shares are outstanding under the 2019 Plan. In addition, we have recorded share-based compensation expenses of RMB6.6 million and RMB23.8 million (US$3.6 million), respectively, allocated to us based on equity awards granted to our employees under the 2019 Plan, in 2019 and 2020. We believe the granting of share-based awards is of significant importance to our ability to attract and retain key personnel and employees, and we will continue to grant share-based awards in the future. As a result, our expenses associated with share-based compensation may increase. Any increase in our share-based compensation may have an adverse effect on our results of operations.

Enforcement of stricter labor laws and regulations and increases in labor costs in the PRC may materially and adversely affect our business and results of operations.

The PRC Labor Contract Law has reinforced the protection of employees who, under the PRC Labor Contract Law, have the right, among others, to have written employment contracts, to enter into employment contracts with no fixed term under certain circumstances, to receive overtime wages and to terminate or alter terms in labor contracts. Furthermore, the PRC Labor Contract Law sets forth additional restrictions and increases the costs involved with dismissing employees. We expect that our labor costs, including wages and employee benefits, will continue to increase, and unless we are able to pass on these increased labor costs to our customers by increasing the prices of our products and services, our financial condition and results of operations would be materially and adversely affected. Additionally, to the extent that we need to significantly reduce our workforce, the PRC Labor Contract Law could adversely affect our ability to do so in a timely and cost-effective manner, and our results of operations could be adversely affected. In addition, for employees whose employment contracts include non-competition terms, the PRC Labor Contract Law requires us to pay economic compensation to the laborer on a monthly basis during the term of non-competition after such employment is terminated, which will increase our operating expenses.

In addition, we are required by PRC laws and regulations to make social insurance registration and open housing fund account with relevant governmental authorities and pay various statutory employee benefits, including pensions, housing fund, medical insurance, work-related injury insurance, unemployment insurance and maternity insurance to designated government agencies for the benefit of our employees. The relevant government agencies may examine whether an employer has made adequate payments of the requisite statutory employee benefits, and those employers who fail to make

 

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adequate payments may be subject to late payment fees, fines and/or other penalties. Certain of our PRC subsidiaries have historically failed to make social insurance and housing fund contributions in full for their employees. Our VIE and certain of our PRC subsidiaries engage third-party service providers to make social insurance and housing fund contributions for some of their employees. They also engage third-party service providers to help us recruit, manage and settle service fees with teachers. There is no assurance that such third-party service providers make necessary contributions in full in a timely manner, or at all. If the relevant PRC authorities determine that we shall be responsible for making up for social insurance and housing fund contributions, or that we are subject to fines and legal sanctions in relation to our failure to make social insurance and housing fund contributions in full for our employees, our business, financial condition and results of operations may be adversely affected. The PRC authorities have not made such determination and have not imposed any penalty on us as of the date of the prospectus.

There remains uncertainty as to whether the relevant PRC authorities will promulgate new laws and regulations or change their interpretation of existing laws and regulations regarding the engagement of third-party service providers for making social insurance and housing fund contributions. If we cannot timely comply with new laws and regulations like this, our business, financial condition and results of operations could be materially and adversely affected.

We cannot assure you that our employment practices will be deemed to be in compliance with labor-related laws and regulations in China due to interpretation and implementation uncertainties related to the evolving labor laws and regulations, which may subject us to labor disputes or government investigations. If we are deemed to have violated relevant labor laws and regulations, we could be required to provide additional compensation to our employees and our business, financial condition and results of operations could be materially and adversely affected.

We face certain risks relating to the real properties that we lease.

We lease real properties from third parties primarily for our office use in China, and the lease agreements for most of these leased properties have not been registered with the PRC government authorities as required by PRC law. Although the failure to do so does not in itself invalidate the leases, we may be ordered by the PRC government authorities to rectify such noncompliance and, if such noncompliance were not rectified within a given period of time, we may be subject to fines imposed by the PRC government authorities ranging from RMB1,000 and RMB10,000 for those of our lease agreements that have not been registered with the relevant PRC government authorities

As of the date of this prospectus, we are not aware of any regulatory or governmental actions, claims or investigations being contemplated or any challenges by third parties to our use of our leased properties the lease agreements of which have not been registered with the government authorities. However, we cannot assure you that the government authorities will not impose fines on us due to our failure to register any of our lease agreements, which may negatively impact our financial condition.

In addition, some of the ownership certificates or other similar proof of certain leased properties have not been provided to us by the relevant lessors. Therefore, we cannot assure you that such lessors are entitled to lease the relevant real properties to us. If the lessors are not entitled to lease the real properties to us and the owners of such real properties decline to ratify the lease agreements between us and the respective lessors, we may not be able to enforce our rights to lease such properties under the respective lease agreements against the owners. As of the date of this prospectus, we are not aware of any claim or challenge brought by any third parties concerning the use of our leased properties without obtaining proper ownership proof. If our lease agreements are claimed as null and void by third parties who are the real owners of such leased real properties, we could be required to vacate the properties, in the event of which we could only initiate the claim against the

 

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lessors under relevant lease agreements for indemnities for their breach of the relevant leasing agreements. We cannot assure you that suitable alternative locations are readily available on commercially reasonable terms, or at all, and if we are unable to relocate our operations in a timely manner, our operations may be interrupted.

Our operations depend on the performance of the internet infrastructure and telecommunications networks in China.

As we deliver courses online, the successful operation of our business depends on the performance of the internet infrastructure and telecommunications networks in China. Almost all access to the internet is maintained through state-owned telecommunications operators under the administrative control and regulatory supervision of the MIIT. We have limited access to alternative networks or services in the event of disruptions, failures or other problems with China’s internet infrastructure or the telecommunications networks provided by telecommunications service providers. Our platform regularly serves a large number of students, parents and teachers. With the expansion of our business, we may be required to upgrade our technology and infrastructure to keep up with the increasing traffic on our platform. However, we have no control over the costs of the services provided by telecommunications service providers. If the prices we pay for telecommunications and internet services rise significantly, our results of operations may be materially and adversely affected. If internet access fees or other charges to internet users increase, our user traffic may decline and our business may be harmed.

We are subject to third-party payment processing-related risks.

We accept payments through major third-party online payment channels in China, as well as bank transfers and credit cards. We may be susceptible to fraud, student data leakage and other illegal activities in connection with the various payment methods we offer. In addition, our business depends on the billing, payment and escrow systems of the third-party payment service providers to maintain accurate records of payments by customers and collect such payments. If the quality, utility, convenience or attractiveness of these payment processing and escrow services declines, or if we have to change the pattern of using these payment services for any reason, our business may be disrupted, and we may incur additional costs and expenses that could adversely affect our business operations. We are also subject to various rules, regulations and requirements, regulatory or otherwise, governing electronic funds transfers which could change or be reinterpreted to make it difficult or impossible for us to comply. If we fail to comply with these rules or requirements, we may be subject to fines and higher transaction fees and become unable to accept the current online payments solutions from our students, and our business, financial condition and results of operations could be materially and adversely affected.

We currently do not have any business insurance coverage.

Insurance companies in China currently do not offer as extensive an array of insurance products as insurance companies in more developed economies. Currently, we do not have any business liability or disruption insurance to cover our operations. 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. Any uninsured business disruptions may result in our incurring substantial costs and the diversion of resources, which could have an adverse effect on our results of operations and financial condition.

 

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We face risks related to natural disasters, extreme weather conditions, health epidemics, such as the outbreak of COVID-19, and other catastrophic incidents, which could significantly disrupt our operations.

China has in the past experienced significant natural disasters, including earthquakes, extreme weather conditions, as well as health scares related to epidemic diseases, and any similar event could materially impact our business in the future. If a disaster or other disruption were to occur in the future that affects the regions where we operate our business, our operations could be materially and adversely affected due to loss of personnel and damages to property. Even if we are not directly affected, such a disaster or disruption could affect our operations or financial condition. In addition, our business could be affected by public health epidemics, such as the outbreak of avian influenza, severe acute respiratory syndrome, or SARS, Zika virus, Ebola virus, coronavirus or other disease. If any of our employees is suspected of having contracted a contagious disease, we may be required to apply quarantines or suspend our operations. Furthermore, any future outbreak may restrict economic activities in affected regions, resulting in reduced business volume, temporary closure of our offices or otherwise disrupt our business operations and adversely affect our results of operations. Also see “—The COVID-19 pandemic has disrupted our business and operations and it, or any future health epidemic or other adverse public health developments, may continue to do so.”

We rely on certain key operating metrics to evaluate the performance of our business, and real or perceived inaccuracies in such metrics may harm our reputation and negatively affect our business.

We continually review the number of students, number of course units consumed by our students for our online small-class courses and certain other metrics to evaluate growth trends, measure our performance and make strategic decisions. These metrics are calculated using internal data and are not independently verified by any third party. While these numbers are based on what we believe to be reasonable estimates for the applicable period of measurement, there are inherent challenges in measuring such key metrics, and the methodologies used to measure these metrics may be susceptible to technical errors. If investors do not perceive our operating metrics to accurately represent our operating performance, or if we discover material inaccuracies in our operating metrics, our business, financial condition and results of operations may be materially and adversely affected.

Our business and results of operations may be subject to seasonal fluctuations.

Our business and results of operations may be subject to seasonal fluctuations. Historically, we have not experienced significant seasonality as we have grown rapidly. However, in the future our business may be affected by factors such as public holidays and school schedules. Therefore, our historical performance may not be indicative of our future operating results. The trading price of our ADSs may fluctuate from time to time due to seasonality.

Risks Related to Our Corporate Structure

If the PRC government finds that the agreements that establish the structure for operating certain of our operations in China do not comply with PRC regulations relating to the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.

Foreign ownership in entities that provide value-added telecommunication services (except for e-commerce, domestic multi-party communications, store-and-forward and call center), such as provision of online course content, is subject to restrictions under current PRC laws and regulations.

 

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Specifically, foreign ownership of a value-added telecommunication service provider may not exceed 50%, and the major foreign investor is required to have a record of good performance and operating experience in managing value-added telecommunications business. We are a company registered in the Cayman Islands. Beijing Spark Education and Technology Co., Ltd., or Beijing Spark Education, is one of our PRC subsidiaries and a foreign-invested enterprises under the PRC laws. To comply with PRC laws and regulations, we conduct such business activities in China primarily through Beijing Xingengyuan Technology Ltd., or Xingengyuan. Beijing Spark Education has entered into a series of contractual arrangements with Xingengyuan and its shareholders. For a description of these contractual arrangements, see “Our History and Corporate Structure.” As a result of these contractual arrangements, we exert control over Xingengyuan and consolidate financial results of Xingengyuan and its subsidiaries in our financial statements under U.S. GAAP. Xingengyuan holds the licenses, approvals and key assets that are essential for our operations.

In the opinion of our PRC legal counsel, Tian Yuan Law Firm, (i) the ownership structure of Xingengyuan and Beijing Spark Education does not result in any violation of PRC laws and regulations currently in effect; and (ii) the contractual arrangements among Beijing Spark Education, Xingengyuan and its shareholders governed by PRC law will not result in any violation of PRC laws or regulations currently in effect. However, we have been further advised by our PRC legal counsel that there are substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations. Thus, the PRC government may ultimately take a view contrary to the opinion of our PRC legal counsel. If the PRC government otherwise finds that we are in violation of any existing or future PRC laws or regulations or lack the necessary permits or licenses to operate our business, the relevant governmental authorities would have broad discretion in dealing with such violation, including, without limitation:

 

   

revoking the business licenses and/or operating licenses of such entities;

 

   

imposing fines on us;

 

   

confiscating any of our income that they deem to be obtained through illegal operations;

 

   

discontinuing or placing restrictions or onerous conditions on our operations;

 

   

placing restrictions on our right to collect revenues; and

 

   

shutting down our servers or blocking our application/software.

Any of these events could cause significant disruption to our business operations and severely damage our reputation, which would in turn materially and adversely affect our business, financial condition and results of operations. If occurrences of any of these events result in our inability to direct the activities of Xingengyuan in China that most significantly impact its economic performance, and/or our failure to receive the economic benefits from our consolidated variable interest entities, we may not be able to consolidate their financial results in our consolidated financial statements in accordance with U.S. GAAP.

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

We have relied and expect to continue to rely on contractual arrangements with Xingengyuan, and its shareholders to operate our business in China. These contractual arrangements may not be as effective as direct ownership in providing us with control over Xingengyuan. For example, Xingengyuan and their shareholders could breach their contractual arrangements with us by, among other things, failing to conduct the operations of Xingengyuan in an acceptable manner or taking other actions that are detrimental to our interests.

 

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If we had direct ownership of Xingengyuan in China, we would be able to exercise our rights as a shareholder to effect changes in the board of directors of Xingengyuan, which in turn could implement changes, subject to any applicable fiduciary obligations, at the management and operational level. However, under the current contractual arrangements, we rely on the performance by Xingengyuan and its shareholders of their obligations under the contracts to exercise control over Xingengyuan. The shareholders of Xingengyuan may not act in the best interests of our company or may not perform their obligations under these contracts. Such risks exist throughout the period in which we intend to operate certain portion of our business through the contractual arrangements with Xingengyuan. If any dispute relating to these contracts remains unresolved, we will have to enforce our rights under these contracts through the operations of PRC law and arbitration, litigation and other legal proceedings and therefore will be subject to uncertainties in the PRC legal system. See “—Any failure by Xingengyuan or its shareholders to perform their obligations under our contractual arrangements with them would have a material and adverse effect on our business.” Therefore, our contractual arrangements with Xingengyuan may not be as effective in ensuring our control over the relevant portion of our business operations as direct ownership would be.

Any failure by Xingengyuan or its shareholders to perform their obligations under our contractual arrangements with them would have a material and adverse effect on our business.

If Xingengyuan or its shareholders fail to perform their respective obligations under the contractual arrangements, we may have to incur substantial costs and expend additional resources to enforce such arrangements. We may also have to rely on legal remedies under PRC law, including seeking specific performance or injunctive relief, and contractual remedies, which we cannot assure you will be sufficient or effective under PRC law. For example, if the shareholders of Xingengyuan were to refuse to transfer their equity interests in Xingengyuan to us or our designee if we exercise the purchase 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.

Our contractual arrangements are governed by PRC law. Accordingly, these contracts would be interpreted in accordance with PRC law, and any disputes would be resolved in accordance with PRC legal procedures.

All the agreements under our contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in China. Accordingly, these contracts would be interpreted in accordance with 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 in 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. Meanwhile, there are very few precedents and little formal guidance as to how contractual arrangements in the context of a consolidated variable interest entity should be interpreted or enforced under PRC law. There remain significant uncertainties regarding the ultimate outcome of such arbitration should legal action become necessary. In addition, under PRC law, rulings by arbitrators are final, parties cannot appeal the arbitration results in courts, and if the losing parties fail to carry out the arbitration awards within a prescribed time limit, the prevailing parties may only enforce the arbitration awards in PRC courts through arbitration award recognition proceedings, which would require additional expenses and delay. In the event we are unable to enforce these contractual arrangements, or if we suffer significant delay or other obstacles in the process of enforcing these contractual arrangements, we may not be able to exert effective control over Xingengyuan, and our ability to conduct our business may be negatively affected. See “—Risks Related to Doing Business in China—Uncertainties with respect to the PRC legal system could adversely affect us.”

 

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The shareholders of Xingengyuan may have actual or potential conflicts of interest with us, which may materially and adversely affect our business and financial condition.

The shareholders of Xingengyuan may have actual or potential conflicts of interest with us. These shareholders may breach, or cause Xingengyuan to breach, or refuse to renew, the existing contractual arrangements we have with them and Xingengyuan, which would have a material and adverse effect on our ability to effectively control Xingengyuan and receive economic benefits from them. For example, the shareholders may be able to cause our agreements with Xingengyuan to be performed in a manner adverse to us by, among other things, failing to remit payments due under the contractual arrangements to us on a timely basis. We cannot assure you that when conflicts of interest arise any or all of these shareholders will act in the best interests of our company or such conflicts will be resolved in our favor.

Currently, we do not have any arrangements to address potential conflicts of interest between these shareholders and our company, except that we could exercise our purchase option under the exclusive option agreements with these shareholders to request them to transfer all of their equity interests in the VIE to a PRC entity or individual designated by us, to the extent permitted by PRC law. For individuals who are also our directors and officers, we rely on them to abide by the laws of the Cayman Islands, which provide that directors and officers owe a fiduciary duty to the company that requires them to act in good faith and in what they believe to be the best interests of the company and not to use their position for personal gains. The shareholders of Xingengyuan have executed powers of attorney to appoint Beijing Spark Education or a person designated by Beijing Spark Education to vote on their behalf and exercise voting rights as shareholders of Xingengyuan. If we cannot resolve any conflict of interest or dispute between us and the shareholders of Xingengyuan, 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.

Contractual arrangements in relation to Xingengyuan may be subject to scrutiny by the PRC tax authorities and they may determine that we or our PRC consolidated variable interest entities owe additional taxes, which could negatively affect our financial condition and the value of your investment.

Under applicable 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 contractual arrangements in relation to Xingengyuan were not entered into on an arm’s length basis in such a way as to result in an impermissible reduction in taxes under applicable PRC laws, rules and regulations, and adjust income of Xingengyuan in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in a reduction of expense deductions recorded by Xingengyuan for PRC tax purposes, which could in turn increase their tax liabilities without reducing our PRC subsidiaries’ tax expenses. In addition, the PRC tax authorities may impose late payment fees and other penalties on Xingengyuan for the adjusted but unpaid taxes according to the applicable regulations. Our financial position could be materially and adversely affected if Xingengyuan’ tax liabilities increase or if they are required to pay late payment fees and other penalties.

Our current corporate structure and business operations may be affected by the newly enacted Foreign Investment Law.

On March 15, 2019, the National People’s Congress promulgated the Foreign Investment Law, which took effect on January 1, 2020. Since it is relatively new, uncertainties exist in relation to its interpretation and implementation. The Foreign Investment Law does not explicitly classify whether variable interest entities that are controlled through contractual arrangements would be deemed as

 

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foreign invested enterprises if they are ultimately “controlled” by foreign investors. However, it has a catch-all provision under definition of “foreign investment” that includes investments made by foreign investors in China through other means as provided by laws, administrative regulations or the State Council. Therefore, it still leaves leeway for future laws, administrative regulations or provisions of the State Council to provide for contractual arrangements as a form of foreign investment, and it remains uncertain whether our contractual arrangements will be deemed to be in violation of the market access requirements for foreign investment in the PRC and if yes, how our contractual arrangements should be dealt with.

The Foreign Investment Law grants national treatment to foreign-invested entities, except for those foreign-invested entities that operate in industries specified as either “restricted” or “prohibited” from foreign investment in the Special Administrative Measures (Negative List) for Foreign Investment Access jointly promulgated by Ministry of Commerce, or MOFCOM, and the National Development and Reform Commission, or NDRC, as amended from time to time. The Foreign Investment Law provides that foreign-invested entities are barred from operating in “prohibited” industries and will require market entry clearance and other approvals from relevant PRC government authorities if operating in “restricted” industries. On December 26, 2019, the Supreme People’s Court issued the Interpretations on Certain Issues Regarding the Application of Foreign Investment Law, or the FIL Interpretations, which came into effect on January 1, 2020. In accordance with the FIL Interpretations, any claim to invalidate an investment agreement will be supported by courts if such agreement is found to be entered into for purposes of making investments in the “prohibited industries” under the negative list or for purposes of investing in “restricted industries” while failing to satisfy the conditions set out in the Negative List. If our control over Xingengyuan through contractual arrangements are deemed as foreign investment in the future, and any business of Xingengyuan is “restricted” or “prohibited” from foreign investment under the “negative list” effective at the time, we may be deemed to be in violation of the Foreign Investment Law, the contractual arrangements that allow us to have control over Xingengyuan may be deemed as invalid and illegal, and we may be required to unwind such contractual arrangements and/or restructure our business operations, any of which may have a material adverse effect on business, financial condition and our business operation.

Furthermore, if future laws, administrative regulations or provisions mandate further actions to be taken by companies with respect to existing contractual arrangements, we may face substantial uncertainties as to whether we can complete such actions in a timely manner, or at all. Failure to take timely and appropriate measures to cope with any of these or similar regulatory compliance challenges could materially and adversely affect our current corporate structure and business operations.

We may lose the ability to use and enjoy assets held by Xingengyuan that are material to the operation of a certain portion of our business if the entities go bankrupt or become subject to a dissolution or liquidation proceeding.

As part of our contractual arrangements with Xingengyuan, Xingengyuan holds certain assets that are material to the operation of certain portion of our business, including licenses, permits, domain names and most of our IP rights. If Xingengyuan goes bankrupt and all or part of their assets become subject to liens or rights of third-party creditors, we may be unable to continue some or all of our business activities, which could materially and adversely affect our business, financial condition and results of operations. Under the contractual arrangements, Xingengyuan may not, in any manner, sell, transfer, mortgage or dispose of their assets or legal or beneficial interests in the business without our prior consent. If Xingengyuan undergoes a voluntary or involuntary liquidation proceeding, the independent third-party creditors may claim rights to some or all of these assets, thereby hindering our ability to operate our business, which could materially and adversely affect our business, financial condition and results of operations.

 

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Risks Related to Doing Business in China

Changes in China’s economic, political or social conditions or government policies could have a material adverse effect on our business and operations.

Substantially all of our assets and operations are located in China. Accordingly, our business, financial condition, results of operations and prospects may be influenced to a significant degree by political, economic and social conditions in China generally. The Chinese economy differs from the economies of most developed countries in many respects, including the level of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. Although the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets, and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the government. In addition, the Chinese government continues to play a significant role in regulating industry development by imposing industrial policies. The Chinese government also exercises significant control over China’s economic growth through allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. While the Chinese economy has experienced significant growth over past decades, growth has been uneven, both geographically and among various sectors of the economy. Any adverse changes in economic conditions in China, in the policies of the Chinese government or in the laws and regulations in China could have a material adverse effect on the overall economic growth of China. Such developments could adversely affect our business and operating results, lead to a reduction in demand for our services and adversely affect our competitive position. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures may benefit the overall Chinese economy, but may have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations. While Chinese economy has experienced significant growth in the past decades, that growth may not continue, at least at the same rate. In addition, there are uncertainties around the COVID-19 pandemic, including the unknown duration and extent of negative impact on Chinese economy. Any prolonged slowdown in the Chinese economy may reduce the demand for our products and services and materially and adversely affect our business and results of operations.

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

The PRC legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions under the civil law system may be cited for reference but have limited precedential value.

In 1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general. The overall effect of legislation over the past three decades has significantly enhanced the protections afforded to various forms of foreign investments in China. However, China has not developed a fully integrated legal system, and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, the interpretation and enforcement of these laws and regulations involve uncertainties. Since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory provisions and contractual terms, it may be difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy. These uncertainties may affect our judgment on the relevance of legal requirements and our ability to enforce our contractual rights or tort claims. In addition, the regulatory uncertainties may be exploited through unmerited or frivolous legal actions or threats in attempts to extract payments or benefits from us.

 

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Furthermore, the PRC legal system is based in part on government policies and internal rules, some of which are not published on a timely basis or at all and may have a retroactive effect. As a result, we may not be aware of our violation of any of these policies and rules until sometime after the violation. In addition, any administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources and management attention.

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

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

Shareholder claims that are common in the United States, including securities law class actions and fraud claims, generally are difficult to pursue as a matter of law or practicality in China. For example, in China, there are significant legal and other obstacles to obtaining information needed for shareholder investigations or litigation outside China or otherwise with respect to foreign entities. Although the local authorities in China may establish a regulatory cooperation mechanism with the securities regulatory authorities of another country or region to implement cross-border supervision and administration, such regulatory cooperation with the securities regulatory authorities in the Unities States have not been efficient in the absence of mutual and practical cooperation mechanism. No organization or individual may provide the documents and materials relating to securities business activities to overseas parties arbitrarily without the consent of the competent securities regulatory authority in China according to the PRC Securities Law. See “—Risks Related to the ADSs and This Offering—You may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited, because we are incorporated under Cayman Islands law.”

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

We are a Cayman Islands holding company and we rely principally on dividends and other distributions on equity from our PRC subsidiaries for our cash requirements, including for services of any debt we may incur. The ability of our PRC subsidiaries to pay dividends and other distributions on equity, in turn, depends on the payment they receive from Xingengyuan as service fees pursuant to certain contractual arrangements among our PRC subsidiaries, Xingengyuan and Xingengyuan’s shareholders entered into to comply with certain restriction under PRC law on foreign investment. For more information about such contractual arrangements, see “Our History and Corporate Structure—Contractual Arrangements with Our VIE and Its Shareholders.”

Our PRC subsidiaries’ ability to distribute dividends is based upon their distributable earnings. Current PRC regulations permit our PRC subsidiaries to pay dividends to their respective shareholders only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, each of our PRC subsidiaries and Xingengyuan are required to set aside

 

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at least 10% of their after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of their registered capital. These reserves are not distributable as cash dividends. If our PRC subsidiaries incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments to us. Any limitation on the ability of our PRC subsidiaries to distribute dividends or other payments to their respective shareholders could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our businesses, pay dividends or otherwise fund and conduct our business.

To address the persistent capital outflow and the RMB’s depreciation against the U.S. dollar in the fourth quarter of 2016, the People’s Bank of China and the State Administration of Foreign Exchange, or SAFE, have implemented a series of capital control measures in the subsequent months, including stricter vetting procedures for China-based companies to remit foreign currency for overseas acquisitions, dividend payments and shareholder loan repayments. For instance, the Circular on Promoting the Reform of Foreign Exchange Management and Improving Authenticity and Compliance Review, or SAFE Circular 3, issued on January 26, 2017, provides that the banks shall, when dealing with dividend remittance transactions from domestic enterprise to its offshore shareholders of more than US$50,000, review the relevant board resolutions, original tax filing form and audited financial statements of such domestic enterprise based on the principal of genuine transaction. The PRC government may continue to strengthen its capital controls and our PRC subsidiaries’ dividends and other distributions may be subject to tightened scrutiny in the future. Any limitation on the ability of our PRC subsidiaries to pay dividends or make other distributions to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business.

In addition, the Enterprise Income Tax Law and its implementation rules provide that a withholding tax at a rate of 10% will be applicable to dividends payable by Chinese companies to non-PRC-resident enterprises unless reduced under treaties or arrangements between the PRC central government and governments of other countries or regions where the non-PRC resident enterprises are tax residents.

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 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 local branches of the SAMR.

In order to secure the use of our chops and seals, we have established internal control procedures and rules for using these chops and seals. In any event that the chops and seals are intended to be used, the responsible personnel will submit the application which will then be verified and approved by authorized employees in accordance with our internal control procedures and rules. In addition, in order to maintain the physical security of our chops, we generally have them stored in secured locations accessible only to authorized employees. Although we monitor such authorized employees, the procedures may not be sufficient to prevent all instances of abuse or negligence. There is a risk that our employees could abuse their authority, for example, by entering into a contract not approved by us or seeking to gain control of one of our subsidiaries or VIE. If any employee obtains and misuses or misappropriates our chops and seals or other controlling non-tangible 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.

 

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PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay us from making loans or additional capital contributions to our PRC subsidiaries and to make loans to Xingengyuan, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

Any funds we transfer to our PRC subsidiaries, either as a shareholder loan or as an increase in registered capital, as well as any loans we provide to Xingengyuan, are subject to approval by or registration with relevant governmental authorities in China. According to the relevant PRC regulations on foreign-invested enterprises, or FIEs, in China, capital contributions to our PRC subsidiaries are subject to the reporting with the MOFCOM, or its local branches and registration with a local bank authorized by SAFE. In addition, (i) any foreign loan procured by our PRC subsidiaries is required to be registered with SAFE or its local branches and (ii) any of our PRC subsidiaries may not procure loans which exceed the difference between its total investment amount and registered capital or, as an alternative, only procure loans subject to the calculation approach and limitation as provided in the Notice of the People’s Bank of China on Matters concerning the Macro-Prudential Management of Full-Covered Cross-Border Financing, or PBOC Notice No. 9. Additionally, any medium or long-term loans to be provided by us to Xingengyuan must be registered with the NDRC and SAFE or its local branches. We may not be able to obtain these government approvals or complete such registrations on a timely basis, if at all, with respect to future capital contributions or foreign loans by us to our PRC subsidiaries or loans by us to Xingengyuan. If we fail to receive such approvals or complete such reporting, registration or filing, our ability to use the proceeds of our initial public offering and to capitalize our PRC operations may be negatively affected, which could adversely affect our liquidity and our ability to fund and expand our business. See “Our History and Corporate Structure—Our Corporate History.”

On March 30, 2015, SAFE promulgated the Circular on Reforming the Management Approach Regarding the Foreign Exchange Capital Settlement of Foreign-Invested Enterprises, or SAFE Circular 19, which took effect as of June 1, 2015. SAFE Circular 19 launched a nationwide reform of the administration of the settlement of the foreign exchange capital of FIEs and allows FIEs to settle foreign exchange capital at their discretion, but continues to prohibit FIEs from using Renminbi funds converted from foreign exchange capital for expenditure beyond their business scopes, providing entrusted loans or repaying loans between nonfinancial enterprises. SAFE issued the Circular on Reforming and Regulating Policies on the Control over Foreign Exchange Settlement of Capital Accounts, or SAFE Circular 16, which became effective in June 2016. Pursuant to SAFE Circular 16, enterprises registered in China may also convert their foreign debts from foreign currency to Renminbi on a self-discretionary basis. SAFE Circular 16 provides an integrated standard for conversion of foreign exchange under capital account items (including but not limited to foreign currency capital and foreign debt) on a self-discretionary basis which applies to all enterprises registered in China. SAFE Circular 16 reiterates the principle that Renminbi converted from foreign currency-denominated capital of a company may not be directly or indirectly used for purposes beyond its business scope or prohibited by PRC laws or regulations, while such converted Renminbi shall not be provided as loans to its non-affiliated entities. On October 23, 2019, SAFE promulgated the Notice of the State Administration of Foreign Exchange on Further Promoting the Convenience of Cross-Border Trade and Investment, or SAFE Circular 28, which, among other things, allows all foreign-invested companies to use Renminbi converted from foreign currency-denominated capital for equity investments in China, as long as the equity investment is genuine, does not violate applicable laws, and complies with the negative list on foreign investment. However, since SAFE Circular 28 is relatively new, it is unclear how SAFE and competent banks will carry this out in practice. SAFE Circular 19, SAFE Circular 16 and SAFE Circular 28 may significantly limit our ability to use Renminbi converted from the net proceeds of our initial public offering to fund the establishment of new entities in China by Xingengyuan, to invest in or acquire any other PRC companies through our PRC subsidiaries, or to establish new VIEs in China, which may adversely affect our business, financial condition and results of operations.

 

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A severe or prolonged downturn in the Chinese or global economy could materially and adversely affect our business and financial condition.

The COVID-19 pandemic had a severe and negative impact on the Chinese and the global economy in 2020. Even before the outbreak of COVID-19, the global macroeconomic environment presented challenges, including the economic slowdown in the eurozone since 2014 and uncertainties over the impact of Brexit. The growth of the Chinese economy has slowed down since 2012 compared to the previous decade and the trend may continue or even deteriorate, with the added disruption caused by COVID-19. There is considerable uncertainty regarding the effectiveness or the long-term effects of the massive expansionary monetary and fiscal policies adopted in response to COVID-19 by the central banks and financial authorities of some of the world’s leading economies, including the United States and China. There have been concerns over unrest and terrorist threats in the Middle East, Europe and Africa. There have also been concerns about the relationship between China and the United States and other countries, particularly with respect to the increasingly tense political and economic relationship between the United States and China. Economic conditions in China are sensitive to global economic conditions as well as changes in domestic economic and political policies and the expected or perceived overall economic growth rate in China. Any prolonged slowdown in the global or Chinese economy may have a negative impact on our business, results of operations and financial condition. Our students and users may reduce or delay spending with us, while we may have difficulty expanding our user base fast enough, or at all, to offset the impact of decreased spending by our existing users.

Fluctuations in exchange rates could have a material and adverse effect on our results of operations and the value of your investment.

The value of the Renminbi against the U.S. dollar and other currencies is affected by changes in China’s political and economic conditions and by China’s foreign exchange policies, among other things. In July 2005, the PRC government changed its decades-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 subsided 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. While appreciating approximately by 7% against the U.S. dollar in 2017, the Renminbi in 2018 and 2019 depreciated approximately by 5% and 1% against the U.S. dollar, respectively. Since October 1, 2016, the RMB has joined the International Monetary Fund’s basket of currencies that make up the Special Drawing Right, along with the U.S. dollar, the euro, the Japanese yen and the British pound. With the development of the foreign exchange market and progress towards interest rate liberalization and Renminbi internationalization, the PRC government may in the future announce further changes to the exchange rate system and there is no guarantee that the RMB will not appreciate or depreciate significantly in value against the U.S. dollar in the future. 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.

Substantially all of our revenue and costs are denominated in Renminbi. We are a holding company and we rely on dividends paid by our operating subsidiaries in China for our cash needs. Any significant revaluation of Renminbi may materially and adversely affect our results of operations and financial position reported in Renminbi when translated into U.S. dollars, and the value of, and any dividends payable on, the ADSs in U.S. dollars.

 

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

The PRC government imposes controls on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our revenues in Renminbi. Under our current corporate structure, our Cayman Islands holding company primarily relies on dividend payments from our PRC subsidiaries to fund any cash and financing requirements we may have. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval of SAFE by complying with certain procedural requirements. Specifically, under the existing exchange restrictions, without prior approval of SAFE, cash generated from the operations of our PRC subsidiaries in China may be used to pay dividends to our company. However, approval from or registration with appropriate government authorities is required where Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. As a result, we need to obtain SAFE approval to use cash generated from the operations of our PRC subsidiaries and VIE to pay off their respective debt in a currency other than Renminbi owed to entities outside China, or to make other capital expenditure payments outside China in a currency other than Renminbi. The PRC government may at its discretion restrict access to foreign currencies for current account transactions in the future. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of the ADSs.

Certain PRC regulations may make it more difficult for us to pursue growth through acquisitions.

Among other things, the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, adopted by six PRC regulatory agencies in 2006 and amended in 2009, established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time-consuming and complex. Such regulation requires, among other things, that the MOFCOM be notified in advance of any change-of-control transaction in which a foreign investor acquires control of a PRC domestic enterprise or a foreign company with substantial PRC operations, if certain thresholds under the Provisions on Thresholds for Prior Notification of Concentrations of Undertakings, issued by the State Council in 2008 and amended in 2018, are triggered. Moreover, the Anti-Monopoly Law promulgated by the Standing Committee of the National People’s Congress, which became effective in 2008 requires that transactions which are deemed concentrations and involve parties with specified turnover thresholds must be cleared by the relevant governmental authorities before they can be completed. On February 7, 2021, the Anti-monopoly Commission of the State Council published the Anti-Monopoly Guidelines for the Internet Platform Economy Sector, which aims at specifying some of the circumstances under which an activity of internet platforms may be identified as monopolistic act as well as setting out merger controlling filing procedures involving variable interest entities. In addition, PRC national security review rules which became effective in September 2011 require acquisitions by foreign investors of PRC companies engaged in military related or certain other industries that are crucial to national security be subject to security review before consummation of any such acquisition. The Measures for the Security Review of Foreign Investments promulgated by the NDRC and MOFCOM, which became effective from January 2021, further requires that security review by relevant governmental authorities shall be conducted in accordance with the provisions of such measures for foreign investments that affect or may affect national security. We may pursue potential strategic acquisitions that are complementary to our business and operations. Complying with the requirements of these regulations to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval or clearance from the MOFCOM, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.

 

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PRC regulations relating to the establishment of offshore special purpose companies 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 our PRC subsidiaries, limit our PRC subsidiaries’ ability to increase their registered capital or distribute profits to us, or may otherwise adversely affect us.

In July 2014, SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment Through Special Purpose Vehicles, or SAFE Circular 37, to replace the Notice on Relevant Issues Concerning Foreign Exchange Administration for Domestic Residents’ Financing and Roundtrip Investment Through Offshore Special Purpose Vehicles, or SAFE Circular 75, which ceased to be effective upon the promulgation of SAFE Circular 37. SAFE Circular 37 requires PRC residents (including PRC individuals and PRC corporate entities) to register with SAFE or its local branches in connection with their direct or indirect offshore investment activities. SAFE Circular 37 is applicable to our shareholders who are PRC residents and may be applicable to any offshore acquisitions that we make in the future.

SAFE Circular 37 requires registration with, and approval from, Chinese government authorities in connection with direct or indirect control of an offshore entity by PRC residents. The term “control” under SAFE Circular 37 is broadly defined as the operation rights, beneficiary rights or decision-making rights acquired by PRC residents in the offshore special purpose vehicles by means of acquisition, trust, proxy, voting rights, repurchase, convertible bonds or other arrangements. In addition, any PRC resident who is a direct or indirect shareholder of a special purpose vehicle, or SPV, is required to update its filed registration with the local branch of SAFE with respect to that SPV, to reflect any material change. Moreover, any subsidiary of such SPV in China is required to urge its PRC resident shareholders to update their registration with the local branch of SAFE. If any PRC shareholder of such SPV fails to make the required registration or to update the previously filed registration, the subsidiary of such SPV in China may be prohibited from distributing its profits or the proceeds from any capital reduction, share transfer or liquidation to the SPV, and the SPV may also be prohibited from making additional capital contributions into its subsidiary in China. On February 13, 2015, SAFE promulgated a Notice on Further Simplifying and Improving Foreign Exchange Administration Policy on Direct Investment, or SAFE Notice 13, which became effective on June 1, 2015. Under SAFE Notice 13, applications for foreign exchange registration of inbound foreign direct investments and outbound overseas direct investments, including those required under SAFE Circular 37, will be filed with qualified banks instead of SAFE. The qualified banks will directly examine the applications and accept registrations under the supervision of SAFE. SAFE Notice 13 further provides that annual inspection of inbound foreign direct investments and outbound overseas direct investments is canceled. Instead, relevant entities or individuals, as the case may be, shall register data and information with respect to their inbound foreign direct investments and outbound overseas direct investment interests with SAFE.

These regulations may have a significant impact on our present and future structuring and investment. We have requested our shareholders who to our knowledge are PRC residents to make the necessary applications, filings and amendments as required under these regulations. We intend to take all necessary measures to ensure that all required applications and filings will be duly made and all other requirements will be met. We further intend to structure and execute our future offshore acquisitions in a manner consistent with these regulations and any other relevant legislation. However, because it is presently uncertain how SAFE regulations, and any future legislation concerning offshore or cross-border transactions, will be interpreted and implemented by the relevant government authorities in connection with restructuring by PRC beneficial owners of our company, our future offshore financings or acquisitions, we cannot provide any assurances that we will be able to comply with, qualify under, or obtain any approvals required by the regulations or other legislation. Furthermore, we cannot assure you that any PRC beneficial owners of our company or any PRC

 

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company into which we invest is or will in the future be able to comply with those requirements. Any failure or inability by such individuals to comply with SAFE regulations may subject us to fines or legal sanctions, such as restrictions on our cross-border investment activities or our PRC subsidiaries’ ability to distribute dividends to, or obtain foreign exchange-denominated loans from, our company or prevent us from making distributions or paying dividends. As a result, our business operations and our ability to make distributions to you could be materially and adversely affected.

Furthermore, as these foreign exchange regulations are still relatively new and their interpretation and implementation has been constantly evolving, it is unclear how these regulations, and any future regulation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant government authorities. For example, we may be subject to a more stringent review and approval process with respect to our foreign exchange activities, such as remittance of dividends and foreign-currency-denominated borrowings, which may adversely affect our financial condition and results of operations. In addition, if we decide to acquire a PRC domestic company, we cannot assure you that we or the owners of such company, as the case may be, will be able to obtain the necessary approvals or complete the necessary filings and registrations required by the foreign exchange regulations. This may restrict our ability to implement our acquisition strategy and could adversely affect our business and prospects.

Any failure to comply with PRC regulations regarding the registration requirements for employee stock incentive plans may subject the PRC plan participants or us to fines and other legal or administrative sanctions.

In February 2012, SAFE promulgated the Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly Listed Company, replacing earlier rules promulgated in 2007. Pursuant to these rules, 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 SAFE through a domestic qualified agent, which could be the PRC subsidiaries of such overseas-listed company, and complete certain other procedures. In addition, an overseas-entrusted institution must be retained to handle matters in connection with the exercise or sale of stock options and the purchase or sale of shares and interests. We and our executive officers and other employees who are PRC citizens or who reside in the PRC for a continuous period of not less than one year and who have been granted options are subject to these regulations. Failure to complete SAFE registrations may subject them to fines and legal sanctions, there may be additional restrictions on the ability of them to exercise their stock options or remit proceeds gained from sale of their stock into the PRC. We also face regulatory uncertainties that could restrict our ability to adopt additional incentive plans for our directors, executive officers and employees under PRC law. See “Regulation—Regulation on Stock Incentive Plans.”

If we are classified as a PRC resident enterprise for PRC enterprise income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders and ADS holders.

Under the PRC Enterprise Income Tax Law and its implementation rules, an enterprise established outside of the PRC with its “de facto management body” within the PRC is considered a “resident enterprise” and will be subject to the enterprise income tax on its global income at the rate of 25%. The implementation rules define the term “de facto management body” as the body that exercises full and substantial control and overall management over the business, productions, personnel, accounts and properties of an enterprise. In 2009, the State Administration of Taxation, or SAT, issued a circular, known as SAT Circular 82, which provides certain specific criteria for determining whether the “de facto management body” of a PRC-controlled enterprise that is

 

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incorporated offshore is located in China. Although this circular only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreigners, the criteria set forth in the circular may reflect the SAT’s general position on how the “de facto management body” text should be applied in determining the tax resident status of all offshore enterprises. According to SAT Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be regarded as PRC tax resident by virtue of having its “de facto management body” in China, and will be subject to PRC enterprise income tax on its global income only if all of the following conditions are met: (i) the primary location of the day-to-day operational management is in the PRC; (ii) decisions relating to the enterprise’s financial and human resource matters are made or are subject to approval by organizations or personnel in the PRC; (iii) the enterprise’s primary assets, accounting books and records, company seals, and board and shareholder resolutions are located or maintained in the PRC; and (iv) at least 50% of voting board members or senior executives habitually reside in the PRC.

We believe our company is not a PRC resident enterprise for PRC tax purposes. However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body.” If the PRC tax authorities determine that our company is a PRC resident enterprise for enterprise income tax purposes, we will be subject to PRC enterprise income on our worldwide income at the rate of 25%. Furthermore, we will be required to withhold a 10% withholding tax from dividends we pay to our shareholders that are non-resident enterprises, including the holders of the ADSs. In addition, non-resident enterprise shareholders (including our ADS holders) may be subject to PRC tax at a rate of 10% on gains realized on the sale or other disposition of ADSs or ordinary shares, if such gains are treated as derived from a PRC source. Furthermore, if we are deemed a PRC resident enterprise, dividends paid to our non-PRC individual shareholders (including our ADS holders) and any gain realized on the transfer of ADSs or ordinary shares by such shareholders may be subject to PRC tax at a rate of 20% (which, in the case of dividends, may be withheld at source by us). These rates may be reduced by an applicable tax treaty, but it is unclear whether non-PRC shareholders of our company would, in practice, be able to obtain the benefits of any tax treaties between their country of tax residence and the PRC in the event that we are treated as a PRC resident enterprise. Any such tax may reduce the returns on your investment in the ADSs or ordinary shares.

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

On February 3, 2015, the SAT issued the Public Notice Regarding Certain Corporate Income Tax Matters on Indirect Transfer of Properties by Non-Tax Resident Enterprises, or SAT Bulletin 7. 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 securities 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 of the State Administration of Taxation on Issues Concerning the Withholding of Non-resident Enterprise Income Tax at Source, or SAT Bulletin 37, which came into effect on December 1, 2017. The SAT Bulletin 37 further clarifies the practice and procedure for 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

 

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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. Our company may be subject to filing obligations or taxed if our company is transferor in such transactions, and may be subject to withholding obligations if our company is transferee in such transactions, under SAT Bulletin 7 and/or SAT Bulletin 37. For transfer of shares in our company 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 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 our company should not be taxed under these circulars, which may have a material adverse effect on our financial condition and results of operations.

The ADSs may be delisted under the Holding Foreign Companies Accountable Act if the PCAOB is unable to inspect auditors who are located in China. The delisting of the ADSs, or the threat of their being delisted, may materially and adversely affect the value of your investment. Additionally, the inability of the PCAOB to conduct inspections deprives our investors with the benefits of such inspections.

The Holding Foreign Companies Accountable Act, or the HFCA Act, was enacted on December 18, 2020. The HFCA Act states if the SEC determines that we have filed audit reports issued by a registered public accounting firm that has not been subject to inspection by the PCAOB for three consecutive years beginning in 2021, the SEC shall prohibit our shares or ADSs from being traded on a national securities exchange or in the over the counter trading market in the U.S.

Our auditor, the independent registered public accounting firm that issues the audit report included elsewhere in this prospectus, as an auditor of companies that are traded publicly in the United States and a firm registered with the PCAOB, is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. Since our auditor is located in China, a jurisdiction where the PCAOB has been unable to conduct inspections without the approval of the Chinese authorities, our auditor is currently not inspected by the PCAOB.

On March 24, 2021, the SEC adopted interim final rules relating to the implementation of certain disclosure and documentation requirements of the HFCA Act. We will be required to comply with these rules if the SEC identifies us as having a “non-inspection” year under a process to be subsequently established by the SEC. The SEC is assessing how to implement other requirements of the HFCA Act, including the listing and trading prohibition requirements described above.

The SEC may propose additional rules or guidance that could impact us if our auditor is not subject to PCAOB inspection. For example, on August 6, 2020, the President’s Working Group on Financial Markets, or the PWG, issued the Report on Protecting United States Investors from Significant Risks from Chinese Companies to the then President of the United States. This report recommended the SEC implement five recommendations to address companies from jurisdictions that do not provide the PCAOB with sufficient access to fulfil its statutory mandate. Some of the concepts of

 

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these recommendations were implemented with the enactment of the HFCA Act. However, some of the recommendations were more stringent than the HFCA Act. For example, if a company was not subject to PCAOB inspection, the report recommended that the transition period before a company would be delisted would end on January 1, 2022.

The SEC has announced that the SEC is preparing a consolidated proposal for the rules regarding the implementation of the HFCA Act and to address the recommendations in the PWG report. It is unclear when the SEC will complete its rulemaking and when such rules will become effective and what, if any, of the PWG recommendations will be adopted. The implications of this possible regulation in addition the requirements of the HFCA Act are uncertain. Such uncertainty could cause the market price of the ADSs to be materially and adversely affected, and our securities could be delisted or prohibited from being traded “over-the-counter” earlier than would be required by the HFCA Act. If our securities are unable to be listed on another securities exchange by then, such a delisting would substantially impair your ability to sell or purchase our ADSs when you wish to do so, and the risk and uncertainty associated with a potential delisting would have a negative impact on the price of the ADSs.

The PCAOB’s inability to conduct inspections in China prevents it from fully evaluating the audits and quality control procedures of our independent registered public accounting firm. As a result, we and investors in our ordinary shares are deprived of the benefits of such PCAOB inspections. The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our independent registered public accounting firm’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to the PCAOB inspections, which could cause investors and potential investors in our stock to lose confidence in our audit procedures and reported financial information and the quality of our financial statements.

In May 2013, the PCAOB announced that it had entered into a Memorandum of Understanding on Enforcement Cooperation with the CSRC and the PRC Ministry of Finance, which establishes a cooperative framework between the parties for the production and exchange of audit documents relevant to investigations undertaken by the PCAOB in the PRC or by the CSRC or the PRC Ministry of Finance in the United States. The PCAOB continues to be in discussions with the CSRC and the PRC Ministry of Finance to permit joint inspections in the PRC of audit firms that are registered with the PCAOB and audit Chinese companies that trade on U.S. exchanges.

Proceedings instituted by the SEC against Chinese affiliates of the “big four” accounting firms, including our independent registered public accounting firm, could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act.

In December 2012, the SEC instituted administrative proceedings against the Big Four PRC-based accounting firms, including our independent registered public accounting firm, alleging that these firms had violated U.S. securities laws and the SEC’s rules and regulations thereunder by failing to provide to the SEC the firms’ audit work papers with respect to certain PRC-based companies that are publicly traded in the United States.

On January 22, 2014, the administrative law judge, or the ALJ, presiding over the matter rendered an initial decision that each of the firms had violated the SEC’s rules of practice by failing to produce audit papers and other documents to the SEC. The initial decision censured each of the firms and barred them from practicing before the SEC for a period of six months.

On February 6, 2015, the four China-based accounting firms each agreed to a censure and to pay a fine to the SEC to settle the dispute and avoid suspension of their ability to practice before the SEC

 

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and audit U.S.-listed companies. The settlement required the firms to follow detailed procedures and to seek to provide the SEC with access to Chinese firms’ audit documents via the CSRC. Under the terms of the settlement, the underlying proceeding against the four China-based accounting firms was deemed dismissed with prejudice four years after entry of the settlement. The four-year mark occurred on February 6, 2019. While we cannot predict if the SEC will further challenge the four China-based accounting firms’ compliance with U.S. law in connection with U.S. regulatory requests for audit work papers or if the results of such a challenge would result in the SEC imposing penalties such as suspensions, if the accounting firms are subject to additional remedial measures, our ability to file our financial statements in compliance with SEC requirements could be impacted. A determination that we have not timely filed financial statements in compliance with the SEC requirements could ultimately lead to the delisting of our ADSs from Nasdaq or the termination of the registration of our ordinary shares under the Securities Exchange Act of 1934, or both, which would substantially reduce or effectively terminate the trading of our ADSs in the United States.

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 and internet publishers 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 platform or content is 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.

It may be difficult for overseas regulators to conduct an investigation or collect evidence within China.

Shareholder claims or regulatory investigation that are common in the United States generally are difficult to pursue as a matter of law or practicality in China. For example, in China, there are significant legal and other obstacles to providing information needed for regulatory investigations or litigation initiated outside China. Although the authorities in China may establish a regulatory cooperation mechanism with the securities regulatory authorities of another country or region to implement cross-border supervision and administration, such cooperation with the securities regulatory authorities in the Unities States may not be efficient in the absence of mutual and practical cooperation mechanism. Furthermore, Article 177, which became effective in March 2020, prohibits, without the approval of the securities regulatory authority in China, (i) foreign securities regulators from engaging in any inspection activities within China, and (ii) anyone from providing any documents or materials relating to capital markets activities to foreign parties. While detailed interpretation of or implementation rules under Article 177 have yet to be promulgated, the inability for an overseas securities regulator to directly conduct investigation or evidence collection activities within China may further increase difficulties faced by you in protecting your interests.

The current tension in international trade, particularly with regard to U.S. and China trade policies, may adversely impact our business, financial condition, and results of operations.

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our products and services, impact our competitive position, or prevent us from being able to conduct business in certain countries. If any new tariffs, legislation, or regulations are implemented, or if existing trade agreements are renegotiated, such changes could adversely affect our business, financial condition, and results of operations. Recently, there have been heightened tensions in international economic relations, such as the one between the United States and China. The U.S. government has recently imposed, and has recently proposed to impose additional, new, or higher tariffs on certain products imported from China to penalize China for what it characterizes as unfair trade practices. China has responded by imposing, and proposing to impose additional, new, or higher tariffs on certain products imported from the United States. Following mutual retaliatory actions for months, on January 15, 2020, the United States and China entered into the Economic and Trade Agreement Between the United States of America and the People’s Republic of China as a phase one trade deal, effective on February 14, 2020. It remains unclear what additional actions, if any, will be taken by the U.S. or other governments with respect to international trade, tax policy related to international commerce, or other trade matters.

The situation is further complicated by the political tensions between the United States and China that escalated during the COVID-19 pandemic and in the wake of the PRC National People’s Congress’ decision on Hong Kong national security legislation, sanctions imposed by the U.S. Department of Treasury on certain officials of the Hong Kong Special Administrative Region and the central government of the PRC and the executive orders issued by the U.S. president in August 2020 that prohibit certain transactions with certain China-based companies and their respective subsidiaries. Rising trade and political tensions could reduce levels of trade, investments, technological exchanges and other economic activities between China and other countries, which would have an adverse effect on global economic conditions, the stability of global financial markets, and international trade policies.

Although the direct impact of the current international trade and political tension, and any escalation of such tension, on the online education industry in China is uncertain, the negative impact on general, economic, political and social conditions may adversely impact our business, financial condition and results of operations.

Risks Related to the ADSs and This Offering

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

We will apply to list our ADSs on Nasdaq. We have no current intention to seek a listing for our ordinary shares on any stock exchange. Prior to the completion of this offering, there has been no public market for the ADSs or our ordinary shares, and we cannot assure you that a liquid public market for the ADSs will develop. If an active public market for the ADSs does not develop following the completion of this offering, the market price and liquidity of the ADSs may be materially and adversely affected. The initial public offering price for the ADSs was determined by negotiation between us and the underwriters based upon several factors, and we can provide no assurance that the trading price of the ADSs after this offering will not decline below the initial public offering price. As a result, investors in our securities may experience a significant decrease in the value of their ADSs.

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

The trading price of the ADSs is likely to be volatile and could fluctuate widely due to factors beyond our control. This may happen because of broad market and industry factors, including the performance and fluctuation of the market prices of other companies with business operations located

 

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mainly in China that have listed their securities in the United States. In addition to market and industry factors, the price and trading volume for the ADSs may be highly volatile for factors specific to our own operations, including the following:

 

   

variations in our net revenues, earnings and cash flows;

 

   

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

 

   

announcements of new offerings, solutions and expansions by us or our competitors;

 

   

changes in financial estimates by securities analysts;

 

   

detrimental adverse publicity about us, our services or our industry;

 

   

announcements of new regulations, rules or policies relevant to our business;

 

   

additions or departures of key personnel;

 

   

our controlling shareholder’s business performance and reputation;

 

   

release of lock-up or other transfer restrictions on our outstanding equity securities or sales of additional equity securities; and

 

   

potential litigation or regulatory investigations.

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

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

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

If you purchase ADSs in this offering, you will pay more for your ADSs than the amount paid by our existing shareholders for their ordinary shares on a per ADS basis. As a result, you will experience immediate and substantial dilution of approximately US$             per ADS, representing the difference between the initial public offering price of US$             per ADS, and our net tangible book value per ADS as of March 31, 2021, after giving effect to the net proceeds we receive from this offering. See “Dilution” for a more complete description of how the value of your investment in the ADSs will be diluted upon the completion of this offering.

If securities or industry analysts do not publish research or reports about our business, or if they adversely change their recommendations regarding the ADSs, the market price for the ADSs and trading volume could decline.

The trading market for the ADSs will be influenced by research or reports that industry or securities analysts publish about our business. If one or more analysts who cover us downgrade the ADSs, the market price for the ADSs would likely decline. If one or more of these analysts cease to cover us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the market price or trading volume for the ADSs to decline.

 

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Our dual-class voting structure will limit your ability to influence corporate matters and could discourage others from pursuing any change of control transactions that holders of our Class A ordinary shares and ADSs may view as beneficial.

Our authorized and issued ordinary shares will be divided into Class A ordinary shares and Class B ordinary shares immediately prior the completion of this offering (with certain shares remaining undesignated, with power for our directors to designate and issue such classes of shares as they think fit). Holders of Class A ordinary shares will be entitled to one vote per share, while holders of Class B ordinary shares will be entitled to 12 votes per share. We will issue Class A ordinary shares represented by our ADSs in this offering. Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof, while Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances.

Immediately prior to the completion of this offering, Mr. Jian (Mark) Luo, our founder, chairman of the Board and Chief Executive Officer, and Mr. Zebing Shan, our co-founder, director and Chief Technology Officer, will beneficially own         % of our issued Class B ordinary shares. These Class B ordinary shares will constitute approximately         % of our total issued and outstanding share capital immediately after the completion of this offering and         % of the aggregate voting power of our total issued and outstanding share capital immediately after the completion of this offering due to the disparate voting powers associated with our dual-class share structure, assuming the underwriters do not exercise their over-allotment option. As a result of the dual-class share structure and the concentration of ownership, holders of Class B ordinary shares will have considerable influence over matters such as decisions regarding mergers and consolidations, election of directors, and other significant corporate actions. Such holders may take actions that are not in the best interest of us or our other shareholders. This concentration of ownership may discourage, delay, or prevent a change in control of our company, which could have the effect of depriving our other shareholders of the opportunity to receive a premium for their shares as part of a sale of our company and may reduce the price of the ADSs. This concentrated control will limit your ability to influence corporate matters and could discourage others from pursuing any potential merger, takeover, or other change of control transactions that holders of Class A ordinary shares and ADSs may view as beneficial.

The sale or availability for sale of substantial amounts of ADSs could adversely affect their market price.

Sales of substantial amounts of ADSs in the public market after the completion of this offering, or the perception that these sales could occur, could adversely affect the market price of the ADSs and could materially impair our ability to raise capital through equity offerings in the future. The ADSs sold in this offering will be freely tradable without restriction or further registration under the Securities Act, and shares held by our existing shareholders may also be sold in the public market in the future subject to the restrictions in Rule 144 and Rule 701 under the Securities Act and the applicable lock-up agreements. There will be                      ADSs (representing                      Class A ordinary shares) issued and outstanding immediately after this offering, or                      ADSs (representing                      Class A ordinary shares) if the underwriters exercise their option to purchase additional ADSs in full. In connection with this offering, we, our directors, executive officers, existing shareholders and holders of share-based awards have agreed, subject to certain exceptions, not to sell any ordinary shares or ADSs for 180 days. The underwriters may release these securities from these restrictions at any time, subject to applicable regulations of the Financial Industry Regulatory Authority, Inc. We cannot predict what effect, if any, market sales of securities held by our significant shareholders or any other shareholder or the availability of these securities for future sale will have on the market price of the ADSs. See “Underwriting” and “Shares Eligible for Future Sale” for a more detailed description of the restrictions on selling our securities after this offering.

 

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Techniques employed by short sellers may drive down the market price of the ADSs.

Short selling is the practice of selling securities that the seller does not own but rather has borrowed from a third party with the intention of buying identical securities back at a later date to return to the lender. The short seller hopes to profit from a decline in the value of the securities between the sale of the borrowed securities and the purchase of the replacement shares, as the short seller expects to pay less in that purchase than it received in the sale. As it is in the short seller’s interest for the price of the security to decline, many short sellers publish, or arrange for the publication of, negative opinions regarding the relevant issuer and its business prospects in order to create negative market momentum and generate profits for themselves after selling a security short. These short attacks have, in the past, led to selling of shares in the market.

Public companies that have substantially all of their operations in China have been the subject of short selling. Much of the scrutiny and negative publicity has centered on allegations of a lack of effective internal control over financial reporting resulting in financial and accounting irregularities and mistakes, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result, many of these companies are now conducting internal and external investigations into the allegations and, in the interim, are subject to shareholder lawsuits and/or SEC enforcement actions.

It is not clear what effect such negative publicity could have on us. If we were to become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we could have to expend a significant amount of resources to investigate such allegations and/or defend ourselves. While we would strongly defend against any such short seller attacks, we may be constrained in the manner in which we can proceed against the relevant short seller by principles of freedom of speech, applicable state law or issues of commercial confidentiality. Such a situation could be costly and time-consuming, and could distract our management from growing our business. Even if such allegations are ultimately proven to be groundless, allegations against us could severely impact our business operations, and any investment in the ADSs could be greatly reduced or even rendered worthless.

Because we do not expect to pay dividends in the foreseeable future after this offering, you must rely on a price appreciation of the ADSs for a return on your investment.

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

Our board of directors has complete discretion as to whether to distribute dividends, subject to certain requirements of Cayman Islands law. Under Cayman Islands law, a Cayman Islands company may pay a dividend out of either profit or share premium account, provided that in no circumstances may a dividend be paid if this would result in the company being unable to pay its debts as they fall due in the ordinary course of business. Even if our board of directors decides to declare and pay dividends, the timing, amount and form of future dividends, if any, will depend on our future results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries, our financial condition, contractual restrictions and other factors deemed relevant by our board of directors. Accordingly, the return on your investment in the ADSs will likely depend entirely upon any future price appreciation of the ADSs. There is no guarantee that the ADSs will appreciate in value after this offering or even maintain the price at which you purchased the ADSs. You may not realize a return on your investment in our ADSs and you may even lose your entire investment in the ADSs.

 

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The approval of the China Securities Regulatory Commission may be required in connection with this offering under PRC law.

The M&A Rules purport to require offshore special purpose vehicles that are controlled by PRC companies or individuals and that have been formed for the purpose of seeking a public listing on an overseas stock exchange through acquisitions of PRC domestic companies or assets to obtain CSRC approval prior to publicly listing their securities on an overseas stock exchange. The interpretation and application of the regulations remain unclear. If CSRC approval is required, it is uncertain whether it would be possible for us to obtain the approval, and any failure to obtain or delay in obtaining CSRC approval for this offering would subject us to sanctions imposed by the CSRC and other PRC regulatory agencies.

Tian Yuan Law Firm, our PRC legal counsel, has advised us that, based on its understanding of the current PRC laws and regulations, we will not be required to submit an application to the CSRC for the approval of this offering and the listing and trading of our ADSs on Nasdaq because (i) the CSRC currently has not issued any definitive rule or interpretation concerning whether offerings like ours under this prospectus are subject to this regulation, (ii) we established the WFOE by means of direct investment and not through a merger or acquisition of the equity interests or assets of a “PRC domestic company” as such term is defined under the M&A Rules; and (iii) no provision in the M&A Rules classifies the contractual arrangements under the VIE Agreements as a type of acquisition transaction falling under the M&A Rules.

However, our PRC legal counsel has further advised us that there remains some uncertainty as to how the M&A Rules will be interpreted or implemented in the context of an overseas offering, and its opinions summarized above are subject to any new laws, rules and regulations or detailed implementations and interpretations in any form relating to the M&A Rules. We cannot assure you that relevant PRC government agencies, including the CSRC, would reach the same conclusion as our PRC legal counsel, and hence we may face regulatory actions or other sanctions from the CSRC or other PRC regulatory agencies. These regulatory agencies may impose fines and penalties on our operations in China, limit our ability to pay dividends outside of China, limit our operating privileges in China, delay or restrict the repatriation of the proceeds from this offering and the concurrent private placements to Orbis into China or take other actions that could have a material adverse effect on our business, financial condition, results of operations and prospects, as well as the trading price of the ADSs. The CSRC or other PRC regulatory agencies also may take actions requiring us, or making it advisable for us, to halt this offering before settlement and delivery of the ADSs offered hereby. Consequently, if you engage in market trading or other activities in anticipation of and prior to settlement and delivery, you do so at the risk that settlement and delivery may not occur. In addition, if the CSRC or other regulatory agencies later promulgate new rules or explanations requiring that we obtain their approvals for this offering, we may be unable to obtain a waiver of such approval requirements, if and when procedures are established to obtain such a waiver. Any uncertainties and/or negative publicity regarding such approval requirement could have a material adverse effect on the trading price of the ADSs.

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

We are an exempted company incorporated under the laws of the Cayman Islands. Our corporate affairs are governed by our memorandum and articles of association, the Companies Act (as Revised) of the Cayman Islands, or the Companies Act, and the common law of the Cayman Islands. The rights of shareholders to take action against our directors, actions by our minority shareholders and the fiduciary duties of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from

 

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comparatively limited judicial precedent in the Cayman Islands as well as from the common law of England and Wales, the decisions of whose courts are of persuasive authority, but are not binding, on a court in the Cayman Islands. The rights of our shareholders and the fiduciary duties of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands have a less developed body of securities laws than the United States. 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. In addition, while under Delaware law, controlling shareholders owe fiduciary duties to the companies they control and their minority shareholders, under Cayman Islands law, our controlling shareholders do not owe any such fiduciary duties to our company or to our minority shareholders. Accordingly, our controlling shareholders may exercise their powers as shareholders, including the exercise of voting rights in respect of their shares, in such manner as they think fit, subject only to very limited equitable constraints, including that the exercise of voting rights to amend the memorandum or articles of association of a Cayman company must be exercised in good faith for the benefit of the company as a whole.

Shareholders of Cayman Islands exempted companies like us have no general rights under Cayman Islands law to inspect corporate records (other than the memorandum and articles of association, the register of mortgages and charges and any special resolutions passed by the shareholders) or to obtain copies of lists of shareholders of these companies. Our directors have discretion under our articles of association that will become effective immediately prior to completion of this offering to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.

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

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

The deposit agreement provides that the United States District Court for the Southern District of New York (or, if the United States District Court for the Southern District of New York lacks subject matter jurisdiction over a particular dispute, the state courts in New York County, New York) is the exclusive judicial forum within the U.S. for the resolution of any complaint asserting a cause of action arising out of or relating in any way to the federal securities laws of the United States, and any suit, action or proceeding arising out of or relating in any way to the ADSs or the deposit agreement, which could limit the ability of holders of our ordinary shares, the ADSs or other securities to obtain a favorable judicial forum for disputes with us, our directors and officers, the depositary, and potentially others.

The deposit agreement provides that the United States District Court for the Southern District of New York (or, if the United States District Court for the Southern District of New York lacks subject matter jurisdiction over a particular dispute, the state courts in New York County, New York) shall have

 

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exclusive jurisdiction over any suit, action or proceeding against or involving us or the depositary, arising out of or relating in any way to the deposit agreement, including without limitation claims under the Securities Act of 1933 arising out of or relating in any way to the deposit agreement. The enforceability of similar federal court choice of forum provisions in other companies’ organizational documents has been challenged in legal proceedings in the United States, and it is possible that a court could find this type of provision to be inapplicable or unenforceable. If a court were to find the federal choice of forum provision contained in the deposit agreement to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions. If upheld, the forum selection provision in the deposit agreement may limit a security-holder’s ability to bring a claim against us, our directors and officers, the depositary, and potentially others in his or her preferred judicial forum, and this limitation may discourage such lawsuits. Holders of our shares or the ADSs will not be deemed to have waived our compliance with the federal securities laws and the regulations promulgated thereunder pursuant to the exclusive forum provision in the deposit agreement.

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

We are an exempted company limited by shares incorporated under the laws of the Cayman Islands and substantially all of our assets are located outside of the United States. Substantially all of our current operations are conducted in China. In addition, most of our current directors and officers are nationals and residents of countries other than the United States. Substantially all of the assets of these persons are located outside the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the United States in the event that you believe that your rights have been infringed under the U.S. federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of China 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 China, see “Enforceability of Civil Liabilities.” However, the deposit agreement gives you the right to submit claims against us to binding arbitration, and arbitration awards may be enforceable against us and our assets in China even when court judgments are not.

ADSs holders may not be entitled to a jury trial with respect to claims arising under the deposit agreement, which could result in less favorable outcomes to the plaintiff(s) in any such action.

The deposit agreement governing the ADSs representing our ordinary shares provides that, to the fullest extent permitted by law, ADS holders waive the right to a jury trial for any claim they may have against us or the depositary arising out of or relating to our shares, the ADSs or the deposit agreement, including any claim under the U.S. federal securities laws.

If we or the depositary were to oppose a jury trial based on this waiver, the court would have to determine whether the waiver was enforceable based on the facts and circumstances of the case in accordance with applicable state and federal law. To our knowledge, the enforceability of a contractual pre-dispute jury trial waiver in connection with claims arising under the federal securities laws has not been finally adjudicated by the United States Supreme Court. However, we believe that a contractual pre-dispute jury trial waiver provision is generally enforceable, including under the laws of the State of New York, which govern the deposit agreement, or by a federal or state court in the City of New York, which has non-exclusive jurisdiction over matters arising under the deposit agreement. In determining whether to enforce a contractual pre-dispute jury trial waiver, courts will generally consider whether a party knowingly, intelligently and voluntarily waived the right to a jury trial. We believe that this would be the case with respect to the deposit agreement and the ADSs. It is advisable that you consult legal counsel regarding the jury waiver provision before investing in the ADSs.

 

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If you or any other holders or beneficial owners of ADSs bring a claim against us or the depositary in connection with matters arising under the deposit agreement or the ADSs, including claims under federal securities laws, you or such other holder or beneficial owner may not be entitled to a jury trial with respect to such claims, which may have the effect of limiting and discouraging lawsuits against us or the depositary. If a lawsuit is brought against us or the depositary under the deposit agreement, it may be heard only by a judge or justice of the applicable trial court, which would be conducted according to different civil procedures and may result in different outcomes than a trial by jury would have, including outcomes that could be less favorable to the plaintiff(s) in any such action.

Nevertheless, if this jury trial waiver is not permitted by applicable law, an action could proceed under the terms of the deposit agreement with a jury trial. No condition, stipulation or provision of the deposit agreement or the ADSs serves as a waiver by any holder or beneficial owner of ADSs or by us or the depositary of compliance with any substantive provision of the U.S. federal securities laws and the rules and regulations promulgated thereunder.

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

As a Cayman Islands exempted company, we are not obliged by the Companies Act to call shareholders’ annual general meetings. Our post-offering memorandum and articles of association provide that we may (but are not obliged to) each year hold a general meeting as our annual general meeting. As a holder of ADSs, you will not have any direct right to attend general meetings of our shareholders or to cast any votes at such meetings. You will only be able to exercise the voting rights which attach to the Class A ordinary shares underlying your ADSs indirectly by giving voting instructions to the depositary in accordance with the provisions of the deposit agreement. Under the deposit agreement, you may vote only by giving voting instructions to the depositary, as holder of the Class A ordinary shares underlying your ADSs. If we ask for your instructions, then upon receipt of your voting instructions, the depositary will try to vote the underlying Class A ordinary shares in accordance with those instructions. If we do not instruct the depositary to ask for your instructions, the depositary may still vote in accordance with instructions you give, but it is not required to do so. You will not be able to directly exercise any right to vote with respect to the underlying Class A ordinary shares unless you withdraw the shares and become the registered holder of such shares prior to the record date for the general meeting. When a general meeting is convened, you may not receive sufficient advance notice of the meeting to enable you to withdraw the shares underlying your ADSs and become the registered holder of such shares prior to the record date for the general meeting to allow you to attend the general meeting and to vote directly with respect to any specific matter or resolution to be considered and voted upon at the general meeting. In addition, under our post-offering memorandum and articles of association that will become effective immediately prior to completion of this offering, for the purposes of determining those shareholders who are entitled to attend and vote at any general meeting, our directors may close our register of members and/or fix in advance a record date for such meeting, and such closure of our register of members or the setting of such a record date may prevent you from withdrawing the ordinary shares underlying your ADSs and becoming the registered holder of such shares prior to the record date, so that you would not be able to attend the general meeting or to vote directly. Where any matter is to be put to a vote at a general meeting, the depositary will notify you of the upcoming vote and to deliver our voting materials to you, if we ask it to. We cannot assure you that you will receive the voting material in time to ensure you can direct the depositary to vote your shares. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for their manner of carrying out your voting instructions. This means that you may not be able to exercise your right to direct how the shares underlying your ADSs are voted and you may have no legal remedy if the shares underlying your ADSs are not voted as you requested.

 

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You may experience dilution of your holdings due to the inability to participate in rights offerings.

We may, from time to time, distribute rights to our shareholders, including rights to acquire securities. However, we cannot make such rights available to you in the United States unless we register both the rights and the securities to which the rights relate under the Securities Act or an exemption from the registration requirements is available. Under the deposit agreement, the depositary will not distribute rights to holders of ADSs unless the distribution and sale of rights and the securities to which these rights relate are either exempt from registration under the Securities Act with respect to all holders of ADSs, or are registered under the provisions of the Securities Act. The depositary may, but is not required to, attempt to sell these undistributed rights to third parties, and may allow the rights to lapse. We may be unable to establish an exemption from registration under the Securities Act, and we are under no obligation to file a registration statement with respect to these rights or underlying securities or to endeavor to have a registration statement declared effective. Accordingly, holders of the ADSs may be unable to participate in our rights offerings and may experience dilution of their holdings as a result.

You may be subject to limitations on the transfer of your ADSs.

Your ADSs are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems it expedient in connection with the performance of its duties. The depositary may close its books in emergencies, and on weekends and public holidays. The depositary may refuse to deliver, transfer or register transfers of our ADSs generally when our share register or the books of the depositary are closed, or at any time if we or the depositary thinks it is advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.

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

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

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

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

 

   

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

 

   

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

 

   

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

 

   

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

 

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We will be required to file an annual report on Form 20-F within four months of the end of each fiscal year. In addition, we intend to publish our results on a quarterly basis as press releases, distributed pursuant to the rules and regulations of Nasdaq. Press releases relating to financial results and material events will also be furnished to the SEC on Form 6-K. However, the information we are required to file with or furnish to the SEC will be less extensive and less timely compared to that required to be filed with the SEC by U.S. domestic issuers. As a result, you may not be afforded the same protections or information that would be made available to you were you investing in a U.S. domestic issuer.

We are a “controlled company” within the meaning of the rules of Nasdaq and, as a result, can rely on exemptions from certain corporate governance requirements that provide protection to shareholders of other companies.

We are a “controlled company” as defined under the rules of the Nasdaq since Mr. Luo beneficially owns more than 50% of our total voting power. For so long as we remain a controlled company under this definition, we are permitted to elect to rely, and currently we intend to rely, on certain exemptions from corporate governance rules, including the exemption from the rule that a majority of our board of directors must be independent directors. As a result, you will not have the same protection afforded to shareholders of companies that are subject to these corporate governance requirements.

As an exempted company incorporated in the Cayman Islands, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from the Nasdaq corporate governance listing standards. These practices may afford less protection to shareholders than they would enjoy if we complied fully with the Nasdaq corporate governance listing standards.

As a Cayman Islands exempted company listed on Nasdaq, we are subject to corporate governance listing standards of Nasdaq. However, Nasdaq rules permit a foreign private issuer like us to follow the corporate governance practices of its home country. Certain corporate governance practices in the Cayman Islands, which is our home country, may differ significantly from the Nasdaq corporate governance listing standards. We currently intend to follow Cayman Islands corporate governance practices in lieu of the corporate governance requirements of Nasdaq that listed companies must have a majority of independent directors and that the audit committee consist of at least three members. To the extent that we choose to follow home country practice in the future, our shareholders may be afforded less protection than they otherwise would enjoy under the Nasdaq corporate governance listing standards applicable to U.S. domestic issuers.

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

In general, a non-U.S. corporation is a PFIC for U.S. federal income tax purposes for any taxable year in which (i) 50% or more of the average value of its assets (generally determined on a quarterly basis) consists of assets that produce, or are held for the production of, passive income, or (ii) 75% or more of its gross income consists of passive income. For purposes of the above calculations, a non-U.S. corporation that owns, directly or indirectly, at least 25% by value of the shares of another corporation is treated as if it held its proportionate share of the assets of the other corporation and received directly its proportionate share of the income of the other corporation. Passive income generally includes dividends, interest, investment gains and certain rents and royalties. Cash is generally a passive asset for these purposes. The goodwill value is generally treated as an active asset if it is associated with business activities that produce active income.

 

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Based on the expected composition of our income and assets and the value of our assets, including goodwill, which is based on the expected price of the ADSs in this offering, we do not expect to be a PFIC for our current taxable year. However, our PFIC status for any taxable year is an annual determination that can be made only after the end of that year and will depend on the composition of our income and assets and the value of our assets from time to time. The value of our goodwill may be determined, in large part, by reference to the market price of the ADSs, which could be volatile. Therefore, because we hold, and will continue to hold after this offering, a substantial amount of cash, our risk of being or becoming a PFIC will increase if our market capitalization declines. Moreover, it is not entirely clear how the contractual arrangements among us and our VIE will be treated for purposes of the PFIC rules, and we may be or become a PFIC if our VIE is not treated as owned by us for these purposes. Accordingly, there can be no assurance that we will not be a PFIC for our current or any future taxable year. If we are a PFIC for any taxable year during which a U.S. taxpayer owns ADSs or Class A ordinary shares, the U.S. taxpayer generally will be subject to adverse U.S. federal income tax consequences, including increased tax liability on disposition gains and “excess distributions” and additional reporting requirements. See “Taxation—Material U.S. Federal Income Tax Considerations—Passive Foreign Investment Company Rules.”

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains statements that constitute forward-looking statements. Many of the forward-looking statements contained in this prospectus can be identified by the use of forward-looking words such as “anticipate,” “believe,” “could,” “expect,” “should,” “plan,” “intend,” “estimate” and “potential,” among others.

Forward-looking statements appear in a number of places in this prospectus and include, but are not limited to, statements regarding our intent, belief or current expectations. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. Such statements are subject to risks and uncertainties, and actual results may differ materially from those expressed or implied in the forward-looking statements due to of various factors, including, but not limited to, those identified under the section entitled “Risk Factors” in this prospectus. These risks and uncertainties include factors relating to:

 

   

general economic, political, demographic and business conditions in China and globally;

 

   

our ability to implement our growth strategy;

 

   

the success of operating initiatives, including advertising and promotional efforts and new product and service development by us and our competitors;

 

   

our ability to develop and apply our technologies to support and expand our foundational learning offerings;

 

   

the expected growth of the K-12 AST industry in China and globally;

 

   

the availability of qualified personnel and the ability to retain such personnel;

 

   

competition in the K-12 AST industry;

 

   

changes in government policies and regulation;

 

   

other factors that may affect our business development, financial condition, liquidity and results of operations; and

 

   

other risk factors discussed under “Risk Factors.”

You should not rely upon forward-looking statements as predictions of future events. Forward-looking statements speak only as of the date they are made, and we do not undertake any obligation to update them in light of new information or future developments or to release publicly any revisions to these statements in order to reflect later events or circumstances or to reflect the occurrence of unanticipated events. You should read this prospectus and the documents that we refer to in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect.

This prospectus also contains statistical data and estimates that we obtained from industry publications and reports generated by government or third-party providers of market intelligence. Although we have not independently verified the data, we believe that the publications and reports are reliable. Furthermore, if any one or more of the assumptions underlying the market data are later found to be incorrect, actual results may differ from the projections based on these assumptions. You should not place undue reliance on these forward-looking statements.

 

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USE OF PROCEEDS

We expect to receive total estimated net proceeds from this offering of approximately US$                million, or approximately US$                million if the underwriters exercise their option to purchase additional ADSs in full, based on the midpoint of the estimated initial public offering price range set forth on the front cover of this prospectus, after deducting underwriting discounts and commissions and the estimated offering expenses payable by us.

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

 

   

approximately 40% to improve our pedagogy, courseware and educational content, and further broaden our course offerings;

 

   

approximately 30% to improve our technology infrastructure;

 

   

approximately 15% to expand our marketing and branding efforts; and

 

   

the balance to fund working capital and for other general corporate purposes.

The amounts and timing of any expenditures will vary depending on the amount of cash generated by our operations, and the rate of growth, if any, of our business, and our plans and business conditions. The foregoing represents our current intentions based upon our present plans and business conditions to use and allocate the net proceeds of this offering. Our management will have significant flexibility in applying and discretion to apply the net proceeds of the offering. If an unforeseen event occurs or business conditions change, we may use the proceeds of this offering differently than as described in this prospectus. We currently do not intend to use any net proceeds from this offering, either directly or indirectly, to acquire assets other than in the ordinary course of business. In utilizing the proceeds from this offering, we are permitted under PRC laws and regulations to provide funding to our PRC subsidiaries only through loans or capital contributions, and to our consolidated VIE only through loans, and only if we satisfy the applicable government registration and approval requirements. We cannot assure you that we will be able to meet these requirements on a timely basis, if at all. In addition to government registration and approval requirements, the amount of loans that we can provide to our PRC subsidiaries or our VIE is subject to certain limitations prescribed by PRC laws and regulations, which may restrict our ability to fund and expand our business in a timely manner. See “Risk Factors—Risks Related to Doing Business in China—PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay us from making loans or additional capital contributions to our PRC subsidiaries and to make loans to Xingengyuan, which could materially and adversely affect our liquidity and our ability to fund and expand our business.”

 

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DIVIDEND POLICY

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

We are a holding company incorporated in the Cayman Islands. We rely principally on dividends from our PRC subsidiaries for our cash requirements, including any payment of dividends to our shareholders. PRC regulations may restrict the ability of our PRC subsidiaries to pay dividends to us. See “Regulation—Regulation Relating to Foreign Exchange—Regulation on Dividend Distribution.”

Our board of directors has discretion as to whether to distribute dividends, subject to certain requirements of Cayman Islands law. Under Cayman Islands law, a Cayman Islands company may pay a dividend out of either profit or share premium account, provided that in no circumstances may a dividend be paid if this would result in the company being unable to pay its debts as they fall due in the ordinary course of business. Even if our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant. If we pay any dividends on our Class A ordinary shares, we will pay those dividends which are payable in respect of the Class A ordinary shares underlying the ADSs to the depositary, as the registered holder of such Class A ordinary shares, and the depositary then will pay such amounts to the ADS holders in proportion to the Class A ordinary shares underlying the ADSs held by such ADS holders, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. See “Description of American Depositary Shares.”

 

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CAPITALIZATION

The table below sets forth our capitalization as of March 31, 2021:

 

   

on an actual basis;

 

   

on a pro forma basis to give effect to (i) the automatic conversion or redesignation, as the case may be, of all of the issued and outstanding preferred shares, into Class A ordinary shares, on a one-for-one basis, immediately prior to the completion of this offering; and (ii) the immediate vesting of our founders’ unvested restricted shares as of March 31, 2021 upon the completion of this offering; and

 

   

on a pro forma as adjusted basis to give effect to (i) the automatic conversion or re-designation, as the case may be, of issued and outstanding preferred shares, into Class A ordinary shares, on a one-for-one basis, immediately prior to the completion of this offering, (ii) the immediate vesting of our founders’ unvested restricted shares as of March 31, 2021 upon the completion of this offering; and (iii) the issuance and sale of                Class A ordinary shares in this offering, and the receipt of approximately US$                million in estimated net proceeds, considering an offering price of US$                per ADS (the midpoint of the estimated initial public offering price range set forth on the front cover of this prospectus), after deduction of the underwriting discounts and commissions and estimated offering expenses payable by us.

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

 

     As of March 31, 2021  
     Actual      Pro forma      Pro forma as
adjusted(1)
 
     RMB      US$      RMB      US$      RMB      US$  
MEZZANINE EQUITY                  

Series A preferred shares (US$0.0001 par value; 22,973,381shares authorized, 22,973,381 shares issued and outstanding on an actual basis, and none outstanding on a pro forma or a pro forma as adjusted basis) .

     60,922        9,298        —          —          

Series B preferred shares (US$0.0001 par value; 30,162,301shares authorized, 30,162,301 shares issued and outstanding on an actual basis, and none outstanding on a pro forma or apro forma as adjusted basis)

     77,830        11,879        —          —          

Series B+ preferred shares (US$0.0001 par value; 33,367,574shares authorized, 33,367,574 shares issued and outstanding on an actual basis, and none outstanding on a pro forma or a pro forma as adjusted basis) .

     117,491        17,933        —          —          

 

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     As of March 31, 2021  
     Actual      Pro forma      Pro forma as
adjusted(1)
 
     RMB      US$      RMB      US$      RMB      US$  

Series C preferred shares (US$0.0001 par value; 29,167,458 shares authorized, 29,167,458 shares issued and outstanding on an actual basis, and none outstanding on a pro forma or a pro forma as adjusted basis) .

     234,587        35,805        —          —          

Series D preferred shares (US$0.0001 par value; 45,613,502shares authorized, 45,613,502 shares issued and outstanding on an actual basis, and none outstanding on a pro forma or a pro forma as adjusted basis)

     576,481        87,988        —          —          

Series D+ preferred shares (US$0.0001 par value; 8,411,895shares authorized, 8,411,895 shares issued and outstanding on an actual basis, and none outstanding on a pro forma or a pro forma as adjusted basis)

     146,817        22,409        —          —          

Series E-1 preferred shares (US$0.0001 par value; 43,868,754shares authorized, 43,868,754 shares issued and outstanding on an actual basis, and none outstanding on a pro forma or a pro forma as adjusted basis)

     917,766        140,078        —          —          

Series E-2 preferred shares (US$0.0001 par value; 30,845,218 shares authorized, 30,845,218 shares issued and outstanding on an actual basis, and none outstanding on a pro forma or a pro forma as adjusted basis)

     630,165        96,182        —          —          

Series E-3 convertible redeemable preferred shares (US$0.0001 par value; 41,284,349 shares authorized, issued and outstanding on an actual basis; and none outstanding on a pro forma or a pro forma as adjusted basis)

     1,038,687        158,535        —          —          
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
Total mezzanine equity      3,800,746        580,107        —          —                                            
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Class A ordinary shares (US$0.0001 par value; 463,897,187 shares authorized, 7,755,662 shares issued and outstanding on an actual basis, and 293,450,094 shares issued and outstanding on a pro forma or pro forma as adjusted basis)

     5        1        192        29        

 

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     As of March 31, 2021  
     Actual     Pro forma     Pro forma as
adjusted(1)
 
     RMB     US$     RMB     US$     RMB      US$  

Class B ordinary shares (US$0.0001 par value; 50,408,381 shares authorized, 50,408,381 shares issued, 24,130,672 shares outstanding on an actual basis, and 50,408,381 shares issued and outstanding on a pro forma or pro forma as adjusted basis)

     33       5       33       5       

Treasury stock

     (19     (3     —         —         

Additional paid-in capital

     —         —         3,831,165       584,751       

Accumulated deficit

     (2,443,630     (372,970     (2,474,255     (377,645     

Accumulated other comprehensive income/(loss)

     (59,239     (9,042     (59,239     (9,042     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 
Total shareholders’ (deficit)/equity      (2,502,850     (382,009     1,297,896       198,098       
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total mezzanine equity and shareholders’ (deficit)/equity

     1,297,896       198,098       1,297,896       198,098       
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 
Total capitalization      1,297,896       198,098       1,297,896       198,098       
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

Note:

(1)

The pro forma as adjusted information discussed above is illustrative only. Our additional paid-in capital, total shareholders’ (deficit)/equity and total capitalization following the completion of this offering are subject to adjustment based on the actual initial public offering price and other terms of this offering determined at pricing.

(2)

Assuming the number of ADSs offered by us as set forth on the cover page of this prospectus remains the same, and after deduction of underwriting discounts and commissions and the estimated offering expenses payable by us, a US$1.00 change in the assumed initial public offering price of US$                per ADS (the midpoint of the estimated initial public offering price range set forth on the front cover of this prospectus) would, in the case of an increase, increase and, in the case of a decrease, decrease each of additional paid-in capital, total shareholders’ (deficit)/equity and total capitalization by US$                million.

 

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DILUTION

If you invest in the ADSs, your interest will be diluted to the extent of the difference between the initial public offering price per ADS and our net tangible book value per ADS after this offering. Dilution results from the fact that the initial public offering price per Class A ordinary share is substantially in excess of the book value per Class A ordinary share attributable to the existing shareholders for our presently outstanding Class A ordinary shares on an as-converted basis.

Our net tangible book value as of March 31, 2021 was US$(382) million, or US$(12.00) per Class A ordinary share and US$                per ADS. Net tangible book value represents the amount of our total consolidated tangible assets, less the amount of our total consolidated liabilities and mezzanine equity. Dilution is determined by subtracting net tangible book value per Class A ordinary share, on an as-converted basis, as adjusted from the initial public offering price per Class A ordinary share and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

Without taking into account any other changes in such net tangible book value after March 31, 2021, other than to give effect to (i) the conversion of all of our preferred shares into Class A ordinary shares on a one-to-one basis which will occur automatically immediately prior to the completion of this offering; (ii) the immediate vesting of our founders’ unvested restricted shares as of March 31, 2021 up on the completion of this offering; and (iii) our issuance and sale of Class A ordinary shares represented by the                 ADSs offered in this offering at an assumed initial public offering price of US$                per ADS, the midpoint of the estimated initial public offering price range set forth on the front cover of this prospectus, after deduction of the underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of March 31, 2021 would have been US$                million, or US$                per Class A ordinary share and US$                per ADS, to existing shareholders and an immediate dilution in net tangible book value of US$                per Class A ordinary share, or US$                per ADS, to purchasers of ADSs in this offering. The following table illustrates such dilution:

 

     Per
Class A
Ordinary
Share
    Per
ADS
 

Assumed initial public offering price

   US$                   US$                

Net tangible book value as of March 31, 2021

   US$ (12.00   US$    

Pro forma net tangible book value after giving effect to the automatic conversion of all of our outstanding preferred shares and the immediate vesting of our founders’ restricted shares

   US$ 0.58     US$    

Pro forma as adjusted net tangible book value as adjusted to give effect to the automatic conversion of all of our outstanding preferred shares, the immediate vesting of our founders’ restricted shares and this offering

   US$       US$    

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

   US$       US$    

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

A US$1.00 increase (decrease) in the assumed initial public offering price of US$                 per ADS would increase (decrease) our pro forma as adjusted net tangible book value after giving effect to this offering by US$                 , the pro forma as adjusted net tangible book value per Class A ordinary share and per ADS after giving effect to this offering by US$                 per Class A ordinary share and

 

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US$                 per ADS, and the dilution in pro forma as adjusted net tangible book value per Class A ordinary share and per ADS to new investors in this offering by US$                 per Class A ordinary share and US$                 per ADS, assuming no change to the number of ADSs offered by us as set forth on the front cover of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

The following table summarizes, on a pro forma basis as of March 31, 2021, the differences between the existing shareholders and the new investors with respect to the number of Class A ordinary shares purchased from us in this offering, the total consideration paid and the average price per Class A ordinary share paid at the initial public offering price of US$                 per ADS, the midpoint of the estimated initial public offering price range set forth on the front cover of this prospectus, before deducting underwriting discounts and commissions and estimated offering expenses. The total number of Class A ordinary shares does not include the Class A ordinary shares underlying the ADSs issuable upon the exercise of the over-allotment option granted to the underwriters.

 

     Class A Ordinary Shares
Purchased
     Total Consideration      Average Price
Per Class A
Ordinary
Share
     Average Price
Per ADS
 
     Amount (in
thousands
of US$)
     Percent  
     Number      Percent      US$      US$  

Existing shareholders

                 

New investors

                 

Total

                 

The discussion and tables above also assume no exercise of any stock options outstanding as of the date of this prospectus. As of the date of this prospectus, there are 42,131,429 Class A ordinary shares issuable upon exercise of outstanding stock options, and there are a total of 43,198,157 Class A ordinary shares available for future issuance upon the exercise of grants under our 2019 Incentive Compensation Plan. To the extent that any of these options are exercised, there will be further dilution to new investors.

 

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ENFORCEABILITY OF CIVIL LIABILITIES

Cayman Islands

We are incorporated under the laws of the Cayman Islands as an exempted company with limited liability. We are incorporated in the Cayman Islands because of certain benefits associated with being a Cayman Islands exempted company, such as:

 

   

political and economic stability;

 

   

an effective judicial system;

 

   

a favorable tax system;

 

   

the absence of exchange control or currency restrictions; and

 

   

the availability of professional and support services.

However, certain disadvantages accompany incorporation in the Cayman Islands. These disadvantages include, but are not limited to, the following:

 

   

the Cayman Islands has a less developed body of securities laws as compared to the United States and these securities laws provide significantly less protection to investors as compared to the United States; and

 

   

Cayman Islands companies may not have standing to sue before the federal courts of the United States.

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

Substantially all of our operations are conducted in China, and substantially all of our assets are located in China. All of our directors and executive officers are nationals or residents of jurisdictions other than the United States and a substantial portion of their assets are located outside the United States. As a result, it may be difficult for a shareholder to effect service of process within the United States upon these persons, or to enforce against us or them judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States.

We have appointed Cogency Global Inc. as our agent upon whom process may be served in any action brought against us under the securities laws of the United States.

Maples and Calder (Hong Kong) LLP, our counsel as to Cayman Islands law, and Tian Yuan Law Firm, our counsel as to PRC law, have advised us, respectively, that there is uncertainty as to whether the courts of the Cayman Islands and China, respectively, would:

 

   

recognize or enforce judgments of United States courts obtained against us or our directors or officers predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States; or

 

   

entertain original actions brought in each respective jurisdiction against us or our directors or officers predicated upon the securities laws of the United States or any state in the United States.

Maples and Calder (Hong Kong) LLP has informed us that it is uncertain whether the courts of the Cayman Islands will allow shareholders of our company to originate actions in the Cayman Islands

 

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based upon securities laws of the United States. In addition, there is uncertainty with regard to Cayman Islands law related to whether a judgment obtained from the U.S. courts under civil liability provisions of U.S. securities laws will be determined by the courts of the Cayman Islands as penal or punitive in nature. If such a determination is made, the courts of the Cayman Islands will not recognize or enforce the judgment against a Cayman Islands company, such as our company. As the courts of the Cayman Islands have yet to rule on making such a determination in relation to judgments obtained from U.S. courts under civil liability provisions of U.S. securities laws, it is uncertain whether such judgments would be enforceable in the Cayman Islands. Maples and Calder (Hong Kong) LLP has informed us that although there is no statutory enforcement in the Cayman Islands of judgments obtained in the federal or state courts of the United States (and the Cayman Islands are not a party to any treaties for the reciprocal enforcement or recognition of such judgments), the courts of the Cayman Islands will, at common law, recognize and enforce a foreign monetary judgment of a foreign court of competent jurisdiction without any re-examination of the merits of the underlying dispute based on the principle that a judgment of a competent foreign court imposes upon the judgment debtor an obligation to pay the liquidated sum for which such judgment has been given, provided such judgment (a) is given by a foreign court of competent jurisdiction, (b) imposes on the judgment debtor a liability to pay a liquidated sum for which the judgment has been given, (c) is final, (d) is not in respect of taxes, a fine or a penalty, and (e) was not obtained in a manner and is not of a kind the enforcement of which is contrary to natural justice or the public policy of the Cayman Islands.

PRC

We have been advised by Tian Yuan Law Firm, our PRC legal counsel, that there is uncertainty as to whether the courts of the PRC would enforce judgments of United States courts or Cayman courts obtained against us or these persons predicated upon the civil liability provisions of the United States federal and state securities laws. Tian Yuan Law Firm has further advised us that the recognition and enforcement of foreign judgments are provided for under PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of PRC Civil Procedures Law and other applicable laws and regulations based either on treaties between China and the country where the judgment is made or on reciprocity between jurisdictions. China does not have any treaties or other form of reciprocity with the United States or the Cayman Islands that provide for the reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates the basic principles of PRC law or national sovereignty, security or public interest. As a result, it is uncertain whether and on what basis a PRC court would enforce a judgment rendered by a court in the United States or in the Cayman Islands. Under the PRC Civil Procedures Law, foreign shareholders may originate actions based on PRC law against us in the PRC, if they can establish sufficient nexus to the PRC for a PRC court to have jurisdiction, and meet other procedural requirements, including, among others, the plaintiff must have a direct interest in the case, and there must be a concrete claim, a factual basis and a cause for the suit. However, it would be difficult for foreign shareholders to establish sufficient nexus to the PRC by virtue only of holding the ADSs or Class A ordinary shares.

 

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OUR HISTORY AND CORPORATE STRUCTURE

Our Corporate History

We launched our first online course through Xingengyuan, in March 2018. Our ultimate holding company, previously named Wan Duoduo Limited, was incorporated in July 2016 in the Cayman Islands to facilitate financing and offshore listing. In November 2019, Wan Duoduo Limited was renamed as Spark Education Limited.

In July 2016, Spark Hong Kong, our wholly-owned subsidiary, was incorporated in Hong Kong. In December 2016, Beijing Spark Education, our wholly-owned subsidiary, was incorporated in the PRC. Between January 2017 and February 2021, Beijing Spark Education entered into a series of contractual arrangements with Xingengyuan and its shareholders, through which Beijing Spark Education, our wholly owned subsidiary, effectively controls Xingengyuan.

As part of our business expansion, in 2020, a number of wholly-owned subsidiaries, including Tianjin Spark Education and Technology Co., Ltd., or Tianjin Spark Education, Chengdu Spark Education and Technology Co., Ltd., or Chengdu Spark Education, and Chengdu Juli Education Consulting Co., Ltd., or Chengdu Juli, were incorporated in the PRC. In January 2021, Wuhan Spark Education and Technology Co., Ltd. was incorporated as our wholly-owned subsidiary in the PRC.

Our Corporate Structure

The following chart illustrates our corporate structure, including our significant subsidiaries as that term is defined under Section 1-02 of Regulation S-X under the Securities Act, our VIE and certain other subsidiaries, as of the date of this prospectus:

 

LOGO

 

LOGO

   Equity interest

LOGO

   Contractual arrangements, including the exclusive business cooperation agreement, the equity pledge agreement, the exclusive purchase option agreement, the powers of attorney and the spousal consent letters. See “—Contractual Arrangements with Our VIE and Its Shareholders.”

 

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Note:

(1)

Shareholders of Xingengyuan are Mr. Luo, our founder, chairman of the board and chief executive officer, and Mr. Shan, our co-founder, director and chief technology officer, holding 86.9% and 13.1% of Xingengyuan’s equity interests, respectively.

Contractual Arrangements with Our VIE and Its Shareholders

Current PRC laws and regulations impose certain restrictions or prohibitions on foreign ownership of companies that engage in value-added telecommunication services and certain other businesses. We are a company registered in the Cayman Islands. Beijing Spark Education, our PRC subsidiary, is considered foreign-invested enterprise. To comply with PRC laws and regulations, we primarily conduct our business in China through Xingengyuan, our VIE in the PRC, based on a series of contractual arrangements. These contractual arrangements allow us to exercise effective control over our VIE, receive substantially all of the economic benefits of our VIE and have an exclusive call option to purchase all or part of the equity interests in and/or assets of our VIE when and to the extent permitted by the relevant laws. As a result of these contractual arrangements, we exert effective control over, and are considered the primary beneficiary of Xingengyuan, our VIE and therefore consolidate the operating results of our VIE and its subsidiaries in our financial statements under the U.S. GAAP.

The following is a summary of the contractual arrangements by and among Beijing Spark Education, Xingengyuan and the shareholders of Xingengyuan. For the complete text of these contractual arrangements, please see the copies filed as exhibits to the registration statement filed with the SEC of which this prospectus forms a part.

In the opinion of Tian Yuan Law Firm, our PRC legal counsel, the contractual arrangements described below among Beijing Spark Education, Xingengyuan and the shareholders of Xingengyuan governed by PRC law are valid, binding and enforceable under current PRC laws. However, these contractual arrangements may not be as effective in providing control as direct ownership. There are substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations. Accordingly, the PRC regulatory authorities may take a view that is contrary to the opinion of our PRC legal counsel. It is uncertain whether any new PRC laws or regulations relating to variable interest entity structures will be adopted or if adopted, what they would provide. If we or our VIE are found to be in violation of any existing or future PRC laws or regulations, or fail to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities would have broad discretion to take action in dealing with such violations or failures. For a description of the risks related to these contractual arrangements and our corporate structure, please see “Risk Factors—Risks Related to Our Corporate Structure.”

Exclusive Business Cooperation Agreement

Beijing Spark Education and Xingengyuan entered into an exclusive business cooperation agreement on January 3, 2017.

Pursuant to the exclusive business cooperation agreement, Beijing Spark Education has the exclusive right to provide or designate any third-party to provide, among other things, management consultancy services, software licensing services, technological support and other services to Xingengyuan. In exchange, Xingengyuan pay monthly management fees and service fees to Beijing Spark Education in an amount determined by Beijing Spark Education and Xingengyuan based on certain factors as specified in the exclusive business cooperation agreement. Without the prior written consent of Beijing Spark Education, Xingengyuan cannot accept similar services provided by, or establish similar cooperation relationship with, any third-party. Beijing Spark Education has the

 

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exclusive ownership of all intellectual property rights created as a result of the performance of this agreement unless otherwise provided by PRC laws or regulations, which remain effective whether or not the agreement is amended or terminated.

The exclusive business cooperation agreement was effective from January 3, 2017 and will continue to be effective unless it is terminated. Beijing Spark Education may terminate the agreement unilaterally if Xingengyuan materially breaches any provisions under the agreement, whereas under no circumstances can Xingengyuan terminate the agreement unless otherwise provided by PRC laws or regulations.

Equity Pledge Agreement

Each of Xingengyuan’s shareholders entered into an equity pledge agreement with Beijing Spark Education and Xingengyuan on January 3, 2017, among which the equity pledge agreement among Mr. Luo, Beijing Spark Education and Xingengyuan was last amended and restated on February 24, 2021 and the equity pledge agreement among Mr. Shan, Beijing Spark Education and Xingengyuan was last amended and restated on November 12, 2018. Under such equity pledge agreements, each of Mr. Luo and Mr. Shan pledged his respective equity interest in Xingengyuan to Beijing Spark Education to secure his and Xingengyuan’s obligations under the exclusive business cooperation agreement, exclusive purchase option agreement, spousal consent letter, power of attorney and the equity pledge agreement. Each of Mr. Luo and Mr. Shan further agreed not to transfer or pledge his respective equity interest in Xingengyuan without the prior written consent of Beijing Spark Education. Each of the equity pledge agreements will remain binding until the respective pledger and Xingengyuan discharge all their obligations under the above-mentioned agreements.

We have completed the registration of the equity pledge relating to Xingengyuan with the competent branch of the SAMR in accordance with the Civil Code of the PRC.

Exclusive Purchase Option Agreement

Each of Xingengyuan’s shareholders entered into an exclusive purchase option agreement with Beijing Spark Education and Xingengyuan on January 3, 2017, among which the exclusive purchase option agreement among Mr. Luo, Beijing Spark Education and Xingengyuan was last amended and restated on July 24, 2020 and the exclusive purchase option agreement among Mr. Shan, Beijing Spark Education and Xingengyuan was last amended and restated on November 12, 2018. Under the exclusive purchase option agreements, each of Mr. Luo and Mr. Shan granted Beijing Spark Education an exclusive and irrevocable option to purchase, or designate a third party to purchase, all or a portion of his respective equity interest in Xingengyuan at the higher price between RMB10 and the lowest price permissible by the then-applicable PRC laws. In addition, without Beijing Spark Education’s prior written consent, the shareholders of Xingengyuan shall not, individually or collectively, make or procure Xingengyuan to engage in any transaction or conduct that has a material adverse effect on the assets, liabilities, operations, equity and other legal rights of Xingengyuan. Without Beijing Spark Education’s prior written consent, Xingengyuan shall not enter into any contract with a price exceeding RMB500,000, except for contracts in the ordinary course of business. Xingengyuan shall not be dissolved or liquidated without prior written consent by Beijing Spark Education, unless otherwise provided by PRC laws or regulations. Each exclusive purchase option agreement shall remain in effect until all of the equity interests in Xingengyuan have been acquired by Beijing Spark Education or its designee.

Powers of Attorney

Pursuant to the powers of attorney executed by each of Mr. Luo and Mr. Shan, which was last amended and executed respectively on July 24, 2020 and November 12, 2018, each of Mr. Luo and

 

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Mr. Shan irrevocably authorized Beijing Spark Education to act on their respective behalf as exclusive agent and attorney, to the extent permitted by law, with respect to all rights of shareholders concerning all equity interests held by each of them in Xingengyuan, including but not limited to the right to attend shareholder meetings, exercise all the shareholder’s rights (including but not limited to voting rights and right to sell, transfer, pledge or dispose of all or part equity interests held in part or in whole) and designate and appoint on their respective behalf the legal representative, directors, supervisors, general managers and other senior management members of Xingengyuan.

Spousal Consent Letters

Pursuant to the spousal consent letters executed by the spouses of each of Mr. Luo and Mr. Shan which was last amended and executed respectively on July 24, 2020 and November 5, 2018, respectively, the signing spouses unconditionally and irrevocably agreed that the equity interest in Xingengyuan held by and registered in the name of Mr. Luo and Mr. Shan be disposed of in accordance with the equity pledge agreements, the exclusive purchase option agreements and the powers of attorney described above, and that Mr. Luo and Mr. Shan may perform, amend or terminate such agreements without their additional consent.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated statements of operations and comprehensive loss for the years ended December 31, 2019 and 2020, selected consolidated balance sheet data as of December 31, 2019 and 2020 and selected consolidated statements of cash flows data for the years ended December 31, 2019 and 2020 have been derived from audited consolidated financial statements included elsewhere in this prospectus. The following summary consolidated statements of operations and comprehensive loss for the three months ended March 31, 2020 and 2021, summary consolidated balance sheet data as of March 31, 2021 and summary consolidated statements of cash flows data for the three months ended March 31, 2020 and 2021 have been derived from unaudited interim condensed consolidated financial statements included elsewhere in this prospectus. Our consolidated financial statements are prepared and presented in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. Our historical results are not necessarily indicative of results expected for future periods. You should read this Selected Consolidated Financial Data section together with our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

 

    For the Year Ended December 31,     For the Three Months Ended March 31,  
    2019     2020     2020     2021  
    RMB     % of
total net
revenues
    RMB     US$     % of
total net
revenues
    RMB     % of
total net
revenues
    RMB     US$     % of
total net
revenues
 
    (in thousands, except for share, per share data and percentage)  

Selected Consolidated Statements of Operations and Comprehensive Loss:

                   

Net revenues

    195,412       100.0       1,174,359       179,242       100.0       149,644       100.0       453,661       69,242       100.0  

Cost of revenues(1)

    (361,873     (185.2     (852,332     (130,091     (72.6     (150,340     (100.5     (284,509     (43,425     (62.7
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross (loss)/profit

    (166,461     (85.2     322,027       49,151       27.4       (696     (0.5     169,152       25,817       37.3  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

                   

Sales and marketing expenses(1)

    (235,769     (120.7     (798,356     (121,853     (68.0     (112,940     (75.5     (342,552     (52,284     (75.5

Research and development expenses(1)

    (239,941     (122.8     (327,349     (49,963     (27.9     (69,083     (46.2     (143,533     (21,907     (31.6

General and administrative expenses(1)

    (128,203     (65.6     (177,960     (27,162     (15.2     (34,378     (23.0     (72,442     (11,057     (16.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    (603,913     (309.1     (1,303,665     (198,978     (111.1     (216,401     (144.7     (558,527     (85,248     (123.1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income

    2,163       1.1       21,866       3,337       1.9       7,154       4.8       11,530       1,760       2.5  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (768,211     (393.2     (959,772     (146,490     (81.8     (209,943     (140.4     (377,845     (57,671     (83.3

Interest income

    1,953       1.0       11,749       1,793       1.0       1,246       0.8       3,259       499       0.7  

Interest expenses

    (926     (0.5     (822     (125     (0.1     (241     (0.2     (187     (29     (0.0

Others, net

    (3,939     (2.0     (2,850     (435     (0.2     (305     (0.2     1,064       162       0.2  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax expense

    (771,123     (394.7     (951,695     (145,257     (81.1     (209,243     (140.0     (373,709     (57,039     (82.4

Income tax expense

    —         —         —         —         —         —         —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (771,123     (394.7     (951,695     (145,257     (81.1     (209,243     (140.0     (373,709     (57,039     (82.4

Accretion of convertible redeemable preferred shares to redemption value

    (40,788     (20.9     (100,895     (15,400     (8.6     (15,858     (10.6     (51,929     (7,925     (11.4

Deemed dividends due to extinguishment of preferred shares

    —         —         (13,415     (2,047     (1.1     —         —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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    For the Year Ended December 31,     For the Three Months Ended March 31,  
    2019     2020     2020     2021  
    RMB     % of
total net
revenues
    RMB     US$     % of
total net
revenues
    RMB     % of
total net
revenues
    RMB     US$     % of
total net
revenues
 
    (in thousands, except for share, per share data and percentage)  

Net loss attributable to ordinary shareholders of Spark Education Limited

    (811,911     (415.6     (1,066,005     (162,704     (90.8     (225,101     (150.6     (425,638     (64,964     (93.8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of ordinary shares used in computing net loss per share

                   

Basic and diluted

    24,770,658         29,605,885       29,605,885         24,475,239         37,153,734       37,153,734    

Net loss per share attributable to ordinary shareholders

                   

Basic and diluted

    (32.78       (36.01     (5.50       (9.20       (11.46     (1.75  

Unaudited Pro Forma Data(2):

                   

Pro forma effect of conversion of preferred shares

        285,694,432       285,694,432             285,694,432       285,694,432    

Pro forma effect of vesting of founders’ restricted shares

        33,942,041       33,942,041             26,277,709       26,277,709    

Pro forma weighted average number of shares used in computing net loss per share:

                   

Basic and diluted

        349,242,358       349,242,358             349,125,875       349,125,875    

Pro forma net loss per share:

                   

Basic and diluted

        (2.90     (0.44           (1.17     (0.18  

 

Notes:

(1)

Share-based compensation expenses included in:

 

     For the Year Ended
December 31,
     For the Three
Months Ended March 31,
 
     2019      2020      2020      2021  
     RMB      RMB      US$      RMB      RMB      US$  
     (in thousands)  

Cost of revenues

     774        1,873        286        267        819        125  

Sales and marketing expenses

     1,150        3,338        509        380        1,632        249  

Research and development expenses

     3,318        10,761        1,642        1,769        5,164        788  

General and administrative expenses

     51,514        30,838        4,708        6,689        11,844        1,808  

 

(2)

Pro forma basic and diluted net loss per share gives effect to the assumption that all preferred shares have been converted into ordinary shares as of January 1, 2020, at the conversion ratio of one for one, and that all of our founders’ unvested restricted shares have been vested as of January 1, 2020. See Note 11(b) to the Consolidated Financial Statements for more information regarding our founders’ restricted shares.

 

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The following table presents our selected consolidated balance sheet data as of December 31, 2019 and 2020 and March 31, 2021.

 

     As of December 31,     As of March 31,  
     2019     2020     2021  
                 Actual     Pro forma(1)  
     RMB     RMB     US$     RMB     US$     RMB      US$  
     (in thousands)  

Selected Consolidated Balance Sheet Data:

                                             

Cash and cash equivalents

     506,145       1,926,289       294,009       2,542,140       388,006       2,542,140        388,006  

Total current assets

     567,422       2,086,550       318,470       3,017,938       460,628       3,017,938       
460,628
 

Total assets

     784,581       2,462,056       375,783       3,417,567       521,623       3,417,567        521,623  

Deferred revenues

     410,930       1,216,756       185,713       1,423,142       217,214       1,423,142        217,214  

Total current liabilities

     680,973       1,815,463       277,094       2,075,006       316,708       2,075,006        316,708  

Total liabilities

     749,345       1,860,430       283,958       2,119,671       323,525       2,119,671        323,525  

Total mezzanine equity

     992,021       2,722,314       415,505       3,800,746       580,107       —          —    

Total shareholders’ deficit

     (956,785     (2,120,688     (323,680     (2,502,850     (382,009     1,297,896        198,098  

Total liabilities, mezzanine equity and shareholders’ deficit

     784,581       2,462,056       375,783       3,417,567       521,623       3,417,567        521,623  

 

 

(1) On a pro forma basis to reflect the conversion of all of our outstanding preferred shares on a one-for-one basis into ordinary shares, as if such conversion had occurred as of March 31, 2021.

 

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The following table presents our selected consolidated statement of cash flows data for the year ended December 31, 2019 and 2020 and for the three months ended March 31, 2020 and 2021.

 

    For the Year Ended December 31,     For the Three Months Ended
March 31,
 
    2019     2020     2020     2021  
    RMB     RMB     US$     RMB     RMB     US$  
    (in thousands)  

Selected Consolidated Statement of Cash Flows Data:

           

Net cash (used in) / provided by operating activities

    (228,999     204,359       31,191       (9,853     (75,613     (11,541

Net cash used in investing activities

    (79,564     (213,840     (32,638     (20,696     (354,348     (54,084

Net cash provided by / (used in) financing activities

    475,800       1,542,945       235,499       (4,157     1,021,471       155,907  

Effect of exchange rate changes on cash and cash equivalents

    26,726       (113,320     (17,296     2,694       24,341       3,715  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase / (decrease) in cash and cash equivalents

    193,963       1,420,144       216,756       (32,012     615,851       93,997  

Cash and cash equivalents at beginning of the period

    312,182       506,145       77,253       506,145       1,926,289       294,009  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of the period

    506,145       1,926,289       294,009       474,133       2,542,140       388,006  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP Financial Measures

In evaluating our business, we consider and use gross billings and adjusted net loss, both non-GAAP measures, as supplemental measures to review and assess our operating performance. We present these non-GAAP measures because they are used by our management to evaluate our operating performance and formulate business plans.

We define gross billings for a specific period as the total amount of cash received in respect of sales of courses in such period, net of the total amount of refunds in such period. For a more detailed discussion of our refund policy, see “Business—Pricing and Refund Policy.”

We generally charge tuition fees for the online small-class courses we sell to students upfront. Upon payment of the tuition fees, students are given a specified number of course units that they can consume to attend our course sessions. The tuition fees for our online small-class courses are initially recorded as deferred revenues. Because our students generally attend online small-class courses on pre-determined schedules and deferred revenues are recognized proportionally as course units are consumed, we have better visibility into our future revenues. We collect the tuition fees upfront for our AI-enhanced courses which are initially recorded as deferred revenues and recognized proportionally as these courses are “unlocked,” i.e. become available for viewing by students, on pre-determined schedules. We believe gross billings provide valuable insights into the sales of our online courses and the performance of our business.

This non-GAAP financial measure should not be considered in isolation from, or as a substitute for, its most directly comparable financial measure prepared in accordance with GAAP. A reconciliation of the historical non-GAAP financial measure to its most directly comparable GAAP measure has been provided in the tables included below. Investors are encouraged to review the reconciliation of the historical non-GAAP financial measure to its most directly comparable GAAP financial measure. As

 

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gross billings has material limitations as an analytical metric and may not be calculated in the same manner by all companies, it may not be comparable to other similarly titled measures used by other companies. In light of the foregoing limitations, you should not consider gross billings as a substitute for, or superior to, net revenues prepared in accordance with GAAP. We encourage investors and others to review our financial information in its entirety and not rely on a single financial measure.

We compensate for these limitations by relying primarily on our GAAP results and using gross billings only as a supplemental measure. The table below sets forth a reconciliation of our gross billings to net revenues for the periods indicated:

 

    For the Year Ended
December 31,
    For the Three Months Ended
March 31,
 
    2019     2020     2020     2021  
    RMB     RMB     US$     RMB     RMB     US$  
    (in thousands)  

Net revenues

    195,412       1,174,359       179,242       149,644       453,661       69,242  

Add: tax and surcharges

    11,764       70,787       10,804       9,025       27,582       4,210  

Add: ending deferred revenues

    410,930       1,216,756       185,713       560,152       1,423,142       217,214  

Less: beginning deferred revenues

    (43,418     (410,930     (62,720     (410,930     (1,216,756     (185,713

Less: Nonmonetary consideration awarded for promotion services(1)

    (61,194     (142,859     (21,805     (38,074     (34,143     (5,211
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross billings (non-GAAP)

    513,494       1,908,113       291,234       269,817       653,486       99,742  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Note:

(1)

Represent the Spark Coins and free course units awarded to parents of our students in return for the distinct promotion services they perform for us; for more information, see “Business—Branding, Sales and Marketing—Channels—Referrals and Organic Traffic.”

Adjusted net loss represents net loss before share-based compensation expenses. Although share-based compensation is an important aspect of the compensation of our employees, we exclude share-based compensation expenses from adjusted net loss primarily because they are non-cash expenses and are partially discretionary in nature. Further, share-based compensation expenses are based on valuations with many underlying assumptions beyond our control that vary over time. Share-based compensation expenses may also include modifications that may not occur on a predictable cycle. Neither such assumptions nor modifications are necessarily indicative of our ongoing business performance. We believe that it would be useful to exclude share-based compensation expense for investors to better understand the long-term underlying performance of our core operations and to facilitate comparison of our results to our prior periods and to our peer companies, which may use share-based compensation to a greater or less degree than us. This non-GAAP financial measure should not be considered in isolation from, or as a substitute for, its most directly comparable financial measure prepared in accordance with GAAP. As adjusted net loss has limitations as an analytical metric and may not be calculated in the same manner by all companies, it may not be comparable to other similarly titled measures used by other companies. In light of the foregoing limitations, you should not consider adjusted net loss as a substitute for, or superior to, net loss prepared in accordance with GAAP. We encourage investors and others to review our financial information in its entirety and not

 

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rely on a single financial measure. The table below sets forth a reconciliation of our net loss and adjusted net loss for the periods indicated:

 

     For the Year Ended December 31,      For the Three Months Ended
March 31,
 
     2019      2020      2020      2021  
     RMB      RMB      US$      RMB      RMB      US$  
     (in thousands)  

Net loss

     (771,123      (951,695      (145,257      (209,243      (373,709      (57,039

Add: Share-based compensation expenses

     56,756        46,810        7,145        9,105        19,459        2,970  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted net loss (non-GAAP)

     (714,367      (904,885      (138,112      (200,138      (354,250      (54,069
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Overview

We are a pioneer and innovator in China’s K-12 after-school tutoring, or AST, market, offering foundational learning services to K-12 students. According to CIC, we are the first online education company to develop and offer online small-class foundational learning courses on a large scale. As a result of our unique approach to learning, we have become China’s largest online small-class education company in terms of gross billings in 2020 and the number of students as of December 31, 2020, according to CIC.

We deliver our courses primarily through online small classes with four to eight students per class. According to CIC, online small-class is the most effective format for providing students with an engaging, interactive and personalized learning experience. We currently offer online courses to students in three main subjects: mathematical thinking, which is our flagship course, Chinese, and English. We also offer AI-enhanced courses to supplement our offerings.

We have experienced rapid growth within a relatively short period of time. We had 370,530 students as of March 31, 2021, representing a significant increase from 133,902 as of March 31, 2020. Our net revenues increased by 501.0% from RMB195.4 million in 2019 to RMB1,174.4 million (US$179.2 million) in 2020, and increased by 203.3% from RMB149.6 million in the three months ended March 31, 2020 to RMB453.7 million (US$69.2 million) in the three months ended March 31, 2021. Our gross billings almost quadrupled from RMB513.5 million in 2019 to RMB1,908.1 million (US$291.2 million) in 2020, and increased by 142.2% from RMB269.8 million in the three months ended March 31, 2020 to RMB653.5 million (US$99.7 million) in the three months ended March 31, 2021. We recorded a gross profit of RMB322.0 million (US$49.2 million) and a net loss of RMB951.7 million (US$145.3 million) in 2020, as compared to a gross loss of RMB166.5 million and a net loss of RMB771.1 million in 2019. We recorded a gross profit of RMB169.2 million (US$25.8 million) and a net loss of RMB373.7million (US$57.0 million) in the three months ended March 31, 2021, as compared to a gross loss of RMB0.7 million and a net loss of RMB209.2 million in the three months ended March 31, 2020. For a reconciliation of gross billings to net revenues, see “—Non-GAAP Financial Measures.”

Major Factors Affecting Our Results of Operations

We operate in China’s K-12 AST market. As a result, our business, results of operations and financial condition are affected by the general factors affecting this market, including China’s continued economic growth, increasing disposable income per capita, rapidly growing demand for quality education resources, and growing K-12 student population, among other things. Additionally, we benefit significantly from the large and rapidly growing demand for foundational learning, and a number of other key trends that are reshaping China’s K-12 AST market. These trends include the growing online penetration, as well as the emergence of online small-class format. We believe these trends will continue to drive our long-term growth. Our results of operations, financial condition and prospects will depend significantly on our ability to capitalize on the growth opportunities that these trends have

 

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presented. Our results of operations, financial condition and prospects are also affected by evolving competition and regulatory landscapes in China’s K-12 AST market.

The COVID-19 pandemic has affected us in both negative and positive ways. The pandemic has caused temporary interruptions to our business operations in the first quarter of 2020 as we implemented internal protocols to keep our faculty members and other employees safe by closing our offices in Beijing and several other cities in China. As K-12 students continued to learn from home, the market acceptance of virtual learning and online education has also rapidly increased, which is expected to drive demand for online AST services, including ours, in the long run. See “Risk Factors—Risks Related to Our Business and Industry—Risks Related to Our Business and Industry—The COVID-19 pandemic has caused interruptions to our business and operations and it, or any future health epidemic or other adverse public health developments, may continue to do so.”

Additionally, we believe that our results of operations and financial condition are also affected by company-specific factors, including the factors discussed below.

Our Ability to Increase Course Units Consumed by Students

We currently generate our net revenues primarily from the tuition fees paid by students to purchase online small-class course packages. Each of these course packages contains a certain number of course units that our students can consume to attend our course sessions. We typically receive the full amount of the tuition fees upfront and recognize net revenues proportionally as these course units are consumed. Because our students attend a given online small-class course generally on pre-determined schedules, the deferred revenues are recognized at a fixed rate over the duration of the course. As a result, the net revenues from our online small-class courses for a given period are directly affected by the number of course units consumed by our students during that period which, in turn, is mainly affected by the number of our students. In 2020, our students consumed a total of 15,168 thousand course units, which more than quadrupled from 2,844 thousand in 2019. In the three months ended March 31, 2021, our students consumed a total of 5,465 thousand course units, which more than doubled from 2,071 thousand in the three months ended March 31, 2020. We had a total of 370,530 students as of March 31, 2021, representing a significant increase from 133,902 as of March 31, 2020. Our ability to attract and retain students is driven by a variety of factors, including our ability to offer an engaging, interactive and personalized learning experience; our ability to deliver a satisfactory learning outcome; our ability to deliver consistent, high-quality teaching; the effectiveness of our sales and marketing efforts; and our brand recognition, among other things. Our course units consumed for a given period are also affected by our ability to expand our courses to cover more subjects and age groups to meet students’ diverse learning needs and preferences.

Our Ability to Increase Our Tuition Fees

Our results of operations and financial condition are affected by the level of tuition fees we charge for our online courses. We use average net revenues per course unit consumed as a proxy to measure our ability to price our online courses. Our average net revenues per course unit consumed of our online small-class courses increased from RMB68.2 in 2019 to RMB74.1 (US$11.3) in 2020, and from RMB70.5 in the three months ended March 31, 2020 to RMB76.6 (US$11.7) in the three months ended March 31, 2021. Our pricing depends on a variety of factors, including the acceptance of foundational learning; the market demand of online K-12 AST courses; our brand recognition; students’ and their families’ perception of the quality and effectiveness of our courses; our ability to deliver consistent, high-quality teaching and course offerings; and the prices and availability of competing offerings, among other things. We will continue to monitor developments associated with these factors with a view to optimize pricing for our courses while ensuring our competitiveness.

 

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Our Ability to Effectively Manage Our Costs and Operating Expenses

Our results of operations and financial condition are affected by our ability to effectively manage our costs and operating expenses.

A substantial portion of our cost of revenues currently consist of faculty costs, as we continue to attract, train and retain a large number of full-time teachers and tutors to support our rapidly growing student base. Our ability to manage these costs depends significantly on whether we are able to cost-effectively attract qualified teachers and tutors. It also depends on our ability to leverage our operational sophistication and technologies to maximize our class attendance and increase teacher utilization. Additionally, we expect that we will be able to better manage our course material costs and other costs, as our economies of scale increase. Our improving cost efficiency and our ability to benefit from economies of scale are evidenced by our gross margin of 27.4% in 2020, as compared to a negative gross margin of 85.2% in 2019, as well as our gross margin of 37.3% in the three months ended March 31, 2021, as compared to a negative gross margin of 0.5% in the three months ended March 31, 2020.

Since sales and marketing expenses have been a major component of our operating expenses, our results of operations and financial position are affected by our ability to cost-effectively sell and market our courses. We have historically benefited from our strong brand reputation and the resulting significant word-of-mouth referrals and organic traffic. Our ability to control our sales and marketing expenses depends in large part on our ability to continue to leverage brand recognition to generate organic growth in our student base. Currently, a substantial majority of our sales and marketing expenses consist of spending on promotion and referral programs and other marketing and branding activities and compensation paid to our sales and marketing personnel. As a result, the cost-effectiveness of our sales and marketing depends heavily on our ability to continue to generate significant word-of-mouth referrals and enhance returns from marketing and promotional channels, and enable our sales and marketing personnel to sell our courses more efficiently.

We have also incurred substantial research and development expenses as we invested heavily in developing and improving our proprietary pedagogy, courseware and other educational content and enhancing our technology systems and infrastructure. While we will continue to invest in these areas, we expect to benefit from our increased economies of scale as we leverage our existing experience and expertise to expand our course offerings more cost-effectively in the long term. We expect our continued investments in research and development efforts to affect our results of operations and financial condition.

Our Ability to Continue to Upgrade Our Content Development and Technology Capabilities

We have a proven capability to develop consistent, high-quality courses and educational content and deliver an engaging, interactive and personalized learning experience through technology. We believe this has been instrumental to our ability to attract and retain students and build our brand recognition. We have built robust technology systems and infrastructure, to drive our productivity and operational efficiencies. We believe our dedicated focus on content development and technology capabilities to optimize the learning experiences for students and drive operational efficiency will have a long-term positive impact on our business and results of operations.

Key Components of Results of Operations

Net Revenues

We derive substantially all of our net revenues from providing online small-class courses. In 2019, 2020 and the three months ended March 31, 2020 and 2021, the net revenues generated from online

 

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small-class courses accounted for 99.2%, 95.6%, 97.6% and 92.3%, respectively, of our total net revenues. Mathematical thinking courses accounted for a substantial majority of our online small-class course revenues in each of 2019, 2020 and the three months ended March 31, 2020 and 2021. We also generated 0.8%, 4.4%, 2.4% and 7.7% of our total net revenues from AI-enhanced courses and others in 2019, 2020 and the three months ended March 31, 2020 and 2021, respectively. The following table sets forth a breakdown of our net revenues for the periods indicated:

 

     For the Year Ended December 31,      For the Three Months Ended March 31,  
     2019      2020      2020      2021  
     RMB      %      RMB      US$      %      RMB      %      RMB      US$      %  
     (in thousands, except for percentages)  

Online small-class courses

     193,863        99.2        1,123,243        171,440        95.6        146,086        97.6        418,634        63,896        92.3  

AI-enhanced courses and others

     1,549        0.8        51,116        7,802        4.4        3,558        2.4        35,027        5,346        7.7  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total net revenues

     195,412        100.0        1,174,359        179,242        100.0        149,644        100.0        453,661        69,242        100.0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

We generally charge tuition fees for the online small-class courses we sell to students upfront. Upon payment of the tuition fees, students are given a specified number of course units that they can consume to attend our course sessions. The tuition fees for our online small-class courses are initially recorded as deferred revenues. Because our students generally attend online small-class courses on pre-determined schedules and deferred revenues are recognized proportionally as course units are consumed, we have better visibility into our future revenues. We collect the tuition fees upfront for our AI-enhanced courses which are initially recorded as deferred revenues and recognized proportionally as these courses are “unlocked,” i.e. become available for viewing by students, on pre-determined schedules. We believe gross billings provide valuable insights into the sales of our online courses and the performance of our business.

Cost of Revenues

The following table sets forth a breakdown of our cost of revenues, in absolute amounts and as percentages of total net revenues, for the periods indicated:

 

    For the Year Ended December 31,     For the Three Months Ended March 31,  
    2019     2020     2020     2021  
    RMB     %     RMB     US$     %     RMB     %     RMB     US$     %  
    (in thousands, except for percentages)  

Faculty costs(1)

    243,997       124.9       623,540       95,171       53.1       109,667       73.3       216,567       33,055       47.7  

Course material costs

    23,912       12.2       75,159       11,471       6.4       10,738       7.2       17,409       2,656       3.8  

Others

    93,964       48.1       153,633       23,449       13.1       29,935       20.0       50,533       7,714       11.2  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

    361,873       185.2       852,332       130,091       72.6       150,340       100.5       284,509       43,425       62.7  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Note:

(1)

Includes share-based compensation of RMB774 thousand in 2019, RMB1,873 thousand (US$286 thousand) in 2020, RMB267 thousand in the three months ended March 31, 2020 and RMB819 thousand (US$125 thousand) in the three months ended March 31, 2021.

Our cost of revenues primarily consists of faculty costs, mainly representing the compensation paid to our teachers, tutors and customer services personnel, and service fees for delivering course units. In 2019, 2020 and the three months ended March 31, 2020 and 2021, faculty costs classified as cost of revenues were RMB244.0 million, RMB623.5 million (US$95.2 million), RMB109.7 million and

 

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RMB216.6 million (US$33.1 million), respectively, accounting for 124.9%, 53.1%, 73.3% and 47.7%, respectively, of our net revenues for the same periods.

Our cost of revenues also includes (i) course material costs, mainly consisting of the cost of the physical learning kits that we offer students as part of the course packages; and (ii) others, including rental, facility and utilities costs associated with the office spaces used by our faculty members and the live-stream studios where our teachers broadcast courses live to students, transportation and warehousing costs and the costs for the bandwidth and streaming services for our online courses.

Operating Expenses

The following table sets forth our operating expenses, in absolute amounts and as percentages of our total net revenues, for the periods indicated:

 

     For the Year Ended December 31,      For the Three Months Ended March 31,  
     2019      2020      2020      2021  
     RMB      %      RMB      US$      %      RMB      %      RMB      US$      %  
     (in thousands, except for percentages)  

Sales and marketing expenses(1)

     235,769        120.7        798,356        121,853        68.0        112,940        75.5        342,552        52,284        75.5  

Research and development expenses(2)

     239,941        122.8        327,349        49,963        27.9        69,083        46.2        143,533        21,907        31.6  

General and administrative expenses(3)

     128,203        65.6        177,960        27,162        15.2        34,378        23.0        72,442        11,057        16.0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

     603,913        309.1        1,303,665        198,978        111.1        216,401        144.7        558,527        85,248        123.1  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Note:

(1)

Includes share-based compensation of RMB1,150 thousand in 2019, RMB3,338 thousand (US$509 thousand) in 2020, RMB380 thousand in the three months ended March 31, 2020 and RMB1,632 thousand (US$249 thousand) in the three months ended March 31, 2021.

(2)

Includes share-based compensation of RMB3,318 thousand in 2019, RMB10,761 thousand (US$1,642 thousand) in 2020, RMB1,769 thousand in the three months ended March 31, 2020 and RMB5,164 thousand (US$788 thousand) in the three months ended March 31, 2021.

(3)

Includes share-based compensation of RMB51,514 thousand in 2019, RMB30,838 thousand (US$4,708 thousand) in 2020, RMB6,689 thousand in the three months ended March 31, 2020 and RMB11,844 thousand (US$1,808 thousand) in the three months ended March 31, 2021.

Sales and marketing expenses. Our sales and marketing expenses primarily consist of (i) marketing expenses, which primarily consist of spending on marketing and branding activities and the promotion and referral programs; (ii) personnel expenses, which primarily consist of the compensation paid to our sales and marketing personnel; and (iii) others, including rental, facility and utilities costs associated with our sales and marketing activities. We expect our sales and marketing expenses to increase in the foreseeable future, driven by our continued investment in our sales, branding and marketing efforts to increase our student base and strengthen our brand recognition.

 

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The following table sets forth a breakdown of our sales and marketing expenses, in absolute amounts and as percentages of total net revenues, for the periods indicated:

 

     For the Year Ended December 31,      For the Three Months Ended March 31,  
     2019      2020      2020      2021  
     RMB      %      RMB      US$      %      RMB      %      RMB      US$      %  
     (in thousands, except for percentages)  

Marketing expenses

     135,681        69.5        530,089        80,907        45.1        59,916        40.1        246,668        37,648        54.4  

Personnel expenses

     84,879        43.4        247,387        37,759        21.1        49,977        33.4        87,860        13,410        19.4  

Others

     15,209        7.8        20,880        3,187        1.8        3,047        2.0        8,024        1,226        1.7  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total sales and marketing expenses

     235,769        120.7        798,356        121,853        68.0        112,940        75.5        342,552        52,284        75.5  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Research and development expenses. Our research and development expenses primarily consist of (i) the salaries and other benefits paid to our pedagogical research, product development and technology personnel; and (ii) rental, facility and utilities costs associated with our pedagogical research, product development and technology activities. We expect our research and development expenses to increase in the foreseeable future, as we continue to invest substantially in pedagogical research, product development and technology efforts to optimize learning experiences for students and drive operational efficiency.

General and administrative expenses. Our general and administrative expenses primarily consist of (i) the salaries and other benefits paid to our management and administrative personnel; and (ii) rental, facility and utilities costs associated with our management and administrative personnel. We expect our general and administrative expenses to increase as we incur additional costs as a result of operating as a public company.

Other Income

Other income mainly consists of government concessions and subsidies. As part of the Chinese government’s efforts to ease the burden of businesses affected by the COVID-19 outbreak, the Ministry of Finance and the State Taxation Administration jointly announced on February 6, 2020, that paying output VAT related to specific consumer services could be waived, effective from January 2020 and valid until March 2021. In particular, income obtained by taxpayers from providing consumer services shall be exempted from value added tax. We recorded a tax relief of zero, RMB11.1 million (US$1.7 million), RMB6.9 million and zero, for the years ended December 31, 2019 and 2020 and the three months ended March 31, 2020 and 2021, respectively. On September 30, 2019, the Ministry of Finance and the State Taxation Administration announced that from October 1, 2019 to December 31, 2021, taxpayers engaging in providing consumer services are allowed to deduct an extra 15% of the deductible input VAT for the then current period from the payable tax. For the years ended December 31, 2019 and 2020 and the three months ended March 31, 2020 and 2021, we recorded a tax deduction of RMB0.8 million, RMB5.7 million (US$0.9 million), RMB0.3 million and RMB11.5 million (US$1.8 million), respectively, due to such additional value-added tax credit policy for income generated from providing consumer services.

Taxation

Cayman Islands

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

 

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Hong Kong

Our wholly owned subsidiary in Hong Kong, Spark Hong Kong, was subject to Hong Kong profits tax on their activities conducted in Hong Kong at a uniform tax rate of 16.5% before April 1, 2018. Starting from the financial year commencing on April 1, 2018, the two-tiered profits tax regime took effect, under which the tax rate is 8.25% for assessable profits on the first HK$2 million and 16.5% for any assessable profits in excess of HK$2 million. Payments of dividends by our subsidiaries to us are not subject to withholding tax in Hong Kong.

PRC

Our subsidiaries and our consolidated VIE and its subsidiaries in China are companies incorporated under PRC law and, as such, are subject to PRC enterprise income tax on their taxable income in accordance with the relevant PRC income tax laws. Pursuant to the PRC Enterprise Income Tax Law (the “EIT Law”), which became effective on January 1, 2008 and last amended on December 29, 2018, a uniform 25% enterprise income tax rate is generally applicable to both foreign-invested enterprises and domestic enterprises, except where a special preferential rate applies. For example, enterprises qualified as High and New Technology Enterprises, or HNTE, are entitled to a 15% enterprise income tax rate rather than the 25% uniform statutory tax rate. The enterprise income tax is calculated based on the entity’s global income as determined under PRC tax laws and accounting standards. Xingengyuan obtained HNTE status to enjoy a preferential tax rate of 15% in 2018, to the extent they have taxable income under the PRC EIT Law, as long as they re-apply for HNTE status every three years and meet the HNTE criteria during this three-year period. If an HNTE fails to meet the criteria for qualification as an HNTE in any year, (i) the enterprise cannot enjoy the 15% preferential tax rate in that year and must instead use the uniform 25% enterprise income tax rate and (ii) they will need to re-apply for HNTE status in 2021.

Our educational services are subject to VAT at the rate of 3% for small-scale-VAT-payer entities or at the rate of 6% for general-VAT-payer entities in accordance with PRC tax rules.

As a holding company with no material operations of our own, we conduct our operations primarily through our PRC subsidiaries and our consolidated VIE in China. We are permitted under PRC laws and regulations to provide funding to our PRC subsidiaries in China through capital contributions or loans, subject to the approval, filings or registration of government authorities and limits on the amount of capital contributions and loans. In addition, our subsidiaries in China may provide Renminbi funding to our consolidated VIE only through entrusted loans. See “Risk Factors—Risks Related to Doing Business in China—PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay us from making loans or additional capital contributions to our PRC subsidiaries and to make loans to Xingengyuan, which could materially and adversely affect our liquidity and our ability to fund and expand our business.” The ability of our subsidiaries in China to make dividends or other cash payments to us is subject to various restrictions under PRC laws and regulations. See “Risk Factors—Risks Related to Doing Business in China—We may rely on dividends and other distributions of equity paid by our PRC subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our PRC subsidiaries to make payments to us could have a material and adverse effect on our ability to conduct our business” and “Risk Factors—Risks Related to Doing Business in China—If we are classified as a PRC resident enterprise for PRC enterprise income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders and ADS holders.”

If our holding company in the Cayman Islands or any of our subsidiaries outside of China were deemed to be a “resident enterprise” under the PRC EIT Law, it would be subject to enterprise income tax on its worldwide income at a rate of 25%. See “Risk Factors—Risks Related to Doing Business in

 

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China—If we are classified as a PRC resident enterprise for PRC enterprise income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders and ADS holders.”

Critical Accounting Estimates

We prepare our consolidated financial statements in accordance with U.S. GAAP, which requires our management to make estimates that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the balance sheet dates, as well as the reported amounts of revenues and expenses during the reporting periods. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations would be affected. We base our estimates on our own historical experience and other assumptions that we believe are reasonable after taking account of our circumstances and expectations for the future based on available information. We evaluate these estimates on an ongoing basis.

The selection of critical accounting policies, and the determination of critical accounting estimates affecting the application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors that should be considered when reviewing our financial statements.

We consider an accounting estimate to be critical if: (1) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and (2) changes in the estimate that are reasonably likely to occur from period to period, or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations. There are other items within our financial statements that require estimation but are not deemed critical, as defined above. Changes in estimates used in these and other items could have a material impact on our financial statements.

For a detailed discussion of our significant accounting policies and related judgments, please refer to “Notes to Consolidated Financial Statements – Note 2 Summary of Significant Accounting Policies”. You should read the following description of critical accounting estimates in conjunction with our consolidated financial statements and other disclosures included in this prospectus.

Revenue Recognition

Standalone selling price of Spark Coins

Nature of estimate: We identify performance obligations associated with the online small-class courses and AI-enhanced courses that we sell to customers in order to allocate the transaction price across the separate obligations based on the estimated stand-alone selling price of each performance obligation. The performance obligations identified by us were the delivery of course sessions to students included in the package and the Spark Coins awarded to students upon the successful purchase of a package. Spark Coins can be redeemed for online course units, branded merchandise, or cash vouchers for third-party e-commerce platforms. The standalone selling price of Spark Coins is not directly observable, and so when estimating the standalone selling price of the Spark Coins we consider the standalone selling price of the services and goods that can be redeemed using the Spark Coins, and the likelihood that the Spark Coins will be redeemed.

Assumptions: The key assumptions underpinning the estimate are the respective likelihood that the Spark Coins will be redeemed to online course units, branded merchandise, or cash vouchers for third-party e-commerce platforms, as well as the level of anticipated forfeiture of Spark Coins. We use historical redemption and forfeiture data in order to form the basis for our assumptions, before assessing their reasonableness against any known recent events. Based on this data, we update our estimates on a regular basis.

 

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Should the standalone selling price of the services and goods that can be redeemed change significantly, and/or the redemption pattern of the Spark Coins change significantly, then the estimated standalone selling price of Spark Coins will also change. This would directly impact the pattern of future revenue recognition for online courses and redemption of Spark Coins.

The Group’s estimate of the standalone value of Spark Coins did not change significantly throughout the periods presented and there is no indication that this estimate will change significantly in the near future.

See Note 2 (p) of the Notes to the Consolidated Financial Statements for more information regarding revenue recognition.

Fair value of promotion services received in exchange for Spark Coins or free course units

Nature of estimate: In order to encourage parents to promote our course packages, customers can also earn Spark Coins by sharing posters that recommend our online courses on certain social media platforms (the “promotion program”) and can earn free online small-class course units by successfully referring new customers for online small-class courses (the “referral program”). Revenue from such exchange is measured based on the fair value of the promotion service provided by the customers.

Assumptions: Where applicable, we have estimated the fair value of the promotion service from the customer to be the amount that the customer could have received if they redeemed the Spark Coins for cash vouchers. This effective cash-out value is similar to the amount that we are willing to pay for the promotion service. If we had determined the fair value of the promotion service received from the customer to have a different basis, then our revenue and sales and marketing expenses could have been recorded at different values.

Our estimates with regards to the fair value of promotion services received from customers did not change throughout the periods presented and there is no indication that these estimates will change in the near future. Any change to the fair value associated with these promotion services would directly impact the value of the revenue and sales and marketing expenses recorded.

See Note 2 (p) of the Notes to the Consolidated Financial Statements for more information regarding revenue recognition.

Share-based Compensation

Fair value of options

Nature of estimate: For share options for the purchase of ordinary shares granted to employees classified as equity awards, the related share-based compensation expenses are recognized in the consolidated financial statements based on the fair value of the awards on the grant date, which is calculated using the binomial option pricing model.

Assumptions: The determination of the fair value is affected by the share price as well as assumptions regarding several complex and subjective variables, including the expected share price volatility, actual and projected employee share option exercise behavior, risk-free interest rates and expected dividends. The fair value of the ordinary shares is assessed using the income approach/discounted cash flow method, with a discount for lack of marketability, given that the shares underlying the awards were not publicly traded at the time of grant.

 

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We adopted an employee incentive compensation plan, or the 2019 Plan, in November 2019 and amended the plan in March 2021. For key terms of the 2019 Plan, see “Management—Equity Incentive Plan.” The fair value of the options granted under the 2019 Plan is estimated on the dates of grant using the binomial option pricing model with the following assumptions used.

 

     For the Year Ended December 31,     For the Three
Months Ended
March 31,
 
     2019     2020     2021  

Risk-free interest rate(1)

     1.9%~2.1     0.6%~0.9     1.68%~2.31

Expected volatility(2)