Many of the data-related legislations are relatively new and certain concepts thereunder remain subject to interpretation by the regulators. If any data that we possess belongs to data categories that are subject to heightened scrutiny, we may be required to adopt stricter measures for protection and management of such data. The Cybersecurity Review Measures and the Draft Regulations remain unclear on whether the relevant requirements will be applicable to companies that are already listed in the United States, such as us, if we were to pursue another listing outside mainland China. We cannot predict the impact of the Cybersecurity Review Measures and the Draft Regulations, if any, at this stage, and we will closely monitor and assess any development in the rule-making process. If the Cybersecurity Review Measures and the enacted version of the Draft Regulations mandate clearance of cybersecurity review and other specific actions to be taken by issuers like us, we face uncertainties as to whether these additional procedures can be completed by us timely, or at all, which may delay or disallow our future listings (should we decide to pursue them), subject us to government enforcement actions and investigations, fines, penalties, suspension of our non-compliant operations, and materially and adversely affect our business and results of operations. As of the date of this annual report, we have not been involved in any formal investigations on cybersecurity review made by the CAC on such basis. In addition to the cybersecurity review, the Draft Regulations require that data processors processing “important data” or listed overseas shall conduct an annual data security assessment by themselves or commission a data security service provider to do so, and submit the assessment report of the preceding year to the municipal cybersecurity department by the end of January each year. If a final version of the Draft Regulations is adopted, we may be subject to review when conducting data processing activities and annual data security assessment and may face challenges in meeting its requirements or making necessary changes to our internal policies and practices in data processing.
In general, compliance with the existing laws and regulations of mainland China, as well as additional laws and regulations that PRC regulatory bodies may enact in the future, related to data security and personal information protection, may be costly and result in additional expenses to us, and subject us to negative publicity, which could harm our reputation and business operations. It may place restrictions on the conduct of our business and the manner in which we interact with our customers. Any failure to comply with applicable regulations could also result in regulatory enforcement actions against us, and misuse of or failure to secure personal information could also result in violation of data privacy laws and regulations, proceedings against us by governmental authorities or other authorities or damage to our reputation and credibility and could have a negative impact on revenues and profits. Significant capital and other resources may be required to protect against information security breaches or to alleviate problems caused by such breaches or to comply with our privacy policies or privacy-related legal obligations. The resources required may increase over time as the methods used by hackers and others engaged in online criminal activities are increasingly sophisticated and constantly evolving. Any failure or perceived failure by us to prevent information security breaches or to comply with privacy policies or privacy-related legal obligations, or any compromise of security that results in the unauthorized release or transfer of personally identifiable information or other customer data, could cause our customers to lose trust in us and could expose us to legal claims. There are also uncertainties with respect to how such laws and regulations will be implemented and interpreted in practice.
Our business and financial results may be materially and adversely affected if we are unable to maintain our cooperative relationships with financing service providers for student loans.
A significantIn 2020, 2021 and 2022, a portion of our adult students enrolled in 2015 relied on loans provided or arranged by CreditEase Business Consulting (Beijing)a number of financing service providers to pay our tuition fees. Since 2018, we collaborated with well-known personal financing service providers such as Baidu Small Loan Co., Ltd., or CreditEase, Bank of China Consumer Finance Co., Ltd., or BOC CFC, RenRenDaiShanghai Shimiao Financial Information Service Co., Ltd. (formerly known as “Beijing Ronglian Shiji Information Technology Co., Ltd.”) Beijing Youfei Jinxin Digital Technology Co., Ltd., Qihao Commercial Factoring Co. Ltd., and ShiTuDai, as well as a number of other financing sources, to pay our tuition fees. We have entered into cooperative agreements with BOC CFC pursuant to which they provide loans to our students for the payment of our tuition fees. We have also entered into agreements with CreditEase and RenRenDai,Chongqing Haier Small Loan Co. Ltd., whereby they assisted our students in obtaining loans to pay for our tuition fees. ShiTuDai is a person-to-person lending service provided by an independent third party. In 2015, approximately 49.3%2020, 2021 and 2022, 28.1%, 26.3% and 16.4% of our adult students took outreceived loans provided or arranged by CreditEase, BOC CFC, RenRenDai or ShiTuDaifinancing service providers to pay for our tuition fees. Approximately 1.1% of our students took out loans provided or arranged by other financing sources to pay for our tuition fees in 2015.
Our cooperative agreement with BOC CFC will expire in March, 2017. We may not be able to renew our cooperative agreements with BOC CFC on commercially reasonable terms or at all. Moreover, CreditEase, BOC CFC, RenRenDai and ShiTuDaifinancing service partners have full discretion in deciding whether or not to extend or arrange for loans to a particular adult student. Furthermore, macroeconomic conditions in China may force the financing service providers to decrease or eliminate the amount of credit available for our students, making it difficult for our prospective students to afford our education. In addition, if the default rates on the loans provided or arranged by these and other financing service providers were to increase, they may raise the interest rates on the student loans, making such financing options less attractive to our adult students. Although person-to-person lending is generally protected as private loans between individuals under PRC law and has flourished in recent years in China, there are uncertainties as to the licensing requirements and the nature of business provided by those intermediaries, such as CreditEase, RenRenDai and ShiTuDai, in facilitating the person-to-person lending. If one or more new PRC laws and/or regulations are passed in the future prohibiting person-to-person lending facilitated by, or imposing significant licensing requirements on, intermediaries such as CreditEase, RenRenDai and ShiTuDai, we cannot assure you that CreditEase, RenRenDai or ShiTuDai will be able to obtain relevant licenses and continue facilitating person-to-person lending in the future. If CreditEase, RenRenDai or ShiTuDai ceases to facilitate person-to-person lending to our students in the future, if our cooperative relationships with the financing service providers are damaged or lost, or if the financing service providers significantly increase their interest rates, our business and financial results would be adversely affected.
28
If we fail to protect our intellectual property rights, we may lose our competitive advantage and our brandbrands and operations may suffer.
We consider our copyrights, trademarks, trade names and domain names invaluable to our ability to continue to develop and enhance our brand recognition. Unauthorized use of our copyrights, trademarks, trade names and domain names may damage our reputation and brand.brands. Our major brand names and logos are registered trademarks in mainland China. Our proprietary curricula and course materials, together with ourTarena Teaching System,, or TTS, are protected by copyrights. However, preventing copyright, trademark and trade name infringement or misuse could be difficult, costly and time-consuming, particularly in mainland China. The measures we take to protect our copyrights, trademarks and other intellectual property rights are currently based upon a combination of trademark and copyright laws in mainland China and may not be adequate to prevent unauthorized uses. Furthermore, application of laws governing intellectual property rights in mainland China is uncertain and evolving, and could involve substantial uncertainties to us. There hadhave been several incidents in the past where third parties used our “Tarena” (达内) brand without our authorization, and we had to resort to litigation to protect our intellectual property rights. These proceedings were all resolved in our favor and our brand and business were not materially harmed. However, if we are unable to adequately protect our trademarks, copyrights and other intellectual property rights in the future, we may lose our competitive advantage, our brand name may be harmed and our business may suffer materially. Furthermore, our management’s attention may be diverted by violations of our intellectual property rights, and we may be required to enter into costly litigation to protect our proprietary rights against any infringement or violation.
We may be subject to intellectual property rights claims or other claims, which could result in substantial costs and diversion of our financial and management resources away from our business.
We cannot assure you that our course materials, other educational contents or other intellectual properties developed or used by us do not or will not infringe upon patents, valid copyrights or other intellectual property rights held by third parties. We have, and may from time to time be subject to legal proceedings and claims from time to time relating to the intellectual property of others. In addition, some of our employees were previously employed at other companies, including our current and potential competitors. To the extent these employees are involved in content development at our company similar to content development in which they have been involved at their former employers, we may become subject to claims that such employees or we may have used or disclosed trade secrets or other proprietary information of the former employers of our employees. In addition, our competitors may file lawsuits against us. Although we are not aware of any pending or threatened claims, ifIf any such claim arises in the future, litigation or other dispute resolution proceedings may be necessary to retain our ability to offer our current and future course materials or other content, which could result in substantial costs and diversion of our financial and management resources. Furthermore, if we are found to have violated the intellectual property rights of others, we may be enjoined from using such intellectual property rights, incur additional costs to license or develop alternative intellectual property rights and be forced to pay fines and damages, any of which may materially and adversely affect our business.
We recruit a significant portion of our students directly from our network of cooperative universities and colleges. If we lose these relationships, or the benefits we derive from these relationships diminish, our growth and our business may be harmed.
We haveAs of December 31, 2022, we established various kinds of cooperative relationships with over 620633 universities and colleges in mainland China.We enroll a significant percentageportion of our students directly from these universities and colleges through jointly offered majors, on-campus learning sites and university recruiting promotional events. We recruited approximately 16.2% ofevents and other marketing approaches as agreed by our students in 2015 from these universities and colleges.university partners. If our relationships with any of these universities and colleges were to be damaged or lost, or the benefits we derive from these relationships were to be diminished, whether by our own actions, actions of one or more governmental entities or actions of our competitors, our growth and our business may be harmed.
29
Failure to control rental costs, obtain leases at desired locations at reasonable prices or protect our leasehold interests could materially and adversely affect our business.
AllA majority of our offices and learning centers are located on leased premises. At the end of each lease term we must negotiate an extension of the lease. If we are not able to negotiate an extension on terms acceptable to us, we will be forced to move to a different location, or the rent may increase significantly. This could disrupt our operations and adversely affect our profitability. All of our leases are subject to renewal at market prices, which could result in a substantial rent increase each renewal period. We compete with many other businesses for sites in certain highly desirable locations. As a result, we may not be able to obtain new leases at desirable locations or renew our existing leases on acceptable terms or at all, which could adversely affect our business. In addition,As of December 31, 2022, we have not been able to receivehad received from our lessorslessors’ copies of title certificates or proof of authorization to lease the properties to us for all leased properties of approximately 3,300 square meters, which consisted of approximately 2.2% of our total leased property as of December 31, 2015. Weproperties. However, we cannot assure you that we will be able to obtain copies of title certificates or proof of authorization to lease any properties that we may lease in the future or the title to these properties we currently lease or any properties that we may lease in the future will not be otherwise challenged. Furthermore, several of our leased properties are owned by universities or the military or built on allocated land in mainland China. Such properties may not be legally leased to us under PRC law.laws of mainland China. Our leasehold interest in these properties may be challenged by relevant PRC governmental authorities to be invalid, and we may be forced to move out of such premises.
In addition, we have not registered most of our lease agreements with relevant PRC governmental authorities as required by PRC law,laws of mainland China, and although failure to do so does not in itself invalidate the leases, we may not be able to defend these leases against bona fide third parties. As of the date of this annual report, we are not aware of any actions, claims or investigations being contemplated by governmental authorities against us or our lessors with respect to the defects in our leased real properties or any challenges by third parties to our use of these properties. However, if any of our leases are terminated as a result of challenges by third parties or governmental authorities for lack of title certificates or proof of authorization to lease, we may not be able to protect our leasehold interest and may be forced to relocate the affected learning centers and incur additional expenses relating to such relocation. If we fail to find suitable replacement sites in a timely manner or on terms acceptable to us, our business and results of operations could be materially and adversely affected.
Our accounts receivable havehas been relatively high. Inability to collect our accounts receivable on a timely basis, if at all, could materially and adversely affect our financial condition, liquidity and results of operations.
Understanding the difficulty for recent college graduates to afford the tuition fees of our courses, we offered qualified students the post-graduation tuition payment option beginning in 2006, which led to our relatively high accounts receivable. As of December 31, 2013, 20142020, 2021 and 2015,2022, our outstanding accounts receivable, net of allowance for doubtful accounts, were US$15.4RMB33.0 million, US$24.7RMB48.5 million and US$23.8RMB68.9 million (US$10.0 million), respectively.Although we conduct financial evaluations of our students applying to use our post-graduation tuition payment option, we do not require collateral or other security from our students. Adverse changes in the macroeconomic environmentalenvironment and the earnings capacity of our students couldmay negatively impact our ability to collect our accounts receivable. Furthermore, as time passes, it might be more difficult for us to collect historical accounts receivables.receivable. Our bad debt allowance increased significantly between 2013amounted RMB6.9 million, RMB5.8 million and 2015, whichRMB15.5 million (US$2.2 million) in 2020, 2021 and 2022, respectively. Our balance of bad debt allowance amounted RMB9.2 million, RMB15.0 million and RMB30.5 million (US$4.4 million) as of December 31, 2020, 2021 and 2022, respectively. There is no guarantee that our bad debt allowance expense will not increase was primarily associated with our post-graduation tuition payment option for qualified students enrolled between 2010 and 2014.in the following years. Our inability to collect our accounts receivable on a timely basis, if at all, could cause our bad debt allowance to continue to increase or remain relatively high in the future, and materially and adversely affect our financial condition, liquidity and results of operations.
Furthermore, we have extended loans with one-year terms to certain of our employees to support their personal needs. As of December 31, 2022, our outstanding other receivable for such loans was RMB12.1 million (US$1.8 million). Our allowance for credit loss of our employee loans amounted RMB22.3 million (US$3.2 million) in 2022. We have no receivables due from any of our directors and officers. If we cannot collect such outstanding accounts receivable in a timely manner, or at all, our financial condition, liquidity and result of operations will be adversely impacted, and any legal proceedings initiated to collect such receivables may adversely impact our relationship with such employees.
30
Capacity constraints of our learning centers could cause us to lose students to our competitors.
Our learning centers are limited in size and number of classrooms. We may not be able to admit all students who would like to enroll in our courses due to the capacity constraints of our learning centers. If we fail to expand our physical capacity as quickly as the demand for our classroom-based services grows, we could lose potential students to our competitors, which could adversely affect our results of operations and business prospects. As we further expand our STEAM education programs, we may face more intense capacity challenges. Furthermore, the investment in the expansion of learning centers can be costly, which may have adverse impact on our gross margin, if we can manage to make such investments at all.
We may not be able to recoup the capital expenditures or investments we make to expand and upgrade our teaching, administrative, research and other capabilities.
GeographicWe purchased two office buildings in Beijing for an aggregate price of RMB231.9 million in 2016. The office buildings are mainly for teaching purposes, and to a lesser extent for administrative functions. We, through our wholly owned subsidiary in mainland China, sold one of the two office buildings and received the full payment of the sales proceed amounting to RMB92.0 million (US$14.4 million) in 2021 and incurred a loss on disposal amounting to RMB22.3 million (US$3.5 million). In March 2023, we signed a housing contract of the other office building with a consideration of RMB93.0 million (US$13.5 million), received a deposit of RMB18.6 million (US$ 2.7 million) in March 2023, and recognized an impairment loss of RMB11.6 million (US$1.7 million). We may continue to use the building until November 30, 2023. We also purchased a building in Qingdao and another one in Haikou for an aggregate price of RMB49.6 million in 2016. The purpose of these two buildings is for teaching purposes as learning centers to accommodate the growing demand in the local market and to take advantage of favorable local policies. We intended to sell the Qingdao building and the board of directors began to discuss and review the proposed sales of the Qingdao building in 2022. As the criteria for classifying such two buildings in Beijing and Qingdao as assets held for sale were met, such two buildings were confirmed and recognized as assets held for sale as of December 31, 2022. In February 2023, we signed a letter of intent from a third party to sell the Qingdao building with a total consideration of RMB26.1 million (US$3.8 million), and we received a deposit of RMB0.2 million (US$0.03 million) in March 2023.
We may continue to invest in our teaching, administrative, research and other capabilities as our business further develops. Although we will evaluate the feasibility of each property purchase for the good of our business operations, we are likely to incur costs associated with these investments earlier than some of the anticipated benefits and the return on these investments may be lower, or may develop more slowly, than we expect. We may not be able to recover our capital expenditures or investments, in part or in full, or the recovery of these capital expenditures or investments may take longer than expected. As a result, the carrying value of the related assets may be subject to an impairment charge, which could adversely affect our profitability.
Our strategy of investments and acquiring complementary businesses and assets may fail.
As part of our business strategy, we have pursued, and intend to continue to pursue, selective strategic investments and acquisitions of businesses and assets that complement our existing business. Investments and acquisitions involve uncertainties and risks, including:
| ● | potential ongoing financial obligations and unforeseen or hidden liabilities, including liability for infringement of third-party copyrights or other intellectual property; |
| ● | failure to achieve the intended objectives, benefits or revenue-enhancing opportunities; |
| ● | costs and difficulties of integrating acquired businesses and managing a larger business; |
| ● | potentially significant goodwill impairment charges; |
| ● | high acquisition and financing costs; |
| ● | possible loss of key employees of a target business; |
| ● | potential claims or litigation regarding our board’s exercise of its duty of care and other duties required under applicable law in connection with any of our significant acquisitions or investments approved by the board; |
| ● | diversion of resources and management attention; and |
31
| ● | in the case of acquisitions of businesses or assets outside mainland China, the need to integrate operations across different business cultures and languages and to address the particular economic, currency, political, and regulatory risks associated with specific countries. |
Any failure to address these risks successfully may have a material and adverse effect on our financial condition and results of operations. Investments and acquisitions may require a significant amount of capital investment, which would decrease the amount of cash available for working capital or capital expenditures. In addition, if we use our equity securities to pay for investments and acquisitions, we may dilute the value of our ADSs and the underlying ordinary shares. If we borrow funds to finance investments and acquisitions, such debt instruments may contain restrictive covenants that could, among other things, restrict us from distributing dividends. Moreover, acquisitions may also generate significant amortization expenses related to intangible assets. We may also incur impairment charges to earnings for investments and acquired businesses and assets which are determined to be impaired, and recognize the proportional share of the net losses of the investees to the extent of the amount of the investments for the equity method investments.
The geographic concentration of our learning centers may unfavorably impact our operations.
We derive a substantial portion of our net revenues from our learning centersentities in HangzhouBeijing and Beijing.Hangzhou. Revenue derived from the learning centersentities in HangzhouBeijing accounted for 5.3%17.2%, 25.5%16.2% and 33.0%14.5% of our net revenues in 2013, 20142020, 2021 and 2015,2022, respectively. Revenue derived from the learning centersentities in BeijingHangzhou accounted for 36.1%13.9%, 15.5%11.1% and 12.3%10.2% of our net revenues in 2013, 20142020, 2021 and 2015,2022, respectively.As a result of this geographic concentration, our results of operations are significantly affected by economic conditions in HangzhouBeijing and Beijing.Hangzhou. Furthermore, any natural disaster or health epidemics affecting the HangzhouBeijing and BeijingHangzhou regions could significantly impact our operations. WeAlthough we have been and will be exploring opportunities of setting up additional learning centers in second-tier or third-tier cities, we expect that we will continue to derive a substantial portion of our net revenues from HangzhouBeijing and BeijingHangzhou in the near future. Deterioration in economic conditions and the professional services industries in these markets could decrease the demand for our courses, which in turn could negatively impact our operations and business prospects.
Our historical financial and operating results growth rates and profitability may not be indicative of future performance.
Although we commenced operations in 2002, our significant business growth and expansion began in 2009.2009, and certain of our courses, especially our STEAM education courses, were only developed in recent years. Our business and our prospects must be evaluated in light of the risks and uncertainties encountered by companies at a comparable stage of development. In addition, the professional education services market in China is still at an early stage of development, which makes it difficult to evaluate our business and future prospects. Furthermore, our results of operations may vary from period to period in response to a variety of other factors, including general economic conditions and regulations, government actions pertaining to the professional education services sector in China, changes in spending on professional education services, our ability to control cost of revenues and operating expenses and non-recurring charges incurred in connection with acquisitions or other extraordinary transactions or under unexpected circumstances. Due to the above factors, some of which are beyond our control, our historical financial and operating results growth rates and profitability may not be indicative of our future performance, and you should not rely on our past results or our historic growth rates as indicators of our future performance.
Our ability to broadcast our lectures live and to offer online learning modules on TTS, TMOOC.cn and 61it.cn depends upon the performance and reliability of our systems and the Internetinternet infrastructure and telecommunications networks in China.
We deliver live broadcasts of our lectures via a dedicated network provided byof China Telecom and China Unicom on third-party live broadcasting platforms to terminals located in selected learning centers with high student enrollment and via public Internetinternet infrastructure to other learning centers.Any unscheduled service interruption of the Internetinternet infrastructure and telecommunications networks in China could cause us to be unable to deliver these live broadcasts, forcing us to resort to using pre-recorded lectures in the event of such service interruptions. Our inability to broadcast live lectures during service interruptions may damage the quality of our education and student experience, which may hurt our reputation and negatively impact our financial condition and results of operations. Furthermore, our gross profit and net income could be adversely affected if the prices that we pay for telecommunications and Internetinternet services rise significantly.
32
Our ability to offer online learning modules also depends on the performance and reliability of the Internetinternet infrastructure in China. Disruptions to the Internetinternet infrastructure of China may deny our students access to the learning functionalities on our TTS, orTMOOC.cn or 61it.cn, which may hinder students from effectively learning our education contents. Furthermore, increases in the traffic on TTS, orTMOOC.cn or 61it.cncould also strain the capacity of our existing computer systems, which could lead to slower response times or system failures. This would cause a disruption or suspension in our course offerings, which would hurt our brandbrands and reputation and negatively affect our revenue growth. We may need to incur additional costs to improve our systems in order to accommodate increased demand if we anticipate that our systems cannot handle higher traffic volume in the future.
Our new CRM system may not function properly, which may materially and adversely affect our operations
We recently switched to a new customer relationship management, or CRM, system. The new CRM system is developed in-house and is intended to improve functionality and information flow. As with any major new software system, there are inherent risks in the design, construction, implementation and operation of our new CRM system. These risks include the potential failures to properly design the system, to efficiently construct and implement the system and to effectively operate the system. While we believe that our new CRM system will provide the anticipated IT and customer service enhancements we expect, no assurances can be given in this regard. The failure to properly and efficiently operate the new CRM system could disrupt our operations and adversely affect our financial results.
Accidents or injuries suffered by our students or other people on our premises may adversely affect our reputation, subject us to liability and cause us to incur substantial costs.
We do not carry liability insurance for most of our students at our learning centers.In the event of accidents, injuries or other harm to students or other people on our premises, including those caused by or otherwise arising from the actions of our employees on our premises, our facilities may be perceived to be unsafe, which may discourage prospective students from attending our classes. We could also face claims alleging that we were negligent or provided inadequate supervision to our employees and therefore should be held jointly liable for harm caused by them or are otherwise liable for injuries suffered by our students or other people on our premises. A liability claim, even of unsuccessful, against us or any of our employees could adversely affect our reputation, enrollment and revenues, causing us to incur substantial expenses and divert the time and attention of our management.
If we fail to maintain an effective system of internal controls, we may be unable to accurately report our results of operations or prevent fraud or fail to meet our reporting obligations, and investor confidence and the market price of our ADSs may be materially and adversely affected.
We are subject to reporting obligations under the U.S. securities laws. Among other things, the Securities and Exchange Commission, or the SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, adopted rules requiring every public company, including us, to include a management report on the company’s internal control over financial reporting in its annual report, which contains management’s assessment of the effectiveness of the company’s internal control over financial reporting. In addition, once we cease to be an “emerging growth company,” as such term is defined in the Jumpstart Our Business Startups Act of 2012 (as amended by the Fixing America’s Surface Transportation Act of 2015), or the JOBS Act, our independent registered public accounting firm may be required to report on the effectiveness of our internal control over financial reporting.
In connection with the audit of our consolidated financial statements as of December 31, 2015, we and our independent registered public accounting firm identified a material weakness in our internal control over financial reporting as defined in standards established by the Public Company Accounting Oversight Board of the United States, or PCAOB as of December 31, 2015. The material weakness identified related to insufficient review over system extracted data for tuition fees calculation during transitional period of system upgrade. Following the identification of the material weakness, we have reinforced the oversight and review procedure over the data extraction. However, the implementation of these measures may not fully address the material weakness in our internal control over financial reporting, and we cannot conclude that they have been fully remedied. Our failure to correct the material weakness or our failure to discover and address any other material weakness or deficiencies 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. As a result, our business, financial condition, results of operations and prospects, as well as the trading price of our ADSs, may be materially and adversely affected. Moreover, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we list, regulatory investigations and civil or criminal sanctions. We may also be required to restate our financial statements from prior periods.
Furthermore, it is possible that, had our independent registered public accounting firm conducted an audit of our internal control over financial reporting, such firm might have identified additional material weaknesses and deficiencies. 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, as 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. If we fail to maintain an effective internal control environment, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information. This could in turn limit our access to capital markets, harm our results of operations and lead to a decline in the trading price of our ADSs. Additionally, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we list, regulatory investigations and civil or criminal sanctions.
We have limited insurance coverage for our operations in China.
Insurance companies in China currently do not offer as extensive an array of insurance products as insurance companies do in more developed economies. We have determined that the risks of disruption or liability from our business, the loss or damage to our fixed assets, including our equipment and office furniture, the cost of insuring for these risks, and the difficulties associated with acquiring such insurance on commercially reasonable terms render it commercially impractical for us to have such insurance. As a result, weWe do not have any business interruption, litigation or property insurance coverage for our operations in mainland China. Any uninsured occurrence of personal injury, loss or damage to fixed assets, or litigation or business disruption may result in the incurrence of substantial costs and the diversion of resources, which could have an adverse effect on our operating results.
Our business is subject to seasonal fluctuations, which may cause our operating results to fluctuate from quarter to quarter. This may result in volatility in and adversely affect the price of our ADSs.
We have experienced, and expect to continue to experience, seasonal fluctuations in our net revenues and results of operations, primarily due to seasonal changes in student enrollment. Historically, our courses tend to have the largest student enrollment, cash collection and net revenues in the third and fourth quarters.quarters, although the seasonal fluctuation was to some extent eased in the fourth quarter of 2022 due to the impact of COVID-19 in China. We generally generate less tuition fees in the first quarter of each year due to the Chinese New Year holiday. Our expenses, however, vary significantly and do not necessarily correspond to changes in our student enrollment and net revenues. We make investments in marketing and promotion, instructor recruitment and training and course development throughout the year. We expect quarterly fluctuations in our net revenues and results of operations to continue. These fluctuations could result in volatility and adversely affect the price of our ADSs. As our net revenues grow, these seasonal fluctuations may become more pronounced.
Higher labor costs and inflation in China may adversely affect our business and our profitability.
Labor costs in China have risen in recent years. We employed 5,0667,955 employees in mainland China as of December 31, 2015.2022. The increases in labor cost may erode our profitability and materially harm our business, financial condition and results of operations. In addition, the PRC government havehas promulgated some new laws and regulations to enhance labor protection, in recent years, such as the Labor Contract Law and the Social Insurance Law, which are also expected to cause our labor costs to increase. As the interpretation and implementation of these new laws and regulations are still evolving, our employment practicepractices may not be at all times be deemed in compliance with the new laws and regulations. If we are subject to severe penalties or incur significant liabilities in connection with labor disputes or investigation, our business and profitability may be adversely affected.
Although we have not in the past been materially affected by inflation since our inception, we can provide no assurance that we will not be affected in the future by higher rates of inflation in China.
33
We have granted share-based awards and may grant more share-based awards in the future, which may materially reduce our net income.
We adopted a share plan in 2008, or the 2008 Plan, that permits granting of options to purchase our ordinary shares, restricted shares (or share appreciation rights or other similar awards) and rights to purchase restricted shares. Under the 2008 Plan, the maximum aggregate number of ordinary shares that may be issued pursuant to all awards under our share plan is 8,184,990 shares. In February 2014, we adopted a 2014 share incentive plan, or the 2014 Plan. Pursuant to the 2014 Plan, we may issue options, restricted shares and restricted share units to our qualified employees, directors and consultants on a regular basis. The maximum aggregate number of shares which may be issued pursuant to all awards under the 2014 Plan, or the Award Pool, is 1,833,696, provided that the shares reserved in the Award Pool shall be increased on the first day of each calendar year, commencing withon January 1, 2015, if the unissued shares reserved in the Award Pool on such day account for less than 2% of the total number of shares issued and outstanding on a fully-dilutedfully diluted basis on December 31 of the immediately preceding calendar year, as a result of which increase the shares unissued and reserved in the Award Pool immediately after each such increase shall equal 2% of the total number of shares issued and outstanding on a fully-dilutedfully diluted basis on December 31 of the immediately preceding calendar year. As a result of grants and potential future grants under the 2008 Plan and the 2014 Plan, we have incurred and will continue to incur share-based compensation expenses. As of December 31, 2015,2022, the unrecognized compensation cost related to unvested options and non-vested shares amounted to US$9.5RMB6.7 million (US$1.0 million) and US$40 thousand,RMB4.4 million (US$0.6 million), respectively, which will be recognized over a weighted average period of approximately 1.894.38 years and 0.25 year.0.71 year, respectively. Expenses associated with share-based compensation awards granted under our share plan may materially reduce our future net income. However, if we limit the size of grants under our share plan to minimize share-based compensation expenses, we may not be able to attract or retain key personnel.
Any natural catastrophes, severe weather conditions, health epidemics and other extraordinary events could severely disrupt our business operations.
The occurrence of natural catastrophes such as earthquakes, floods, typhoons, tsunamis or any acts of terrorism may result in significant property damages as well as loss of revenues due to interruptions in our business operations. HealthIn addition to COVID-19, health epidemics such as outbreaks, ofZika, Ebola, avian influenza, severe acute respiratory syndrome (SARS) or the influenza A (H1N1), and severe weather conditions such as snow storm and hazardous air pollution, as well as the government measures adopted in response to these events, could require the temporary closure of our offices and learning centers.
centers and quarantines of our employees.
Furthermore, our ability to broadcast live lectures and provide our education services through TTS, orTMOOC.cn or 61it.cndepends on the continuing operation of our technology system, which is vulnerable to damage or interruption from natural catastrophes and other extraordinary events. Our disaster recovery planning cannot account for every conceivable possibility. Any damage to or failure of our technology system could result in interruptions in our services, and our brandbrands could be damaged if students believe our systems are unreliable. Such disruptions could severely interfere with our business operations and adversely affect our results of operations.
34
Risks RelatingRelated to Our Corporate Structure
If the PRC government finds that the agreements that establish the structure for holding our ICP license do not comply with applicable PRC laws and regulations of mainland China, or if these laws and regulations or the interpretation of existing laws and regulations change in the future, we could be subject to severe penalties.
penalties or be forced to relinquish our interests in those operations.
Prior to 2012, we conducted a substantial portion of our operations through ourthe consolidated VIEs and their subsidiaries and schools. On January 30, 2012, thePRC Catalogue for the Guidance of Foreign Investment Industries (amended) became effective, which listed professional education service as an industry for which foreign investments are “encouraged” by the government. On April 10, 2015, the newPRC Catalogue for the Guidance of Foreign Investment Industries (amended) became effective, which listed non-accredited professional education service as an industry for which foreign investments are “encouraged” by the government. On July 28, 2017, the new PRC Catalogue for the Guidance of Foreign Investment Industries (amended) became effective, which listed non-accredited professional education service as an industry for which foreign investments are “encouraged” by the government. The Catalog of Industries for Encouraged Foreign Investment (2020 Edition), which became effective on January 27, 2021, and the Catalog of Encouraged Industries for Foreign Investment (2022 Edition), which took effect on January 1, 2023, both listed non-accredited professional education service as an industry for which foreign investments are “encouraged” by the government. In light of such change of law, starting from the second half of 2012, we began to transfer the operations, including related assets and liabilities, of ourthe consolidated VIEs to Tarena Tech, and its subsidiaries and schools. All of our learning center operations of VIEs had been transferred to Tarena Tech and its subsidiaries and schools. We areschools before 2018, while one of our learning centers was transferred back to Beijing Tarena for business operation purpose in the process2018. In 2019, three of winding down Shanghaiour learning centers, which provide online education services, were transferred back to Beijing Tarena for business operation purpose, and one school was newly set up through Beijing Tarena. In 2020 and 2021, three and two schools were newly set up through Beijing Tarena, respectively. In February 2023, one school was transferred to a subsidiary of Beijing Tarena.
Pursuant to the Provisions on Administration of Foreign Invested Telecommunications Enterprises promulgated by the State Council on December 11, 2001, andas amended on September 10, 2008, February 6, 2016 and March 29, 2022, the ultimate foreign equity ownership in a value-added telecommunications services provider may not exceed 50%.Moreover, for a The latest amended version cancelled the previous requirements on the primary foreign investor to acquire any equity interest in a value-added telecommunication business in China, it must satisfy a number of stringentinvestor’s performance and operational experience and requirements including demonstrating good track records and experience in operating value-added telecommunication business overseas. Foreign investors that meet these requirements must obtainon approvals from the MIIT, and the Ministry of Commerce, or the MOFCOM, or their authorized local counterparts, which retain considerable discretioncounterparts. However, this modification is relatively new, uncertainties still exist in granting approvals. Pursuantrelation to publicly available information, the PRC government has issued telecommunications business operating licenses to only a limited number of foreign invested companies, all of which are Sino-foreign joint ventures engaging in the value-added telecommunication business.its interpretation and implementation. Although the Guidance CatalogSpecial Administrative Measures for Access of Industries for Foreign Investment amended(Negative List) (2021 Edition), or the Negative List, jointly issued by the NDRC and the MOFCOM on December 27, 2021, and effective from January 1, 2022, and Circular of the Ministry of Industry and Information Technology on Liberalizing the Restrictions on Foreign Shareholding Percentages in 2015Online Data Processing and Transaction Processing Business (For-profit E-commerce Business), or the Circular 196, promulgated by the MIIT in June 2015, allowsallow a foreign investor to own up to 100% of the total equity interest in an E-Commercee-commerce business, domestic multi-party communication, storage and forwarding classes and call centers, we have not engaged in any E-Commercesuch business. Due to the foreign ownership restriction on Internetinternet content and other value-added telecommunication services, we operate ourTMOOC.cn website through our VIE, Beijing Tarena. Beijing Tarena, isand such website has been included in the process of applying to add ourTMOOC.cn websitepermitted operation scope under the ICP license held by Beijing Tarena. We operate our 61it.cn website through Beijing Tongcheng, and such website has been included in the permitted operation scope under the ICP license held by Beijing Tongcheng. Beijing Tarena is 70% owned by Mr. Shaoyun Han, our founder chairman and chief executive officer,chairman, and 30% owned by Mr. Jianguang Li, our independent director. Beijing Tongcheng is 70% owned by Mr. Shaoyun Han, our founder and chairman, and 30% owned by Mr. Shenghuan Feng, our employee. Mr. Han, Mr. Li and Mr. LiFeng are both PRC citizens.all citizens of mainland China. We entered into a series of contractual arrangements with Beijing Tarena, Beijing Tongcheng and itstheir shareholders, which enable us to:
| exercise effective financial control over Beijing |
| receive substantially all of the economic benefits and bear the obligation to absorb substantially all of the losses of Beijing |
| have an exclusive option to purchase all or part of the equity interests in Beijing Tarena and Beijing Tongcheng when and to the extent permitted by |
Because of these contractual arrangements, we are the primary beneficiary of Beijing Tarena and Beijing Tongcheng and consolidate itstheir financial results in our consolidated financial statements in accordance with U.S. GAAP. For a detailed discussion of these contractual arrangements, see “Item 4. Information on the Company—C. Organizational Structure.” Investors in our ADSs thus are not purchasing equity interest in the variable interest entities in mainland China but instead are purchasing equity interest in a Cayman Islands holding company with no equity ownership in the variable interest entities.
35
Han Kun Law Offices, our PRC legal counsel, is of the opinion that (i) the ownership structure of Beijing Tarena and Tarena Tech and the ownership structure of Beijing Tongcheng and Tongcheng Shidai will not result in any violation of PRC laws or regulations of mainland China currently in effect; and (ii) the contractual arrangements among Tarena Tech, Beijing Tarena and its shareholders and the contractual arrangements among Tongcheng Shidai, Beijing Tongcheng and its shareholders governed by PRC lawlaws of mainland China are valid, binding and enforceable, and will not result in any violation of PRC laws or regulations of mainland China currently in effect.
There are, however, substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations of mainland China concerning foreign investment in the PRC,mainland China, and their application to and effect on the legality, binding effect and enforceability of the contractual arrangements. In particular, we cannot rule out the possibility that PRC regulatory authorities, courts or arbitral tribunals may in the future adopt a different or contrary interpretation or take a view that is inconsistent with the opinion of our PRC legal counsel. It is uncertain whether any new PRC laws or regulations of mainland China relating to VIEsVIE will be adopted or if adopted, what they would provide. In or around September 2011, various media sources reported thatFor example, on February 17, 2023, the ChinaCSRC issued the Trial Administrative Measures of Overseas Securities Regulatory Commission,Offering and Listing by Domestic Companies, or the Overseas Listing Regulations, and five supporting guidelines, which was aimed to regulate both direct and indirect overseas offering and listing of mainland China domestic companies’ securities by adopting a filing-based regulatory regime. Companies in mainland China that seek to offer and list securities in overseas markets, in direct or indirect means, are required to fulfill the filing procedures with the CSRC had prepared a report proposing regulatingand submit relevant information. At the usepress conference in relation to the promulgation of the Overseas Listing Regulations on February 17, 2023, the CSRC officials clarified that, as for companies seeking overseas offering and listing with VIE structures and applying to file with the CSRC, the CSRC will solicit opinions from relevant PRC regulatory authorities and proceed with the filing of the overseas listing of such as ours,companies if such companies duly meet the compliance requirements. If we fail to complete the filing with the CSRC in industriesa timely manner, or at all, for our further capital raising activities, which are subject to foreign investment restrictionsfiling requirements under the Overseas Listing Regulations, due to our VIE structure, we may be required to unwind the VIEs or adjust our business operations to meet the filing requirements and our ability to raise or utilize funds could be materially and adversely affected. However, as the Overseas Listing Regulations was recently promulgated, it remains uncertain as to its interpretation, implementation and enforcement, in particular, for companies with VIE structures, and there also remain uncertainties how they will affect our operations in mainland China and overseas listings by China-based companies. However, it is unclear whetherour future capital-raising activities. On March 15, 2019, the CSRC officially issued or submitted such a report to a higher level government authority or what such report provides, or whether any new PRC laws or regulations relating toNational People’s Congress approved the VIE structures will be adopted or if adopted, what they would provide. In January 2015, the MOFCOM published a discussion draft of the proposedForeign Investment Law for public review and comments. Among other things,, which came into effect on January 1, 2020. Under the draft Foreign Investment Law expands, “foreign investment” refers to the investment activities directly or indirectly conducted by foreign individuals, enterprises or other entities in mainland China. Although the PRC Foreign Investment Law does not explicitly classify contractual arrangements as a form of foreign investment, there is no assurance that foreign investment via contractual arrangement would not be interpreted as a type of indirect foreign investment activities under the definition of foreign investment and introduces“foreign investment” in the principle of “actual control” in determining whether a company is considered a foreign-invested enterprise, or an FIE. Under the draft Foreign Investment Law, variable interest entities would also be deemed as FIEs, if they are ultimately “controlled” by foreign investors, and be subject to restrictions on foreign investments. However, the draft law has not taken a position on what actions will be taken with respect to existing companies with the “variable interest entity” structure, whether or not these companies are controlled by Chinese parties. It is uncertain when the draft would be signed into law and whether the final version would have any substantial changes from the draft.future. See “Item 4. Information on the Company—B. Business Overview—Government Regulations—Regulations on Value–Added Telecommunications Services—The Discussion Draft PRC Foreign Investment Law” and “—“Item.3. Key Information—D. Risk Factors—Risks RelatingRelated to Doing Business in China—Substantial uncertaintiesUncertainties exist with respect to the enactment timetable, interpretation and implementation of draftthe newly enacted PRC Foreign Investment Law and how it may impact the viability of our current corporate structure, corporate governance and business operations.”
Our holding company in the Cayman Islands, the variable interest entities, and investments in our Company face uncertainty about potential future actions by the PRC government that could affect the enforceability of the contractual arrangements with the variable interest entities and, consequently, the business, financial condition, and results of operations of the variable interest entities and our Company as a group. In addition, our ADSs may decline in value or become worthless if we are unable to assert our contractual control rights over the assets of the variable interest entities, which contributed 6.4% of our revenues in 2022. If we, Beijing Tarena or Beijing TarenaTongcheng is found to be in violation of any existing or future PRC laws or regulations of mainland China, or such arrangement is determined as illegal and invalid by the PRC court, arbitral tribunal or regulatory authorities, or if we fail to obtain, maintain or renew 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, including:
| revoking the business and operating licenses of our |
| discontinuing or restricting the conduct of any transactions between our |
| imposing fines, confiscating the income from Beijing Tarena or Beijing Tongcheng, or imposing other requirements with which we, Beijing Tarena or Beijing |
| requiring us to restructure our ownership structure or operations, including terminating the contractual arrangements with Beijing Tarena or Beijing Tongcheng and deregistering the equity pledges of Beijing |
36
We launched ourTMOOC.cn online learning platform in March 2015 and 61it.cn online learning platform in July 2018 to cover a broader customer base.TMOOC.cn features sample lecture videos and class materials covering our course subjects. Currently, although revenues generated fromWe offer our class students the opportunity to complete a portion of lessons online using TMOOC.cn, especially during the temporary closure of our learning centers due to the COVID-19 pandemic. We launched 61it.cn to deliver online live instruction of our IT-focused supplementary STEAM education courses to students aged between three and eighteen. 61it.cn features an OMO-based interactive classroom and leveled class materials covering multiple programming languages such as Scratch, Python, Javascript, HTML, CSS and C++. TMOOC.cn were inconsequential, it isand 61it.cn are also important for our marketing efforts. Therefore, the imposition of any of these penalties could result in a material and adverse effect on our ability to provide online education services and conduct our marketing and promotional activities throughTMOOC.cn. and 61it.cn Beijing Tarena is in the process of applying to addand Beijing Tongcheng have added ourTMOOC.cn websiteand 61it.cn websites under ourtheir ICP license. However, we cannot guarantee that Beijing Tarena will be successful in this effort. If we fail to add ourTMOOC.cn website under our ICP license, our continued operation ofTMOOC.cn may subject us to penalties, including confiscation of illegal income and fines, and we may be ordered to shut down ourTMOOC.cnwebsite.
licenses.
If the relevant PRC authorities determine that we can no longer own and operate certain of our learning centers through our PRC subsidiaries in mainland China, we may need to restructure the ownership and operation of these learning centers (including possibly transferring these learning centers to ourthe consolidated VIEs), our business may be disrupted and we may be exposed to increased risks associated with the contractual arrangements relating to ourthe consolidated VIEs.
Prior to 2012, we operated a substantial portion of our learning centers through ourthe consolidated VIEs and their subsidiaries and schools. After thePRC Catalogue for the Guidance of Foreign Investment Industries (amended) became effective on January 30, 2012, amended in 2015 and as amended2017 and replaced by the New Catalog of Industries for Encouraged Foreign Investment (2022 Edition) on April 10, 2015, non-accreditedJanuary 1, 2023, foreign investment in non-accredited professional education services is now “encouraged” in mainland China and there is no limitation with respect to maximum percentage of foreign ownership in a company conducting business in this area.
In light of such change of law, starting from the second half of 2012, we began to transfer the operations, including related assets and liabilities, of ourthe consolidated VIEs to our wholly-ownedwholly owned subsidiary, Tarena Tech, and its subsidiaries. All of our learning center operations of VIEs had been transferred to Tarena Tech and its subsidiaries and schools.schools before 2018, while one of our learning centers was transferred back to Beijing Tarena for business operation purpose in 2018. In 2019, three of our learning centers which provide online education services were transferred back to Beijing Tarena for business operation purpose and one school was newly set up through Beijing Tarena. In 2020 and 2021, three and two schools were newly set up through Beijing Tarena, respectively. In February 2023, one school was transferred to a subsidiary of Beijing Tarena. As of December 31, 2015,2022, we operated 3658 of our learning centers through private schools owned by subsidiaries of Tarena Tech.us. These 3658 learning centers in the aggregate accounted for 29.7%12.9% of our totalSTEAM education student enrollments in 2015.2022 and accounted for 34.2% of our professional education student enrollments, respectively.
37
However, there are still uncertainties under current PRC laws of mainland China as to whether a wholly foreign ownedforeign-owned enterprise (such as Tarena Tech) is allowed to indirectly invest in and own private schools through its PRC subsidiaries.subsidiaries in mainland China. On the one hand, thePRC CatalogueCatalog of Industries for the Guidance ofEncouraged Foreign Investment Industries (Amended)(2022 Edition) encourages and permitpermits 100% foreign ownership of non-accredited professional training business in mainland China and theLaw for Promoting Private Education Law does not expressly prohibit a subsidiary of a foreign-invested enterprise from investing in private schools. The Amendment to the Private Education Law Implementation Rules provides that foreign-invested enterprises established in mainland China and social organizations controlled by any foreign entity are prohibited from establishing or participating in establishing private schools to provide compulsory education; and the establishment of any other type of private school is subject to the provisions of the State on foreign investment. Moreover, the Alleviating Burden Opinions specifies that foreign capital is prohibited from controlling or participating in any academic after-school tutoring institutions through mergers and acquisitions, entrusted operation, joining franchise or variable interest entities, but has not expressly imposed restriction on non-academic after-school tutoring institutions. On the other hand, according to theLaw for Promoting Private Education Law, Chinese-foreign cooperation in operating schools is specifically governed by theRegulations on Operating Chinese-foreign Schools and its implementing rules, which requires specific approvals from those governmental authorities in charge of either human resources and social security or education and requires any foreign party to such Chinese-foreign cooperation in operating schools to be an educational institution with relevant experience in providing educational services outside ofmainland China. In addition, theRegulations on Operating Chinese-foreign Schools prohibits foreign institutions or individuals from independently establishing schools which provide educational services mainly for Chinese citizens in mainland China. It remains uncertain as to how and to what extent the Alleviating Burden Opinions may affect the regulation and administration on non-academic after-school tutoring institutions. In addition, there are substantial uncertainties regarding the interpretation and application of current and future laws and regulations of mainland China. In practice, different local authorities have different views and administrative policies on whether foreign institutions or individuals are permitted to use their direct or indirect wholly-owned subsidiarywholly owned subsidiaries incorporated in mainland China to establish a school under theLaw for Promoting Private Education Law without violating theRegulations on Operating Chinese-foreign Schools. 22As of March 31, 2023, 51 private schools sponsored by our wholly-ownedwholly owned subsidiaries in mainland China have obtained private school operating permits, and based on the results of oralverbal inquiries with the relevant governmental authorities of human resources and social security or education, we believe that the relevant government authorities have not challenged and are unlikely to challenge the ownership structure of our schools. However, if the relevant PRC government authorities determine in the future that we can no longer own and operate our schools and their related learning centers through our PRC subsidiaries in mainland China, which are considered ineligible to act as sponsors of private schools, we may need to transfer these schools and the related learning centers to ourthe consolidated VIEs, which may severely disrupt our business and expose us to increased risks associated with the contractual arrangements relating to ourthe consolidated VIEs. See “—“Item.3. Key Information—D. Risk Factors—Risks RelatingRelated to Our Corporate Structure.” If we fail to restructure the ownership and operation of these schools or otherwise accommodate requests from the relevant PRC human resources and social security or education regulatory authorities in a timely manner or to their satisfaction, we may be subject to fines, the suspension or ceasing of our operations or other penalties, which may materially and adversely affect our business and results of operations.
Any failure by Beijing Tarena, Beijing Tongcheng or itstheir shareholders to perform their obligations under our contractual arrangements with them would have an adverse effect on our business.
If Beijing Tarena, Beijing Tongcheng or itstheir shareholders fail to perform their obligations under their contractual arrangements with us, 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,laws of mainland China, including seeking specific performance or injunctive relief, and claiming damages, which we cannot assure you will be effective. For example, if the shareholders of Beijing Tarena or Beijing Tongcheng were to refuse to transfer their equity interest in Beijing Tarena or Beijing Tongcheng to us or our designee if we exercise the exclusive option agreements pursuant to these contractual arrangements, or if they were otherwise to act in bad faith toward us, then we may have to take legal actions to compel them to perform their contractual obligations.
All the agreements under our contractual arrangements are governed by PRC lawlaws of mainland China and provide for the resolution of disputes through arbitration in mainland China. Accordingly, these contracts would be interpreted in accordance with PRC lawlaws of mainland China 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. Under PRC law,laws of mainland China, 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, we may not be able to exert effective financial control over Beijing Tarena or Beijing Tongcheng, and our ability to conduct our business may be negatively affected.
38
If we had direct ownership of Beijing Tarena or Beijing Tongcheng, we would be able to exercise our rights as a shareholder to effect changes in the board of directors of Beijing Tarena or Beijing Tongcheng, which in turn could effect changes, subject to any applicable fiduciary obligations, at the management level. However, under the current contractual arrangements, we rely on the performance by Beijing Tarena, Beijing Tongcheng and itstheir shareholders of their obligations under the contracts to exercise control over Beijing Tarena.Tarena or Beijing Tongcheng. Meanwhile, there are very few precedents as to whether contractual arrangements would be judged to form effective control over variable interest entities through the contractual arrangements, or how contractual arrangements in the context of a variable interest entities should be interpreted or enforced by the PRC courts. Should legal actions become necessary, we cannot guarantee that the court will rule in favor of the enforceability of the variable interest entities contractual arrangements. 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 the variable interest entities, and our ability to conduct our business may be materially adversely affected. Therefore, our contractual arrangements with Beijing Tarena and Beijing Tongcheng may not be as effective in ensuring our control over the relevant portion of our business operations as direct ownership would be.
The shareholders of Beijing Tarena and Beijing Tongcheng may have potential conflicts of interest with us, which may materially and adversely affect our business and financial condition.
We have designated individuals who are PRC nationals to be the shareholders of Beijing Tarena.Tarena and Beijing Tongcheng. The equity interests of Beijing Tarena are held by Mr. Shaoyun Han and Mr. Jianguang Li. The equity interests of Beijing Tongcheng are held by Mr. Shaoyun Han and Mr. Shenghuan Feng. The interests of these individuals as the shareholders of Beijing Tarena and Beijing Tongcheng may differ from the interests of our company as a whole. These shareholders may breach, or cause Beijing Tarena or Beijing Tongcheng to breach, or refuse to renew, the existing contractual arrangements we have with them and Beijing Tarena or Beijing Tongcheng, which would have a material and adverse effect on our ability to effectively control Beijing Tarena.Tarena or Beijing Tongcheng. 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 purchase option agreement with these shareholders to request himthem to transfer all of histheir equity ownership in Beijing Tarena or Beijing Tongcheng to a PRCmainland China entity or individual designated by us. We rely on Mr. Shaoyun Han and Mr. Jianguang Li, who are both our directors and who owe a fiduciary duty to our company, and Mr. Shenghuan Feng who is our employee, to comply with the terms and conditions of the contractual arrangements. Such fiduciary duty requires directors to act in good faith and in the best interests of the company and not to use their positions for personal gains. If we cannot resolve any conflict of interest or dispute between us and the shareholders of Beijing Tarena or Beijing Tongcheng, 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.
Our contractual arrangements with ourthe consolidated VIEs may be subject to scrutiny by the PRC tax authorities, and a finding that we owe additional taxes could substantially reduce our consolidated net income and the value of your investment.
Under PRC laws and regulations of mainland China, 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 among Tarena Tech, Tongcheng Shidai, and ourthe consolidated VIEs did not represent an arm’s-lengtharms-length price and adjust ourthe consolidated VIEs’ income in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in a reduction, for PRC tax purposes, of expense deductions recorded by ourthe consolidated VIEs, which could in turn increase their tax liabilities without reducing our tax liabilities. In addition, the PRC tax authorities may impose late payment fees and other penalties to ouron the consolidated VIEs for under-paid taxes. Our consolidated net income may be materially and adversely affected if our tax liabilities increase or if we are found to be subject to late payment fees or other penalties.
39
We may rely on dividends and other distributions on equity paid by our subsidiaries in mainland China to fund any cash and financing requirements we may have, and any limitation on the ability of our subsidiaries in mainland China to make payments to us could have a material and adverse effect on our ability to conduct our business.
We are a holding company, and we may rely on dividends and other distributions on equity paid by our subsidiaries in mainland China for our cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders and service any debt we may incur. If these 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 distributions to us. In addition, the PRC tax authorities may require any of our subsidiaries in mainland China to adjust its taxable income under the contractual arrangements it currently has in place with the variable interest entities in a manner that would materially and adversely affect its ability to pay dividends and other distributions to us. See “—Our contractual arrangements with the consolidated VIEs may be subject to scrutiny by the PRC tax authorities, and a finding that we owe additional taxes could substantially reduce our consolidated net income and the value of your investment.”
Under laws and regulations of mainland China, our wholly foreign-owned subsidiaries in mainland China may pay dividends only out of their respective accumulated profits as determined in accordance with accounting standards and regulations of mainland China. In addition, a mainland China enterprise is required to set aside at least 10% of its accumulated after-tax profits each year, if any, to fund certain statutory reserve funds, until the aggregate amount of such fund reaches 50% of its registered capital.
Any limitation on the ability of our subsidiaries in mainland China 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. See also “—Risks Related to Doing Business in China—We are affected by the PRC Enterprise Income Tax Law, and we may be classified as a mainland China ‘resident enterprise’ for mainland China enterprise income tax purposes. Such classification would likely result in unfavorable tax consequences to us and our non-mainland China shareholders and have a material adverse effect on our results of operations and the value of your investment.”
If Beijing Tarena or Beijing Tongcheng becomes the subject of a bankruptcy or liquidation proceeding, we may lose the ability to use and enjoy its assets, which could materially and adversely affect our business.
Due to foreign ownership restrictions in the online value-added telecommunications business, we hold our ICP licenselicenses through contractual arrangements with Beijing Tarena and Beijing Tongcheng as well as itstheir shareholders. As part of these arrangements, Beijing Tarena holdsand Beijing Tongcheng hold assets that are important to the operation of our business, including the domain name and ICP licenses for ourTMOOC.cn website.
and 61it.cn websites.
We do not have priority pledges and liens against Beijing Tarena’s or Beijing Tongcheng’s assets. As a contractual and property right matter, this lack of priority pledges and liens has remote risks. If Beijing Tarena or Beijing Tongcheng undergoes an involuntary liquidation proceeding, third-party creditors may claim rights to some or all of its assets and we may not have priority against such third-party creditors on Beijing Tarena’s or Beijing Tongcheng’s assets. If Beijing Tarena or Beijing Tongcheng liquidates, we may take part in the liquidation procedures as a general creditor under the PRC Enterprise Bankruptcy Law and recover any outstanding liabilities owed by Beijing Tarena to Tarena Tech or Beijing Tongcheng by Tongcheng Shidai under the applicable service agreements. To ameliorate the risks of an involuntary liquidation proceeding initiated by a third-party creditor, we closely monitor the operations and finances of Beijing Tarena and Beijing Tongcheng through carefully designed budgetary and internal controls to ensure that Beijing Tarena and Beijing Tongcheng is well capitalized and is highly unlikely to trigger any third partythird-party monetary claims in excess of its assets and cash resources. Furthermore, Tarena Tech hasand Tongcheng Shidai have the ability, if necessary, to provide financial support to Beijing Tarena and Beijing Tongcheng, respectively, to prevent such an involuntary liquidation.
40
If the shareholders of Beijing Tarena or Beijing Tongcheng were to attempt to voluntarily dissolve or liquidate Beijing Tarena or Tongcheng Shidai without obtaining our prior consent, we could effectively prevent such unauthorized voluntary liquidation by exercising our right to request Beijing Tarena’s shareholders and Tongcheng Shidai’s shareholders to transfer all of their equity ownership interest to a PRCmainland China entity or individual designated by us in accordance with the exclusive option agreements with the shareholders of Beijing Tarena.Tarena and Beijing Tongcheng. In the event that the shareholders of Beijing Tarena initiatesor Beijing Tongcheng initiate a voluntary liquidation proceeding without our authorization or attempts to distribute the retained earnings or assets of Beijing Tarena or Beijing Tongcheng without our prior consent, we may need to resort to legal proceedings to enforce the terms of the contractual agreements. Any such legal proceeding may be costly and may divert our management’s time and attention away from the operation of our business, and the outcome of such legal proceeding would be uncertain. The uncertainties in legal proceedings to enforce the terms of the contractual agreements are mainly caused by PRC laws of mainland China that prohibit domestic companies holding ICP licenses from assisting foreign investors in conducting value-added telecommunications business in mainland China. Under the MIIT Circular, a domestic company that holds an ICP license is prohibited from leasing, transferring or selling the license to foreign investors in any form, and from providing any assistance, including providing resources, sites or facilities, to foreign investors that conduct value-added telecommunications business illegally in mainland China.
If the custodians or authorized users of our controlling non-tangible assets, including chops and seals, fail to fulfill their responsibilities, or misappropriate or misuse these assets, our business and operations could be materially and adversely affected.
In mainland China, legal documents for corporate transactions, including agreements and contracts such as the leases and sales contracts that our business relies on, are typically executed using the chop or seal of the signing entity or with the signature of a legal representative whose designation is registered and filed with the relevant local branch of the State Administration for Industry and Commerce, or the SAIC.SAMR. We generally execute legal documents by affixing chops or seals, rather than having the designated legal representatives sign the documents.
We have three major types of chops—corporate chops, contract chops and finance chops. We use corporate chops generally for documents to be submitted to government agencies, such as applications for changing business scope, directors or company name, and for legal letters. We use contract chops for executing leases and commercial contracts. We use finance chops generally for making and collecting payments, including but not limited to issuing invoices. Use of corporate chops and contract chops must be approved by our legal department and administrative department, and use of finance chops must be approved by our finance department. The chops of our subsidiaries and ourthe consolidated VIEs are generally held by the relevant entities so that documents can be executed locally. Although we usually utilize chops to execute contracts, the registered legal representatives of our PRC subsidiaries and ourthe consolidated VIEs in mainland China have the apparent authority to enter into contracts on behalf of such entities without chops, unless such contracts set forth otherwise. All designated legal representatives of our PRC subsidiaries and ourthe consolidated VIEs in mainland China have signed employment agreements with us under which they agree to abide by duties they owe to us.
In order to maintain the physical security of our chops, we generally store them in secured locations accessible only to the department heads of the legal, administrative or finance departments. Our designated legal representatives generally do not have access to the chops. Although we monitor our employees, including the designated legal representatives of our PRC subsidiaries and ourthe consolidated VIEs in mainland China, the procedures may not be sufficient to prevent all instances of abuse or negligence. There is a risk that our employees or designated legal representatives could abuse their authority, for example, by binding the relevant subsidiary or consolidated VIEs with contracts against our interests, as we would be obligated to honor these contracts if the other contracting party acts in good faith in reliance on the apparent authority of our chops or signatures of our legal representatives. If any designated legal representative obtains control of the chop in an effort to obtain control over the relevant entity, we would need to have a shareholder or board resolution to designate a new legal representative and to take legal action to seek the return of the chop, apply for a new chop with the relevant authorities, or otherwise seek legal remedies for the legal representative’s misconduct. If any of the designated legal representatives obtains and misuses or misappropriates our chops and seals or other controlling intangible assets for whatever reason, we could experience disruption to our normal business operations. We may have to take corporate or legal action, which could involve significant time and resources to resolve while distracting management from our operations.
41
Risks RelatingRelated to Doing Business in China
Uncertainties in the interpretation and enforcement of PRC laws and regulations of mainland China could limit the legal protections available to you and us.
The PRC legal system is based on written statutes. Unlike common law systems, it is a system in which legal cases have limited value as precedents. In the late 1970s, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters. The overall effect of legislation over the past three decades has significantly increased the protections afforded to various forms of foreign or private-sector investment in mainland China. Our PRC subsidiaries in mainland China are subject to various PRC laws and regulations of mainland China generally applicable to companies in mainland China. However, since these laws and regulations are relatively new and the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involve uncertainties.
From time to time, we may have to resort to administrative and court proceedings to enforce our legal rights. However, since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. Furthermore, the PRC legal system is based in part on government policies and internal rules (some of which are not published in a timely manner or at all) some of which may have retroactive effect. As a result, we may not be aware of our violation of these policies and rules until some timesometime after the violation. Such uncertainties, including uncertainty over the scope and effect of our contractual, property (including intellectual property) and procedural rights, and any failure to respond to changes in the regulatory environment in mainland China could materially and adversely affect our business and impede our ability to continue our operations.
Changes in China’s economic, political or social conditions or government policies could have a material adverse effect on our business and operations.
AllSubstantially all of our business operations are conducted in mainland 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 and by continued economic growth in China as a whole.
China’s 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 PRC government has implemented measures since the late 1970s 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 mainland China is still owned by the PRC government. In addition, the PRC government continues to play a significant role in regulating industry development by imposing industrial policies. The PRC government also has significant authority to exert influence on the ability of a China-based company, such as us, to conduct its business. Therefore, investors of our company and our business face potential uncertainty from China. The PRC government also exercises significant control over the PRC 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 China’s economy has experienced significant growth over the past decades, growth has been uneven, both geographically and among various sectors of the economy, and the rate of growth has been slowing. Some of the government 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. Any stimulus measures designed to boost the Chinese economy may contribute to higher inflation, which could adversely affect our results of operations and financial condition.
42
COVID-19 had a severe and negative impact on the Chinese and the global economy and its impact in the future remains uncertain. Whether this will lead to a prolonged downturn in the economy is still unknown. Even before the outbreak of COVID-19, the global macroeconomic environment was facing numerous challenges. The growth rate of the Chinese economy has gradually slowed in recent years and the trend may be subjectcontinue. There is considerable uncertainty related to the tightening monetary and fiscal policies which had been adopted by the central banks and financial authorities of some of the world’s leading economies, which may have a material and adverse impact on the global and Chinese economy. There have been concerns over unrest, terrorist threats and potential wars in the Middle East, Europe and Africa. Additionally, the Russia-Ukraine war has caused, and continues to intensify, significant limitationsgeopolitical tensions in Europe and across the world. The resulting sanctions are expected to have significant impacts on our abilitythe economic conditions of the targeted countries and may disrupt global markets. There have also been concerns about the relationship between China and other countries, including the surrounding Asian countries, which may potentially have economic effects. In particular, there is significant uncertainty about the future relationship between the United States and China with respect to operate private schools, or otherwise be materiallytrade policies, treaties, government regulations and adversely affected bytariffs. Economic conditions in China are sensitive to global economic conditions, as well as changes in PRC laws governing private education providers.
Under theLaw for Promoting Private Educationdomestic economic and political policies and theImplementation Rules for The Law for Promoting Private Education, a private school may elect to be a school that does not require reasonable returns expected or a school that requires reasonable returns. At the end of each fiscal year, every private school is required to allocate a certain amount to its development fund for the constructionperceived overall economic growth rate in China. Any severe or maintenance of the school or procurement or upgrade of educational equipment. In the case of a private school that requires reasonable returns, this amount shall be no less than 25% of annual net income of the school, whileprolonged slowdown in the case of a private school that does not require reasonable returns, this amount shall be equivalent to no less than 25% of the annual increase in the net assets of the school, if any. A private school that requires reasonable returns must publicly disclose such election and additional information required under the regulations. A private school shall consider factors such as the school’s tuition, ratio of the funds used for education-related activities to the course fees collected, admission standards and educational quality when determining the percentage of the school’s net income that would be distributed to the investors as reasonable returns. However, none of the current PRC laws and regulations provides a formulaglobal or guidelines for determining “reasonable returns.” In addition, none of the current PRC laws and regulations sets forth clear requirements or restrictions on a private school’s ability to operate its education business based on such school’s status as a school that requires reasonable returns or a school that does not require reasonable returns.
As of December 31, 2015, we had five schools registered as schools requiring reasonable returns, while all other schools are registered as schools not requiring reasonable returns. Unlike typical schools which grant diplomas to students upon graduation, we provide professional education and do not grant any diploma to our students. However, the current PRC laws and regulations governing private educationChinese economy may be amended or replaced by new laws and regulations that (i) impose significant limitations on the ability of our schools to operate their business, charge course fees or make payments to related parties for services, (ii) specify the formula for calculating “reasonable returns,” or (iii) change the tax treatment policies applicable to private schools. We cannot predict the timing and effects of any such amendments or new laws and regulations. Changes in PRC laws and regulations governing private education could materially and adversely affect our business, prospects and results of operations and financial condition.
The PRC government’s significant oversight and discretion over our business operation could result in a material adverse change in our operations and the value of our ADSs.
We conduct our business primarily in mainland China. Our operations in mainland China are governed by laws and regulations of mainland China. The PRC government has significant oversight and discretion over the conduct of our business, and may intervene or influence our operations. For example,The PRC government has recently published new policies that significantly affected certain industries and we cannot rule out the possibility that it will in the future release regulations or policies that directly or indirectly affect our industry or require us to seek additional permission to continue our operations, which could result in a material adverse change in our operation, and our ordinary shares and ADSs may decline in value or become worthless.
Our ADSs will be prohibited from trading in the United States under the Holding Foreign Companies Accountable Act, or the HFCA Act, in the future if the PRC government imposes additional restrictionsPCAOB is unable to inspect or investigate completely our auditors. The delisting of our ADSs, or the threat of their being delisted, may materially and adversely affect the value of your investment.
Pursuant to the Holding Foreign Companies Accountable Act, if the SEC determines that we have filed audit reports issued by a registered public accounting firm that has not been subject to inspections by the PCAOB for two consecutive years, the SEC will prohibit our shares or the ADSs from being traded on private schools’a national securities exchange or in the over-the-counter trading market in the United States. On December 16, 2021, the PCAOB issued a report to notify the SEC of its determination that the PCAOB was unable to inspect or investigate completely registered public accounting firms headquartered in mainland China and Hong Kong. On December 15, 2022, the PCAOB removed mainland China and Hong Kong from the list of jurisdictions where it is unable to inspect or investigate completely registered public accounting firms.
Our current auditor, Marcum Asia CPAs, LLP, or Marcum Asia, the independent registered public accounting firm that issues the audit report included elsewhere in this annual report, as an auditor of companies that are traded publicly in the United States and a firm registered with the Public Company Accounting Oversight Board (United States), or 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. Marcum Asia, whose audit report is included in this annual report on Form 20-F, is headquartered in New York, New York, and was not included in the list of PCAOB Identified Firms in the PCAOB Determination Report issued in December, 2021.
43
Our ability to operate their businessretain an auditor subject to PCAOB inspection and investigation, including but not limited to inspection of the audit working papers related to us, may depend on the relevant positions of U.S. and Chinese regulators. Marcum Asia’s audit working papers related to us are located in mainland China. With respect to audits of companies with operations in mainland China, such as the Company, there are uncertainties about the ability of our auditor to fully cooperate with a request by the PCAOB for audit working papers in mainland China without the approval of Chinese authorities. Each year, the PCAOB will determine whether it can inspect and investigate completely audit firms in mainland China and Hong Kong, among other jurisdictions. Whether the PCAOB will be able to conduct inspections of our auditor, including but not limited to inspection of the audit working papers related to us, in the future is subject to substantial uncertainty and depends on a number of factors out of our, and our auditor’s, control. If the PCAOB determines in the future that it no longer has full access to inspect and investigate completely the auditors we retain to issue an audit report on our financial statements filed with the Securities and Exchange Commission, we would be identified as a Commission-Identified Issuer following the filing of the annual report on Form 20-F for the relevant fiscal year. In accordance with the HFCAA, our securities would be prohibited from being traded on a national securities exchange or restricts private schoolsin the over-the-counter trading market in the United States if we are identified as a Commission-Identified Issuer for two consecutive years in the future. If our shares and ADSs are prohibited from making paymentstrading in the United States, there is no certainty that we will be able to related partieslist on a non-U.S. exchange or that a market for services,our shares will develop outside of the United States. A prohibition of being able to trade in the United States would substantially impair your ability to sell or purchase our ADSs when you wish to do so, and the risk and uncertainty associated with delisting would have a negative impact on the price of our ADSs. Also, such a prohibition would significantly affect our ability to receive service fees fromraise capital on terms acceptable to us, or at all, which would have a material adverse impact on our schools may be limited.business, financial condition, and prospects.
UnderWe are affected by the PRC Enterprise Income Tax Law, and we may be classified as a PRC “residentmainland China“resident enterprise” for PRCmainland China enterprise income tax purposes. Such classification would likely result in unfavorable tax consequences to us and our non-PRCnon-mainland China shareholders and have a material adverse effect on our results of operations and the value of your investment.
Under the PRC Enterprise Income Tax Law, or the EIT Law, that became effective on January 1, 2008, as amended on February 24, 2017, and December 29, 2018, an enterprise established outside the PRCmainland China with “de facto management bodies” within the PRCmainland China is considered a PRCmainland China “resident enterprise” for PRCmainland China enterprise income tax purposes and is generally subject to a uniform 25% enterprise income tax rate on its worldwide income. Under the Implementation Rules to the EIT Law, a “de facto management body” is defined as a body that has material and overall management and control over the manufacturing and business operations, personnel and human resources, finances and properties of an enterprise. In addition, a circular, known as Circular 82, issued in April 2009, as amended in January 2014 and December 2017, by the State Administration of Taxation, or the SAT, specifies that certain offshore incorporated enterprises controlled by PRCmainland China enterprises or PRCmainland China enterprise groups will be classified as PRCmainland China resident enterprises if the following are located or resident in the PRC:mainland China: senior management personnel and departments that are responsible for daily production, operation and management; financial and personnel decision making bodies; key properties, accounting books, company seal,seals, and minutes of board meetings and shareholders’ meetings; and half or more of the senior management or directors having voting rights. Circular 82 also clarified that dividends and other income paid by such “resident enterprises” will be considered to be PRCmainland China source income, subject to PRCmainland China withholding tax, currently at a rate of 10%, when recognized by shareholders that are non-PRCnon-mainland China resident enterprises. Further to Circular 82, the SAT issued a bulletin, known as Bulletin 45, which took effect on September 1, 2011, to provide more guidance on the implementation of Circular 82 and clarify the reporting and filing obligations of such “Chinese-controlled offshore-incorporated resident enterprises.” Bulletin 45 provides procedures and administrative details for the determination of PRCmainland China resident enterprise status and administration on post-determination matters. Although both Circular 82 and Bulletin 45 only apply to offshore enterprises controlled by PRCmainland China enterprises and there are currently no further rules or PRCprecedents governing the procedures and specific criteria for determining the “de facto management body” for a company like ours, or controlled by mainland China enterprise groups, not those controlled by PRCmainland China individuals or foreign individuals like us, the determining criteria set forth in Circular 82 and Bulletin 45 may reflect the SAT’s general position on how the “de facto management body” test should be applied in determining the tax resident enterprise status of offshore enterprises, regardless of whether they are controlled by PRCmainland China enterprises, PRCmainland China enterprise groups or by PRCmainland China or foreign individuals.
44
We do not believe that Tarena International, Inc. meets all of the conditions above and thus we do not believe that Tarena International, Inc. is a PRCmainland China resident enterprise, despite the fact that all of the members of our management team as well as the management team of our offshore holding company are located in mainland China. However, if the PRC tax authorities determine that Tarena International, Inc. is a PRCmainland China resident enterprise for PRCmainland China enterprise income tax purposes, a number of unfavorable PRCmainland China tax consequences could follow. First, we will be subject to the uniform 25% enterprise income tax on our world-wideworldwide income, which could materially reduce our net income. In addition, we will also be subject to PRCmainland China enterprise income tax reporting obligations. Second, although dividends paid by one PRCmainland China tax resident to another PRCmainland China tax resident should qualify as “tax-exempt income” under the EIT Law, we cannot assure you that such dividends will not be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax on dividends, and the PRC tax authorities, have not yet issued guidance with respect to the processing of outbound remittances to entities that are not controlled by any PRCmainland China enterprise or enterprise group and treated as resident enterprises for PRCmainland China enterprise income tax purposes.
Finally, dividends we pay to our non-PRCnon-mainland China enterprise shareholders and gains derived by our non-PRCnon-mainland China shareholders from the sale of our shares may be become subject to a 10% PRCmainland China withholding tax. In addition, future guidance may extend the withholding tax to dividends we pay to our non-PRCnon-mainland China individual shareholders and gains derived by such shareholders from transferring our shares. In addition to the uncertainty in how the new “resident enterprise” classification could apply, it is also possible that the rules may change in the future, possibly with retroactive effect. If PRCmainland China income tax were imposed on gains realized through the transfer of our ADSs or ordinary shares or on dividends paid to our non-resident investors, the value of the investment in our ADSs or ordinary shares may be materially and adversely affected. Furthermore, our ADS holders whose jurisdictions of residence have tax treaties or arrangements with mainland China may not qualify for benefits under such tax treaties or arrangements.
We face uncertainty regarding the PRCmainland China tax reporting obligations and consequences for certain indirect transfers of our operating company’s equity interests. Enhanced scrutiny over acquisition transactions by the PRC tax authorities may have a negative impact on potential acquisitions we may pursue in the future.
In connection with the EIT Law, the Ministry of Finance, or the MOF and the SAT jointly issued a Circular 59 in April 2009, and the SAT issued a Circular 698 in December 2009. Both Circular 59 and Circular 698 became effective retroactively on January 1, 2008.
According to Circular 698, where a non-resident enterprise transfers the equity interests of a PRC “resident enterprise” indirectly by disposition of the equity interests of an overseas holding company, or an Indirect Transfer, and the overseas holding company is located in a tax jurisdiction that: (i) has an effective tax rate less than 12.5% or (ii) does not impose tax on foreign income of its residents, the non-resident enterprise, being the transferor, must report to the relevant tax authority of the PRC “resident enterprise” this Indirect Transfer. Using a “substance over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such Indirect Transfer may be subject to PRC withholding tax at a rate of up to 10%. Circular 698 also provides that, where a non-PRC resident enterprise transfers its equity interests in a PRC “resident enterprise” to its related parties at a price lower than the fair market value, the relevant tax authority has the power to make a reasonable adjustment to the taxable income of the transaction. In addition, the PRC “resident enterprise” is supposed to provide necessary assistance to support the enforcement of Circular 698.
On February 3, 2015, the SAT issued a Public Notice [2015]2015 No.7, or Public Notice 7, to supersede the existing tax rules in relation to the Indirect Transfer while the other provisions ofunder Circular 698 remain in force.698. Under Public Notice 7, introducedwhere a new tax regime that is significantly different from that under Circular 698. Public Notice extend its tax jurisdiction to capture not only Indirect Transfer as set forth under Circular 698 but also transactions involving transfer of immovable propertynon-resident enterprise conducts an “indirect transfer” by transferring the equity interests in a mainland China and“resident enterprise” or other taxable assets held under the establishment and place, in China of a foreign company through the offshore transfer of a foreign intermediate holding company. Public Notice 7 also addresses the term transferindirectly by disposing of the equity interestinterests in a foreign intermediatean overseas holding company, widely.the non-resident enterprise, being the transferor, may be subject to mainland China enterprise income tax, if the indirect transfer is considered to be an abusive use of company structure without reasonable commercial purposes. In addition, Public Notice 7 provides clearerclear criteria than Circular 698 on how to assess reasonable commercial purposes and introduces safe harbor scenarios applicable to internal group restructurings. However, it also brings challenges to both the foreign transferor and transferee of the Indirect Transfer as they have to make a self-assessment onas to whether the transaction should be subject to PRCmainland China tax and to file or withhold the PRCmainland China tax accordingly. Since Public Notice 7 was recently promulgated and it is unclear how this set of measures, and any future implementation rules thereof, will be interpreted, amended and implemented by the relevant governmental authorities. Where non-resident investors were involved in our private equity financing, if such transactions were determined by the tax authorities to lack reasonable commercial purpose, we and our non-resident investors may become at risk of being taxed under Circular 698 and Public Notice 7 and may be required to expend valuable resources to comply with Circular 698 and Public Notice 7 or to establish that we should not be taxed under Circular 698 and Public Notice 7, which may have a material adverse effect on our financial condition and results of operations or the non-resident investors’ investments in us.
In October 2017, the SAT promulgated the Announcement of the State Administration of Taxation on Matters Concerning Withholding of Income Tax of Non-resident Enterprises at Source, or SAT Circular 37, which provides certain changes to the current withholding regime, repeals and replaces all other provisions under Circular 698 and amends certain provisions in Public Notice 7. For example, SAT Circular 37 requires that the transferor shall declare to the competent tax authority for payment of tax within seven (7) days after the tax payment obligation comes into being if the withholding agent fails to withhold the tax due or withhold the tax due in full. However, according to SAT Circular 37, if the withholding agent fails to withhold and remit the income tax payable, or is unable to perform its obligation in this regard, as long as the non-resident enterprise that earns the income voluntarily declares and pays the tax payable before the tax authority orders it to do so within required time limits, it shall be deemed that such enterprise has paid the tax in time.
45
By promulgating and implementing these circulars, the PRC tax authorities have enhanced their scrutiny over the direct or indirect transfer of equity interests in a PRCmainland China resident enterprise by a non-resident enterprise. The PRC tax authorities have the discretion under Circular 59, Circular 698 and Public Notice 7 and SAT Circular 37 to make adjustments to the taxable capital gains based on the difference between the fair value of the equity interests transferred and the cost of investment. Although we currently have no confirmed plans to pursue any acquisitions in China or elsewhere in the world, weWe may pursue acquisitions in the future that may involve complex corporate structures. If we are considered a non-resident enterprise under the EIT Law and if the PRC tax authorities make adjustments under Circular 59 or Circular 698 and Public Notice 7 or SAT Circular 37, our income tax costs associated with such potential acquisitions will be increased, which may have an adverse effect on our financial condition and results of operations.
In addition, the State Administration of Taxation promulgated Administrative Measures on the General Anti-Avoidance Rule (Trial), or GAAR Measures, on December 12, 2014, which shows the authority’s intention to fight against any tax avoidance scheme that is adopted to obtain unwarranted tax benefit without reasonable commercial purpose. A press release, made by the State Administration of Taxation to clarify certain issues relating to the application of the GAAR Measures, stated that the GAAR Measures may be applicable if any general tax-avoidance scheme exists in the offshore indirect transfer of equity interests. Since GAAR Measures was recently promulgated and it is unclear how this set of measures, and any future implementation rules thereof, will be interpreted, amended and implemented by the relevant governmental authorities, we cannot predict how these regulations will affect our business operation,operations, future acquisitions or strategy.
We face risks and uncertainties with respect to the licensing requirement for Internetvalue-added telecommunication services, internet audio-video programs, radio or television programs production and operation, internet publication, human resources intermediary service.service and filing requirements for commercial franchise.
On September 25, 2000, the Telecommunications Regulations of the People’s Republic of China, or the Telecom Regulations, were issued by the PRC State Council, which were subsequently amended in 2014 and 2016. Under the Telecom Regulations, it is a requirement that telecommunications service providers procure operating licenses prior to their commencement of operations. A “Catalog of Telecommunications Business” was issued as an attachment to the Telecom Regulations to categorize telecommunications services as basic or value-added. The Catalog was most recently updated in June 2019, and the information services are classified as value-added telecommunications services.
On September 25, 2000, the State Council promulgated the Administrative Measures on Internet Information Services, or the Internet Measures, which were amended in January 2011. Under the Internet Measures, commercial internet information services operators shall obtain an ICP license from the relevant government authorities before engaging in any commercial internet information services operations within mainland China. We offer online learning courses through TMOOC.cn and 61it.cn websites and Tongchengzaixian mobile application, which may be deemed as providing commercial internet information services and required to obtain an ICP license. Conducting value-added telecommunication services without obtaining an ICP license may result in fines or even order to suspend operation of our websites. Beijing Tarena, obtained an ICP license for TMOOC.cn website, and Beiing Toncheng obtained an ICP license for 61it.cn website.
In December 2007, the State Administration of Press Publication Radio Film and Television, or SAPPRFT, the predecessor of Administration of Radio and Television newly established in April 2018, and the Ministry of Industry and Information Technology, or MIIT, issued the Administrative Measures Regarding Internet Audio-Video Program Services, or the Internet Audio-Video Program Measures, which became effective on January 31, 2008.2008, and amended on August 28, 2015. Among other things, the Internet Audio-Video Program Measures stipulate that no entities or individuals may provide Internetinternet audio-video program services without a “License for Disseminating Audio-Video Programs through Information Network” issued by SAPPRFT or its local bureaus or completing the relevant registration with SAPPRFT or its local bureaus, and only entities wholly owned or controlled by the PRC government may engage in the production, editing, integration or consolidation, and transmission to the public through the Internet,internet of audio-video programs, or the provision of audio-video program uploading and transmission services. In February 2008, SAPPRFT and MIIT jointly held a press conference in response to inquiries related to the Internet Audio-Video Program Measures, during which SAPPRFT and MIIT officials indicated that providers of audio-video program services established prior to the promulgation date of the Internet Audio-Video Program Measures that do not have any regulatory non-compliance records can re-register with the relevant government authorities to continue their current business operations. After the conference, the two authorities published a press release that confirmed the above guidelines. There are still significant uncertainties relating to the interpretation and implementation of the Internet Audio-Video Program Measures, in particular, the scope of “Internet Audio-Video Programs.”
46
Furthermore, on April 1, 2010, SAPPRFT promulgated the Test Implementation of the Tentative Categories of Internet Audio-Visual Program Services, or the Categories, amended on March 10, 2017, which clarified the scope of Internetinternet audio-video programs services. According to the Categories, there are four categories of Internetinternet audio-visual program services which are further divided into seventeen sub-categories. The third sub-category to the second category covers the making and editing of certain specialized audio-video programs concerning, among other things, educational content, and broadcasting such content to the general public online.
We transmit our recorded audio-video educationalquality education programs through our TTS system, andTMOOC.cn not onlyand 61it.cn to enrolled course participants, but also to the general public.participants. In addition, we provide audio-video program uploading and transmission services.live teaching services so that students can choose different learning modes. As a result, we mightmay be subject to the Internet Audio-Video Program Measures. If the governmental authorities determine that our provision of lecture videos on TTS, TMOOC.cnand/orTMOOC.cn61it.cn falls within the Internet Audio-Video Program Measures, we may not be able to obtain the License for Disseminating Audio-Video Programs through Information Network. If this occurs, we may become subject to significant penalties, fines, legal sanctions or an order to suspend our use of audio-video content, all of which could have a material adverse effect on our business, financial condition, results of operations and prospects. In addition, a producer or operator of radio or television programs is required to obtain a Radio and Television Program Production and Operation License under laws and regulations of mainland China. We obtained a Radio and Television Program Production and Operation License on June 27, 2019, for the audio-video educational programs on our TTS system, which is held by Beijing Tarena.
Furthermore, we offer videos of lectures on our website of TMOOC.cn and 61it.cn. Governmental authorities may determine our online content services fall within the scope of “internet publishing,” and therefore require us to apply for an Internet Publishing License, which we have not obtained from SAPPRFT. We may not be able to obtain such a license if we are requested to obtain one in the future, and we may therefore become subject to penalties, fines, legal sanctions or be ordered to suspend the video content on the website, all of which could have a material adverse effect on our business, financial condition, results of operations and prospects.
Pursuant to the Provisions on the Administration of Human Resources Markets issued by SAIC in 2001 and as amended in 2005, 2015 and 2019, respectively, a human resources service intermediary refers to any entity which provides intermediary services for employers and any potential employees, and no entity may provide such services without a “LicenseLicense for Human Resources Intermediary Resources.”Service. Any internet information service provider which provides intermediary services for employers and any potential employees via the internet shall obtain such license. In January 2015, we launchedaddition, the Interim Regulations for the Human Resources Market, or the Interim Regulations, issued by the State Council in June 2018 further clarifies the requirements of human resources service licensing and filing. In accordance with the Interim Regulations, any commercial human resources service provider engaging in employment introduction information services or internet human resources information services for employers and individuals shall obtain a self-developed job search website called Job Show (www.jobshow.cn), which serves as a dedicated open platformLicense for our studentsHuman Resources Service and other job-seeking candidatesany commercial human resources service provider engaging in collection and release of human resources information shall complete the necessary filing with competent human resources and social security authorities.
We provide employment services to connect with corporate employers more effectively. Although we have not entered into any agreement with corporate employers or anyand job-seeking candidates, we source and list job opportunities from both IT and non-IT employers in China through the website, which may be deemed as a human resources service intermediary. Currently, we have not obtained the “License for Human Resources Intermediary Resources,” and ifIf the relevant PRC government authorities determine that we shallmust obtain such licensea License for Human Resources Services for the operation of Job Showour employment services and we fail to obtain such license, they may order us to shut down the website and subject us to a fine of RMB10,000 (US$1,544),cease such activities and if there is any illegal income, we may be subject a fine of no more than three timesto confiscation of the illegal income and a fine of more than RMB10,000 and less than RMB50,000. If the relevant PRC government authorities determine that we must file with the competent authority for engaging in human resources services activities and we fail to complete such filings on time, the competent authority shall order us to correct, or we may be subject a fine of more than RMB5,000 and less than RMB10,000 if such correction is not made. Tarena Times (Wuhan) Technology Co., Ltd., the wholly owned subsidiary of Tarena Tech, obtained the License for Human Resources Services on July 6, 2020 for the job intermediary activities, which will expire in July 2023, and we are going to engage in job intermediary activities through this company.
47
In addition, the State Council promulgated The Administrative Regulations on Commercial Franchise, or Franchise Regulations, on February 6, 2007. The MOFCOM promulgated the Administrative Measures on Filing of Commercial Franchise, or the Franchise Filing Measures, on April 30, 2007, as amended on December 12, 2011. Under these regulations, “franchise operations” refers to a license by an enterprise owner of registered trademarks, enterprise logos, patents, proprietary technologies or other business resources, or franchisor, to another business operator, the franchisee, to use such business resources owned by the franchisor through a contractual arrangement, where the franchisee operates the business according to a uniform business model stipulated under the contract and pays the franchisor franchising fees. A franchisor shall file with the MOFCOM or its local office within 15 days from the date of entering into a franchise contract with a franchisee for the first time. We have 29 franchisees for STEAM education programs and 1 franchisee for professional education programs in 2022, which requires filing with MOFCOM or its local office for the franchise operations. If we fail to complete such filing, the competent authorities may order us to complete such filing within a stipulated period and we may be subject to a fine between RMB10,000 and RMB50,000. If we still fail to complete such filing within a stipulated period, we may be subject to a fine between RMB50,000 and RMB100,000, and a public announcement may be issued against us. Wuhan Haoxiaozi Robot Technology Co., Ltd., the wholly owned subsidiaries of Tongcheng Shidai, completed the filling with MOFCOM for the franchise operations.
The approval of and filing with the CSRC or other PRC government authorities may be required in connection with our offshore offerings under the laws of mainland China, and, if required, we cannot predict whether or for how long we will be able to obtain such approval or complete such filing.
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, require an overseas special purpose vehicle formed for listing purposes through acquisitions of mainland China domestic companies and controlled by mainland China persons or entities to obtain the approval of the CSRC prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock exchange. The interpretation and application of the regulations remain unclear, and our offshore offerings may ultimately require approval of the CSRC. If the CSRC approval is required, it is uncertain whether we can or how long it will take us to obtain the approval and, even if we obtain such CSRC approval, the approval could be rescinded. Any failure to obtain or delay in obtaining the CSRC approval for any of our offshore offerings, or a rescission of such approval if obtained by us, would subject us to sanctions imposed by the CSRC or other PRC regulatory authorities, which could include fines and penalties on our operations in mainland China, restrictions or limitations on our ability to pay dividends outside mainland China, and other forms of sanctions that may materially and adversely affect our business, financial condition, and results of operations.
On July 6, 2021, the relevant PRC government authorities issued Opinions on Strictly Cracking Down Illegal Securities Activities in Accordance with the Law. These opinions emphasized the need to strengthen the administration over illegal securities activities and the supervision on overseas listings by China-based companies and proposed to take effective measures, such as promoting the construction of relevant regulatory systems to deal with the risks and incidents faced by China-based overseas-listed companies. As a follow-up, on February 17, 2023, CSRC released the Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies, or the Overseas Listing Regulations, and five relevant guidelines, which became effective on March 31, 2023.
Pursuant to the Overseas Listing Regulations, companies in mainland China that directly or indirectly offer or list their securities in an overseas market must file with the CSRC within three business days after submitting their listing application documents to the regulator in the place of intended listing. The Overseas Listing Regulations also provide that a company in mainland China must file with the CSRC within three business days after completion of its follow-on offering of securities after it is listed in an overseas market. If the company fails to complete the filing procedure or conceals any material fact or falsifies any major content in its filing documents, it may be subject to administrative penalties, such as order to rectify, warnings, fines, and its controlling shareholders, actual controllers, the person directly in charge and other directly liable persons may also be subject to administrative penalties, such as warnings and fines. According to the Notice on Administration of the Filing of Overseas Offering and Listing by Domestic Companies issued by the CSRC on February 17, 2023, the companies in mainland China that have been listed overseas before March 31, 2023 are not required to file with the CSRC in connection with the historical offerings, but these companies are required to fulfill filing obligations with the CSRC in connection with their additional capital raising activities in accordance with the Overseas Listing Regulations. Based on the foregoing, we are not required to complete filing with the CSRC for our historical offerings, but may be subject to the filing requirements for our future capital raising activities, if any, under the Overseas Listing Regulations. As the Overseas Listing Regulations were newly promulgated, the interpretation, application and enforcement of the Overseas Listing Regulations remain uncertain, and this is particularly true for companies conducting their operations in mainland China through variable interest entities. There remains substantial uncertainties with respect to how the CSRC filing procedures under the Overseas Listing Regulations would be applied to, and implicate, the procedures, timetables and outcomes of our future offering or other capital raising activities. For more details of the Overseas Listing Regulations, please refer to “Item 4. Information on the Company— B. Business Overview— Government Regulations—Regulations Relating to Overseas Listing and M&A.”
48
On February 24, 2023, the CSRC, jointly with other relevant governmental authorities, published the Provisions on Strengthening Confidentiality and Archives Management of Overseas Securities Issuance and Listing by Domestic Enterprises, or the Confidentiality and Archives Management Provisions, which became effective on March 31, 2023. Pursuant to the Confidentiality and Archives Management Provisions, China-based companies that offer and list securities in overseas markets shall establish confidentiality and archives system. These China-based companies shall obtain approval from the relevant authorities and file with the confidential administration authorities, either by itself or its offshore listing entity, when providing or publicly filing documents and materials related to state secrets or secrets of the governmental authorities to the relevant securities companies, securities service institutions or offshore regulatory authorities. In addition, these companies shall complete relevant procedures if the documents or materials filed may adversely affect national security or public interests once publicly disclosed, or if these companies provide accounting files or copies to relevant securities companies, securities service institutions, overseas regulators and individuals.
Relatedly, on December 27, 2021, the NDRC and the MOFCOM, jointly issued the Special Administrative Measures (Negative List) for Foreign Investment Access (2021 Version), or the 2021 Negative List, which became effective on January 1, 2022. Pursuant to such Special Administrative Measures, if a domestic company engaging in the prohibited business stipulated in the 2021 Negative List seeks an overseas offering and listing, it shall obtain the approval from the competent governmental authorities. Moreover, the foreign investors of the company shall not exceed RMB30,000 (US$4,631).be involved in the company’s operation and management, and their shareholding percentage shall be subject, mutatis mutandis, to the relevant regulations on the domestic securities investments by foreign investors. As the 2021 Negative List is relatively new, there remain substantial uncertainties as to the interpretation and implementation of these new requirements, and it is unclear as to whether and to what extent listed companies like us will be subject to these new requirements. If we are required to comply with these requirements and fail to do so on a timely basis, if at all, our business operations, financial condition and business prospects may be adversely and materially affected.
In addition, we cannot assure you that any new rules or regulations promulgated in the future will not impose additional requirements on us. If it is determined in the future that approval and filing from the CSRC or other regulatory authorities or other procedures, including the cybersecurity review under the Measures for Cybersecurity Review and the draft of Regulations on Network Data Security, are required for our offshore offerings, it is uncertain whether we can or how long it will take us to obtain such approval or complete such filing procedures and any such approval or filing could be rescinded or rejected. Any failure to obtain or delay in obtaining such approval or completing such filing procedures for our offshore offerings, or a rescission of any such approval or filing if obtained by us, would subject us to sanctions by the CSRC or other PRC regulatory authorities for failure to seek CSRC approval or filing or other government authorization for our offshore offerings. These regulatory authorities may impose fines and penalties on our operations in mainland China, limit our ability to pay dividends outside mainland China, limit our operating privileges in mainland China, delay or restrict the repatriation of the proceeds from our offshore offerings into mainland China or take other actions that could materially and adversely affect our business, financial condition, results of operations, and prospects, as well as the trading price of our listed securities. The CSRC or other PRC regulatory authorities also may take actions requiring us, or making it advisable for us, to halt our offshore offerings before settlement and delivery of the shares offered. Consequently, if investors engage in market trading or other activities in anticipation of and prior to settlement and delivery, they do so at the risk that settlement and delivery may not occur. In addition, if the CSRC or other regulatory authorities later promulgate new rules or explanations requiring that we obtain their approvals or accomplish the required filing or other regulatory procedures for our prior offshore offerings, 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 or negative publicity regarding such approval requirement could materially and adversely affect our business, prospects, financial condition, reputation, and the trading price of our listed securities.
PRC regulations
49
Regulations establish complex approval procedures for some acquisitions of PRCmainland China companies by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China. The transfers of our learning centers from ourthe consolidated VIEs to our wholly-ownedwholly owned subsidiaries in China may be subject to such approval procedures, in which case we may need to restructure the ownership and operation of the affected learning centers, and as a result we may be exposed to increased risks associated with the contractual arrangements relating to ourthe consolidated VIEs.
Six PRC regulatory agencies promulgated regulations effective in September 2006 and amended in June 2009 that are commonly referred to as the M&A Rules.Rules. The M&A Rules establish procedures and requirements that could make some acquisitions of PRCmainland China companies by foreign investors more time-consuming and complex, including requirements in some instances that the MOFCOM be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRCmainland China domestic enterprise. In addition, national security review rules issued by the PRC governmental authorities in 2011 require acquisitions by foreign investors of domestic companies engaged in military-related or certain other industries that are crucial to national security to be subject to prior security review. Moreover, the Anti-Monopoly Law requires that the MOFCOM shall be notified in advance of any concentration of undertaking if certain thresholds are triggered. We may expand our business in part by acquiring complementary businesses. Complying with the requirements of the M&A Rules, security review rules and other PRC regulations of mainland China to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval 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.
In addition, in accordance with the M&A Rules, approval of the MOFCOM is required for acquisitions of PRCmainland China domestic enterprises by foreign companies that are established or controlled by PRCmainland China domestic companies, enterprises or individuals related to the target PRCmainland China domestic enterprises, or “Related Party Acquisitions”,Acquisitions,” and the parties are not allowed to evade such requirements through investment by foreign investment enterprises in mainland China or in other ways. Although M&A Rules have becomebeen effective since September 2006, we are not aware of any precedent of approval by the MOFCOM of any Related Party Acquisition conducted by PRCmainland China domestic individuals. Starting from the second half of 2012, we began to transfer ourthe operations, including related assets and liabilities, of ourthe consolidated VIEs to our wholly-ownedwholly owned subsidiary, Tarena Tech, and its subsidiaries, either through transferring the companies that operate learning centers or that sponsor the schools, or through changing the schools’ sponsors. All of our learning center operations of VIEs had been transferred to Tarena Tech and its subsidiaries and schools.schools before 2018, while one of our learning centers was transferred back to Beijing Tarena for business operation purpose in 2018. In 2019, three of our learning centers which provide online education services were transferred back to Beijing Tarena for business operation purpose and one school was newly set up through Beijing Tarena. In 2020 and 2021, three and two schools were newly set up through Beijing Tarena, respectively. In February 2023, one school was transferred to a subsidiary of Beijing Tarena. As Mr. Shaoyun Han is a shareholder of both Tarena and ourthe consolidated VIEs, even though the transfers of the companies which operated 23 of our learning centers themselves or through schools they established as of December 31, 2015, from ourthe consolidated VIEs to our wholly-ownedwholly owned subsidiaries in mainland China are not “acquisitions by foreign investors of PRCmainland China domestic enterprises” under the M&A Rules, and Tarena Tech, our wholly foreign invested enterpriseenterprises in PRC, wasmainland China were converted into a wholly foreign invested enterprise before the effective date of the M&A Rules, the requirement for an approval from the MOFCOM may still be required for such transfers because of the above anti-evasion clause. Furthermore, it is unclear whether our transfers of the schools, which operated 11 learning centers as of December 31, 2015, which are not enterprises, from subsidiaries of ourthe consolidated VIEs to our wholly-ownedwholly owned subsidiaries, could be regarded as Related Party Transactions under the M&A Rules.Rules. If the MOFCOM determines that our previous transfers of learning centers from ourthe consolidated VIEs to our wholly-ownedwholly owned subsidiaries are Related Party Transactions under the M&A Rules and we fail to obtain the MOFCOM’s approvals on such transfers, the effectiveness of such transfers may be challenged and we may be need to transfer these companies and schools, including the related learning centers, back to ourthe consolidated VIEs. Under such circumstances, our business may be disrupted and we may be exposed to increased risks associated with the contractual arrangements relating to ourthe consolidated VIEs. See “—Risks RelatingRelated to Our Corporate Structure.”
PRC regulations50
Regulations relating to offshore investment activities by PRCmainland China residents may limit our PRCmainland China subsidiaries’ ability to increase their registered capital or distribute profits to us, limit our ability to inject capital into our PRCmainland China subsidiaries, or otherwise expose us to liability and penalties under PRC law.
laws of mainland China.
The PRC State Administration of Foreign Exchange, or the SAFE, has promulgated regulations, including the Notice on Relevant Issues Relating to Domestic Residents’ Investment and Financing and Round-Trip Investment through Special Purpose Vehicles, or SAFE Circular No. 37, effective on July 4, 2014, and its appendixes, that require PRCmainland China residents, including PRCmainland China institutions and individuals, to register with the local branchesbranch of the SAFE in connection with their direct establishment or indirect control of an offshore entity, for the purpose of overseas investment and financing, with such PRCmainland China residents’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests, referred to in SAFE Circular No. 37 as a “special purpose vehicle.” SAFE Circular No. 37 further requires an amendment to the registration in the event of any significant changes with respect to the special purpose vehicle, such as an increase or decrease of capital contributed by PRCmainland China individuals, share transfer or exchange, merger, division or other material event.events. In the event that a PRCmainland China shareholder holding interests in a special purpose vehicle fails to fulfill the required SAFE registration, the PRCmainland China subsidiaries of that special purpose vehicle may be prohibited from making profit distributions to the offshore parent and from carrying out subsequent cross-border foreign exchange activities, and the special purpose vehicle may be restricted in theirits ability to contribute additional capital into its PRCmainland China subsidiary. Further, failure to comply with the various SAFE registration requirements described above could result in liability under PRC lawlaws of mainland China for foreign exchange evasion, including (i) the requirement by the SAFE to return the foreign exchange remitted overseas within a period specified by the SAFE, with a fine of up to 30% of the total amount of foreign exchange remitted overseas and deemed to have been evasive and (ii) in circumstances involving serious violations, a fine of no less than 30% of and up to the total amount of remitted foreign exchange deemed evasive. Furthermore, the persons-in-charge and other persons at our PRCmainland China subsidiaries who are held directly liable for the violations may be subject to criminal sanctions. On February 28, 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. In accordance with SAFE Notice 13, entities and individuals are required to apply for foreign exchange registration of foreign direct investment and overseas direct investment, including those required under the SAFE Circular No. 37, with qualified banks, instead of the SAFE. The qualified banks, under the supervision of the SAFE, directly examine the applications and conduct the registration.
These regulations apply to our direct and indirect shareholders who are PRCmainland China residents and may apply to any offshore acquisitions or share transfers that we make in the future if our shares are issued to PRCmainland China residents. We have requested PRCmainland China residents who we know currently hold direct or indirect interests in our company to make the necessary applications, filings and amendments as required under SAFE Circular No. 37 and other related rules.
ToWe have used our knowledge,best efforts to notify all of our shareholders who are PRCmainland China citizens and hold interestinterests in us have registeredto register with the local SAFE branch and/or qualified banks as required under SAFE Circular No. 37 and SAFE Notice 13. However, in practice, different local SAFE branches and/or qualified banks may have different views and procedures on the application and implementation of SAFE regulations. Therefore, we cannot assure you that they can successfully amend their foreign exchange registrations with the local SAFE branch and/or qualified banks in full compliance with applicable laws. In addition, we may not be informed of the identities of all the PRCmainland China residents holding direct or indirect interestinterests in our company, and we cannot provide any assurances that these PRCmainland China residents will comply with our request to make or obtain any applicable registrations or comply with other requirements required by SAFE Circular No. 37, SAFE Notice 13 or other related rules. A failure by any of our current or future shareholders or beneficial owners who are PRCmainland China residents to comply with the SAFE regulations may subject us to fines or other legal sanctions, restrict our cross-border investment activities, limit our PRCmainland China subsidiaries’ ability to make distributions or pay dividends or affect our ownership structure, which could adversely affect our business and prospects.
Furthermore, 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. We cannot predict how these regulations will affect our business operations or future strategy. 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 PRCmainland China domestic company, either we or the owners of such company, as the case may be, may not 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.
51
Failure to comply with PRC regulations of mainland China regarding the registration requirements for employee share ownership plans or share option plans may subject the PRCmainland China 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 Plans of Overseas Publicly-ListedPublicly Listed Companies, or the Stock Option Rules. Under the Stock Option Rules and other relevant rules and regulations, PRCmainland China residents who participate in a stock incentive plan in an overseas publicly-listedpublicly listed company are required to register with the SAFE or its local branchesbranch and complete certain other procedures. Participants of a stock incentive plan who are PRCmainland China residents must retain a qualified PRCmainland China agent, which could be a PRCmainland China subsidiary of the overseas publicly-listedpublicly listed company or another qualified institution selected by the PRCmainland China subsidiary, to conduct the SAFE registration and other procedures with respect to the stock incentive plan on behalf of its participants. The participants must also retain an overseas entrusted institution to handle matters in connection with their exercise of stock options, the purchase and sale of corresponding stocks or interests and fund transfers. In addition, the PRCmainland China agent is required to amend the SAFE registration with respect to the stock incentive plan if there is any material change to the stock incentive plan, the PRCmainland China agent or the overseas entrusted institution or other material changes. See “Item 4. Information on the Company—B. Business Overview—Government Regulations—Regulations on Stock Incentive Plans.” We and our PRCmainland China employees who have been granted share options and restricted share units are subject to these regulations and we have completed the registrations of our stock incentive plans, namely, the 2008 Plan and the 2014 Plan, with the local SAFE as required by PRC law.laws of mainland China. Failure of our PRCmainland China share option holders or restricted shareholders to complete their SAFE registrations may subject these PRCmainland China residents to fines and legal sanctions and may also limit our ability to contribute additional capital into our PRC subsidiaries limitedin mainland China, limit our PRCmainland China subsidiaries’ ability to distribute dividends to us, or otherwise materially and adversely affect our business.
PRC regulationRegulation of direct investment and loans by offshore holding companies to PRCmainland China entities and governmental control of currency conversion may delay or limit us from using the proceeds of offshore offerings to make additional capital contributions or loans to our PRC subsidiaries.
subsidiaries in mainland China.
Any capital contributions or loans that we, as an offshore entity, make to our PRC subsidiaries in mainland China are subject to PRC regulations.regulations of mainland China. Under PRC laws and regulations of mainland China, we are permitted to utilize the proceeds from offshore offerings to fund our existing PRC subsidiaries in mainland China only through loans or capital contributions or to establish new PRC subsidiaries in mainland China, subject to applicable government registration and approval requirements. None of our loans to a PRC subsidiary in mainland China can exceed the difference between its total amount of investment and its registered capital approved under relevant PRC laws of mainland China or two and a half times of the net assets provided in the latest audited financial report of such subsidiary in mainland China, as applicable, and the loans must be registered with the local branch of SAFE. Our capital contributions to our PRC subsidiaries in mainland China or establishment of new PRC subsidiaries mustin mainland China shall be approved byrecorded with the MOFCOM or its local counterpart. We cannot assure you that we will be able to complete the necessary registration or obtain the necessary approval on a timely basis, or at all. If we fail to complete the necessary registration or obtain the necessary approval, our ability to make loans or equity contributions to our PRC subsidiaries in mainland China may be negatively affected, which could adversely affect our PRCmainland China subsidiaries’ liquidity and their ability to fund their working capital and expansion projects and meet their obligations and commitments.
On March 30, 2015, the SAFE promulgated Circular 19, which expands a pilot reform of the administration of the settlement of the foreign exchange capitals of foreign-invested enterprises nationwide. Circular 19 came into force replacing both previous SAFE Circular 142 and SAFE Circular 36 on June 1, 2015. Circular 19 allows all foreign-invested enterprises established in the PRCmainland China to use their foreign exchange capitals to make equity investmentinvestments and removes certain other restrictions provided under Circular 142previous laws and regulations promulgated by the SAFE for these enterprises. However, Circular 19 continues to prohibit foreign-invested enterprises from, among other things, using the Renminbi fund converted from itstheir foreign exchange capitals for expenditure beyond itstheir business scope, and providing entrusted loans or repaying loans between non-financial enterprises. The business scopesOn June 9, 2016, the SAFE promulgated Circular 16, the application scope of Tarena Tech include researchwhich expands from only the capital of foreign-invested enterprises to the capital, foreign debt proceeds and development of computer software, hardware, internet technologyproceeds from overseas public offerings. Furthermore, Circular 16 allows foreign-invested enterprises to use their foreign exchange capitals under capital account to the extent permitted by the relevant laws and productsregulations, and telecommunications technology, transfer of proprietary technologies, information technology consulting, technical services, computer technology training, sales of self-developed products and franchise business operations. The business scopes of Tarena Software Technology (Hangzhou) Co., Ltd., or Tarena Hangzhou, include technology development, technology consulting, technical services, computer software and hardware, network technology, telecommunication technology, services, non-certification computer technology training for adults (excluding business subject to pre-approvals), wholesale and retail of computer software and hardware and telecommunication equipment (excluding equipment subject to national control sand other special controls). Tarena Tech and Tarena Hangzhou may only useremoves certain prohibitions on using the Renminbi fund converted from the foreign exchange capital contribution for activities within their respective approved business scope. Therefore, we may not usecapitals under Circular 19, such Renminbi funds convertedas prohibitions on providing loans to make equity investments in the PRC through our PRC subsidiaries. In addition, the useaffiliated enterprises of such Renminbi capital may not be altered without SAFE approval, and such Renminbi capital may not in any case be used to repay Renminbiforeign-invested enterprises or repaying loans if the proceeds of such loans have not been used.between non-financial enterprises. Violations of SAFE Circular 19 and Circular 16 could result in severe monetary or other penalties.
On October 23, 2019, the SAFE also promulgated a SAFE Circular 45 in November 2011,issued the Notice of the State Administration of Foreign Exchange on Further Facilitating Cross-border Trade and Investment, which, among other things, restricts a foreign-invested enterprise from using RMB converted from its registeredexpanded the use of foreign exchange capital to provide entrusted loans or repay loans between non-financial enterprises. Those circulars may significantly limit our abilitydomestic equity investments. Non-investment foreign-funded enterprises are allowed to use Renminbi converted fromlawfully make domestic equity investments by using capital funds on the net proceedspremise without violation to prevailing special administrative measures for access of offshore offerings to fund establishmentforeign investments (negative list) and the authenticity and compliance with the regulations of new PRCdomestic investment projects.
52
Our subsidiaries by Tarena Tech and Tarena Hangzhou to invest in or acquire any other PRC companies, or to establish new PRC consolidated affiliated entities.
Our PRC subsidiariesmainland China are subject to restrictions on paying dividends or making other payments to us, which may restrict our ability to satisfy our liquidity requirements.
We are a holding company incorporated in the Cayman Islands. We may need dividends and other distributions on equity from our PRC subsidiaries to satisfy our liquidity requirements. Current PRC regulations of mainland China permit our PRC subsidiaries in mainland China to pay dividends to us only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations.regulations of mainland China. In addition, our PRC subsidiaries in mainland China are required to set aside at least 10% of their respective accumulated profits each year, if any, to fund certain reserve funds until the total amount set aside reaches 50% of their respective registered capital. Our PRC subsidiaries in mainland China may also allocate a portion of itstheir after-tax profits based on PRC accounting standards of mainland China to employee welfare and bonus funds at their discretion. These reserves are not distributable as cash dividends. Furthermore, if our PRC subsidiaries in mainland China 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 subsidiaries to distribute dividends to us or may restrict our ability to satisfy our liquidity requirements.
In addition, the EIT Law, and its implementation rules provide that a withholding tax rate of up to 10% will be applicable to dividends payable by Chinese companies to non-PRC-residentnon-mainland China-resident enterprises unless otherwise exempted or reduced according to treaties or arrangements between the PRC central government and governments of other countries or regions where the non-PRC-residentnon-mainland China-resident enterprises are incorporated.
53
We may not be able to obtain certain treaty benefits on dividends paid to us by our PRC subsidiary in mainland China through our Hong Kong Subsidiary.
Under the EIT Law and its implementation rules, dividends generated from retained earnings after January 1, 2008 from a PRCmainland China company and distributed to a foreign parent company are subject to a withholding tax rate of 10% unless the foreign parent’s jurisdiction of incorporation has a tax treaty with mainland China that provides for a preferential withholding arrangement. Pursuant to the Arrangement between Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect to Taxes on Income, or the Hong Kong Tax Treaty, which became effective on December 8, 2006, a company incorporated in Hong Kong, such as Tarena HK, will be subject to withholding income tax at a rate of 5% on dividends it receives from its PRC subsidiary in mainland China if it holds a 25% or more interest in that particular PRC subsidiary in mainland China, or 10% if it holds less than a 25% interest in that subsidiary. However,Pursuant to the SAT promulgated a tax notice on October 27, 2009, or Circular 601, which provides that tax treaty benefits will be denied to “conduit” or shell companies without business substance, and a beneficial ownership analysis will be used based on a “substance-over-the-form” principle to determine whether or not to grant tax treaty benefits. On June 29, 2012, the SAT further issued the AnnouncementNotice of the SAT on the Issues concerning the Application of the Dividend Clauses of Tax Agreements, or Circular 81, the 5% withholding tax rate does not automatically apply and certain requirements must be satisfied, including, without limitation, that (a) the Hong Kong enterprise must be the beneficial owner of the relevant dividends; and (b) the Hong Kong enterprise must directly hold at least a 25% share ownership in the mainland China enterprise during the 12 consecutive months preceding its receipt of the dividends. However, a transaction or an arrangement entered into for the primary purpose of enjoying a preferential tax treatment should not be a reason for the application of the preferential tax treatment under the Hong Kong Tax Treaty. If a taxpayer inappropriately is entitled to such preferential tax treatment, the competent tax authority has the power to make appropriate adjustments. According to the Circular on Several Issues regarding Recognition ofthe “Beneficial Owner” in Tax Treaties, which was issued on February 3, 2018, by the SAT and took effect from April 1, 2018, or Circular 9, when determining the applicant’s status of the “beneficial owner” regarding tax treatments in connection with dividends, interests or royalties in the tax treaties, several factors, including, without limitation, whether the applicant is obligated to pay more than 50% of his or her income in 12 months to residents in a third country or region, whether the business operated by the applicant constitutes the actual business activities, and whether the counterparty country or region to the tax treaties levies any tax or grants a tax exemption on relevant incomes or levies tax at an extremely low rate, will be taken into account, and such determination will be analyzed according to the actual circumstances of the specific cases. Circular 9 further provides that an applicant who intends to prove his or her status as the “beneficial owner” shall submit the relevant documents to the relevant tax authority according to the Administrative Measures for Tax Convention Treatment for Non-resident Taxpayers, or Circular 60, which was replaced and repealed by Administrative Measures for Non-Resident Taxpayers to Enjoy Treatments under Tax Treaties, or Announcement 30, whichCircular 35. Circular 60 provides that non-resident enterprises are not required to obtain preapproval from the relevant tax authority in order to enjoy the reduced withholding tax rate. Instead, non-resident enterprises and their withholding agents may, by self-assessment and on confirmation that the prescribed criteria to enjoy the tax treaty benefits are met, directly apply the reduced withholding tax rate, and file necessary forms and supporting documents when performing tax filings, which will be subject to post-tax filing examinations by the relevant tax authorities. Circular 35, which was issued in October 2019 by the SAT and became effective on January 1, 2020, sets forth similar rules to those of Circular 60 that non-resident enterprises and their withholding agents shall enjoy treaty benefits by means of “self-judgment of eligibility, declaration of entitlement, and retention of relevant materials for future reference.” However, if a comprehensive analysis should be made when determiningcompetent tax authority finds out that it is necessary to apply the beneficial owner status based on various factors supported by various types of documents including the articles of association, financial statements, records of cash movements, board meeting minutes, board resolutions, staffinggeneral anti-tax avoidance rules, it may start general investigation procedures for anti-tax avoidance and materials, relevant expenditures, functions and risk assumption as well as relevant contracts and other information.adopt corresponding measures for subsequent administration. As a result, although our PRC subsidiary in mainland China, Tarena Hangzhou, is currently wholly owned by our Hong Kong subsidiary, Tarena HK, we cannot assure you that we would be entitled to the tax treaty benefits and enjoy the favorable 5% rate applicable under the Hong Kong Tax Treaty on dividends. If Tarena HK cannot be recognized as the beneficial owner of the dividends to be paid by Tarena Hangzhou to us, such dividends will be subject to a normal withholding tax of 10% as provided by the EIT Law. Moreover, according to Circular 81 and Circular 35, if the relevant tax authorities consider the transactions or arrangements we have are for the primary purpose of enjoying a preferential tax treatment, the relevant tax authorities may adjust the preferential withholding tax in the future.
54
Discontinuation or revocation of any of the preferential tax treatments and government subsidies or imposition of any additional taxes and surcharges could adversely affect our financial condition and results of operations.
Our PRC subsidiaries in mainland China are incorporated in the PRCmainland China and governed by applicable PRC tax laws and regulations.regulations of mainland China. The EIT Law, and its Implementing Rules, bothwhich became effective on January 1, 2008, and as amended on December 29, 2018, and its Implementing Rules, which became effective on January 1, 2008, and as amended on December 29, 2018, and April 23, 2019, respectively, have adopted a uniform statutory enterprise income tax rate of 25% to all enterprises in mainland China, including foreign-invested enterprises. The EIT Law and its Implementation Rulesimplementation rules also permit qualified “high and new technology enterprises,” or HNTEs, to enjoy a preferential enterprise income tax rate of 15% upon filing with relevant tax authorities. The qualification as a HNTE generally has a valid term of three years and the renewal of such qualification is subject to review by the relevant authorities in mainland China. Tarena Tech obtained its HNTE certificate in 2009 and renewed its HNTE certificate in 2012, 2015, 2018 and again in 2015,2021, and is eligible to enjoy a preferential tax rate of 15% until December 2024. In addition, Tarena Hangzhou, one of our subsidiaries in mainland China, was established in 2013 and is qualified as a “newly established software enterprise,” which entitles it to two years of full tax exemption followed by three years of 50% tax exemption, commencing from the endyear in which its taxable income is greater than zero, which was 2014. Tarena Hangzhou no longer has the 50% tax exemption since the beginning of 2017.2019. Tarena Hangzhou has obtained its HNTE certificate in 2020, and is eligible to enjoy a preferential income tax rate of 15% from December 2020 to December 2023. Tarena Hangzhou has also received financial subsidies from a PRC local government authority in 2013, 2015 and 2016. In 2016, Tarena Hangzhou acquired Hangzhou Hanru Education & Technology Co., Ltd., or Hanru Hangzhou, which was qualified as a “newly established software enterprise” and entitled to a full tax exemption of two years followed by a 50% tax exemption of three years, commencing from 2016. In addition, Hanru Hangzhou obtained its HNTE certificate in 2019 and is eligible to enjoy a preferential tax rate of 15% until December 2022. If Tarena Techany of these entities fails to maintain its HNTE qualification or renew its qualification when its current term expires, its applicable enterprise income tax rate may increase to 25%, which could have an adverse effect on our financial condition and results of operations. In addition, Tarena Hangzhou, one of our PRC subsidiaries, was established in 2013 and is qualified as a “newly established software enterprise”, which entitles it to two years of full tax exemption followed by three years of 50% tax exemption, commencing from the year in which its taxable income is greater than zero, which was 2014.Tarena Hangzhou has also received financial subsidies from PRC local government authority in 2013 and 2015.
Preferential tax treatments and financial subsidies are subject to review and may be adjusted or revoked at any time in the future. The discontinuation of any preferential tax treatments or financial subsidies or imposition of any additional taxes could adversely affect our financial condition and results of operations.
It may be difficult for overseas regulators to conduct an investigation or collect evidence within China.
Shareholder claims or regulatory investigations that are common in jurisdictions outside mainland China are difficult to pursue as a matter of law or practicality in mainland China. For example, in mainland China, there are significant legal and other obstacles to providing information needed for regulatory investigations or litigation initiated outside mainland China. Although the authorities in mainland 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 United States or other jurisdictions may not be efficient in the absence of a mutual and practical cooperation mechanism. Furthermore, according to Article 177 of the PRC Securities Law, or Article 177, which became effective in March 2020, no overseas securities regulator is allowed to directly conduct investigation or evidence collection activities within the territory of mainland China, and without the consent of the Chinese securities regulatory authorities and the other competent governmental agencies, no entity or individual may provide documents or materials related to securities business to any foreign party. While detailed interpretation of or implementation rules under Article 177 have yet to be promulgated, the inability of an overseas securities regulator to directly conduct investigation or evidence collection activities within mainland China and the potential obstacles for information provision may further increase difficulties you face in protecting your interests. See also “Item 3. Key Information—D. Risk Factors—Risks Related to Our 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.”
55
Fluctuations in exchange rates could have a material adverse effect on our results of operations and the value of your investment.
Although our reporting currency is in U.S. dollars, we earn revenues and incur costs and expenses in Renminbi. As a result, fluctuations in the exchange rate between the U.S. dollar and RMB will affect the relative purchasing power in RMB terms of our foreign currency holdings. As the functional currency for our PRC subsidiaries and consolidated VIEs is RMB, fluctuations in the exchange rate may also cause us to incur foreign exchange losses on any foreign currency holdings they may have. In addition, appreciation or depreciation in the value of the Renminbi relative to the U.S. dollar would affect our financial results in U.S. dollar terms without giving effect to any underlying change in our business or results of operations. If we decide to convert our RMB into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or for other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us.
The value of the Renminbi against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economic conditions and China’s foreign exchange policies. The PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar in 2005, and the Renminbi appreciated more than 20% against the U.S. dollar over the following three years.2005. However, the People’s Bank of China regularly intervenes in the foreign exchange market to limit fluctuations in Renminbi exchange rates and achieve policy goals. During the period between July 2008 and June 2010, the exchange rate between the RMB and the U.S. dollar had been stable and traded within a narrow range. However, the Renminbi fluctuated significantly during that period against other freely traded currencies, in tandem with the U.S. dollar. Since June 2010, the RMB has fluctuated against the U.S. dollar, at times significantly and unpredictably. In August 2015, the People’s Bank of China changed the way it calculates the mid-point price of Renminbi against the U.S. dollar, requiring the market-makers who submit for reference rates to consider the previous day’s closing spot rate, foreign-exchange demand and supply as well as changes in major currency rates. On November 30, 2015, the Executive Board of the International Monetary Fund (IMF) completed the regular five-year review of the basket of currencies that make up the Special Drawing Right, or the SDR, and decided that with effect from October 1, 2016, Renminbi is determined to be a freely usable currency and will be included in the SDR basket as a fifth currency, along with the U.S. dollar, the Euro, the Japanese yen and the British pound. The value of the RMB against the U.S. dollar has been volatile over the past few years. From mid 2020 to early 2022, the RMB appreciated significantly due to the influx of foreign capital into the Chinese market. During 2022, however, the RMB depreciated significantly amid the contrast monetary policy measures between China and the United States. Over the past few months, the RMB has been on an appreciation trend as China reopened near the end of 2022 and the market feels greater optimism over prospects for a domestic economic recovery. 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 we cannot assure you that the Renminbi will not appreciate or depreciate significantly in value against the U.S. dollar in the future. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the RMB and the U.S. dollar in the future.
Any significant appreciation or depreciationSignificant revaluation of the RenminbiRMB may materiallyhave a material and adversely affect our net revenues, earnings and financial position, and the value of, and any dividends payableadverse effect on our ADSs in U.S. dollars.your investment. For example, a significant depreciationto the extent that we need to convert U.S. dollars into RMB for capital expenditures and working capital and other business purposes, appreciation of the RenminbiRMB against the U.S. dollar may significantly reducewould have an adverse effect on the RMB amount we would receive from the conversion. Conversely, if we decide to convert our RMB into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs or for other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us. In addition, appreciation or depreciation in the value of the RMB relative to U.S. dollars would affect the U.S. dollar equivalent of our earnings, whichregardless of any underlying change in turn could adversely affect the priceour business or results of our ADSs.operations.
In January 2016, weWe have not entered into a forwardany foreign currency contracts with China Merchants Bank Co., Ltd. The notional amounts offorward contract since 2017. Due to the forward foreign currency contracts were RMB564.1 million (US$87.1 million)fluctuation in the exchange rate between U.S. dollars and the settlement date will be on May 19, 2016. WeRMB, we may decide to enter into additional foreign currency contractcontracts in the future, the availability and effectiveness of these hedges may be limited and we may not be able to adequately hedge our exposure or at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations of mainland China that restrict our ability to convert Renminbi into foreign currency. As a result, fluctuations in exchange rates may have a material adverse effect on your investment.
56
The audit report included in this annual report is prepared by an auditor who is not inspected by the Public Company Accounting Oversight Board and, as such, you are deprivedTable of the benefits of such inspection.Contents
Auditors of companies that are registered with the U.S. Securities and Exchange Commission, or the SEC, and traded publicly in the United States, including our independent registered public accounting firm, must be registered with the U.S. Public Company Accounting Oversight Board (United States), or PCAOB, and are required by the laws of the United States to undergo regular inspections by the PCAOB to assess their compliance with the laws of the United States and professional standards. Because our auditor is located in the Peoples’ Republic of China, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the PRC authorities, our auditor is not currently inspected by the PCAOB. In May 2013, 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 PCAOB, the CSRC or the PRC Ministry of Finance in the United States and the PRC, respectively. 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 PCAOB and audit Chinese companies that trade on U.S. exchanges.
This lack of PCAOB inspections in China prevents the PCAOB from regularly evaluating audits and quality control procedures of any auditors operating in China, including our auditor. As a result, investors may be deprived of the benefits of PCAOB inspections. The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections. Investors may lose confidence in our reported financial information and procedures and the quality of our financial statements.
Proceedings instituted by the SEC against certain China-based 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 Securities Exchange Act of 1934, as amended, or the Exchange Act.
On January 22, 2014, Judge Cameron Elliot, an SEC administrative law judge, issued an initial decision suspending the Chinese member firms of the “Big Four” accounting firms, including our independent registered public accounting firm, from, among other things, practicing before the SEC for six months. In February 2014, the initial decision was appealed. While under appeal and in February 2015, the Chinese member firms of the “Big Four” accounting firms reached a settlement with the SEC. As part of the settlement, each of the Chinese member firms of the “Big Four” accounting firms agreed to settlement terms that include a censure; undertakings to make a payment to the SEC; procedures and undertakings as to future requests for documents by the SEC; and possible additional proceedings and remedies should those undertakings not be adhered to.
If the settlement terms are not adhered to, Chinese member firms of the “Big Four” accounting firms may be suspended from practicing before the SEC. If our independent registered public accounting firm were suspended, from practicing before the SEC and we were unable to timely find another registered public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be determined not to be in compliance with the requirements of the Exchange Act. Such a determination could ultimately lead to our delisting from the NASDAQ Global Select Market or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of our ADSs in the United States.
Substantial uncertaintiesUncertainties exist with respect to the enactment timetable, interpretation and implementation of draftthe newly enacted PRC Foreign Investment Law and how it may impact the viability of our current corporate structure, corporate governance and business operations.
The MOFCOM published a discussion draft ofOn March 15, 2019, the proposedNational People’s Congress approved the PRC Foreign Investment Law, inor the Foreign Investment Law, which came into effect on January 2015 aiming to, upon its enactment, replace1, 2020, and replaced the trio of existing laws regulating foreign investment in mainland China, namely,the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Lawand the Wholly Foreign-invested Enterprise Law,, together with their implementation rules and ancillary regulations. The draft Foreign Investment Law embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for both foreign and domestic investments. WhileHowever, since it is relatively new, uncertainties still exist in relation to its interpretation and implementation. For instance, under the MinistryForeign Investment Law, “foreign investment” refers to the investment activities directly or indirectly conducted by foreign individuals, enterprises or other entities in mainland China. Though the Foreign Investment Law does not explicitly classify contractual arrangements as a form of Commerce solicited commentsforeign investment, there is no assurance that foreign investment via a contractual arrangement would not be interpreted as a type of indirect foreign investment activity under the definition of “foreign investment” in the future. In addition, the definition contains a catch-all provision which includes investments made by foreign investors through means stipulated in laws or administrative regulations or other methods prescribed by the State Council. Therefore, it still leaves leeway for future laws, administrative regulations or provisions promulgated by the State Council to provide for contractual arrangements as a form of foreign investment. In any of these cases, it will be uncertain whether our contractual arrangements will be deemed to be in violation of the market access requirements for foreign investment under laws and regulations of mainland China. In addition, the Supreme People’s Court issued Certain Opinions Concerning the Application of the Foreign Investment Law on this draft earlier this year, substantial uncertainties existDecember 16, 2019, or the Foreign Investment Law Judicial Interpretations, which provides that an investment contract in relation to the investment by a foreign investor in a field which is prohibited from foreign investment under the Negative List may be invalidated by the courts. Although we believe a contractual arrangement would not be deemed as an “investment contract” under the Foreign Investment Law Judicial Interpretations, we cannot assure you that the PRC courts would take the same view that we have. Furthermore, if future laws, administrative regulations or provisions prescribed by the State Council mandate further actions to be taken by companies with respect to its enactment timetable, interpretationexisting 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 implementation. The draft Foreign Investment Law, if enacted as proposed, mayappropriate measures to cope with any of these or similar regulatory compliance challenges could materially impact the viability ofand adversely affect our current corporate structure, corporate governance and business operationsoperations.
The tension in many aspects.international trade and rising political tension, particularly between the U.S. and China, may adversely impact our business, financial condition, and results of operations.
Among other things,Although cross-border business may not be an area of our focus, if we plan to expand our business internationally in the draft Foreign Investment Law expandsfuture, any unfavorable government policies on international trade, such as capital controls or tariffs, may affect the definitiondemand for 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 foreign investmentoperations. There have been heightened tensions in international economic relations, such as in the relations between the United States and introducesChina. The U.S. government has imposed, and has 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 principleUnited 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 “actual control” in determining whetherAmerica and the People’s Republic of China as a company is considered a foreign-invested enterprise, or an FIE. The draft Foreign Investment Law specifically provides that entities established in China but “controlled” by foreign investorsphase one trade deal, effective on February 14, 2020. It remains unclear what additional actions, if any, will be treated as FIEs. Once an entitytaken by the U.S. or other governments with respect to international trade, tax policy related to international commerce, or other trade matters.
57
The situation is determined to be an FIE, it will be subject tofurther complicated by the foreign investment restrictions or prohibitions set forthpolitical tensions between the United States and China that escalated during the COVID-19 pandemic and in a “negative list” to be separatelythe 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 State Council later. The “negative list” will consistU.S. President in August 2020 that prohibit certain transactions with certain China-based companies and their respective subsidiaries. Against this backdrop, China has implemented, and may further implement, measures in response to the changing trade policies, treaties, tariffs and sanctions and restrictions against Chinese companies initiated by the U.S. government. Recently, the United States and various foreign governments have imposed controls, license requirements and restrictions on the import or export of technologies and products (or voiced the intention to do so). For instance, in October 2022, the U.S. Commerce Department’s Bureau of Industry and Security issued rules aimed at restricting China’s ability to obtain advanced computing chips, develop and maintain supercomputers, and manufacture advanced semiconductors. In addition, the U.S. government may potentially impose a list of industry categories where foreign investments are strictly prohibited and a list of industry categories where foreign investments are subject to certain restrictions. Foreignban prohibiting U.S. persons from making investments in or engaging in transactions with certain Chinese companies. Measures such as these could deter suppliers in the United States and/or other countries that impose export controls and other restrictions from providing technologies and products to, making investments in, or otherwise engaging in transactions with Chinese companies. As a result, Chinese companies would have to identify and secure alterative supplies or sources of financing, while they may not be able to do so in a timely manner and at commercially acceptable terms, or at all. In addition, Chinese companies may have to limit and reduce their research and development and other business sectors outsideactivities, or cease conducting transactions with parties, in the United States and other countries that impose export controls or other restrictions. 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 “negative list” will only be subject to filing procedures, whereas foreign investments in the restricted industries must apply for prior approval from the foreign investment administration authority. In case the underlying businesscurrent international trade and political tension, and any escalation of an FIE falls within the foreign investment restricted industries, upon market entry clearance by the MOFCOM, the FIE may file an application for being treated as a PRC domestic investment if the FIE is “controlled” by PRC entities and/or citizens. In this connection, “control” is broadly defined in the draft law to cover the following summarized categories: (i) holding 50% or more of the voting rights of the subject entity; (ii) holding less than 50% of the voting rights of the subject entity but having the power to secure at least 50% of the seatssuch tension, on the board or other equivalent decision making bodies, or havingeducation industry in China is uncertain, the voting power to exert material influencenegative impact on the board, the shareholders’ meeting or other equivalent decision making bodies; or (iii) having the power to exert decisive influence, via contractual or trust arrangements, over the subject entity’s operations,general, economic, political and social conditions may adversely impact our business, financial matters or other key aspectscondition and results of business operations.
The “variable interest entity” structure, or VIE structure, has been adopted by many PRC-based companies, including us, to obtain necessary licenses and permits in the industries that are currently subject to foreign investment restrictions in China. See “—Risks RelatingRelated to Our Corporate Structure—If the PRC government finds that the agreements that establish the structure for holding our ICP license do not comply with applicable PRC laws and regulations, we could be subject to severe penalties” and “Item 4. Information on the Company—C. Organizational Structure.” Under the draft Foreign Investment Law, variable interest entities that are controlled via contractual arrangement would also be deemed as FIEs, if they are ultimately “controlled” by foreign investors. Therefore, for any companies with a VIE structure in an industry category that is on the “negative list,” the VIE structure may be deemed legitimate only if the ultimate controlling person(s) is/are of PRC nationality (including PRC citizens, PRC governmental authorities and their affiliates, and the PRC companies controlled by the foregoing). Conversely, if the actual controlling person(s) is/are of foreign nationalities, then the variable interest entities will be treated as FIEs and any operation in the industry category on the “negative list” without market entry clearance may be considered as illegal.
Through our dual-class share structure, Mr. Shaoyun Han, our founder, chairman and chief executive officer, a PRC citizen, possessed and controlled 53.8% of the voting power of our company as of March 31, 2016. The draft Foreign Investment Law has not taken a position on what actions will be taken with respect to the existing companies with a VIE structure, whether or not these companies are controlled by Chinese parties. Moreover, it is uncertain whether the Internet content and other value-added telecommunication service industry, in which our VIEs operate, will be subject to the foreign investment restrictions or prohibitions set forth in the “negative list” to be issued. If the enacted version of the Foreign Investment Law and the final “negative list” mandate further actions, such as MOFCOM market entry clearance or certain restructuring of our corporate structure and operations, to be completed by companies with existing VIE structure like us, we face substantial uncertainties as to whether these actions can be timely completed, or at all, and our business and financial condition may be materially and adversely affected.
The draft Foreign Investment Law, if enacted as proposed, may also materially impact our corporate governance practice and increase our compliance costs. For instance, the draft Foreign Investment Law imposes stringent ad hoc and periodic information reporting requirements on foreign investors and the applicable FIEs. Aside from investment implementation report and investment amendment report that are required at each investment and alteration of investment specifics, an annual report is mandatory, and large foreign investors meeting certain criteria are required to report on a quarterly basis. Any company found to be non-compliant with these information reporting obligations may potentially be subject to fines and/or administrative or criminal liabilities, and the persons directly responsible may be subject to criminal liabilities.
Risks Relating to Our ADSs
The trading prices of our ADSs have fluctuated and may be volatile, which could result in substantial losses to investors.
The trading prices of our ADSs have fluctuated since we first listed our ADSs. Since our ADSs became listed on NASDAQ on April 3, 2014, the trading price of our ADSs has ranged from US$6.54 to US$15.85 per ADS, and the last reported trading price on April 19, 2016 was US$10.97 per ADS. The trading prices of our ADSs may continue to fluctuate and be volatile due to factors beyond our control. This may happen because of broad market and industry factors, likesuch as the performance and fluctuation of the market prices of other companies with business operations located mainly in mainland China that have listed their securities in the United States. In recent years, the widespread negative publicity of alleged fraudulent accounting practices and poor corporate governance of certain U.S. public companies with operations in mainland China were believed to have negatively affected investors’ perception and sentiment towards companies with a connection with China, which significantly and negatively affected the trading prices of some companies’ securities listed in the U.S. Any similar negative publicity or sentiment may affect the performances of our ADSs. A number of PRCmainland China companies have recently listed or are in the process of listing their securities on U.S. stock markets. The securities of some of these companies have experienced significant volatility, including price declines in connection with their initial public offerings. The trading performances of these PRCmainland China companies’ securities after their offerings may affect the attitudes of investors toward PRCmainland China companies listed in the United States in general and consequently may impact the trading performance of our ADSs, regardless of our actual operating performance.
Furthermore, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of companies like us. These broad market and industry factors may materially reduce the market price of our ADSs, regardless of our operating performance.
In addition to market and industry factors, the price and trading volume for our ADSs may be highly volatile for factors specific to our own operations, including the following:
| the financial projections that we may choose to provide to the public, any changes in those projections or our failure for any reason to meet those projections; |
| variations in our net revenues, net income and cash flow; |
| announcements of new investments, acquisitions, strategic partnerships, or joint ventures; |
| announcements of new services and expansions by us or our competitors; |
| changes in financial estimates by securities analysts; |
58
| additions or departures of key personnel; |
| release of lock-up or other transfer restrictions on our outstanding equity securities or sales of additional equity securities; |
| potential litigation, regulatory investigations or other legal proceedings involving us; and |
| detrimental negative publicity about us or our industry. |
Any of these factors may result in large and sudden changes in the volume and price at which our ADSs will trade.
If we fail to meet Nasdaq’s minimum bid price or minimum market value of publicly held shares requirements, our ADSs could be subject to delisting, which may significantly reduce the liquidity of our ADSs and cause further declines to the market price of our ADSs.
Our ADSs are currently listed on the Nasdaq Global Select Market, or Nasdaq. The Nasdaq Listing Rules have minimum requirements that a company must meet for continued listing on Nasdaq. These requirements include maintaining a minimum closing bid price of US$1.00 per ADS and a minimum market value of publicly held shares of US$15 million for a period of 30 consecutive trading days. On December 10, 2021, we received a written notification from Nasdaq advising us that our ADS had been trading at a price that would subject our ADSs to delisting if we fail to regain compliance with the Nasdaq minimum bid price requirements. We were granted a grace period of 180 calendar days, expiring on June 8, 2022, in which to regain compliance. We have regained compliance by changing the ratio of our ADS to our Class A ordinary shares since January 6, 2022, as the closing bid price of our ADSs was at least US$1.00 for a minimum of ten consecutive business days during this 180-day period. However, there can be no assurance that we will meet the requirements for continued listing.
On January 20, 2022, we received a further notice from Nasdaq indicating that we no longer meet the continued listing requirement of minimum Market Value of Publicly Held Shares (MVPHS) for Nasdaq because our MVPHS for the last 30 consecutive business days was below the minimum MVPHS requirement of US$15 million. We were granted a grace period of 180 calendar days, expiring on July 19, 2022, in which to regain compliance. We can cure this deficiency if our MVPHS closes at US$15 million or more for a minimum of ten consecutive business days during the compliance period. We have regained compliance with the minimum MVPHS requirement since June 1, 2022. However, there can be no assurance that we will meet the requirements for continued listing.
There can be no assurance that we will stay compliant with the requirements for continued listing at all times going forward. The delisting of our ADSs or transfer of listing may significantly reduce the liquidity of our ADSs, cause further declines to the market price of our ADSs, and make it more difficult for us to obtain adequate financing to support our continued operation.
If securities or industry analysts do not publish research or reports about our business, or if they adversely change their recommendations regarding our ADSs, the market price for our ADSs and trading volume could decline.
The trading market for our ADSs is influenced by research or reports that industry or securities analysts publish about our business. If one or more analysts who cover us downgrade our ADSs or publish unfavorable research about us, the market price for our ADSs would likely decline. If one or more of these analysts cease to cover us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the market price or trading volume for our ADSs to decline.
We cannot guarantee that any share repurchase program will be fully consummated or that any share repurchase program will enhance long-term shareholder value, and share repurchases could increase the volatility of the price of our Class A ordinary shares and/or ADSs and could diminish our cash reserves.
On December 31, 2021, we announced that our board of directors has authorized a share repurchase program, under which we may purchase up to US$2.5 million of our shares over the next six months. On June 29, 2022, we announced that our board of directors has authorized to extend the share repurchase program over the next six months, pursuant to which we may repurchase up to approximately US$1.36 million of our shares through December 31, 2022. On November 28, 2022, our board of directors authorized a new share repurchase program over the next twelve months, pursuant to which we may repurchase up to US$3 million of our shares during the 12-month period beginning from November 28, 2022. From December 31, 2021, to March 31, 2023, we repurchased approximately 700,452 ADSs at a weighted average price of US$3.54 per ADS. Our share repurchase program could affect the price of our stock and increase volatility and may be suspended or terminated at any time.
59
Our dual class share structure with different voting rights 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 ordinary shares are divided into Class A ordinary shares and Class B ordinary shares. Holders of Class A ordinary shares are entitled to one vote per share, while holders of Class B ordinary shares are entitled to ten votes per share, with Class A and Class B ordinary shares voting together as one class on all matters subject to a shareholders’ vote. As of March 31, 2016,February 28, 2023, our Class B ordinary shares represent 19.0%13.4% of our total issued and outstanding ordinary shares on an as-converted basis and entitle their holders to 70.1%60.8% of our total voting power.
As a result of the dual class share structure and the concentration of ownership, holders of our Class B ordinary shares have substantial influence over our business, including decisions regarding mergers, consolidations and the sale of all or substantially all of our assets, election of directors and other significant corporate actions. They 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 deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and may reduce the price of our 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. For more information regarding our principal shareholders and their affiliated entities, see “Item 7. Major Shareholders and Related Party Transactions.”
The sale or availability for sale of substantial amounts of our ADSs could adversely affect their market price.
Sales of substantial amounts of our ADSs in the public market, or the perception that these sales could occur, could adversely affect the market price of our ADSs and could materially impair our ability to raise capital through equity offerings in the future. We cannot predict what effect, if any, market sales of securities held by our significant shareholders or any other shareholder or the availability of these securities for future sale will have on the market price of our ADSs. In addition, certain holdersTalent Fortune Investment Limited, an affiliate of our existing shareholders areKKR & Co. L.P., is entitled to certain registration rights, including demand registration rights, piggyback registration rights, and Form F-3 or Form S-3 registration rights. Registration of these shares under the Securities Act would result in these shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration. Sales of these registered shares in the public market, or the perception that such sales could occur, could cause the price of our ADSs to decline.
We may be classified as a passive foreign investment company, for United States federal income tax purposes,or PFIC, which could result in adverse United StatesU.S. federal income tax consequences to United States investors in theU.S. Holders of our ADSs or Class A ordinary shares.
WeA non-U.S. corporation, such as our company, will be classified as a “passivepassive foreign investment company” or (a “PFIC” if, in the case of) for U.S. federal income tax purposes for any particular taxable year, if either (a)(i) 75% or more of ourits gross income for such year consists of certain types of “passive” income, or (b)(ii) 50% or more of the average quarterly value of ourits assets (as determined(generally based on an average of the basisquarterly values of fair market value)the assets) during such year is attributable to assets that produce passive income or are held for the production of passive income.income (the “asset test”). A separate determination must be made after the close of each taxable year as to whether a non-U.S. corporation is a PFIC for that year. Passive income generally includes dividends, interest, royalties, rents, annuities, net gains from the sale or exchange of passive assets (including property producing passive income)such income and net foreign currency gains. For this purpose, cash isand assets readily convertible into cash are categorized as a passive assetassets and the company’sour unbooked intangibles associated with active business activity are taken into account as non-passive assets.
In addition, a non-passive asset. Wenon-U.S. corporation will be treated as owning oura proportionate share of the assets and earning oura proportionate share of the income of any other corporation in which we own, directly or indirectly, 25% or more than 25% (by value) of the stock.
Although the law in this regard is unclear, we treat our consolidatedthe VIEs as being beneficially owned by us for United StatesU.S. federal income tax purposes not only because we exercise effective financial control over the operation of such entities, but also becauseentity’s management decisions, we are entitled to substantially all of theirthe economic benefits associated with the entity, and, as a result, we consolidate their operatingthe entity’s results of operations in our consolidatedU.S. GAAP financial statements. If it werewas determined, however, that we are not the owner of our consolidatedthe VIEs for United StatesU.S. federal income tax purposes, we may be treated as a PFIC for ourthe current taxable year and in futureany subsequent taxable years.
year.
Based on our current income and assets and the valuemarket price of our ADSs and outstanding Class A ordinary shares, the value of our assets and the composition of our assets and income, we do not believe that we were a PFIC for our taxable year ended December 31, 20152022, and we do not expect to be classified as a PFIC for ourin the current taxable year ending December 31, 2016 or in the foreseeable future.
60
While we do not expect to become a PFIC, because the value of our assets for purposes of the asset test will generally be determined by reference to the market price of our ADSs or Class A ordinary shares, fluctuations in the market price of our ADSs or Class A ordinary shares may cause us to become a PFIC for the current or subsequent taxable years. In particular, recent declines in the market price of our ADSs increased our risk of becoming a PFIC. The market price of our ADSs may continue to fluctuate considerably and, consequently, we cannot assure you of our PFIC status for any taxable year. The determination of whether we will be or become a PFIC will also depend, in part, on the composition of our income and assets, which will be affected by how, and how quickly, we use our liquid assets. Under circumstances where we determine not to deploy significant amounts of cash for active purposes, or not to treat our consolidated VIEs as owned by us for United States federal income tax purposes, our risk of being classified as a PFIC may substantially increase. BecauseIn addition, because there are uncertainties in the application of the relevant rules and because PFIC status is a factualfact-intensive determination made annually after the close of each taxable year,on an annual basis, there can be no assurance that we will not be a PFIC for the current taxable year or any future taxable year.
If we are classifiedwere treated as a PFIC infor any taxable year during which a U.S. Holder (as defined in(defined below) held an ADS or a Class A ordinary share, certain adverse U.S. federal income tax consequences could apply to the U.S. Holder. See “Item 10. Additional Information—E. Taxation—United States Federal Income Tax Considerations—Passive Foreign Investment Company Considerations”) may incur significantly increased United States income tax on gain recognized on the sale or other disposition of the ADSs or ordinary shares and on the receipt of distributions on the ADSs or ordinary shares to the extent such gain or distribution is treated as an “excess distribution” under the United States federal income tax rules and such holders may be subject to burdensome reporting requirements. Further, if we are classified as a PFIC for any year during which a U.S. Holder holds our ADSs or ordinary shares, we generally will continue to be treated as a PFIC for all succeeding years during which such U.S. Holder holds our ADSs or ordinary shares. For more information, see “Item 10. Additional Information—E. Taxation—United States Federal Income Tax Considerations—Passive Foreign Investment Company Considerations.”
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 LawAct, Cap 22 (Law 3 of 1961, as consolidated and revised) of the Cayman Islands, (2013 Revision) and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from the common law of England, the decisions of whose courts are of persuasive authority, but are not binding, on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States. Some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands. In addition, Cayman Islands companies may not have the standing to initiate a shareholder derivative action in a federal court of the United States.
The Cayman Islands courts are also unlikely:
| to recognize or enforce against us judgments of courts of the United States based on certain civil liability provisions of U.S. securities laws; and |
| to impose liabilities against us, in original actions brought in the Cayman Islands, based on certain civil liability provisions of U.S. securities laws that are penal in nature. |
There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the courts of the Cayman Islands will in certain circumstances recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits.
As a result of all of the above, public shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders than they would as public shareholders of a company incorporated in the United States.
Judgments obtained against us by our shareholders may not be enforceable.
We are a Cayman Islands company and almost all of our assets are located outside of the United States. AllSubstantially all of our current operations are conducted in mainland China. In addition, most of our current directors and executive officers are nationals and residents of countries other than 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 United States 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.
61
The voting rights of holders of ADSs are limited by the terms of the deposit agreement, and you may not be able to exercise your right to vote your Class A ordinary shares.
As a holder of our ADSs, you will only be able to exercise the voting rights with respect to the underlying Class A ordinary shares in accordance with the provisions of the deposit agreement. Under the deposit agreement, you must vote by giving voting instructions to the depositary. Upon receipt of your voting instructions, the depositary will vote the underlying Class A ordinary shares in accordance with these instructions. You will not be able to directly exercise your right to vote with respect to the underlying shares unless you withdraw the shares. Under our amended and restated memorandum and articles of association, as amended, the minimum notice period required for convening a general meeting is ten clearcalendar days. When a general meeting is convened, you may not receive sufficient advance notice to withdraw the shares underlying your ADSs to allow you to vote with respect to any specific matter. If we ask for your instructions, the depositary will notify you of the upcoming vote and will arrange to deliver our voting materials to you. We cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your shares. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for their manner of carrying out your voting instructions. This means that you may not be able to exercise your right to vote and you may have no legal remedy if the shares underlying your ADSs are not voted as you requested.
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 intend to take advantage of certain exemptions from various requirements that are 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 for so long as we are an emerging growth company, which may be for as long as five years following our initial public offering in April 2014. As a result of our current status as an emerging growth company, our investors may not have access to certain information that they may deem important.
The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting standards. However, we had 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. The decision to opt out of the extended transition period under the JOBS Act was irrevocable.
We are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions applicable to United States domestic public companies.
Because we 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 share ownership and trading activities and liability for insiders who profit from trades made in a short period of time; |
| the selective disclosure rules by issuers of material nonpublic information under Regulation |
| ● | certain audit committee independence requirements in Rule 10A-3 of the Exchange Act. |
We are required to file an annual report on Form 20-F within four months of the end of each fiscal year. In addition, we publish our results on a quarterly basis as press releases, distributed pursuant to the rules and regulations of the NASDAQ Global Select Market. Press releases relating to financial results and material events are also be furnished to the SEC on Form 6-K. However, theThe information we are required to file with or furnish to the SEC are less extensive and less timely as compared to that required to be filed with the SEC by United States domestic issuers. As a Cayman Islands company listed on the NASDAQ Global Select Market,Nasdaq, we are subject to the NASDAQ Global Select MarketNasdaq corporate governance listing standards. However, NASDAQ Global Select MarketNasdaq 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 Global Select MarketNasdaq corporate governance listing standards.
We relied on the exemption available to foreign private issuers for the requirement that itsuch issuers hold an annual general meeting of shareholders no later than December 31, 2015 in 2015.2022. In this respect, we elected to follow home country practice and did not hold an annual general meeting of shareholders no later than December 31, 2015 in 2015.2022. We may also continue to rely on this and other exemptions available to foreign private issuers in the future, and to the extent that we choose to do so in the future, our shareholders may be afforded less protection than they otherwise would under the NASDAQ Global Select MarketNasdaq corporate governance listing standards applicable to U.S. domestic issuers. As a result, you may not be afforded the same protections or information which would be made available to you if you were you investing in a United States domestic issuer.
62
You may not receive dividends or other distributions on our Class A ordinary shares and you may not receive any value for them, if it is illegal or impractical to make them available to you.
The depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on Class A ordinary shares or other deposited securities underlying our ADSs, after deducting its fees and expenses. You will receive these distributions in proportion to the number of Class A ordinary shares your ADSs represent. However, the depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to any holders of ADSs. For example, it would be unlawful to make a distribution to a holder of ADSs if it consists of securities that require registration under the Securities Act but that are not properly registered or distributed under an applicable exemption from registration. The depositary may also determine that it is not feasible to distribute certain property through the mail. Additionally, the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may determine not to distribute such property. We have no obligation to register under U.S. securities laws any ADSs, ordinary shares, rights or other securities received through such distributions. We also have no obligation to take any other action to permit the distribution of ADSs, ordinary shares, rights or anything else to holders of ADSs. This means that you may not receive distributions we make on our ordinary shares or any value for them if it is illegal or impractical for us to make them available to you. These restrictions may cause a material decline in the value of our ADSs.
You may not be able to participate in our rights offerings and may experience dilution of your holdings.
We may, from time to time, distribute rights to our shareholders, including rights to acquire securities. Under the deposit agreement, the depositary will not distribute rights to holders of ADSs unless the distribution and sale of rights and the securities to which these rights relate are either exempt from registration under the Securities Act with respect to all holders of ADSs, or are registered under the provisions of the Securities Act. The depositary may, but is not required to, attempt to sell these undistributed rights to third parties, and may allow the rights to lapse. We may be unable to establish an exemption from registration under the Securities Act, and we are under no obligation to file a registration statement with respect to these rights or underlying securities or to endeavor to have a registration statement declared effective. Accordingly, holders of ADSs may be unable to participate in our rights offerings and may experience dilution of their holdings as a result.
You may be subject to limitations on transfer of your ADSs.
Your ADSs are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems expedient in connection with the performance of its duties. The depositary may close its books from time to time for a number of reasons, including in connection with corporate events, such as a rights offering, during which time the depositary needs to maintain an exact number of ADS holders on its books for a specified period. The depositary may also close its books in emergencies, and on weekends and public holidays. The depositary may refuse to deliver, transfer or register transfers of our ADSs generally when our share register or the books of the depositary are closed, or at any time if we or the depositary thinks it is advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.
63
We incur increased costs as a result of being a public company, and we cannot predict or estimate the amount of additional future costs we may incur or the timing of such costs
costs.
As a public company, we incur significant legal, accounting and other expenses that we did not incur as a private company, including additional costs associated with our public company reporting obligations. The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC and NASDAQ Global Select Market,Nasdaq, impose various requirements on the corporate governance practices of public companies. As a companyCompliance with less than US$1.0 billion in revenues for our last fiscal year, we qualify as an “emerging growth company” pursuant to the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 in the assessment of the emerging growth company’s internal control over financial reporting and permission to delay adopting new or revised accounting standards until such time as those standards apply to private companies. However, we had 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. The decision to opt out of the extended transition period under the JOBS Act was irrevocable.
We expect these rules and regulations have increased, and we expect such compliance to continue to increase our legal and financial compliance costs and to make somecertain corporate activities more time-consuming and costly. After we are no longer an “emerging growth company,” we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 and the other rules and regulations of the SEC. We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate with reasonable certainty the amount of additional costs we may incur or the timing of such costs.
In the past, shareholders of a public company often brought securities class action suits against the company following periods of instability in the market price of that company’scompany’s securities. In the fourth quarter of 2015,We have been investigated by several law firmfirms in the U.S. announced that they were investigatingfor potential securities claims in the past. Tarena International Inc. and certain of its current and former officers and directors have been named as defendants in a putative securities class action captioned Yili Qiu v. Tarena International, Inc. et al., (Case No. 1:21-cv-03502) filed on behalfJune 22, 2021, in the U.S. District Court for the Eastern District of our shareholders against us.New York. The complaint asserts that defendants made false or misleading statements in certain SEC filings between August 16, 2016, and November 1, 2019, related to the Company’s business and operating results in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. On September 1, 2021, the court entered an order appointing lead plaintiff in this action. On September 14, 2021, the parties filed a joint status report and proposed scheduling stipulation, pursuant to which, the lead plaintiff filed an amended complaint on November 1, 2021. On January 18, 2022, Tarena International Inc. moved to dismiss the complaint. On April 4, 2022, lead plaintiff served its opposition to the motion. Briefing was completed on May 19, 2022. While the motion to dismiss was pending, Plaintiff and the Company reached an agreement in principle to settle all claims. On July 13, 2022, Plaintiff filed a letter informing the court of the settlement in principle. On August 31, 2022, the parties filed a motion for preliminary approval of the proposed settlement agreement. Preliminary approval hearing took place on November 8, 2022, and the Court reserved judgement on the motion pending submission of additional information. In December 2022, the parties submitted revised settlement materials to the Court. The Court decision on the revised settlement papers is pending. We cannot predict whether such investigations willascertain the final result in lawsuits, includingof the pending class action, suits, being filed against us. If we were involvedand our involvement in athe class action suit, itactions, whatever the final result may be, could divert a significant amount of our management’smanagement’s attention and other resources from our business and operations, which could harm our results of operations and require us to incur significant expenses to defend the suit. Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could have a material adverse effect on our financial condition and results of operations.
ITEM 4.INFORMATION ON THE COMPANY
| A. | History and Development of the Company |
We began our operations in Beijing in September 2002 through Beijing Tarena Technology Co., Ltd. In November 2012, we changed the name of Beijing Tarena Technology Co., Ltd. to Tarena Technologies Inc., or Tarena Tech. Tarena International, Inc., an exempted company with limited liability, was incorporated in the Cayman Islands in October 2003 and became our ultimate holding company. We established Tarena Hong Kong Limited, or Tarena HK, as our wholly-ownedwholly owned subsidiary in October 2012. Tarena HK wholly owns Tarena Software Technology (Hangzhou) Co., Ltd., or Tarena Hangzhou, an entity that we established in January 2013.
On April 3, 2014, our ADSs began trading on the NASDAQ Global Select MarketNasdaq under the ticker symbol “TEDU.” We and certain selling shareholders sold a total of 15,300,000 ADSs, representing 15,300,000 Class A ordinary shares, at an initial offering price of $9.00 per ADS. Concurrently with our initial public offering, we also issued 1,500,000 Class A ordinary shares at a price of US$9.00 per share to New Oriental Education & Technology Group Inc. Ltd. through a private placement.
64
Prior to 2012, we conducted a substantial portion of our operations through ourthe consolidated VIEs and their respective subsidiaries and schools. On January 30, 2012, thePRC Catalogue for the Guidance of Foreign Investment Industries (amended) became effective, which listed professional education service as an industry for which foreign investments are “encouraged” by the government andgovernment. On April 10, 2015, the newPRC Catalogue for the Guidance of Foreign Investment Industries (amended) became effective, which listed non accreditednon-accredited professional education service as an industry for which foreign investments are “encouraged” by the government. On July 28, 2017, the new PRC Catalogue for the Guidance of Foreign Investment Industries (amended) became effective, which listed non-accredited professional education service as an industry for which foreign investments are “encouraged” by the government. In light of such change of law, starting from the second half of 2012, we began to transfer the operations, including related assets and liabilities, of ourthe consolidated VIEs to Tarena Tech and its subsidiaries and schools. All of our learning center operations of VIEs had been transferred to Tarena Tech and its subsidiaries and schools. We areschools before 2018, while one of our learning centers was transferred back to Beijing Tarena for business operation purpose in the process2018. In 2019, three of winding down Shanghaiour learning centers which provide online education services were transferred back to Beijing Tarena for business operation purpose and one school was newly set up through Beijing Tarena. In 2020 and 2021, three and two schools were newly set up through Beijing Tarena, respectively. In February 2023, one school was transferred to a subsidiary of Beijing Tarena. We expect to continue to control and consolidate Beijing Tarena and Beijing Tongcheng, which holds anhold Internet Content Provider license,licenses, or ICP license. Beijing Tarena islicenses. We operate our TMOOC.cn and 61it.cn websites through the VIEs, and TMOOC.cn website has been included in the process of applying to add ourTMOOC.cn websitepermitted operation scope under the ICP license held by Beijing Tarena. In 2015, we invested US$2.9 millionTarena and 61it.cn website has been included in three PRC companies which are engaged in provision of educational products and services throughthe permitted operation scope under the ICP license held by Beijing Tarena.Tongcheng. For a description of the risks relatingrelated to our corporate structure and the contractual arrangements we have entered into with ourthe VIEs, see “Item 3. Key Information—D. Risk Factors—Risks RelatingRelated to Our Corporate Structure.”
In 2018, we invested RMB18.5 million in three companies that are mainly engaged in the provision of IT and educational products and services, and we disposed of our investment in one of them with a consideration of RMB4.9 million (US$0.7 million) in 2022. In 2018, we acquired Wuhan Haoxiaozi Robot Technology Co., Ltd. (or “RTEC”), one of the largest STEAM robotics programming education service providers in Hunan and Hubei provinces in China. In 2019, we invested RMB10.0 million in one mainland China company which is mainly engaged in investment management businesses.
The table below sets forth the percentages of the respective revenues and assets of Tarena and our wholly-ownedwholly owned subsidiaries and ourthe consolidated VIEs as of the dates and for the periods indicated:
| Net Revenues(1) | Total Assets(1) | |||||||||||||||
| For the year ended December 31, 2013 | For the year ended December 31, 2014 | For the year ended December 31, 2015 | As of December 31, 2015 | |||||||||||||
| Tarena and its wholly-owned subsidiaries | 92.0 | % | 99.7 | % | 100.0 | % | 98.8 | % | ||||||||
| Consolidated VIEs | 8.0 | % | 0.3 | % | 0.0 | %(2) | 1.2 | % | ||||||||
| Total | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||
| | | | | | | | | |
| | | | | | | | Total |
|
|
| Net Revenues(1) |
| Assets(1) |
| ||||
|
| For the year |
| For the year |
| For the year |
| |
|
| | ended | | ended | | ended | | As of |
|
| | December | | December | | December | | December |
|
| | 31, | | 31, | | 31, | | 31, | |
|
| 2020 |
| 2021 |
| 2022 |
| 2022 | |
Tarena and our wholly owned subsidiaries |
| 93.3 | % | 94.1 | % | 93.6 | % | 86.1 | % |
Consolidated VIEs |
| 6.7 | % | 5.9 | % | 6.4 | % | 13.9 | % |
Total |
| 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
Notes:
| (1) | The percentages exclude the inter-company transactions and balances between Tarena and |
We have dualOne of our headquarters is located in Beijing, China. Our principal executive offices in Beijing are located at Suite 10017, Building E, Zhongkun Plaza, A18 Bei San Huan West Road, Haidian6/F, No. 1 Andingmenwai Street, Litchi Tower, Chaoyang District, Beijing 100011, China, People’s Republic of China. Our telephone number at this address is +86 10 6213 5687. Our principal executive offices in Hangzhou are located at 1/F, Block A, Training Building, 65 Kejiyuan Road, Baiyang Jie Dao, Economic Development District, Hangzhou 310000, People’s Republic of China. Our telephone number at this address is +86 571 5602 9509.0827. Our registered office in the Cayman Islands is located at the offices of CodanConyers Trust Company (Cayman) Limited, Cricket Square, Hutchins Drive, PO Box 2681, Grand Cayman KY1-1111, Cayman Islands. Our agent
65
On December 8, 2020, we received a preliminary non-binding proposal letter, or the Proposal Letter, from Mr. Shaoyun Han, our founder and chairman of the board of directors, to acquire all of the outstanding Class A ordinary shares of our company that are not already owned by Mr. Shaoyun Han and his affiliates (the “Buyer Group”) for servicea purchase price of process$4.00 per American Depositary Share, or US$4.00 per Class A ordinary share, in cash. On December 10, 2020, our board of directors formed a special committee (the “Special Committee”) consisting of two independent directors, Mr. Arthur Lap Tat Wong, as the chairman of the Special Committee, and Mr. Hon Sang Lee, to evaluate and consider the Proposal Letter. On December 30, 2020, we announced that the Special Committee had retained Duff & Phelps, LLC as its independent financial advisor and Gibson, Dunn & Crutcher LLP as its U.S. legal counsel to assist it in this process. On April 30, 2021, we announced that we had entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Kidedu Holdings Limited (“Parent”) and Kidarena Merger Sub, a wholly owned subsidiary of Parent (“Merger Sub”). Pursuant to the Merger Agreement, Merger Sub will merge with and into us, with us continuing as the surviving company and becoming a wholly owned subsidiary of Parent in a transaction implying an equity value of us of approximately US$230.6 million. The merger consideration will be funded through cash contribution by Ascendent Capital Partners III, L.P. (“ACP”) or its affiliates (the “Sponsor,” together with Mr. Shaoyun Han, the “Buyer Group”). On September 31, 2021, we announced that we had delivered a written notice to Parent, Merger Sub and ACP, of our intention to terminate the Merger Agreement due to the breach of the Merger Agreement by Parent and Merger Sub. On November 15, 2021, we announced that all parties mutually agreed to terminate the Merger Agreement due to disagreement on specific terms and conditions within the Merger Agreement. Pursuant to the Termination Agreement, the Buyer Group will pay a settlement payment of US$3.53 million to us by November 26, 2021. The Buyer Group paid a settlement fee of US$3.53 million to us on November 24, 2021. The Merger Agreement was therefore terminated on the same date upon receipt of the settlement fee.
We currently provide IT and non-IT related training courses to both IT professional education and IT-focused supplementary STEAM education services. We also cooperate with universities and colleges in mainland China to offer joint-major degree programs and related peripheral services to colleges and students in accordance with the higher education reform policies of each province. We integrate our selected courses into universities and colleges' standard undergraduate curriculum for students enrolled in such joint-major programs. Students can attend part of the courses in our established on campus learning sites and part of the courses at our learning centers. On April 28, 2023, we entered into agreements to dispose of our controlling interest in our university and college joint academic programs and related peripheral services to colleges and students (the “Target Business”), to a consortium (the “Disposal”). Mr. Shaoyun Han, our founder and chairman, is member of the investor consortium and has an interest in the United StatesDisposal. The Target Business accounted for an insignificant portion of our revenues and assets during the recent fiscal years, and therefore, we do not expect the Disposal to have any material impact on our business operations and financial performance.
SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC on www.sec.gov. You can also find information on our website https://ir.tedu.cn. The information contained on our website is Law Debenture Corporate Services Inc. located at Suite 4D, 400 Madison Avenue, New York, New York 10017.
not a part of this annual report.
| B. | Business Overview |
We provide STEAM education and professional education services in China. Our core strength is in IT-focused supplementary STEAM education and IT professional education services. Since our inception in 2002, we have trained over 273,000 students, cooperated with more than 620 universities and colleges and placed students with approximately 70,000 corporate employers in a variety of industries. We currently offer courses in eleventen STEAM education programs, seven IT subjects and three non-IT subjects and two kid education programs.
For our adult students, oursubjects. Our education platform combineshas live distance instruction, classroom-based tutoringlearning and online learning modules.
STEAM Education. In December 2015, we launched new training programs TongchengTongmei featuring IT training courses and non-IT training courses for minors. In March 2016, we rolled out robotics programming courses for students aged between three and eighteen. In 2017, we launched coding mathematics to further diversify our course offerings in STEAM education. These new programs target and contain curriculum that is customized for pre-school, primary to secondary school students aged between three and eighteen. Similar to programs designed for adult students, our courses for preschool, primary to high school students also adopted a dual-teaching model, which was comprised by the online teaching models and instructors from online or offline learning centers, facilitating the delivery of personalized and systematic tutoring and improving students’ understanding in on-site or online classrooms. Students are taught by either live distance instructors and/or pre-recorded videos, with instructors face-to-face in classrooms. In order to build a more vivid and concentrated learning environment, students will watch a series of interesting courseware videos step by step, led by on-site instructors. These programs are partly delivered through the facilities of existing learning centers to improve the utilization of the facilities. Since 2016, we also set up standalone centers for STEAM education programs, which have further improved our brand recognition and teaching facilities and brought better learning experience for our students. In 2018, we developed and launched 61it.cn as an online platform to facilitate the live instruction of our STEAM education courses targeting minors to deliver an interactive and engaging learning experience beyond the geographical limitation. As of December 31, 2022, there were 217 TongchengTongmei standalone learning centers covering 53 cities in mainland China.
66
Professional Education. We deliver professional education lectures through a group of experienced and passionate instructors based in Beijing to a nationwide network of 13486 directly managed learning centers in 4142 cities in mainland China as of December 31, 2015.2022. For each class, instructors deliver lectures from one classroom in Beijing to students in the same classroom as well as to students at our learning centers across mainland China via simultaneous webcast. To facilitate a disciplined and focused learning environment, we staff each classroom at our learning centers with one or two on-site teaching assistants to tutor and supervise students. We complement the live instruction and tutoring with our proprietary learning management system TTS. TTS has five core functions, featuring course content, self-assessment exams,examinations, student and teaching staff interaction tools, student management tools and an online student community. Through this education platform, we provide job-oriented education with measurable outcomes, as demonstrated by our high job placement rates and students’ academic performance. In addition to our TTS platform, we launchedTMOOC.cn in March 2015, which offers not only regular teaching video content, but also continuing education courses and job placement training courses, in order to cover a broader customer base. ForWe offer our part-time class students the period from its launchopportunity to December 31, 2015, revenues generated fromcomplete a portion of their lessons online using TMOOC.cn were inconsequential.
In December 2015, we launched new training programsTongcheng andTongmei featuring IT training courses and non-IT training courses. Both new programs target and contain curriculum that are customized, which is also important for primary to high school students aged between 8 and 18. Unlike programs designed for adult students, our courses for primary to high school students are taught by teaching assistants face-to-face in offline classrooms. In order to build a more vivid and concentrated learning environment, students will watch a series of interesting courseware videos step by step, under the lead of on-site teaching assistants. These programs are delivered through the facilities of existing learning centers to improve the utilization of the facilities, and managed under the same operational team.
marketing efforts. We have a strong commitment to career services.services for our professional education business. We had 308285 career counselors as of December 31, 2015,2022, who advise students through mandatory job skill seminars, one-on-one interview workshops and systematic career assessment and planning. We had 18880 employer cooperation representatives as of December 31, 2015,2022, who liaise closely with employers, alumni, human resources websites and other employment recruiters to maximize job opportunities for our students. In January 2015, we launched a self-developed job search website called Job Show (www.jobshow.cn), which serves as a dedicated open platform for our students and other job-seeking candidates to connect with corporate employers more effectively. Through Job Show, we source and list job opportunities from both IT and non-IT employers in China. We have a track record of producing qualified, job-ready candidates for many corporate employers in China, including globalFortune 500 companies and leading technology companies.
We are a holding company with no material operations of our own. We conduct our operations primarily through our wholly-ownedwholly owned subsidiaries in mainland China. We also control and consolidate a VIE,VIEs, Beijing Tarena Jinqiao Technology Co., Ltd., orand Beijing Tarena.Tongcheng. We operate our TMOOC.cn website through Beijing Tarena, isand such website has been included in the process of applying to add ourTMOOC.cn websitepermitted operation scope under the ICP license held by Beijing Tarena. We operate our 61it.cn website through Beijing Tongcheng, and such website has been included in the permitted operation scope under the ICP license held by Beijing Tongcheng. Our wholly owned subsidiaries in mainland China are currently not eligible as awholly owned foreign-invested enterpriseenterprises to hold an ICP license.licenses.
Our Education Platform
For our adult students, ourOur education platform combineshas three key components: live distance instruction, classroom-based tutoringlearning and online learning modules.
Live distance instruction
FromFor our headquarters in Beijing,professional education, our instructors deliver live courses from our headquarters in Beijing primarily via live webcast to our learning centers across mainland China. Students attending class watch live audio-video broadcasts of lectures delivered using streaming media and other Internet-basedinternet-based technologies. Our full-time adult students typically watch live lectures for approximately five hours a day and work on practice exercises assigned by instructors for approximately two hours every day during the classroom sessions, which generally last from 9:00 a.m. to 6:00 p.m. five days a week.
For online programs of our STEAM education, our instructors deliver live courses from our headquarters in Beijing primarily via live webcast to our students.
Our live broadcast method of lecture delivery ensures consistency in teaching quality across all our centers. All of our instructors that deliver the lecture through a webcasting system are located in Beijing, where we centralize our training support. Our headquarter-level quality control department monitors the performance of each lecturer on a daily basis. We typically have multiple instructors for each course, with each instructor focusing on separate topic areas. We believe this allows our instructors to focus, and offer more in-depth teaching, on their specific areas of expertise within a subject.
Classroom-based learning
Classroom-based tutoringOur learning centers function both as classrooms for delivering lectures and self-study rooms after class hours. As of December 31, 2022, we directly managed a total of 217 learning centers in 53 cities across mainland China solely for our STEAM education business. Learning centers for our STEAM education business vary in terms of size, ranging between approximately 300 and 700 square meters. The number of students vary according to different courses, with typically around 6 to 8 students in small classrooms and 12 to 15 students in large classrooms. As of December 31, 2022, we directly managed a total of 86 professional education learning centers in 42 major cities across mainland China. Our learning centers for our professional education business vary in terms of size, typically having between 7 and 15 classrooms, with each classroom typically able to host between 20 and 40 students. In addition to the learning centers that we operate directly, we also have 29 franchisees for STEAM education programs and 1 franchisee for professional education programs in 2022. The franchise fee from such learning centers was immaterial in 2022.
67
In 2022, STEAM education learning centers are distributed in 53 cities, and professional education learning centers are distributed in 42 cities, with 57 cities in total, and the student enrollments of STEAM education and professional education were approximately 209,400 and 66,200, respectively. Approximately 51% of the students aged between three and eighteen were from the following cities: Beijing, Guangzhou, Shenzhen, Changsha, Kunming, Wuhan, Tianjin, Hefei, Zhengzhou and Nanning. Approximately 55% of the adult students were from the following cities: Beijing, Hangzhou, Shenzhen, Chengdu, Guangzhou, Shanghai, Zhengzhou, Hefei, Nanjing and Chongqing.
Our students are generally required to physically attend classes at our learning centers. We believe physical attendance is important as it creates a disciplined and focused learning environment for students to effectively master the course content. Requiring students to physically attend classes also facilitates the delivery of personalized and systematic tutoring and, for professional education courses, job placement services to our students.
Our In terms of professional education programs, our classrooms are equipped with computers for each student, as well as projectors and other equipment necessary for the live broadcast of our lectures. Our classroom technology infrastructure allows students to interact with instructors and teaching assistants online during lecture hours to receive help on course materials and to use online modules in TTS to take notes and conduct practice exercises.
Our learning centers function both as classrooms for delivering lectures and self-study rooms after class hours. As of December 31, 2015, we directly managed a total of 134 learning centers in 41 major cities across China. Our learning centers vary in terms of size, typically having between 5 and 20 classrooms, with each classroom typically able to host between 20 and 100 students. In addition to the learning centers that we operate directly, we also have one franchised learning center in Xi’an, and the franchise fee from such learning center was immaterial in 2015.
The following table provides an overview of our national network of learning centers that we manage directly and the courses offered in each city as of December 31, 2015 and student enrollments in each city in 2015:
Notes:
In 2015, we have entered 41 cities in China and recruited 84,041 students, approximately 65.7% of whom are from top 10 cities, namely Beijing, Shanghai, Shenzhen, Hangzhou, Chengdu, Nanjing, Guangzhou, Wuhan, Chongqing and Zhengzhou, accounting for 16.8%, 7.9%, 7.6%, 6.6%, 5.4%, 5.3%, 5.3%, 4.2%, 3.4% and 3.3%, respectively. Other cities accounted for 34.3% of total student enrollments.
Online learning modules
Our live distance instruction and classroom-based tutoringlearning for professional education are supplemented by our proprietary online learning modules featured on our TTS platform. TTS has the following five core functions:
| Course content. TTS contains lecture slides, key lecture video recordings, case studies, practice exercises and supplemental reading materials. In addition to recordings of past lectures, TTS also features exclusive online videos on key course materials. Students may view lecture videos using the computers at our learning centers. To foster effective learning of our course lecture materials, especially theoretical knowledge points, TTS features software development case studies and practice exercises. TTS contains supplemental reading materials on areas in which we have historically received frequent questions from students. TTS also allows students to download coding materials and study notes that they have prepared for reference in their future jobs. |
| Self-assessment |
| Student and teaching staff |
| Student management |
| Online student community. TTS serves as an online student community that fosters academic collaboration among students. We encourage students to post course-related articles and comments sharing their study experiences on the bulletin board forum. |
68
In addition to our TTS platform, we launchedTMOOC.cn in March 2015 and 61it.cn in July 2018 to cover a broader customer base.TMOOC.cn offers two types of online learning products: continuing education courses and job placement training courses. Continuing education courses, composed of a library of video clips that focus on on-the-job practical skills, target working professionals and others with continuing education needs. Job placement training courses are full lengthfull-length programs that target job seekers. These recruitment-oriented courses are carefully chosen from existing courses at our learning centers and redesigned to be more suitable for the online learning environment. StudentsUsers who finish all modules in a job placement training course and pass the relevant Tarena certification examination will receive the same job placement services that we offer to other students at learning centers. The numberWe also offer our part-time class students the opportunity to complete a portion of registeredlessons online using TMOOC.cn users has reached more than 140,000. We launched 61it.cn to deliver online live instruction of our IT-focused supplementary STEAM education courses to students aged between three and eighteen. 61it.cn features an OMO-based interactive classroom and leveled class materials covering multiple programming languages such as of December 31, 2015,Scratch, Python, Javascript, HTML, CSS and our proprietary content library offers nearly 10,000 hours of video content.C++.
Our Course Offerings
Our courses provide students aged between three and eighteen with STEAM education to help them develop their logical thinking ability as well as their practical skills. We also provide adult students with practical education to prepare them for jobs in industries with significant growth potential and strong hiring demand. We currently offer (i) ten STEAM education programs and (ii) courses in elevenseven IT subjects and three non-IT subjects and two kid education programs.subjects.
For adult students, we generallyWe primarily offer the following twothree types of classes in order to accommodate the different scheduling and training needs of our students:
| Full-time class. The term for a full-time class is typically four months and includes approximately |
| Part-time class.Part-time classes typically have terms of |
| ● | STEAM class. Our featured IT-focused supplementary STEAM classes are leveled courses covering a variety of IT-related knowledge and skills tailored for Chinese learners aged between three and eighteen, and include approximately 64 to 120 learning hours per year depending on the level of course. Our STEAM classes are primarily conducted by a dual-teaching model, which was comprised by the online teaching models and instructors from online or offline learning centers, facilitating the delivery of personalized and systematic tutoring and improving students’ understanding in on-site or online classrooms. In 2022, the total student enrollments of our IT-focused supplementary STEAM classes were approximately 209,400. |
We have adopted stringent quality control procedures to ensure that we produce high quality graduates.high-quality graduates for our professional education programs. We use entrance exams to assess the level of our students. Prospective full-time students with low entrance exam scores are recommended to enroll in preparatory training camps. We have a total of four monthly closed-book performance tests to evaluate the learning status of our students. For underperforming students who have failed the first monthly performance test, we offer them the opportunity to re-take the first month classes at no extra cost. We believe physical class attendance is important, and students with low attendance rates are generally not given graduation certificates and job opportunities referrals at the end of our program.
Our full-time classes also include short term,short-term, project-based training programs designed for college students to gain practical IT experience, which are not material for our business as a whole.
69
STEAM Education Programs
In December 2015, we launched new training programs under the brand name TongchengTongmei featuring IT training courses and non-IT training courses for students aged between three and eighteen. In March 2016, we rolled out robotics programming courses. In 2017, we launched Graphical Intelligent Programming and NOI Informatics Olympiad to further diversify our course offerings in STEAM education. In 2018, we further adjusted our course offering of our TongchengTongmei programs. In 2018, we launched Python Artificial Intelligence and in 2019 we launched High level hardware programming for secondary school and Soft and hard programming enlightenment. In 2020, we launched the Creative Programming Starter course and STEAM education which can help children to develop their logical thinking skills and practical skills. We treat the TongchengTongmei programs as our main effort to enter into the STEAM education market, and a significantly growing part of our operation. In 2021, we launched robotics programming courses including SPIKE Starter and SPIKE Advanced, which have gained popularity among our students aged between six and twelve. In 2022, we launched the Python Programming Basics, which is an upgraded version of Python Artificial Intelligence and has gained popularity among our students aged between eight and ten. We have discontinued all above STEAM non-IT training courses, which contributed less than 1% of our net revenue generated from our STEAM education business in 2022.
70
Subject | Year of | Focus of Course Content | ||
Robotics programming | | 2016 | | Using LEGO WeDo2.0, EV3 teaching aids, taking into account engineering machinery and programming knowledge, design a variety of physical works close to life, combined with the standard teaching process, scientific teaching methods, so that children are exposed to technology from an early age. |
Graphical Intelligent Programming | | 2017 | | Suitable for students from Kindergarten to elementary school students of grade 3, the progressive course consists of 3 Levels, using the Scratch programming platform to implement situational story programming, game animation programming and smart application programming. |
NOI Informatics Olympiad | | 2017 | | Suitable for elementary school students from grade 4 onwards and secondary school students, the course implements data structures and algorithms using the C++ language. |
Python Artificial Intelligence | | 2018 | | Suitable for elementary school students from grade 3 onwards as well as secondary school students, the advanced course consists of seven levels, using Python language, JavaScript language to implement fun game programming, intelligent scene programming, web programming, server programming, AI algorithm programming, and APP programming. |
High level hardware programming for secondary school | | 2019 | | Software and hardware programming class using Python as the programming language. The software part uses PyQt5 to create the PC-side upper computer software; the hardware part uses STM32 self-developed main control board to control the deformable robot and a variety of hardware sensors through programming; and the software and hardware are integrated to realize the interactive application. |
Soft and hard programming enlightenment | | 2019 | | Combined by LEGO WeDo 2.0 and Scratch programming, software and hardware and virtual and reality are perfectly integrated. In the course, through scene animation, game design and other vivid contents, children can fully grasp the foundation of artificial intelligence technology. |
Creative Programming Starter | | 2020 | | Using the building blocks and physical programming modules that children are interested in as carriers, with the goal of developing children’s understanding, application and re-creation abilities, using the building blocks to construct scenes and the physical programming modules to complete the task challenges, through the deep integration of building and programming, to achieve a true hand-brain combination, to comprehensively train children’s hands and brains to solve practical problems and help them acquire the ability to face the future society. |
SPIKE Starter | | 2021 | | It is an upgraded version of the WeDo course. Combining modular programming into Lego SPIKE basic set to master robot building skills in the course building process and improve students’ hands-on ability and spatial construction ability. Programming allows children to understand programming thinking and master the writing skills of simple programs. |
SPIKE Advanced | | 2021 | | It is an upgraded version of EV3 course. Using SPIKE robot teaching aids and combining Scratch and Python programming languages to create rich robot programming projects and students can learn mechanical structure and gain programming knowledge. |
Python Programming Basics | | 2022 | | It is an upgraded version of Python Artificial Intelligence, imparting basic skills for programming engineering and required knowledge for programming level exams. Python programming cultivates children's ability to write programs independently and to design and develop simple games. |
Compared with the curriculum for adult students, the IT and non-IT courses offered under the TongchengTongmei programs feature materials that are customized for young children. All of our STEAM education programs target and contain curriculum that is customized for students aged between three and eighteen. Similar to programs designed for adult students, our courses for students aged between three and eighteen also adopted a dual-teaching model, which was comprised by the online teaching models and instructors from online or offline learning centers, facilitating the delivery of personalized and systematic tutoring and improving students’ understanding in on-site or online classrooms. Students are taught by either live distance instructors and/or pre-recorded videos, with teaching assistants face-to-face in classrooms. In order to build a more vivid and concentrated learning environment, students will watch a series of interesting courseware videos step by step, led by on-site teaching assistants. In 2018, we launched 61it.cn to deliver online live instruction of our IT-focused supplementary STEAM education courses to students aged between three and eighteen. 61it.cn features an OMO-based interactive classroom and leveled class materials covering multiple programming languages such as Scratch, Python, Javascript, HTML, CSS and C++.
71
Courses under TongchengTongmei programs typically have multiple levels, with each level consisting of 64 to 120 learning hours per year. Each session usually takes two to three hours depending on different levels applicable. Depending on the age group, it generally takes approximately one year to complete each level. In 2022, our TongchengTongmei programs were offered in 53 cities in mainland China. The revenue of online course and offline course in TongchengTongmei programs accounts for 7.7% and 92.3%, respectively. Online learning in the small groups model is also available for selection, of which the current enrollment is insignificant.
IT education courses
We began offering courses in IT subjects in 2002. We launched our Java courses in 2002, software testing courses in 2009, Linux and network engineering courses in 2013, Web front-end development and Big Data* courses in 2015, Python and AI courses in 2017, Network Security Engineer† courses in 2018, and Data Analysis and Business Intelligence courses in 2022. We primarily offer IT education courses covering the following eleven IT subjects:
Subject | Year of | Focus of Course Content | ||
Java Senior Software Architect† | | 2002 | | Programming for Windows and Linux-based desktop software and web-based software |
Software testing | | 2009 | | Practical software testing and quality assurance training |
Linux and network engineering | | 2013 | | Linux operating system and network management technology |
Web front-end development | | 2015 | | HTML5, CSS3, JavaScript, jQuery, AJAX, Bootstrap, AngularJS, Web APP |
Python | | 2017 | | Python and artificial intelligence (AI) full stack of software development |
Network Security Engineer† | | 2018 | | Designing, modeling, and implementing computer networks for reliability, performance, and security |
Data Analysis and Business Intelligence | | 2022 | | Excel, Power Bi, Tableau (Business Intelligence), Database and Hadoop, Hive, Python, Statistics and Machine learning |
*Discontinued in 2022
†Renamed in 2021
Graduates of our IT education courses receiveTarena Certified Software Developer certificatescertificates,, or TCSD certificates. Holders of TCSD certificates are qualified to obtain the intermediate-advanced software engineer certificate issued by the Ministry of Industry and Information Technology of China, or the MIIT for their respective field of study subject to such graduates passingafter they pass our internal examination. Graduates of our Java courses are grantedORACLE Certified Java Programmer certificates byORACLE Corporation after passing thewho finish Tarena programming course and pass relevant exams. Graduates of our Linux and Network engineering coursesexaminations are awarded the international network engineer certificate issued by CompTIA upon passing the relevant exams, and ourofficial MTA certificates from Microsoft. Our Linux and network engineering course graduates may also sign up for and take Red Hat certificationCertification exams,CKA Certification exams and HUAWEI Certifications exams directly at our learning centers. Graduates of our embeddedwho finish Tarena’s Spring certification programs and pass relevant examinations are granted JAVA Spring Certification. Graduates are granted 360 Network Security Competency Certification, HUAWEI HCIP and HCIE Certification after finishing Tarena’s Network Security Engineer course are awarded theEmbedded Engineer Certificate issued by ARM uponand passing the relevant exams. Pursuant to our strategic partnership agreement with Alibaba Cloud Computing Co., Ltd., or Aliyun, Aliyun will provide two opportunities to take the ACF (Ali Cloud Foundation) certification exams to each Tarena student.examinations.
Non-IT education courses
We began offering courses in non-IT subjects in 2013. We launched our digital art course in February 2013, our online sales and marketing course in November 2013, our Computer-based design course* in 2018 and our accountingVisual effects-VFX course in October 2014.2019. The following table describes the three non-IT courses that we currently offer:
Subject
| Year of | Focus of Course Content | |||||||
|---|---|---|---|---|---|---|---|---|---|
Digital art | | 2013 | | Latest Adobe user interface design technology for graphic, webpage and mobile sites design | | ||||
Online sales and marketing | | 2013 | | Search engine marketing, search engine optimization, and other | | ||||
Visual Special Effects† | | 2019 | | Professional film and | |
*Discontinued in 2020
Since its launch†Renamed in February 2013, our digital art course has registered strong growth in student enrollments and has become the largest course in terms2021
72
Graduates of our online sales and marketingdesign courses are awardedcan receive CEAC certification after passing the relevant exams. Graduates of our SEM Certificate issued by Baidu without additional examination.
Kid Education Programs
In December 2015, we launched new training programsTongcheng andTongmei featuring IT training courses and non-IT training courses. Compared with the curriculum for adult students, the IT and non-IT courses offered under theTongcheng andTongmeiAdobe certification programs feature materials that are customized for young kids. Both new programs targetcan receive world-class digital art training and contain curriculum that are customized for primaryearn the official validation from the industry leader to high school students aged between 8help achieve their career aspirations. Graduates of our Internet marketing and 18. Unlike programs designed for adult students, ourProfessional film and television Visual effects courses for primary to high school students are taught by teaching assistants face-to-face in offline classrooms. In order to build a more vivid and concentrated learning environment, students will watch a series of interesting courseware videos step by step, undercan receive media operator certification after passing the lead of on-site teaching assistants.relevant exams.
Tongcheng andTongmeiprograms each has four levels, with each level consisting of 120 learning hours per year. Students begin from level 1 and attend a 3-hour class per week. Depending on the age group, it generally takes approximately one year to complete each level. As of December 31, 2015, each of ourTongcheng andTongmeiprograms is offered in 4 learning centers in Beijing.
Our Teaching Staff
Our instructors
As of December 31, 2015,2022, we employed 1932,860 full-time instructors based in Beijing. and teaching assistants for both STEAM education and professional education.
Our instructors
Most of our instructors for IT education courses are graduates with strong academic background in IT or have industry backgrounds in global and domestic technology companies. Instructors for non-IT education courses are typically experts or veterans in their respective specialized fields. Our instructors also provide us with unique access to a large pool of experts on industry trends that is especially valuable in our decision-making and development process for new courses. We believe we attract highly qualified instructors by virtue of our respected brand,brands, our well-established teaching infrastructure and sales team and our competitive compensation.
We believe that developing and maintaining highly capable and motivated instructors is critical to our success. We seek qualified instructor candidates who have extensive industry experience or come from other professional education service providers. These candidates are subject to multiple rounds of interviews conducted by our director of teaching, vice-president for teaching and the chief executive officer.All instructors are required to undergo training in teaching skills and techniques. We require our instructors to regularly update their course materials to remain current with evolving employer needs, industry developments and other key trends necessary to teach effectively. We typically have a backup instructor assigned to each course to meet any emergency needs.
To align incentives, instructors receive bonuses based on students’ ratings and the number of class sessions taught, in addition to their base compensation.
Our teaching assistants
We believe that our dedicated teaching assistants are essential to the success of our education model. Our teaching assistants interact with and tutor our students on a daily basis, and are instrumental in facilitating a disciplined and focused learning environment. EachFor our professional education, each classroom is staffed with one or two teaching assistants, who attend lectures together with students. Teaching assistants are available during class hours to answer student questions in person, and after class hours to address inquiries online via TTS or on-site until 8:30 p.m. Teaching assistants are also responsible for offering focused tutoring services to underperforming students and continuously monitoring their academic results. Four our STEAM education, our teaching assistants are also one of the key factors of the operation as we need our teaching assistants to guide our students throughout the course. We have adopted a comprehensive set of key performance indicators, or KPIs, to evaluate the performance of our teaching assistants. Such KPIs include student satisfaction, exam scores of students on monthly performance tests, the improvement of underperforming students and employment results after graduation, among other indicators.
We primarily seek teaching assistant candidates from our graduates who have demonstrated strong command of materials in the relevant subject areas. We provide necessary training to newly hired teaching assistants to tutor effectively. Our teaching assistants are frequently evaluated by students on the quality of their assistance. We had a total
73
Course Content Development
In addition to teaching, our instructors for IT professional education also develop the course content in their respective subject areas. We regularly update our existing courses, typically every six months, to stay abreast of the latest technology developments and industry trends.Our instructors are also responsible for producing practice exercises and exam questions for monthly performance tests to evaluate the effectiveness of our student self-assessment tests in TTS.
We regularly engage in new course development in order to capture demands created by evolving job market and industry trends. We have a set of procedures for new course development. Prior to developing a new course, we gather market intelligence by collecting job market demand information to ensure that we are developing relevant and up-to-date courses. We conduct a series of surveys, each with clear parameters, to determine various aspects of the proposed new course. Once we gather enough market intelligence, we recruit, or identify from within Tarena, instructors with the appropriate industry and academic background to form a course-specific development task team. The development of our STEAM education program courses is mostly programming centered. In addition, we focus on leveraging our experience in IT courses, especially programming courses, to develop coding- and programming-based courses for our STEAM education programs.
All of our new courses are then pilot tested in selected learning centers in Beijing for student satisfaction, training practicality and employment outcomes. In 2015,2018, we launched two newa Network Security Engineer course. In 2019, we launched a Visual Special Effects course. In 2020, we launched a Creative Programming Starter course. In 2021, we launched robotics programming courses in Web front-end developmentincluding SPIKE Starter and Big Data,SPIKE Advanced, which began in Januaryhave gained popularity among our students aged between six and April, respectively.
twelve. In 2022, we launched the Python Programming Basics, which is an upgraded version of Python Artificial Intelligence and has gained popularity among our students aged between eight and ten.
Our software research and development department is tasked with improving the technical performance and user experience of TTS. Since introducing TTS, student version 1.0 in 2006, we have produced seven upgrades to TTS. The current version that our students use is TTS student version 8.0.
TMOOC.cn and 61it.cn.
Our Students
Our student enrollment in STEAM education programs reached approximately 209,400 in 2022, and our student enrollment in professional education courses reached approximately 66,200 in 2022. The majority of our students of our STEAM education courses are students aged between three and eighteen. The majority of our students of our professional education courses are college students and graduates. In 2015, approximately 82.6%2022, 76% of our enrolled students of such courses were either studying towards, or already held, a post-secondary degree. We have experienced significant growth in student enrollment in recent years. Our student enrollment reached 84,041 in 2015.
Student recruitment
WeFor professional education, we rely primarily on Internet-basedinternet-based marketing to attract students and increase enrollments. We advertise on the Internetinternet using search engine keywords on leading search engines. We also use banners and other advertising placements on targeted sites, such as education portals, career sites and industry-specific websites. We actively monitor the effectiveness of our advertising and adjust marketing spending accordingly.
Student recruitment generally occurs at the learning center level. Our learning centers also host seminars, information sessions and preparatory training camps for prospective students. For STEAM education, we primarily rely on the on-site marketing based on our offline learning centers to attract students and distribute print and Internet-based advertising materials. their parents for enrollment growth. We also adopted such customer acquisition channels to grasp massive customer base with relatively lower costing.
When a prospective student responds to our advertisements, and contacts a learning center, an enrollment advisor generates a prospective student profile and advises the candidate, eitherthrough online, telephone or in a face-to-face meeting, on various aspects of our courses and educational experience. AsBesides, our excellent course and delivery quality and our students’ learning results in IT-focused supplementary STEAM education have translated into word-of-mouth referrals and an increase in the number of December 31, 2015, we hadrenewal students as a totalpercentage of 1,506 enrollment advisors nationally.
fee-paying students, partially offsetting the decrease in customer acquisition due to limited center access.
To promote brand awareness, we place advertisements in industry trade publications and present at industry trade seminars and conventions. We also began to host our annualTarena-Discovery Cup Chinese University Students Software Design Competition in April 2012. In 2015, we changed our logo from “Tarena Technology” (达内科技) to “Tarena Education” (达内教育) to better showcase our professional image in education.
We also encourage our students at schoolschools to introduce their friends or classmates who are interested in taking professional education courses. The proportion from student referrals increased significantly in 2015.Student referral has become one of the key channels we access to gain new students.
74
In addition to our marketing efforts and student referrals, we recruit a significant portion of our students directly from universities and colleges. As of December 31, 2015,2022, we have cooperated with over 620633 universities and colleges in mainland China under one of the threetwo following modes of cooperation:
| Joint-majors. We |
| Enrollment |
We had a total of 252 university cooperation representatives as of December 31, 2015. Our university cooperation representatives are responsible for establishing new and maintaining current cooperative relationships between us and universities in China. In 2015, we enrolled approximately 16.2% of our students from universities and colleges with which we cooperated.
Student job placement services
We have an effective job placement program for our adult students. Each learning center retains full-time career counselors who meet with students on the first day of class to discuss their career goals and to build an employment profile for each student. Our career counselors host a series of mandatory career development seminars for students throughout the term. During the final weeks of each course, our career counselors meet with students one-on-one to offer training on interview and résumé preparation. In addition to the scheduled career service activities, our career counselors are generally available to meet with students one-on-one during office hours. Our career counselors also monitor the employment results of our students and actively offer personalized assistance to students facing difficulties in securing job offers. We had a total of 308285 career counselors as of December 31, 2015.
2022.
Each learning center offering courses for adult students also retains full-time employer cooperation representatives who routinely collaborate with employers, alumni, human resources websites and other employment recruiters to maximize opportunities for job placements. We had a total of 18880 employer cooperation representatives as of December 31, 2015.2022. We invite corporate employers to host recruiting events and interviews at our learning centers and offer to students with interview opportunities across the country.
In January 2015,We gather data on post-course job placement rates by conducting surveys of our graduates. Based on the survey responses, we launchedcalculate the six-month post-course job placement rates for a self-developedmonth by dividing (i) the number of job-seeking students enrolled in such month who (A) successfully graduated from our programs with graduation certificates awarded and (B) indicated that they had received employment offers within six months of graduation, by (ii) the total number of job-seeking students enrolled in such month who later successfully graduated from our programs with graduation certificates awarded. We calculate the annual average six-month post-course job search website called Job Show(www.jobshow.cn)placement rate by averaging the rate of each month. Our average six-month post-course job placement rate for each of 2020 and 2021 was about 92%. When calculating such job placement rates for 2020 and 2021, a majority of the employment reported by relevant students was full-time employment, and a majority of the employment reported by relevant students was in the fields of their studies with us. All of the students enrolled in 2019, 2020 and 2021 who later successfully graduated from our programs with graduation certificates awarded and who were job-seeking, have filled out our surveys. Among the students enrolled in 2019, 2020 and 2021, 96%, which serves as88% and 92% of such students, respectively, graduated from our programs with graduation certificates awarded. Among the students enrolled in 2019, 2020 and 2021 who later successfully graduated from our programs with graduation certificates awarded, 65%, 57% and 60% of such students, respectively, were deemed to be job-seeking students. The decrease was primarily because the ratio of non-job-seeking students (e.g., those who already have a dedicated open platform forfull-time or part-time job) who graduated from our students and other job-seeking candidates to connect with corporate employers more effectively. Through Job Show, we source and list job opportunities from both IT and non-IT employers in China.programs has been steadily increasing over the recent years.
Our Network of Employers
We have a track record of producing job-ready and highly qualified candidates for many corporate employers. Since our inception, ourOur network of potential employers for our students covered approximately 70,000 corporate employers, including include GlobalFortune 500 companies, and leading technology, IT services and Internetinternet companies in China.
75
We offer the following recruiting services to corporate employers:
| General recruiting services. We offer corporate employers candidate referral services and other recruitment-related services. Once an employer communicates its hiring needs to us, we direct the relevant learning centers to produce a list of student candidates that meet the hiring criteria of such employer, and refer such candidates to the employer for interviews and assessments. We also offer space at our learning centers for employers to host recruiting events targeting our students and to conduct interviews. |
| Customized courses. We offer customized courses targeting specific employers with large demands for trained professionals. Prospective students for our customized courses generally undergo interviews conducted by the employers before the start of classes. In addition to our standard curriculum, students enrolled in customized courses must participate in additional training provided by employers at our learning centers. Such additional training is tailored according to the particular skill requirements of the employers. Successful graduates of our customized courses who have passed the relevant qualifying exams are granted job offers by the employers. |
While we currently do not generate any material revenue from any of our recruiting services for corporate employers, we believe such services enhance our brand recognition and are instrumental in our ability to help students achieve high job placement rates.
Tuition Fees
For our full-timeSTEAM education programs, our standard tuition fees are between RMB8,000 and part-timeRMB23,400. Courses under our STEAM education program typically are composed of multiple levels, with each level consisting of 64 to 120 learning hours in one year. For our full-time classes for adultprofessional education students, our standard tuition fees generally range from RMB16,800 (US$2,593)RMB22,800 to RMB19,800 (US$3,057)RMB26,800 per course. We increased our tuition fees for most of our full-time classes by RMB1,000 (US$154) in 2013, further increased such tuition fees by RMB1,000 (US$154) in 2014 and again increased such tuition fees by RMB1,000 (US$154) in 2015. We also increased our tuition fees for part-time classes by RMB1,000 (US$154) to RMB2,000 (US$309) per course in 2015.
For our kidSTEAM education programs, our standard tuition fees are RMB15,360 (US$2,371). Each kid education program is composed of four levels,we collect pre-paid tuitions in accordance with each level consisting of 120 learning hours in one year.
applicable laws and regulations. We primarily offer two payment options for our adult students, including one-time full payment upon enrollment and multiple payments within two months of enrollment. We also offer an option whereby qualified adult students can pay our tuition fees within a period of time after graduation.
For students recruited through our joint-majors with universities and colleges, they pay tuition fees for their degrees directly to the universities and colleges, and we share a portion of such fees with the universities and colleges as tuition for our courses.
To assist our students in paying ourthe tuition fees, we primarilymainly offered the following fourfive credit sources, namely Baidu Small Loan Co., Ltd., Shanghai Shimiao Financial Information Service Co., Ltd., Beijing Youfei Jinxin Digital Technology Co., Ltd., Qihao Commercial Factoring Co. Ltd., and Chongqing Haier Small Loan Co. Ltd., to provide financing services for our adult students to make one-time, up-front tuition payments in 2015:
2022.
Approximately 49.3%16.4% of our adult students enrolled in 20152022 obtained financing from one of the four abovementionedfive above-mentioned sources. Such financing arrangements are bilateral in nature, and are carried out between our adult students and the respective financing institution directly. We do not take any credit risk or liability in such arrangements.
Historically, Chuanbang utilized a person-to-person lending method similar to the one used by CreditEase to assist our students in obtaining loans to pay for their tuition. Chuanbang is owned by Mr. Shaoyan Han, our chief executive officer. We have stopped providing guarantees for any new student loan arranged by Chuanbang since April 2013. Chuanbang ceased offering loan services to our students enrolled since January 1, 2014. Chuanbang provides certain consulting-related services to the lenders of ShiTuDai.
Technology
Building a reliable, scalable and secure technology infrastructure is crucial to our ability to support our live lecture broadcasts, online TTS,TMOOC.cn, 61it.cn and the various services that we provide to our students. We manage our lecture delivery system, TTS, TMOOC.cn andTMOOC.cn 61it.cn using a combination of commercially available software and hardware systems. Since 2006, we have established a powerful online platform that enables thousands of students to simultaneously log onto our TTS and participate in activities online.
76
All of our servers and routers, including backup servers, are currently hosted at our learning centers or by third-party service providers in multiple cities in China. We regularly back up our databases. Our network administration department regularly monitors the performance of our websites and infrastructure to enable us to respond quickly to potential problems. We deliver live broadcastbroadcasts of audio and video of the lectures given in Beijing via the dedicated network of China Telecom and China Unicom on third-party live broadcasting platforms to terminals located in selected learning centers with high student enrollment, and via public Internetinternet infrastructure to our other learning centers.
We have recently developed our CRM software in-house to manage our student and corporate employer information, as well as to integrate our key administrative functions. We will rely on our internal IT resources to upgrade the CRM system as needed going forward.
Seasonality
Seasonal fluctuations have affected, and are likely to continue to affect, our business. Historically, we typically generate the highest net revenues in the third and fourth quarters because of the increased student enrollments during summer vacation.vacation, although the seasonal fluctuation was to some extent eased in the fourth quarter of 2022 due to the impact of COVID-19 in China. We generally generate less tuition fees in the first quarter of each year due to the Chinese New Year holiday. Our quarterly cost of revenue, selling and marketing expenses, general and administrative expenses and research and development expenses have generally been increasing in absolute amounts since 2012 as we expanded our network of learning centers, increased the number of our personnel, enhanced our marketing efforts and offered more courses.
Intellectual Property
Our trademarks, copyrights, domain names, trade secrets and other intellectual property rights distinguish our courses and services from those of our competitors and contribute to our ability to compete in our target markets. We rely on a combination of copyright and trademark law, trade secret protection and confidentiality agreements with senior executive officers and most other employees, to protect our intellectual property rights. In addition, we require certain of our senior executive officers and other employees to enter into agreements with us under which they acknowledge that all inventions, utility models, designs, know-how, copyrights and other forms of intellectual property made by them within the scope of their employment with us, pursuant to job assignments or using our materials and technology, or during the two years after their employment that relates to their employment with us, are our property and they should assign the same to us if we so require. We also regularly monitor any infringement or misappropriation of our intellectual property rights.
As of December 31, 2015,2022, we had registered 215120 domain names relating to our business, including ourwww.tedu.cn,TMOOC.cn,jobshow.cn,www.IT61.cn andwww.art61.cnwww.61IT.cn websites, with the Internet Corporation for Assigned Names and Numbers and China Internet Network Information Center. Tarena Tech holds 17held 169 registered software copyrights 35 trademarks and 213 registered domain names includingwww.tedu.cn. Beijing Tarena holds the domain nameTMOOC.cn.
178 trademarks.
Competition
As we enter the STEAM education services market, we face competition from other national and regional providers of STEAM education services. Our student enrollment rate could be impacted by the operations of other childhood and adolescent academic or quality education and tutoring service providers, given our target students have limited time and energy and they need to choose among different courses and programs. The professional education services market in China is fragmented, rapidly evolving and highly competitive. We face competition in our offered courses and in many of the geographic markets in which we operate. For our IT training courses, we face competition from IT professional education providers that offer specialized training programs targeting certain niche job markets in the IT industry. In the future, we may also face competition from new entrants into the Chinese IT professional education market. For our non-IT training courses, we face competition for student enrollment from existing online and offline providers of professional education services, as well as smaller regional professional education services providers in China. As we enter the kid professional education services market, we also face competition from other national and regional providers of kid education services.
We believe that the principal competitive factors in our markets include the following:
| scope and quality of course offerings and services; |
| student placement and employer satisfaction with our graduates; |
| brand recognition; |
| ability to effectively market course offerings and services to a broad base of prospective students; |
| cost effectiveness of the education; and |
| ability to align course offerings and services to specific needs of students and employers. |
We believe that we are well-positioned to effectively compete in markets in which we operate on the basis77
Some of our current or future competitors may have longer operating histories, greater brand recognition, richer experience or greater financial, technical or marketing resources than we do. For a discussion of risks relatingrelated to competition, see “Item 3. Key Information—D. Risk Factors—Risks RelatingRelated to Our Business—We may lose market share and our profitabilityfinancial results may be materially and adversely affected, if we fail to compete effectively with our present and future competitors or to adjust effectively to the changing market conditions and trends.”
Insurance
We do not maintain any property insurance policies covering students, equipment and facilities for injuries, death or losses due to fire, earthquake, flood or any other disaster. Consistent with customary industry practice in mainland China, we do not maintain business interruption insurance, nor do we maintain key-man life insurance. We maintain accident injury insurance and accident injury medical insurance for our employees based in our headquarters in Beijing, and we maintain liability insurance and travel insurance for our students enrolled through universityaged between three and college cooperation channel.eighteen and teachers participating in our camp or event-related travel. Uninsured injury or death to our students or staff, or damage to any of our equipment or buildings could have a material adverse effect on our results of operations. See “Item 3. Key Information—D. Risk Factors—Risks RelatingRelated to Our Business—We have limited insurance coverage for our operations in China.”
Government Regulations
Regulations on Private Education
The principal regulations governing private education in China consist of theEducation Law of the PRC, theLaw for Promoting Private Education and theImplementation Rules for the Law for Promoting Private Education, or the PE Implementation Rules and the Regulations on Chinese-Foreign Cooperation in Operating Schools.
Education Law of the PRC
Mainland China
On March 18, 1995, the PRC National People’s Congress, or the NPC, promulgated theEducation Law of the PRC, or the Education Law. Pursuant to the Education Law, enterprises, social organizations and individuals are generally encouraged to operate schools and other types of educational organizations in accordance with PRC laws and regulations though private schools are prohibited from providing military, police, political and other kinds of education which are of a special nature. Althoughmainland China. It is provided in the Education Law that no organization or individual may establish or operate a school or any other educational institution of education for profit-making purposes,commercial purposes. However, private schools may be operated for “reasonable returns”, as described in more detail below.
The Law for Promoting Private Education and its Implementation Rules
On December 28, 2002,27, 2015, the Standing Committee of the PRC National People’s Congress promulgated theNPC released Law for Promoting Private Education, or the Private Education Law, which became effective on September 1, 2003 and was amended on June 29, 2013. On March 5, 2004, the PRC State Council promulgated theImplementation Rules for the Law for Promoting Private Education, which became effective on April 1, 2004, or the PE Implementation Rules. Under the Private Education Law and the Private Education Law Implementation Rules, “private schools” are defined as schools established by social organizations or individuals using non-government funds. Private schools providing certifications, pre-school education, education for self-study aid and other academic education shall be subjectAmendment to approval by the education authorities, while private schools engaging in professional qualification training and professional education training shall be subject to approvals from the authorities in charge of labor and social welfare. A duly approved private school engaging in professional qualification training and professional education training shall (i) be granted a Permit for Operating a Private School by the authorities in charge of human resources and social security, (ii) be registered with the Ministry of Civil Affairs or its local counterparts as a privately run non-enterprise institution and (iii) pass the annual inspection with the Ministry of Civil Affairs or its local counterparts. As of December 31, 2015, we operated 22 schools, 18 of which are engaged in professional education training.Each has (i) obtained a Permit for Operating a Private School issued by the authorities in charge of human resources and social security or education, (ii) been registered with the relevant local counterpart of the Ministry of Civil Affairs and (iii) passed the annual inspection, as applicable, with the Ministry of Civil Affairs or its local counterparts.
The types and amounts of fees charged by a private school providing certifications shall be approved by the governmental pricing authority and be publicly disclosed. A private school that does not provide certifications shall file its pricing information with the governmental pricing authority and publicly disclose such information. A private school shall file its advertisement and school enrollment brochure with the relevant governmental authorities of human resources and social security or education. None of our schools provides a diploma or certification to students, and 12 of our schools have filed their pricing information with the governmental pricing authority and publicly disclose such information. 11 of our schools have filed their advertisement and school enrollment brochure with the relevant governmental authorities of human resources and social security or education.See “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business—The operations of certain of our learning centers are, or may be deemed by relevant PRC government authorities to be, beyond their authorized business scope or without proper license or registration. If the relevant PRC government authorities take actions against such learning centers, our business and operations could be materially and adversely affected.”
Private education is treated as a public welfare undertaking under relevant regulations, and entities and individuals who establish private schools are commonly referred to as “sponsors” instead of “owners” or “shareholders” under the regulations. Nonetheless, sponsors of a private school may choose to require “reasonable returns” from the annual net balance of the school after deduction of costs, donations received, government subsidies, if any, the reserved development fund and other expenses as required by the regulations. Private schools are divided into three categories: private schools established with donated funds; private schools that require reasonable returns and private schools that do not require reasonable returns.
The election to establish a private school requiring reasonable returns shall be provided in the articles of association of the school. The percentage of the school’s annual net balance that can be distributed as a reasonable return shall be determined by the school’s board of directors, taking into consideration the following factors: (i) school fee types and collection criteria, (ii) the ratio of the school’s expenses used for educational activities and improving the educational conditions to the total fees collected, and (iii) the admission standards and educational quality. The relevant information relating to the above factors shall be publicly disclosed before the school’s board determines the percentage of the school’s annual net balance that can be distributed as reasonable returns. Such information and the decision to distribute reasonable returns shall also be filed with the approval authorities within 15 days from the decision made by the board. However, none of the current PRC laws and regulations provides a formula or guidelines for determining “reasonable returns”. In addition, none of the current PRC laws and regulations sets forth sponsors’ economic rights in schools that do not distribute reasonable returns, nor do they have different requirements or restrictions on a private school’s ability to operate its education business based on such school’s status as a school that requires reasonable returns or a school that does not require reasonable returns.
At the end of each fiscal year, every private school is required to allocate a certain amount to its development fund for the construction or maintenance of the school or procurement or upgrade of educational equipment. In the case of a private school that requires reasonable returns, this amount shall be no less than 25% of the annual net income of the school, while in the case of a private school that does not require reasonable returns, this amount shall be equal to no less than 25% of the annual increase in the net assets of the school, if any. Private schools that do not require reasonable returns shall be entitled to the same preferential tax treatment as public schools, while the preferential tax treatment policies applicable to private schools requiring reasonable returns shall be formulated by the finance authority, taxation authority and other authorities under the State Council. To date, however, no regulations have been promulgated by the relevant authorities in this regard.
Regardless of whether distributing reasonable return or not, the Private Education Law provides that properties that remain upon termination and liquidation of a school after payment of relevant fees and compensations shall be made in accordance with other relevant laws and regulations. However, there have been no other relevant national laws and regulations addressing the distribution of residual properties upon termination and liquidation of a private school.
Except for aforementioned differences, the “sponsorship interest” that a sponsor holds in a private school is, for all other practical purposes, substantially equivalent under PRC law and practice to the “equity interest” a shareholder holds in a company. A sponsor of a private school has the obligation to make capital contributions to the school in a timely manner. The contributed capital can be in the form of tangible or non-tangible assets such as materials in kind, land use rights or intellectual property rights. The capital contributed by the sponsor becomes assets of the school and the school has independent legal person status. In addition, the sponsor of a private school has the right to exercise ultimate control over the school by becoming the member of and controlling the composition of the school’s decision making body. Specifically, the sponsor has control over the private school’s constitutional documents and has the right to elect and replace the private school’s decision making bodies, such as the school’s board of directors, and therefore controls the private school’s business and affairs.
In August, 2015, The National People’s Congress of the PRC released the Educational Laws Amendments Package (Draft), or Package (Draft), which provides that private schools may choose to register as the non-profitable legal person or profitable legal person at will. Also, profitable private schools may decide their own charging standards, which may be market-adjusted. It is uncertain when such draft would be signed into law and whether the final version would have any substantial changes from such draft.
As of December 31, 2015, we had five schools registered as schools requiring reasonable returns, while all other schools are registered as schools not requiring reasonable returns.
Regulations on Chinese-Foreign Cooperation in Operating Schools
Chinese-foreign cooperation in operating schools or training programs is specifically governed by the Regulations on Operating Chinese-foreign Schools, promulgated by the State Council in 2003 in accordance with the Education Law of the Occupational Education Law and the Private Education Law. The Implementing Rules for the Regulations on Operating Chinese-foreign Schools, or the Implementing Rules, were issued by the MOE in 2004. The Regulations on Chinese-Foreign Cooperation in Operating Schools and its Implementing Rules encourage substantive cooperation between overseas educational organizations with relevant qualifications and experience in providing high-quality education and Chinese educational organizations to jointly operate various types of schools in the PRC. Cooperation in the areas of higher education and occupational education is especially encouraged. Chinese-foreign cooperative schools are not permitted, however, to engage in compulsory education or military, police, political and other kinds of education that are of a special nature in China. The Regulations on Operating Chinese-foreign Schools prohibits foreign institutions or individuals from independently establishing schools in China, which provide educational services mainly for Chinese citizens.
The Ministry of Human Resources and Social Security (formerly known as Ministry of Labor and Social Security) also promulgated the Regulations on Operation Chinese-foreign Cooperation School in Professional Education Training to implement the Regulations on Operating Chinese-foreign Schools on July 26, 2006,PRC, which took effect on OctoberJune 1, 2006. The Regulations2016, and was further amended on Operation Chinese-foreign Cooperation School in Professional Education Training prohibits foreign institutions or individuals from independently establishing professional education training institutions in China, which provide educational services mainly for Chinese citizens.
We have not operated or applied for any Chinese-foreign schools. Prior to 2012, we operated a substantial portion of our learning centers through subsidiaries of our consolidated VIEs and schoolsApril 29, 2021, pursuant to which our consolidated VIEsthe Standing Committee of the NPC narrowed the provision prohibiting the establishment or their respective subsidiaries are sponsors. Starting from the second half of 2012, we began to transfer our operations to our wholly-owned subsidiary, Tarena Tech, and its subsidiaries. All of our learning center operations of VIEs had been transferred to Tarena Tech and its subsidiaries and schools. As of December 31, 2015, we operated 36 of our learning centers through private schools owned by subsidiaries of Tarena Tech.However, there are still uncertainties under the current PRC laws as to whether a wholly foreign owned enterprise (such as Tarena Tech) is allowed to indirectly invest in and own private schools through its PRC subsidiaries. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business—If the relevant PRC authorities determine that we can no longer own and operate certain of our learning centers through our PRC subsidiaries, we may need to restructure the ownership and operation of these learning centers (including possibly transferring these learning centersschools or other educational institutions for commercial purposes to our consolidated VIEs), our business may be disrupted and we may be exposed to increased risks associatedonly restricting a school or other educational institution founded with the contractual arrangements relating to our consolidated VIEs.”governmental funds or donated assets.
Regulations on Professional Education
On May 15, 1996, the Standing Committee of the PRC National People’s CongressNPC promulgated the Professional Education Law of the PRC, or the Professional Education Law, which became effective on September 1, 1996. Pursuant to the Professional Education Law, professional training includes training pre-employment, training for military personnel transferring to civil positions, training for apprentices, on-the-job training, job-transfer training and other professional training. Professional training may be classified as junior, middle or senior level according to the actual situations. It shall be conducted by either professional training institutions or professional schools, which may develop various professional training to satisfy the needs of the society. The PRC government encourages institutional organizations, social organizations, other social groups and citizens to establish professional schools and professional training institutions, and the financial allocation for professional schools and professional training institutions from the governments at various levels shall be gradually increased. The PRC government also encourages financial institutions to support and develop professional education by means of credit facilities. On April 20, 2022, the Standing Committee of the NPC, issued the revised Professional Education Law (2022 Revision), or the Amended Professional Education Law, which came into effect on May 1, 2022. According to the Amended Professional Education Law, professional education is a type of education of the same status as general education. It is an important part of the national education system and human resources development, and an important way to cultivate diversified talents, inherit technical skills, and promote employment and entrepreneurship. Professional education shall be planned by the government as a whole, administered at different levels, led by local authorities, given industrial guidance, school-enterprise cooperation, and participated by the whole society. The state encourages, guides, and supports enterprises and other social forces to establish professional schools and professional training institutions in accordance with the law. In addition, the AmendedProfessional Education Law also provides incentive policies such as rewards and tax incentives to enterprises that actively participate in industry-education integration and school-enterprise cooperation.
78
On August 3, 2007, the Standing Committee of the PRC National People’s CongressNPC promulgated the Employment Promotion Law of the PRC, or theEmployment Promotion Law, which became effective on January 1, 2008.2008, and was amended on April 24, 2015. Pursuant to the Employment Promotion Law, the PRC government at and above the county level shall encourage and support professional schools, professional training institutions and corporations to carry out pre-employment training, employment training, re-employment training and entrepreneurship training, and encourage workers to attend various types of training programs. Corporations in mainland China are requested to set aside financial resources for the training and continued education of their employees.
The Law for Promoting Private Education and its Implementation Rules
Foreign Investments in ProfessionalOn December 28, 2002, the Standing Committee of the NPC promulgated the Law for Promoting Private Education Services
The Catalogue, or the Private Education Law, which became effective on September 1, 2003, and was amended on December 29, 2018. On March 5, 2004, the State Council promulgated the Implementation Rules for the Guidance of Foreign Investment Industries,Law for Promoting Private Education, or the Catalogue,Private Education Implementation Rules, which became effective on April 1, 2004, and were amended on April 4, 2021, which became effective on September 1, 2021. Under the Private Education Law and the Private Education Implementation Rules, “private schools” are defined as promulgatedschools established by social organizations or individuals using non-government funds. Private schools providing certifications, pre-school education, education for self-study aid and amended from timeother academic education shall be subject to timeapproval by the MOFCOMeducation authorities, while private schools engaging in professional qualification training and professional education training shall be subject to approvals from the National Developmentauthorities in charge of human resources and Reform Commission, issocial security.
Under the principal guide to foreign investors’ investment activities inabove regulations, the PRC. The most updated versionoperations of a private school are highly regulated. For example, the Catalogue, which was promulgated in March 2015types and became effective in April 2015, dividesamounts of fees charged by a private school providing certifications shall be approved by the industries into three categories: encouraged, restrictedgovernmental pricing authority and prohibited. Industriesbe publicly disclosed. A private school that does not listed inprovide certifications shall file its pricing information with the Catalogue are generally open to foreign investment unless specifically restricted by other PRC lawsgovernmental pricing authority and regulations.publicly disclose such information. A wholly foreign-owned enterprise is generally permitted for encouraged industriesprivate school shall file its advertisement and industries not listed inschool enrollment brochure with the Catalogue, while there are some limitations to the ownership and/relevant governmental authorities of human resources and social security or corporate structure of the foreign-invested companies that operate in restricted industries. Industries in the prohibited category are not open to foreign investors. education.
According to the latest Catalogue, foreign investment is encouraged in non-accredited professional education services Private Education Law and there is no limitation with respectthe Private Education Implementation Rules, entities and individuals who establish private schools are commonly referred to maximum percentageas “sponsors” rather than “owners” or “shareholders.” The economic substance of foreign ownership“sponsorship interest” that a sponsor holds in a company conductingprivate school is, for all other practical purposes, substantially equivalent under laws of mainland China and practice to the “equity interest” a shareholder holds in a company. A sponsor of a private school has the obligation to make capital contributions to the school in a timely manner. The contributed capital can be in the form of tangible or non-tangible assets, such as materials in kind, land use rights or intellectual property rights. The capital contributed by the sponsor becomes assets of the school and the school has independent legal person status. In addition, the sponsor of a private school has the right to exercise ultimate control over the school by becoming the member of and controlling the composition of the school’s decision-making body. Specifically, the sponsor has control over the private school’s constitutional documents and has the right to elect and replace the private school’s decision-making bodies, such as the school’s board of directors, and therefore controls the private school’s business in professional education services.
Regulationsand affairs. Nevertheless, before the Standing Committee of the NPC promulgated the Decision on For-profit Private Training Institutions
TheAmending the Law for Promoting Private Education of the PRC on November 7, 2016, which came into force on September 1, 2017, and was further amended on December 29, 2018, or the Amendment to the Private Education Law, sponsors of a private school may choose to require “reasonable returns” from the annual net balance of the school after deduction of costs for school operations, donations received, government subsidies (if any), the reserved development fund and other expenses as required by the regulations. However, none of the current laws and regulations of mainland China provides a formula or guidelines for determining “reasonable returns.” Private schools whose sponsor does not require reasonable returns shall be entitled to the same preferential tax treatment as public schools, while the preferential tax treatment policies applicable to private schools whose sponsor require reasonable returns shall be formulated by the finance authority, taxation authority and other authorities under the State Council. To date, however, no regulations have been promulgated by such authorities in this regard.
As for private training institutions, the Private Education Law provides that the regulations applicable to private training institutions registered with the SAICSAMR and its local counterparts shall be formulated by the State Council separately. On July 29, 2010, the PRC central government promulgated the Outline of China’s National Plan for Medium- and Long-Term Education Reform and Development (2010-2020), which announced the policy that the government will implement a reform to divide private schools into two categories: (i) for-profit private schools and (ii) not-for-profit private schools. On October 24, 2010, the General Office of the State Council issued the Notices on the National Education System Innovation Pilot. Under this notice,Pilot, pursuant to which the PRC government plans to implement a for-profit and non-profit classified management system for the private schools in Shanghai, Zhejiang, Shenzhen and Jilin Huaqiao Foreign Language School. However,
79
The Amendment to the Private Education Law has followed the principles and spirits of the above outline and the pilot program, is stillwhich establishes a new classification system for private schools to be classified by whether they are established and no further national lawoperated for profit-making purposes. Under the Amendment to the Private Education Law, sponsors of private schools may choose to establish non-profit or regulation has been promulgatedfor-profit private schools at their own discretion. Nonetheless, school sponsors are not allowed to implement them and, exceptestablish for-profit private schools that are engaged in Shanghai, nocompulsory education. In other local governmentwords, the schools engaged in compulsory education should retain their non-profit status after the Amendment to the Private Education Law comes into force.
According to the Amendment to the Private Education Law, there are certain key features of the pilot areas has promulgatedaforesaid new classification system for private schools, including, but not limited to (1) sponsors of for-profit private schools are entitled to retain the profits and proceeds from the schools, and the operation surplus may be allocated to the sponsors pursuant to the PRC Company Law and other relevant regulationslaws and regulations. But sponsors of non-profit private schools are not entitled to the distribution of profits or proceeds from the non-profit schools and all operation surplus of non-profit schools shall be used for the operation of the schools; (2) for-profit private schools are entitled to set their own tuition fees and other miscellaneous fees without the need to seek prior approvals from or report to the relevant government authorities. The collection of fees by non-profit private schools, on differentiated managementthe other hand, shall be regulated by the provincial, autonomous regional or municipal governments; (3) private schools (for-profit and non-profit) may enjoy preferential tax treatments. Non-profit private schools will be entitled to the same tax benefits as public schools. Taxation policies for for-profit private schools after the Amendment to the Private Education Law taking effect are still unclear as more specific provisions are yet to be introduced; (4) where there is construction or expansion of a non-profit private school, the school may acquire the required land use rights in the form of allocation by the government as a preferential treatment. Where there is construction or expansion of a for-profit private school, the school may acquire the required land use rights by purchasing them from the government; (5) the remaining assets of non-profit private schools after liquidation shall continue to be used for the operation of non-profit schools. The remaining assets of for-profit private schools shall be distributed to the sponsors in accordance with the PRC Company Law; and (6) the people’s governments at or above the county level may support private schools by subscribing to their services, providing student loans and scholarships, and leasing or transferring unused state assets. The governments may further take such measures as government subsidies, bonus funds and incentives for donation in support of non-profit private schools.
On December 29, 2016, the State Council issued the Several Opinions of the State Council on Encouraging the Operation of Education by Social Forces and Promoting the Healthy Development of Private Education, or the State Council Opinions, which require each level of the people’s governments to ease access to the operation of private schools and encourage social forces to enter the education industry. The State Council Opinions also provide that each level of the people’s governments shall increase its support to the private schools in terms of financial investment, financial support, autonomy policies, preferential tax treatments, land policies, fee policies, autonomy operation, protecting the rights of teachers and students, etc. Further, the State Council Opinions require each level of the people’s governments to improve its local policies on government support to for-profit and non-profit private schools by ways of preferential tax treatments etc. In addition, under the State Council Opinions, private schools shall strengthen their construction of organizations of the Chinese Communist Party, or the CCP, and further the theoretical system of Socialism with Chinese Characteristics by introducing such system into textbooks and teaching programs. The construction of the CCP’s organizations by the private schools as well as the CCP’s leadership to private schools shall constitute an important part of such schools’ annual inspections.
On December 30, 2016, the Implementation Rules for Private School Classification Registration was issued by the MOE, the MOHRSS and other relevant authorities, which require all private schools, including non-profit private schools and for-profit training institutions.
On June 20, 2013, Shanghai promulgatedprivate schools, to obtain “school permits.” Existing private schools established before promulgation of the Interim MeasuresAmendment to the Private Education Law that choose to register as for-profit private schools should apply for Administrationnew school permits and complete the re-registration process. If such private schools choose to register as non-profit schools, they shall amend their articles of Operationalassociation, continue their operation and complete the new registration process. The Regulatory Implementation Rules for For-Profit Private Training Institutions,School issued by the MOE, the MOHRSS and other relevant authorities further provide that the establishment, division, merger and other material changes of a for-profit private school shall first be approved by the education authorities or Measure No. 5, which requiresthe authorities in charge of human resources and social welfare, and then be registered with the competent branch of SAMR. In addition, for-profit private training institutions shall also be regulated and governed by reference to register with local counterpartssuch rules.
On August 31, 2017, the Notice on the Work concerning the Administration of the SAIC. The local counterpartsName Registration for For-profit Private Schools was issued by the SAMR and the MOE, which requires that for-profit private schools shall, in accordance with the relevant provisions of the SAICPRC Company Law and the Private Education Law, be registered as limited liability companies or joint stock limited companies, and their names shall consultcomply with the provisions of relevant laws and regulations on company registration, administration and education.
80
In addition to the Amendment to the Private Education Law and the above regulations, the details of the operation requirement of non-profit schools and for-profit schools will further be provided in implementation regulations which may include the Amendment to the Private Education Implementation Rules, the local human resources and social securities authorities before completion ofregulations relating to legal person registration of for-profit and non-profit private schools, and the specific measure to be formulated and promulgated by the competent authorities responsible for the administration of private schools, including, but not limited to, the specific measures for registration of pre-existing private schools, the specific requirements for authenticating various parties’ property rights and payment of taxes and fees of for-profit private schools, taxation policies for for-profit private schools, and measures for the collection of non-profit private schools’ fees.
As of the date of this annual report, certain local governments, such as Shanghai, Beijing and Jiangsu province, Hebei province, Shaanxi province, and Qionghai of Hainan province have promulgated their local regulations relating to legal person registration and administration for private schools. However, the implementation of regulations at the national level and some provinces relating to the regulation regarding the private schools in mainland China are yet to be introduced.
On April 7, 2021, the State Council promulgated the Amended Implementation Rules for the Law for Promoting Private Education, or the Amended Private Education Implementation Rules, which took effect on September 1, 2021. The Amended Private Education Implementation Rules provide, among other things, that (i) social organizations and individuals are prohibited from controlling a private school that provides compulsory education or a non-profit private school that provides pre-school education through mergers and acquisitions and control agreements; (ii) a private school providing compulsory education is prohibited from conducting transactions with its related party; and (iii) relevant government authorities shall enhance the supervision on the agreements entered into between non-profit private schools and their respective related parties and shall review such transaction on an annual basis. In terms of online education, the Amended Private Education Implementation Rules provide that (i) online education activities using internet technology are encouraged by the regulatory authorities and shall comply with laws and regulations related to internet management; (ii) any private school engaging in online education activities using internet technology shall obtain the relevant private school operating permit and it shall also establish and implement internet security management systems and take technical security measures; (iii) upon discovery of any information whose release or transmission is prohibited by applicable laws or regulations, the private school shall immediately cease the transmission of that information and take further remedial actions, such as deleting that information, to prevent it from spreading; and (iv) records pertaining to the situation shall be kept and reported to the appropriate authorities.
Regulations on Off-Campus Training for Students Aged Between Three and Eighteen
The General Office of the State Council promulgated Circular 80 on August 6, 2018. Circular 80 requires that after-school education institutions shall obtain school operation permits and business licenses. Circular 80 further provides that after-school education institutions shall obtain approvals from local education authorities for opening new branches or learning centers.
In addition, the Notice on Effectively Reducing Extracurricular Burdens of Primary and Middle School Students and Conducting Special Administrative Actions for Off-campus Training Institutions promulgated by the MOE and other relevant authorities on February 13, 2018, the Notice on Effectively Conducting Special Administrative Actions for Off-campus Training Institutions promulgated by the MOE on August 31, 2018, the Notice on Perfecting the Working System of Conducting Special Administrative Actions for Off-campus Training Institutions promulgated by the MOE and other relevant authorities on November 20, 2018, and the Notice on Measures to Reduce the Burden on Primary and Secondary School Students promulgated by the MOE and other relevant authorities on December 28, 2018, also provide after-school education institutions shall obtain school operation permits and business licenses.
On March 30, 2021, the MOE promulgated the Guiding Opinions of the Ministry of Education on Vigorously Promoting the Scientific Connection of Kindergartens and Primary Schools, which prohibits after-school tutoring institutions from providing training for pre-school children in violation of regulations and provides that after-school tutoring institutions in violation of the regulations above shall be included in the blacklist.
On April 8, 2021, the General Office of the MOE enacted the Notice of Strengthening the Management of Homework for Compulsory Education, which requires that the local governments shall implement prohibition measures on leaving homework as an important part of the daily supervision on after-school training institutions in accordance with relevant regulations, and in order to avoid reducing the burden in schools but increasing the burden after-school, after-school training institutions shall not leave homework to primary and secondary school students.
81
On July 24, 2021, the General Office of the State Council and the General Office of the Central Committee of the Communist Party of China jointly promulgated the Opinions on Further Alleviating the Burden of Homework and Off-campus Training on Students in Compulsory Education Stage, or the Alleviating Burden Opinion. Moreover, the Alleviating Burden Opinion specifies a series of operating requirements that after-school tutoring institutions must meet, including, among other things, (i) for online tutoring, each session shall be no more than thirty minutes and the training shall end no later than 9:00 p.m.; (ii) no advertisements for after-school tutoring shall be published or broadcasted in the network platforms and billboards displayed in the mainstream media, new media, public places and residential areas; (iii) the provision of overseas education courses is strictly prohibited; (iv) government authorities will implement risk management and control for the pre-collection of fees by after-school tutoring institutions with requirements such as setting up third-party custodians and risk reserves, and strengthen supervision over loans regarding tutoring services; and (v) online tutoring for preschool-age children is prohibited.
On July 28, 2021, the General Office of MOE promulgated the Notice on Further Clarifying the Scope of Academic Subjects and Non-Academic Subjects of After-School Tutoring in the Compulsory Education, which specifies that according to the national curriculum on compulsory education, when after-school institutions carry out tutoring, morality and rule of law, Chinese, history, geography, mathematics, foreign language (including English, Japanese, Russian), physics, chemistry and biology are classified as academic subjects, while sports (or sports and health), art (or music, art), and comprehensive practical activities (including information technology education, labor and technology education) are classified as non-academic subjects. The Guidelines for Classification and Identification of Off-campus Training Programs in Compulsory Education issued in November 2021 by the General Office of MOE further clarifies that off-campus training will be classified as academic subject training if the following criteria are met: (i) the courses are guided by subject knowledge and skills training, and aiming at improving academic performance of the subject; (ii) the training contents mainly involve subjects such as ethics and the rule of law, Chinese, history, geography, mathematics, foreign languages (English, Japanese, Russian), physics, chemistry, biology, etc.; (iii) the training is carried out by way of teachers (including virtual image, artificial intelligence, etc.) teaching, demonstration and interaction, with emphasis on aspects of knowledge explanation, listening, speaking, reading, writing and arithmetic and other subject ability training, and the main process include preview, teaching and review exercises, and as the main process form; (iv) the evaluation of students focuses on screening and selection, and takes academic performance and examination results as the main evaluation basis.
On August 25, 2021, the General Office of MOE issued the Administrative Measures for After-School Tutoring Materials for Primary and Secondary School Students (for Trial Implementation), which, among other things, provide that: (i) after-school tutoring materials for primary and secondary school students and staff preparing such tutoring materials shall meet certain requirements specified in such measures, which include, among other requirements, tutoring materials shall follow the national curriculum standard and shall not provide contents in advance of the school curriculum; (ii) after-school tutoring institutions shall establish internal management system for the tutoring materials and the staff preparing such tutoring materials; (iii) after-school tutoring institutions shall conduct internal review of the tutoring materials and the local education administrations shall conduct external review of the tutoring materials; (iv) after-school tutoring institutions may only use tutoring materials that have been internally and externally reviewed or if the materials have been officially published; (v) after school tutoring institutions shall file with the relevant education administrations the tutoring materials and the staff preparing such materials; and (vi) after-school tutoring institutions in violation of the measures will be subject to rectification and shall not use the relevant tutoring materials during the rectification period; if the after-school tutoring institution refuses to rectify within the time limit or if the violation is severe, its private school operating permit may be revoked by the local education administration.
On September 9, 2021, the General Office of MOE and the General Office of the MOHRSS jointly issued the Administrative Measures for Practitioners of the After-School Tutoring Institutions (for Trial Implementation), which set out a series of requirements for the after-school tutoring institutions with respect to their employed teachers, research staff and teaching assistants. After-school tutoring institutions in violation of such requirements will be subject to rectification. If an after-school tutoring institution violates the requirements several times or violates several requirements, such after-school tutoring institution is prohibited from enrollment of students and shall not conduct tutoring activities during the rectification period; and if the after-school tutoring institution refuses to rectify within the time limit or if the violation is severe, its private school operating permit may be revoked by the local education administration.
82
The Announcement on Regulating Non-academic Off-campus Tutoring published by the MOE, the NDRC and the SAMR on March 3, 2022, provides that, among other requirements, (i) non-academic off-campus tutoring institutions should operate in accordance with principles of fairness, legality and good faith, and determine tuition fees reasonably. Information such as the course subject, course length, charge items and standard should be transparent to the public; (ii) non-academic off-campus tutoring institutions should use the standard Contract on Off-campus Tutoring Services for Primary and Secondary School Students (Template) and are prohibited from price fraud and unfair-competition activities, such as fictitious original prices, false discounts, false publicity, etc., and monopolistic behaviors should be prevented and stopped; (iii) prepaid tuition fees should be deposited into a special account of the non-academic off-campus tutoring institutions and courses for primary and secondary school students should not be paid through loans; and (iv) where fees are charged based on the number of classes, fees are not allowed to be collected in a lump sum for more than 60 classes, and where fees are charged based on the length of the course, the fees shall not be collected for a course length of more than three months.
On November 30, 2022, the MOE, jointly with other 12 departments, published the Opinions on Regulating Non-academic After-class Training for Primary and Secondary School Students, which reiterate the principles and requirements of establishment standard, approval process, length and time of class session, charge management, and daily supervision of non-academic after-class training institutions. Measure No. 5 cameFor example, the Opinions require the non-academic training institutions must obtain administrative licenses from relevant competent authorities prior to registering as legal persons, and online non-academic training institutions shall be approved to engage in internet information service by telecommunications authorities.
The MOE published the Interim Measures for Administrative Punishments for After-class Training (Draft for Comment) for public comments on November 23, 2022. The draft, among others, proposes to impose penalties of suspension of business, refund of collected tuitions and fines ranging from one to five times to illegal income in the event a person engages in after-class tutoring without approval and meets certain criteria. However, it is uncertain when the Interim Measures for Administrative Punishments for After-class Training would be promulgated and whether the final version would have any substantial changes to the draft.
In addition, the Alleviating Burden Opinion also requires that local government authorities shall clarify the competent authorities for administering the non-academic after-school tutoring institutions, by classifying sports, culture and art, science and technology and other non-academic subjects, formulate standards among different classification of non-academic tutoring and conduct strict examination before granting permission. As of the date of this annual report, certain local government authorities have promulgated rules that require non-academic tutoring service providers in areas such as art, music, physics, among others, to obtain private school operation permit.
Regulations on Educational Apps
The MOE, jointly with certain other PRC government authorities, issued the Opinions on Educational Apps, which require, among other things, mobile apps that provide services for school teaching and management, student learning and student life, or home-school interactions, with school faculty, students or parents as the main users, and with education or learning as the main application scenarios (the “Educational Apps”), be filed with competent provincial regulatory authorities for education before the end of 2019. The MOE expects to further promulgate implementation rules with respect to such filing requirements. The Opinions on Educational Apps also require, among other things, that (i) before filing, the Educational App’s provider obtain the ICP license or complete the ICP filing and obtain the certificate of the grade evaluation report for graded protection of cybersecurity; (ii) Educational Apps whose main users are under the age of 18 limit the use time, specify the range of suitable ages, and strictly monitor their content; (iii) before an Educational App is introduced as a mandatory app to students, such Educational App be approved by the applicable school through its collective decision-making process and be filed with the competent education authority; and (iv) Educational Apps adopted by education authorities and schools as their uniformly used teaching or management tools not charge the students or parents any fee, and not offer any commercial advertisements or games.
On April 27, 2022, Beijing Municipal Education Commission, jointly with certain other PRC government authorities, published the Notice on Further Working on the Filing and Management of Educational Mobile Internet Applications, which reiterates that Educational Apps are mandated to complete filing; those applications not developed for the education system and whose main users are not targeted at faculty and students, and applications that are general tools not catering to educational system do not fall into the filing scope. The Notice on Further Working on the Filing and Management of Educational Mobile Internet Applications classifies Educational Apps as academic training related or non-academic training related, for academic training related Education Apps, the providers shall obtain the operation permits for online subject training.
83
Regulations on Chinese-Foreign Cooperation in Operating Schools
Chinese-foreign cooperation in operating schools or training programs is specifically governed by the Regulations on Operating Chinese-foreign Schools, promulgated by the State Council in 2003 and amended in 2019 in accordance with the Education Law, the Professional Education Law and the Private Education Law. The Implementing Rules for the Regulations on Operating Chinese-foreign Schools, or the Implementing Rules, were issued by the MOE in 2004. The Regulations on Chinese-Foreign Cooperation in Operating Schools and its Implementing Rules encourage substantive cooperation between overseas educational organizations with relevant qualifications and experience in providing high-quality education and Chinese educational organizations to jointly operate various types of schools in mainland China. Cooperation in the areas of higher education and occupational/professional education is especially encouraged. Chinese-foreign cooperative schools are not permitted, however, to engage in compulsory education or military, police, political and other kinds of education that are of a special nature in China. The Regulations on Operating Chinese-foreign Schools prohibits foreign institutions or individuals from independently establishing schools in China, which provide educational services mainly for Chinese citizens.
The MOHRSS also promulgated the Regulations on Operation Chinese-foreign Cooperation School in Professional Education Training to implement the Regulations on Operating Chinese-foreign Schools on July 26, 2006, which took effect on July 20, 2013October 1, 2006, and will remain effectivewas amended on April 30, 2015. The Regulations on Operation Chinese-foreign Cooperation School in Professional Education Training prohibits foreign institutions or individuals from independently establishing professional education training institutions in China, which provide educational services mainly for Chinese citizens.
We have not operated or applied for any Chinese-foreign schools. Prior to 2012, we operated a substantial portion of our learning centers through subsidiaries of the consolidated VIEs and schools to which the consolidated VIEs or their respective subsidiaries are sponsors. Starting from the second half of 2012, we began to transfer our operations to our wholly owned subsidiary, Tarena Tech, and its subsidiaries. All of our learning center operations of VIEs had been transferred to Tarena Tech and its subsidiaries and schools before 2018, while one of our learning centers was transferred back to Beijing Tarena for business operation purpose in 2018. In 2019, three of our learning centers which provide online education services were transferred back to Beijing Tarena for business operation purpose and one school was newly set up through Beijing Tarena. In 2020 and 2021, three and two years.
schools were newly set up through Beijing Tarena respectively. In February 2023, one school was transferred to a subsidiary of Beijing Tarena. As of December 31, 2015, 142022, we operated 51 and 244 learning centers by schools and subsidiaries owned by Tarena Tech, Tarena Hangzhou, or Tongcheng Shidai, respectively, whilst 7 and 1 learning centers by schools and subsidiaries owned by Beijing Tarena, respectively. However, there are still uncertainties under the current laws of mainland China as to whether a wholly foreign owned enterprise (such as Tarena Tech) is allowed to indirectly invest in and own private schools through its subsidiaries in mainland China. See “Item 3. Key Information—D. Risk Factors— Risks Related to Our Corporate Structure—If the relevant PRC authorities determine that we can no longer own and operate certain of our learning centers through our subsidiaries in mainland China, we may need to restructure the ownership and operation of these learning centers (including possibly transferring these learning centers to the consolidated VIEs), our business may be disrupted and we may be exposed to increased risks associated with the contractual arrangements relating to the consolidated VIEs.”
84
Foreign Investments in Professional Education Services
The PRC subsidiaries, consolidated VIEsCatalogue for the Guidance of Foreign Investment Industries, or the Catalogue, as promulgated and subsidiariesamended from time to time by the MOFCOM and the National Development and Reform Commission, or the NDRC, is the principal guide to foreign investors’ investment activities in mainland China. The most updated version of consolidated VIEs had computer technology trainingthe Catalogue, which was promulgated in March 2017 and became effective in July 2017, divides the industries into three categories: encouraged, restricted and prohibited. On December 27, 2021, the NDRC and the MOFCOM jointly issued Special Administrative Measures for Access of Foreign Investment (Negative List), or trainingthe Negative List, which became effective on January 1, 2022. Industries not listed in its approvedthe Catalogue or the Negative List are generally open to foreign investment unless specifically restricted or prohibited. A wholly foreign-owned enterprise is generally permitted for encouraged industries and industries not listed in the Catalogue or industries not listed in the Negative List, while there are some limitations to the ownership and/or corporate structure of the foreign-invested companies that operate in restricted industries, such as the maximum shareholding threshold and special senior manager requirements. Industries in the prohibited category are not open to foreign investors. According to the Catalogue and the Negative List, foreign investment is encouraged in non-accredited professional education services and there is no limitation with respect to the maximum percentage of foreign ownership in a company conducting business scope.
in professional education services. Foreign investment is restricted to establishing Sino-foreign cooperative joint venture operations led by Chinese parties in pre-school education institutions, ordinary senior high schools and institutions of higher learning. Foreign investment is prohibited in compulsory education institutions.
Regulations on Online and Distance Education
Pursuant to the Administrative Regulations on Educational Websites and Online and Distance Education Schools issued by the Ministry of EducationMOE on July 5, 2000, educational websites and online education schools may provide educational services in relation to higher education, elementary education, pre-school education, teaching education, occupationaloccupational/professional education, adult professional education, other education and public educational information services. “Educational websites” refer to organizations providing education or education-related information services to website visitors by means of a database or online education platform connected via the Internetinternet or an educational television station through an Internet Service Provider, or ISP. “Online education schools” refer to education websites providing academic education services or training services with the issuance of various certificates.
Setting up educationeducational websites and online education schools is subject to approval from relevant education authorities, depending on the specific types of education. Any educationeducational website and online education school shall, upon the receipt of approval, indicate on its website such approval information as well as the approval date and file number.
On June 29, 2004, the State Council promulgated the Decision on Setting Down Administrative Licenses for the Administrative Examination and Approval Items Really Necessary to be Retained, pursuant to which the administrative license for “online education schools” was retained, while the administrative license for “educational websites” was not retained. Accordingly, Beijing Tarena ourand Beijing Tongcheng, the consolidated VIEVIEs engaging in online education-related services, isare not required to obtain approval to operate “educational websites” from the Ministry of Education.MOE. On January 28, 2014, the State Council promulgated the Decision on Abolishing and Delegating Certain Administrative Examination and Approval Items, pursuant to which the administrative approval for “online education schools” of higher education was abolished.
Notwithstanding these decisions formulated by the State Council, as the Administrative Regulations on Educational Websites and Online and Distance Education Schools were not explicitly abolished, in practice, certain local authorities continue to implement the approval requirement for setting up educational websites and online education schools until February 3, 2016, when the State Council promulgated the Decision on Cancelling the Second Batch of 152 Items Subject to Administrative Examination and Approval by Local Governments Designated by the Central Government, explicitly withdrew the approval requirements for operating educational websites and online education schools as provided by the Administrative Regulations on Educational Websites and Online and Distance Education Schools, and reiterated the principle that administrative approval requirements may only be imposed in accordance with the PRC Administrative Licensing Law. The Administrative Regulations on Educational Websites and Online and Distance Education Schools were explicitly abolished on July 13, 2017, upon the MOE issuing the Notice on Strengthening Interim and Ex-post Supervision After Canceling Examination and Approval of Online Schools and Educational Websites.
85
In December 2017, the Shanghai Municipal Government promulgated the Management Methods of Classified Registration of Private Schools, the Setting Standards for Private Training Institutions of Shanghai, that became effective on January 1, 2018, and the Management Measures for the For-profit Private Training Institutions of Shanghai, and the Management Methods for the Non-Profit Private Training Institutions of Shanghai, pursuant to which, any management measures and regulations applied to the institutions that provide training services only through the internet will be further promulgated separately. On November 9, 2018, the Beijing Tarena is not requiredMunicipal Government promulgated the Operation Standards for Private Education Training Institutions in Beijing (For Trial) that became effective on the same date, which provide that the setting up standards for the institutions that provide training services only through the internet will be promulgated separately. On November 26, 2018, the Beijing Municipal Government further promulgated the Methods of Classified Registration of Private School in Beijing and the Measures for the Supervision and Administration for the For-profit Private School in Beijing that became effective on the same date, which kept silent on such standards for the institutions that provide training services only through the internet. On February 24, 2020, the Shanghai Municipal Education Commission and other competent authorities jointly promulgated the Shanghai Off-campus Online Training Registration Rules, which only apply to off-campus online training activities for cultural subjects, such as mathematics and English, for elementary and middle school students.
The Implementation Opinions on Regulating Online After-School Training, promulgated by the MOE jointly with certain other PRC government authorities and effective on July 12, 2019 require all the academic subjects online after-school training institutions for primary and secondary school students to file with the competent provincial education regulatory authorities before October 31, 2019. The Alleviating Burden Opinion and the Notice on Changing the Filing to Approval of Existing Online Academic Training Institutions issued by the General Office of the MOE, jointly with five other PRC government authorities on September 10, 2021, mandate all online academic training institutions to obtain aschool operation permits.
The Opinions on Regulating Non-academic After-class Training for Primary and Secondary School Students, promulgated on November 30, 2022 by the MOE and 12 PRC government authorities, provides that non-academic after-class training institutions shall obtain administrative license to operate “online education schools,” as it does not directly offer government accredited degrees or certifications through its online education or trainingfrom competent authorities and approval for engaging in internet information services.
Regulations on Onlinethe Collection of Tuition Fees
Pursuant to the Interim Measures for the Management of the Collection of Private Education Fees, which were promulgated by the NDRC, the MOE and the MOHRSS on March 2, 2005, and were repealed and annulled by the NDRC on March 12, 2020, private schools may charge the students for tuition (or training expenses) and may also charge the students accommodating at school for an accommodation fee. The charging standards of the private schools that provide academic qualifications education shall be examined by the education authorities or the human resources and social security authorities and be approved by the competent pricing authority. The private schools that provide non-academic qualifications education may determine their own charging standards and file the standards with the competent pricing authority.
According to the Notice on the Cancellation of the Fee Charge Permit System and Strengthening Supervision, which was issued jointly by the NDRC and the MOF on January 9, 2015, the Fee Charge Permit certificate issuance and annual review system was cancelled nationwide from January 1, 2016.
On October 12, 2015, the State Council and the Central Committee of the Communist Party of China jointly issued the Several Opinion of the Central Committee of the Communist Party of China and the State Council on Promoting the Price Mechanism Reform, which allows for-profit private schools to determine their prices on their own, while the tuition-collecting policies of non-profit private schools shall be determined by the provincial governments in a market-oriented manner and based on the local conditions.
On October 21, 2021, the MOE, jointly with other five national authorities, issued the Notice on Strengthening the Supervision over Prepaid Fees Collected by After-School Tutoring Institutions, which provides that, among other requirements, (i) after-school tutoring institutions should not charge excessive fees; (ii) off-campus training institutions should use the standard Contract on Off-campus Tutoring Services for Primary and Secondary School Students (Template); (iii) details of the pricing schemes, such as the charging items and standards should be publicized; (iv) prepaid tuition fees collected by off-campus training institutions must be deposited into a special account that is in custody of a bank; and before the prepaid tuition fees are placed in a bank’s custody, off-campus training institutions should deposit funds not less than the aggregate amount of tuitions fees to be received in three months in order to guarantee the performance of training service commitments and refunds; (v) tuition fees of training courses for primary and secondary school students should not be paid in loans; and (vi) where fees are charged based on the number of classes, fees are not allowed to be collected in a lump sum for more than 60 classes, and where fees are charged based on the length of the course, the fees shall not be collected for a course length of more than three months.
86
Some local governments in mainland China have promulgated their local rules on prepaid tuitions collected by after-class tutoring institution. For example, Beijing has published the Measures for the Administration of Prepayment for Training Courses of For-profit Culture and Art After-class Training Institutions in Beijing (For Trial) on December 22, 2022 and the Measures for the Administration of Prepaid Consumption of Science and Technology After-class Training in Beijing (Trial) (Draft for Comment) on January 16, 2023, which for the most part repeat and detail the provisions contained in the abovementioned state rules.
Regulations on Internet Publications
On February 4, 2016, the State Administration of Press, Publication, Radio, Film and Television of the PRC (formerly the General Administration of Press and Publication), or the SAPPRFT and the Ministry of Industry and Information Technology, or the MIIT jointly promulgated the Internet Publishing Service Administrative Measures, or the Internet Publishing Measures, which took effect on March 10, 2016, and replaced the Tentative Internet Publishing Administrative Measures jointly promulgated by the General Administration of Press and Publication and MIIT on June 27, 2002. The Internet Publishing Measures require entities that engage in Internetinternet publishing to obtain an Internet Publishing License for engaging in Internetinternet publishing from the SAPPRFT. Pursuant to the Internet Publishing Measures, the definition of “Internet“internet publishing” is broad and refers to the act of online spreading of articles, whereby the Internetinternet information service providers select, edit and process works created by themselves or others and subsequently post such works on the Internetinternet or transmit such works to the users’ end through Internetinternet for the public to browse. These works include contents from books, newspapers, periodicals, audio-video products, electronic publications that have already been formally published or works that have been made public in other media. See also “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—We face risks and uncertainties with respect to the licensing requirement for value-added telecommunication services, internet audio-video programs, radio or television programs production and operation, internet publication, human resources intermediary service and filing requirements for commercial franchise.”
Regulations on Production and Operation of Radio/Television Programs
Beijing Tarena has offered videosOn July 19, 2004, the SARFT promulgated the Administrative Measures on the Production and Operation of lecturesRadio and Television Programs, or the Radio and Television Program Production Measures, which took effect on its websiteTMOOC.cnAugust 20, 2004, and has not obtained an Internet Publishing License from the SAPPRFT. However, governmental authorities could determinewere amended on August 28, 2015, and October 29, 2020, respectively. The Radio and Television Program Production Measures provide that Beijing Tarena’s online content services fallany business operator that produces or operates radio or television programs must first obtain a Radio and Television Program Production and Operation License. Entities holding such licenses shall conduct their business within the permitted scope of “internet publishing,”as provided in their licenses. See also “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—We face risks and therefore require Beijing Tarenauncertainties with respect to applythe licensing requirement for an Internet Publishing License. Beijing Tarena may not be able to obtain such a license,value-added telecommunication services, internet audio-video programs, radio or television programs production and it may become subject to penalties, fines, legal sanctions or be ordered to suspend the video content on the website.
operation, internet publication, human resources intermediary service and filing requirements for commercial franchise.”
Regulation on Broadcasting Audio-Video Programs through the Internet or Other Information Network
The SAPPRFT promulgated the Rules for Administration of Broadcasting of Audio-Video Programs through the Internet and Other Information Networks, or the Broadcasting Rules, in 2004, which became effective on October 11, 2004. The Broadcasting Rules apply to the activities of broadcasting, integration, transmission, downloading of audio-video programs with computers, televisions or mobile phones as the main terminals and through various types of information networks. Pursuant to the Broadcasting Rules, a Permit for Broadcasting Audio-video Programs via Information Network is required to engage in these Internet broadcasting activities. On April 13, 2005, the State Council announced a policy on private investments in businesses in China that relate to cultural matters, which prohibits private investments in businesses relating to the dissemination of audio-video programs through information networks.
On December 20, 2007, the SAPPRFT and MIIT issued the Internet Audio-Video Program Measures, which became effective on January 31, 2008.2008, and were amended on August 28, 2015. Among other things, the Internet Audio-Video Program Measures stipulate that no entities or individuals may provide Internetinternet audio-video program services without a Permit for Broadcasting Audio-video Programs via Information Network issued by the SAPPRFT or its local counterparts and only entities wholly owned or controlled by the PRC government may engage in the production, editing, integration or consolidation, and transfer to the public through the Internet,internet, of audio-video programs, and the provision of audio-video program uploading and transmission services. On September 15,21, 2009, SAPPRFT promulgated the Notice on Several Issues regarding the Permit for Broadcasting Audio-video Programs via Information Network.Network. The Notice restates the necessity of applying for such license and sets forth the legal liabilities for those providing Internetinternet audio-video program services without the license.
On April 1, 2010, SAPPRFT promulgated the Test Implementation of the Tentative Categories of Internet Audio-Visual Program Services, which was amended on March 10, 2017, or the Tentative Categories, which clarified the scope of Internetinternet audio-video programs services. According to the Tentative Categories, there are four categories of Internetinternet audio-visual program services which are further divided into seventeen sub-categories. The third sub-category to the second category covers the making and editing of certain specialized audio-video programs concerning, among other things, educational content, and broadcasting such content to the general public online.
On March 23, 2021, the SAPPRFT issued the Provisions on the Administration of Private Network and Targeted Communication Audiovisual Program Services (2021 Edition), or Targeted Communication Rules, which replaced the Broadcasting Rules issued in 2016. The Target Communication Rules mainly focus on networks and services such as IPTV and private network mobile TV.
87
In the course of offering our lecture videos, we transmit our audio-video educational programs live through the Internet not onlyinternet to enrolled course participants, but also to the general public.participants. If the governmental authorities determine that our provision of lecture videos falls within the Internet Audio-Video Program Measures and demand that we apply for the license, we may not be able to obtain the License for Disseminating Audio-Video Programs through Information Network. If this occurs, we may become subject to significant penalties, fines, legal sanctions or an order to suspend our use of audio-video content.
Regulations on Value-Added Telecommunications Services
Licenses for Value-Added Telecommunication Services
On September 25, 2000, the Telecommunications Regulations of the People’s Republic of China, or the Telecom Regulations, were issued by the PRC State Council as the primary governing law on telecommunication services.services, which were subsequently amended in 2014 and 2016. The Telecom Regulations set out the general framework for the provision of telecommunication services by PRCmainland China companies. Under the Telecom Regulations, it is a requirement that telecommunications service providers procure operating licenses prior to their commencement of operations. The Telecom Regulations draw a distinction between “basic telecommunications services” and “value-added telecommunications services.” A “Catalog of Telecommunications Business” was issued as an attachment to the Telecom Regulations to categorize telecommunications services as basic or value-added. In February 2003, theThe Catalog was most recently updated in June 2019, and the information services such as content service, entertainment and online games services are classified as value-added telecommunications services.
On March 1,5, 2009, the MIIT issued the Administrative Measures for Telecommunications Business Operating Permit, or the Telecom Permit Measures, which took effect on April 10, 2009.2009, and was amended on July 3, 2017. The Telecom Permit Measures confirm that there are two types of telecom operating licenses for operators in mainland China, namely, licenses for basic telecommunications services and licenses for value-added telecommunications services. The operation scope of the license will detail the permitted activities of the enterprise to which it was granted. An approved telecommunication services operator shall conduct its business in accordance with the specifications recorded on its value-added telecommunications services operating license, or VATS License. In addition, a VATS License’s holder is required to obtain approval from the original permit-issuing authority prior to any change to its shareholders.
On September 25, 2000, the State Council promulgated the Administrative Measures on Internet Information Services, or the Internet Measures, which waswere amended in January 2011. Under the Internet Measures, commercial Internetinternet information services operators shall obtain an ICP license from the relevant government authorities before engaging in any commercial Internetinternet information services operations within the PRC.mainland China. The ICP license has a term of five years and shall be renewed within 90 days before expiration. Our consolidated VIE,Conducting value-added telecommunication services without obtaining an ICP license may result in fines or even order to suspension our business. Beijing Tarena renewed an ICP license for the website TMOOC.cn issued by Beijing Communications Administration on October 9, 2022, which will expire on October 9, 2027. Beijing Tongcheng obtained an ICP license for the websitewww.it211.com.cn61it.cn issued by Beijing Communications Administration on March 1, 2012,July 28, 2021, which will expire on March 1, 2017. Beijing Tarena is in the process of applying to add ourTMOOC.cn website under our ICP license.
July 28, 2026.
Foreign Investment in Value-Added Telecommunication Services
Pursuant to the Provisions on Administration of Foreign Invested Telecommunications Enterprises promulgated by the State Council on December 11, 2001, and amended respectively on September 10, 2008, February 6, 2016 and March 29, 2022, the ultimate foreign equity ownership in a value-added telecommunications services provider (except E-Commerce) may not exceed 50%. The Guidance Catalog of Industries for Foreign Investment amended in 2015Negative List allows a foreign investor to own up to 100% of the total equity interest in an E-Commerce business. Moreover, for a foreign investor to acquire any equity interest in a value-added telecommunication business in China, it must satisfy a number
88
The MIIT Circular issued by the MIIT in July 2006 reiterated the regulations on foreign investment in telecommunications businesses, which require foreign investors to set up foreign-invested enterprises and obtain an ICP license to conduct any value-added telecommunications business in mainland China. Under the MIIT Circular, a domestic company that holds an ICP license is prohibited from leasing, transferring or selling the license to foreign investors in any form, and from providing any assistance, including providing resources, sites or facilities, to foreign investors that conduct value-added telecommunications business illegally in mainland China. Furthermore, the relevant trademarks and domain names that are used in the value-added telecommunications business must be owned by the local ICP license holder or its shareholder. The MIIT Circular further requires each ICP license holder to have the necessary facilities for its approved business operations and to maintain such facilities in the regions covered by its license. Currently, Beijing Tarena our VIE, owns the domain nameswww.it211.com.cn andname TMOOC.cn and holds the ICP license necessary to operate ourwww.it211.com.cnTMOOC.cn website in mainland China, while the trademarks relating to our professional education business operations are held by Tarena Tech, our WFOE. Beijing Tongcheng owns the domain names 61it.cn and holds the ICP license necessary to operate our 61it.cn website in mainland China, while the trademarks relating to our IT-focused supplementary STEAM education business operations are held by Tongcheng Shidai, our WFOE. If the relevant PRC government authorities determine in the future that the current ownership of our trademarks do not comply with the relevant regulations and the trademarks relating to our operations must be held by our VIE,the VIEs, we may need to transfer the trademarks to our VIE,the VIEs, which may severely disrupt our business. The Internet Electronic MessagingBulletin Board Service Administrative Measures promulgated by the MIIT in NovemberOctober 2000 require ICP operators to obtain specific approvals before providing BBS services. BBS services include electronic bulletin boards, electronic forums, message boards and chat rooms. On July 4, 2010, the approval requirement for operating BBS services was terminated by a decision issued by the PRC State Council.Council and on September 23, 2014, the foregoing measures were repealed and annulled. However, in practice, the competent authorities in Beijing may still require the relevant operating companies to obtain such approval for the operation of BBS services which we have not obtained.
In light of the aforesaid restrictions, we rely on Beijing Tarena ourand Beijing Tongcheng, the consolidated VIEVIEs in mainland China, to hold and maintain the licenses necessary to provide online education and other value-added telecommunications services in mainland China. We operate ourTMOOC.cn website and value-added telecommunications services through Beijing Tarena.Tarena and operate our 61it.cn website and value-added telecommunications services through Beijing Tongcheng. Beijing Tarena our consolidated VIE in China, holds an ICP license that was renewed in October 9, 2022 and is valid until March 1, 2017October 9, 2027, for the operation ofwww.it211.com.cnTMOOC.cn. Beijing TarenaTongcheng obtained an ICP license for the website 61it.cn issued by Beijing Communications Administration on July 28, 2021, which will expire on July 28, 2026.
Regulations on Human Resources Service
Human resources services in mainland China are mainly regulated by the MOHRSS. The principal regulation applicable to human resources services is the Regulations on Administration of Human Resources Markets, jointly promulgated by the MOHRSS and the SAIC on September 11, 2001, as amended on March 22, 2005, April 30, 2015, and December 9, 2019, respectively. Under the Regulations on Administration of Human Resources Markets, a human resources service intermediary refers to any entity which provides intermediary services for employers and any potential employees, and no entity may provide such services without a License for Human Resources Service. Any internet information service provider which provides intermediary services for employers and any potential employees via internet shall obtain such license.
On May 2, 2018, the State Council promulgated the Interim Regulations for the Human Resources Market, or the Interim Regulations, which took effect on October 1, 2018. The Interim Regulations further clarify the requirements of human resources service licensing and filing. In accordance with the Interim Regulations, commercial human resources service providers intending to conduct employment agency activities are required to obtain a License for Human Resources, and any commercial human resources service provider engaging in the processcollection and release of applyinghuman resources supply and demand information, employment and entrepreneurship guidance, human resources management consulting, human resources assessment, human resources training, or other human resources services activities, should register with the competent authority within 15 days of the date on which it opens such activities. In addition, if any entity engages in commercial human resources service without a License for Human Resources Service, the competent authority shall order cessation of such activities, and if there is any illegal income, the illegal income will be confiscated and a fine of more than RMB10,000 and less than RMB50,000 will be imposed; if any commercial human resources service providers engaging in human resources services activities fail to add ourTMOOC.cn website under our ICP license.register with the competent authority on time, the competent authority shall order correction, or a fine of more than RMB5,000 and less than RMB10,000 shall be imposed if such correction is not made. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—We face risks and uncertainties with respect to the licensing requirement for value-added telecommunication services, internet audio-video programs, radio or television programs production and operation, internet publication, human resources intermediary service and filing requirements for commercial franchise.”
89
The Discussion Draft PRC Foreign Investment Law
In January 2015,On March 15, 2019, the MOFCOM published a discussion draft of the proposed Foreign Investment Law for public review and comments. The draft Foreign Investment Law purports to change the existing “case-by-case” approval regime to a “filing or approval” procedure for foreign investments in China. The MOFCOM, together with other relevant authorities, will determine a catalogue for special administrative measures, or the “negative list,” which will consist of a list of industry categories where foreign investments are strictly prohibited and a list of industry categories where foreign investments are subject to certain restrictions. Foreign investments in business sectors outside of the “negative list” will only be subject to filing procedures, in contrast to the existing prior approval requirements, whereas foreign investments in the restricted industries must apply for approval from the foreign investment administration authority.
The draft Foreign Investment Law for the first time defines “foreign investor,” “foreign investment,” “Chinese investor” and “actual control.” A foreign investor is not only determined based on the place of its incorporation, but also on the conditions of the “actual control.” The draft Foreign Investment Law specifically provides that entities established in China but “controlled” by foreign investors, such as via contracts or trust, will be treated as FIEs, whereas foreign investment in China in the foreign investment restricted industries by a foreign investor may nonetheless apply for being, when approving market entry clearance by the foreign investment administration authority, treated as a PRC domestic investment if the foreign investor is determined by the foreign investment administration authority as being “controlled” by PRC entities and/or citizens. In this connection, “actual control” is broadly defined in the draft Foreign Investment Law to cover the following summarized categories: (i) holding 50% of more of the voting rights of the subject entity; (ii) holding less than 50% of the voting rights of the subject entity but having the power to secure at least 50% of the seats on the board or other equivalent decision making bodies, or having the voting power to material influence on the board, the shareholders’ meeting or other equivalent decision making bodies; or (iii) having the power to exert decisive influence, via contractual or trust arrangements, over the subject entity’s operations, financial matters or other key aspects of business operations. According to the draft Foreign Investment Law, variable interest entities would also be deemed as FIEs, if they are ultimately “controlled” by foreign investors, and be subject to restrictions on foreign investments. However, the draft Foreign Investment Law has not taken a position on what actions will be taken with respect to the existing companies with the “variable interest entity” structure, whether or not these companies are controlled by Chinese parties.
The draft Foreign Investment Law emphasizes on the security review requirements, whereby all foreign investments concerning national security must be reviewed andNPC approved in accordance with the security review procedure. In addition, the draft Foreign Investment Law imposes stringent ad hoc and periodic information reporting requirements on foreign investors and the applicable FIEs. In addition to investment implementation report and investment amendment report that are required at each investment and alteration of investment specifics, an annual report is mandatory, and large foreign investors meeting certain criteria are required to report on a quarterly basis. Any company found to be non-compliant with these information reporting obligations may potentially be subject to fines and/or administrative or criminal liabilities, and the persons directly responsible may be subject to criminal liabilities.
The draft Foreign Investment Law is now open for public review and comments. It is still uncertain when the draft would be signed into law and whether the final version would have any substantial changes from this draft. When the Foreign Investment Law, becomes effective,which came into effect on January 1, 2020, and replaced the trio of existing laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation rules and ancillary regulations, willregulations. Meanwhile, the Regulations for the Implementation of the Foreign Investment Law came into effect as of January 1, 2020, which clarified and elaborated the relevant provisions of the Foreign Investment Law. The organization form, organization and activities of foreign-invested enterprises shall be abolished.governed, among others, by the PRC Company Law and the PRC Partnership Enterprise Law. Foreign-invested enterprises established before the implementation of the Foreign Investment Law may retain the original business organization and so on within five years after the implementation of the Foreign Investment Law.
The Foreign Investment Law is formulated to further expand the opening-up, vigorously promote foreign investment and protect the legitimate rights and interests of foreign investors. According to the Foreign Investment Law, foreign investments are entitled to pre-entry national treatment and are subject to negative list management system. The pre-entry national treatment means that the treatment given to foreign investors and their investments at the stage of investment access shall not be less favorable than that of domestic investors and their investments. The negative list management system means that the state implements special administrative measures for access of foreign investment in specific fields. The Foreign Investment Law does not mention the relevant concept and regulatory regime of VIEs structures. However, since it is relatively new, uncertainties still exist in relation to its interpretation and implementation. See “Item 3. Key Information—D. Risk Factors—Risks RelatingRelated to Doing Business in China—Substantial uncertaintiesUncertainties exist with respect to the enactment timetable, interpretation and implementation of draftthe newly enacted PRC Foreign Investment Law and how it may impact the viability of our current corporate structure, corporate governance and business operations.”
Foreign investors’ investment, earnings and other legitimate rights and interests within the territory of mainland China shall be protected in accordance with the law, and all national policies on supporting the development of enterprises shall equally apply to foreign-invested enterprises. Among others, the state guarantees that foreign-invested enterprises participate in the formulation of standards in an equal manner and that foreign-invested enterprises participate in government procurement activities through fair competition in accordance with the law. Further, the state shall not expropriate any foreign investment except under special circumstances, under which the state may levy or expropriate the investment of foreign investors in accordance with the law for the needs of the public interest. The expropriation and requisition shall be conducted in accordance with legal procedures and timely and reasonable compensation shall be given. In carrying out business activities, foreign-invested enterprises shall comply with relevant provisions on labor protection.
Regulations on Internet Information Security and Privacy Protection
The Standing Committee of the National People’s Congress, China’s national legislative body, enacted the Decisions on the Maintenance of Internet Security on December 28, 2000, and amended them on August 27, 2009, which may subject persons to criminal liabilities in China for any attempt to use the internet to (i) gain improper entry to a computer or system of strategic importance, (ii) disseminate politically disruptive information, (iii) leak state secrets, (iv) spread false commercial information or (v) infringe upon intellectual property rights. In 1997, the Ministry of Public Security issued the Administration Measures on the Security Protection of Computer Information Network with International Connections, which was amended in 2011 and prohibits using the internet to leak state secrets or to spread socially destabilizing materials. If an ICP license holder violates these measures, the PRC government may revoke its ICP license and shut down its websites.
On July 1, 2015, the SCNPC issued the National Security Law, which became effective on the same day. The National Security Law provides that the state shall safeguard the sovereignty, security and cybersecurity development interests of the state, and that the state shall establish a national security review and supervision system to review, among other things, foreign investment, key technologies, internet and information technology products and services, and other important activities that are likely to impact the national security of China.
90
Pursuant to the Ninth Amendment to the Criminal Law issued by the Standing Committee of the National People’s Congress on August 29, 2015, effective on November 1, 2015, any ICP provider that fails to fulfill the obligations related to internet content security as required by applicable laws and refuses to take corrective measures will be subject to criminal liability for (i) any large-scale dissemination of illegal information, (ii) any severe effect due to the leakage of users’ personal information, (iii) any serious loss of evidence of criminal activities or (iv) other severe situations; and any individual or entity that (i) sells or provides personal information to others unlawfully or (ii) steals or illegally obtains any personal information will be subject to criminal liability in severe situations. Interpretations of the Supreme People’s Court and the Supreme People’s Procuratorate on Several Issues Concerning the Application of Law in the Handling of Criminal Cases Involving Infringement of Personal Information, issued on May 8, 2017, and effective on June 1, 2017, specified certain standards for the conviction and sentencing of the criminals in relation to personal information infringement. On May 28, 2020, the National People’s Congress adopted the Civil Code, which came into effect on January 1, 2021. Pursuant to the Civil Code, the personal information of a natural person shall be protected by the law. Any organization or individual shall legally obtain such personal information of others when necessary and ensure the safety of such information, and shall not illegally collect, use, process or transmit personal information of others, or illegally purchase or sell, provide or make public personal information of others.
The Cybersecurity Law of the PRC, or the PRC Cybersecurity Law, which was promulgated on November 7, 2016, by the Standing Committee of the National People’s Congress and came into effect on June 1, 2017, provides that network operators shall meet their cybersecurity obligations and shall take technical measures and other necessary measures to protect the safety and stability of their networks. Under the PRC Cybersecurity Law, network operators are subject to various security protection-related obligations, including (i) network operators shall comply with certain obligations regarding maintenance of the security of internet systems; (ii) network operators shall verify users’ identities before signing agreements or providing certain services such as information publishing or real-time communication services; (iii) when collecting or using personal information, network operators shall clearly indicate the purposes, methods and scope of the information collection, the use of information collection, and obtain the consent of those from whom the information is collected; (iv) network operators shall strictly preserve the privacy of user information they collect, and establish and maintain systems to protect user privacy; (v) network operators shall strengthen management of information published by users, and when they discover information prohibited by laws and regulations from publication or dissemination, they shall immediately stop dissemination of that information, including taking measures such as deleting the information, preventing the information from spreading, saving relevant records, and reporting to the relevant governmental agencies. In addition, the PRC Cybersecurity Law requires that critical information infrastructures operators generally shall store, within the territory of mainland China, the personal information and important data collected and produced during their operations in mainland China and their purchase of network products and services that affect or may affect national securities shall be subject to national cybersecurity review.
On June 10, 2021, the SCNPC promulgated the PRC Data Security Law, which became effect in September 2021. The PRC Data Security Law provides for data security and privacy obligations on entities and individuals carrying out data activities and introduces a data classification and hierarchical protection system based on the importance of data in economic and social development, as well as the degree of harm it will cause to national security, public interests or legitimate rights and interests of individuals or organizations when such data is tampered with, destroyed, leaked or illegally acquired or used. The appropriate level of protection measures is required to be taken for each respective category of data. For example, a processor of important data shall designate the personnel and the management body responsible for data security, carry out risk assessments for its data processing activities and file the risk assessment reports with the competent authorities. In addition, the PRC Data Security Law provides a national security review procedure for those data activities that affect or may affect national security, and imposes export restrictions on certain data and information.
On July 6, 2021, certain PRC regulatory authorities issued Opinions on Strictly Cracking Down on Illegal Securities Activities, which, among others, provides for improving relevant laws and regulations on data security, cross-border data transmission and confidential information management. It provided that efforts will be made to revise the regulations on strengthening the confidentiality and file management relating to the offering and listing of securities overseas, to implement the responsibility on information security of overseas listed companies and to strengthen the standardized management of cross-border information provision mechanisms and procedures.
91
On April 13, 2020, the CAC, the NDRC and several other administrations jointly promulgated the Measures for Cybersecurity Review, or the Review Measures, which became effective on June 1, 2020. The Review Measures establish the basic framework for national security reviews of network products and services, and provide the principal provisions for undertaking cybersecurity reviews. In addition, on September 22, 2020, the Ministry of Public Security issued the Guiding Opinions on Implementing the Cybersecurity Protection System and Critical Information Infrastructure Security Protection System to further improve the national cybersecurity prevention and control system. On December 28, 2021, the CAC, together with certain other PRC governmental authorities, jointly released the Revised Cybersecurity Review Measures, which took effect on February 15, 2022. Pursuant to the Revised Cybersecurity Review Measures, operators of critical information infrastructure that intend to purchase network products and services and online platform operators engaging in data processing activities that affect or may affect national security must apply for a cybersecurity review. The cybersecurity review will evaluate, among others, the risk of critical information infrastructure, core data, important data or the risk of a large amount of personal information being influenced, controlled or maliciously used by foreign governments after going public, and cyber information security risk. The Revised Cybersecurity Review Measures set out certain general factors that would be the focus in assessing the national security risk during a cybersecurity review. However, the definition of online platform operators and the scope of network product or service or data processing activities that will or may affect national security are still unclear, and the PRC government authorities may have wide discretion in the interpretation and enforcement of these laws, rules and regulations.
On November 14, 2021, the CAC published the Draft Measures for Internet Data Security for public comments, which provides that data processors conducting the following activities shall apply for cybersecurity review: (i) merger, reorganization or division of internet platform operators that have acquired a large number of data resources related to national security, economic development or public interests and affects or may affect national security, (ii) listing abroad of data processors processing over one million users’ personal information, (iii) listing in Hong Kong that affects or may affect national security or (iv) other data processing activities that affect or may affect national security. The Draft Cyber Data Security Regulations also provide that operators of large internet platforms that set up headquarters, operation centers or R&D centers overseas shall report to the national cyberspace administration and competent authorities. In addition, the Draft Cyber Data Security Regulations also require that data processors processing important data or going public overseas shall conduct an annual data security self-assessment or entrust a data security service institution to do so, and submit the data security assessment report of the previous year to the local branch of CAC before January 31 each year. As of the date of this annual report, this draft has not been formally adopted. Substantial uncertainties exist with respect to the enactment timetable, final content, interpretation and implementation.
On July 30, 2021, the PRC State Council promulgated the Regulations on Security Protection of Critical Information Infrastructures, which took effect on September 1, 2021, and provide that “critical information infrastructures” shall mean any important network facilities or information systems of important industries or fields such as public communication and information service, energy, communications, water conservation, finance, public services, e-government affairs and national defense science, and any other important network facilities or information systems that may endanger national security, people’s livelihood and public interest in case of damage, function loss or data leakage. In addition, relevant administration departments of each critical industry and sector, or Protection Departments, shall be responsible to formulate eligibility criteria and determine the critical information infrastructure operator in the respective industry or field. The operators shall be informed about the final determination as to whether they are categorized as critical information infrastructure operators. The regulations further require critical information infrastructures operators, among others, (i) to report to the competent Protection Departments in a timely manner when the identification result may be affected due to material changes in the critical information infrastructures, (ii) to plan, construct or put into use the security protection measures and the critical information infrastructures simultaneously and (iii) to report to the competent Protection Departments in a timely manner in the event of merger division or dissolution, and deal with critical information infrastructures as required by the competent Protection Departments. Operators in violation of the regulations may be ordered to rectify, subject to warnings, fines and other administrative penalties or even criminal liabilities, and the directly responsible personnel in charge may also be imposed on fines or other liabilities.
On July 12, 2021, the MIIT and two other authorities jointly issued the Provisions on the Administration of Security Vulnerabilities of Network Products, or the Provisions. The Provisions state that no organization or individual may abuse the security vulnerabilities of network products to engage in activities that endanger network security, or to illegally collect, sell or publish the information on such security vulnerabilities. Anyone who is aware of the aforesaid offences shall not provide technical support, advertising, payment settlement and other assistance to the relevant offenders. According to the Provisions, network product providers, network operators and platforms collecting network product security vulnerabilities shall establish and improve channels for receiving network product security vulnerability information and keep such channels available, and retain network product security vulnerability information reception logs for at least six months. The Provisions also ban provision of undisclosed vulnerabilities to overseas organizations or individuals other than to the product providers.
On June 27, 2022, the CAC published the Administrative Provisions for Internet User Account Name Information, effective on August 1, 2022, which provides that an online user account service platform shall require users to provide real identity information when users apply to register an account on the platform and adopt certain measures to verify users’ identification.
92
On July 7, 2022, the CAC issued the Measures for Security Assessment of Cross-border Data Transfer, which took effect on September 1, 2022. According to these measures, in addition to the self-risk assessment requirement for provision of any data outside mainland China, a data processor shall apply to the competent cyberspace department for data security assessment and clearance of outbound data transfer in any of the following events: (i) outbound transfer of important data; (ii) outbound transfer of personal data by an operator of critical information infrastructure or a data processor that has processed more than one million users’ personal data, (iii) outbound transfer of more than one hundred thousand users’ personal information or more than ten thousand users’ sensitive personal information cumulatively since January 1 of the preceding year and (iv) such other circumstances where ex-ante security assessment and evaluation of cross-border data transfer is required by the CAC. Also, on February 24, 2023, the CAC issued the Measures for the Standard Contract for Outbound Cross-border Transfer of Personal Information, taking effect on June 1, 2023, which clarifies the applicable scope and filling requirements for a standard contract, specifies a model standard contract and provides guidelines for cross-border transfer of personal information.
Under the Several Provisions on Regulating the Market Order of Internet Content Services, which was issued by the MIIT in December 2011 and took effect in March 2012, an internet content service provider may not collect any personal information on a user or provide any such information to third parties without the user’s consent. It must expressly inform the user of the method, content and purpose of the collection and processing of such user’s personal information and may only collect information to the extent necessary to provide its services. An internet content service provider is also required to properly maintain users’ personal information, and in case of any leak or likely leak of such information, it must take immediate remedial measures and, in the event of a serious leak, report to the telecommunications regulatory authority immediately.
Pursuant to the Decision on Strengthening the Protection of Online Information, which was issued by the SCNPC and took effect in December 2012, and the Order for the Protection of Telecommunication and Internet User Personal Information, which was issued by the MIIT in 2013, any collection and use of a user’s personal information must be subject to the consent of the user; be legal, rational and necessary; and be limited to specified purposes, methods and scopes. An internet content service provider must also keep such information strictly confidential, and is further prohibited from divulging, tampering or destroying any such information, or selling or providing such information to other parties. An internet content service provider is required to take technical and other measures to prevent the collected personal information from any unauthorized disclosure, damage or loss. Any violation of these laws and regulations may subject the internet content service provider to warnings, fines, confiscation of illegal gains, revocation of licenses, cancelation of filings, closedown of websites or even criminal liabilities.
The Provisions on Technological Measures for Internet Security Protection, published by the Ministry of Public Security on January 13, 2006, and having become effective on March 1, 2006, requires internet service providers to keep records of certain information about their users (including user registration information, log-in and log-out times, IP addresses, content and time of posts by users) for at least 60 days. Under the PRC Cybersecurity Law, network operators must also report any instances of public dissemination of prohibited content. If a network operator fails to comply with such requirements, the PRC government may revoke its ICP License and shut down its websites.
On January 23, 2019, the SAMR, the Office of the Central Cyberspace Affairs Commission, the MIIT and the Ministry of Public Security jointly issued the Announcement on Carrying out Special Campaigns against Mobile Internet Application Programs Collecting and Using Personal Information in Violation of Laws and Regulations, or “the App Announcement,” which prohibits mobile app operators from collecting personal information irrelevant to their services, or forcing users to give authorization in disguised manner. According to the App Announcement, mobile app operators shall indicate to users the rules for collecting and using personal information in a simple, concise and easy-to-understand manner, with permission independently granted by the user. Furthermore, coercive or excessive collection of personal information, collection and use of personal information without user permission, leakage and loss of information or possible leakage and loss of personal information without any remedial measure and illegal use of personal information are prohibited. On November 28, 2019, the SAMR, the Office of the Central Cyberspace Affairs Commission, the MIIT and the Ministry of Public Security jointly issued the Measures for the Determination of the Collection and Use of Personal Information by Apps in Violation of Laws and Regulations, which provides guidance for the regulatory authorities to identify the illegal collection and use of personal information through mobile apps, and for the app operators to conduct self-examination and self-correction and for other participants to voluntarily monitor compliance.
On August 22, 2019, the Office of the Central Cyberspace Affairs Commission promulgated the Cyber Protection of Children’s Personal Information Provisions, effective on October 1, 2019, which requires, among 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.
93
On March 12, 2021, the CAC and three other authorities jointly issued the Rules on the Scope of Necessary Personal Information for Common Types of Mobile Internet Applications. The Rules specifies the scope of necessary personal information to be collected each for a variety of common mobile internet applications, such as maps and navigation apps, online ride-hailing apps, instant messaging apps and online community apps. Operators of such apps shall not refuse to provide basic services to users on the ground of users’ refusal to provide their personal nonessential information. On April 26, 2021, the MIIT issued the Interim Administrative Provisions on Personal Information Protection in Internet Mobile Applications (Draft for Comment). The draft of the Interim Administrative Provisions on Personal Information Protection in Internet Mobile Applications sets forth two principles of collection and utilization of personal information, namely, “explicit consent” and “minimum necessity.”
On August 20, 2021, the SCNPC promulgated the PRC Personal Information Protection Law, which will take effect from November 1, 2021. Pursuant to the PRC Personal Information Protection Law, personal information refers to the information related to an identified or identifiable individual recorded electronically or by other means, excluding the anonymized information, and processing of personal information includes, among others, the collection, storage, use, handling, transmission, provision, disclosure or deletion of personal information. The PRC Personal Information Protection Law explicitly sets forth the circumstances where it is allowed to process personal information, including (i) the consent from the individual has been obtained; (ii) it is necessary for the conclusion and performance of a contract under which an individual is a party, or it is necessary for human resource management in accordance with the labor-related rules and regulations and the collective contracts formulated or concluded in accordance with laws; (iii) it is necessary to perform statutory duties or statutory obligations; (iv) it is necessary to respond to public health emergencies, or to protect the life, health and property safety of individuals in emergencies; (v) carrying out news reports, public opinion supervision and other acts for the public interest, and processing personal information within a reasonable scope; (vi) processing personal information disclosed by individuals or other legally disclosed personal information within a reasonable scope in accordance with this law; or (vii) other circumstances stipulated by laws and administrative regulations. In addition, this law emphasizes that individuals have the right to withdraw their consent to process their personal information, and the processors must not refuse to provide products or services on the grounds that the individuals do not agree to the processing of their personal information or withdraw their consent, unless processing of personal information is necessary for the provision of products or services. Before processing the personal information, the processors should truthfully, accurately and completely inform individuals of the following matters in a conspicuous manner and in clear and easy-to-understand language: (i) the name and contact information of the personal information processor; (ii) the purpose of processing personal information, the processing method, the type of personal information processed and the retention period; (iii) methods and procedures for individuals to exercise their rights under this law; and (iv) other matters that should be notified according to laws and administrative regulations. Furthermore, the law provides that personal information processors who use personal information to make automated decisions should ensure the transparency of decision-making and the fairness and impartiality of the results, and must not impose unreasonable differential treatment on individuals in terms of transaction prices and other transaction conditions.
In addition to the aforementioned general rules, the PRC Personal Information Protection Law also introduces the rules for processing sensitive personal information, which refers to the personal information that, once leaked or illegally used, can easily lead to the infringement of the personal dignity of natural persons or harm personal and property safety, including biometrics, religious beliefs, specific identities, medical health, financial accounts, whereabouts and other information, as well as personal information of minors under the age of fourteen. Personal information processors can process sensitive personal information only if they have a specific purpose and sufficient necessity, and take strict protective measures. In addition, the law provides rules for cross-border provision of personal information. In particular, it is provided that the operators of critical information infrastructures and the personal information processors that process personal information up to the number prescribed by the national cyberspace administration shall store personal information collected and generated within mainland China. If it is really necessary to provide such personal information overseas, they shall pass the security assessment organized by the national cyberspace administration, except as otherwise stipulated by laws, administrative regulations and the national cyberspace administration. Any processor in violation of this law may be subject to administrative penalties, including rectifications, warnings, fines, confiscation of illegal gains, suspension of the apps illegally processing personal information or suspension of the relevant business, revocation of business operation permits or business licenses, civil liabilities or even criminal liabilities. The directly responsible personnel in charge and other directly responsible personnel may be imposed with fines and prohibited from serving as directors, supervisors, senior management personnel and personal information protection officers of related companies for a certain period of time.
On December 31, 2021, the MIIT, the CAC, the SAMR and the PBOC issued the Provisions on the Administration of Algorithm-generated Recommendations for Internet Information Services which took effect on March 1, 2022, stipulating rules for algorithm-generated recommendations for Internet information services. On June 14, 2022, the CAC published the amended Administrative Provisions on Mobile Internet Applications Information Services, which specifies rules for mobile applications providers and platforms when they are providing information services for online users.
94
While we take measures to comply with all applicable data privacy and protection laws and regulations, we cannot guarantee the effectiveness of the measures undertaken by us and business partners. As certain laws and regulations, including the PRC Data Security Law and the PRC Personal Information Protection Law, were recently promulgated, we may be required to make further adjustments to our business practices to comply with these laws and regulations. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—Our business is subject to complex and evolving Chinese laws and regulations regarding cybersecurity, information security, privacy and data protection. Many of these laws and regulations are subject to change and uncertain interpretation, and any failure or perceived failure to comply with these laws and regulations could result in claims, changes to our business practices, negative publicity, legal proceedings, increased cost of operations, or declines in student base, or otherwise harm our business.”
Regulations on Intellectual Property Rights
Copyright and Software Products
The National People’s CongressNPC adopted the Copyright Law in 1990 and amended it in 2001, 2010 and 2010,2020, respectively. The amended Copyright Law extends copyright protection to Internet activities, products disseminated over the Internet and software products. In addition, there is a voluntary registration system administered by the China Copyright Protection Center. The latest amended Copyright Law also requires registration of a copyright pledge.
provides new criteria for calculating damages compensation, increases the statutory damages, and introduces punitive damages.
To address the problem of copyright infringement related to the content posted or transmitted over the Internet,internet, the National Copyright Administration and the MIIT jointly promulgated the Measures for Administrative Protection of Copyright Related to Internet on April 29, 2005. This measure became effective on May 30, 2005.
The Administrative Measures on Software Products, issued by the MIIT in October 2000 and subsequently amended, provide a registration and filing system with respect to software products made in or imported into China. These software products may be registered with the relevant local authorities in charge of software industry administration. Registered software products may enjoy preferential treatment status granted by relevant software industry regulations. Software products can be registered for five years, and the registration is renewable upon expiration.
In order to further implement the Computer Software Protection Regulations promulgated by the State Council on December 20, 2001, and amended on January 30, 2013, the State Copyright Bureau issued the Computer Software Copyright Registration Procedures on February 20, 2002, amended in June 2004, which apply to software copyright registration, license contract registration and transfer contract registration. In compliance with, and in order to take advantage of, the above rules, as of December 31, 2015,2022, we had registered 30169 software copyrights in mainland China.
Trademarks
Trademarks are protected by the PRC Trademark Law, which was adopted in 1982 and subsequently amended in 1993, 2001, 2013 and 20132019, as well as the Implementation Regulation of the PRC Trademark Law most recently adopted by the State Council in 2002.2014. The Trademark Office under the SAICSAMR handles trademark registrations and grants a term of ten years to registered trademarks, which may be renewed for consecutive ten-year periods upon request by the trademark owner. Trademark license agreements must be filed with the Trademark Office for record. The PRC Trademark Law has adopted a “first-to-file” principle with respect to trademark registration. Where a trademark for which a registration has been made is identical or similar to another trademark whichthat has already been registered or been subject to a preliminary examination and approval for use on the same kind of or similar commodities or services, the application for registration of such trademark may be rejected. Any person applying for the registration of a trademark may not prejudice the existing right first obtained by others, nor may any person register in advance a trademark that has already been used by another party and has already gained a “sufficient degree of reputation” through such party’s use. We have registered 35178 trademarks in mainland China as of December 31, 2015.2022.
Regulations on Foreign Currency Exchange
The principal regulations governing foreign currency exchange in China are the Foreign Exchange Administration Regulations, or the Foreign Exchange Regulations, as amended on August 5, 2008. Under the Foreign Exchange Regulations, Renminbi is freely convertible for current account items, including the distribution of dividends, interest payments, trade and service-related foreign exchange transactions, but not for capital account items, such as direct investments, loans, repatriation of investments and investments in securities outside ofmainland China, unless the prior approval of the SAFE is obtained and prior registration with the SAFE is made. Though there are restrictions on the convertibility of Renminbi for capital account transactions, which principally include investments and loans, we generally follow the regulations and apply to obtain the approval of the SAFE and other relevant PRC governmental authorities.
On March 30, 2015, the SAFE promulgated Circular 19, which expands a pilot reform of the administration of the settlement of the foreign exchange capitals of foreign-invested enterprises nationwide. Circular 19 came into force replacing both previous SAFE Circular 142 and SAFE Circular 36 on June 1, 2015. Circular 19 allows all foreign-invested enterprises established in the PRCmainland China to use their foreign exchange capitals to make equity investmentinvestments and removes certain other restrictions provided under Circular 142previous laws and regulations promulgated by the SAFE for these enterprises. However, Circular 19 continues to prohibit foreign-invested enterprises from, among other things, using the Renminbi fund converted from its foreign exchange capitals for expenditure beyond its business scope, and providing entrusted loans or repaying loans between non-financialnonfinancial enterprises.
95
On June 9, 2016, SAFE promulgated Circular 16, which expands the application scope from only the capital of foreign-invested enterprises to the capital, foreign debt proceeds and proceeds from overseas public offering. Furthermore, Circular 16 allows foreign-invested enterprises to use their foreign exchange capitals under capital account to the extent permitted by the relevant laws and regulations and removes certain prohibitions on using the Renminbi fund converted from the foreign exchange capitals under Circular 19, such as prohibitions on providing loans to the affiliated enterprises of such foreign-invested enterprises or repaying loans between nonfinancial enterprises.
On October 23, 2019, SAFE issued the Circular of the State Administration of Foreign Exchange on Further Facilitating Cross-border Trade and Investment, or Circular 28, which, among other things, expanded the use of foreign exchange capital to domestic equity investments. Non-investment foreign-funded enterprises are allowed to lawfully make domestic equity investments by using capital funds on the premise without violation to prevailing special administrative measures for access of foreign investments (negative list) and the authenticity and compliance with the regulations of domestic investment projects.
These circulars may delay or limit us from using the proceeds of offshore offerings to make additional capital contributions or loans to our PRC subsidiaries in mainland China, and violations of these circulars could result in severe monetary or other penalties. See also “Item 3. Key Information—D. Risk Factors—Risks RelatingRelated to Doing Business in China—PRC regulationRegulation of direct investment and loans by offshore holding companies to PRCmainland China entities and governmental control of currency conversion may delay or limit us from using the proceeds of offshore offeringofferings to make additional capital contributions or loans to our PRC subsidiaries.subsidiaries in mainland China.”
Regulations on Dividend Distribution
Under our current corporate structure, our Cayman Islands holding company primarily relies on dividend payments from Tarena Tech, which is a wholly foreign ownedforeign-owned enterprise incorporated in the PRC,mainland China, to fund any cash and financing requirements we may have. The principal regulations governing the distribution of dividends of foreign investedforeign-invested enterprises include the Foreign Invested EnterpriseCompany Law, as amended on October 31, 2000,respectively in 2004, 2005, 2013 and 2018, and the Implementation Rules of the Foreign Invested EnterpriseInvestment Law as amended, which came into effect on April 12, 2001.
January 1, 2020.
Under these laws and regulations, wholly foreign ownedforeign-owned enterprises in mainland China may pay dividends only out of their accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations.regulations of mainland China. In addition, wholly foreign ownedforeign-owned enterprises in mainland China are required to allocate at least 10% of their respective accumulated profits each year, if any, to fund certain reserve funds until these reserves have reached 50% of the registered capital of the enterprises. Wholly foreign ownedforeign-owned companies may, at their discretion, allocate a portion of their after-tax profits based on PRC accounting standards of mainland China to staff welfare and bonus funds. These reserves are not distributable as cash dividends.
Regulations on Foreign Exchange Registration of Overseas Investment by PRCMainland China Residents
Pursuant to SAFE’s Notice on Relevant Issues Relating to Domestic Residents’ Investment and Financing and Round-Trip Investment through Special Purpose Vehicles, or SAFE Circular No. 37, issued and effective on July 4, 2014, and its appendixes, PRCmainland China residents, including PRCmainland China institutions and individuals, must register with local branchesbranch of SAFE in connection with their direct establishment or indirect control of an offshore entity, for the purpose of overseas investment and financing, with such PRCmainland China residents’ legally owned assets or equity interest in domestic enterprises or offshore assets or interests, referred to in SAFE Circular No. 37 as a “special purpose vehicle.” SAFE Circular No. 37 further requires an amendment to the registration in the event of any significant changes with respect to the special purpose vehicle, such as an increase or decrease of capital contributed by PRCmainland China individuals, share transfer or exchange, merger, division or other material event.
events.
On February 28,13, 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. In accordance with SAFE Notice 13, entities and individuals are required to apply for foreign exchange registration of foreign direct investment and overseas direct investment, including those required under the SAFE Circular No. 37, with qualified banks, instead of SAFE. The qualified banks, under the supervision of SAFE, directly examine the applications and conduct the registration.
96
In the event that a PRCmainland China shareholder holding interests in a special purpose vehicle fails to fulfill the required SAFE registration, the PRC subsidiaries in mainland China of that special purpose vehicle may be prohibited from making distributions of profit to the offshore parent and from carrying out subsequent cross-border foreign exchange activities and the special purpose vehicle may be restricted in their ability to contribute additional capital into its PRC subsidiary. Further,subsidiaries in mainland China. Furthermore, failure to comply with the various SAFE registration requirements described above could result in liability under PRC lawlaws of mainland China for foreign exchange evasion. These regulations apply to our direct and indirect shareholders who are PRCmainland China residents, and may apply to any offshore acquisitions and share transfer that we make in the future if our shares are issued to PRCmainland China residents. We have requested PRCmainland China residents currently holding direct or indirect interests in our company, to our knowledge, to make the necessary applications, filings and amendments as required under SAFE Circular No. 37 and other related rules. ToWe have used our knowledge,best efforts to notify all of our shareholders who are PRCmainland China citizens and hold interestinterests in us have registeredto register with the local SAFE branch and/or qualified banks as required under SAFE Circular No. 37 and SAFE Notice 13. See “Item 3. Key Information—D. Risk Factors—Risks RelatingRelated to Doing Business in China—PRC regulationsRegulations relating to offshore investment activities by PRCmainland China residents may limit our PRCmainland China subsidiaries’ ability to increase their registered capital or distribute profits to us, limit our ability to inject capital into our PRC subsidiaries in mainland China, or otherwise expose us to liability and penalties under PRC law.laws of mainland China.”
Regulations Relating to Overseas Listing and M&A
On August 8, 2006, six PRC governmental and regulatory agencies, including the MOFCOM and the CSRC, jointly promulgated the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (the “M&A Rules”), a new regulation with respect to the mergers and acquisitions of domestic enterprises by foreign investors that became effective on September 8, 2006, and revised on June 22, 2009. Foreign investors shall comply with the M&A rules when they purchase equity interests of a domestic company or subscribe for the increased capital of a domestic company, thus changing the nature of the domestic company into a foreign-invested enterprise; or when the foreign investors establish a foreign-invested enterprise in mainland China for the purpose of purchasing the assets of a domestic company and operating the asset; or when the foreign investors purchase the asset of a domestic company, establish a foreign-invested enterprise by injecting such assets and operate the assets. The M&A rules, among other things, purports to require that an offshore special vehicle, or a special purpose vehicle, formed for listing purposes and controlled directly or indirectly by mainland China companies or individuals, shall obtain the approval of the CSRC prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock exchange.
On July 6, 2021, the relevant PRC government authorities issued Opinions on Strictly Cracking Down Illegal Securities Activities in Accordance with the Law. These opinions emphasized the need to strengthen the administration over illegal securities activities and the supervision on overseas listings by China-based companies and proposed to take effective measures, such as promoting the construction of relevant regulatory systems to deal with the risks and incidents faced by China-based overseas-listed companies.
On December 27, 2021, the NDRC and the MOC jointly issued the Special Administrative Measures (Negative List) for Foreign Investment Access (2021 Version), or the 2021 Negative List, which became effective on January 1, 2022. Pursuant to such Special Administrative Measures, if a domestic company engaging in the prohibited business stipulated in the 2021 Negative List seeks an overseas offering and listing, it shall obtain the approval from the competent governmental authorities. Besides, the foreign investors of the company shall not be involved in the company’s operation and management, and their shareholding percentage shall be subject, mutatis mutandis, to the relevant regulations on the domestic securities investments by foreign investors.
On February 17, 2023, the CSRC issued the Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies, or the Overseas Listing Regulations, and five supporting guidelines, which became effective on March 31, 2023. Pursuant to the Overseas Listing Regulations, companies in mainland China that directly or indirectly offer or list their securities in an overseas market, including a company in mainland China limited by shares and an offshore company whose main business operations are in mainland China and intends to offer shares or be listed in an overseas market based on its equities, assets or similar interests in mainland China are required to file with the CSRC within three business days after submitting their listing application documents to the regulator in the place of intended listing. If the company fails to complete the filing procedure or conceals any material fact or falsifies any major content in its filing documents, it may be subject to administrative penalties, such as order to rectify, warnings, fines, and its controlling shareholders, actual controllers, the person directly in charge and other directly liable persons may also be subject to administrative penalties, such as warnings and fines. The Overseas Listing Regulations also provide that a company in mainland China must file with the CSRC within three business days for its follow on offering of securities after it is listed in an overseas market. On February 17, 2023, the CSRC also issued the Notice on Administration of the Filing of Overseas Offering and Listing by Domestic Companies and held a press conference for the release of the Overseas Listing Regulations, which, among others, clarified that the companies in mainland China that have been listed overseas before March 31, 2023 are not required to file with the CSRC immediately, but these companies should complete filing with the CSRC for their refinancing activities in accordance with the Overseas Listing Regulations. Based on the foregoing, we are not required to complete filing with the CSRC for our prior offshore offerings at this stage, but we may be subject to the filing requirements for our refinancing activities under the Overseas Listing Regulations.
97
On February 24, 2023, the CSRC, jointly with other relevant governmental authorities, published the Provisions on Strengthening Confidentiality and Archives Management of Overseas Securities Issuance and Listing by Domestic Enterprises, or the Confidentiality and Archives Management Provisions, which became effective on March 31, 2023. Pursuant to the Confidentiality and Archives Management Provisions, China-based companies that offer and list securities in overseas markets shall establish confidentiality and archives system. The “China-based companies” refer to companies in mainland China limited by shares which are directly listed on a foreign stock exchange and the domestic operating entities of an offshore company being indirectly listed on a foreign stock exchange. These China-based companies shall obtain the approvals from relevant authorities and file with the competent confidential administration authorities when providing or publicly filing documents and materials related to state secrets or secrets of the government authorities to the relevant securities companies, securities service agencies or the offshore regulatory authorities, or providing or publicly filing such documents and materials through its offshore listing entity. In addition, the China-based companies shall complete corresponding procedures when (i) providing or publicly filing documents and materials which may adversely affect national security and public interests to the relevant securities companies, securities service agencies or the offshore regulatory authorities, (ii) providing or publicly filing such documents and materials through its offshore listing entity, or (iii) providing accounting files or copies to relevant securities companies, securities service institutions, overseas regulators and individuals. These China-based companies are also required to provide written statements as to whether they have completed the approval or filing procedures as above when providing documents and materials to securities companies and securities service providers, and the securities companies and securities service providers should properly retain such written statements for inspection. If a China-based company finds that the documents and materials related to state secrets or secrets of the government authorities or other materials, which may adversely affect national security and public interests, have been leaked or have leakage risks, it should take remedial measures immediately and report to the relevant authorities.
Regulations on Stock Incentive Plans
In February 2012, SAFE promulgated the Stock Option Rules. Under the Stock Option Rules. Under the Stock Option Rules and other relevant rules and regulations, PRCmainland China residents who participate in stock incentive plan in an overseas publicly-listedpublicly listed company are required to register with SAFE or its local branchesbranch and complete certain other procedures. Participants of a stock incentive plan who are PRCmainland China residents must retain a qualified PRCmainland China agent, which could be a PRC subsidiary in mainland China of the overseas publicly listed company or another qualified institution selected by the PRC subsidiary in mainland China, to conduct the SAFE registration and other procedures with respect to the stock incentive plan on behalf of its participants. The participants must also retain an overseas entrusted institution to handle matters in connection with their exercise of stock options, the purchase and sale of corresponding stocks or interests, and fund transfers. In addition, the PRCmainland China agent is required to amend the SAFE registration with respect to the stock incentive plan if there is any material change to the stock incentive plan, the PRCmainland China agent or the overseas entrusted institution, or other material changes. The PRCmainland China agents must, on behalf of the PRCmainland China residents who have the right to exercise the employee share options, apply to SAFE or its local branchesbranch for an annual quota for the payment of foreign currencies in connection with the PRCmainland China residents’ exercise of the employee share options. The foreign exchange proceeds received by the PRCmainland China residents from the sale of shares under the stock incentive plans granted and dividends distributed by the overseas listed companies must be remitted into the bank accounts in the PRCmainland China opened by the PRCmainland China agents before distribution to such PRCmainland China residents.
We adopted two share incentive plans, namely, the 2008 Plan and the 2014 Plan. Pursuant to the 2008 Plan, we may issue options, restricted shares (or share appreciation rights or other similar awards) and rights to purchase restricted shares to our qualified employees and directors and consultants on a regular basis. Pursuant to the 2014 Plan, we may issue options, restricted shares and restricted share units to our qualified employees, directors and consultants on a regular basis. We have advised our employees and directors participating in the employee stock option plan to handle foreign exchange matters in accordance with the Stock Option Rules, and we have completed the registrations of our stock incentive plans with the local SAFE as required by PRC law.
laws of mainland China.
In addition, the State Administration for Taxation has issued circulars concerning employee share options, under which our employees working in the PRCmainland China who exercise share options will be subject to PRCmainland China individual income tax. Our PRC subsidiaries in mainland China have obligations to file documents related to employee share options with relevant tax authorities and to withhold individual income taxes of those employees who exercise their share options. If our employees fail to pay or if we fail to withhold their income taxes as required by relevant laws and regulations, we may face sanctions imposed by the PRC tax authorities or other PRC government authorities.
98
Regulation on Tax
PRC Enterprise Income Tax Law
On March 16, 2007, the National People’s Congress, the PRC legislature,NPC enacted the EIT Law. BothLaw, which was amended on February 24, 2017, and on December 29, 2018. Under the EIT Law and its Implementing Rules, which was enacted on December 6, 2007, by the State Council, became effectiveand amended on January 1, 2008. Under the EIT Law,April 23, 2019, enterprises are classified as PRCmainland China resident enterprises and non-PRC-residentnon-mainland China-resident enterprises. PRCMainland China resident enterprises typically pay an enterprise income tax at the rate of 25%. An enterprise established outside of the PRCmainland China with its “de facto management bodies” located within the PRCmainland China is considered a PRCmainland China “resident enterprise,” meaning that it shall be treated in a manner similar to a PRCmainland China resident enterprise for enterprise income tax purposes. The Implementing Rules to the EIT Law defines “de facto management body” as a managing body that in practice exercises “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of an enterprise.
The SAT issued Circular 82 on April 22, 2009, as amended in January 2014.December 2017. Circular 82 provides certain specific criteria for determining whether the “de facto management body” of a PRC-controlledmainland China-controlled and offshore-incorporated enterprise is located in mainland China, which criteria include all of the following conditions:following: (a) the location where senior management members responsible for an enterprise’s daily operations discharge their duties;duties, (b) the location where financial and human resource decisions are made or approved by organizations or persons;persons, (c) the location where the major assets and corporate documents are kept;kept and (d) the location where more than half (inclusive) of all directors with voting rights or senior management have their habitual residence. In addition, the SAT issued a bulletin on July 27, 2011, effective from September 1, 2011, and amended respectively in 2015, 2016 and 2018, or Bulletin 45, providing more guidance on the implementation of Circular 82. Bulletin 45 clarifies matters, including PRCmainland China resident enterprise status determination, post-determination administration and competent tax authorities etc. Although both Circular 82 and Bulletin 45 only apply to offshore enterprises controlled by PRCmainland China enterprises or PRCmainland China enterprise groups, not those controlled by PRCmainland China individuals or foreign individuals like us, the determining criteria set forth in Circular 82 and Bulletin 45 may reflect the SAT’s general position on how the “de facto management body” test should be applied in determining the PRCmainland China tax resident enterprise status of offshore enterprises, regardless of whether they are controlled by PRCmainland China enterprises, PRCmainland China enterprise groups, or by PRCmainland China or foreign individuals.
We do not believe that Tarena International, Inc. meets all of the conditions above, and thus we do not believe that Tarena International, Inc. is a PRCmainland China resident enterprise despite the fact that all members of our management team as well as the management team of our offshore holding company are located in mainland China. However, if the PRC tax authorities determine that Tarena International, Inc. is a PRCmainland China resident enterprise for PRCmainland China enterprise income tax purposes, a number of unfavorable PRCmainland China tax consequences could follow. See “Item 3. Key Information—D. Risk Factors—Risks RelatingRelated to Doing Business in China—UnderWe are affected by the PRC Enterprise Income Tax Law, and we may be classified as a PRC “resident enterprise”mainland China ‘resident enterprise’ for PRCmainland China enterprise income tax purposes. Such classification would likely result in unfavorable tax consequences to us and our non-PRCnon-mainland China shareholders and have a material adverse effect on our results of operations and the value of your investment.”
99
Pursuant to the Arrangement Between the Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect to Taxes on Income, or the Hong Kong Tax Treaty, and other applicable PRC regulations of mainland China, if a Hong Kong resident enterprise is determined by the competent PRC tax authority to have satisfied the relevant conditions and requirements under such Hong Kong Tax Treaty and other applicable regulations, the 10% withholding tax on the dividends the Hong Kong resident enterprise receives from a PRCmainland China resident enterprise may be reduced to 5% upon receiving approval from in-charge tax authority. However, based on the Notice on Certain Issues with Respect to the Enforcement of Dividend Provisions in Tax Treaties issued on February 20, 2009 by the SAT, or Circular 81, ifthe 5% withholding tax rate does not automatically apply and certain requirements must be satisfied, including without limitation that (a) the Hong Kong enterprise must be the beneficial owner of the relevant PRC tax authorities determine,dividends and (b) the Hong Kong enterprise must directly hold at least 25% share ownership in their discretion, thatthe mainland China enterprise during the 12 consecutive months preceding its receipt of the dividends. However, a company benefits from such reduced income tax rate due to a structuretransaction or arrangement that is primarily tax-driven, such PRCentered into for the primary purpose of enjoying a preferential tax authorities may adjusttreatment should not be a reason for the application of the preferential tax treatment; and based on the Notice on the Interpretation and Recognition of Beneficial Owners in Tax Treaties, or Circular 601, issued on October 27, 2009 by the SAT, and the Announcement on the Recognition of Beneficial Owners in Tax Treaties issued on June 29, 2012 by the SAT, conduit companies, which are established for the purpose of evading or reducing tax, or transferring or accumulating profits, shall not be recognized as beneficial owners and thus are not entitled to the above-mentioned reduced income tax rate of 5%treatment under the Hong Kong Tax Treaty. Tarena HKIf a taxpayer inappropriately is entitled to such preferential tax treatment, the competent tax authority has the power to make appropriate adjustments. According to the Circular 9, effective from April 1, 2018, when determining the applicant’s status of the “beneficial owner” regarding tax treatments in connection with dividends, interests or royalties in the tax treaties, several factors, including without limitation whether the applicant is obligated to pay more than 50% of his or her income in twelve months to residents in a third country or region, whether the business operated by the applicant constitutes the actual business activities and whether the counterparty country or region to the tax treaties levies any tax or grants tax exemption on relevant incomes or levies tax at an extremely low rate, will be taken into account, and such determination will be analyzed according to the actual circumstances of the specific cases. Circular 9 further provides that applicants who intend to prove his or her status of the “beneficial owner” shall submit the relevant documents to the relevant tax authority according to Circular 60. Based on Circular 60, non-resident enterprises are not obtainedrequired to obtain preapproval from the approval for arelevant tax authority in order to enjoy the reduced withholding tax rate. Instead, non-resident enterprises and their withholding agents may, by self-assessment and on confirmation that the prescribed criteria to enjoy the tax treaty benefits are met, directly apply the reduced withholding tax rate, and file necessary forms and supporting documents when performing tax filings, which will be subject to post-tax filing examinations by the relevant tax authorities. On October 14, 2019, the State Administration of 5% fromTaxation promulgated a new Administrative Measures for Non-Resident Taxpayers to Enjoy Treaty Benefits, or Circular 35, which became effective on January 1, 2020, and replaced and repealed Circular 60. Circular 35 sets forth similar rules that non-resident enterprises and their withholding agents shall enjoy treaty benefit by means of “self-judgment of eligibility, declaration of entitlement, and retention of relevant materials for future reference.” However, if a competent tax authority finds out that it is necessary to apply the local tax authority.general anti-tax avoidance rules, it may start general investigation procedures for anti-tax avoidance and adopt corresponding measures for subsequent administration. See “Item 3. Key Information—D. Risk Factors—Risks RelatingRelated to Doing Business in China—We may not be able to obtain certain treaty benefits on dividends paid to us by our PRC subsidiary in mainland China through our Hong Kong Subsidiary.”
100
In January 2009, the SAT promulgated the Provisional Measures for the Administration of Withholding of Enterprise Income Tax for Non-resident Enterprises, or the Non-resident Enterprises Measures, pursuant to which the entities which have the direct obligation to make certain payments to a non-resident enterprise shall be the relevant tax withholders for such non-resident enterprise. Further,Furthermore, the Non-resident Enterprises Measures providesprovide that in case of an equity transfer between two non-resident enterprises whichthat occurs outside mainland China, the non-resident enterprise whichthat receives the equity transfer payment shall, by itself or engage an agent to, file tax declaration with the PRC tax authority located at the place of the PRCmainland China company whose equity has been transferred, and the PRCmainland China company whose equity has been transferred shall assist the tax authorities to collect taxes from the relevant non-resident enterprise. On October 17, 2017, the SAT released Announcement Regarding Issues Concerning the Withholding of Non-resident Enterprise Income Tax at Source, or SAT Circular 37, effect from December 1, 2017, and amended in June 2018, which replaced the Non-resident Enterprise Measures. On April 30, 2009, the MOF and the SAT jointly issued the Notice on Issues Concerning Process of Enterprise Income Tax in Enterprise Restructuring Business, or Circular 59. On December 10, 2009, the SAT issued the Notice on Strengthening the Administration of the Enterprise Income Tax concerning Proceeds from Equity Transfers by Non-resident Enterprises, or Circular 698. Both Circular 59 and Circular 698 became effective retroactively as of January 1, 2008. By promulgating and implementing these two circulars, the PRC tax authorities have enhanced their scrutiny over the direct or indirect transfer of equity interests in a PRCmainland China resident enterprise by a non-resident enterprise. Under Circular 698, where a non-resident enterprise transfers the equity interests of a PRC “resident enterprise” indirectly by disposition of the equity interests of an overseas holding company, or an Indirect Transfer, and such overseas holding company is located in certain low tax jurisdictions, the non-resident enterprise, being the transferor, shall report to the competent tax authority of the PRC “resident enterprise” this Indirect Transfer. The PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such Indirect Transfer may be subject to PRC tax at a rate of up to 10%. On February 3, 2015, the SAT issued a Public Notice [2015]2015 No.7, or Public Notice 7, to supersede the existing tax rules in relation to the Indirect Transfer as set forth in Circular 698, while the other provisions of Circular 698 remain in force.698. Under Public Notice 7, introduceswhere a new tax regime that is significantly different from that under Circular 698. Public Notice extend its tax jurisdiction to capture not only Indirect Transfer as set forth under Circular 698 but also transactions involving transfer of immovable propertynon-resident enterprise conducts an “indirect transfer” by transferring the equity interests in a mainland China and“resident enterprise” or other taxable assets held under the establishment and place, in China of a foreign company through the offshore transfer of a foreign intermediate holding company. Public Notice 7 also addresses the term transferindirectly by disposing of the equity interestinterests in a foreign intermediatean overseas holding company, widely.the non-resident enterprise, being the transferor, may be subject to mainland China enterprise income tax, if the indirect transfer is considered to be an abusive use of company structure without reasonable commercial purposes. In addition, Public Notice 7 provides clearerclear criteria than Circular 698 on how to assess reasonable commercial purposes and introduces safe harbor scenarios applicable to internal group restructurings on.restructurings. However, it also brings challenges to both the foreign transferor and transferee of the Indirect Transfer as they have to make self-assessment on whether the transaction should be subject to PRCmainland China tax and to file or withhold the PRCmainland China tax accordingly. SAT Circular 37 provides certain changes to the current withholding regime, repeals and replaces all other provisions under Circular 698 and amends certain provisions in Public Notice 7. For example, SAT Circular 37 requires that the transferor shall declare to the competent tax authority for payment of tax within seven (7) days after the tax payment obligation comes into being if the withholding agent fails to withhold the tax due or withhold the tax due in full. However, according to SAT Circular 37, if the withholding agent fails to withhold and remit the income tax payable, or is unable to perform its obligation in this regard, as long as the non-resident enterprise that earns the income voluntarily declares and pays the tax payable before the tax authority orders it to do so within required time limits, it shall be deemed that such enterprise has paid the tax in time. There is little guidance and practical experience as to the application of Circular 698 and Public Notice 7.7 or SAT Circular 37. Where non-resident investors were involved in our private equity financing, if such transactions were determined by the tax authorities to lack reasonable commercial purpose, we and our non-resident investors may become at risk of being taxed under Circular 698 and Public Notice 7 and may be required to expend valuable resources to comply with Circular 698 and Public Notice 7 or SAT Circular 37 or to establish that we should not be taxed under Circular 698 and Public Notice 7.7 or SAT Circular 37. The PRC tax authorities have the discretion under SAT Circular 59, Circular 698 and Public Notice 7 or SAT Circular 37 to make adjustments to the taxable capital gains based on the difference between the fair value of the equity interests transferred and the cost of investment.
The State Administration of Taxation promulgated Administrative Measures on the General Anti-Avoidance Rule (Trial), or GAAR Measures, on December 12,2, 2014, which shows the authority’s intention to fight against tax avoidance scheme that is adopted to obtain unwarranted tax benefit without reasonable commercial purpose. A press release, made by the State Administration of Taxation to clarify certain issues relating to the application of the GAAR Measures, stated that the GAAR Measures may be applicable if any general tax-avoidance scheme exists in the offshore indirect transfer of equity interests. Since GAAR Measures was recently promulgated and it is unclear how this set of measures, and any future implementation rules thereof, will be interpreted, amended and implemented by the relevant governmental authorities, we cannot predict how these regulations will affect our business operation, future acquisitions or strategy.
101
In addition, the EIT Law and its Implementation Rulesimplementation rules permit certain “high and new technology enterprises strongly supported by the state” that hold independent ownership of core intellectual property and simultaneously meet a list of other criteria, financial or non-financial,nonfinancial, as stipulated in the Implementation Rules and other regulations, to enjoy a reduced 15% enterprise income tax rate. The SAT, the Ministry of Science and Technology and the Ministry of FinanceMOF jointly issued the Administrative Measures on the Recognition Criteria and Procedures for AdvanceHigh and New Technology Enterprise delineating the specific criteria and procedures for the “high and new technology enterprises” certification in April 2008.2008, which was amended in January 2016. Enterprises recognized as “high and new technology enterprises,” or HNTEs, will enjoy a reduced 15% enterprise income tax rate after they go through tax reduction application formalities with relevant tax authorities. Tarena Tech obtained its HNTE certificate in 2009, renewed its HNTE certificate in 2012, 2015, 2018 and again in 2015,2021, and is eligible to enjoy a preferential tax rate of 15% until the end of 2017.December 2024. Tarena Hangzhou was established in 2013 and is qualified as a “newly established software enterprise”,enterprise,” which entitles it to two years of full tax exemption followed by three years of 50% tax exemption, commencing from the year in which its taxable income is greater than zero, which was 2014.
Tarena Hangzhou no longer has the 50% tax exemption beginning from 2019. Tarena Hangzhou obtained its HNTE certificate in 2020, and is eligible to enjoy a preferential income tax rate of 15% from December 2020 to December 2023. In 2016, Tarena Hangzhou acquired 100% of the equity interests in Hangzhou Hanru Education Technology Co., Ltd., or Hanru Hangzhou, which is qualified as a “newly established software enterprise” and entitles to two years of full tax exemption followed by three years of 50% tax exemption, commencing from the year in which its taxable income is greater than zero, which was 2016. In addition, Hanru Hangzhou obtained its HNTE certificate in 2019 and is eligible to enjoy a preferential tax rate of 15% until December 2022.
PRC Value-added Tax (“VAT”) in lieu of Business Tax (the “VAT Pilot Program”)
An enterprise or individual providing taxable service within the territory of mainland China has been historically required to pay BTthe business tax at the rate of 3% or 5% on the revenues generated from provision of such services in accordance with applicable PRC tax regulations. However, if the services provided are technical transfer or technical development, or technical consulting and technical service related to technology transfer or technical development, BTbusiness may be exempted subject to approval by the relevant tax authorities.
In November 2011,On March 23, 2016, the Ministry of Finance and the SAT promulgated the Notice on the Pilot Program in Shanghai Replacing BT with VAT in Transportation and Some Modern Service Sectors. Pursuant to this circular and other relevant notices, VAT shall be imposed in lieu of BT in transportation and some modern service sectors firstly in Shanghai starting from January 1, 2012. On August 1, 2013, the VAT Pilot Program was implemented throughout China in transportation and some modern services sectors. On April 29, 2014, the Ministry of FinanceMOF and the SAT issued the Circular on the Inclusion of Telecommunications Industry in the Pilot Collection of Value-added Tax in Lieu of Business Tax. On March 23, 2016, the Ministry of Finance and the SAT issued the Circular on Comprehensively Promoting the Pilot Program of the Collection of Value addedValue-added Tax in Lieu of Business Tax.Tax. Effective from May 1, 2016, the PRC tax authorities will collect VAT in lieu of Business Tax on a trial basis within the territory of mainland China, and in industries such as construction industries, real estate industries, financial industries and living service industries. The VAT tax rates generally applicable VAT rates are simplified as 17%, 11%, 6% and 0%, and the VAT tax rate applicable to the small-scale taxpayers is 3%. The Notice of the Ministry of Finance and the State Administration of Taxation on Adjusting Value-added Tax Rates, or the Notice, was promulgated on April 4, 2018, and came into effect on May 1, 2018. According to the Notice, the VAT tax rates of 17% and 11% are changed to 16% and 10%, respectively. On March 20, 2019, the MOF, SAT and General Administration of Customs jointly promulgated the Announcement on Policies for Deeping the entities that are general taxpayerVAT Reform or Notice 39, which came into effect on April 1, 2019. Notice 39 further changes the VAT tax rates of 16% and small-scale taxpayer,10% to 13% and 9%, respectively.
Local Surcharges
The city construction tax and education surcharge are local surcharges imposed as a certain percentage of PRCmainland China turnover taxes (i.e., business tax, value-added tax and consumption tax). The city construction tax is charged at rates of 1%, 5% or 7% (the applicable city construction tax rate depends on the location of the taxpayer) of the turnover tax paid while the education surcharge rate is currently at 3% of the turnover tax paid. Though in the past, foreign-invested enterprises, foreign enterprises and foreign individuals were exempted from such surcharges, these entities were required to make such payments from December 1, 2010, according to a notice issued by PRC State Council in October 2010.
In addition to the city construction tax and the education surcharge, the China Ministry of FinanceMOF issued Circular Caizong (2010) No. 98, or Circular 98, that requires all entities and individuals (including foreign-invested enterprises, foreign enterprises and foreign individuals) to pay a local education surcharge, or LES, at 2% on turnover tax paid. Local governments are required to report their implementation measures on LES to the Ministry of Finance.MOF. LES became applicable to all entities and individuals in Beijing on January 1, 2012.
Employment Laws and Social Insurance
We are subject to laws and regulations governing our relationship with our employees, including wage and hour requirements, working and safety conditions, and social insurance, housing funds and other welfare. The compliance with these laws and regulations may require substantial resources.
102
China’s National Labor Law, which became effective on January 1, 1995, and was amended on August 27, 2009, and on December 29, 2018, and China’s National Labor Contract Law, which became effective on January 1, 2008, and was amended on December 28, 2012, permit workers in both state-owned and private enterprises in mainland China to bargain collectively. The National Labor Law and the National Labor Contract Law provide for collective contracts to be developed through collaboration between the labor union (or worker representatives in the absence of a union) and management that specify such matters as working conditions, wage scales, and hours of work. The laws also permit workers and employers in all types of enterprises to sign individual contracts, which are to be drawn up in accordance with the collective contract. The National Labor Contract Law has enhanced rights for the nation’s workers, including permitting open-ended labor contracts and severance payments. The legislation requires employers to provide written contracts to their workers, restricts the use of temporary labor and makes it harder for employers to lay off employees. It also requires that employees with fixed-term contracts be entitled to an indefinite-term contract after a fixed-term contract is renewed twice or the employee has worked for the employer for a consecutive ten-year period.
On October 28, 2010, the National People’s Congress of ChinaNPC promulgated the PRC Social Insurance Law, which became effective on July 1, 2011.2011, and was amended on December 29, 2018. In accordance with the PRC Social Insurance Law and other relevant laws and regulations, mainland China establishes a social insurance system including basic pension insurance, basic medical insurance, work-related injury insurance, unemployment insurance and maternity insurance. An employer shall pay the social insurance for its employees in accordance with the rates provided under relevant regulations and shall withhold the social insurance that should be assumed by the employees. The authorities in charge of social insurance may request an employer’s compliance and impose sanctions if such employer fails to pay and withhold social insurance in a timely manner. Under the Regulations on the Administration of Housing Fund effective in 1999, as amended in 2002 PRCand 2019, mainland China companies must register with applicable housing fund management centers and establish a special housing fund account in an entrusted bank. Both PRCmainland China companies and their employees are required to contribute to the housing funds.
On September 18, 2018, the General Meeting of State Council announced that the policies for social insurance shall remain unchanged until the reform has been completed for the transfer of the authority for social insurance from the MOHRSS to the SAT on January 1, 2019. On September 21, 2018, the MOHRSS released the Urgent Notice on Enforcing the Requirement of the General Meeting of the State Council and Stabilization the Levy of Social Insurance Payment which requires that the policies for both the rate and basis of social insurance contributions shall remain unchanged until the reform on the transfer of the authority for social insurance has been completed. On November 16, 2018, the SAT released the Notice of Certain Measures on Further Supporting and Serving the Development of Private Economy which provides that the policy for social insurance shall remain stable and the SAT will pursue to lower the social insurance contribution rates with the relevant authorities, and ensure the overall burden of social insurance contribution on enterprises will be lowered.
C. Organizational Structure103
| C. | Organizational Structure |
The following diagram illustrates our corporate structure, including our subsidiaries and the consolidated VIEs and their subsidiaries, as of the date of this annual report:March 31, 2023:
 | ||
 | ||
 |
Notes:
| (1) | Mr. Shaoyun Han, our founder |
| (2) | Mr. Shaoyun Han, our founder and |
104
| (3) |
| Mr. Shaoyun Han is the principal of Weifang Tarena Professional Education School. |
| (4) |
| Mr. Shaoyun Han is the principal of Shenyang Tarena Professional Education School, Jinan Tarena Professional Education School, Wuhan Tarena Professional Education School, Chongqing Jiulongpo Tarena Professional Education School, Kunming |
| * | Dexun Wang and Zhi Han are no longer employed by us. The principal registration for each of Guangzhou Tarena Software Professional Education School and Shijiazhuang Xinhuaqudarenzhinei Tarena Professional Education School Co., Ltd. has not been updated. |
Because of foreign ownership restriction on Internetinternet content and other value-added telecommunication services in mainland China, we operate ourTMOOC.cn websiteand 61it.cn websites through our consolidated VIE, Beijing Tarena.the VIEs, Beijing Tarena is in the process of applying to add ourTMOOC.cn website under the ICP license held byand Beijing Tarena.Tongcheng. Beijing Tarena is 70% owned by Mr. Shaoyun Han, our founder chairman and chief executive officer,chairman, and 30% owned by Mr. Jianguang Li, our independent director. Beijing Tongcheng is 70% owned by Mr. Shaoyun Han, our founder and chairman, and 30% owned by Mr. Shenghuan Feng, our employee. Mr. Han, Mr. Li, and Mr. LiFeng are both PRCall mainland China citizens. We entered into a series of contractual arrangements with Beijing Tarena, Beijing Tongcheng, and itstheir shareholders, which enable us to:
| exercise effective financial control over Beijing |
| receive substantially all of the economic benefits and bear the obligation to absorb substantially all of the losses of Beijing |
105
| have an exclusive option to purchase all or part of the equity interests in Beijing Tarena and Beijing Tongcheng when and to the extent permitted by |
Because of these contractual arrangements, we are the primary beneficiary of Beijing Tarena and Beijing Tongcheng and consolidate itstheir financial results in our consolidated financial statements in accordance with U.S. GAAP.
The following is a summary of the currently effective contracts by and among Tarena International,us, our subsidiary Tarena Tech, our VIE, Beijing Tarena,subsidiaries, the consolidated VIEs and the shareholders of Beijing Tarena.
their shareholders.
Exclusive Business Cooperation Agreement
Agreements
Under the exclusive business cooperation agreement between Beijing Tarena and Tarena Tech, as amended and restated, Tarena Tech has the exclusive right to provide, among other things, technical support, business support and related consulting services to Beijing Tarena, and Beijing Tarena agrees to accept all the consultation and services provided by Tarena Tech. Beijing Tongcheng and Tongcheng Shidai have entered into an exclusive business cooperation agreement on August 29, 2022, the terms of which are substantially the same as the agreement between Beijing Tarena and Tarena Tech summarized above. Without Tarena Tech’sthe prior written consent Beijingof Tarena is prohibited from engagingTech or Tongcheng Shidai, none of the VIEs may engage any third party to provide any of the services under this agreement. In addition, Tarena Tech and Tongcheng Shidai exclusively ownsown all intellectual property rights arising out of or created during the performance of thistheir respective agreement. Beijing TarenaThe respective VIE agrees to pay a monthly service fee to Tarena Tech or Tongcheng Shidai at an amount determined solely by Tarena Technegotiated between themselves after taking into account factors including the complexity and difficulty of the services provided, the time consumed, the seniority of the Tarena Tech employees providing services to Beijing Tarena,the VIE, the value of services provided, the market price of comparable services and the operating conditions of Beijing Tarena.the VIE. Furthermore, to the extent permitted under the PRC law,laws of mainland China, Tarena Tech agrees to provide financial support to Beijing Tarena if Beijing Tarena has any operating loss or suffered any critical operation adversity. The term of the agreement will remain effective unless Tarena Tech or Tongcheng Shidai terminates the agreement in writing or a competent governmental authority rejects the renewal applications by either Beijing Tarena or Tarena Techparty to the abovementioned agreements to renew its respective business license upon expiration. Without the consent of Tarena Tech Beijing Tarenaor Tongcheng Shidai, the respective VIE is not permitted to terminate this agreement in any event unless required by applicable laws.
Power of Attorney
Pursuant to the power of attorney dated on July 5, 2016, as amended and restated, the shareholders of Beijing Tarena each irrevocably appointed Tarena Tech as the attorney-in-fact to act on their behalf on all matters pertaining to Beijing Tarena and to exercise all of their rights as a shareholder of Beijing Tarena, including but not limited to attend shareholders’ meetings, vote on their behalf on all matters of Beijing Tarena requiring shareholders’ approval under PRC laws and regulations of mainland China and the articles of association of Beijing Tarena, and designate and appoint directors and senior management members. Tarena Tech may assign its rights under this power of attorney to any other person or entity at its sole discretion without prior notice to the shareholders of Beijing Tarena. Each of the shareholders of Beijing Tongcheng has executed an irrevocable power of attorney will remain in force untilon August 29, 2022, the terms of which are substantially the same as the power of attorney of Tarena Tech summarized above. The power of attorney remains effective as long as the relevant person remains a shareholder ceases to hold any equity interest in Beijing Tarena.of the VIE.
Equity Interest Pledge Agreements
Under the equity interest pledge agreements dated on July 5,2016 between Tarena Tech, Beijing Tarena and the shareholders of Beijing Tarena, as amended and restated, the shareholders pledged all of their equity interests in Beijing Tarena to Tarena Tech to guarantee Beijing Tarena’s and Beijing Tarena’s shareholders’ performance of their obligations under the contractual arrangements including, but not limited to the service fees due to Tarena Tech. If Beijing Tarena or any of Beijing Tarena’s shareholders breaches its contractual obligations under the contractual arrangements, Tarena Tech, as the pledgee, will be entitled to certain rights and entitlements, including receiving proceeds from the auction or sale of whole or part of the pledged equity interests of Beijing Tarena in accordance with legal procedures. Tarena Tech has the right to receive dividends generated by the pledged equity interests during the term of the pledge. If any event of default as provided in the contractual arrangements occurs, Tarena Tech, as the pledgee, will be entitled to dispose of the pledged equity interests in accordance with PRC laws and regulations.regulations of mainland China.
106
Tongcheng Shidai, each individual shareholder of Beijing Tongcheng and Beijing Tongcheng have entered into a share pledge agreement on August 29, 2022, the terms of which are substantially the same as the equity interest pledge agreement summarized above. The equity interestinterest/share pledge agreements became effective on the date when the agreements were duly executed. The pledge was registered with Changping Bureau of Beijing Administration for Industry and Commerce in December 2013 and April 2017, and with Beijing Haidian District Market Supervision Bureau in September 2022, respectively. The pledge will remain binding until Beijing Tarenathe pledgee and its shareholders discharge all their obligations under the contractual arrangements. The registration of the equity pledge enables Tarena Techthe pledgee to enforce the equity pledge against third parties who acquire the equity interests of Beijing Tarenain the pledgor in good faith.
Exclusive Option Agreements
Under the exclusive option agreements dated July 5, 2016 between Tarena International, Inc., Tarena Tech, each of the shareholders of Beijing Tarena and Beijing Tarena, as amended and restated, each of the shareholders irrevocably granted Tarena International, Inc. or its designated representative(s) an exclusive option to purchase, to the extent permitted under PRC law,laws of mainland China, all or part of his equity interests in Beijing Tarena. In addition, Tarena International, Inc. has the option to acquire the equity interests ofin Beijing Tarena for a specified price equal to the loan provided by Tarena Tech to the individual shareholders. If the lowest price permitted under PRC lawlaws of mainland China is higher than the above price, the lowest price permitted under PRC lawlaws of mainland China shall apply. Tarena International, Inc. or its designated representative(s) has sole discretion as to when to exercise such options, either in part or in full. Without Tarena International, Inc.’s prior written consent, Beijing Tarena’s shareholders shall not sell, transfer, mortgage, or otherwise dispose any equity interests in Beijing Tarena. These agreements will remain effective until all equity interests in Beijing Tarena held by its shareholders are transferred or assigned to Tarena International, Inc. or Tarena International, Inc.’s designated representatives.
Tongcheng Shidai, each individual shareholder of Beijing Tongcheng and Beijing Tongcheng have entered into an exclusive option agreement on August 29, 2022, the terms of which are substantially the same as the exclusive option agreement summarized above.
Loan Agreements
Pursuant to the loan agreements dated on July 5,2016 between Tarena Tech and each individual shareholder of Beijing Tarena, as amended and restated, Tarena Tech provided loans with an aggregate amount of RMB2RMB5 million (US$0.3 million) to the individual shareholders of Beijing Tarena for the sole purpose of providing capital for Beijing Tarena. The loans can only be repaid in a manner determined by Tarena Tech at its sole discretion, which repayment may take the form of transferring the individual shareholders’ equity interest in Beijing Tarena to Tarena or its designated person pursuant to the exclusive option agreements. The loan shall be interest-free, unless the transfer price exceeds the principal of the loan when each individual shareholder of Beijing Tarena transfers his equity interests in Beijing Tarena to Tarena or its designated person(s). Such excess over the principal of the loan shall be deemed the interest of the loan to the extent permitted under PRC law.laws of mainland China. Tongcheng Shidai and each individual shareholder of Beijing Tongcheng have entered into a loan agreement on August 29, 2022, the terms of which are substantially the same as the loan agreement summarized above. The term of each loan agreement is ten years from the date of the agreement expiring in 2023 and can be extended with the written consent of both parties before expiration.
Spousal Consent Letters
Ms. Ying Sun and Ms. Nan Li executed spousal consent letters. Pursuant to the spousal consent letters, each of Ms. Ying Sun and Ms. Nan Li:
The contractual arrangements by and among Tarena, our subsidiary Tarena Tech, Shanghai Tarena, and the shareholders of Shanghai Tarena are substantially the same as the contractual arrangements discussed above.
In the opinion of our PRC counsel, Han Kun Law Offices, these contractual arrangements are valid, binding and enforceable under current PRC laws.laws of mainland China. However, these contractual arrangements may not be as effective in providing control as direct ownership. Thereownership and there are substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations.regulations of mainland China. For a description of the risks relatingrelated to our contractual arrangements, please see “Item 3. Key Information—D. Risk Factors—Risks RelatingRelated to Our Corporate Structure.”
D. Property, Plants and Equipment
| D. | Property, Plants and Equipment |
We have dual headquarters in China, located in Beijing and Hangzhou. Our principal executive offices in Beijing comprise of approximately 1,3196,592.9 square meters and accommodate certain of our management and general and administrative activities, as well as our research and development activities. We also have approximately 15,54818,682.2 square meters in leased classroom space in Beijing. Our principal executive offices and classrooms in Hangzhou comprise of approximately 7,1419,596.3 square meters of leased space. Our principal executive offices in Hangzhou accommodate certain of our management and general and administrative activities.
107
In addition to our principal executive offices in Beijing and Hangzhou, we maintain a number of offices, classrooms and student dormitories with an aggregate of approximately 142,786241,650 square meters in 4160 cities in the PRC. We lease all of themainland China. For our leased facilities, that we currently occupyleased them from unrelated third parties. Our lease terms range from onesix months to ten years.
We purchased two office buildings in Beijing in 2016, mainly for teaching purpose, and to a lesser extent for administrative function. We paid an aggregate of RMB231.9 million for these two office buildings. We, through our wholly owned subsidiary in mainland China, sold one of the two office buildings and received the full payment of the sales proceed amounting to RMB92.0 million (US$14.4 million) in 2021 and incurred a loss on disposal amounting to RMB22.3 million (US$3.5 million). In March 2023, we signed a housing contract of the other office building with a consideration of RMB93.0 million (US$13.5 million), received a deposit of RMB18.6 million (US$ 2.7million) in March 2023 and recognized an impairment loss of RMB11.6 million (US$1.7million). The office buildings sold are located in Building 17 and Building 19, Block 2, Yard 31, Kechuang 13 Street, Beijing Economic-Technological Development Area, Beijing and have an aggregate gross floor area of approximately 16,500 square meters. We also purchased a building in Qingdao and another one in Haikou for an aggregate price of RMB50 million in 2016. The purpose of these two buildings is for teaching purposes as learning centers to accommodate the growing demand in the local market and to take advantage of favorable local policies. We intended to sell the Qingdao building and the board of directors began to discuss and review the proposed sales of the Qingdao building in 2022. As the criteria for classifying such two buildings in Beijing and Qingdao as assets held for sale were met, such two buildings were confirmed and recognized as assets held for sale as of December 31, 2022. In February 2023, we signed a letter of intent to sell the Qingdao building with a total consideration of RMB26.1 million (US$3.8 million), and we received a deposit of RMB0.2 million (US$0.03 million) in March 2023.
We believe that the facilities that we currently own or lease are adequate to meet our needs for the foreseeable future, and we believe that we will be able to obtain adequate facilities, principally through leasing of additional properties, to accommodate our future expansion plans.
ITEM 4.A.UNRESOLVED STAFF COMMENTS
Not Applicable.
ITEM 5.OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion of our financial condition and results of operations is based upon and should be read in conjunction with our consolidated financial statements and their related notes included in this annual report on Form 20-F. This report contains forward-looking statements. See “Forward-Looking Information.” In evaluating our business, you should carefully consider the information provided under the caption “Item 3. Key Information—D. Risk Factors” in this annual report on Form 20-F. We caution you that our businesses and financial performance are subject to substantial risks and uncertainties.
| A. | Operating Results |
A. Operating Results
Overview
Net Revenues
We derive substantially all of our net revenues from tuition fees that we charge students. In 2013, 20142020, 2021 and 2015,2022, we generated net revenues of US$92.8RMB1,897.9 million, US$136.2RMB2,386.5 million and US$189.2RMB2,468.1 million (US$357.8 million), respectively. We record tuition fees that we collect in advance as deferred revenues.revenue. Our net revenues are presented net of business tax and surcharges.
108
Number of Student Enrollments
Our abilitytotal net revenue increased by 3.4% from RMB2,386.5 million in 2021 to generateRMB2,468.1 million (US$357.8 million) in 2022. Student enrollments in our STEAM education programs increased from approximately 141,600 in 2020 to approximately 178,400 in 2021, and increase revenues is primarily driven by our abilityfurther increased to increase the number of student enrollments. The number of our209,400 in 2022. Our total professional education student enrollments is primarily driven by the numberdecreased from approximately 83,400 in 2020 to approximately 72,100 in 2021, and popularity of our course offerings. We evaluate the market demands for our course offerings and open new learning centersfurther decreased to cater to such demands. approximately 66,200 in 2022.
Our total student enrollments increased from 46,458 in 2013 to 59,960 in 2014 and further to 84,041 in 2015. The total number of our learning centers nationwide grew from 92 as of December 31, 2013 to 118 as of December 31, 2014 and to 134 as of December 31, 2015.
Our total student enrollment isare affected by the continuing popularity of our existing courses and programs and the number and popularity of new courses and new programs we offer. In 2015,2022, our digital art course was the largest course in terms of revenuesSTEAM robotics programming and number of student enrollments. Since 2012, we have developed and launched seven new courses, as well as two new education programs targeting kids. Java and iOScomputer programming courses were the two most popular courses in our second and third largest course in terms of student enrollment for 2015. Our accounting course, launched in the fourth quarter of 2014, has become our fourth largest course in terms of student enrollment for 2015. Expanding our course offeringscourses and programs and diversifying our sources of revenues help protect us from potential reduced student enrollments due to down-turns in certain industries or professions.offering portfolio.
Our total student enrollment isenrollments are also affected by our ability to maintain our cooperative relationships with financing service providers for adult student loans. A significant portion of our adult students enrolled in 20152022 relied on loans mainly provided or arranged by CreditEase, BOC CFC, RenRenDaiBaidu Small Loan Co., Ltd., Shanghai Shimiao Financial Information Service Co., Ltd., Beijing Youfei Jinxin Digital Technology Co., Ltd., Qihao Commercial Factoring Co. Ltd., and ShiTuDaiChongqing Haier Small Loan Co. Ltd. to pay for our tuition fees. In 2015, approximately 49.3%2022, 16.4% of our adult students took outreceived loans provided or arranged by CreditEase, BOC CFC, RenRenDai or ShiTuDaithese five financing service providers to pay for our tuition fees. Our cooperative agreement with BOC CFC will expire in March, 2017.
Starting from 2011, Chuanbang, a credit-sourcing company in China owned by Mr. Shaoyun Han, our chief executive officer, began to offer person-to-person lending services to our students to help them pay for our tuition fees. In connection with the person-to-person lending services provided by Chuanbang, we serve as a guarantor of the loans taken out by students. We recognized US$90,490, US$18,188 and nil as guarantee fee revenue in 2013, 2014 and 2015, respectively. We have stopped providing guarantees for any new student loan arranged by Chuanbang since April 2013. We have not generated any interest income in connection with the person-to-person lending services provided by Chuanbang.
Tuition fees
Our net revenues are affected by the tuition fees for each of our courses. Courses under STEAM education programs typically are composed of multiple levels, with each level consisting of 64 to 120 learning hours in one year. For our STEAM education programs, our standard tuition fees are between RMB8,000 and RMB23,400 in 2022. For our full-time and part-time classes for adult students, our standard tuition fees generally range from RMB16,800 (US$2,593)RMB22,800 to RMB19,800 (US$3,057) per course. We increased our tuition fees for most of our full-time classes by RMB1,000 (US$154) in 2013, further increased such tuition fees by RMB1,000 (US$154) in 2014 and again increased such tuition fees by RMB1,000 (US$154) in 2015. We also increased our tuition fees for part-time classes by RMB1,000 (US$154) to RMB2,000 (US$309)RMB26,800 per course in 2015. For our kid education programs, our standard tuition fees are RMB15,360 (US$2,371). Each kid education program is composed of four levels, with each level consisting of 120 learning hours in one year.
2022. The actual tuition fees of our courses for adult students may vary according to the recruiting channel through which a student is enrolled. We recruit students either through our direct marketing efforts or from our network of cooperative universities and colleges. We generally offer a discount of approximately RMB4,000 (US$617) per person per full-time course
Our tuition fees for students enrolled through our network of cooperative universitiesSTEAM education programs are paid up-front to the extent permitted by applicable laws and colleges. In 2015, we recruited approximately 16.2% of our students from these universities and colleges.
regulations. Our tuition fees of our professional education courses for adult students are also affected by the payment option selected by our students. We primarily offer two payment options for our adult students, including one-time full payment upon enrollment and multiple payments within two months of enrollment.during the semester. We also allow qualified adult students to pay our tuition fees within a period of time after graduation. We generally charge approximately RMB1,000 (US$154)to RMB4,000 higher in tuition fees to adult students electing to pay in multiple payments, within two months of enrollment and charge RMB3,000 (US$463) higher in tuition fees to students qualified and electing to pay in installments post graduation, as compared to students who elect to pay in full upfront. OurFor students recruited through our joint-majors with universities and colleges, they pay tuition fees forTongcheng their degrees directly to the universities andTongmei education programs colleges according to the tuition payment schedule stipulated by such schools, which is typically paid in installments prior to the beginning of each semester of the degree program. For our post-graduation payment option, qualified adult students are requiredgiven a grace period of up to six months after graduation to look for employment, during which time no repayment needs to be fully paid up-front.
made. After such grace period, students are given one-year repayment period. In order to qualify for such payment option, students must pass our credit screening by furnishing to us a number of supporting documents, for instance a credit report from the People’s Bank of China.
Cost of Revenues
Our cost of revenues primarily consists of payroll and employee benefits for our instructors (as apportioned based on the amount of time that they devote to teaching), teaching assistants, career counselors and employer cooperation representatives, as well as rental payments for our learning centers, and to a lesser extent, depreciation relating to property and equipment used at our learning centers. The following table sets forth a breakdown of our cost of revenues in absolute amounts and as percentages of net revenues for the periods indicated:
| | | | | | | | | | | | | | |
|
| For the Year Ended December 31, | ||||||||||||
| | 2020 |
| 2021 |
| 2022 | ||||||||
| | | | % of net | | | | % of net | | | | | | % of net |
|
| RMB |
| revenues |
| RMB |
| revenues |
| RMB |
| US$ |
| revenues |
| | (in thousands, except percentages) | ||||||||||||
Personnel cost and welfare | | 548,763 | | 28.9 | | 702,649 | | 29.4 | | 668,026 | | 96,855 | | 27.1 |
Rental cost |
| 212,551 |
| 11.2 |
| 249,772 |
| 10.5 |
| 198,095 |
| 28,721 |
| 8.0 |
Depreciation expenses |
| 133,787 |
| 7.0 |
| 94,639 |
| 4.0 |
| 73,682 |
| 10,683 |
| 3.0 |
Others |
| 171,741 |
| 9.1 |
| 154,359 |
| 6.5 |
| 116,240 |
| 16,853 |
| 4.7 |
Total cost of revenues |
| 1,066,842 |
| 56.2 |
| 1,201,419 |
| 50.4 |
| 1,056,043 |
| 153,112 |
| 42.8 |
| For the Year Ended December 31, | ||||||||||||||||||||||||
| 2013 | 2014 | 2015 | ||||||||||||||||||||||
| US$ | % of net revenues | US$ | % of net revenues | US$ | % of net revenues | |||||||||||||||||||
| (in thousands of US$, except percentages) | ||||||||||||||||||||||||
| Personnel cost and welfare | 11,109 | 12.0 | 14,409 | 10.6 | 19,809 | 10.5 | ||||||||||||||||||
| Rental cost | 8,668 | 9.3 | 11,263 | 8.3 | 15,727 | 8.3 | ||||||||||||||||||
| Others | 9,291 | 10.0 | 13,408 | 9.8 | 18,034 | 9.5 | ||||||||||||||||||
| Total cost of revenues | 29,068 | 31.3 | 39,080 | 28.7 | 53,570 | 28.3 | ||||||||||||||||||
109
Our cost of revenues is primarily affected by the number of our learning centers. WeIn terms of the STEAM education business, we had a total of 92, 118236, 238 and 134217 learning centers for students aged between three and eighteen as of December 31, 2020, 2021 and 2022, respectively. In terms of the professional education business, we had a total of 104, 100 and 86 learning centers as of December 31, 2013, 20142020, 2021 and 2015,2022, respectively. Our cost of revenues as a percentage of net revenues was 31.3%, 28.7% and 28.3% in 2013, 2014 and 2015, respectively. We expect our cost of revenues to continue to increase as we plan to open more learning centers.
Operating Expenses
Our operating expenses consist primarily of selling and marketing expenses, general and administrative expenses and, to a lesser extent, research and development expenses. The following table sets forth our operating expenses in absolute amounts and as percentages of net revenues for the periods indicated:
| | | | | | | | | | | | | | |
|
| For the Year Ended December 31, | ||||||||||||
| | 2020 |
| 2021 |
| 2022 | ||||||||
| | | | % of net | | | | % of net | | | | | | % of net |
|
| RMB |
| revenues |
| RMB |
| revenues |
| RMB |
| US$ |
| revenues |
| | (in thousands, except percentages) | ||||||||||||
Selling and marketing expenses | | 906,337 | | 47.8 | | 878,130 | | 36.8 | | 642,937 | | 93,217 | | 26.1 |
General and administrative expenses |
| 630,618 |
| 33.2 |
| 569,985 |
| 23.9 |
| 604,028 |
| 87,576 |
| 24.5 |
Research and development expenses |
| 100,466 |
| 5.3 |
| 106,098 |
| 4.4 |
| 72,028 |
| 10,443 |
| 2.9 |
Total operating expenses |
| 1,637,421 |
| 86.3 |
| 1,554,213 |
| 65.1 |
| 1,318,993 |
| 191,236 |
| 53.5 |
| For the Year Ended December 31, | ||||||||||||||||||||||||
| 2013 | 2014 | 2015 | ||||||||||||||||||||||
| US$ | % of net revenues | US$ | % of net revenues | US$ | % of net revenues | |||||||||||||||||||
| (in thousands of US$, except percentages) | ||||||||||||||||||||||||
| Selling and marketing expenses | 30,252 | 32.6 | 42,562 | 31.2 | 61,824 | 32.7 | ||||||||||||||||||
| General and administrative expenses | 16,224 | 17.6 | 29,948 | 22.0 | 40,359 | 21.3 | ||||||||||||||||||
| Research and development expenses | 3,807 | 4.1 | 5,446 | 4.0 | 8,113 | 4.3 | ||||||||||||||||||
| Total operating expenses | 50,283 | 54.3 | 77,956 | 57.2 | 110,296 | 58.3 | ||||||||||||||||||
Our selling and marketing expenses primarily consist of compensation expenses relating to our personnel involved in selling and marketing, including our enrollment advisors and our university cooperation representatives based at our learning centers, advertising expenses relating to our marketing activities, and, to a lesser extent, rental expenses relating to our selling and marketing functions. We expect our selling and marketing expenses to increase in the future as we further expand our business.
Our general and administrative expenses primarily consist of compensation expenses relating to our management and administrative personnel and bad debt allowance associated with our post-graduation tuition installment payment option for qualified students.personnel. To a lesser extent, our general and administrative expenses include share-based compensation and office expenses relating to administrative functions. We expect our general and administrative expenses to increasedecrease in the future on an absolute basisamount as our business grows and we incur costs relatedwill continue to complying with our reporting obligations as a public company under U.S. securities laws.implement effective cost control measures.
Our research and development expenses primarily consist of a portion of the personnel costs of our instructors as determined based on the amount of time that they devote to research and development-related activities, as well as the personnel costs of our software engineers.
We expect our research and development expenses to increase in absolute amounts as we will continue to upgrade our IT infrastructure and quality of our course offerings.
Seasonality
Seasonal fluctuations have affected, and are likely to continue to affect, our business. Historically, we typically generate the highest net revenues in the third and fourth quarters because of the increased student enrollments during summer vacation.vacation, although the seasonal fluctuation was to some extent eased in the fourth quarter of 2022 due to the impact of COVID-19 in China. We generally generate less tuition fees in the first quarter of each year due to the Chinese New Year holiday. Our quarterly cost
Internal Control Over Financial Reporting
We are subject to reporting obligations under the U.S. securities laws. Among other things, the Securities and Exchange Commission, or the SEC, as required by Section 404 of revenue, selling and marketing expenses, general and administrative expenses and research and development expenses have generally been increasingthe Sarbanes-Oxley Act of 2002, or Section 404, adopted rules requiring every public company, including us, to include a management report on the company’s internal control over financial reporting in absolute amounts since 2012 as we expandedits annual report, which contains management’s assessment of the effectiveness of the company’s internal control over financial reporting. Furthermore, our network of learning centers, increasedindependent registered public accounting firm is required to report on the numbereffectiveness of our personnelinternal control over financial reporting.
We have made, and enhancedwill continue to make necessary changes and improvements to the overall design of our marketing efforts.control environment to address any deficiencies or material weaknesses in internal control over financial reporting and any ineffectiveness of our disclosure controls and procedures.
110
During 2020, our management has undertaken remedial actions to address the material weaknesses in our internal control over financial reporting. As a result of the remedial actions which have been taken, management has concluded that our internal control over financial reporting was effective as of December 31, 2020, 2021 and 2022. In addition, our independent registered public accounting firm attesting the effectiveness of our internal control reported that our internal control over financial reporting was effective as of December 31, 2020, 2021 and 2022.
Taxation
Cayman Islands
We are incorporated in the Cayman Islands. Under the current law of the Cayman Islands, we are not subject to income or capital gains tax. In addition, dividend payments are not subject to withholding tax in the Cayman Islands.
Hong Kong
Our wholly-ownedwholly owned subsidiary in Hong Kong, Tarena Hong Kong Limited, is subject to Hong Kong profits tax on its activities conducted in Hong Kong. No provision for Hong Kong profits tax has been made in the consolidated financial statements as Tarena Hong Kong Limited has no assessable income since its inception on October 22, 2012 to December 31, 2015.2022.
Mainland China
Pursuant to the EIT Law and its Implementation Rules,implementation rules, which became effective on January 1, 2008, and amended on December 29, 2018 and April 23, 2019, respectively, foreign-invested enterprises and domestic companies are subject to enterprise income tax at a uniform rate of 25%. In addition, “high and new technology enterprises,” or HNTEs, will enjoy a preferential enterprise income tax rate of 15% under the EIT Law. Tarena Tech qualified as aobtained its HNTE under the EIT Lawcertificate in 2009 and renewed its HNTE certificate in 2012, 2015, 2018 and 2021, and is eligible forto enjoy a preferential enterprise income tax rate of 15% for the period from 2009 to the end of 2017.until December 2024. Tarena Hangzhou was established in 2013 and qualified as a “newly established software enterprise”,enterprise,” which entitles it to two years of full exemption followed by three years of 50% exemption, commencing from the year in which its taxable income is greater than zero, which was 2014.Certain Tarena Hangzhou no longer has the 50% tax exemption since 2019. Tarena Hangzhou obtained its HNTE certificate in 2020, and is eligible to enjoy a preferential income tax rate of 15% from December 2020 to December 2023. In 2016, Tarena Hangzhou acquired 100% of the equity interests in Hangzhou Hanru Education Technology Co., Ltd., or Hanru Hangzhou, which is qualified as a “newly established software enterprise” and entitled to two years of full tax exemption followed by three years of 50% tax exemption, commencing from 2016. In addition, Hanru Hangzhou obtained its HNTE certificate in 2019 and is eligible to enjoy a preferential tax rate of 15% until December 2022. Some of our subsidiaries have been qualified as “Small Profit Enterprises” in 2013, 2014since 2017 and 2015,2018, and therefore are subjectentitled to theenjoy a preferential income tax rate of 20% on 50% of the assessable profit before tax. From January 1, 2019, to December 31, 2020, 25% of the first RMB1.0 million of the assessable profit before tax is subject to the tax rate of 20% for our subsidiaries that are qualified as “Small Profit Enterprises,” and the 50% of the assessable profit before tax exceeding RMB1.0 million but not exceeding RMB3.0 million is also subject to the tax rate of 20%. From January 1, 2021 to December 31, 2021, 12.5% of the first RMB1.0 million of the assessable profit before tax is subject to the tax rate of 20% for our subsidiaries that are qualified as “Small Profit Enterprises,” and the 50% of the assessable profit before tax exceeding RMB1.0 million but not exceeding RMB3.0 million is subject to the tax rate of 20%. From January 1, 2022 to December 31, 2022, 12.5% of the first RMB1.0 million of the assessable profit before tax is subject to the tax rate of 20% for our subsidiaries that are qualified as “Small Profit Enterprises,” and the 25% of the assessable profit before tax exceeding RMB1.0 million but not exceeding RMB3.0 million is subject to the tax rate of 20%. From January 1, 2023 to December 31, 2024, 25% of the assessable profit before tax is subject to the tax rate of 20% for our subsidiaries that are qualified as “Small Profit Enterprises”. Subject to the approvals from the tax authorities in certain locations in the PRC,mainland China, our subsidiaries and consolidatedthe VIEs that are based in these locations are required to use the deemed profit method to determine their income tax. Under the deemed profit method, these subsidiaries are subject to income tax at 25% on its deemed profit which is calculated based on revenues less deemed expenses equal to 85% to 90%
111
Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements in accordance with U.S. GAAP and includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of a company’s assets, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that a company’s receipts and expenditures are being made only in accordance with authorizations of a company’s management and directors, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of a company’s assets that could have a material effect on the consolidated financial statements.
In connection with the audit of our consolidated financial statements as of and for the year ended December 31, 2015, we and our independent registered public accounting firm identified a material weakness in our internal control over financial reporting as of December 31, 2015, as defined in the PCAOB Audit Standard No. 2. The material weakness identified related to the insufficient review over system extracted data for tuition fees calculation during transitional period of system upgrade. Our independent registered public accounting firm did not undertake a comprehensive assessment of our internal controls for purposes of identifying and reporting material weaknesses and other control deficiencies in our internal control over financial reporting, as they will be required to do under the Section 404 of the Sarbenes-Oxley Act of 2002. Had our independent registered public accounting firm performed an audit of our internal control over financial reporting, additional control deficiencies may have been identified.
To remedy our control deficiencies, we have reinforced the oversight and review procedure over the data extraction. We will continue to implement the necessary procedures and policies, including those outlined above, to improve our internal controls over financial reporting and remediate any potential material weaknesses and significant deficiencies as we prepare for our initial Section 404 reporting requirement under the Sarbanes-Oxley Act of 2002, which will take place in the fiscal year ending December 31, 2016 if certain conditions are met.
See “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business—If we fail to maintain an effective system of internal controls, we may be unable to accurately report our results of operations or prevent fraud or fail to meet our reporting obligations, and investor confidence and the market price of our ADSs may be materially and adversely affected.”
Critical Accounting Policies
We prepare our consolidated financial statements in accordance with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect (i) the reported amounts of our assets and liabilities; (ii) the disclosure of our contingent assets and liabilities at the end of each reporting period; and (iii) the reported amounts of revenues and expenses during each reporting period. We continually evaluate these judgments, estimates and assumptions based on our own historical experience, knowledge and assessment of current business and other conditions and our expectations regarding the future based on available information, which together form our basis for making judgments about matters that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, our actual results could differ from those estimates. Some of our accounting policies require a higher degree of judgment than others in their application.
When reading our consolidated financial statements, you should consider our selection of critical accounting policies, the judgment and other uncertainties affecting the application of such policies and the sensitivity of reported results to changes in conditions and assumptions. We believe the following accounting policies involve the most significant judgments and estimates used in the preparation of our financial statements.
Revenue recognition
We derive substantially all of our net revenues from tuition fees, a portion of which we allow qualified students to pay on installment for a period of time exceeding one year. When tuition services are sold on repayment terms that exceed one year beyond the point in time that revenue is recognized, the receivable, and therefore the revenue is recorded at the present value of the total payments. The difference between the present value of the receivable and the nominal or principal value of the tuition fees is recognized as interest income over the contractual collection period using the effective interest rate method. The interest rate used to determine the present value of the total amount receivable is the rate at which students can obtain financing of a similar nature from other sources at the date of the transaction. Revenue is presented net of business tax and value added taxes at rates ranging between 3% and 6%, and surcharges.
Allowance for doubtful accounts
We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our students to make payments according to their respective payment plans stipulated on the arrangement. We determine the allowance by analyzing students’ accounts that have known or potential collection issues and applying historical loss rates to the aging of the remaining balances of accounts receivable. In the event that we believe an account receivable will become uncollectible, we record an additional provision to increase the allowance for doubtful accounts.
Long-lived assets
Our long-lived assets include property and equipment. We depreciate our property and equipment using the straight-line method over the estimated useful lives of the assets. We make estimates of the useful lives of property and equipment, including the salvage values, in order to determine the amount of depreciation expense to be recorded during each reporting period. We amortize leasehold improvements of our learning center facilities and offices over the shorter of the lease term or the estimated useful life of the assets. We estimate the useful lives of our other property and equipment at the time the assets are acquired based on historical experience with similar assets, as well as anticipated technological or other changes. If technological changes were to occur more rapidly than anticipated or in a different form than anticipated, the useful lives assigned to these assets may be shortened, which would result in the recognition of increased depreciation expense in future periods. There has been no change to the estimated useful lives or salvage values of our property and equipment in 2013, 2014 and 2015.
We evaluate property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We assess recoverability by comparing the carrying amount of a long-lived asset or asset group to the estimated undiscounted future cash flows expected to be generated by the asset or asset group. If the carrying amount of an asset or asset group exceeds its estimated undiscounted future cash flows, we recognize an impairment charge based on the amount by which the carrying amount exceeds the estimated fair value of the asset or asset group. We estimate the fair value of the asset or asset group based on the best information available, including prices for similar assets, and in the absence of an observable market price, the results of using a present value technique to estimate the fair value of the asset or asset group.
No impairment on our long-lived assets was recognized in 2013, 2014 and 2015.
Share-based Compensation
We measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award and recognize the cost over the period the employee is required to provide service in exchange for the award, which is generally the vesting period. We have elected to recognize the compensation cost for an award with only service conditions that have a graded vesting schedule on a straight-line basis over the requisite service period for the entire award, net of estimated forfeitures, provided that the cumulative amount of compensation cost recognized at any date at least equals the portion of the grant-date value of such award that is vested at that date. Forfeiture rates are estimated based on historical and future expectations of employee turnover rates.
On September 22, 2008, we adopted the 2008 Plan, pursuant to which we can issue share options and other share-based awards to our key employees, directors and consultants to purchase up to 6,002,020 of our ordinary shares (being retroactively adjusted to reflect the effect of the share split). On November 28, 2012, we increased the number of our ordinary shares authorized for issuance under the 2008 Plan to 8,184,990. Share options issued before September 22, 2008 are also administered under the 2008 Plan.
In February 2014, we adopted the 2014 Plan, pursuant to which we were authorized to issue options, restricted shares and restricted share units to our qualified employees, directors and consultants. The maximum aggregate number of shares which may be issued pursuant to all awards under the 2014 Plan, or the Award Pool, is 1,833,696, provided that the shares reserved in the Award Pool shall be increased on the first day of each calendar year, commencing with January 1, 2015, if the unissued shares reserved in the Award Pool on such day account for less than 2% of the total number of shares issued and outstanding on a fully-diluted basis on December 31 of the immediately preceding calendar year, as a result of which increase the shares unissued and reserved in the Award Pool immediately after each such increase shall equal 2% of the total number of shares issued and outstanding on a fully-diluted basis on December 31 of the immediately preceding calendar year.
Share options granted prior to initial public offering
From January 1, 2004 to February 20, 2014, our board of directors has granted the following options to our executive officers and employees:
| Number of Options | Exercise Price (US$) | Fair Value of Ordinary Shares (US$) | ||||||||||
| Grant date | ||||||||||||
| Prior to January 1, 2012 | 7,117,020 | 0.058-1.00 | 0.04-0.83 | |||||||||
| January 1, 2013 | 2,029,386 | 1.83 | 3.75 | |||||||||
| September 16, 2013 | 488,424 | 1.83 | 5.69 | |||||||||
| February 20, 2014 | 1,805,784 | 1.83-4.36 | 8.60 | |||||||||
Prior to our initial public offering in April 2014, we did not have quoted market prices for our ordinary shares. Accordingly we have considered the guidance prescribed by theAICPA Audit and Accounting Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, or the Practice Aid, which sets forth the preferred types of valuation that should be used. We have followed the “Level B” recommendation, and established the fair value of our ordinary shares at the dates of grant using a retrospective valuation for valuation dates prior to September 2013 with the assistance of an independent valuation firm. We obtained a retrospective valuation instead of contemporaneous valuation for valuation dates prior to September 2013, because at that time, our financial and managerial resources were limited. The valuation as of September 16, 2013 and February 20, 2014 was prepared on contemporaneous basis. We are ultimately responsible for all the fair value measurements in relation to the options and ordinary shares.
In determining the fair value of our ordinary shares for the purpose of determining the fair value of the share options, we followed a two-step process. In the first step, the equity value of our company was determined by taking into consideration the income approach, or the discounted cash flow on DCF, method. We considered the market approach and searched for public companies located in China with business nature and in a development stage similar to ours. However, no companies were similar to us in all aspects. We therefore did not apply any weight for the market approach to arrive at the equity value of our company and only used the market approach to corroborate the valuation results based on the income approach.
In estimating the total equity value of our ordinary shares, we considered the DCF method, which incorporates the projected cash flow of our management’s best estimation as of each measurement date. The projected cash flow estimation includes, among others, analysis of projected net revenue growth, gross margins and terminal value. The assumptions used in deriving the fair value of ordinary shares are consistent with our business plan.
The key assumptions used in developing the cash flow forecasts include: (i) compounded annualized growth rates of net revenue range from 19% to 52% for the forecasted period; (ii) gross margin forecast to improve with increasing economies of scale; and (iii) a terminal growth rate after the projection period.
The DCF method of the income approach involves applying appropriate weighted average cost of capital, or WACC, to discount the future cash flows forecast to present value. WACC comprises a required rate of return on equity plus the current tax effected rate of return on debt, weighted by the relative percentages of equity and debt in the capital structure of comparable public companies whose business operations are similar to that of ours. The required rates of return on equity were based on an estimation of the market required rate of return for investing in business similar to ours, which were derived by using the capital asset pricing model, or CAPM. Under CAPM, the discount rate was determined with consideration of the risk-free rate, industry-average correlated relative volatility coefficient beta, equity risk premium, size of our company, the scale of our business and our ability in achieving forecasted projections.
The risks associated with achieving the forecasts were assessed in selecting the appropriate WACC, which had been determined to range from 16.5% to 30%. The determined WACC decreased from 30% as of 2004 to 16.5% as of February 20, 2014 due to decrease in uncertainties associated with our financial forecast as we achieved millstones, progressed to later stage of development and developed solid track records.
In estimating the fair value of our ordinary shares by the DCF method, our management does not think there would be disproportionate returns of cash flows to different shareholders. Therefore, neither control premium nor a lack of control discount was considered in our valuations.
We also applied a discount for lack of marketability, or DLOM, ranging from 5% to 35%, to reflect the fact that there is no ready market for shares in a closely-held company like us. When determining the DLOM, the Black-Scholes option pricing model was used. Under this option-pricing method, the cost of the put option, which can hedge the price change before the privately held shares can be sold, was considered as a basis to determine the DLOM. This option pricing method was used because it takes into account certain company-specific factors, including the timing of the expected initial public offering and the volatility of the share price of the guideline companies engaged in the same industry.
The above assumptions used in determining the fair values were consistent with our business plan and major milestones we achieved. We also applied general assumptions, including the following:
In the second step, since our capital structure comprised convertible redeemable preferred shares and ordinary shares at each grant date, we allocated our equity value among each class of equity securities using the option-pricing method. The option-pricing method treats ordinary shares and preferred shares as call options on our company’s equity value and liquidation preference, redemption preference and conversion threshold of the preferred shares as exercise price of the call options.
The increase in the fair value of our ordinary shares from US$3.75 per share as of January 1, 2013 to US$5.69 per share as of September 16, 2013 was primarily attributable to the following factors:
The increase in the fair value of our ordinary shares from US$5.69 per share as of September 16, 2013 to US$8.60 per share as of February 20, 2014 was primarily attributable to the following factors:
In determining the fair value of share options granted to executive officers and certain employees, we have used the binomial option pricing model. Under this option pricing model, certain assumptions, including the risk-free interest rate, the expected dividends on the underlying ordinary shares and the expected volatility of the price of the underlying shares for the contract term of the options, are required in order to determine the fair value of the options. Changes in these assumptions could significantly affect the fair value of share options and hence the amount of compensation expense we recognize in our consolidated financial statements.
For the options granted, we used the following assumptions on the date of grant in determining the estimated fair value per option:
| Options Granted In | ||||||||||||||||
| 2011 | 2012 | 2013 | 2014 | |||||||||||||
| Expected volatility | 45-46 | % | — | 52 | % | 52 | % | |||||||||
| Expected dividends yield | 0 | % | — | 0 | % | 0 | % | |||||||||
| Exercise multiple | 2.2 | — | 2.2 | 2.2 | ||||||||||||
| Risk-free interest rate per annum | 3.89%-3.93 | % | — | 2.27%-3.38 | % | 3.81 | % | |||||||||
| Estimated fair value of underlying ordinary shares (per share) | US$ | 0.63-0.83 | — | US$ | 3.75-5.69 | US$ | 8.60 | |||||||||
For the purpose of determining the estimated fair value of our share options, we believe the expected volatility and the estimated fair value of our ordinary shares are the most critical assumptions since we are a privately-held company when we granted these share options.
Since we did not have a trading history at the time the share options were granted and we did not have sufficient share price history to calculate our own historical volatility, expected volatility of our future ordinary share price was estimated based on the price volatility of the shares of comparable public traded companies engaged in the similar industry.
Share options granted after initial public offering
From March 1, 2015 to December 6, 2015, our board of directors has granted the following options to our executive officers and employees:
| Number of Options | Exercise Price (US$) | Fair Value of Ordinary Shares (US$) | ||||||||||
| Grant date | ||||||||||||
| March 1, 2015 | 452,233 | 1.00-4.36 | 11.40 | |||||||||
| April 1, 2015 | 10,000 | 4.36 | 9.44 | |||||||||
| May 1, 2015 | 516 | 1.00 | 12.12 | |||||||||
| July 1, 2015 | 104,981 | 1.00-4.36 | 12.85 | |||||||||
| August 1, 2015 | 22,396 | 1.00 | 11.82 | |||||||||
| October 1, 2015 | 24,785 | 0.89-1.00 | 9.28 | |||||||||
| December 6, 2015 | 713 | 1.00 | 11.37 | |||||||||
On June 16, 2015, Mr. Shaoyun Han exercised 2,439,014 share options to purchase 2,439,014 Class A ordinary shares. Mr. Shaoyun Han remitted US$2,783,957 to us on August 4, 2015.
In determining the fair value of share options granted to executive officers and certain employees, we have used the binomial option pricing model. Under this option pricing model, certain assumptions, including the risk-free interest rate, the expected dividends on the underlying ordinary shares and the expected volatility of the price of the underlying shares for the contract term of the options, are required in order to determine the fair value of the options. Changes in these assumptions could significantly affect the fair value of share options and hence the amount of compensation expense we recognize in our consolidated financial statements.
For the options granted, we used the following assumptions on the date of grant in determining the estimated fair value per option:
The fair values of underlying ordinary shares are closing prices of our stock traded in the open market as of each grant date. For the purpose of determining the estimated fair value of our share options, we believe the expected volatility is the most critical assumption.
Since we did not have sufficient share price history, expected volatility of our future ordinary share price was estimated with reference to the price volatility of the shares of comparable public traded companies engaged in the similar industry.
Income taxes
The realization of the future tax benefits of deferred income tax assets is dependent on future taxable income against which such tax benefits can be applied or utilized and any tax planning strategies. In assessing the realizability of deferred income tax assets, we consider whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. All available evidence must be considered in determining the realizability of the deferred income tax assets. Such evidence includes, but is not limited to, the financial performance of subsidiaries and consolidated VIEs, the market environment in which these entities operate, the utilization of past tax credits, and the length of relevant carryforward periods. Sufficient negative evidence, such as a cumulative net loss during a three-year period that includes the current year and the prior two years, may require that a valuation allowance be established with respect to existing and future deferred income tax assets. In view of cumulative losses sustained by our PRC subsidiaries and consolidated VIEs, valuation allowances of US$0.60 million, US$2.35 million and US$3.10 million were provided as of December 31, 2013, 2014 and 2015, respectively. If, in the future, taxable incomes are available for each tax-paying component, the valuation allowances against our deferred income tax assets may be adjusted.
In order to assess uncertain tax positions, we adopt a more likely than not threshold and a two-step approach for the tax position measurement and financial statement recognition. For the two-step approach, the first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is greater than 50% likely to be realized upon settlement. The unrecognized tax benefits were US$3.1 million, US$6.0 million and US$8.2 million as of December 31, 2013, 2014 and 2015, respectively. No interest and penalty expenses were recorded for the years ended December 31, 2013, 2014 and 2015.
Recently Issued Accounting Policies
The Financial Reporting Standards Board (“FASB”) issuedAccounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, in May 2014. ASU 2014-09 requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity should also disclose sufficient quantitative and qualitative information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In December 2015, the FASB issued ASU No. 2015-14, Revenue from contracts with customers, which deferred the effective date of ASU 2014-19. The new standard is effective for annual reporting periods beginning after December 15, 2017. We will implement the provisions of ASU 2014-09 as of January 1, 2018. We have not yet determined the impact of the new standard on our current policies for revenue recognition.
In 2015, we elected to early adopt the ASU 2015-17, Balance Sheet Classification of Deferred Taxes, which requires entities with a classified balance sheet to present all deferred tax assets and liabilities as noncurrent. We adopted this new guidance retrospectively. As a result of adoption of this guidance, we reclassified current deferred income tax assets in the amount of US$2.1 million to other noncurrent assets as of December 31, 2014. There was no impact on results of operations or cash flows as a result of this guidance.
The FASB issued Accounting Standards Codification (“ASC”) Topic 842, Leases, in February 2016. ASC Topic 842 requires a lessee to recognize all leases, including operating leases, on balance sheet via a right-of-use asset and lease liability, unless the lease is a short-term lease (one with an accounting lease term of 12 months or less). All (or a portion of) fixed payments by the lessee to cover lessor costs related to ownership of the underlying assets, or executory costs, that do not represent payments for a good or service will be considered lease payments and reflected in the measurement of lease assets and lease liabilities by lessees. The new standard does not substantially change lessor accounting from current U.S. GAAP. The new standard also requires lessees and lessors to disclose more qualitative and quantitative information about their leases than current U.S. GAAP does. The standard is applied retrospectively, with elective reliefs. The new standard is effective for annual and interim reporting periods beginning after December 15, 2018 for a public business entity. Early adoption is permitted. We have not yet determined the impact of the new standard on our current policies for leases.
Results of Operations
The following table sets forth a summary of our consolidated results of operations for the periods indicated, both in absolute amounts and as percentages of our net revenues. This information should be read together with our consolidated financial statements and related notes included elsewhere in this annual report. The operating results in any period are not necessarily indicative of the results that may be expected for any future period.
| For the Year Ended December 31, | ||||||||||||||||||||||||
| 2013 | 2014 | 2015 | ||||||||||||||||||||||
| US$ | % ofNet Revenues | US$ | % ofNet Revenues | US$ | % ofNet Revenues | |||||||||||||||||||
| (in thousands of US$, except percentages) | ||||||||||||||||||||||||
| Net revenues | 92,834 | 100.0 | 136,204 | 100.0 | 189,190 | 100.0 | ||||||||||||||||||
| Cost of revenues(1) | (29,068 | ) | (31.3 | ) | (39,080 | ) | (28.7 | ) | (53,570 | ) | (28.3 | ) | ||||||||||||
| Gross profit | 63,766 | 68.7 | 97,124 | 71.3 | 135,620 | 71.7 | ||||||||||||||||||
| Operating expenses(1): | ||||||||||||||||||||||||
| Selling and marketing | (30,252 | ) | (32.6 | ) | (42,562 | ) | (31.2 | ) | (61,824 | ) | (32.7 | ) | ||||||||||||
| General and administrative | (16,224 | ) | (17.6 | ) | (29,948 | ) | (22.0 | ) | (40,359 | ) | (21.3 | ) | ||||||||||||
| Research and development | (3,807 | ) | (4.1 | ) | (5,446 | ) | (4.0 | ) | (8,113 | ) | (4.3 | ) | ||||||||||||
| Operating income | 13,483 | 14.4 | 19,168 | 14.1 | 25,324 | 13.4 | ||||||||||||||||||
| Interest income | 1,541 | 1.7 | 4,360 | 3.2 | 6,863 | 3.6 | ||||||||||||||||||
| Foreign exchange gain (loss) | — | — | 1,197 | 0.9 | (4,738 | ) | (2.5 | ) | ||||||||||||||||
| Other income | 1,294 | 1.4 | 2,371 | 1.7 | 1,897 | 1.0 | ||||||||||||||||||
| Income before income taxes | 16,318 | 17.5 | 27,096 | 19.9 | 29,346 | 15.5 | ||||||||||||||||||
| Income tax expense | (2,271 | ) | (2.4 | ) | (2,405 | ) | (1.8 | ) | (637 | ) | (0.3 | ) | ||||||||||||
| Net income | 14,047 | 15.1 | 24,691 | 18.1 | 28,709 | 15.2 | ||||||||||||||||||
| | | | | | | | | | | | | | |
| | For the Year Ended December 31, | ||||||||||||
|
| 2020 |
| 2021 | | 2022 | ||||||||
| | | | % of Net | | | | % of Net | | | | | | % of Net |
|
| RMB |
| revenues |
| RMB |
| revenues |
| RMB |
| US$ |
| revenues |
| | (in thousands, except percentages) | ||||||||||||
Net revenues | | 1,897,883 |
| 100.0 |
| 2,386,520 |
| 100.0 |
| 2,468,074 |
| 357,837 | | 100 |
Cost of revenues(1) | | (1,066,842) |
| (56.2) |
| (1,201,419) |
| (50.3) |
| (1,056,043) |
| (153,112) |
| (42.8) |
Gross profit | | 831,041 |
| 43.8 |
| 1,185,101 |
| 49.7 |
| 1,412,031 |
| 204,725 |
| 57.2 |
Operating expenses(1): | | |
| |
| |
| |
| |
| |
| |
Selling and marketing | | (906,337) |
| (47.8) |
| (878,130) |
| (36.8) |
| (642,937) |
| (93,217) |
| (26.1) |
General and administrative | | (630,618) |
| (33.2) |
| (569,985) |
| (23.9) |
| (604,028) |
| (87,576) |
| (24.5) |
Research and development | | (100,466) |
| (5.3) |
| (106,098) |
| (4.4) |
| (72,028) |
| (10,443) |
| (2.9) |
Operating (loss) income | | (806,380) |
| (42.5) |
| (369,112) |
| (15.5) |
| 93,038 |
| 13,489 |
| 3.8 |
Interest income (expenses), net | | (199) |
| — |
| 2,335 |
| 0.1 |
| 2,700 |
| 391 |
| 0.1 |
Other income | | 5,201 |
| 0.3 |
| 5,572 |
| 0.2 | | 11,283 |
| 1,636 |
| 0.5 |
Foreign currency exchange loss, net | | (4,849) |
| (0.3) |
| (518) |
| — | | (954) |
| (138) |
| — |
(Loss) income before income taxes | | (806,227) |
| (42.5) |
| (361,723) |
| (15.2) | | 106,067 |
| 15,378 |
| 4.3 |
Income tax benefit (expenses) | | 35,034 |
| 1.9 |
| (114,057) |
| (4.8) | | (20,834) |
| (3,021) |
| (0.8) |
Net (loss) income | | (771,193) |
| (40.6) |
| (475,780) |
| (19.9) | | 85,233 |
| 12,357 |
| 3.5 |
Notes:
| (1) | Share-based compensation expenses were allocated in cost of revenues and operating expenses as follows: |
| | | | | | | | |
| | For the Year Ended December 31 | ||||||
|
| 2020 |
| 2021 | | 2022 | ||
|
| RMB |
| RMB |
| RMB |
| US$ |
| | (in thousands) | ||||||
Cost of revenues |
| 379 |
| 70 |
| 325 |
| 47 |
Selling and marketing expenses |
| 1,842 |
| 2,785 |
| 1,388 |
| 201 |
General and administrative expenses |
| 26,242 |
| 14,840 |
| 12,296 |
| 1,783 |
Research and development expenses |
| 7,783 |
| 1,408 |
| 2,528 |
| 367 |
| For the Year Ended December 31 | ||||||||||||
| 2013 | 2014 | 2015 | ||||||||||
| (in thousands US$) | ||||||||||||
| Cost of revenues | 17 | 57 | 107 | |||||||||
| Selling and marketing expenses | 45 | 169 | 315 | |||||||||
| General and administrative expenses | 654 | 3,627 | 4,541 | |||||||||
| Research and development expenses | 48 | 210 | 325 | |||||||||
The Year Ended December 31, 20152022, Compared to the Year Ended December 31, 2014
2021
Net revenues
Our net revenues increased by 38.9%3.4% from US$136.2RMB2,386.5 million in 20142021 to US189.2RMB2,468.1 million (US$357.8 million) in 2015. This2022. The increase was primarily due to increasedthe increase in student enrollments of STEAM education from 178,400 in 2021 to 209,400 in 2022, and higher average revenue per student.was partially offset by a decrease in IT professional education revenues.
For our STEAM education programs, our net revenues increased by 13.2% from RMB1,236.3 million in 2021 to RMB1,399.9 million (US$203.0 million) in 2022. We experienced a significant increase of 17.4% in our total student enrollments from approximately 178,400 in 2021 to approximately 209,400 in 2022. Our STEAM education business has expanded into 53 cities in mainland China. The number of total student enrollments grew by 40.2% from 59,960 in 2014 to 84,041 in 2015. The number of our student enrollments is primarily driven by the number and popularity of our course offerings and programs. We experienced significant increase in student enrollment for our new courses in the past few years, such as digital art, iOS and accounting. The number of ourSTEAM education learning centers increaseddecreased from 118238 as of December 31, 20142021 to 134217 as of December 31, 20152022.
For our professional education programs, our net revenues decreased by 7.1% from RMB1,150.2 million in 2021 to cater to the increased demand for our courses.RMB1,068.2 million (US$154.9 million) in 2022. The increase in our average revenue per studentdecrease was primarily a result of our tuition fees increase in 2015 andmainly driven by the decrease in the percentagestudent enrollments from 72,100 in 2021 to 66,200 in 2022. The number of our students recruited through our networkprofessional education learning centers decreased from 100 as of cooperative universities and colleges. In 2015, we raised the standard tuition fees on mostDecember 31, 2021 to 86 as of our courses by RMB1000 (US$161) per course. We generally offer a discountDecember 31, 2022.
112
Cost of Revenues
Our cost of revenues increaseddecreased by 37.1%12.1% from US$39.1RMB1,201.4 million in 20142021 to US$53.6RMB1,056.0 million (US$153.1 million) in 2015.2022. This increasedecrease was mainly due to higher personnel costdecrease in rental costs, depreciation costs, and welfare expensespersonnel-related costs resulting from increased numberthe closing of teaching and advisory staff at our learning centers, higher rental cost resulting from increased number of learning centers and expansion of existing learning centers, as well as higher depreciation expenses for our learning centers. Our instructors, teaching assistants, career counselors and employer cooperation representatives at our learning centers increased from 1,378 as of December 31, 2014 to 1,729 as of December 31, 2015. The numbersome of our learning centers increased from 118 as of December 31, 2014 to 134 as of December 31, 2015.teaching centers.
Gross Profit and Gross Margin
As a result of the foregoing, our gross profit increased by 39.6%19.1% from US$97.1RMB1,185.1 million in 20142021 to US$135.6 millionRMB1,412.0 (US$204.7 million) in 2015.2022. Our gross profit margin increased from 71.3%49.7% in 20142021 to 71.7%57.2% in 2015. The improvement in gross margin was mainly due2022, as we continued to increasedimprove operational scale and efficiency for our learning centers. Our overall center utilization rate in 2015 increased to 73% from 71% in 2014.efficiency.
Operating Expenses
Our operating expenses increaseddecreased by 41.5%15.1% from US$78.0RMB1,554.2 million in 20142021 to US$110.3RMB1,319.0 million (US$191.2 million) in 20152022, as a result of increasesdecrease in our selling and marketing general and administrativeexpenses and research and development expenses.
Selling and Marketing Expenses
Our selling and marketing expenses increaseddecreased by 45.3%26.8% from US$42.6RMB878.1 million in 20142021 to US$61.8RMB642.9 million (US$93.2 million) in 2015.2022. This increasedecrease was partiallymainly due to increased personnel costa drop in the number of sales staff and welfare expenses relateda decrease in advertising spending as the Company continued to growthcontrol marketing spending in our selling and marketing headcount from 1,773 as of December 31, 2014 to 2,300 as of December 31, 2015. The amount of personnel cost and welfare expenses for our selling and marketing staff increased from US$19.1 million in 2014 to US$29.3 million in 2015. The increase in selling and marketing expenses was also due to expanded marketing efforts, which increased advertising expenses from US$16.7 million in 2014 to US$24.3 million in 2015, primarily as a result of increased spending on search engine advertising as we expanded our network of learning centers.2022.
General and Administrative Expenses
Our general and administrative expenses increased by 34.8%6.0% from US$29.9RMB570.0 million in 20142021 to US$40.4RMB604.0 million (US$87.6 million) in 20152022. The increase was primarily due to higher personnel costs and welfare expenses for our increased headcount ofthe lower general and administrative personnel,expenses in the fourth quarter of 2021 resulting from 742the receipt of a settlement payment from the buyer group in connection with the termination of a proposed privatization transaction, as well as a provision of December 31, 2014 to 1,015a shareholder litigation in 2022. Rental expenses decreased as of December 31, 2015 to support our growing operations, higher bad debt allowance associated with our post-graduation tuition installment payment option for qualified students enrolled from 2010 to 2014we closed some low performing centers and higher share-based compensationobtained some rental relief. Office expenses which increased from US$3.6 million in 2014 to US$4.5 million in 2015.decreased as the Company focused on improving operational efficiency.
Research and Development Expenses
Our research and development expenses increaseddecreased by 49.0%32.1% from US$5.4RMB106.1 million in 20142021 to US$8.1RMB72.0 million (US$10.4 million) in 20152022. The decrease was primarily due to increased personnel costs and welfarethe decrease in personnel-related expenses of our instructors allocated to their content development activities for our new courses, as well as increased number of research and development staff as we expanded our course offerings and operations.in 2022.
Interest Income
Our net interest income increased from US$4.4were RMB2.3 million in 2014 to US$6.92021 and RMB2.7 million (US$0.4 million) in 2015.2022. Our interest income in both periods consisted of interest earned on our cash, cash equivalents and time deposits deposited in commercial banks and interest income recognized in relation to our installment payment plan for adult students. The increase in interest income was primarily due to higher tuition interest income in relation to our installment payment plan for studentsbecause we conducted fund management and higher bankpurchased structured deposits generated ultimately from operating activities.during this year.
Income Tax Expense
Expenses
Our income tax expenses were RMB20.8 million (US$3.0 million) in 2022, compared to the income tax expense decreased by 73.5% from US$2.4of RMB114.1 million in 2014 to US$0.6 million in 2015.2021. The decrease of tax expenses was mainly due to a decrease in provision allowance made to the effectivedeferred income tax rate to 2.2% in 2015assets which was derived from 8.9% in 2014, partially offset by higher taxable income. The decrease in the effective incomeunutilized tax rateloss, as it was primarily due to amore likely than not that the tax holiday enjoyed by Tarena Hangzhou as a “newly established software enterprise”, as well as more profit before tax being generated by this tax-exempt subsidiary.
loss will not be utilized within the corresponding deduction period.
The effective income tax rate of 8.9%19.6% in 20142022 was lower than the statutory income tax rate of 25%25.0% primarily because of (i) the impact of changes in tax rates on certain of our subsidiaries; (ii) the preferential income tax rate of 15% enjoyed by Tarena Tech, (ii) the tax holiday enjoyed by Tarena Hangzhou andsome of our subsidiaries; (iii) the effectimpact of researchdifferent tax rates in other jurisdictions; and development expenses bonus deduction allowed under PRC tax regulations,(iv) partially offset by the recognition of valuation allowances for deferred income tax assets of certain subsidiaries, which were at cumulative loss position. In 2022, due to multiple factors, such as the COVID-19 pandemic and the regulations on some sectors of the education industry, the STEAM education business did not achieve the profitability as expected. Considering that the future profitability of the STEAM education business is unlikely to offset the accumulated losses already incurred, the valuation allowance of deferred tax assets of most STEAM entities was provided in 2022.
113
The effective income tax rate of 2.2%-31.5% in 20152021 was lower than the statutory income tax rate of 25%25.0% primarily because of (i) the impact of changes in tax rates on certain of our subsidiaries; (ii) the preferential income tax rate of 15% enjoyed by Tarena Tech, (ii) the tax holiday enjoyed by Tarena Hangzhou andsome of our subsidiaries; (iii) the effectimpact of researchdifferent tax rates in other jurisdictions; and development expenses bonus deduction allowed under PRC tax regulations,(iv) partially offset by the recognition of valuation allowances for deferred income tax assets of certain subsidiaries, which were at cumulative loss position. In 2021, due to multiple factors, such as the COVID-19 pandemic and the regulations on some sectors of the education industry, the STEAM education business did not achieve the profitability as expected. Considering that the future profitability of the STEAM education business is unlikely to offset the accumulated losses already incurred, the valuation allowance of deferred tax assets of most STEAM education entities was provided in 2021.
Net Loss
Net Income
As a result of the foregoing, ourwe incurred a net income increased by 16.3% from US$24.7of RMB85.2 million (US$12.4 million) in 2022 as compared to a net loss of RMB475.8 million in 2014 to US$28.7 million in 2015.
2021.
The Year Ended December 31, 20142021, Compared to the Year Ended December 31, 2013
2020
Net revenues
Our net revenues increased by 46.7%25.7% from US$92.8RMB1,897.9 million in 20132020 to US136.2RMB2,386.5 million in 2014. This2021. The increase was primarily due to increasedthe increase in student enrollments of STEAM education from 141,600 in 2020 to 178,400 in 2021, and higher averagethe increase in unit price of tuition fee and certificate revenue per student.of professional education business.
For our professional education programs, our net revenues increased by 1.2% from RMB1,136.1 million in 2020 to RMB1,150.2 million in 2021. The revenue increase was mainly driven by the increase in unit price of tuition fee, and certificate revenue, whilst partially offset by decrease in student enrollments from 83,400 in 2020 to 72,100 in 2021. The number of professional education learning centers decreased from 104 as of December 31, 2020, to 100 as of December 31, 2021.
For our STEAM education programs, our net revenues increased by 62.3% from RMB761.8 million in 2020 to RMB1,236.3 million in 2021. We experienced a significant increase of 26.0% in our total student enrollments grew by 29.1% from 46,458approximately 141,600 in 20132020 to 59,960approximately 178,400 in 2014.2021. Our STEAM education business has expanded into 54 cities in mainland China. The number of our student enrollments is primarily driven by the number and popularity of our course offerings. We experienced significant increase in student enrollment for our new courses in the past few years, such as digital art, online sales and marketing, and iOS. The number of ourSTEAM education learning centers increased from 92236 as of December 31, 20132020, to 118238 as of December 31, 2014 to cater to the increased demand for our courses. The increase in our average revenue per student was primarily a result of our tuition fees increase in 2014 and the decrease in the percentage of our students recruited through our network of cooperative universities and colleges. In 2014, we raised the standard tuition fees on most of our courses by RMB1,000 (US$161) per course. We generally offer a discount of approximately RMB4,000 (US$645) per person per full-time course for students enrolled through our network of cooperative universities and colleges. In 2014, the percentage of our students recruited from our network of cooperative universities and colleges was approximately 18%, as compared with 23% in 2013.2021.
Cost of Revenues
Our cost of revenues increased by 34.4%12.6% from US$29.1RMB1,066.8 million in 20132020 to US$39.1RMB1,201.4 million in 2014.2021. This increase was mainly due to higher personnel cost and welfare expensesincrease in personnel-related costs resulting from increasedthe growing number of teaching staff and, advisory staff at our learning centers, higher rental cost resulting from increased number of learning centers and expansion of existing learning centers, as well as higher depreciation expenses for our learning centers. Our instructors, teaching assistants, career counselors and employer cooperation representatives at our learning centers increased from 1,179 as of December 31, 2013increase in social security fees, which were exempted according to 1,378 as of December 31, 2014. The number of our learning centers increased from 92 as of December 31, 2013 to 118 as of December 31, 2014.the preferential policies enacted by the government during COVID-19 pandemic in 2020 but were not exempted in 2021.
Gross Profit and Gross Margin
As a result of the foregoing, our gross profit increased by 52.3%42.6% from US$63.8RMB831.0 million in 20132020 to US$97.1RMB1,185.1 million in 2014.2021. Our gross profit margin increased from 68.7%43.8% in 20132020 to 71.3%49.7% in 2014. The improvement in gross margin2021, which was mainly dueattributable to increased operational scalethe increase in total net revenues outweighing the increase in cost of revenues in 2021 and, efficiency for our learning centers. Our overall center utilization ratethe effective cost controls we have implemented in 2014 increased to 71% from 66% in 2013.2021.
Operating Expenses
Our operating expenses increaseddecreased by 55.0%5.1% from US$50.3RMB1,637.4 million in 20132020 to US$78.0RMB1,554.2 million in 20142021 as a result of increasesdecrease in our selling and marketing expenses and general and administrative and research and development expenses.
Selling and Marketing Expenses
Our selling and marketing expenses increaseddecreased by 40.7%3.1% from US$30.3RMB906.3 million in 20132020 to US$42.6RMB878.1 million in 2014.2021. This increasedecrease was partiallymainly due to increased personnel cost and welfare expenses related to growthdecrease in our selling and marketing headcount from 1,321 as of December 31, 2013 to 1,773 as of December 31, 2014. The amount of personnel cost and welfare expenses for our selling and marketing staff increased from US$12.9 million in 2013 to US$19.1 million in 2014. The increase in selling and marketing expenses was also due to expanded marketing efforts, which increased advertising expenses from US$11.6 million in 2013 to US$16.7 million in 2014, primarily as a result2021.
114
General and Administrative Expenses
Our general and administrative expenses increaseddecreased by 84.6%9.6% from US$16.2RMB630.6 million in 20132020 to US$29.9RMB570.0 million in 20142021. The decrease was primarily due to higher personnel costsdecrease in personnel-related expenses and welfare expenses for our increased headcountas a result of generaldecrease in the number of staff and administrative personnel,the one-off income recognized resulting from 591 asthe receipt of December 31, 2013 to 742 asthe settlement payment from the Buyer Group of December 31, 2014 to support our growing operations, higher bad debt allowance associated with our post-graduation tuition installment payment option for qualified students enrolled between 2010 and 2012 and higher share-based compensation expenses, which increased from US$0.7 millionthe proposed privatization transaction in 2013 to US$3.6 million in 2014.2021.
Research and Development Expenses
Our research and development expenses increased by 43.0%5.6% from US$3.8RMB100.5 million in 20132020 to US$5.4RMB106.1 million in 20142021. The increase was primarily due to increased personnel coststhe increase in personnel-related expenses in 2021.
Interest Income/(expenses)
Our net interest expenses were RMB0.2 million in 2020 and welfare expenses of our instructors allocated to their content development activities for our new courses, as well as increased number of research and development staff as we expanded our course offerings and operations.
Interest Income
Ournet interest income increased from US$1.5was RMB2.3 million in 2013 to US$4.4 million in 2014.2021. Our interest income in both periods consisted of interest earned on our cash, cash equivalents and time deposits deposited in commercial banks and interest income recognized in relation to our installment payment plan for adult students. The increasedecrease in interest incomeexpense was primarily due to higher deposits resultingthe repayment of short-term loans borrowed from our initial public offering and concurrent private placement in April 2014.the Bank of Beijing.
Income Tax ExpenseBenefit/(expenses)
Our income tax expense increased by 5.9% from US$2.3expenses were RMB114.1 million in 20132021, compared to US$2.4the income tax benefit of RMB35.0 million in 2014.2020. The increase in tax expenses was mainly due to higher taxable income, largely offset by a decreaseincrease in provision allowance made to the effectivedeferred income tax rate to 8.9% in 2014assets which was derived from 13.9% in 2013. The decrease in our effective incomethe unutilized tax rate is primarily due toloss, as it was more likely than not that the significant profits generated in one of our PRC subsidiaries, Tarena Hangzhou, which is entitled totax loss will not be utilized within the full income tax exemption during the year ended December 31, 2014.five years deduction period.
The effective income tax rate of 13.9%-31.5% in 20132021 was lower than the statutory income tax rate of 25%25.0% primarily because of (i) the preferential income tax rate of 15% enjoyed by Tarena Tech, and (ii) the effect of research and development expenses bonus deduction allowed under PRC tax regulations, partially offset by recognition of valuation allowances for deferred income tax assets of certain subsidiaries, which were at cumulative loss position. In 2021, due to multiple factors, such as the COVID-19 pandemic and the regulations on some sectors of the education industry, the STEAM education business did not achieve the profitability as expected. Considering that the future profitability of the STEAM education business is unlikely to offset the accumulated losses already incurred, the valuation allowance of deferred tax assets of most STEAM education entities was provided in 2021; (ii) the impact of different tax rates in other jurisdictions; (iii) the preferential income tax rate enjoyed by some of our subsidiaries; and (iv) the impact of changes in tax rates on certain of our subsidiaries.
The effective income tax rate of 8.9%4.3% in 20142020 was lower than the statutory income tax rate of 25%25.0% primarily because of (i) the preferential income tax rate of 15% enjoyed by Tarena Tech, (ii) the tax holiday enjoyed by Tarena Hangzhou and (iii) the effect of research and development expenses bonus deduction allowed under PRC tax regulations, partially offset by recognition of valuation allowances for deferred income tax assets of certain subsidiaries, which were at cumulative loss position.position; (ii) the impact of different tax rates in other jurisdictions; (iii) the preferential income tax rate enjoyed by some of our subsidiaries; and (iv) the impact of changes in tax rates on certain of our subsidiaries.
Net Loss
Net Income
As a result of the foregoing, ourwe incurred a net income increased by 75.8% from US$14.0loss of RMB475.8 million in 20132021 as compared to US$24.7a net loss of RMB771.2 million in 2014.
2020.
Inflation
Since our inception,To date, inflation in China has not materially impacted our results of operations. According to the National Bureau of Statistics of China, the year-over-year percent changes in the consumer price index for December 2013, 20142020, 20221 and 20152022, were increases of 2.5%0.2%, 1.5% and 1.6%1.8%, respectively.
Although we have not been materially affected by inflation in the past, we may be affected by higher rates of inflation in China in the future.
Impact of Foreign Currency Fluctuation
See “Item 3. Key Information—D. Risk Factors—Risks RelatingRelated to Doing Business in China—Fluctuations in exchange rates could have a material adverse effect on our results of operations and the value of your investment.” and “Item 11. Quantitative and Qualitative Disclosures About Market Risk—Foreign Exchange Risk.”
115
Impact of Governmental Policies
See “Item 3. Key Information—D. Risk Factors—Risks RelatingRelated to Doing Business in China” and “Item 4. Information on the Company—B. Business Overview—Government Regulations.”
B. Liquidity and Capital Resources
| B. | Liquidity and Capital Resources |
Cash Flows and Working Capital
Our principal sources of liquidity have been cash generated from operating activities and proceeds from the issuancedisposal of property and sale of our shares.long-term investments. As of December 31, 2015,2022, we had US$189.1RMB380.5 million (US$55.2 million) in cash and cash equivalents, restricted time deposits and time deposits and we had no bank borrowings.restricted cash. Our cash consists of cash on hand and cash in bank which are unrestricted as to withdrawal.and deposits place in third-party payment processors. Cash of ourthe consolidated VIEs, in the amount of US$0.2RMB29.6 million (US$4.3 million) as of December 31, 2015,2022, can be used only to settle obligations of ourthe consolidated VIEs. Cash equivalents consist of interest-bearing certificates of deposit with initial term of no more than three months when purchased. Time deposits, which mature within one year as of the balance sheet date, represent interest-bearing certificates of deposit with an initial term of greater than three months when purchased, while the time deposits that mature over one year as of the balance sheet date are included in non-current assets. Restricted time deposits represent deposits not readily available to us. Restricted time deposits aspurchased. As of December 31, 2015 mainly represented2020, restricted cash pledged as securityis the cash received from one financial service provider for a bank line of credit,students’ tuition fee in certain project, which line of credit was not drawn by us and expired by March 9, 2016. The pledge was alsowill release to cash along with the service provided to the students. We terminated on March 9, 2016.
the project with this financial service provider during the year ended December 31, 2021.
We believe that our current cash, cash equivalents, time deposits, restricted time depositscash and anticipated cash flow from operations will be sufficient to meet our anticipated cash needs, including our cash needs for working capital and capital expenditures, for at least the next 12 months.
See “Summary of Significant Accounting Policies—Cash, cash equivalents, time deposits and restricted time depositscash” under Note 2(d) to our audited consolidated financial statements included in this annual report for information regarding the currencies in which cash, cash equivalents, time deposits and restricted time depositscash were held as of December 31, 2015.
2022.
The following table sets forth a summary of our cash flows for the periods indicated:
| For the Year Ended December 31, | ||||||||||||
| 2013 | 2014 | 2015 | ||||||||||
| (US$ in thousands) | ||||||||||||
| Net cash provided by operating activities | 29,706 | 28,460 | 55,843 | |||||||||
| Net cash used in investing activities | (19,537 | ) | (119,459 | ) | (11,615 | ) | ||||||
| Net cash provided by (used in) financing activities | (591 | ) | 106,472 | (4,132 | ) | |||||||
| Net increase in cash and cash equivalents | 9,942 | 16,521 | 36,485 | |||||||||
| Cash and cash equivalents at the beginning of the year | 16,197 | 26,139 | 42,660 | |||||||||
| Cash and cash equivalents at end of the year | 26,139 | 42,660 | 79,145 | |||||||||
| | | | | | | | |
| | For the Year Ended December 31, | ||||||
| | 2020 | | 2021 | | 2022 | ||
|
| RMB |
| RMB |
| RMB |
| US$ |
| | (in thousands) | ||||||
Net cash provided by/ (used in) operating activities | | (108,821) | | 8,610 | | (27,528) | | (3,992) |
Net cash provided by/ (used in) investing activities | | (657) | | 33,693 | | (22,709) | | (3,292) |
Net cash provided by/ (used in) financing activities | | (68,299) | | 23,237 | | (2,105) | | (306) |
Effect of foreign currency exchange rate changes on cash and cash equivalents | | (1,376) | | (67) | | 2,288 | | 332 |
Net increase/ (decrease) in cash and cash equivalents | | (179,153) | | 65,473 | | (50,054) | | (7,258) |
Cash, cash equivalents and restricted cash at the beginning of the year | | 537,701 | | 358,548 | | 424,021 | | 61,479 |
Cash, cash equivalents and restricted cash at end of the year | | 358,548 | | 424,021 | | 373,967 | | 54,221 |
Operating Activities
Net cash used in operating activities amounted to RMB27.5 million (US$4.0 million) in 2022. It was primarily due to (a) a net income of RMB85.2 million, mainly adjusted by depreciation and amortization of RMB94.0 million, amortization of right-of-use asset of RMB172.9 million, loss on disposal of property and equipment of RMB12.8 million, and share based compensation expense of RMB16.5 million; (b) a decrease in operating lease liabilities of RMB173.3 million; and (c) a decrease in deferred income tax assets of RMB0.9 million; and (d) a decrease in deferred revenue of RMB322.2 million due to the reduced collections of our STEAM education business and IT professional education.
Net cash provided by operating activities increasedamounted to US$55.8RMB8.6 million in 2015 from US$28.5 million in 2014,2021. It was primarily due to (a) a net loss of RMB475.8 million, mainly adjusted by depreciation and amortization of RMB125.3 million, amortization of right-of-use asset of RMB250.0 million, loss on disposal of property and equipment of RMB24.7 million, and share based compensation expense of RMB19.1 million; (b) a decrease in operating lease liabilities of RMB252.4 million; and (c) a decrease in deferred income tax assets of RMB101.2 million; and (d) an increase in deferred revenue of approximately US$62.6RMB26.7 million due to the expansion of our STEAM education business.
116
Net cash used in operating activities amounted to RMB108.8 million in cash collected from our students in 2015,2020. It was primarily due to (a) a net loss of RMB771.2 million, mainly adjusted by depreciation and amortization of RMB177.5 million, amortization of right-of-use asset of RMB170.0 million, and share based compensation expense of RMB36.2 million; (b) a decrease in operating lease liabilities of approximately US$0.2 million inRMB128.2 million; and (c) deferred income tax paymentbenefit of RMB42.4 million due to accumulated loss; and proceeds from tax refund of approximately US$0.2 million in 2015, which were partially offset by an increase in deferred revenue of approximately US$35.7RMB412.2 million in cash operating expenditures.
Net cash provided by operating activities decreased to US$28.5 million in 2014 from US$29.7 million in 2013, primarily due to an increasethe expansion of approximately US$26 million in cash operating expenditures in 2014, which were partially offset by an increase of approximately US$24 million in cash collected from our students and a decrease of approximately US$1 million in income tax payment in 2014.
Net cash provided by operating activities increased to US$29.7 million in 2013 from US$7.4 million in 2012, primarily due to an increase of approximately US$48 million in cash collected from our students in 2013, which were partially offset by an increase of approximately US$25 million in cash operating expenditures and an increase of approximately US$1 million in income tax payment in 2013.
STEAM education business.
Investing Activities
We lease all of our facilities. Our cash used in investing activities is primarily related to investments in time deposits and short-term financial products, purchase of property and equipment and leasehold improvements.
Net cash used in investing activities was US$11.6RMB22.7 million (US$3.3 million) in 2015,2022, consisting of purchasethe net proceeds of short-term investmentRMB18.8 million received from the disposal of approximately US$151.8 million, purchase of time deposits of approximately US$102.6 million,property and long-term investments, and purchase of property and equipment, including computers and servers, of approximately US$16.1RMB38.8 million for the replacement of obsolete items.
Net cash provided by investing activities was RMB33.7 million in 2021, consisting of the net proceeds of RMB94.6 million received from the disposal of property and long-term investments, and purchase of property and equipment, including computers and servers, of RMB67.7 million for the replacement of obsolete items.
Net cash used in investing activities was RMB0.7 million in 2020, consisting of purchase of time deposits of RMB94.4 million, and purchase of property and equipment, including computers and servers, of RMB79.4 million in connection with the expansion of our network of STEAM education learning centers, and payment for long-term investment of approximately US$4.0 million; and partially offset by the maturity of short-term investment of approximately US$151.8 million, and maturity of time deposits of approximately US$110.9RMB171.7 million.
Net cash used in investing activities was US$119.5 million in 2014, consisting of purchases of property and equipment, including computers and servers, of approximately US$8 million in connection with the expansion of our network of learning centers; purchase of time deposits of approximately US$115 million; purchase of short-term investment in the amount of approximately US$101 million; and partially offset by the maturity of short-term investment of approximately US$101 million, and maturity of time deposits of approximately US$4 million.
Net cash used in investing activities was US$19.5 million in 2013, consisting of purchases of property and equipment, including computers and servers, of approximately US$9 million in connection with the expansion of our network of learning centers; purchase of time deposits of approximately US$17 million; purchase of short-term investment in the amount of approximately US$11 million; and partially offset by the maturity of short-term investment of approximately US$11 million, maturity of time deposits of approximately US$6 million, and proceeds from repayment of housing loans from employees in the amount of approximately US$1 million.
Financing Activities
Net cash used in financing activities in 20152022 was US$4.1RMB2.1 million (US$0.3 million) in 2022, which was primarily attributableattributed to the payment forrepayment of bank borrowings RMB 30.0 million, the repurchase of treasury stock under a share repurchase plan inof RMB 17.1 million, and the amountprepayment of US$7.7acquiring noncontrolling interests of RMB 7.1 million, and partially offset by the proceeds from Issuancebank borrowings of RMB52.0 million.
Net cash provided by financing activities in 2021 was RMB23.2 million in 2021, which was primarily attributed to, the proceeds from bank borrowings of RMB30.0 million, and proceeds from issuance of Class A ordinary shares in connection with exercise of share options of US$3.6RMB3.9 million, partially offset by the repayment of bank borrowings of RMB10.7 million.
Net cash provided by financing activities in 2014 was US$106.5 million, which was primarily attributable to the gross proceeds from our initial public offering of approximately US$96.2 million, payment of costs related to our initial public offering in the amount of US$3.5 million and net proceeds from our concurrent private placement of US$13.5 million in April.
Net cash used in financing activities in 20132020 was US$0.6RMB68.3 million, which was primarily attributed to repayment of bank borrowings of RMB89.2 million, partially offset by proceeds from bank borrowings of RMB10.7 million, proceeds from issuance of Class A ordinary shares in connection with exercise of share options of RMB3.4 million, and proceeds from the collection of loan of a related party of RMB6.5 million.
117
Impact of COVID-19
The COVID-19 pandemic has created unique global and industry-wide challenges, including challenges to many aspects of our business. Substantially all of our revenues and employees are concentrated in China. Our financial position, results of operations and cash flows are affected by the trajectory of COVID-19, including its impact on the STEAM and professional education industry and the Chinese economy in general.
The COVID-19 pandemic had adversely affected many of our business activities, including delivering lectures at our learning centers, recruiting students and conducting our day-to-day business in 2020. As part of China’s nationwide efforts to contain the spread of COVID-19, our classrooms in Beijing as well as our learning centers across mainland China underwent temporary closure and suspension from operation. China began to modify its zero-COVID policy at the end of 2022, and most of the travel restrictions and quarantine requirements were lifted in December 2022. There were surges of cases in many cities during this time which caused disruption to our operations, especially in January 2023 and there remains uncertainty as to the future impact of the virus, especially in light of this change in policy. After the Chinese New Year holiday, we fully emerged from the pandemic in February 2023. All of our offline centers have resumed classes and student enrollments. However, the extent to which the pandemic impacts our results of operations going forward will depend on future developments which are highly uncertain and unpredictable, including the frequency, duration and extent of outbreaks of COVID-19, the appearance of new variants with different characteristics, the effectiveness of efforts to contain or treat cases, and future actions that may be taken in response to these developments. In light of the uncertainties in the global market and economic conditions attributable to the paymentCOVID-19 pandemic, we will continue to evaluate the nature and extent of costs relatedthe impact of the COVID-19 pandemic to our initial public offeringfinancial condition and liquidity. If there is not a material recovery in the amountCOVID-19 situation, or the situation further deteriorates in China, our business, results of US$0.5 million.operations and financial condition could be materially and adversely affected. Although we have arranged online webcasts for our students to study at home, which covered most of our students, we may not be able to achieve the same effectiveness and service quality without the disciplined and focused learning environment at our learning centers.
The outbreak of COVID-19 in China also caused temporary closures of many of our offices, adjustment of operation hours and work-from-home arrangements in our Beijing headquarters and other offices in China. The COVID-19 global pandemic has resulted in, and may intensify, global economic distress, and the duration and extent of the impact of the COVID-19 outbreak is highly uncertain at this time. The extent to which it may affect our results of operations, financial condition and cash flows will depend on the future development of the outbreak, which is also highly uncertain and will depend on a number of factors, including the duration and severity of COVID-19, the possibility of new waves in China and other countries, the development and progress of distribution of COVID-19 vaccines and other medical treatment, the potential change in consumer behavior due to the prolonged impact of COVID-19, and the actions taken by government authorities to contain the outbreak and stimulate the economy to improve business conditions, all of which are beyond our control. If the situation materially deteriorates in China or globally, our business, results of operations and financial condition could be materially and adversely affected.
Material Cash Requirements
Capital Expenditures
Our capital expenditures are primarily related to purchase of office building, property and equipment, leasehold improvements and investments in computers, network equipment and software. Our capital expenditures were US$9.1RMB71.5 million, US$8.0RMB67.7 million and US$16.1RMB38.8 million (US$5.6 million) in 2013, 20142020, 2021 and 2015,2022, respectively. We intend to continue to lease facilities for our learning centers in order to allocate our capital resources cost-efficiently. We have made and may continue to make acquisitions of businesses and properties that complement our operations. We expect our capital expenditures will continue to be significant for the near future as we continue to acquire new equipment to replace our obsolete items, upgrade our IT infrastructure hardware, and expand our network of learning centers. We expect to fund our future capital expenditures with our current cash, cash equivalents, restricted time deposits, time deposits and anticipated cash flow from operations.
Contractual Obligations
The following table sets forth our contractual obligations as of December 31, 2022:
| | | | | | | | | | | | | | |
| | Payment due by December 31, | ||||||||||||
| | | | | | | | | | | | | | 2028 and |
|
| Total |
| 2023 |
| 2024 |
| 2025 |
| 2026 |
| 2027 |
| thereafter |
| | (RMB in thousands) | ||||||||||||
Operating lease commitments(1) | | 389,832 | | 211,376 | | 104,068 | | 50,572 | | 18,296 | | 4,499 | | 1,021 |
Note:
| (1) | Represents our non-cancelable leases for our offices and learning centers. |
118
Except for those disclosed above, we did not have any significant capital or other commitments, long-term obligations, or guarantees as of December 31, 2022.
Holding Company Structure
We are a holding company with no material operations of our own. We conduct our operations primarily through our wholly-ownedwholly owned subsidiaries in mainland China. As a result, our ability to pay dividends depends upon dividends paid by our wholly-ownedwholly owned subsidiaries. If our wholly-ownedwholly owned subsidiaries or any newly formed subsidiaries incur any debt in the future, the instruments governing their debt may restrict their ability to pay dividends to us. In addition, our wholly-ownedwholly owned subsidiaries are permitted to pay dividends to us only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations.regulations of mainland China. Under PRC law,laws of mainland China, each of our subsidiaries is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory surplus reserve until such reserve reaches 50% of its registered capital. Although the statutory surplus reserves can be used to increase the registered capital and eliminate future losses in excess of retained earnings of the respective companies, the reserve funds are not distributable as cash dividends except in the event of liquidation. As a result of these PRC laws and regulations of mainland China, as of December 31, 2015,2022, we had US$10.3RMB141.5 million (US$20.5 million) in statutory surplus reserves that are not distributable as cash dividends. Our PRC subsidiaries have not historically paid any dividends to our offshore entities from their accumulated profits. However, we do not expect that the statutory surplus reserve requirement will materially limit our ability to pay dividends to our shareholders or our plan to expand our business because weWe are only required to set aside an additional US$10.5RMB409.9 million (US$59.4 million) to satisfy the maximum requirement of statutory surplus reserves for all of our PRC subsidiaries in mainland China as of December 31, 2015.2022. In addition, our private schools requiring reasonable returns are required to appropriate no less than 25% of their net income to a statutory development fund, whereas in the case of private schools requiring no reasonable return, this amount shall be no less than 25% of the annual increase of their net assets. As of December 31, 2015,2022, we had US$1.3RMB53.1 million (US$7.7 million) in statutory development fund that areis not distributable as cash dividends.
C.Research and Development, Patents and Licenses, etc.
Research and Development
Building a reliable, scalable and secure technology infrastructure is crucial to our ability to support our live lecture broadcasts, online TTS,TMOOC.cn, 61it.cn and the various services that we provide to our students. We manage our lecture delivery system, TTS, TMOOC.cn andTMOOC.cn 61it.cn using a combination of commercially available software, hardware systems and proprietary technology. Since 2006, we have established a powerful online platform that enables thousands of students to simultaneously log onto our TTS and participate in activities online.
We have developed our CRM software in-house to manage our student and corporate employer information, as well as to integrate our key administrative functions. We rely on our internal IT resources to upgrade the CRM system as needed.
Our research and development expenses primarily consist of a portion of the personnel costs of our instructors as determined based on the amount of time that they devote to research and development-related activities, as well as the personnel costs of our software engineers. Our research and development expenses were US$3.8RMB100.5 million, US$5.4RMB106.1 million and US$8.1RMB72.0 million (US$10.4 million) in 2013, 20142020, 2021 and 2015,2022 respectively.
Intellectual Property
Our trademarks, copyrights, domain names, trade secrets and other intellectual property rights distinguish our courses and services from those of our competitors and contribute to our ability to compete in our target markets. We rely on a combination of copyright and trademark law, trade secret protection and confidentiality agreements with senior executive officers and most other employees, to protect our intellectual property rights. In addition, we require certain of our senior executive officers and other employees to enter into agreements with us under which they acknowledge that all inventions, utility models, designs, know-how, copyrights and other forms of intellectual property made by them within the scope of their employment with us, pursuant to job assignments or using our materials and technology, or during the one year after their employment that relates to their employment with us, are our property and they should assign the same to us if we so require. We also regularly monitor any infringement or misappropriation of our intellectual property rights.
As of December 31, 2015,2022, we had registered 215120 domain names relating to our business, including ourwww.tedu.cn,TMOOC.cn,jobshow.cn,www.IT61.cnandwww.art61.cn websites, with the Internet Corporation for Assigned Names and Numbers and China Internet Network Information Center. Tarena Tech holds 17Center and held 169 registered software copyrights 35 trademarks and 213 registered domain names includingwww.tedu.cn. Beijing Tarena holds the domain nameTMOOC.cn.178 trademarks.
119
| D. | Trend Information |
Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the period from January 1, 20152022, to December 31, 20152022, that are reasonably likely to have a material effect on our net revenues, income, profitability, liquidity or capital resources, or that would cause the disclosed financial information to be not necessarily indicative of future operating results or financial conditions.
E.Critical Accounting Estimates
Starting from 2011, Chuanbang, a credit-sourcing companyWe prepare our consolidated financial statements in China owned by Mr. Shaoyun Han,accordance with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect (i) the reported amounts of our chief executive officer, began to offer person-to-person lending services toassets and liabilities; (ii) the disclosure of our students to help them paycontingent assets and liabilities at the end of each reporting period; and (iii) the reported amounts of revenues and expenses during each reporting period. We continually evaluate these judgments, estimates and assumptions based on our own historical experience, knowledge and assessment of current business and other conditions and our expectations regarding the future based on available information, which together form our basis for our tuition fees. Under the person-to-person lending service, we serve as the guarantor of the loans taken out by students. Starting from April 2013, we had stopped providing guarantees for any new student loans arranged by Chuanbang. See “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Transactions with Shareholders and Affiliates—Transactions with Chuanbang.” As of December 31, 2013, 2014 and 2015, our maximum exposure to guarantees of student loans obtained through Chuanbang was US$4.4 million, US$0.2 million and nil, respectively.
Other than the above, we have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholders’ equity, ormaking judgments about matters that are not reflectedreadily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, our actual results could differ from those estimates. Some of our accounting policies require a higher degree of judgment than others in their application.
When reading our consolidated financial statements, you should consider our selection of critical accounting policies, the judgment and other uncertainties affecting the application of such policies and the sensitivity of reported results to changes in conditions and assumptions. Our critical accounting policies and practices include the following: (i) revenue recognition; (ii) operating leases; (iii) income taxes; and (iv) fair value measurements. See Note 2—Summary of Significant Accounting Policies to our consolidated financial statements for the disclosure of these accounting policies. We believe the following accounting estimates involve the most significant judgments used in the preparation of our financial statements. Furthermore,
Impairment of Long-Lived Assets
We periodically review our long-lived assets for impairment indicators to identify any events that may lead the carrying value to be irrecoverable. Such events include a historical or projected trend of net cash outflow or a future expectation that we do not have any retainedwill sell or contingent interest indispose of an asset significantly before the end of its previously estimated useful life. In reviewing for impairment, we group our long-lived assets transferred to an unconsolidated entityinto professional education asset group and STEAM education asset group, which are the lowest possible level that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or researchidentifiable cash flows are largely independent of the cash flows of other assets and development services with us.liabilities.
The following table sets forth our contractual obligationsFor the professional education asset group, there was no indicators of impairment as of December 31 2015:2022. For the STEAM education asset group which showed an indicator of impairment as of December 31, 2022, we have performed a recoverability test by comparing estimated undiscounted future cash flows with the carrying value of the related long-lived assets. If the undiscounted future cash flows are less than the related net carrying value of the long-lived assets, the net carrying value of the assets are written down to their fair value.
| Payment due by December 31, | ||||||||||||||||||||||||||||
| Total | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 and thereafter | ||||||||||||||||||||||
| (in thousands of US$) | ||||||||||||||||||||||||||||
| Operating lease commitments(1) | 56,061 | 14,827 | 13,604 | 9,071 | 6,367 | 4,217 | 7,975 | |||||||||||||||||||||
Note:
This annual report on Form 20-F contains forward-looking statements that involve risksWe primarily use discounted future cash flows directly associated with those assets, which consist principally of property and uncertainties. All statements other than statementsequipment and right-of-use (“ROU”) assets, to determine their fair values. Estimating the fair value of historical facts are forward-looking statements. These statements involve known and unknown risks, uncertaintieslong-lived assets by using the discounted cash flow model requires management to estimate future revenues, expenses, discount rates, long-term growth rates, and other factors that may cause ourin order to project future cash flows. The evaluation of long-lived asset impairment requires us to make assumptions about future cash flows over the life of the asset group. These assumptions require judgment and actual results performance or achievementsmay differ from assumed and estimated amounts.
Changes in these estimates, assumptions and judgments could materially affect the quantity of impairment of long-lived assets.
No impairment of long-lived assets was recognized for the years ended December 31, 2020, 2021 and 2022.
120
Allowance for credit losses
We maintain an allowance for credit losses by estimating the expected credit and collectability trend of our customers. Accounts receivable is considered past due based on its contractual terms. In estimating the allowance for credit losses, we consider various factors, including historical experience, credit-worthiness of customers, current and reasonable forecasted future economic conditions, aging of the accounts receivable balances, payment patterns, and the forecasted information in pooling basis upon the use of the Current Expected Credit Loss Model (“CECL Model”) in accordance with ASC topic 326––Financial Instruments––Credit Losses. We also consider to provide specific allowance for credit losses for those accounts receivable balances when facts and circumstances have emerged to indicate that these receivables are unlikely to be collected. Changes in these estimates and assumptions could materially different from those expressedaffect the quantity of credit losses.
Prepaid expenses and other current assets primarily represent prepaid advertising deposits, loans made to employees, prepaid value-added tax, professional fee, prepaid rental expenses and so on. Prepaid expenses and other current assets which are due over one year as of the balance sheet date are presented as other non-current assets. The Company maintains an allowance for credit losses for the part that is not expected to be recovered. In establishing the allowance, management considers overdue employee loan upon the use of the Current Expected Credit Loss Model (“CECL Model”) in accordance with ASC topic 326. Prepaid expenses and other current assets that are deemed to be uncollectible are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. There is a time lag between when the Company estimates a portion of or implied by the forward-looking statements.entire account balances to be uncollectible and when a write off of the account balances is taken. The Company takes a write off of the account balances when the Company can demonstrate all means of collection on the outstanding balances have been exhausted.
The allowance of credit losses for accounts receivable totaled approximately RMB15.0 million and RMB30.5 million (US$4.4 million) as of December 31, 2021 and 2022, respectively. The allowance of credit losses for Prepaid expenses and other current assets totaled approximately RMB7.4 million and RMB29.7 million (US$4.3 million) as of December 31, 2021 and 2022, respectively.
Taxation
You can identify these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “likely to” or other similar expressions. We haveare required to make estimates and apply our judgements in determining the provision for income tax expenses for financial reporting purpose based these forward-looking statements largely on our current expectationstax laws in various jurisdictions in which we operate. In calculating the effective income tax rate, we make estimates and projections about future eventsjudgements, including the calculation of tax credits and the timing differences of recognition of revenues and expenses between financial trends thatreporting and tax reporting. These estimates and judgements may result in adjustments of pre-tax income amount filed with local tax authorities in accordance with relevant local tax rules and regulations in various tax jurisdictions. Although we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include, but are not limited to, statements about:
You should read thoroughly this annual report and the documents that we refer to in this annual report with the understanding that our estimates and judgments are reasonable, actual future results may be materially different from the estimated amounts. Changes in these estimates and worsejudgements may result in material increase or decrease in our provision for income tax expenses.
Deferred tax assets and liabilities are recognized for expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carry forwards. A valuation allowance is recorded when it is more likely than whatnot that some of the deferred tax assets will not be realized. When we expect. Other sectionsdetermine and quantify the valuation allowances, we consider such factors as projected future taxable income, the availability of this annual report include additional factors whichtax planning strategies, the historical taxable income/losses in prior years, and future reversals of existing taxable temporary differences. The assumptions used in determining projected future taxable income require significant judgment. Actual operating results in future years could adversely impactdiffer from our businesscurrent assumptions, judgments and estimates. Changes in these estimates and assumptions may materially affect the tax position measurement and financial performance. Moreover,statement recognition. If, in the future, we operatedetermine that we would not be able to realize our recorded deferred tax assets, an increase in an evolving environment. New risk factorsthe valuation allowance would decrease our earnings in the period in which such determination is made. The Company recorded deferred tax assets of RMB329.8 million and uncertainties emerge from time to timeRMB407.8 million (US$59.1 million), net of valuation allowance of RMB288.8 million and it is not possible for our management to predict all risk factorsRMB367.7 million (US$53.3 million), as of December 31, 2021 and uncertainties, nor can we assess the impact2022, respectively.
121
You should not rely upon forward-looking statements as predictions of future events. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
ITEM 6.DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
| A. | Directors and |
The following table sets forth information regarding our executive officers and directors as of the date of this annual report.
Directors and Executive Officers | Age | Position/Title | |||
Shaoyun Han | | 52 | | Founder | |
Jianguang Li | | 58 | | Independent Director | |
Mingjie Sun | | 59 | | Independent | |
Binshen Meng | | 60 | | Director | |
Shengwen Rong | | 54 | | Independent | |
Ying Sun | | 46 | | Chief | |
Ping Wei | | 51 | | ||
Chief Financial Officer | |||||
|
Shaoyun Hanis our founder and has servedbeen serving as chairman of our board of directors and chief executive officer since our inception. Mr. Han served as our Chief Executive Officer from our inception to April 2020. Before founding Tarena in September 2002, Mr. Han was deputy chief engineer and director of the software division of AsiaInfo-Linkage between 1995 and 2002, responsible for software research and development and corporate management. Mr. Han received a bachelor’s degree in computer application from Jilin University in China.
Jianguang Lihas been serving as our independent director since April 2020. Mr. Li had served as our director since January 2004.from April 2014 to April 2020. Mr. Li has been a partner of IDG Capital Partners since March 2006, responsible for providing venture capital and private equity investment-related advice. Between 1999 and 2006, Mr. Li served as a vice-president of IDG Technology Venture Investment Inc. Prior to joining IDG in 1999, Mr. Li worked in Crosby Assets Management Limited as an investment manager. Mr. Li has been a non-executive director of China Binary Sale Technology Limited, a company listed on the Hong Kong Stock Exchange, since April, 2015. Mr. Li received a bachelor’s degree in management from Peking University and a master’s of science degree from the University of Guelph.
Mingjie Sun
Yongji Sunhas servedbeen serving as our independent director and chairperson of the compensation committee since April 2014. Mr. Sun currently serves as the chairman of Dilato Infotech Inc. Between 2011 and 2014, Mr.December 2022. Ms. Sun served as one of the chief executive officersix members in the Executive Management Team of Shangxue Education TechnologyAsiaInfo Technologies (China) Inc. Between 2005 and 2011, Mr.(01675.HK). Ms. Sun served as executive vice president of special projects and strategic relationships at HiSoft Technology International Ltd., or HiSoft . Prior to joining HiSoftjoined AsiaInfo Technologies (China) Inc. in November 2005, Mr. Sun founded Beijing Tianhai Hongye International Software Co., Ltd. (Ensemble) in 20021996, and served as its chief executive officervice president and senior vice president from 2003January 2014 to 2005. He foundedApril 2022. With over two decades of operational and served as chief executive officer of Newland Network Co. from 2000 to 2002. He founded Lotusleadership experience in the IT and telecommunication industry, Ms. Sun was awarded Forbes China 50 Top Women in 1993 and served as the head of the research and development center until 1998. Mr.Tech in 2020. Ms. Sun received a bachelor’s degree from North Eastern Machinery Institute in 1985, a master’sher bachelor degree in Computer Scienceautomatic control engineering from Nanjing Aerospace & AeronauticHarbin Engineering University and master degree in 1988, and received a masterautomatic control engineering from Harbin Institute of business administration from Babson College in 2000.Technology.
Shengwen Rong
Xiaosong Zhang has served asis one of our independent director since April 2014.directors. Mr. Zhang currently serves as the chief financial officer of Momo Inc., a NASDAQ-listed company. Mr. Zhang servedRong was appointed as an independent director and chairman of the audit committee on March 1, 2022. Mr. Rong currently serves as an independent director and chairman of Sungy Mobile Limited,the audit committees of the following public companies: Vision Deal HK Acquisition Corp. (SEHK: 7827), China Online Education Group (NYSE: COE), MOGU Inc. (NYSE: MOGU), and X Financial (NYSE: XYF), and as an independent director of Qudian Inc. (NYSE: QD). From February 2017 to September 2018, Mr. Rong served as the senior vice president and chief financial officer at Yixia Technology Co., Ltd, a NASDAQ-listed mobile internet company, between November 2013leading live video broadcast and July 2014. Mr. Zhangshort-video platform in China. Prior to that, he served as the chief financial officer of iSoftStone Holdings Limited, a NYSE-listed company, between July 2010 and April 2014, and was an independent director of iSoftStone between February 2010 and July 2010. Priorat Quixey, Inc. from 2015 to joining iSoftStone, Mr. Zhang served as2016, the chief financial officer of BJB Career Education Company Limitedat UCWeb from 20092012 to June 2010, as2014, and the chief financial officer of Emarket Holding Group, Ltd. from 2008 to 2009, as chief financial officer of Chinacars, Inc. from 2007 to 2008 and as chief financial officer of Vimicro International Corporation, a NASDAQ-listedat Country Style Cooking Restaurant Chain Co., Ltd, an NYSE-listed company from 20042010 to 2007. From 2000 to 2004,2012. Mr. Zhang was a manager and then a senior manager at the Beijing office of PricewaterhouseCoopers. From 1995 to 1999, Mr. Zhang was an auditor and then a senior auditor at the Los Angeles office of KPMG LLP. Mr. ZhangRong received his masterbachelor’s degree in accountancyinternational finance from Renmin University in 1991, a master’s degree in accounting from West Virginia University in 1996, and an MBA degree from the University of Illinois, his master degreeChicago Booth School of Business in professional meteorology from Saint Louis University, and his bachelor degree in meteorology from Peking University.2000. Mr. ZhangRong is a Certified Public Accountant in the StateUnited States.
122
Binshen Meng
Ya-Qin Zhanghas been serving as our director since December 2022. Dr. Meng currently serves as a board director of TCE (Shenzhen) Technology Limited (“TCE Limited”). Dr. Meng is a seasoned technology entrepreneur with extensive experience in the TMT industry. Dr. Meng served senior technology and management roles in multiple world-renowned technology companies in Silicon Valley, such as HP, Lucent, Altera and Nvidia. Dr. Meng founded TCE Limited in 2013, in which he has served as our independent director since April 2014. Mr. Zhangthe Chairman of the board, CEO and/or CTO. Dr. Meng has served as presidentnearly 30 years of Baidu, Inc.,R&D and leadership experience in network and telecommunications, consumer electronics, artificial intelligence, big data, Internet of Things and green energy technologies. Dr. Meng received both a NASDAQ-listed company, since September 2014. Mr. Zhang hasbachelor degree and a master degree in electronics technology from Peking University and served as a director of ChinaCache International Holdings Ltd., a NASDAQ-listed company, since September 2010. Mr. Zhang served as an independent director and member of the audit committee of Autohome Inc., a NYSE-listed company, between December 2013 and January 2015. Mr. Zhang served as the chairman of Microsoft Asia-Pacific R&D Group between 2005 and September 2014 and wasprofessor teaching physics in charge of the research and development of Microsoft Corporation in the Asia-Pacific region. Mr. Zhang is one of the founding members of the Microsoft Research Asia lab, where he served as managing director and chief scientist, and he also founded the Advanced Technology Center in 2003. Before joining Microsoft in 1999, Mr. Zhang was a director for the Multimedia Technology Laboratory at Sarnoff Corp. and worked as a senior technical staff member for GTE Laboratories Inc. and Contel Corp. Mr. ZhangTsinghua University. Dr. Meng received his bachelor’smaster degree and master’s degreesPhD in computer and electrical engineering from the University of Science and Technology of China and a Ph.D. in electrical engineering from George Washington University.
Yuduo Yanghas served as our co-chief financial officer since November 2015 and as our chief financial officer since April 2016. Prior to joining us, Mr. Yang was a vice president at Beijing Fengshun Lubao Car Auction Company Limited from March 2015 to November 2015. From December 2013 to October 2014, Mr. Yang was a finance director at Bybon Group Company Limited. From June 2010 to December 2013, Mr. Yang was a finance director at South Beauty Group, a well-known restaurant chain operator in China. Prior to that, Mr. Yang was a finance manager at Google and Lucent Technologies from December 2007 to May 2010, and from April 2005 to November 2007, respectively, and an auditing manager at KPMG Beijing Office from July 1997 to April 2005. Mr. Yang received a bachelor's degree in economics from Renmin University of China, as well as an MBA degree from Fordham University.
Wisconsin-Madison.
Ying Sun ishas been serving as our vice president.Chief Executive Officer since April 2021. Ms. Sun haspreviously served as our vice president sincefrom December 2009 to April 2021, responsible for our nation-wide operations. Ms. Sun joined us in June 2005 as the general manager of our Beijing learning centers. Between 2007 and 2009, she was the general manager of our northern region. Ms. Sun made significant contribution to the development of our marketing system, collaboration with universities and career support for students. From 1999 to 2005, Ms. Sun worked in Gloria Hotels and Resorts, serving in various sales and human resources-related roles. Ms. Sun received a bachelor’s degree in tourism economics management from Dongbei University of Finance and Economics in China.
Ping Wei
Yi Li is our vice president. Mr. Li has served as our vice president since January 2012, responsible for our teaching and research efforts. Mr. Li joined us in November 2008,been serving as our director of teaching between 2008Chief Financial Officer since August 2022. Ms. Wei has extensive experience in capital markets and 2012.the education industry. Prior to joining us, Mr. Li was a senior teacher and later a general supervisor of the Java training course at Oriental Standard between 2005 and 2008. From 2004 to 2005, Mr. Li was a senior development engineer at IBM China R&D center. Mr. Li received a bachelor’s degree in Automation from the Institute of Technology of Taiyuan and a master’s degree in software engineering from Beihang University.
Yinan Qi is our vice president. Mr. Qi hasMs. Wei served as our vice president since September 2013, responsible for student recruitment through retail channels. Mr. Qi served as our general managera partner and the chief financial officer of northern region between 2010 and 2015, responsible for our operations in Northern China. Mr. Qi joined us in March 2007, previously serving in roles including the deputy general manager of northern region, deputy general manager of our Beijing learning centers and director of our Hangzhou learning center.a private venture-backed company focusing on community group buying. Prior to joining us, Mr. Qithat, Ms. Wei served as the general managerchief financial officer of Gravitas Education Holdings, Inc. (NYSE: GEHI) from May 2017 to May 2019. Ms. Wei also served as the Beihang campuschief financial officer of GAMFE between 2005various education and 2006e-commerce companies including Lazada South East Asia Pte. Ltd., Meilishuo Technology Ltd. and as director of technology at Zhonghe Wangxun (Beijing) InformationChina Distance Education Holdings Ltd., a then New York Stock Exchange-listed company since 2008. Prior to that, Ms. Wei held several positions in New Oriental Education & Technology Co.Group Inc., Ltd. between 2002Lorus Therapeutics Inc., Deloitte Touche Tohmatsu Limited and 2005. Mr. Qi receivedArthur Andersen Huaqiang from October 1994 to March 2008. Ms. Wei is a bachelor’s degree in optoelectronic technologyUS CPA from China Jiliang University and a master’s degree in multimedia technologies from the University of Science and Technology Beijing.Illinois.
B.Compensation
For the fiscal year ended December 31, 2015,2022, we paid an aggregate of approximately US$753 thousandRMB7.3 million in cash to our executive officers, and we paid an aggregate of US$130 thousandRMB2.9 million in cash to our non-executive directors. For share incentive grants to our directors and executive officers, see “—“Item 6. Directors, Senior Management and Employees—B. Compensation—Share Incentive Plan.”
Our PRC subsidiaries and consolidated affiliated entities in mainland China are required by law to make contributions equal to certain percentages of each employee’s salary for his or her pension insurance, medical insurance, housing fund, unemployment and other statutory benefits. Other than the above-mentioned statutory contributions mandated by applicable PRC law,laws of mainland China and the health insurance policy, we have not set aside or accrued any amount to provide pension, retirement or other similar benefits to our executive officers and directors.
Employment Agreements and Indemnification Agreements
We have entered into employment agreements with each of our executive officers. Under these agreements, each of our executive officers is employed for a specified time period. We may terminate employment for cause, at any time, without advance notice or remuneration, for certain acts of the executive officer, such as conviction or plea of guilty to a felony or any crime involving moral turpitude, negligent or dishonest acts to our detriment, or misconduct or a failure to perform agreed duties. We may also terminate an executive officer’s employment without cause upon three-month advance written notice. In such case of termination by us, we will provide severance payments to the executive officer as expressly required by applicable law of the jurisdiction where the executive officer is based. The executive officer may resign at any time with a three-month advance written notice.
Each executive officer has agreed to hold, both during and after the termination or expiry of his or her employment agreement, in strict confidence and not to use, except as required in the performance of his or her duties in connection with the employment or pursuant to applicable law, any confidential information or trade secrets of our clients or prospective clients, or the confidential or proprietary information of any third party received by us and for which we have confidential obligations. The executive officers have also agreed to disclose in confidence to us all inventions, designs and trade secrets which they conceive, develop or reduce to practice during the executive officer’s employment with us and to assign all right, title and interest in them to us, and assist us in obtaining and enforcing patents, copyrights and other legal rights for these inventions, designs and trade secrets.
123
In addition, each executive officer has agreed to be bound by non-competition and non-solicitation restrictions during the term of his or her employment and typically for two years following the last date of employment. Specifically, each executive officer has agreed not to (i) approach our suppliers, clients, customers or contacts or other persons or entities introduced to the executive officer in his or her capacity as a representative of us for the purpose of doing business with such persons or entities that will harm our business relationships with these persons or entities; (ii) assume employment with or provide services to any of our competitors, or engage, whether as a principal, partner, licensor or otherwise, any of our competitors, without our express consent; or (iii) seek directly or indirectly, to solicit the services of any of our employees who is employed by us on or after the date of the executive officer’s termination, or in the year preceding such termination, without our express consent.
We have also entered into indemnification agreements with each of our directors and executive officers. Under these agreements, we agree to indemnify our directors and executive officers against certain liabilities and expenses incurred by such persons in connection with claims made by reason of their being a director or officer of our company.
Share Incentive Plan
The 2008 Plan
We have adopted the 2008 Plan in September 2008. The purpose of the 2008 Plan is to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentives to selected directors, officers, employees and consultants and to promote the success of Tarena’s business by offering these individuals an opportunity to acquire a proprietary interest in Tarena.
Under the 2008 Plan, the maximum aggregate number of shares which may be issued is 8,184,990. As of March 31, 2016, options to purchase 2,747,621 Class A ordinary shares are issued and outstanding, and there are 143,349 Class A ordinary shares available for future issuance upon the exercise of future grants under the 2008 Plan.
Options to purchase a total of 3,815,000 Class A ordinary shares were granted prior to our adoption of the 2008 Plan. Such options were ratified by our board and included in the 2008 Plan.
The following paragraphs summarize the terms of the 2008 Plan.
Types of Awards. The 2008 Plan permits the awards of options, restricted shares (or share appreciation rights or other similar awards) and rights to purchase restricted shares.
Plan Administration. Our board of directors or a committee appointed by our board will administer the 2008 Plan. The committee or the full board of directors, as applicable, will determine the participants to receive awards, the type and number of awards to be granted to each participant, and the terms and conditions of each award grant, among other things.
Award Agreement. Awards granted under the 2008 Plan are evidenced by an award agreement that sets forth terms, conditions and limitations for each award, which may include the term of the award and the provisions applicable in the event of the grantee’s employment or service terminates.
Eligibility. We may grant awards to our employees, directors and consultants of our company, as well as trusts or companies established in connection with any of our employee benefit plan for the benefit of our employees, directors or consultants.
Acceleration. The plan administrator may accelerate the vesting or exercisability of an option or lapsing of a repurchase or redemption right to which restricted shares may be subject.
Vesting Schedule. In general, the plan administrator determines the vesting schedule, which is specified in the relevant award agreement.
Exercise of Options. The plan administrator determines the exercise price for each award, which is stated in the award agreement. The vested portion of option will expire if not exercised prior to the time as the plan administrator determines at the time of its grant. However, the maximum exercisable term is the tenth anniversary after the date of a grant.
Transfer Restrictions. Awards may not be transferred in any manner by the recipient other than by will or applicable laws of descent and distribution or pursuant to a qualified domestic relations order and by trusts or companies established in connection with any of our employee benefit plan for the benefit of an employee, director or consultant, except as otherwise provided by the plan administrator.
Termination of Employment or Service. In the event that a grantee ceases employment with us or ceases to provide services to us, any vested options will generally terminate after a period of time following the termination of employment if the grantee does not exercise the options during this period.
Restrictions on Issue of Shares. Options granted under the 2008 Plan can only be exercised and ordinary shares can only be issued upon the occurrence of (i) the consummation of a qualified initial public offering, (ii) the consummation of a liquidation event or (iii) the expiry of the five year period commencing from the grant date.
Termination of the 2008 Plan. Unless terminated earlier, the 2008 Plan will terminate automatically in 2018. Our board of directors has the authority to amend or terminate the plan subject to shareholder approval if required by applicable law.
The 2014 Plan
We adopted the 2014 Plan in February 2014. The maximum aggregate number of shares which may be issued pursuant to all awards under the 2014 Plan, or the Award Pool, is 1,833,696, provided that the shares reserved in the Award Pool shall be increased on the first day of each calendar year, commencing with January 1, 2015, if the unissued shares reserved in the Award Pool on such day account for less than 2% of the total number of shares issued and outstanding on a fully-dilutedfully diluted basis on December 31 of the immediately preceding calendar year, as a result of which increase the shares unissued and reserved in the Award Pool immediately after each such increase shall equal 2% of the total number of shares issued and outstanding on a fully-dilutedfully diluted basis on December 31 of the immediately preceding calendar year. The number of Class A ordinary shares available for future issuance upon the exercise of future grants under the 2014 Plan was 1,203,4021,145,510 as of January 1, 2016.2023. As of March 31, 2016,February 28, 2023, options to purchase 2,001,7103,475,905 Class A ordinary shares are issued and outstanding under the 2014 Plan and 25,00067,005 restricted share units were granted and outstanding under the 2014 Plan. The following paragraphs summarize the terms of the 2014 Plan.
Types of Awards. The 2014 Plan permits the awards of options, restricted shares and restricted share units.
Plan Administration. Our board or a committee of one or more members of our board duly authorized for the purpose of the 2014 Plan can act as the plan administrator.
Award Agreement. Options, restricted shares or restricted share units granted under the 2014 Plan are evidenced by an award agreement that sets forth the terms, conditions and limitations for each grant.
Eligibility. We may grant awards to our employees, consultants or directors. However, we may grant options that are intended to qualify as incentive share options only to our employees and employees of our parent companies and subsidiaries.
Acceleration of Awards upon Change in Control. If a change in control, liquidation or dissolution of our company occurs, the plan administrator may, in its sole discretion, provide for (i) all awards outstanding to terminate at a specific time in the future and give each participant the right to exercise the vested portion of such awards during a specific period of time, or (ii) the purchase of any award for an amount of cash equal to the amount that could have been attained upon the exercise of such award, or (iii) the replacement of such award with other rights or property selected by the plan administrator in its sole discretion, or (iv) payment of award in cash based on the value of ordinary shares on the date of the change-in-control transaction plus reasonable interest.
Exercise of Options. The plan administrator determines the exercise price for each award, which is stated in the award agreement. The vested portion of option will expire if not exercised prior to the time as the plan administrator determines at the time of its grant. However, the maximum exercisable term is the tenth anniversary after the date of a grant.
Exercise Price of Options. The exercise price in respect of any option shall be determined by the plan administrator and set forth in the award agreement which may be a fixed or variable price related to the fair market value of the shares. The exercise price per share subject to an option may be amended or adjusted in the absolute discretion of the plan administrator, the determination of which shall be final, binding and conclusive.
Vesting Schedule. In general, the plan administrator determines the vesting schedule, which is set forth in the award agreement.
124
Transfer Restrictions. Awards may not be transferred in any manner by the recipient other than by will or the laws of descent and distribution, except as otherwise provided by the plan administrator.
Termination.Termination. Unless terminated earlier, the 2014 Plan will terminate automatically in 2024.
The following table summarizes, as of March 31, 2016,February 28, 2023, the outstanding options granted to our directors and executive officers under our share plan.
| Name | Ordinary Shares Underlying Options Awarded | Exercise Price (US$/Share) | Date of Grant | Date of Expiration | ||||||||
| Shaoyun Han | * | 1.000 | August 26, 2011 | September 21, 2023 | ||||||||
| 663,490 | 1.830 | January 1, 2013 | September 21, 2023 | |||||||||
| * | 4.360 | February 20, 2014 | February 19, 2024 | |||||||||
| 558,424 | 1.830 | February 20, 2014 | February 19, 2024 | |||||||||
| * | 4.360 | March 1, 2015 | February 28, 2025 | |||||||||
| Jianguang Li | * | 0.058 | January 1, 2004 | September 21, 2023 | ||||||||
| Yongji Sun | — | |||||||||||
| Xiaosong Zhang | — | |||||||||||
| Ya-Qin Zhang | — | |||||||||||
| Yuduo Yang | — | |||||||||||
| Ying Sun | * | 0.058 | September 1, 2005 | September 21, 2023 | ||||||||
| * | 0.058 | February 1, 2007 | September 21, 2023 | |||||||||
| * | 1.830 | January 1, 2013 | September 21, 2023 | |||||||||
| * | 4.360 | February 20, 2014 | February 19, 2024 | |||||||||
| * | 4.360 | March 1, 2015 | February 28, 2025 | |||||||||
| * | 1.000 | March 1, 2015 | February 28, 2025 | |||||||||
| * | 1.000 | January 1, 2016 | December 31, 2026 | |||||||||
| Yi Li | * | 0.890 | March 1, 2009 | September 21, 2023 | ||||||||
| * | 1.830 | January 1, 2013 | September 21, 2023 | |||||||||
| * | 4.360 | February 20, 2014 | February 19, 2024 | |||||||||
| * | 4.360 | March 1, 2015 | February 28, 2025 | |||||||||
| * | 4.360 | July 1, 2015 | June 30, 2025 | |||||||||
| * | 1.000 | January 1, 2016 | December 31, 2025 | |||||||||
| Yinan Qi | * | 0.890 | June 1, 2009 | September 21, 2023 | ||||||||
| * | 1.830 | January 1, 2013 | September 21, 2023 | |||||||||
| * | 4.360 | February 20, 2014 | February 19, 2024 | |||||||||
| * | 4.360 | March 1, 2015 | February 28, 2025 | |||||||||
| * | 1.000 | March 1, 2015 | February 28, 2025 | |||||||||
| * | 4.360 | July 1, 2015 | June 30, 2025 | |||||||||
| * | 1.000 | January 1, 2016 | December 31, 2025 | |||||||||
| Total | 2,304,665 | |||||||||||
| | | | | | | | | | |
|
| Ordinary Shares |
| |
| | |
| | |
| | Underlying | | Exercise Price | | | | | | |
Name |
| Options Awarded |
| (US$/Share) |
| Date of Grant |
| Date of Expiration | ||
Shaoyun Han |
| 39,075 |
| 0.01 |
| | February 20, 2014 |
| | April 3, 2024 |
|
| 229,210 |
| 0.01 |
| | February 20, 2014 |
| | April 3, 2024 |
|
| 150,000 |
| 0.01 | | | March 1, 2015 | | | February 28, 2025 |
|
| 75,000 |
| 0.01 | | | December 31, 2016 | | | December 31, 2026 |
|
| 110,000 |
| 0.01 | | | April 1, 2017 | | | December 31, 2026 |
|
| 60,000 |
| 0.01 | | | January 1, 2022 | | | December 31, 2031 |
|
| 80,000 |
| 0.01 | | | January 1, 2023 | | | December 31, 2032 |
| | 743,285† | | | | | | | | |
Ying Sun |
| * |
| 0.01 | | | January 1, 2013 | | | April 3, 2024 |
|
| * |
| 0.01 | | | February 20, 2014 | | | April 3, 2024 |
|
| * |
| 0.01 | | | March 1, 2015 | | | February 28, 2025 |
|
| * |
| 0.01 | | | December 31, 2016 | | | December 31, 2026 |
|
| * |
| 0.01 | | | December 28, 2020 | | | December 28, 2030 |
|
| * |
| 0.01 | | | January 1, 2022 | | | December 31, 2031 |
|
| * |
| 0.01 | | | January 1, 2023 | | | December 31, 2032 |
Ping Wei | | 560,000†† | | 0.01 | | | August 15, 2022 | | | August 15, 2032 |
Total | | 1,647,785 | | | | | | | | |
* |
| The aggregate number of ordinary shares underlying the outstanding options held by this individual is less than 1% of our total issued and outstanding shares as of |
† | The aggregate number of ordinary shares underlying the outstanding options held by Mr. Shaoyun Han is 743,285, representing 1.36% of our total issued and outstanding shares as of February 28, 2023. |
†† | The aggregate number of ordinary shares underlying the outstanding options held by Ms. Ping Wei is 560,000, representing 1.04% of our total issued and outstanding shares as of February 28, 2023. |
The following table summarizes, as of March 31, 2016,February 28, 2023, the outstanding restricted share units we granted to our directors and executive officers under the 2014 Plan.
| | | | | | ||||
| Number of | | | ||||||
| | Class A | | | | ||||
| | Ordinary | | | | ||||
| | Shares | | | | ||||
| | Underlying | | | | ||||
| | Restricted | | | | ||||
| | Share | | Date of | |||||
Name | Units | Grant | |||||||
Jianguang Li | |||||||||
* | | | April 9, 2021 | ||||||
* | Less than 1% of our total issued and outstanding shares as of |
As of March 31, 2016,February 28, 2023, other individuals as a group holdheld outstanding options to purchase a total of 2,444,6661,828,120 Class A ordinary shares of our company, with exercise prices ranging from US$0.0580 to US$4.36 per share.share, and held outstanding restricted share units to acquire a total of 24,855 Class A ordinary shares of our company.
125
C.Board Practices
Board of Directors
Our board of directors currently consists of five directors. A director is not required to hold any shares in our company. Subject to the rules of the NASDAQ Global Select Market and disqualification by the chairman of the relevant board meeting, a director may vote with respect to any contract, proposed contract, or arrangement in which he or she is materially interested. The board may exercise all the powers of the company to borrow money, mortgage its business, property and uncalled capital, and issue debentures or other securities whenever money is borrowed or as security for any obligation of the company or of any third party. There is no age limit requirement for directors. The service agreements between us and the directors do not provide benefits upon termination of their services.
Committees of the Board of Directors
We have an audit committee, a compensation committee, and a nominating and corporate governance committee and a strategy committee under the board of directors. We have adopted a charter for each of the threefour committees. In December 2020, we have also formed a special committee of the board of directors in response to a preliminary non-binding proposal letter from Mr. Shaoyun Han. On November 24, 2021, we dissolved the special committee with the termination of the Merger Agreement and related ancillary agreements. Each committee’s members and functions are described below.
Audit Committee. Our audit committee consists of Messrs. Xiaosong Zhang, YongjiMr. Shengwen Rong, Mr. Jianguang Li and Ms. Mingjie Sun, and Ya-Qin Zhang and is chaired by Mr. Xiaosong Zhang.Shengwen Rong. Each member of our audit committee satisfies the “independence” requirements of Rule5605(c)Rule 5605(c)(2) of the NASDAQ Stock Market Rules and meets the independence standards under Rule 10A-3 under the Securities Exchange Act of 1934, as amended, or the Exchange Act. We have determined that Mr. Xiaosong ZhangShengwen Rong qualifies as an “audit committee financial expert.” The audit committee oversees our accounting and financial reporting processes and the audits of the financial statements of our company. The audit committee is responsible for, among other things:
| selecting the independent registered public accounting firm and pre-approving all auditing and non-auditing services permitted to be performed by the independent registered public accounting firm; |
| reviewing with the independent registered public accounting firm any audit problems or difficulties and management’s response; |
| reviewing and approving all proposed related party transactions, as defined in Item 404 of Regulation S-K under the Securities Act; |
| discussing the annual audited financial statements with management and the independent registered public accounting firm; |
| reviewing major issues as to the adequacy of our internal controls and any special audit steps adopted in light of material control deficiencies; |
| reviewing and reassessing annually the adequacy of our audit committee charter; |
| meeting separately and periodically with management and the independent registered public accounting firm; |
| monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our procedures to ensure proper compliance; and |
| reporting regularly to the board. |
126
Compensation Committee. Our compensation committee consists of Messrs. Ya-Qin Zhang, YongjiMs. Mingjie Sun, Mr. Jianguang Li and Xiaosong Zhang,Mr. Shengwen Rong, and is chaired by Ya-Qin Zhang.Ms. Mingjie Sun. Each member of our compensation committee satisfies the “independence” requirements of Rule5605(c)Rule 5605(c)(2) of the NASDAQ Stock Market Rules. The compensation committee assists the board in reviewing and approving the compensation structure, including all forms of compensation, relating to our directors and executive officers. Our chief executive officer may not be present at any committee meeting during which their compensation is deliberated upon. The compensation committee is responsible for, among other things:
| reviewing and approving, or recommending to the board for its approval, the compensation for our chief executive officer and other executive officers; |
| reviewing and recommending to the board for determination with respect to the compensation of our non-employee directors; |
| reviewing and recommending to the board for determination with respect to the compensation of our non-employee |
| selecting compensation consultant, legal counsel or other adviser only after taking into consideration all factors relevant to that person’s independence from management. |
Nominating and Corporate Governance Committee. Our nominating and corporate governance committee consists of Messrs. YongjiMr. Jianguang Li, Ms. Mingjie Sun Xiaosong Zhang and Ya-Qin Zhang,Mr. Shengwen Rong, and is chaired by Mr. Yongji Sun.Jianguang Li. Each member of our nominating and corporate governance committee satisfies the “independence” requirements of Rule5605(c)Rule 5605(c)(2) of the NASDAQ Stock Market Rules. The nominating and corporate governance committee assists the board in selecting individuals qualified to become our directors and in determining the composition of the board and its committees. The nominating and corporate governance committee is responsible for, among other things:
| recommending nominees to the board for election or re-election to the board, or for appointment to fill any vacancy on the board; |
| reviewing annually with the board the current composition of the board with regards to characteristics such as independence, age, skills, experience and availability of service to us; |
| selecting and recommending to the board the names of directors to serve as members of the audit committee and the compensation committee, as well as of the nominating and corporate governance committee itself; |
| developing and reviewing the corporate governance principles adopted by the board and advising the board with respect to significant developments in the law and practice of corporate governance and our compliance with such laws and practices; and |
| evaluating the performance and effectiveness of the board as a whole. |
Strategy Committee. In November 2022, our board of directors formed a strategy committee of Mr. Shaoyun Han, Ms. Mingjie Sun and Dr. Binshen Meng, and is chaired by Mr. Shaoyun Han. The strategy committee assists the board in establishing, evaluating and supervising the implementation of the company’s business strategies. The strategy committee is responsible for, among other things:
| ● | reviewing the middle and long-term development plan and supervising the implementation of the business strategies; |
| ● | reviewing and supervising the implementation of the company’s business and operation plans |
| ● | reviewing proposals subject to the board’s approval in connection with significant acquisition and financing; and |
| ● | reviewing and evaluating the performance of the company’s major business and key personnel. |
127
Duties of Directors
Under Cayman Islands law, our directors have a duty of loyalty to act honestly in good faith with a view to our best interests. Our directors also have a duty to exercise the skill they actually possess and such care and diligence that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their duty of care to us, our directors must ensure compliance with our memorandum and articles of association. A shareholder may have the right to seek damages in our name if a duty owed by our directors is breached.
Terms of Directors and Officers
Our officers are elected by and serve at the discretion of the board. We have entered into director service agreements with each of our independent directors featuring a term of office for two years. Our other directors are not subject to a term of office and hold office until such time as they resign or are removed from office by ordinary resolution of our shareholders. AIn addition, a director will cease to be removed from office automaticallya director if, among other things, the director (i) becomes bankrupt or makes any arrangement or composition with his creditors; or (ii) dies or is found by our company to be of unsound mind.mind; (iii) resigns his office by notice in writing to the Company; (iv) without special leave of absence from the board, is absent from meetings of the Board for three consecutive meetings and the board resolves that his office be vacated; or (v) is removed from office pursuant to any other provision of our articles of association.
Board Diversity
Board Diversity Matrix (As of February 28, 2023) | ||||
Country of Principal Executive Offices: | People’s Republic of China | |||
Foreign Private Issuer | Yes | |||
Disclosure Prohibited Under Home Country Law | No | |||
Total Number of Directors | 5 | |||
| Female | Male | Non-Binary | Did Not Disclose Gender |
Part I: Gender Identity | ||||
Directors | 1 | 4 | N/A | N/A |
Part II: Demographic Background | ||||
Underrepresented Individual in Home Country Jurisdiction | 1 | |||
LGBTQ+ | 0 | |||
D.Employees
We have dual headquarteredheadquarters in Beijing and Hangzhou, where our instructors, software engineers and certain general and administrative staff are based. We have divided our national network of learning centers into three regions, namely, northern region, southern region, and central and western region, and we have regional offices that are responsible for managing the daily operations of learning centers located within each territory.
128
We had a total of 3,104, 3,90410,181, 10,009 and 5,0667,955 employees as of December 31, 2013, 20142020, 2021 and 2015,2022, respectively. As of December 31, 2015,2022, we had 4741,765 employees in Beijing, 348225 employees in Hangzhou and 4,2445,947 employees in other areas withinof mainland China. We also have 18 employees located overseas. The following table sets forth the number of our employees, categorized by function, as of December 31, 2015:
2022:
| | | ||
Functions | Number of Employees | |||
Teaching and content development | 2,963 | |||
Selling and marketing | 2,083 | |||
General and administration | 1,359 | |||
Others* | 1,550 | |||
Total | 7,955 |
Notes:
* mainly includes employer cooperation representatives and career counselors for professional education, and center administrators for STEAM education.
As required by regulations in mainland China, we participate in various employee social security plans that are organized by municipal and provincial governments, including pension, unemployment insurance, childbirth insurance, work-related injury insurance, medical insurance and housing insurance. We are required under PRC lawlaws of to make contributions from time to time to employee benefit plans at specified percentages of the salaries, bonuses and certain allowances of our employees, up to a maximum amount specified by the local government.
Our employees are not covered by any collective bargaining agreement. We believe that we maintain a good working relationship with our employees, and we have not experienced any significant labor disputes.
E.Share Ownership
Except as specifically noted, the following table sets forth information with respect to the beneficial ownership of our ordinary shares as of March 31, 2016February 28, 2023, by:
| each of our directors and executive officers; and |
| each person known to us to own beneficially 5% or more |
The calculations in the table below are based on 55,718,41953,808,116 ordinary shares outstanding as of March 31, 2016,February 28, 2023, comprising of 45,143,52346,602,057 Class A ordinary shares (excluding 10,658,980 Class A ordinary shares issued to our depositary bank for bulk issuance of ADSs reserved for issuances upon the exercise or vesting of awards under our share incentive plan) and 10,574,8967,206,059 Class B ordinary shares.
129
Beneficial ownership is determined in accordance with the rules and regulations of the SEC. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, we have included shares that the person has the right to acquire within 60 days, including through the exercise of any option, warrant or other right or the conversion of any other security. These shares, however, are not included in the computation of the percentage ownership of any other person.
| Ordinary Shares Beneficially Owned | ||||||||||||||||||||
| Class A ordinary shares | Class B ordinary shares | Total ordinary shares on an as- converted basis | % of total ordinary shares on an as- converted basis | % of aggregate voting power † | ||||||||||||||||
| Directors and Executive Officers:** | ||||||||||||||||||||
| Shaoyun Han(1) | 9,352,302 | 7,206,059 | 16,558,361 | 29.4 | 53.8 | |||||||||||||||
| Jianguang Li(2) | * | — | * | * | * | |||||||||||||||
| Yongji Sun(3) | * | — | * | * | * | |||||||||||||||
| Xiaosong Zhang(4) | * | — | * | * | * | |||||||||||||||
| Ya-Qin Zhang(5) | * | — | * | * | * | |||||||||||||||
| Yuduo Yang | — | — | — | — | — | |||||||||||||||
| Ying Sun | * | — | * | * | * | |||||||||||||||
| Yinan Qi | * | — | * | * | * | |||||||||||||||
| Yi Li | * | — | * | * | * | |||||||||||||||
| All directors and executive officers as a group | 10,093,438 | 7,206,059 | 17,299,497 | 30.6 | 54.1 | |||||||||||||||
| Principal and Selling Shareholders: | ||||||||||||||||||||
| KKR funds(6) | 16,598,480 | 7,206,059 | 23,804,539 | 42.3 | 58.5 | |||||||||||||||
| Goldman Sachs funds(7) | 5,457,426 | — | 5,457,426 | 9.8 | 3.6 | |||||||||||||||
| IDG funds(8) | — | 3,368,837 | 3,368,837 | 6.0 | 22.3 | |||||||||||||||
| Learningon Limited(9) | 500,000 | 6,060,000 | 6,560,000 | 11.8 | 40.5 | |||||||||||||||
| Connion Capital Limited(10) | 4,413,288 | — | 4,413,288 | 7.8 | 2.9 | |||||||||||||||
| Techedu Limited(11) | 2,439,014 | 1,146,059 | 3,585,073 | 6.4 | 9.2 | |||||||||||||||
| | | | | | | | | | |
|
| Ordinary Shares Beneficially Owned | | | ||||||
| | | | | | | | % of total | | |
| | | | | | | | ordinary | | |
| | | | | | Total ordinary | | shares on | | % of |
| | Class A | | Class B | | shares on an | | an as- | | aggregate |
| | ordinary | | ordinary | | as-converted | | converted | | voting |
|
| shares |
| shares |
| basis |
| basis |
| power † |
Directors and Executive Officers:** | | | | | | | | | | |
Shaoyun Han(1) | | 10,228,123 |
| 7,206,059 |
| 17,434,182 |
| 32.0 |
| 68.9 |
Jianguang Li(2) | | * |
| — |
| * |
| * |
| * |
Shengwen Rong(3) | | — |
| — |
| — |
| — |
| — |
Mingjie Sun(4) | | — |
| — |
| — |
| — |
| — |
Binshen Meng | | — | | — | | — | | — | | — |
Ying Sun(5) | | 796,606 |
| — |
| 796,606 |
| 1.5 |
| 0.7 |
Ping Wei | | * |
| — |
| * |
| * |
| * |
All directors and executive officers as a group | | 11,434,619 |
| 7,206,059 |
| 18,640,678 |
| 34.0 |
| 69.8 |
Principal Shareholders: | | |
| |
| |
| |
| |
Learningon Limited(6) | | 2,193,220 | | 7,206,059 | | 9,399,279 | | 17.5 | | 62.6 |
Theodore Walker Cheng-De King (7) | | 9,226,355 |
| — |
| 9,226,355 |
| 17.1 |
| 7.8 |
KKR funds (8) | | 6,826,263 | | — | | 6,826,263 | | 12.7 | | 5.8 |
Connion Capital Limited(9) |
| 4,277,720 |
| — |
| 4,277,720 |
| 7.9 |
| 3.6 |
Notes:
* | Less than 1%. |
** | Except for Mr. Jianguang Li, Mr. |
†For each person and group included in this column, percentage of voting power is calculated by dividing the voting power beneficially owned by such person or group by the voting power of all of our Class A and Class B ordinary shares as a single class. Each holder of Class A ordinary shares is entitled to one vote per share and each holder of our Class B ordinary shares is entitled to ten votes per share on all matters submitted to them for a vote. Our Class A ordinary shares and Class B ordinary shares vote together as a single class on all matters submitted to a vote of our shareholders, except as may otherwise be required by law. Our Class B ordinary shares are convertible at any time by the holder thereof into Class A ordinary shares on a one-for-one basis.
| (1) | Represents (i) |
| (2) |
130
| (3) | The business address of Mr. |
| (4) | The business address of |
| (5) | Represents (i) 542,106 Class A Ordinary Shares held by Ms. Sun and (ii) 50,900 ADSs representing 254,500 Class A ordinary shares that Ms. Sun may purchase upon exercise of options within 60 days of February 28, 2023. |
| (6) | Represents (i) 7,206,059 Class B ordinary shares and (ii) 438,644 ADSs representing 2,193,220 Class A ordinary shares. The registered office address of Learningon Limited is the offices of Trident Trust Company (B.V.I.) Limited, Trident Chambers, P.O. Box 146, Road Town, Tortola, the British Virgin Islands. Learningon Limited is ultimately owned by Mr. Shaoyun Han through a trust. |
| (7) | Represents (i) 1,845,271 ADSs representing 9,226,355 Class A Ordinary Shares held by Sutro Park Ltd. and Theodore Walker Cheng-De King is the 100% shareholder of Sutro Park Ltd. Information regarding beneficial ownership is reported as of December 31, 2022, based on the information contained in the Schedule 13G filed by Theodore Walker Cheng-De King and Sutro Park Ltd. with the SEC on February 17, 2023. The registered address of Theodore Walker Cheng-De King is the Unit 1502, 15th Floor, 99 Hennessy Road, Wanchai, Hong Kong. The principal business address for Sutro Park Ltd. is Unit 1502, 15th Floor, 99 Hennessy Road, Wanchai, Hong Kong. |
| (8) | Consists of |
| (9) |
| 28, 2023. The registered office address of Connion Capital Limited is the offices of Trident Trust Company (B.V.I.) Limited, Trident Chambers, P.O. Box 146, Road Town, Tortola, the British Virgin Islands. Connion Capital Limited is ultimately owned by Mr. Shaoyun Han through a trust. |
Our ordinary shares are divided into Class A ordinary shares and Class B ordinary shares. Holders of Class A ordinary shares are entitled to one vote per share, while holders of Class B ordinary shares are entitled to ten votes per share. We issued Class A ordinary shares represented by our ADSs in our initial public offering in April 2014. Holders of our Class B ordinary shares may choose to convert their Class B ordinary shares into the same number of Class A ordinary shares at any time. Class A ordinary shares are not convertible into Class B ordinary shares under any circumstance.
To our knowledge, other than Mr. Shaoyun Han, we are not owned or controlled, directly or indirectly, by another corporation, by any foreign government or by any other natural or legal persons, severally or jointly. We are not aware of any arrangement that may, at a subsequent date, result in a change of control of our company.
To our knowledge, as of March 31, 2016, 32,910,254February 28, 2023, a total of our9,145,102 ADSs (equivalent to 45,725,510 Class A ordinary sharesshares) are held byoutstanding (among which 7,987,570 are unrestricted ADSs while 1,157,532 are restricted ADSs) after a new ADS-to-share ratio change (from the previous ratio of one record holderADS to one Class A ordinary share to a new ratio of one ADS to five Class A ordinary shares) was effected in the United States, which is the depositary of our ADS program,December 2021, representing 72.9%78.3% of our total issued and outstanding Class A ordinary shares as of such date. To our knowledge, there is one record holder in the United States which is CEDE & CO. The number of beneficial owners of our ADSs in the United States is likely to be much larger than the number of record holders of our ordinary shares in the United States. As of March 31, 2016, 3,368,837February 28, 2023, none of our Class B ordinary shares are held by oneany record holder in the United States, representing 31.9%States.
131
For options and restricted share unit granted to our officers, directors and employees, see “—“Item 6. Directors, Senior Management and Employees—B. Compensation of Directors and Executive Officers—Compensation—Share Incentive Plan.”
F.Disclosure of a Registrant’s Action to Recover Erroneously Awarded Compensation
Not applicable.
ITEM 7.MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
| A. | Major Shareholders |
See “Item 6. Directors, Senior Management and Employees—E. Share Ownership.”
| B. | Related Party Transactions |
Contractual Arrangements with ourthe VIEs
See “Item 4. Information on the Company—C. Organizational Structure.”
Transactions with Shareholders and Affiliates
Transactions with Chuanbang. Starting from the second half of 2011, Chuanbang Business Consulting (Beijing) Co., Ltd., or Chuanbang, is a company owned by our chief executive officer,chairman, Mr. Shaoyun Han, began to offer person-to-person lending to enable qualified students to borrow unsecured loans from unrelated individuals to pay for our tuition fees. Under the person-to-person lending service offered by Chuanbang to students enrolled prior to January 1, 2014, a student enters into a loan agreement with Mr. Han, as the designated representative of Chuanbang, to borrow an amount equal to our tuition fees. Mr. Han then assigns the existing loan agreement to an unrelated individual lender identified by Chuanbang, or the person-to-person lender, with us serving as the guarantor of the loan to the student. Upon the receipt of cash from the person-to-person lenders, Mr. Han remits the cash to us directly on behalf of the student for the payment of such student’s tuition fees. Chuanbang services the student loans by collecting repayments on behalf of the person-to-person lenders from students, made to an account opened in the name of Mr. Han. The “interest spread” between (i) the interest rate under the loan agreement between the student and Mr. Han and (ii) the “anticipated annual yield” under the assignment agreement between Mr. Han and the person-to-person lender represents compensation for Chuanbang’s estimated costs incurred in originating and servicing the student loans, plus the amount payable to us for guaranteeing the student loans. Chuanbang ceased offering loan services to our students enrolled since January 1, 2014.
As of December 31, 2015, our maximum exposure to guarantees of student loans was nil. All the third-party lenders were repaid and our guarantee was released by March 15, 2015. Starting from April 2013, we had stopped providing guarantees for any new student loans arranged by Chuanbang, thus no guarantee fee revenue was recognized in 2015. The estimated amount of the loss contingency related to the guarantee was immaterial as of December 31, 2015.
Pursuant to our agreement with Chuanbang, Chuanbang provided cash collection service on our accounts receivable to better manage our cash collection since August 2013. The fee is calculated based on 6%2%~12%20% of the amount collected. The staffEmployees of Chuanbang includes ourinclude former employees of the Company who joined Chuanbangworked in July 2013.the credit evaluation department. Chuanbang also provides similar cash collection service to other financial institutions. The cash collection service fees were US$0.1RMB0.1 million and US$0.3RMB0.04 million for 20142020 and 2015, respectively.2021, respectively, while no cash collection service occurred in 2022.
TransactionsDisposal of interest in Gaohuiqiangxue. Gaohuiqiangxue Software (Hainan) Co., Ltd., or Gaohuiqiangxue, is a wholly-owned subsidiary of Beijing Tarena (“Target Company”) through which we cooperate with an Executiveuniversities and colleges in mainland China to offer joint-major degree programs and related peripheral services to colleges and students (the “Target Business”) in accordance with the higher education reform policies of KKR. An entity owned by an executive of KKR transferred US$230,000 to us in order for us to fund our share repurchase in September 2015, andeach province. On April 28, 2023, we repaid such amount in October 2015.
Registration Rights
Registration Rights Granted in 2011
In connection with our issuance of Series C preferred shares, we and all our then shareholders entered into agreements to dispose of our controlling interest in our Target Business to a consortium led by Beijing Weike Xinneng Education Technology Ltd (“Beijing Weike”). Mr. Shaoyun Han, our founder and chairman, is member of the investor consortium and has an amended and restated shareholders agreement on September 6, 2011.interest in the disposal of our Target Business. Pursuant to our amended and restated shareholders agreement dated September 6, 2011, we have granted certain registration rights to certain of our shareholders. Set forth below is a descriptionthe agreements entered into, on April 28, 2023 Beijing Weike shall invest RMB43,750,000 in the Target Company in exchange for 70% of the registration rights granted underequity in the agreement.
Demand Registration Rights. At any time afterTarget Company and Mr. Shaoyun Han shall invest RMB6,250,000 in the Target Company in exchange for 10% of the equity in the Target Company. Upon the completion of our initial public offering in April 2014, upon a written request from the holders of at least 10%such investments, Beijing Tarena will own 20% of the registrable securities held by our preferred shareholders, we must file a registration statement covering the offer and sale of the registrable securities held by the requesting shareholders and other holders of registrable securities who choose to participateequity in the offering. Registrable securities include, among others, our ordinary shares issued or to be issued upon conversion of the preferred shares.Target Company.
However, we are not obligated to proceed with a demand registration if we have, within the six-month period preceding the date of such request, already effected a registration under the Securities Act pursuant to the exercise of the holders’ registration rights, unless the registrable securities of the holders were excluded from such registration. We have the right to defer filing of a registration statement for up to 90 days if our board of directors determines in good faith that the filing of a registration statement would be materially detrimental to us and our shareholders, but we cannot exercise the deferral right more than once in any 12-month period.
Form F-3 Registration Rights. When we are eligible for registration on Form F-3, upon a written request from the holders of a majority of the registrable securities held by our preferred shareholders, we must file a registration statement on Form F-3 covering the offer and sale of the registrable securities.
We are not obligated to effect a Form F-3 registration, among other things, if we already effected a registration under the Securities Act pursuant to the exercise of the holders’ demand or piggyback registration rights, unless the registrable securities of the holders were excluded from such registration. We have the right to defer filing of a registration statement for up to 60 days if our board of directors determines in good faith that the filing of a registration statement would be materially detrimental to us and our shareholders, but we cannot exercise the deferral right more than once in any 12-month period.
Piggyback Registration Rights. If we propose to file a registration statement for a public offering of our ordinary shares on a form that would be suitable for registrable securities, we must offer holders of registrable securities an opportunity to include in that registration all or any part of their registrable securities. The underwriters of any underwritten offering have the right to limit the number of shares with registration rights to be included in the registration statement, subject to certain limitations.
Expenses of Registration. We will pay all expenses relating to any demand, Form F-3, or piggyback registration, with certain limited exceptions.
Termination of Obligations. We shall have no obligation to effect any demand, Form F-3, or piggyback registration on the earlier of (a) the date that is five years after the completion of our initial public offering, or (b) as to any holder of registrable securities, the time when all registrable securities held by such holder may be sold in any 90-day period without registration pursuant to Rule 144 under the Securities Act.
Registration Rights Granted in 2015
We entered into a registration rights agreement with Talent Fortune Investment Limited, or KKR, an affiliate of KKR & Co. L.P., on July 17, 2015, pursuant to which we granted certain registration rights to KKR. Set forth below is a description of the registration rights granted under the agreement.
Securities Act Registration on Request.Request. Upon a written request from KKR, we must use reasonable best efforts to effect a registration under the Securities Act covering the registrable securities requested by KKR to register.
However, we are not obligated to effect more than a total of three registration requests and at least a period of 180 days shall have elapsed since the previous registration request and the previous registration in which KKR had an opportunity to participate pursuant to its piggyback registration rights. ..
Piggyback Registration Rights.Rights. If we propose to register our securities under the Securities Act, subject to limited exceptions, we must offer KKR an opportunity to include in that registration all or any part of its registrable securities. The managing underwriter of any underwritten offering have the right to limit the number of shares with registration rights to be included in the registration statement, subject to certain limitations.
132
Postponements.Table of Contents
Postponements. We have the right to defer filing of a registration statement for up to 90 days if our board of directors determines in good faith that the filing of a registration statement would be materially adversely affect us and our shareholders, but we cannot exercise the deferral right more than once in any 12-month period.
Expenses of Registration.Registration. We will pay all expenses relating to any requested or piggyback registration, with certain limited exceptions.
Termination of Obligations.Obligations. Our obligations under this registration rights agreement shall terminate when all registrable shares of KKR could be sold without restriction under Rule 144(e) under the Securities Act within a 90-day period.
Employment Agreements and Indemnification Agreements
See “Item 6. Directors, Senior Management and Employees—B. Compensation of Directors and Executive Officers—Compensation—Employment Agreements and Indemnification Agreements.”
Share Option Grants
See “Item 6. Directors, Senior Management and Employees—B. Compensation of Directors and Executive Officers—Compensation—Share Incentive Plan.”
| C. | Interests of Experts and Counsel |
Not applicable.
ITEM 8.FINANCIAL INFORMATION
| A. | Consolidated Statements and Other Financial Information |
We have appended consolidated financial statements filed as part of this annual report.
Legal Proceedings
We and certain of our current and former officers and directors have been named as defendants in a putative securities class action captioned Yili Qiu v. Tarena International, Inc. et al., (Case No. 1:21-cv-03502) filed on June 22, 2021, in the U.S. District Court for the Eastern District of New York. The complaint asserts that defendants made false or misleading statements in certain SEC filings between August 16, 2016, and November 1, 2019, related to the Company’s business and operating results in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. On September 1, 2021, the court entered an order appointing lead plaintiff in this action. On September 14, 2021, the parties filed a joint status report and proposed scheduling stipulation, pursuant to which, the lead plaintiff filed an amended complaint on November 1, 2021. On January 18, 2022, we moved to dismiss the complaint. On April 4, 2022, lead plaintiff served its opposition to the motion. Briefing was completed on May 19, 2022. While the motion to dismiss was pending, Plaintiff and the Company reached an agreement in principle to settle all claims. On July 13, 2022, Plaintiff filed a letter informing the court of the settlement in principle. On August 31, 2022, the parties filed a motion for preliminary approval of the proposed settlement agreement. Preliminary approval hearing took place on November 8, 2022, and the Court reserved judgement on the motion pending submission of additional information. In December 2022, the parties submitted revised settlement materials to the Court. The Court decision on the revised settlement papers is pending.
We133
Except for the above, we are currently not a party to, and are not aware of any threat of, any other legal, arbitration or administrative proceedings that, in the opinion of our management, are likely to have a material and adverse effect on our business, financial condition or results of operations. From time to time, we have become, and may in the future become, a party to various legal or administrative proceedings or claims arising in the ordinary course of our business. Regardless of the outcome, legal or administrative proceedings or claims may have an adverse impact on us because of defense and settlement costs, diversion of management attention and other factors.
Dividend Policy
We have not previouslyIn June 2018, we paid an aggregate amount of cash dividends. On March 7, 2016,dividends of RMB43.0 million (US$6.8 million), US$0.12 per ADS, to our shareholders of record as of the close of business on April 5, 2018. In June 2017, we declaredpaid a RMB63.1 million (US$9.2 million) cash dividend, of US$0.150.16 per ordinary share. Holders ofADS, to our ADS, each representing one ordinary share, are accordingly entitled to the cash dividend of $0.15 per ADS. The cash dividend will be paid on or about May 30, 2016 to shareholders of record as of the close of trading on March 27, 2017, which was declared on February 28, 2017. In May 2016, we paid a RMB54.0 million (US$8.4 million) cash dividend, US$0.15 per ADS, to our shareholders as of the close of trading on April 6, 2016, which was declared on March 7, 2016. The aggregate amount of cash dividends to be paid is approximately US$8.6 million, which will bewere funded by surplus cash on our balance sheet.
134
Our board of directors has complete discretion whether to declare dividends, subject to the Companies Act, our articles of association, and the common law of the Cayman Islands. In addition, our shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our directors. Even if our board of directors decides to declare dividends, their 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. 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.
Holders of our ADSs will be entitled to receive dividends, if any, subject to the terms of the deposit agreement, to the same extent as the holders of our Class A common shares. Cash dividends will be paid to the depositary of our ADSs in U.S. dollars, which will distribute them to the holders of ADSs after fees according to the terms of the deposit agreement. Other distributions, if any, will be paid by the depositary to the holders of ADSs in any means it deems legal, fair and practical.
We are a holding company incorporated in the Cayman Islands. PRC regulationsRegulations of mainland China may restrict the ability of our PRC subsidiaries in mainland China to pay dividends to us. See “Item 4. Information on the Company—B. Business Overview—Government Regulations—Regulations on Dividend Distribution.”
Our board of directors has discretion as to whether to distribute dividends, subject to applicable laws. Subject to our ongoing financial performance, cash position, budget and business plan and market conditions, we may, on an annual basis, consider paying a special dividend. If we pay any dividends, we will pay our ADS holders to the same extent as holders of our ordinary shares, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.
| B. Significant Changes |
Except as disclosed elsewhere in this annual report, we have not experienced any significant changes since the date of our audited consolidated financial statements included in this annual report.
ITEM 9.THE OFFER AND LISTING
| A. |
See “Item 9. The Offer and Listing—C. Markets.”
| B. | Plan of Distribution |
Not applicable.
| C. | Markets |
Our ADSs, each representing onefive Class A ordinary share, have been listed on the NASDAQ Global Select Market since April 3, 2014 under the symbol “TEDU.” Update until April 19, 2016 (starting from April 3, 2014), the trading price of our ADSs on the NASDAQ Global Select Market ranged from US$6.54 to US$15.85 per ADS.
The following table provides the high and low trading prices for our ADSs on the NASDAQ Global Select Market for the periods indicated below.
| Trading Price | ||||||||
| High | Low | |||||||
| Annual Highs and Lows | ||||||||
| 2014 (since April 3, 2014) | 15.85 | 6.54 | ||||||
| 2015 | 14.83 | 6.65 | ||||||
| Quarterly Highs and Lows | ||||||||
| Second Quarter 2014 (since April 3, 2014) | 14.23 | 6.54 | ||||||
| Third Quarter 2014 | 15.85 | 11.12 | ||||||
| Fourth Quarter 2014 | 14.40 | 10.17 | ||||||
| First Quarter 2015 | 12.50 | 9.26 | ||||||
| Second Quarter 2015 | 14.83 | 9.28 | ||||||
| Third Quarter 2015 | 13.31 | 6.65 | ||||||
| Fourth Quarter 2015 | 11.45 | 8.89 | ||||||
| First Quarter 2016 | 11.38 | 8.28 | ||||||
| Monthly Highs and Lows | ||||||||
| October 2015 | 10.41 | 8.89 | ||||||
| November 2015 | 11.00 | 9.21 | ||||||
| December 2015 | 11.45 | 10.33 | ||||||
| January 2016 | 10.27 | 8.58 | ||||||
| February 2016 | 10.65 | 8.28 | ||||||
| March 2016 | 11.38 | 9.92 | ||||||
| April 2016 (through April 19, 2016) | 11.61 | 10.56 | ||||||
Not applicable.
Our ADSs, each representing one Class A ordinary share,shares, have been listed on the NASDAQ Global Select Market under the symbol “TEDU” since April 3, 2014.
| D. | Selling Shareholders |
Not applicable.
| E. | Dilution |
Not applicable.
| F. | Expenses of the Issue |
Not applicable.
ITEM 10.ADDITIONAL INFORMATION
| A. | Share Capital |
Not applicable.
135
| B. | Memorandum and Articles of Association |
The following are summaries of material provisions of our currently effective fifth amended and restated memorandum and articles of association, as well as the Companies Law (2013 Revision)Act, Cap 22 Act 3 of 1961, as consolidated and revised, of the Cayman Islands insofar as they relate to the material terms of our ordinary shares.
The information set forth in Exhibit 1.1 to this Annual Report on Form 20-F is incorporated herein by reference.
Registered Office and Objects
Our registered office in the Cayman Islands is located at the offices of CodanConyers Trust Company (Cayman) Limited, Cricket Square, Hutchins Drive, PO Box 2681, Grand Cayman KY1-1111, Cayman Islands. As set forth in article 3 of our fifth amended and restated memorandum of association, the objects for which our company is established are unrestricted.
Board of Directors
See “Item 6. Directors, Senior Management and Employees—C. Board Practices.”
Ordinary Shares
General.General. Holders of Class A ordinary shares and Class B ordinary shares have the same rights except for voting and conversion rights. All of our outstanding ordinary shares are fully paid and non-assessable. Certificates representing the ordinary shares are issued in registered form. Our shareholders who are non-residents of the Cayman Islands may freely hold and transfer their ordinary shares.
Dividends.Dividends. The holders of our ordinary shares are entitled to such dividends as may be declared by our board of directors, provided that dividends may be declared and paid out of funds legally available therefor, namely, out of either profit, our share premium account or any other fund or account which can be authorized for this purpose in accordance with the Companies Law.Act. Holders of Class A ordinary shares and Class B ordinary shares will be entitled to the same amount of dividends, if declared.
Voting Rights. Holders of our ordinary shares are entitled to ten calendar days notice of meetings of our shareholders.Rights. In respect of all matters subject to a shareholders’ vote, each Class A ordinary share is entitled to one vote, and each Class B ordinary share is entitled to ten votes, voting together as one class. Voting at any meeting of shareholders is by show of hands unless a poll is demanded. A poll may be demanded by the chairman of such meeting or any shareholder present in person or by proxy.
A quorum required for a meeting of shareholders consists of two shareholders who hold at least 50% of all voting power of our share capital in issue at the meeting present in person or by proxy or, if a corporation or other non-natural person, by its duly authorized representative. Shareholders’ meetings may be held annually. Each general meeting, other than an annual general meeting, shall be an extraordinary general meeting. Extraordinary general meetings may be called by a majority of our board of directors or our chairman or upon a requisition of shareholders holding at the date of deposit of the requisition not less than 1/3 of the aggregate voting power of our company. Advance notice of at least ten calendar days is required for the convening of our annual general meeting and other general meetings.
An ordinary resolution to be passed at a meeting by the shareholders requires the affirmative vote of a simple majority of the votes attaching to the ordinary shares cast at a meeting, while a special resolution requires the affirmative vote of no less than 2/3 of the votes cast attaching to the outstanding ordinary shares at a meeting. A special resolution will be required for important matters such as a change of name or making changes to our fifth amended and restated memorandum and articles of association.
Conversion.136
Conversion. 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 transfer of Class B ordinary shares by a holder to any person or entity which is not an affiliate of such holder, such Class B ordinary shares shall be automatically and immediately converted into the equivalent number of Class A ordinary shares.
Transfer of Ordinary Shares.Shares. Subject to the restrictions set out below and the provisions above in respect of Class B ordinary shares, any of our shareholders may transfer all or any of his or her ordinary shares by an instrument of transfer in the usual or common form or any other form approved by our board of directors.
Our board of directors may, in its absolute discretion, decline to register any transfer of any ordinary share which is not fully paid up or on which we have a lien. Our board of directors may also decline to register any transfer of any ordinary share unless:
| the instrument of transfer is lodged with us, accompanied by the certificate for the ordinary shares to which it relates and such other evidence as our board of directors may reasonably require to show the right of the transferor to make the transfer; |
| the instrument of transfer is in respect of only one class of ordinary shares; |
| the instrument of transfer is properly stamped, if required; |
| in the case of a transfer to joint holders, the number of joint holders to whom the ordinary share is to be transferred does not exceed four; and |
| a fee of such maximum sum as the NASDAQ Global Market may determine to be payable or such lesser sum as our directors may from time to time require is paid to us in respect thereof. |
If our directors refuse to register a transfer they shall, within three months after the date on which the instrument of transfer was lodged, send to each of the transferor and the transferee notice of such refusal.
The registration of transfers may, after compliance with any notice required of the NASDAQ Global Market, be suspended and the register closed at such times and for such periods as our board of directors may from time to time determine, provided, however, that the registration of transfers shall not be suspended nor the register closed for more than thirty days in any year as our board may determine.
LiquidationLiquidation.. On a return of capital on winding up or otherwise (other than on conversion, redemption or purchase of ordinary shares), assets available for distribution among the holders of ordinary shares shall be distributed among the holders of the ordinary shares on a pro rata basis. If our assets available for distribution are insufficient to repay all of the paid-up capital, the assets will be distributed so that the losses are borne by our shareholders proportionately. Any distribution of assets or capital to a holder of a Class A ordinary share and a holder of a Class B ordinary share will be the same in any liquidation event.
Calls on Ordinary Shares and Forfeiture of Ordinary Shares. Our board of directors may from time to time make calls upon shareholders for any amounts unpaid on their ordinary shares in a notice served to such shareholders at least fourteen calendar days prior to the specified time of payment. The ordinary shares that have been called upon and remain unpaid are subject to forfeiture.
Repurchase and Redemption of Ordinary Shares. The Companies LawAct and our fifth amended and restated articles of association permit us to purchase our own shares. In accordance with our fifth amended and restated articles of association and provided that the necessary shareholders or board approval havehas been obtained, we may issue shares on terms that are subject to redemption, at our option or at the option of the holders of these shares, on such terms and in such manner, including out of capital, as may be determined by our board of directors.
Variations of Rights of Shares. All or any of the special rights attached to any class of shares may, subject to the provisions of the Companies Law,Act, be varied with the written consent of the holders of three-fourths of the issued shares of that class or with the sanction of a special resolution passed at a general meeting of the holders of the shares of that class. The rights conferred upon the holders of the shares of any class issued shall not, unless otherwise expressly provided by the terms of issue of the shares of that class, be deemed to be varied by the creation or issue of further shares rankingpari passu with such existing class of shares.
137
Inspection of Books and Records. Holders of our ordinary shares have no general right under Cayman Islands law to inspect or obtain copies of our list of shareholders or our corporate records. However, we will provide our shareholders with annual audited financial statements. See “Item 10. Additional Information—H. Documents on Display.”
Issuance of Additional Shares. Our fifth amended and restated memorandum of association authorizes our board of directors to issue additional ordinary shares from time to time as our board of directors shall determine, to the extent of available authorized but unissued shares.
Our fifth amended and restated memorandum of association also authorizes our board of directors to establish from time to time one or more series of preferred shares and to determine, with respect to any series of preferred shares, the terms and rights of that series, including:
| the designation of the series; |
| the number of shares of the series; |
| the dividend rights, dividend rates, voting rights; and |
| the rights and terms of redemption and liquidation preferences. |
Our board of directors may issue preferred shares without action by our shareholders to the extent authorized but unissued. Issuance of these shares may dilute the voting power of holders of ordinary shares.
Anti-Takeover Provisions. Some provisions of our fifth amended and restated memorandum and articles of association may discourage, delay or prevent a change of control of our company or management that shareholders may consider favorable, including provisions that authorize our board of directors to issue preferred shares in one or more series and to designate the price, rights, preferences, privileges and restrictions of such preferred shares without any further vote or action by our shareholders.
Exempted Company. We are an exempted company with limited liability under the Companies Law.Act. “Limited liability” means that the liability of each shareholder is limited to the amount unpaid by the shareholder on the shares of the company. The Companies LawAct distinguishes between ordinary resident companies and exempted companies. Any company that is registered in the Cayman Islands but conducts business mainly outside of the Cayman Islands may apply to be registered as an exempted company. The requirements for an exempted company are essentially the same as for an ordinary company except that an exempted company:
| does not have to file an annual return of its shareholders with the Registrar of Companies; |
| is not required to open its register of members for inspection; |
| does not have to hold an annual general meeting; |
| may issue |
| may obtain an undertaking against the imposition of any future taxation (such undertakings are usually given for 20 years in the first instance); |
| may register by way of continuation in another jurisdiction and be deregistered in the Cayman Islands; |
| may apply to be registered as a special economic zone company; |
| ● | may register as a limited duration company; and |
| may register as a segregated portfolio company. |
Our fifth amended and restated memorandum and articles of association do not provide provisions that are different from those that are applicable to an exempted company as set forth above, except that they do not permit us to issue bearer shares or shares with no par value.
138
| C. | Material Contracts |
We have not entered into any material contracts otherOther than in the ordinary course of business and other than those described in “Item 4. Information on the Company” or elsewhere in this annual report, on Form 20-F.
we have not entered into any material contract during the two years immediately preceding the date of this annual report.
| D. | Exchange Controls |
See “Item 4. Information on the Company—B. Business Overview—Government Regulations—Regulations on Foreign Exchange Registration of Overseas Investment by PRCMainland China Residents,” “Item 4.Information4. Information on the Company—B. Business Overview—Government Regulations—Regulations on Foreign Currency Exchange” and “Item 4. Information on the Company—B. Business Overview—Government Regulations—Regulations on Dividend Distribution.”
| E. | Taxation |
The following summary of certain Cayman Islands, PRCmainland China and United States federal income tax consequencesconsiderations of an investment in our ADSs or ordinary shares is based upon laws and relevant interpretations thereof in effect as of the date of this annual report, all of which are subject to change or differing interpretation, possibly with retroactive effect. This summary does not deal with all possible tax consequencesconsiderations relating to an investment in our ADSs or ordinary shares, such as the tax consequencesconsiderations under other federal, state, local and other tax laws not addressed herein. To the extent that the discussion relates to matters of Cayman Islands tax law, it represents the opinion of Conyers Dill & Pearman, our Cayman Islands counsel. To the extent that the discussion relates to matters of PRC tax law,laws of mainland China, it represents the opinion of Han Kun Law Offices, our PRC counsel.
Cayman Islands Taxation
The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate duty. There are no other taxes levied by the Government of the Cayman Islands that are likely to be material to holders of ADSs or ordinary shares. The Cayman Islands is a party to double taxation treaty with the United Kingdom but otherwise is not party to any double tax treaties. There are no exchange control regulations or currency restrictions in the Cayman Islands.
Pursuant to Section 6 of the Tax Concessions LawAct (2011 Revision) of the Cayman Islands, we have obtained an undertaking from the Governor-in-Council:
(i) that no law which is enacted in the Cayman Islands imposing any tax to be levied on profits or income or gains or appreciation shall apply to us or our operations; and
(ii) that the aforesaid tax or any tax in the nature of estate duty or inheritance tax shall not be payable on our shares, debentures or other obligations.
| (i) | that no law which is enacted in the Cayman Islands imposing any tax to be levied on profits or income or gains or appreciation shall apply to us or our operations; and |
| (ii) | that the aforesaid tax or any tax in the nature of estate duty or inheritance tax shall not be payable on our shares, debentures or other obligations. |
The undertaking for us is for a period of twenty years from March 25, 2014.
139
People’s RepublicTable of Contents
Mainland China Taxation
Under the EIT Law, an enterprise established outside the PRCmainland China with “de facto management bodies” within the PRCmainland China is considered a “resident enterprise” for PRCmainland China enterprise income tax purposes and is generally subject to a uniform 25% enterprise income tax rate on its worldwide income as well as tax reporting obligations. Under the Implementation Rules to the EIT Law, a “de facto management body” is defined as a body that has material and overall management and control over the manufacturing and business operations, personnel and human resources, finances and properties of an enterprise. In addition, Circular 82 issued by the SAT in April 2009, as amended in January 2014,December 2017, specifies that certain offshore-incorporated enterprises controlled by PRCmainland China enterprises or PRCmainland China enterprise groups will be classified as PRCmainland China resident enterprises if the following are located or resident in the PRC:mainland China: senior management personnel and departments that are responsible for daily production, operation and management; financial and personnel decision making bodies; key properties, accounting books, company seal, minutes of board meetings and shareholders’ meetings; and half or more of the senior management or directors having voting rights. Further to Circular 82, the SAT issued the Bulletin 45, which took effect in September 2011 and amended respectively in 2015, 2016 and 2018, to provide more guidance on the implementation of Circular 82. Bulletin 45 provides for procedures and administration details of determination on PRCmainland China resident enterprise status and administration on post-determination matters. We do not believe that Tarena International, Inc. is a PRCmainland China resident enterprise. If the PRC tax authorities determine that Tarena International, Inc. is a PRCmainland China resident enterprise for PRCmainland China enterprise income tax purposes, a number of unfavorable PRCmainland China tax consequences could follow. One example is that a 10% withholding tax would be imposed on dividends we pay to our non-PRCnon-mainland China enterprise shareholders and with respect to gains derived by our non-PRCnon-mainland China enterprise shareholders from transferring our shares or ADSs and potentially a 20% of withholding tax would be imposed on dividends we pay to our non-PRCnon-mainland China individual shareholders and with respect to gains derived by our non-PRCnon-mainland China individual shareholders from transferring our shares or ADSs.
Under the EIT Law and its implementation rules, dividends generated from retained earnings after January 1, 2008 from a PRCmainland China company and distributed to a foreign parent company are subject to a withholding tax rate of 10% unless the foreign parent’s jurisdiction of incorporation has a tax treaty with mainland China that provides for a preferential withholding arrangement. Pursuant to the Arrangement between Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect to Taxes on Income, or the Hong Kong Tax Treaty, which became effectivewas promulgated on December 8,August 21, 2006, a company incorporated in Hong Kong, such as Tarena HK, will be subject to withholding income tax at a rate of 5% on dividends it receives from its PRC subsidiary in mainland China if it holds a 25% or more interest in that particular PRC subsidiary in mainland China, or 10% if it holds less than a 25% interest in that subsidiary. However, based on Circular 81, the SAT promulgated5% withholding tax rate does not automatically apply and certain requirements must be satisfied, including without limitation that (a) the Hong Kong enterprise must be the beneficial owner of the relevant dividends; and (b) the Hong Kong enterprise must directly hold at least 25% share ownership in the mainland China enterprise during the 12 consecutive months preceding its receipt of the dividends. However, a transaction or arrangement entered into for the primary purpose of enjoying a preferential tax noticetreatment should not be a reason for the application of the preferential tax treatment under the Hong Kong Tax Treaty. If a taxpayer inappropriately is entitled to such preferential tax treatment, the competent tax authority has the power to make appropriate adjustments. According to the Circular 9, effective from April 1, 2018, when determining the applicant’s status of the “beneficial owner” regarding tax treatments in connection with dividends, interests or royalties in the tax treaties, several factors, including without limitation whether the applicant is obligated to pay more than 50% of his or her income in twelve months to residents in a third country or region, whether the business operated by the applicant constitutes the actual business activities, and whether the counterparty country or region to the tax treaties levies any tax or grants tax exemption on October 27, 2009,relevant incomes or levies tax at an extremely low rate, will be taken into account, and such determination will be analyzed according to the actual circumstances of the specific cases. Circular 601, which9 further provides that applicants who intend to prove his or her status of the “beneficial owner” shall submit the relevant documents to the relevant tax authority according to Circular 60, which was replaced and repealed by Circular 35. Based on Circular 60, non-resident enterprises are not required to obtain preapproval from the relevant tax authority in order to enjoy the reduced withholding tax rate. Instead, non-resident enterprises and their withholding agents may, by self-assessment and on confirmation that the prescribed criteria to enjoy the tax treaty benefits will be denied to “conduit” or shell companies without business substance, and a beneficial ownership analysis will be used based on a “substance-over-the-form” principle to determine whether or not to grant tax treaty benefits. On June 29, 2012,are met, directly apply the SAT further issued the Announcement of the SAT regarding Recognition of “Beneficial Owner” under Tax Treaties, or Announcement 30, which provides that a comprehensive analysis should be made when determining the beneficial owner status based on various factors supported by various types of documents including the articles of association, financial statements, records of cash movements, board meeting minutes, board resolutions, staffing and materials, relevant expenditures, functions and risk assumption as well as relevant contracts and other information. Tarena HK has not obtained the approval for areduced withholding tax rate, and file necessary forms and supporting documents when performing tax filings, which will be subject to post-tax filing examinations by the relevant tax authorities. Circular 35 sets forth similar rules with Circular 60 that non-resident enterprises and their withholding agents shall enjoy treaty benefit by means of 5% from“self-judgment of eligibility, declaration of entitlement, and retention of relevant materials for future reference.” However, if a competent tax authority finds out that it is necessary to apply the local tax authority.general anti-tax avoidance rules, it may start general investigation procedures for anti-tax avoidance and adopt corresponding measures for subsequent administration.
140
The State Administration of Tax issued a Publicthe Notice on Promulgating the Administrative Measures for Special Tax Investigation Adjustments and Mutual Agreement Procedures, or Public Notice 16,6, on March 18, 2015, to17, 2017. Notice 6 further regulateregulates and strengthenstrengthens the transfer pricing administration on outbound payments by a PRCmainland China enterprise to its overseas related parties. In addition to emphasizing that outbound payments by a PRCmainland China enterprise to its overseas related parties must comply with arm’s-length principles, Public Notice 166 specifies certain circumstances whereby such payments arethat do not deductible forcomply with arm’s-length principles may be subject to the purpose ofspecial tax adjustments by the enterprise income tax of the PRC enterprise,authority, including payments to an overseas related party which does not undertake any function, bear any risk or has no substantial operation or activities, payments for services which do not enable the PRCmainland China enterprise to obtain direct or indirect economic benefits, or for services that are unrelated to the functions and risks borne by the PRC enterprise, or relate to the protection of the investment interests of the direct or indirect investor of the PRC enterprise, or for services that have already been purchased from a third party or undertaken by the PRC enterprise itself, and royalties paid to an overseas related party which only owns the legal rights of the intangible assets but has no contribution to the creationvalue of such intangible assets.assets, royalties paid to an overseas related party for the transfer of the right to use of the intangible assets with no economic benefits, and royalties paid to an overseas related party for the incidental benefits generated from the listing activities. Although we believe all our related party transactions, including all payments by our PRCmainland China subsidiaries and consolidated affiliated entities to our non-PRCnon-mainland China entities, are made on an arm’s-length basis and our estimates are reasonable, the ultimate decisions by the relevant tax authorities may differ from the amounts recorded in our financial statements and may materially affect our financial results in the period or periods for which such determination is made.
It is unclear whether, if we are considered a PRCmainland China resident enterprise, holders of our shares or ADSs would be able to claim the benefit of income tax treaties or agreements entered into between China and other countries or areas. See “Item 3. Key Information—D. Risk Factors—Risks RelatingRelated to Doing Business in China—UnderWe are affected by the PRC Enterprise Income Tax Law, and we may be classified as a PRC “resident enterprise”mainland China ‘resident enterprise’ for PRCmainland China enterprise income tax purposes. Such classification would likely result in unfavorable tax consequences to us and our non-PRCnon-mainland China shareholders and have a material adverse effect on our results of operations and the value of your investment.”
The SAT issued a Circular 59 together with the Ministry of FinanceMOF in April 2009 and a Circular 698 in December 2009. Both Circular 59 and Circular 698 became effective retroactively as of January 1, 2008. By promulgating and implementing these two circulars, the PRC tax authorities have enhanced their scrutiny over the direct or indirect transfer of equity interests in a PRCmainland China resident enterprise by a non-resident enterprise. Under Circular 698, where a non-resident enterprise transfers the equity interests of a PRC “resident enterprise” indirectly by disposition of the equity interests of an overseas holding company, and such overseas holding company is located in certain low tax jurisdictions, the non-resident enterprise, being the transferor, must report to the relevant tax authority of the PRC “resident enterprise” this Indirect Transfer. The PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such Indirect Transfer may be subject to PRC tax at a rate of up to 10%. On February 3, 2015, the SAT issued a Public Notice [2015]2015 No.7, or Public Notice 7, to supersede the existing tax rules in relation to the Indirect Transfer as set forth in Circular 698, while the other provisions of Circular 698 remain in force.698. Under Public Notice 7, introduceswhere a new tax regime that is significantly different from that under Circular 698. Public Notice extend its tax jurisdiction to capture not only Indirect Transfer as set forth under Circular 698 but also transactions involving transfer of immovable propertynon-resident enterprise conducts an “indirect transfer” by transferring the equity interests in a mainland China and“resident enterprise” or other taxable assets held under the establishment and place, in China of a foreign company through the offshore transfer of a foreign intermediate holding company. Public Notice 7 also addresses the term transferindirectly by disposing of the equity interestinterests in a foreign intermediatean overseas holding company, widely.the non-resident enterprise, being the transferor, may be subject to mainland China enterprise income tax, if the indirect transfer is considered to be an abusive use of company structure without reasonable commercial purposes. In addition, Public Notice 7 provides clearerclear criteria than Circular 698 on how to assess reasonable commercial purposes and introduces safe harbor scenarios applicable to internal group restructurings. However, it also brings challenges to both the foreign transferor and transferee of the Indirect Transfer as they have to make self-assessment on whether the transaction should be subject to mainland China tax and to file or withhold the mainland China tax accordingly. In October 2017, the SAT promulgated the Announcement of the State Administration of Taxation on Matters Concerning Withholding of Income Tax of Non-resident Enterprises at Source, or SAT Circular 37, amended in June 2018, which provides certain changes to the current withholding regime, repeals and replaces all other provisions under Circular 698 and amends certain provisions in Public Notice 7. For example, SAT Circular 37 requires that the transferor shall declare to the competent tax authority for payment of tax within seven days after the tax payment obligation comes into being if the withholding agent fails to withhold the tax due or withhold the tax due in full. However, according to SAT Circular 37, if the withholding agent fails to withhold and remit the income tax payable, or is unable to perform its obligation in this regard, as long as the non-resident enterprise that earns the income voluntarily declares and pays the tax payable before the tax authority orders it to do so within required time limits, it shall be deemed that such enterprise has paid the tax in time. There is little guidance and practical experience as to the application of Public Notice 7 or SAT Circular 37. Where non-resident investors were involved in our private equity financing, if such transactions were determined by the tax authorities to lack reasonable commercial purpose, we and our non-resident investors may become at risk of being taxed under Circular 698 and Public Notice 7 or SAT Circular 37 and may be required to expend valuable resources to comply with Circular 698 and Public Notice 7 or SAT Circular 37 or to establish that we should not be taxed under Circular 698 and Public Notice 7.7 or SAT Circular 37. The PRC tax authorities have the discretion under SAT Circular 59, Circular 698 and Public Notice 7 or SAT Circular 37 to make adjustments to the taxable capital gains based on the difference between the fair value of the equity interests transferred and the cost of investment. See “Item 3. Key Information—D. Risk Factors—Risks RelatingRelated to Doing Business in China—We face uncertainty regarding the PRCmainland China tax reporting obligations and consequences for certain indirect transfers of our operating company’s equity interests. Enhanced scrutiny over acquisition transactions by the PRC tax authorities may have a negative impact on potential acquisitions we may pursue in the future.”
141
United States Federal Income Tax Considerations
Taxation
The following discussion is a summary of United StatesU.S. federal income tax considerations relatinggenerally applicable to the ownership and disposition of our ADSs or Class A ordinary shares by a U.S. Holder as(as defined below,below) that holds our ADSs or Class A ordinary shares as “capital assets” (generally, property held for investment) under the United StatesU.S. Internal Revenue Code of 1986, as amended (the “Code”). This discussion is based upon existing United StatesU.S. federal income tax law, which is subject to differing interpretations or change, possibly with retroactive effect. No ruling has been sought from the Internal Revenue Service (the “IRS”) with respect to any United States federal income tax consequences described below,effect, and there can be no assurance that the IRSInternal Revenue Service (the “IRS”) or a court will not take a contrary position. This discussion, moreover, does not address the U.S. federal estate, gift and alternative minimum tax considerations; the Medicare tax on certain net investment income; or any state, local and non-U.S. tax considerations relating to the ownership or disposition of our ADSs or Class A ordinary shares. The following summary does not address all aspects of United StatesU.S. federal income taxation that may be important to particular investors in light of their individual circumstances including investors subjector to persons in special tax rules (such as, for example, certain financial institutions, insurance companies, regulated investment companies, real estate investment trusts, broker-dealers, traders in securities that elect mark-to-market treatment, partnerships and their partners, tax-exempt organizations (including private foundations), investors who are notsituations such as:
| ● | banks and other financial institutions; |
| ● | insurance companies; |
| ● | pension plans; |
| ● | cooperatives; |
| ● | regulated investment companies; |
| ● | real estate investment trusts; |
| ● | broker-dealers; |
| ● | traders that elect to use a mark-to-market method of accounting; |
| ● | certain former U.S. citizens or long-term residents; |
| ● | tax-exempt entities (including private foundations); |
| ● | holders who acquire their ADSs or Class A ordinary shares pursuant to any employee share option or otherwise as compensation; |
| ● | investors that will hold their ADSs or Class A ordinary shares as part of a straddle, hedge, conversion, constructive sale or other integrated transaction for U.S. federal income tax purposes; |
| ● | investors that have a functional currency other than the U.S. dollar; |
| ● | persons that actually or constructively own 10% or more of the total combined voting power or value of our stock; or |
| ● | partnerships or other entities taxable as partnerships for U.S. federal income tax purposes, or persons holding ADSs or Class A ordinary shares through such entities, all of whom may be subject to tax rules that differ significantly from those discussed below. |
Each U.S. Holders, investors that own (directly, indirectly, or constructively) 10% or more of our voting stock, investors that hold their ADSs or ordinary shares as part of a straddle, hedge, conversion, constructive sale or other integrated transaction, or investors that have a functional currency other than the United States dollar, all of whom may be subject to tax rules that differ significantly from those summarized below). In addition, this discussion does not address any state, local, alternative minimum tax, or non-United States tax considerations. Each potential investorHolder is urged to consult its tax advisor regarding the United Statesapplication of U.S. federal taxation to its particular circumstances, and the state, local, and non-United States incomenon-U.S. and other tax considerations of an investment inthe ownership and disposition of our ADSs or Class A ordinary shares.
General
For purposes of this discussion, a “U.S. Holder” is a beneficial owner of our ADSs or Class A ordinary shares that is, for United StatesU.S. federal income tax purposes, (i) purposes:
| ● | an individual who is a citizen or resident of the United States; |
142
| ● | a corporation (or other entity subject to tax as a corporation for U.S. federal income tax purposes) created in or organized under the laws of the United States or any state thereof or the District of Columbia; |
| ● | an estate the income of which is includible in gross income for U.S. federal income tax purposes regardless of its source; or |
| ● | a trust (A) the administration of which is subject to the primary supervision of a U.S. court and which has one or more U.S. persons who have the authority to control all substantial decisions of the trust or (B) that has otherwise validly elected to be treated as a U.S. person under the Code. |
If a partnership (or other entity treated as a partnership for United StatesU.S. federal income tax purposes) is a beneficial owner of our ADSs or Class A ordinary shares, the tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. Partnerships and partners of a partnership holding our ADSs or Class A ordinary shares and their partners are urged to consult their tax advisors regarding an investment in our ADSs or Class A ordinary shares.
BasedThe discussion below assumes that the representations contained in part on certain representations from the depositary bank,deposit agreement and any related agreement are true and that the obligations in such agreements will be complied with in accordance with their terms. Accordingly for U.S. federal income tax purposes, it is generally expected that a U.S. Holder of ADSs will be treated as the beneficial owner for United States federal income tax purposes of the underlying Class A ordinary shares represented by the ADSs.
our ADSs, and therefore deposits or withdrawals of Class A ordinary shares for ADSs will generally not be subject to U.S. federal income tax.
Passive Foreign Investment Company Considerations
A non-United Statesnon-U.S. corporation, such as our company, will be classified as a “passive foreign investment company,” or PFIC for United StatesU.S. federal income tax purposes if, in the case offor any particular taxable year, if either (i) 75% or more of its gross income for such year consists of certain types of “passive” income or (ii) 50% or more of the value of its assets (generally based on an average of the quarterly assets (as determined onvalues of the basis of fair market value)assets) during such year is attributable to assets that produce or are held for the production of passive income. For this purpose, cashincome (the “asset test”). A separate determination must be made after the close of each taxable year as to whether a non-United States corporation is categorized as a passive asset and the company’s unbooked intangibles associated with active business activities may generally be classified as active assets.PFIC for that year. Passive income generally includes among other things, dividends, interest, royalties, rents, annuities, net gains from the sale or exchange of passive assets (including property producing passive income)such income and net foreign currency gains. WeFor this purpose, cash and assets readily convertible into cash are categorized as passive assets and the company’s unbooked intangibles associated with active business activity are taken into account as nonpassive assets.
In addition, a non-U.S. corporation will be treated as owning ourits proportionate share of the assets and earning ourits proportionate share of the income of any other corporation in which we own,it owns, directly or indirectly, 25% or more than 25% (by value) of the stock.
Although the law in this regard is unclear,not entirely clear, we treat our consolidatedthe VIEs as being owned by us for United StatesU.S. federal income tax purposes not only because we exercise effective financial control over the operation of such entities but also because wemanagement decisions and are entitled to substantially all of theirthe economic benefits and, asassociated with this entity. As a result, we consolidate their operatingthe entity’s results of operations in our consolidated U.S. GAAP financial statements. If it were determined, however, that we are not the owner of our consolidatedthe VIEs for United StatesU.S. federal income tax purposes, we may be treated as a PFIC for ourthe current taxable year and in futureany subsequent taxable years.
year.
Based on the market price of our current incomeADSs and assets andoutstanding Class A ordinary shares, the value of our ADSsassets and ordinary shares,the composition of our assets and income, we do not believe that we were a PFIC for our taxable year ended December 31, 20152022, and we do not expect to be classified as a PFIC for ourin the current taxable year ending December 31, 2016 or in the foreseeable future.
While we do not expect to become a PFIC in the current or future taxable years, the determination of whether we will be or become a PFIC will depend upon the composition of our income and assets and the value of our assets from time to time, including, in particular the value of our goodwill and other unbooked intangibles (which may depend upon the market value of our ADSs or Class A ordinary shares from time to time, which may be volatile). Among other factors, if market capitalization is less than anticipated or subsequently declines, we may be classified as a PFIC for the current or future taxable years. It is also possible that the IRS may challenge our classification or valuation of our goodwill and other unbooked intangibles or determine that such assets should not be included in the determination of whether we are classified as a PFIC, which may result in our company being, or becoming classified as, a PFIC for the current or one or more future taxable years. Recent declines in the market price of our ADSs increased our risk of becoming a PFIC. The market price of our ADSs may continue to fluctuate considerably and, consequently, we cannot assure you of our PFIC status for any taxable year.
143
The determination of whether we will be or become a PFIC may also depend, in part, on how, and how quickly, we use our liquid assets. Under circumstances where we determine not to deploy significant amounts of cash for active purposes, or our consolidated VIEs were not treated as owned by us for United States federal income tax purposes, our risk of being classified as a PFIC may substantially increase. Because there are uncertainties in the application of the relevant rules, and because PFIC status is a factualfact-intensive determination made annually after the close of each taxable year,on an annual basis, there can be no assurance that we will not be a PFIC for the current taxable year or any future taxable year. If we were classified as a PFIC for any year during which a U.S. holderHolder held our ADSs or Class A ordinary shares, we generally would continue to be treated as a PFIC for all succeeding years during which such U.S. holderHolder held our ADSs or Class A ordinary shares.
The discussion below under “Dividends”“Item 10. Additional Information—E. Taxation—United States Federal Income Taxation—Dividends” and “Sale“Item 10. Additional Information—E. Taxation—United States Federal Income Taxation—Sale or Other Disposition of ADSs or Ordinary Shares”Disposition” is written on the basis that we will not be classified as a PFIC for United StatesU.S. federal income tax purposes. The United StatesU.S. federal income tax rules that apply if we are classified as a PFIC for the current taxable year or any subsequent taxable year are generally discussed below under “Passive“Item 10. Additional Information—E. Taxation—United States Federal Income Taxation—Passive Foreign Investment Company Rules.”
Dividends
AnySubject to the discussion below under “Item 10. Additional Information—E. Taxation—United States Federal Income Taxation—Passive Foreign Investment Company Rules,” any cash distributions (including the amount of any PRCmainland China tax withheld) paid on ourthe ADSs or Class A ordinary shares out of our current or accumulated earnings and profits, as determined under United StatesU.S. federal income tax principles, will generally be includible in the gross income of a U.S. Holder as dividend income on the day actually or constructively received by the U.S. Holder, in the case of Class A ordinary shares, or by the depositary, bank, in the case of ADSs. Because we do not intend to determine our earnings and profits on the basis of United StatesU.S. federal income tax principles, any distribution paidwe pay will generally be treated as a “dividend” for United StatesU.S. federal income tax purposes. Dividends received on the ADSs or Class A ordinary shares will not be eligible for the dividends received deduction allowed to corporations in respect of dividends received from U.S. corporations.
Individuals and other non-corporate recipient of dividend incomeU.S. Holders will generally be subject to tax onat the lower capital gains tax rate applicable to “qualified dividend income, from a “qualified foreign corporation” at a lower applicable capital gains rate rather than the marginal tax rates generally applicable to ordinary income” provided that certain holding period and other requirementsconditions are met.
satisfied, including that (1) the ADSs or Class A non-Unitedordinary shares on which the dividends are paid are readily tradable on an established securities market in the United States, corporation (other thanor, in the event that we are deemed to be a corporation that is classified asmainland China resident enterprise under the PRC tax law, we are eligible for the benefit of the United States-mainland China income tax treaty (the “Treaty”), (2) we are neither a PFIC nor treated as such with respect to a U.S. Holder (as discussed below) for the taxable year in which the dividend is paid or the preceding taxable year)year, (3) certain holding period requirements are met, and (4) such non-corporate U.S. Holders are not under an obligation to make related payments with respect to positions in substantially similar or related property. For this purpose, ADSs listed on the Nasdaq Global Select Market will generally be considered to be a qualified foreign corporation (a) if it is eligible for the benefits of a comprehensive tax treaty with the United States which the Secretary of Treasury of the United States determines is satisfactory for purposes of this provision and which includes an exchange of information program, or (b) with respect to any dividend it pays on stock (or ADSs in respect of such stock) which is readily tradable on an established securities market in the United States. United States Treasury guidance indicates that common or ordinary shares, or ADSs representing such shares, are considered for the purpose of clause (b) above to be readily tradable on an established securities market in the United States, ifand the ADSs are expected to be readily tradable for so long as they arecontinue to be listed on the NASDAQ Global Select Market, as are our ADSs. Since we do not expect that our ordinary shares will be listed on established securities markets, it is unclear whether dividends that we pay on our ordinary shares that are not backed by ADSs currently meet the conditions required for the reduced tax rate. ThereNasdaq, although there can be no assurance in this regard. However, as mentioned above, on December 10, 2021, we received a written notification from Nasdaq advising us that we were not in compliance with certain continued listing requirements but we have regained compliance since January 6, 2022. See "Item 3. Key Information—D. Risk Factors—Risks Related to Our ADSs." If our ADSs will continue to be consideredare delisted from the Nasdaq and are not otherwise readily tradable on an established securities market in later years. In the event we are deemedUnited States, dividends received on our ADSs would generally not be eligible to be a resident enterprise under the EIT Law, we may be eligible for the benefits of the United States-PRCtaxed as dividend income tax treaty (which the U.S. Treasury Department has determined is satisfactory for this purpose) and we would be treated asfrom a qualified foreign corporation with respect to dividends paid on our ordinary shares or ADSs.corporation. Each U.S. Holders are urged toHolder should consult theirits tax advisors regarding the availability of the reduced taxlower rate onfor dividends in their particular circumstances. Dividends received on ourpaid with respect to the ADSs or Class A ordinary shares will not be eligible for the dividends received deduction allowed to corporations.shares.
For United States foreign tax credit purposes, dividends paid on our ADSs or ordinary shares will generally be treated as income from foreign sources and will generally constitute passive category income. In the event that we are deemed to be a PRCmainland China resident enterprise under the EITPRC Enterprise Income Tax Law (see “Item 4. Information on the Company—B. Business Overview—Government Regulations—Regulation on Tax—PRC Enterprise Income Tax Law”), we may be eligible for the benefits of the Treaty. If we are eligible for such benefits, dividends we pay on our Class A ordinary shares, regardless of whether such shares are represented by the ADSs, and regardless of whether our ADSs are readily tradable on an established securities market in the United States, would be eligible for the reduced rates of taxation applicable to qualified dividend income, as described in the preceding paragraph.
144
For U.S. foreign tax credit purposes, dividends paid on the ADSs or Class A ordinary shares generally will be treated as income from foreign sources and generally will constitute passive category income. If mainland China withholding taxes apply to dividends paid to a U.S. Holder with respect to the ADSs or Class A ordinary shares, such holder may be able to obtain a reduced rate of mainland China withholding taxes under the Treaty if certain requirements are met. In addition, subject to PRC withholdingcertain conditions and limitations, mainland Chinawithholding taxes on dividends paid, if any, on our ADSs or ordinary shares. A U.S. Holderthat are non-refundable under the income tax treaty between the United States and the PRC may be treated as foreign taxes eligible subject tofor credit against a number of complex limitations, to claimU.S. Holder’s U.S. federal income tax liability. If a foreign tax credit in respect of any foreign withholding taxes imposed on dividends received on our ADSs or ordinary shares. A U.S. Holder who does not elect to claim a foreign tax credit, for foreign tax withheldsuch holder may instead claim a deduction for United StatesU.S. federal income tax purposes in respect of such withholding, but only for a year in which such holder elects to do so for all creditable foreign income taxes. The rules governing the foreign tax credit are complex.Each U.S. Holders are urged toHolder should consult theirits tax advisors regarding the availabilitycreditability of the foreign tax credit under their particular circumstances.
any mainland China tax.
Sale or Other Disposition of ADSs or Ordinary Shares
ASubject to the discussion below under “Item 10. Additional Information—E. Taxation—United States Federal Income Taxation—Passive Foreign Investment Company Rules,” a U.S. Holder will generally recognize capital gain or loss if any, upon the sale or other disposition of our ADSs or Class A ordinary shares in an amount equal to the difference between the amount realized upon the disposition and the holder’s adjusted tax basis in such ADSs or Class A ordinary shares. Any capitalThe gain or loss will generally be long-termcapital gain or loss ifloss. Individuals and other non-corporate U.S. Holders who have held the ADSsADS or Class A ordinary shares have been held for more than one year and will generally be United States source gain or losseligible for United States foreignreduced tax credit purposes. In the event that we are treated as a PRC resident enterprise under the PRC Enterprise Income Tax Law, and gain from the disposition of the ADSs or ordinary shares is subject to tax in the PRC, such gain may be treated as PRC source gain for foreign tax credit purposes under the United States-PRC income tax treaty.rates. The deductibility of a capital loss may be subject to limitations. Any such gain or loss that the U.S. Holder recognizes will generally be treated as U.S. source income or loss for foreign tax credit limitation purposes, which will generally limit the availability of foreign tax credits.
As described in “Item 10. Additional Information—E. Taxation—Mainland China Taxation,” if we are deemed to be a mainland China resident enterprise under the EIT Law, gains from the disposition of the ADSs or Class A ordinary shares may be subject to mainland China income tax and will generally be U.S.-source, which may limit the ability to receive a foreign tax credit. If a U.S. Holder is eligible for the benefits of the Treaty, such holder may be able to elect to treat such gain as mainland China-source income under the Treaty. Pursuant to recently issued U.S. Treasury regulations, however, if a U.S. Holder is not eligible for the benefits of the Treaty or does not elect to apply the Treaty, then such holder may not be able to claim a foreign tax credit arising from any mainland China tax imposed on the disposition of the ADSs or Class A ordinary shares. The rules regarding foreign tax credits and deduction of foreign taxes are complex. U.S. Holders are urged toshould consult their tax advisors regarding the tax consequences ifavailability of a foreign tax is imposed on a dispositioncredit or deduction in light of our ADSs or ordinary shares,their particular circumstances, including their eligibility for benefits under the availabilityTreaty, and the potential impact of the foreign tax credit under their particular circumstances.recently issued U.S. Treasury regulations.
Passive Foreign Investment Company Rules
If we are classified as a PFIC for any taxable year during which a U.S. Holder holds our ADSs or Class A ordinary shares, and unless the U.S. Holder makes a mark-to-market election (as described below), the U.S. Holder will generally be subject to special tax rules that have a penalizing effect, regardless of whether we remain a PFIC, on (i) any excess distribution that we make to the U.S. Holder (which generally means any distribution receivedpaid during a taxable year byto a U.S. Holder that is greater than 125% of the average annual distributions received by such U.S. Holder duringpaid in the three preceding taxable years or, if shorter, the U.S. Holder’s holding period for the ADSs or Class A ordinary shares), and (ii) any gain realized on the sale or other disposition including, under certain circumstances, a pledge, of ADSs or Class A ordinary shares. Under the PFIC rules:
| will be increased by an additional tax equal to interest on the resulting tax deemed deferred with respect to each such other taxable year. |
If we are a PFIC for any taxable year during which a U.S. Holder holds our ADSs or Class A ordinary shares and any of our non-United States subsidiaries, the VIEs or any of the subsidiaries of the VIEs is also a PFIC, such U.S. Holder would be treated as owning a proportionate amount (by value) of the shares of the lower-tier PFIC for purposes of the application of these rules. Each U.S. Holder is advisedHolders are urged to consult itstheir tax advisors regarding the application of the PFIC rules to any of our subsidiaries.subsidiaries, the VIEs or any of the subsidiaries of the VIEs.
145
As an alternative to the foregoing rules, a U.S. Holder of “marketable stock” (as defined below) in a PFIC may make a mark-to-market election with respect to our ADSs, provided thatsuch stock. If a U.S. Holder makes this election with respect to the ADSs, are regularly traded on the NASDAQ Global Market. In addition, we do not expect that holders of ordinary shares that are not represented by ADSs will be eligible to make a mark-to-market election. We believe that our ADSs qualify as being regularly traded, but no assurances can be given in this regard. If a mark-to-market election is made, the U.S. Holderholder will generally (i) include as ordinary income for each taxable year that we are a PFIC the excess, if any, of the fair market value of ADSs held at the end of the taxable year over the adjusted tax basis of such ADSs and (ii) deduct as an ordinary loss in each such taxable year the excess, if any, of the adjusted tax basis of the ADSs over the fair market value of such ADSs held at the end of the taxable year, but such deduction will only be allowed to the extent of the net amount previously included in income as a result of the mark-to-market election. The U.S. Holder’s adjusted tax basis in the ADSs would be adjusted to reflect any income or loss resulting from the mark-to-market election. If a U.S. Holder makes an effectivea mark-to-market election in each yearrespect of the ADSs and we cease to be classified as a PFIC, the holder will not be required to take into account the gain or loss described above during any period that we are not classified as a PFICPFIC. However, as mentioned above, on December 10, 2021, we received a written notification from Nasdaq advising us that we were not in compliance with certain continued listing requirements but we have regained compliance since January 6, 2022. See "Item 3. Key Information—D. Risk Factors—Risks Related to Our ADSs." If our ADSs are delisted from the Nasdaq and are not otherwise listed on a qualified exchange or other market, as described above, our ADSs would not be treated as "marketable stock" for these purposes and a U.S. Holder would not be eligible to make a mark-to-market election with respect to our ADSs. If a U.S. Holder makes a mark-to-market election, any gain recognizedsuch U.S. Holder recognizes upon the sale or other disposition of theour ADSs in a year when we are a PFIC will be treated as ordinary income and any loss will be treated as ordinary loss, but such loss will only be treated as ordinary loss to the extent of the net amount previously included in income as a result of the mark-to-market election.
IfThe mark-to-market election is available only for “marketable stock,” which is stock that is regularly traded on a qualified exchange or other market, as defined in applicable United States Treasury regulations. We expect that our ADSs will continue to be listed on the NASDAQ Global Select Market, which is a qualified exchange for these purposes, and, consequently, assuming that our ADSs are regularly traded, it is expected that the mark-to-market election would be available to a U.S. Holder makes a mark-to-market election in respect of a corporation classified asour ADSs if were we to become a PFIC, and such corporation ceases to be classified as a PFIC, the U.S. Holder will not be required to take into account the mark-to-market gain or loss described above during any period that such corporation is not classified as a PFIC.
but no assurances are given in this regard.
Because, as a technical matter, a mark-to-market election cannot be made for any lower-tier PFICs that a PFICwe may own, a U.S. Holder who makes a mark-to-market election with respect to our ADSs may continue to be subject to the general PFIC rules with respect to such U.S. Holder’s indirect interest in any of our non-United States subsidiariesinvestments held by us that is classifiedare treated as an equity interest in a PFIC.
PFIC for U.S. federal income tax purposes.
We do not intend to provide information necessary for U.S. Holders to make qualified electing fund elections which, if available, would result in tax treatment different from (and generally less adverse than) the general tax treatment for PFICs described above.
As discussed above under “Dividends”, dividends that we pay on our ADSs or ordinary shares will not be eligible for the reduced tax rate that applies to qualified dividend income if we are classified as a PFIC for the taxable year in which the dividend is paid or the preceding taxable year. In addition, ifIf a U.S. Holder owns our ADSs or Class A ordinary shares during any taxable year that we are a PFIC, the holder must generally file an annual report withcontaining such information as the IRS.United States Treasury Department may require. Each U.S. Holders are urged toHolder should consult theirits tax advisors concerningregarding the United StatesU.S. federal income tax consequences of purchasing, holding,owning and disposing of our ADSs or Class A ordinary shares if we are or become a PFIC, including the possibility of making a mark-to-market election and the unavailability of the qualified electing fund election.
Medicare Tax
An additional 3.8% tax is imposed on a portion or all of the net investment income of certain individuals with a modified adjusted gross income of over $200,000 (or $250,000 in the case of joint filers or $125,000 in the case of married individuals filing separately) and on the undistributed net investment income of certain estates and trusts. For these purposes, “net investment income” generally includes interest, dividends (including dividends paid with respect to our ADSs or ordinary shares), annuities, royalties, rents, net gain attributable to the disposition of property not held in a trade or business (including net gain from the sale, exchange or other taxable disposition of an ADS or ordinary share) and certain other income, reduced by any deductions properly allocable to such income or net gain. U.S. Holders are urged to consult their tax advisor regarding the applicability of this tax to their income and gains in respect of an investment in our ADSs or ordinary shares.
Information Reporting and Backup Withholding
Individual U.S. Holders and certain entities may be required to submit to the IRS certain information with respect to his or her beneficial ownership of the ADSs or ordinary shares, if such ADSs or ordinary shares are not held on his or her behalf by a U.S. financial institution. An individual U.S. Holder may be subject to penalties if such U.S. Holder is required to submit such information to the IRS and fails to do so.
In addition, U.S. Holders may be subject to information reporting to the IRS and United States backup withholding with respect to dividends on and proceeds from the sale or other disposition of our ADSs or ordinary shares. Backup withholding will not apply to you, however, if you furnish a correct taxpayer identification number and make any other required certification or that are otherwise exempt from backup withholding. U.S. Holders that are required to establish their exempt status generally must provide such certification on IRS Form W-9. U.S. Holders should consult their tax advisors regarding the application of the United States information reporting and backup withholding rules to their particular circumstances.
Backup withholding is not an additional tax. Amounts withheld as backup withholding can be credited against your United States federal income tax liability, and you may obtain a refund of any excess amounts withheld under the backup withholding rules by timely filing the appropriate claim for refund with the IRS and furnishing any required information in a timely manner.
PFIC.
| F. | Dividends and Paying Agents |
Not Applicable.
| G. | Statement by Experts |
Not Applicable.
| H. | Documents on Display |
We previously filed with the SEC our registration statement on Form F-1 (Registration No. 333-194191), as amended, including the prospectus contained therein, to register our Class A ordinary shares in relation to our initial public offering .offering. We have also filed with the SEC a related registration statement on F-6 (Registration No. 333-194662) to register the ADSs.
146
We are subject to the periodic reporting and other informational requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Under the Exchange Act, we are required to file reports and other information with the SEC. Specifically, we are required to file annually a Form 20-F within four months after the end of each fiscal year, which is December 31. Copies of reports and other information, when so filed, may be inspected without charge and may be obtained at prescribed rates at the public reference facilities maintained by the Securities and Exchange Commission at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. The public may obtain information regarding the Washington, D.C. Public Reference Room by calling the Commission at 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding registrants that make electronic filings with the SEC using its EDGAR system. As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act.
We will furnish Citibank, N.A., the depositary of our ADSs, with our annual reports, which will include a review of operations and annual audited consolidated financial statements prepared in conformity with U.S. GAAP, and all notices of shareholders’ meetings and other reports and communications that are made generally available to our shareholders. The depositary will make such notices, reports and communications available to holders of ADSs and, upon our request, will mail to all record holders of ADSs the information contained in any notice of a shareholders’ meeting received by the depositary from us.
In accordance with NASDAQ Stock Market Rules 5250(d), we will post this annual report on Form 20-F on our website at http://ir.tarena.com.cn.
ir.tedu.cn.
| I. | Subsidiary Information |
Not applicable.
ITEM 11.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Exchange Risk
Substantially all of our net revenues, costs and expenses are denominated in Renminbi. The Renminbi is not freely convertible into foreign currencies for capital account transactions. Our exposure to foreign exchange risk primarily relates to the U.S. dollar proceeds of the offerings of our equity securities. We had a net foreign exchange loss of US$4.7RMB1.0 million (US$0.1 million) in 2015. In January 2016, we entered into a forward foreign currency contracts with China Merchants Bank Co., Ltd. The notional amounts of the forward foreign currency contracts were RMB564.1 million (US$87.1 million) and the settlement date will be on May 19, 2016.
2022.
The value of the Renminbi against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economic conditions and China’s foreign exchange policies. In 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar, and the Renminbi appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the Renminbi and the U.S. dollar remained within a narrow band. Since June 2010, the RMB has fluctuated against the U.S. dollar, at times significantly and unpredictably. In August 2015, the People’s Bank of China changed the way it calculates the mid-point price of Renminbi against the U.S. dollar, requiring the market-makers who submit for reference rates to consider the previous day’s closing spot rate, foreign-exchange demand and supply as well as changes in major currency rates. On November 30, 2015, the Executive Board of the International Monetary Fund (IMF) completed the regular five-year review of the basket of currencies that make up the Special Drawing Right, or the SDR, and decided that with effect from October 1, 2016, Renminbi is determined to be a freely usable currency and will be included in the SDR basket as a fifth currency, along with the U.S. dollar, the Euro, the Japanese yen and the British pound. The value of the RMB against the U.S. dollar has been volatile over the past few years. From mid 2020 to early 2022, the RMB appreciated significantly due to the influx of foreign capital into the Chinese market. During 2022, however, the RMB depreciated significantly amid the contrast monetary policy measures between China and the United States. Over the past few months, the RMB has been on an appreciation trend as China reopened near the end of 2022 and the market feels greater optimism over prospects for a domestic economic recovery. 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 we cannot assure you that the Renminbi will not appreciate or depreciate significantly in value against the U.S. dollar in the future. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the RMB and the U.S. dollar in the future.
To the extent that we need to convert the U.S. dollars we received from our equity offerings into Renminbi to fund our operations, acquisitions, or for other uses within the PRC,mainland China, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we receive from the conversion. To the extent that we seek to convert Renminbi into U.S. dollars, depreciation of the Renminbi against the U.S. dollar would have an adverse effect on the U.S. dollar amount we receive from the conversion. On the other hand, a decline in the value of the Renminbi against the U.S. dollar could reduce the U.S. dollar equivalent of our financial results, the value of your investment in the company and the dividends that we may pay in the future, if any, all of which may have a material adverse effect on the prices of our ADS.
147
A hypothetical 10% decrease in the exchange rate of the U.S. dollar against the RMB would have resulted in a decreasean increase of RMB111.6RMB50.1 million (US$17.2 million) in the value of our U.S. dollar-denominated financial assets at December 31, 2015.2022.
Interest Rate Risk
Our exposure to interest rate risk primarily relates to interest income generated by excess cash invested in demand deposits with original maturities of threeone months to 5five years. Interest-earning instruments carry a degree of interest rate risk. We have not used any significant derivative financial instruments to manage our interest rate risk exposure. We have not been exposed, nor do we anticipate being exposed to, material risks due to changes in interest rates. However, our future interest income may be different from expectations due to changes in market interest rates.
ITEM 12.DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
| A. | Debt Securities |
Not applicable.
| B. | Warrants and Rights |
Not applicable.
| C. | Other Securities |
Not applicable.
| D. | American Depositary Shares |
Fees and Charges Our ADS holders May Have to Pay
Holders of our ADSs will be required to pay the following service fees to the depositary bank:
Service | Fees | ||
Issuance of ADSs | | Up to U.S. 5¢ per ADS issued | |
Cancellation of ADSs | | Up to U.S. 5¢ per ADS canceled | |
Distribution of cash dividends or other cash distributions | | Up to U.S. 5¢ per ADS held | |
Distribution of ADSs pursuant to stock dividends, free stock distributions or exercise of rights | | Up to U.S. 5¢ per ADS held | |
Distribution of securities other than ADSs or rights to purchase additional ADSs | | Up to U.S. 5¢ per ADS held | |
Depositary Services | | Up to U.S. 5¢ per ADS held on the applicable record date(s) established by the depositary bank | |
Holders of our ADSs will also be responsible to pay certain fees and expenses incurred by the depositary bank and certain taxes and governmental charges such as:
| fees for the transfer and registration of ordinary shares charged by the registrar and transfer agent for the ordinary shares in the Cayman Islands (i.e., upon deposit and withdrawal of ordinary shares); |
| expenses incurred for converting foreign currency into U.S. dollars; |
| expenses for cable, telex and fax transmissions and for delivery of securities; |
| taxes and duties upon the transfer of securities (i.e., when ordinary shares are deposited or withdrawn from deposit); and |
| fees and expenses incurred in connection with the delivery or servicing of ordinary shares on deposit. |
148
Depositary fees payable upon the issuance and cancellation of ADSs are typically paid to the depositary bank by the brokers (on behalf of their clients) receiving the newly issued ADSs from the depositary bank and by the brokers (on behalf of their clients) delivering the ADSs to the depositary bank for cancellation. The brokers in turn charge these fees to their clients. Depositary fees payable in connection with distributions of cash or securities to ADS holders and the depositary services fee are charged by the depositary bank to the holders of record of ADSs as of the applicable ADS record date.
The depositary fees payable for cash distributions are generally deducted from the cash being distributed. In the case of distributions other than cash (i.e., stock dividend, rights), the depositary bank charges the applicable fee to the ADS record date holders concurrent with the distribution. In the case of ADSs registered in the name of the investor (whether certificated or uncertificated in direct registration), the depositary bank sends invoices to the applicable record date ADS holders. In the case of ADSs held in brokerage and custodian accounts (via DTC), the depositary bank generally collects its fees through the systems provided by DTC (whose nominee is the registered holder of the ADSs held in DTC) from the brokers and custodians holding ADSs in their DTC accounts. The brokers and custodians who hold their clients’ ADSs in DTC accounts in turn charge their clients’ accounts the amount of the fees paid to the depositary banks.
In the event of refusal to pay the depositary fees, the depositary bank may, under the terms of the deposit agreement, refuse the requested service until payment is received or may set off the amount of the depositary fees from any distribution to be made to the ADS holder.
The fees and charges holders of our ADSs may be required to pay may vary over time and may be changed by us and by the depositary bank.
Fees and Other Payments Made by the Depositary to Us
The depositary has agreed to reimburse us for certain expenses we incur that are related to establishment and maintenance of the ADS program upon such terms and conditions as we and the depositary may agree from time to time. In 2015,2022, we did not receive any paymentreceived US$266,169 from the depository for expenses incurred in connection with the establishment and maintenance of the ADS program.
PART II.
ITEM 13.DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14.MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
Material Modifications to the Rights of Security Holders
None.
See “Item 10. Additional Information—B. Memorandum and Articles
149
Use of Proceeds
The following “Use of Proceeds” information relates to the Registration Statement on Form F-1, as amended (File number: 333-19419) in relation to the initial public offering of 15,300,000 ADSs representing 15,300,000 of our Class A ordinary shares, at an initial offering price of US$9.00 per ADS. We offered and sold 11,500,000 ADSs and the selling shareholders offered and sold 3,800,000 ADSs in our initial public offering. Our initial public offering closed in April 2014. Goldman Sachs (Asia) L.L.C. and Credit Suisse Security (USA) LLC were the representatives of the underwriters for our initial public offering. The aggregate price of the offering amount registered and sold were US$137.7 million.
We received net proceeds of approximately US$92.2 million from our initial public offering. Our expenses incurred and paid to others in connection with the issuance and distribution of the ADSs in our initial public offering totaled US$13.6 million, which included US$9.6 million for underwriting discounts and commissions and US$4.0 million for other expenses. Among the US$13.6 million in expenses, US$4.8 million were paid to Goldman Sachs (Asia) L.L.C., an affiliate of ours and one of the underwriters for our initial public offering.
For the period from April 2, 2014, the date that the F-1 Registration Statement was declared effective by the SEC, to December 31, 2015, we invested the net proceeds from our initial public offering in term deposits and still intend to use the proceeds from our initial public offering for general corporate purposes, which may include investing in course development, expanding our learning center network, sales and marketing activities, technology infrastructure and capital expenditures, upgrading facilities and other general and administrative matters. We may also use a portion of the net proceeds for investing in, or acquiring, complementary businesses.
ITEM 15.CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of management, including the chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) asAs of the end of the period covered by this annual report, on Form 20-F. Based upon that evaluation,our management, with the participation of our chief executive officer and chief financial officer, concluded that our company’s disclosure controls and procedures were ineffective as of December 31, 2015 and as of the date that thehas performed an evaluation of the effectiveness of our disclosure controls and procedures was completed, becausewithin the meaning of Rules 13a-15(e) and 15d-15(e) of the material weakness inExchange Act.
Based upon this evaluation, our internal control over financial reporting described below. Ourmanagement concluded that, as of December 31, 2022, our disclosure controls and procedures were not effective to satisfy the objectives for which they are intended.
Notwithstanding management’s assessment that our internal control over financial reporting was ineffective as of December 31, 2015 due to the material weakness described below, we believein ensuring that the consolidatedinformation required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial statements included in this annual report on Form 20-F correctly presents our financial position, results of operations and cash flows for the fiscal years covered thereby in all material respects.
officer, as appropriate, to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control over Financial Reporting and Attestation Report of the Registered Public Accounting Firm
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements in accordance with U.S. GAAP and includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of a company’s assets, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that a company’s receipts and expenditures are being made only in accordance with authorizations of a company’s management and directors, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of a company’s assets that could have a material effect on the consolidated financial statements.
Our management, with the participation of our chief executive officer and chief financial officer, conducted an evaluation of the effectiveness of our company’s internal control over financial reporting as of December 31, 20152019, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013(COSO 2013 Framework). Based on this evaluation, ourwe noted several deficiencies that we believe to be material weaknesses as of December 31, 2019. As a result of the above material weaknesses, management has concluded that our internal control over financial reporting was ineffective as of December 31, 2015. This assessment identified one2019.
During 2020, we have undertaken the remedial steps to address the material weakness related to insufficient review over system extracted data for tuition fees calculation during transitional period of system upgrade.
This annual report does not include an attestation report ofweaknesses in our independent registered public accounting firm regarding internal control over financial reporting as we qualify asreporting. Our management, with the participation of our chief executive officer and chief financial officer, conducted an “emerging growth company” under section 3(a)evaluation of the Securities Exchange Act of 1934, as amended, and are therefore exempt from the attestation requirement.
Changes in Internal Control over Financial Reporting
We have adopted the following measures during the year ended December 31, 2015, which effectively improved our internal controls over financial reporting in areas subject to significant estimates.We have (i) provided on-going training to our accounting and operating personnel across different subsidiaries to improve their accounting knowledge; (ii) developed, and would continue to update as needed, accounting policies and procedures over both routine and non-routine transactions (iii) reinforced the oversight and review procedure over high risk areas subject to significant estimates and judgements.
Notwithstanding the foregoing, during the auditeffectiveness of our consolidated financial statements as of and for the year ended December 31, 2015, we and our independent registered public accounting firm identified a material weakness in ourcompany’s internal control over financial reporting as of December 31, 2015. The2020, 2021 and 2022, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO 2013 Framework). Based on this evaluation, we did not note or identify any deficiencies that we believe to be material weakness identified related to insufficient review over system extracted data for tuition fees calculation during transitional periodweaknesses as of system upgrade.
To remedyDecember 31, 2020, 2021 and 2022. Based on this evaluation, our control deficiencies, we have reinforced the oversight and review procedure over the data extraction. We will continue to implement the necessary procedures and policies, including those outlined above, to improvemanagement has concluded that our internal controlscontrol over financial reporting was effective as of December 31, 2022.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness of our internal control over financial reporting to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and remediate any potential material weaknesses and significant deficiencies as we prepare for our initial Section 404 reporting requirement under the Sarbanes-Oxley Act of 2002.
procedures may deteriorate. See “Item 3. Key Information—D. Risk Factors—Risks RelatingRelated to Our Business—If we failAudit Committee Investigation, Restatement of Our Consolidated Financial Statements, Internal Controls and Related Matters.”
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the year ended December 31, 2022, that have materially affected, or are reasonably likely to maintainmaterially affect, our internal control over financial reporting.
Attestation Report of the Independent Registered Public Accounting Firm
Our independent registered public accounting firm, Marcum Asia CPAs, LLP, has audited the effectiveness of our company’s internal control over financial reporting as of December 31, 2022, and its attestation report is set forth as follows.
150
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
To the Shareholders and Board of Directors of
Tarena International, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Tarena International, Inc.’s (the “Company”) internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets as of December 31, 2022 and 2021, and the related consolidated statements of comprehensive (loss) income, changes in equity, and cash flows and the related notes for each of the three years in the period ended December 31, 2022, of the Company, and our report dated April 28, 2023, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective systeminternal control over financial reporting, and for its assessment of the effectiveness of internal controls, we maycontrol over financial reporting, included in the accompanying “Management Annual Report on Internal Control over Financial Reporting.” Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be unableindependent with respect to accurately report our results of operations or prevent fraud or fail to meet our reporting obligations, and investor confidencethe Company in accordance with the U.S. federal securities laws and the market priceapplicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our ADSsaudit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations, internal control over financial reporting may be materially and adversely affected.”not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that degree of compliance with the policies or procedures may deteriorate.
/s/ Marcum Asia CPAs, LLP
Marcum Asia CPAs, LLP
Beijing, China
April 28, 2023
151
ITEM 16.A.AUDIT COMMITTEE FINANCIAL EXPERT
Our board of directors has determined that Mr. Xiaosong Zhang,Shengwen Rong, an independent director and member of our audit committee, is an audit committee financial expert.
ITEM 16.B.CODE OF ETHICS
Our board of directors has adopted a code of ethics that applies to all of the directors, officers and employees of us and our subsidiaries, whether they work for us on a full-time, part-time, consultative, or temporary basis. Certain provisions of the code apply specifically to our chief executive officer, chief financial officer, senior finance officer, controller, senior vice presidents, vice presidents and any other persons who perform similar functions for us. We have posted a copy of our code of business conduct and ethics on our website at http://ir.tarena.com.cn/phoenix.zhtml?c=253008&p=irol-govhighlights.ir.tedu.cn/
ITEM 16.C.PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the aggregate fees by the categories specified below in connection with certain professional services rendered by KPMG HuazhenMarcum Asia CPAs, LLP formerly known as KPMG Huazhen (SGP), our independent registered public accounting firm,and Shanghai Deloitte Tax Ltd. Tianjin Branch, for the periods indicated. We did not pay any other fees to our auditors during the periods indicated below.
| 2013 | 2014 | 2015 | ||||||||||
| Audit Fees(1) | 977,940 | 975,530 | 904,275 | |||||||||
| Audit-Related Fees | — | — | — | |||||||||
| Tax Fees(2) | 53,079 | — | 24,090 | |||||||||
| All Other Fees(3) | — | 130,362 | — | |||||||||
| | | | |
|
| 2021 |
| 2022 |
| | (RMB in thousands) | ||
Audit Fees(1) |
| 8,599 |
| 8,880 |
Tax Fees(2) |
| 207 |
| 121 |
Notes:
| (1) | “Audit fees” means the aggregate fees in each of the fiscal years listed for professional services rendered by our independent registered public accounting firm for the audit of our annual financial statements or services that are normally provided by the auditors in connection with and regulatory filing or engagements. |
| (2) | “Tax fees” |
The policy of our audit committee is to pre-approve all audit and non-audit services provided by KPMG Huazhen LLP,our independent registered public accounting firms, including audit services, audit-related services, tax services and other services as described above, other than those forde minimis services which are approved by the Audit Committee prior to the completion of the audit.above.
ITEM 16.D.EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not Applicable.
ITEM 16.E.PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
On August 20, 2015,December 31, 2022, our board of directors authorized a share repurchase planprogram under which we were authorized to repurchase our own ordinary shares, in the form of ADSs, with an aggregate value of up to US$2.5 million over the next six months (the “2022 Share Repurchase Program”).
On June 29, 2022, we announced that our board of directors has authorized to extend the 2022 Share Repurchase Program over the next six months, pursuant to which we may repurchase up to approximately US$201.36 million of our shares through December 31, 2022.
On November 28, 2022, our board of directors authorized a new share repurchase program over the next 12 months. The share repurchasestwelve months, pursuant to which we may be maderepurchase up to US$3 million of our shares during the 12-month period beginning from time to time on the open market at prevailing market prices, in privately negotiated transactions, in block trades and/or through other legally permissible means, depending on market conditions and in accordance with applicable rules and regulations. For the period from August 20, 2015 to December 31, 2015, we repurchased 926,113 ADSs for an aggregate considerationNovember 28, 2022 (the “2023 Share Repurchase Program”).
152
The following table sets forthbelow is a summary of our repurchase of our ADSs maderepurchases in 2022, which were all conducted in the year 2015 under the share repurchase programs described in the paragraph above.open market pursuant to our 2022 Share Repurchase Program, as amended, based on respective trade date.
| | | | | | | | |
| | | | | | | | Approximate |
| | | | | | Total Number | | Dollar Value of |
| | | | Average Price | | of ADSs Purchased | | ADSs that May |
| | Total Number of | | Paid | | as Part of Publicly | | Yet be Purchased |
Period |
| ADSs Purchased |
| per ADS (US$) |
| Announced Plan |
| Under the Plan |
January (January 14th to January 31st) | | 181,201 | | 1.92 | | 181,201 | | 348,231 |
February (February 1st to February 25th) | | 71,348 | | 2.36 | | 71,348 | | 168,215 |
March (March 1st to March 31st) | | 92,552 | | 2.40 | | 92,552 | | 222,137 |
April (April 1st to April 29th) | | 57,836 | | 2.41 | | 57,836 | | 139,570 |
May (May 2nd to May 31st) |
| 52,835 |
| 2.62 |
| 52,835 |
| 138,548 |
June (June 1st to June 30th) |
| 18,642 |
| 3.84 |
| 18,642 |
| 71,594 |
August (August 3rd to August 31st) |
| 90,929 |
| 6.51 |
| 90,929 |
| 591,651 |
September (September 1st to September 29th) |
| 71,444 |
| 6.72 |
| 71,444 |
| 479,998 |
October (October 7th to October 31st) |
| 18,640 |
| 4.92 |
| 18,640 |
| 91,644 |
November (November 2nd to November 30th) |
| 18,444 |
| 5.14 |
| 18,444 |
| 94,889 |
December (December 2nd to December 30th) |
| 8,568 |
| 5.12 |
| 8,568 |
| 43,845 |
Total |
| 682,439 |
| 3.50 |
| 682,439 |
| 2,390,323 |
| Period | Total Number | Average Price | Total Number of ADSs | Maximum Dollar Value of ADSs that May Yet Be Purchased Under Plans or Programs (US$) | ||||||||||||
| August (from August 24 to August 31) | 285,689 | US$ | 8.0549 | 285,689 | US$ | 17,698,804 | ||||||||||
| September (from 1 to September 30) | 640,424 | US$ | 8.4907 | 640,424 | US$ | 12,261,156 | ||||||||||
ITEM 16.F.CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
None.
Not applicable.
ITEM 16.G.CORPORATE GOVERNANCE
As a Cayman Islands company listed on the NASDAQ Global Select Market, we are subject to the NASDAQ corporate governance listing standards. 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 relied on the exemption available to foreign private issuers for the requirement that it hold an annual general meeting of shareholders no later than December 31, 20152022, in 2015.2022. In this respect, we elected to follow home country practice and did not hold an annual general meeting of shareholders no later than December 31, 2015 in 2015.2022. If we continue to rely on this and other exemptions available to foreign private issuers in the future, our shareholders may be afforded less protection than they otherwise would under the NASDAQ corporate governance listing standards applicable to U.S. domestic issuers. See “Item 3. Key Information—D. Risk Factors—Risks RelatingRelated to Our ADSs—We are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions applicable to United States domestic public companies.”
ITEM 16.H.MINE SAFETY DISCLOSURE
Not applicable.
ITEM 16.I. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
PART III.
ITEM 17.FINANCIAL STATEMENTS
We have elected to provide financial statements pursuant to Item 18.
ITEM 18.FINANCIAL STATEMENTS
The consolidated financial statements of Tarena International, Inc. and its subsidiaries are included at the end of this annual report.
153
ITEM 19.EXHIBITS
Exhibit | Description of Document | |
1.1 | ||
2.1 | Registrant’s Specimen American Depositary Receipt (included in Exhibit 2.3) | |
2.2 | ||
2.3 | ||
2.4 | ||
2.5 | ||
4.2 | ||
4.3 | ||
| | |
4.4 | ||
4.5 |
4.7 | ||
4.8 | ||
4.9 |
April 25, 2017)
4.10 | ||
154
4.11 | ||
4.12 | ||
4.13 | ||
4.14 | | |
| | |
4.15 | ||
4.16 | ||
| | |
4.17* | | |
| | |
4.18* | | |
| | |
4.19* | | |
| | |
4.20* | | |
| | |
4.21* | | |
| | |
4.22* | | |
| | |
4.23* | | |
| | |
4.24* | | |
| | |
4.25* | | |
| | |
4.26* | | |
| | |
4.27* | | Sales and Purchase Agreement in connection with an office building in Beijing |
| | |
4.28* | | |
| | |
155
8.1* | List of Subsidiaries and Variable Interest Entities of the Registrant | |
11.1 | ||
12.1* | CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
12.2* | CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
13.1** | CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
13.2** | CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
15.1* | ||
15.2* | ||
15.3* | ||
101.INS* | Inline XBRL Instance |
Document—this instance document does not appear in the Interactive Data File because its XBRL tags embedded within the Inline XBRL document
101.SCH* | Inline XBRL Taxonomy Extension Schema Document | |
101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| | |
104* | | Cover Page Interactive Data File—the cover page XBRL tags are embedded within the Exhibit 101 Inline XBRL document set |
* Filed herewith.
** Furnished herewith.
156
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing its annual report on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
157 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||