| Operations and Reorganization | 1. Operations and Reorganization China Online Education Group (the ‘‘Company’’ or ‘‘COE’’), through its consolidated subsidiaries and the variable interest entities (‘‘VIEs’’) and VIEs’ subsidiaries (collectively referred to as the ‘‘Group’’) is primarily engaged in providing online English language education services to students in the People’s Republic of China (the ‘‘PRC’’ or ‘‘China’’) and overseas markets. As of December 31, 2021, the Company’s major subsidiaries and the VIEs and VIEs’ subsidiaries are as follows: Percentage of Place of Date of Direct or Indirect Incorporation/ Incorporation/ Economic Company Establishment Establishment Ownership Subsidiaries China Online Education (HK) Limited Hong Kong April 1, 2013 100 % 51Talk English International Limited Hong Kong October 7, 2014 100 % China Online Innovations Inc.* Philippines October 9, 2014 99.999993 % On Demand English Innovations Inc.* Philippines January 14, 2016 99.999 % Beijing Dasheng Online Technology Co., Ltd. PRC June 4, 2013 100 % Helloworld Online Education Group Cayman July 13, 2018 100 % Helloworld Online Education Group (HK) Limited Hong Kong August 10, 2018 100 % Beijing Helloworld Online Technology Co., Ltd. PRC September 3, 2018 100 % Beijing Xiangyue Education Technology Co., Ltd. PRC September 22, 2016 100 % TESOL Academy Online Limited Hong Kong February 25, 2019 100 % Hainan Dasheng International Technology Co., Ltd PRC January 22, 2021 100 % VIEs and VIES’ subsidiaries Beijing Dasheng Zhixing Technology Co., Ltd PRC July 8, 2011 100 % 51Talk English Philippines Corporation Philippines August 3, 2012 100 % Shanghai Zhixing Helloworld Information Consulting Co., Ltd PRC December 30, 2016 100 % Wuhan Houdezaiwu Online Technology Co., Ltd PRC January 12, 2017 100 % Beijing Dasheng Helloworld Technology Co., Ltd. PRC July 9, 2018 100 % Shenzhen Dasheng Zhiyun Technology Co., Ltd. PRC July 17, 2019 100 % Dasheng Zhixing (Tianjin) Training School Co., Ltd. PRC February 26, 2021 100 % Shenzhen Dasheng Zhixing Education Technology Co., Ltd PRC April 22, 2021 100 % Guangzhou Dasheng Zhixing Education Technology Co., Ltd PRC March 30, 2021 100 % Tianjin Xiangyue Education Technology Co., Ltd PRC July 19, 2019 100 % Beijing Kaola Reading Technology Co., Ltd PRC July 3, 2018 100 % * The Company directly holds the 99.999993% and 99.999% shares of China Online Innovations Inc. and On Demand English Innovations Inc. respectively. There is no substantive non-controlling interest for China Online Innovations Inc. and On Demand English Innovations Inc. as of December 31, 2020 and 2021. The non-controlling shareholders are nominee shareholders mainly consisting of local residents to comply with local regulations of the Philippines. a History of the Group and Basis of Presentation for the Reorganization The Group began operations in July 2011 through Beijing Dasheng Zhixing Technology Co., Ltd. (‘‘Dasheng Zhixing’’). The beneficial interest of Dasheng Zhixing was held by Mr. Jiajia Huang and Ms. Ting Shu (the ‘‘Founding Shareholders’’) and an angel investor in 2011. On January 5, 2012, another angel investor invested into Dasheng Zhixing. In accordance with the investment agreement, the Founding Shareholders set aside from their own holdings 15% of the ownership of Dasheng Zhixing for an employee option plan. While the plan to establish employee option plan was cancelled, the 15% ownership interest in Dasheng Zhixing was not returned to the Founding Shareholders. Consequently, beneficial interest of Dasheng Zhixing was then 71% by the Founding Shareholders and 29% held by angel investors. 1 Operations and Reorganization (Continued) Given the cost advantage and high English proficiency of teachers in the Philippines, the Group retains teachers in the Philippines. To do this, in August 2012, the Founding Shareholders established, a company in the Philippines, 51Talk English Philippines Corporation (the ‘‘Philippines Co I’’), using funds provided by Dasheng Zhixing. On September 3, 2012, Dasheng Zhixing entered into a service agreement with Philippines Co I, to formalize the business arrangements. Under the agreement, Philippines Co I provides teaching service for the Group in accordance with the Group’s instructions. In return, Dasheng Zhixing pays for all the expenses incurred for the services provided by Philippines Co I. The equity of Philippines Co I is considered to be insufficient to finance its activities without additional subordinated financial support provided by another party. As a result, Dasheng Zhixing is considered to be the primary beneficiary of Philippines Co I as it has the power to direct the activities of Philippines Co I that most significantly impact Philippines Co I’s economic performance and has obligation to absorb losses of Philippines Co I. As such, Dasheng Zhixing consolidates Philippines Co I. Dasheng Zhixing was the predecessor of the Group and operated substantially all of the businesses of the Group prior to November 2012. In order to facilitate international financing, the Group underwent a reorganization (the ‘‘Reorganization’’) from November 2012 until October 2014. In November 2012, the Founding Shareholders incorporated the Company under the Laws of the Cayman Islands to be an offshore holding company for the Group. In June 2013, the Company issued ordinary shares to the two angel investors, in exchange for their equity beneficial ownerships in Dasheng Zhixing. Following the exchange, the ownership of the Company was held 71% by the Founding Shareholders and 29% by the angel investors. In April 2013, China Online Education (HK) Limited (the ‘‘COE HK Co I’’) was incorporated in Hong Kong as a wholly owned subsidiary of the Company. Beijing Dasheng Online Technology Co. Ltd., (‘‘Dasheng Online’’), was set up in June 2013 as a wholly owned subsidiary of COE HK Co I in the PRC. Due to PRC legal restrictions on foreign ownership and investment in the companies in value-added telecommunications market, the Group continues to operate its online education platform through Dasheng Zhixing, Shenzhen Zhixing and Dasheng Zhiyun. To comply with PRC laws and regulations, the Group operate www.51talk.com On June 18, 2013, as part of the restructuring, a series of contractual agreements discussed in 1.b. below were entered into among Dasheng Online, Dasheng Zhixing and shareholders of Dasheng Zhixing. As a result of the agreements, Dasheng Online has the ability to direct substantially all the activities of Dasheng Zhixing, and absorb substantially all of the risks and rewards of the Dasheng Zhixing. Dasheng Online became the primary beneficiary of Dasheng Zhixing and consolidates the financial results of Dasheng Zhixing. The restructuring provided the beneficial interest holders of Dasheng Zhixing received an interest in the Company equal to their beneficial interest in Dasheng Zhixing. On June 3, 2019, a shareholder of Dasheng Zhixing transferred her shares to Mr. Jiajia Huang. The above contractual agreements were updated to reflect the shares transfer, without substantial change of the terms. On August 5, 2021, after involve a new shareholder, Mr. Caijian Jia, who is an employee of the Group, the above contractual agreements were further updated to reflect the capital increase, without substantial change of the terms, equity interest of Dasheng Zhixing was then 72.2750% by Mr. Jiajia Huang, 25.7250% held by Ms. Ting Shu and 2.0000% by Mr. Caijian Jia. On July 21 2014, a series of contractual agreements discussed in 1.b. below were entered into among COE HK Co I, Philippines Co I and the shareholders of Philippines Co I. Pursuant to these agreements COE HK Co I has the ability to direct substantially all the activities of Philippines Co I, and absorb substantially all of the risks and rewards of Philippines Co I. COE HK Co I replaced Dasheng Zhixing as the primary beneficiary of Philippines Co I, and the Group continued to consolidate the financial results of Philippines Co I. 1 Operations and Reorganization (Continued) To further optimize the organizational structure of the Group, in October 2014, 51 Talk English International Limited (the ‘‘COE HK Co II’’) was incorporated with limited liability in Hong Kong as a wholly owned subsidiary of COE HK Co I. China Online Innovations Inc. (the ‘‘Philippines Co II’’), which was incorporated by the Company with limited liability in the Philippines to eventually replace Philippines Co I. The Company owns 99.999993% of the equity interest of Philippines Co II. In order to comply with local laws, there are seven individual shareholders holding an aggregate of 0.000007% of the equity interest of Philippines Co II. A series of contractual arrangements was entered into among the Company, Philippines Co II and the seven individual shareholders. Under these contractual arrangements, the Company has an exclusive option to purchase all of the equity interests in Philippines Co II held by the seven individuals and to exercise their rights as shareholders of Philippines Co II. Since then, Philippine home-based teachers delivering paid lessons on the Company’s platform no longer entered into service agreements with Philippines Co I, but rather entered into service agreements with COE HK Co II. Furthermore, the bulk of the business operations in Philippines Co I was transferred to Philippines Co II, and the Group began to enter into employment agreements with office-based teachers and other full-time employees in the Philippines through Philippines Co II. To further optimize group structure, on January 14, 2016, On Demand English Innovations Inc. (the “Philippines Co III”) was incorporated by the Company with limited liability in the Philippines to replace Philippines Co I. The Company owns 99.999% of the equity interest of Philippines Co III. In order to comply with local laws, there are five individual shareholders holding an aggregate of 0.001% of the equity interest of Philippines Co III. A series of contractual arrangements was entered into among the Company, Philippines Co III and the five individual shareholders. Under these contractual arrangements, the Company has an exclusive option to purchase all of the equity interests in Philippines Co III held by the five individuals and the power to exercise their rights as shareholders of Philippines Co III. In April 2016, all business operations and assets of Philippines Co I were transferred to Philippines Co III, including the office leasehold and office equipment in Baguio City, Philippines. Philippines Co III also entered into new employment agreement with the free trial teachers and support staff previously employed by Philippines Co I. The above series of transactions to reorganize the Group were accounted for in a manner similar to a pooling of interest with assets and liabilities at their historical amounts in the Group’s consolidated financial statements. As such, the Group’s consolidated financial statements were prepared as if the current corporate structure had been in existence for all periods presented. On December 30, 2016, Dasheng Zhixing established a wholly-owned subsidiary, Shanghai Zhishi Education Training Co., Ltd.(“Zhishi Training”), of which the current registered business scope includes “education training: classic English (level 1-9)” . In December, 2021, Zhishi Training changed its registered name to Shanghai Zhixing Helloworld Information Consulting Co., Ltd, of which the current registered business scope is information consulting service. In January 2017, Wuhan Houdezaiwu Online Technology Co., Ltd. (“Houdezaiwu Online”), was incorporated as a wholly-owned subsidiary of Dasheng Zhixing to conduct the Group’s business operations in Wuhan. In October 2017, Tianjin Dasheng Zhixing Technology Co., Ltd.(“Tianjin Zhixing”) was incorporated as a wholly-owned subsidiary of Dasheng Zhixing to conduct the Group’s business operations in Tianjin. In July 2018, Helloworld Online Education Group (“HAWO Company”) was incorporated under the Laws of the Cayman Islands as wholly-owned subsidiary of the Company. In August 2018, Helloworld Online Education Group (HK) Limited (“HAWO HK Co”) was incorporated in Hong Kong as a wholly-owned subsidiary of HAWO Company. Beijing Helloworld Online Technology Co., Ltd. (‘‘HAWO Online’’) was set up in September 2018 as a wholly-owned subsidiary of HAWO HK Co in the PRC. In July 2018, Beijing Dasheng Helloworld Technology Co., Ltd. (“Dasheng HAWO”) was incorporated with beneficial interest held by Mr. Jiajia Huang to conduct the Group’s operations of small class business. 1 Operations and Reorganization (Continued) In September 2018, a series of contractual agreements discussed in 1.b. below were entered into among HAWO Online, Dasheng HAWO and shareholders of Dasheng HAWO. As a result of the agreements, HAWO Online has the ability to direct substantially all the activities of Dasheng HAWO, and absorb substantially all of the risks and rewards of the Dasheng HAWO. HAWO Online became the primary beneficiary of Dasheng HAWO and consolidates the financial results of Dasheng HAWO. In February 2019, TESOL Academy Online Limited (“TESOL”) was incorporated as a wholly-owned subsidiary of the Company to training the Group’s teachers to obtain the certificate of “Teaching English to Speakers of Other Languages”. In July 2019, Dasheng Zhiyun, was incorporated with beneficial interest held by Mr. Jiajia Huang to conduct the operations of business in Shenzhen. In July 2019, a series of contractual agreements discussed in 1.b. below were entered into among Dasheng Online, Dasheng Zhiyun and shareholders of Dasheng Zhiyun. As a result of the agreements, Dasheng Online has the ability to direct substantially all the activities of Dasheng Zhiyun, and absorb substantially all of the risks and rewards of the Dasheng Zhiyun. Dasheng Online became the primary beneficiary of Dasheng Zhiyun and consolidates the financial results of Dasheng Zhiyun. In October 2019, Tianjin Zhixing discontinued its operations and cancelled its registration. In January 2021, Hainan Dasheng International Technology Co., Ltd., or Hainan Dasheng, was incorporated as a wholly-owned subsidiary of China Online Education (HK) Limited in Hainan. In February 2021, Dasheng Zhixing (Tianjin) Training School Co., Ltd., or Tianjin School, was incorporated as a wholly-owned subsidiary of Dasheng Zhixing. In March 2021, Guangzhou Dasheng Zhixing Education Technology Co., Ltd., or Guangzhou Zhixing, was incorporated as a wholly-owned subsidiary of Dasheng Zhixing. In April 2021, Shenzhen Zhixing, was incorporated as a wholly-owned subsidiary of Dasheng Zhixing to conduct the Group’s business operations in Guangzhou. In April 2021, the Group entered into a definitive agreement to acquire 100% control right with 52.6978% equity interest in Beijing Xiangyue Education Technology Co., Ltd. (“Beijing Xiangyue”), and with the rest of equity interest waived by other shareholders. Beijing Xiangyue Education Technology Co., Ltd. is in the process of deregistration procedures. Zichun Zhao holds 95% of the equity interest in Tianjin Xiangyue Education Technology Co.,Ltd.(“Tianjin Xiangyue”), and Yu Deng holds 5% of the equity interest in Tianjin Xiangyue. Zichun Zhao holds 100% of the equity interest in Beijing Kaola Reading Technology Co., Ltd.(“Beijing Kaola”). In July 2020, a series of contractual agreements discussed in 1.b. below were entered into among Beijing Xiangyue, Tianjin Xiangyue and shareholders of Tianjin Xiangyue, as well as among Beijing Xiangyue, Beijing Kaola and shareholders of Beijing Kaola. As a result of the agreements, Beijing Xiangyue has the ability to direct substantially all the activities of Tianjin Xiangyue and Beijing Kaola, and absorb substantially all of the risks and rewards of Tianjin Xiangyue and Beijing Kaola. Beijing Xiangyue became the primary beneficiary of Tianjin Xiangyue and Beijing Kaola and consolidates the financial results of Tianjin Xiangyue and Beijing Kaola. 1 Operations and Reorganization (Continued) b Contractual agreements with VIEs The following is a summary of (i) the contracts by and among Dasheng Online, Dasheng Zhixing, and the shareholders of Dasheng Zhixing; (ii) the contracts by and among COE HK Co I, Philippines Co I, and the shareholders of Philippines Co I and (iii) the contracts by and among HAWO Online, Dasheng HAWO, and the shareholders of Dasheng HAWO (iv) the contracts by and among Dasheng Online, Dasheng Zhiyun, and the shareholders of Dasheng Zhiyun (v) the contracts by and among Beijing Xiangyue, Tianjin Xiangyue, and the shareholders of Tianjin Xiangyue (vi) the contracts by and among Beijing Xiangyue, Beijing Kaola, and the shareholders of Beijing Kaola. Contractual Agreements with Dasheng Zhixing Amended and Restated Exclusive Business Cooperation Agreement. Exclusive Option Agreements. Powers of Attorney. 1 Operations and Reorganization (Continued) Equity Interest Pledge Agreements. Spousal Consent Letters. Contractual Agreements with Philippines Co I Exclusive Business Cooperation Agreements. Exclusive Option Agreements. 1 Operations and Reorganization (Continued) Powers of Attorney. Contractual Agreements with Dasheng HAWO Exclusive Business Cooperation Agreement. Exclusive Option Agreement. Power of Attorney. Equity Interest Pledge Agreement. If Dasheng HAWO or Dasheng HAWO’s shareholder breaches its contractual obligations under the contractual arrangements, HAWO Online 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 Dasheng HAWO in accordance with legal procedures. HAWO Online has the right to receive dividends generated by the pledged equity interests during the term of the pledge. The pledge will remain binding until Dasheng HAWO and the sole shareholder discharge all their obligations under the contractual arrangements. The equity pledge has been registered with the registration authorities of industries and commerce in accordance with PRC law. 1 Operations and Reorganization (Continued) Spousal Consent Letter. Contractual Agreements with Dasheng Zhiyun Exclusive Business Cooperation Agreements. Exclusive Option Agreements. Powers of Attorney. Equity Interest Pledge Agreement. 1 Operations and Reorganization (Continued) If Dasheng Zhiyun or any of Dasheng Zhiyun’s shareholders breaches its contractual obligations under the contractual arrangements, Dasheng Online 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 Dasheng Zhiyun in accordance with legal procedures. Dasheng Online has the right to receive dividends generated by the pledged equity interests during the term of the pledge. The pledge will remain binding until Dasheng Zhiyun and the shareholders discharge all their obligations under the contractual arrangements. The equity pledge has been registered with the registration authorities of industries and commerce in accordance with PRC law. Spousal Consent Letters. 1 Operations and Reorganization (Continued) c Risks in relation to the VIE structure The following table sets forth the assets, liabilities, results of operations and changes in cash and cash equivalents of the VIEs and VIEs’ subsidiaries, which were included in the Group’s consolidated balance sheets, consolidated statements of comprehensive income/(loss) and consolidated statements of cash flows: The consolidated VIEs includes: Dasheng Zhixing and its subsidiaries Shenzhen Zhixing, Zhixing(Tianjin), Zhishi Training and Houdezaiwu Online, Philippines Co I, Dasheng HAWO, Dasheng Zhiyun, Tianjin Xiangyue and Beijing Kaola: As of December 31, 2020 2021 RMB RMB Cash and cash equivalents 175,439 37,577 Restricted cash — 50,518 Time deposits- current and non-current 692,000 37,000 Short-term investments 434,548 504,032 Prepaid expenses and other current assets 268,305 49,890 Inventory 1,935 1,080 Amounts due from inter-company entities* 806,186 954,407 Property and equipment, net 14,547 10,530 Intangible assets, net 1,780 1,416 Rights-of-use assets 71,839 24,891 Deferred tax assets 9,684 56,629 Other assets 22,345 4,013 Total assets 2,498,608 1,731,983 Advances from students-current 2,718,776 1,731,884 Advances from students-non-current 2,270 1,126 Accrued expenses and other current liabilities 121,539 50,636 Taxes payable 15,693 22,897 Lease liability-current and non-current 69,515 26,111 Amounts due to inter-company entities* 218,149 327,487 Other non-current liabilities 244 224 Total liabilities 3,146,186 2,160,365 * All inter-company balances have been eliminated upon consolidation. For the year ended December 31, 2019 2020 2021 RMB RMB RMB Third-party revenues 1,478,493 2,054,095 2,175,366 Intra-Group revenues — 8,434 14,922 Total revenues 1,478,493 2,062,529 2,190,288 Third-party costs and expenses (832,962) (1,055,643) (1,080,447) Intra-Group costs and expenses (691,968) (748,556) (975,011) Total costs and expenses (1,524,930) (1,804,199) (2,055,458) Other income — 43,237 21,603 Income (loss) from operations (46,437) 301,567 156,433 Others 8,713 38,637 20,151 Income (loss) before income tax expenses (37,724) 340,204 176,584 Income tax benefits 22 9,655 46,735 Net income/(loss) (37,702) 349,859 223,319 For the year ended December 31, 2019 2020 2021 RMB RMB RMB Net cash provided by operating activities with external parties 1,167,957 1,608,807 378,973 Net cash used in operating activities with intra-Group entities (793,220) (930,593) (890,487) Net cash provided by/(used in) operating activities* 374,737 678,214 (511,514) Net cash (used in)/provided by investing activities with external parties (287,883) (718,832) 567,970 Net cash used in investing activities with intra-Group entities — — (147,160) Net cash (used in)/provided by investing activities (287,883) (718,832) 420,810 Net cash provided by financing activities with intra-Group entities — — 3,366 Net cash provided by financing activities — — 3,366 * The year over year decrease from 2020 to 2021 was primarily due to the Group has stopped selling online tutoring services taught by foreign teachers located overseas toK-12 students in mainland China to comply with the Opinions on Further Alleviating the Burden of Homework and After-School Tutoring for Students in Compulsory Education released on July 24, 2021. Refer to Note 1 (d) – liquidity and going concern. 1 Operations and Reorganization (Continued) Under the contractual arrangements with the VIEs, the Company has the power to direct activities of the VIEs through Dasheng Online, COE HK Co I, HAWO Online, Beijing Xiangyue, and can have assets transferred freely out of the VIEs without restrictions. Therefore, the Company considers that there is no asset of the VIEs that can only be used to settle obligations of the respective VIEs, except for registered capital of Dasheng Zhixing amounting to RMB1,143 and RMB1,166 as of December 31, 2020 and 2021, respectively. Since the VIEs are incorporated as limited liability companies under the PRC and Philippine Company Law, creditors of the VIEs do not have recourse to the general credit of the Company. There is currently no contractual arrangement that would require the Company to provide additional financial support to the VIEs. The Group believes that the contractual arrangements among Dasheng Online, COE HK Co I and HAWO Online, Beijing Xiangyue, the VIEs and their shareholders are in compliance with PRC and Philippine laws and regulations, as applicable, and are legally binding and enforceable. However, uncertainties in the PRC and Philippine legal system could limit the Company’s ability to enforce these contractual arrangements. On March 15, 2019, the National People’s Congress promulgated the Foreign Investment Law, which took effect on January 1, 2020. Since it is relatively new, substantial uncertainties exist in relation to its interpretation and implementation. The Foreign Investment Law does not explicitly classify whether variable interest entity that are controlled through contractual arrangements would be deemed as foreign invested enterprises if they are ultimately “controlled” by foreign investors. However, it has a catch-all provision under definition of “foreign investment” that includes investments made by foreign investors in China through other means as provided by laws, administrative regulations or other methods prescribed by the State Council. Therefore, it still leaves leeway for future laws, administrative regulations or provisions of the State Council to provide for contractual arrangements as a form of foreign investment, at which time it will be uncertain whether the Group’s contractual arrangements will be deemed to be in violation of the market access requirements for foreign investment in the PRC and if yes, how the Group’s contractual arrangements should be dealt with. The Foreign Investment Law grants national treatment to foreign-invested entities, except for those foreign-invested entities that operate in industries specified as either “restricted” or “prohibited” from foreign investment in the Special Administrative Measures for Access of Foreign Investment (Negative List) (2021 Version), or the 2021 Negative List, which was jointly promulgated by the Ministry of Commerce of the People’s Republic of China (“MOFCOM”) and the National Development and Reform Commission (“NDRC”) on December 27, 2021 and became effective on January 1, 2022. The Foreign Investment Law provides that foreign-invested entities operating in “restricted” or “prohibited” industries are required to obtain market entry clearance and other approvals from relevant PRC government authorities. If the Group’s control over the PRC consolidated VIEs through contractual arrangements are deemed as foreign investment in the future, and any business of the PRC consolidated VIEs is “restricted” or “prohibited” from foreign investment under the “negative list” effective at the time, the Group may be deemed to be in violation of the Foreign Investment Law, the contractual arrangements that allow us to have control over the PRC consolidated VIEs may be deemed as invalid and illegal, and the Group may be required to unwind such contractual arrangements and/or restructure the Group’s business operations, any of which may have a material adverse effect on the Group’s business operation. The Company’s ability to control the VIEs also depends on the Power of Attorney. The consolidated VIEs have to vote on all matters requiring shareholder approval in the VIEs. As noted above, the Company believes these Power of Attorney are legally enforceable but may not be as effective as direct equity ownership. In addition, if the Group’s corporate structure or the contractual arrangements with the VIEs were found to be in violation of any existing PRC or Philippine laws and regulations, the PRC or the Philippine regulatory authorities could, within their respective jurisdictions: ● ● ● ● 1 Operations and Reorganization (Continued) ● ● ● The imposition of any of these restrictions or actions may result in a material adverse effect on the Group’s ability to conduct its business. In addition, if the imposition of any of these restrictions causes the Group to lose the right to direct the activities of the VIEs or the right to receive their economic benefits, the Group would no longer be able to consolidate the financial statements of the VIEs. In the opinion of management, the likelihood of losing the benefits in respect of the Group’s current ownership structure or the contractual arrangements with the VIEs is remote. As of December 31, 2020 and 2021, the aggregate accumulated deficit of the VIEs was approximately RMB723,925 and RMB515,435 respectively, which have been included in the Group’s accompanying consolidated financial statements. d Liquidity and going concern The Group’s consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and liquidation of liabilities during the normal course of operations. The Group incurred net losses of RMB104,420 for the year ended December 31, 2019, earned net income of RMB146,962 and RMB120,574 for the years ended December 31, 2020 and 2021, respectively. Accumulated deficits were RMB2,051,940 and RMB1,931,366 as of December 31, 2020 and 2021, respectively. The net current liabilities were RMB1,400,431 and RMB929,524 as of December 31, 2020 and 2021, respectively. The operating cash inflows were RMB 397,933 and RMB719,243 for the years ended December 31, 2019 and 2020 and the operating cash outflows were RMB676,063 for the year ended December 31, 2021. The Company assesses its liquidity by its ability to generate cash from operating activities to fund its operations, attract investors and borrow funds on favorable economic terms. On July 24, 2021, the Opinions on Further Alleviating the Burden of Homework and After-School Tutoring for Students in Compulsory Education (the “Alleviating Burden Opinion “or the “Opinion”) was issued by the General Office of the CPC Central Committee and the General Office of the State Council. The Opinion contains high-level policy directives about requirements and restrictions related to online and offline after-school tutoring services, including, among others, banning foreign teachers located overseas from providing tutoring services in the mainland of China. As a result, the Company has stopped selling online tutoring services taught by foreign teachers located overseas to new K-12 students in the mainland of China except for the foregoing, to comply with the Alleviating Burden Opinion. The Company’s continuous operation depends on (i) the level of subsequent refunds to paying students, (ii) whether the Company is allowed to continuously deliver the online tutoring services taught by foreign teachers located overseas to K-12 students in the mainland of China sold before the issuance of the Opinion; (iii) whether the Company may become subject to fines or other penalties by regulators, and (iv) the success of the Company’s business plans as mentioned above. All these factors are subject to inherent uncertainties. The Company’s accumulated deficits and net current liabilities as of December 31, 2021 and the operating cash outflow for the year then ended, and the Company’s business, financial condition, results of operations, and prospects have been and will be materially and adversely affected by the Opinion. These conditions cast substantial doubt about the Company’s ability to continue as a going concern. The Company has taken the following actions and plans to mitigate the significant decline in lessons sold: (i) The Company developed and released all-round proficiency course offering taught by Chinese teachers for K-12 students in the mainland of China. The Company believe the all-round proficiency course offering is in compliance with the Alleviating Burden Opinion and is allowed to operate under the current VIE structure. (ii) The Company offered one-on-one course taught by foreign teachers to students in overseas markets and plans to expand the international business. (iii) The Company has streamlined its operation to reduce operating expenses and plans to continue containing expenses and improving operating efficiency. (iv) The Company has made effort to reduce advances related to prohibited services by providing refunds, exchanges, or replacing such services with alternative compliant services such as the all-round proficiency course offering and plans to continue to do such business activities subsequently. As of December 31, 2021, advances related to non-compliant services have decreased to RMB 1,126,984 . (v) As of December 31, 2021, the Group's balance of cash and cash equivalents, time deposits (current and non-current) and short-term investments was RMB 942,007 , and the Group had no outstanding borrowing under credit agreements. (vi) The Company is exploring strategic options of divesting part of the business and looking for potential investors for capital injection. However, it is uncertain any option will be available to the Company on commercially acceptab |
