Annual and Transition Report (foreign Private Issuer) (20-f)

E9F4K3F4F4F4F4F4F4K3X12023-01-012022-12-312023-01-01falseFY00017420562020-11-30Expected volatility is estimated based on the average of historical volatilities of the comparable companies in the same industry as at the valuation dates.The risk-free interest rate of periods within the contractual life of the share option is based on the market yield of the US Treasury Strip Bond with a maturity life equal to the expected life to expiration.The Company has no history or expectation of paying dividends on its ordinary shares.Before the IPO, the estimated fair value of the Company’s ordinary shares at their respective grant dates, was determined with the assistance of an independent third party valuation firm by using income approach.The effects of all outstanding share options of 1,051,152 in 2019 and 372,273 in 2020 have been excluded from the computation of diluted loss per share as their effects would be anti-dilutive.Options exercisable for a minimal exercise price are included in the denominator of basic loss per share calculation once there are no further vesting conditions or contingencies associated with them, as they are considered contingently issuable shares. Accordingly, the weighted average number of shares of nil, nil and 215,684 related to these options, for which the exercise price is US$0.01 per share, are included in the denominator for the computation of basic net (loss)/income per share for the years ended December 31, 2019, 2020 and 2021, respectively.Basic and diluted net (loss)/income per ADS calculation was given the retroactive effect per the subsequent event disclosed in Note 21. 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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

(Mark One)

☐	REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

☒	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended

December 31

2021

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

☐	SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report

For the transition period from

Commission file number:

001-38657

LAIX Inc.

(Exact Name of Registrant as Specified in Its Charter)

Not Applicable

(Translation of Registrant’s Name Into English)

The Cayman Islands

(Jurisdiction of Incorporation or Organization)

Yi Wang, Chief Executive Officer

Building C2, No. 1687 Changyang Road

Yangpu District, Shanghai 200090

People’s Republic of China

Telephone:

+86-21-3511-7188

Email: yi.wang@liulishuo.com

(Name, Telephone,

E-mail,

and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:


Title of Each Class	Trading Symbol (1 )	Name of Each Exchange On Which Registered (1 )
American depositary shares, each American depositary share representing fourteen Class A ordinary shares Class A ordinary shares , par value US$0.001 per share*	LAIX	New York Stock Exchange

*	Not for trading, but only in connection with the listing on the New York Stock Exchange and quoting on the OTC Market, as applicable, of the American depositary shares.

(1)

On April 22, 2022, the New York Stock Exchange, or the NYSE, applied to the SEC by filing a Form 25 to delist the American depository shares of LAIX Inc., which is expected to be effective ten days after filing the Form 25. The American depository shares of LAIX Inc. are expected to be delisted from the NYSE and have been quoted on the OTC Market under the symbol “LAIXY” after the NYSE suspended the trading of LAIX Inc’s American depositary shares in April 2022.

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

(Title of Class)

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

None

(Title of Class)

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

As of December 31, 2021, there were

50,083,728

ordinary shares issued and outstanding, par value US$0.001 per share, being the sum of

30,408,054

Class A ordinary shares and

19,675,674

Class B ordinary shares.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes ☒

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. ☐ Yes ☒

Note – Checking the box above will not relieve any registrant required to fi le reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒

Yes

☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation

S-T

(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒

Yes

☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a

non-accelerated

filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule

12b-2

of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☐	Non-accelerated filer	☒

				Emerging growth company	☒

If an emerging growth company that

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

☒

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

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

☐

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


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

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

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in

Rule 12b-2

of the Exchange Act). ☐ Yes

☒

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

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

Table of Contents

TABLE OF CONTENTS


INTRODUCTION			1
FORWARD-LOOKING STATEMENTS			2
PART I			3
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS			3
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE			3
ITEM 3. KEY INFORMATION			3
ITEM 4. ITEM 4. INFORMATION ON THE COMPANY			54
ITEM 4A. UNRESOLVED STAFF COMMENTS			90
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS			90
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES			104
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS			112
ITEM 8. FINANCIAL INFORMATION			114
ITEM 9. THE OFFER AND LISTING			115
ITEM 10. ADDITIONAL INFORMATION			116
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			124
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES			125
PART II			127
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES			127
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS			127
ITEM 15. CONTROLS AND PROCEDURES			127
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT			128
ITEM 16B. CODE OF ETHICS			128
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES			128
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES			129
ITEM 16E. PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS			129
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT			129
ITEM 16G. CORPORATE GOVERNANCE			129
ITEM 16H. MINE SAFETY DISCLOSURE			129
ITEM 16I. DISCLOSURE REGARDING FOREIGN JURISDICTION THAT PREVENT INSPECTIONS			129
PART III			129
ITEM 17. FINANCIAL STATEMENTS			129
ITEM 18. FINANCIAL STATEMENTS			129
ITEM 19. EXHIBITS			130
SIGNATURES			132

Table of Contents

INTRODUCTION

Except where the context otherwise requires and for purpose of this annual report only:

•

“ADRs” are to the American depositary receipts that evidence our ADSs;

•

“ADSs” are to our American depositary shares, each of which currently represents fourteen Class A ordinary shares;

•

“LAIX,” “we,” “us,” “our company” and “our” are to LAIX Inc., its subsidiaries, and, in the context of describing our operations and consolidated financial statements, also include the variable interest entities;

•

“China” or the “PRC” are to the People’s Republic of China, excluding, for the purposes of this annual report only, Hong Kong, Macau and Taiwan;

•

“monthly active users” or “MAUs” are to the number of registered users that launched our mobile app(s) during a given month; we derive the average monthly active users in a certain period by computing the average of monthly active users of all months in that period;

•

“paying users” for a certain period are to users who make payments for any of our courses and services during that period; a user who makes payments across different courses and services offered on the same mobile app using the same registered account is counted as one paying user; a user who makes payments for the same course or service multiple times in the same period is counted as one paying user;

•

“gross billings” for a certain period are to the total amount of cash received from the sale of course packages in that period, net of the total amount of cash refunds paid to users in the same period;

•

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

•

“Class A ordinary shares” are to our Class A ordinary shares, par value US$0.001 per share;

•

“Class B ordinary shares” are to our Class B ordinary shares, par value US$0.001 per share;

•

“shares” or “ordinary shares” are to our Class A and Class B ordinary shares, par value US$0.001 per share; and

•

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

Effective March 4, 2022, we effected a change of the ratio of the ADS to our Class A ordinary shares from one ADS representing one Class A ordinary share to one ADS representing fourteen Class A ordinary shares. Currently, each ADS represents fourteen Class A ordinary shares. The change in the ratio of the ADS to our Class A ordinary shares had no impact on our underlying Class A ordinary shares, and no Class A ordinary shares were issued or cancelled in connection with the change in the ratio of the ADS to our Class A ordinary shares. Unless otherwise indicated, ADSs and per ADS amount in this annual report have been retroactively adjusted to reflect the changes in ratio for all periods presented.

Our reporting currency is the Renminbi because our business is mainly conducted in China and all of our revenues are denominated in Renminbi. This annual report contains translations of Renminbi amounts into U.S. dollars at specific rates solely for the convenience of the reader. The conversion of Renminbi into U.S. dollars in this annual report is based on the exchange rate set forth in the H.10 statistical release of the Board of Governors of the Federal Reserve System. Unless otherwise noted, all translations from Renminbi to U.S. dollars and from U.S. dollars to Renminbi in this annual report were made at a rate of RMB6.3726 to US$1.00, the noon buying rate on December 30, 2021, as set forth in the H.10 statistical release of the Board of Governors of the Federal Reserve System. We make no representation that any Renminbi or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or Renminbi, as the case may be, at any particular rate, the rates stated below, or at all. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of Renminbi into foreign exchange and through restrictions on foreign trade. On April 22, 2022, the noon buying rate for Renminbi was RMB6.5010 to US$1.00.

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FORWARD-LOOKING STATEMENTS

This annual report on Form

20-F

contains forward-looking statements that reflect our current expectations and views of future events. These statements are made under the “safe harbor” provisions of Section 21E of the Securities Exchange Act of 1934, as amended. Known and unknown risks, uncertainties and other factors, including those listed under “Item 3. Key Information—D. Risk Factors,” may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements.

You can identify some of these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “is/are likely to,” “potential,” “continue” or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include, among other things, statements relating to:

•

our goals and strategies;

•

our future business development, financial condition and results of operations;

•

the expected growth of the AI technology and education industries in China;

•

our expectations regarding demand for and market acceptance of our products and services;

•

our expectations regarding our relationships with users, content providers, third-party service providers and other stakeholders;

•

competition in our industry; and

•

relevant government policies and regulations relating to our industry.

These forward-looking statements involve various risks and uncertainties. Although we believe that our expectations expressed in these forward-looking statements are reasonable, our expectations may later be found to be incorrect. Our actual results could be materially different from our expectations. Important risks and factors that could cause our actual results to be materially different from our expectations are generally set forth in “Item 3. Key Information—D. Risk Factors,” “Item 4. Information on the Company—B. Business Overview,” “Item 5. Operating and Financial Review and Prospects,” and other sections in this annual report. You should read thoroughly this annual report and the documents that we refer to with the understanding that our actual future results may be materially different from and worse than what we expect. We qualify all of our forward-looking statements by these cautionary statements.

This annual report contains certain data and information that we obtained from various government and private publications. Statistical data in these publications also include projections based on a number of assumptions. The AI technology and education industries may not grow at the rate projected by market data, or at all. Failure of this market to grow at the projected rate may have a material and adverse effect on our business and the market price of our ADSs. In addition, the rapidly evolving nature of the AI technology and education industries results in significant uncertainties for any projections or estimates relating to the growth prospects or future condition of our market. Furthermore, if any one or more of the assumptions underlying the market data are later found to be incorrect, actual results may differ from the projections based on these assumptions. You should not place undue reliance on these forward-looking statements.

The forward-looking statements made in this annual report relate only to events or information as of the date on which the statements are made in this annual report. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this annual report and the documents that we refer to in this annual report and have filed as exhibits to the registration statement, of which this annual report is a part, completely and with the understanding that our actual future results may be materially different from what we expect.

Table of Contents

PART I

ITEM 1.

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

ITEM 2.

OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3.

KEY INFORMATION

Our Holding Company Structure and Contractual Arrangements with the Variable Interest Entities

LAIX Inc. is not an operating company in China but a Cayman Islands holding company with no equity ownership in the variable interest entities. We conduct our operations in China through (i) our PRC subsidiaries, and (ii) the variable interest entities with which we have maintained contractual arrangements and their subsidiaries in China. PRC laws and regulations prohibit foreign investment in internet and other-related businesses. Accordingly, we conduct substantially all of our operations in China through the variable interest entities and we rely on contractual arrangements among our PRC subsidiaries, the variable interest entities and their shareholders to control the business operations of the variable interest entities and their subsidiaries. Revenues contributed by the variable interest entities accounted for 100.0%, 100.0% and 100.0% of our total revenues for the year ended December 31, 2019, 2020 and 2021, respectively. As used in this annual report, “we,” “us,” “our company” and “our” refers to LAIX Inc., its subsidiaries, and, in the context of describing our operations and consolidated financial information, also include the variable interest entities in China, primarily including Shanghai Liulishuo Information Technology Co., Ltd., Shanghai Mengfan Education Technology Co., Ltd. and Shanghai Mengfan Cultural Communication Co., Ltd. Investors in our ADSs are not purchasing equity interest in the variable interest entities in China but instead are purchasing equity interest in a holding company incorporated in the Cayman Islands.

A series of contractual agreements, including powers of attorney, exclusive technology service agreements, equity pledge agreements, exclusive call option agreements, and loan agreements (applicable to Shanghai Mengfan Education Technology Co., Ltd. only), have been entered into by and among our subsidiaries, the variable interest entities and their respective shareholders. Terms contained in each set of contractual arrangements with the variable interest entities and their respective shareholders are substantially similar. As a result of the contractual arrangements, we have effective control over and are considered the primary beneficiary of these companies, and we have consolidated the financial results of these companies in our consolidated financial statements. For more details of these contractual arrangements, see “Item 4. Information on the Company – C. Organizational Structure – Contractual Arrangements with the VIEs and Their Respective Shareholders.”

However, the contractual arrangements may not be as effective as direct ownership in providing us with control over the variable interest entities and we may incur substantial costs to enforce the terms of the arrangements. In addition, these agreements have not been tested in China courts. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Corporate Structure—We rely on contractual arrangements with the VIEs and their respective shareholders to exercise control over a significant part of our business, which may not be as effective as direct ownership in providing operational control” and “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Corporate Structure—The shareholders of the VIEs may have potential conflicts of interest with us, which may materially and adversely affect our business and financial condition.”

There are also substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations and rules regarding the status of the rights of our Cayman Islands holding company with respect to its contractual arrangements with the variable interest entities and their shareholders. It is uncertain whether any new PRC laws or regulations relating to variable interest entity structures will be adopted or if adopted, what they would provide. If we or any of the variable interest entities is found to be in violation of any existing or future PRC laws or regulations, or fail to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities would have broad discretion to take action in dealing with such violations or failures. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Corporate Structure—If the PRC government deems that our contractual arrangements with the VIEs do not comply with PRC regulatory restrictions on foreign investment in the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations” and “Item 3. Key Information—D. Risk Factors—Risks Relating to Doing Business in China—Substantial uncertainties exist with respect to the interpretation and implementation of the PRC Foreign Investment Law and Double Alleviating Opinions and how they may impact the viability of our current corporate structure, corporate governance and business operations.”

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Our corporate structure is subject to risks associated with our contractual arrangements with the variable interest entities. If the PRC government deems that our contractual arrangements with the variable interest entities do not comply with PRC regulatory restrictions on foreign investment in the relevant industries, or if these regulations or the interpretation of existing regulations change or are interpreted differently in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations. Our holding company, our PRC subsidiaries and variable interest entities, and investors of 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, significantly affect the financial performance of the variable interest entities and our company as a whole. For a detailed description of the risks associated with our corporate structure, please refer to risks disclosed under “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Corporate Structure.”

We face various risks and uncertainties related to doing business in China. Our business operations are primarily conducted in China, and we are subject to complex and evolving PRC laws and regulations. For example, we face risks associated with regulatory approvals on offshore offerings, anti-monopoly regulatory actions, and oversight on cybersecurity and data privacy, as well as the lack of inspection by the Public Company Accounting Oversight Board, or the PCAOB, on our auditors, which may impact our ability to conduct certain businesses, accept foreign investments, or list on a United States or other foreign exchange. These risks could result in a material adverse change in our operations and the value of our ADSs, significantly limit or completely hinder our ability to continue to offer securities to investors, or cause the value of such securities to significantly decline or be of little or no value. For a detailed description of risks related to doing business in China, please refer to risks disclosed under “Item 3. Key Information—D. Risk Factors—Risks Relating to Doing Business in China.”

PRC government’s significant authority in regulating our operations and its oversight and control over offerings conducted overseas by, and foreign investment in, China-based issuers could significantly limit or completely hinder our ability to offer or continue to offer securities to investors. Implementation of industry-wide regulations, including data security or anti-monopoly related regulations, in this nature may cause the value of such securities to significantly decline or be of little or no value. For more details, see “Item 3. Key Information—D. Risk Factors—Risks Relating to Doing Business in China—The PRC government’s significant oversight over our business operation could result in a material adverse change in our operations and the value of our ADSs and ordinary shares.”

Risks and uncertainties arising from the legal system in China, including risks and uncertainties regarding the enforcement of laws and quickly evolving rules and regulations in China, could result in a material adverse change in our operations and the value of our ADSs. For more details, see “Item 3. Key Information—D. Risk Factors—Risks Relating to Doing Business in China—Substantial uncertainties exist with respect to the interpretation and implementation of the PRC Foreign Investment Law and Double Alleviating Opinions and how they may impact the viability of our current corporate structure, corporate governance and business operations” and “Item 3. Key Information—D. Risk Factors—Risks Relating to Doing Business in China—Uncertainties with respect to the PRC legal system could adversely affect us.”

Permissions Required from the PRC Authorities for our Operations

We conduct our business in China primarily through our subsidiaries and the variable interest entities in China. Our operations in China are governed by PRC laws and regulations. As of the date of this annual report, our PRC subsidiaries and the variable interest entities have obtained the necessary licenses and permits from the PRC government authorities that are material for the business operations of our subsidiaries and the variable interest entities in China, including, among others, the value-added telecommunications business operating license with the approved business scope of “internet information service” and filing of multi-level protection of cyber security (level three). In addition, in response to the Opinions on Further Alleviating the Burden of Homework and After-School Tutoring for Students in Compulsory Education, or the Double Alleviating Opinions, issued by the General Office of the CPC Central Committee and the General Office of the State Council on July 24, 2021, which is intended to strengthen the supervision of discipline training institutions for the compulsory education stage and also mandates management of

off-campus

training for preschool children and high school students, we ceased the operations of our “Kids Liulishuo” for the avoidance of being deemed as an institution that might be subject to the restrictive requirements of the Double Alleviating Opinions due to our content offering on Kids Liulishuo and started to collaborate with Shanghai Yangpu District Liuli Education and Training Center, or Yangpu Liuli, a private

non-profit

institution established by our three founders with a private school operating permit, to have Yangpu Liuli operate Kids Liulishuo.

Due to the development of our businesses, and also given the uncertainties of interpretation and implementation of relevant laws and regulations and the enforcement practice by relevant government authorities, we are required and may further be required to obtain additional licenses, permits, filings or approvals for the functions and services of our platform in the future. For more detailed information, see “Item 3. Key Information—D. Risk Factors—Risks Relating to Doing Business in China— Our failure to obtain, maintain or renew other licenses, approvals, permits, registrations or filings necessary to conduct our operations in China could have a material adverse impact on our business, financial conditions and results of operations.”

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Furthermore, in connection with our historical listing on the New York Stock Exchange and the current quoting on the OTC Market of our securities, under current PRC laws, regulations and regulatory rules, as of the date of this annual report, we, our PRC subsidiaries and the variable interest entities, (i) are not required to obtain permissions from the China Securities Regulatory Commission, or the CSRC, (ii) are not required to go through cybersecurity review by the Cyberspace Administration of China, or the CAC, and (iii) have not received or were denied such requisite permissions by any PRC authority.

However, the PRC government has recently indicated an intent to exert more oversight and control over offerings that are conducted overseas and/or foreign investment in China-based issuers. For more detailed information, see “Item 3. Key Information—D. Risk Factors—Risks Relating to Doing Business in China—The approval of the CSRC or other PRC government authorities may be required in connection with our offshore offerings under PRC law, and, if required, we cannot predict whether or for how long we will be able to obtain such approval.”

Cash and Asset Flows through Our Organization

LAIX Inc. is a holding company with no material operations of its own. We conduct our operations primarily through our PRC subsidiaries, the variable interest entities and their subsidiaries in China. As a result, LAIX Inc.’s ability to pay dividends depends upon dividends paid by our PRC subsidiaries. If our existing PRC subsidiaries or any newly formed ones incur debt on their own behalf in the future, the instruments governing their debt may restrict their ability to pay dividends to us. In addition, our wholly foreign-owned subsidiaries in China are permitted to pay dividends to us only out of its retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. Remittance of dividends by a wholly foreign-owned enterprise out of China is also subject to examination by the banks designated by SAFE. Under PRC law, each of our subsidiaries and the variable interest entities in China is required to make appropriations to certain statutory reserve funds or may make appropriations to certain discretionary funds, which are not distributable as cash dividends except in the event of a solvent liquidation of the companies. For more details, see “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Holding Company Structure.” and “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Corporate Structure—We may rely on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our PRC subsidiaries to make payments to us could have a material and adverse effect on our ability to conduct our business.” Pursuant to the applicable PRC laws and regulations, our PRC subsidiaries and variable interest entities are currently not eligible to pay dividends or otherwise transfer any of their net assets to us.

Under PRC laws, LAIX Inc. may, through its intermediary holding companies, provide funding to our PRC subsidiaries only through capital contributions or loans, and to the variable interest entities only through loans, subject to satisfaction of applicable government registration and approval requirements. For the years ended December 31, 2019, 2020 and 2021, LAIX Inc., through its intermediate holding companies, provided capital contributions of RMB71.3 million, RMB172.4 million and RMB186.7 million (US$29.3 million), respectively, to its PRC subsidiaries. For the years ended December 31, 2019, 2020 and 2021, no loans were provided by LAIX Inc. or its intermediary holding companies to its PRC subsidiaries or the variable interest entities. For the years ended December 31, 2019, 2020 and 2021, the service fee charged by the primary beneficiary of the variable interest entities to the variable interest entities was RMB601.0 million, RMB426.9 million and RMB233.9 million (US$36.7 million), respectively. For details of the financial position, cash flows and results of operations of the variable interest entities, see “—Financial Information Related to the Variable Interest Entities” and pages

F-12

F-13

of this annual report on Form

20-F.

For the years ended December 31, 2019, 2020 and 2021, no assets other than cash were transferred between the Cayman Islands holding company and a subsidiary, a variable interest entity or its subsidiary of our Group, and no subsidiaries paid dividends or made other distributions to the holding company.

LAIX Inc. has not declared or paid any cash dividends, nor does it has any present plan to pay any cash dividends on its ordinary shares in the foreseeable future. We currently intend to retain most, if not all, of our available funds and any future earnings to fund the development and growth of our business. See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Dividend Policy.” For the material Cayman Islands, PRC and U.S. federal income tax consequences of an investment in our ADSs or ordinary shares, see “Item 10. Additional Information—E. Taxation.”

Financial Information Related to the Variable Interest Entities

The following table presents the condensed consolidating schedule of financial information of LAIX Inc., its subsidiaries, and the variable interest entities and other entities as of the dates presented.

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Selected Condensed Consolidated Statements of Operations and Comprehensive (Loss)/Income Data


	For the Year Ended December 31, 2021
	LAIX Inc.			Other Subsidiaries			Primary Beneficiary of Variable Interest Entities			Variable Interest Entities			Eliminations			Consolidated Total

	(RMB in thousands)
Net revenue		—			66			227			684,635			—			684,928
Inter-company revenues		—			—			233,868			—			(233,868	)		—

Total costs and operation expenses		(12,640	)		(43,676	)		(249,268	)		(582,950	)		233,868			(654,666	)
Other operating income		—			—			3,620			10,586			—			14,206
Income/(loss) from subsidiaries and VIEs		70,351			111,919			124,277			—			(306,547	)		—
Income/(loss) from others		2,196			2,153			(805	)		13,604			—			17,148
Income/(loss) before income tax expenses		59,907			70,462			111,919			125,875			(306,547	)		61,616
Less: income tax expenses		—			(111	)		—			(1,598	)		—			(1,709	)

Net income/(loss)		59,907			70,351			111,919			124,277			(306,547	)		59,907

Net income/(loss) attributable to LAIX’s shareholders		59,907			70,351			111,919			124,277			(306,547	)		59,907


	For the Year Ended December 31, 2020
	LAIX Inc.			Other Subsidiaries			Primary Beneficiary of Variable Interest Entities			Variable Interest Entities			Eliminations			Consolidated Total

	(RMB in thousands)
Net revenue		—			—			—			972,628			—			972,628
Inter-company revenues		—			—			426,886			—			(426,886	)		—

Total costs and operation expenses		(12,549	)		(12,266	)		(704,748	)		(1,077,640	)		426,886			(1,380,317	)
Other operating income		—			—			—			43			—			43
Income/(loss) from subsidiaries and VIEs		(385,075	)		(381,148	)		(101,843	)		—			868,066			—
Income/(loss) from others		2,797			8,451			(1,442	)		4,915			—			14,721
Income/(loss) before income tax expenses		(394,827	)		(384,963	)		(381,147	)		(100,054	)		868,066			(392,925	)
Less: income tax expenses		—			(112	)		(1	)		(1,789	)		—			(1,902	)

Net income/(loss)		(394,827	)		(385,075	)		(381,148	)		(101,843	)		868,066			(394,827	)

Net income/(loss) attributable to LAIX’s shareholders		(394,827	)		(385,075	)		(381,148	)		(101,843	)		868,066			(394,827	)


	For the Year Ended December 31, 2019
	LAIX Inc.			Other Subsidiaries			Primary Beneficiary of Variable Interest Entities			Variable Interest Entities			Eliminations			Consolidated Total

	(RMB in thousands)
Net revenue		—			—			—			1,023,213			—			1,023,213
Inter-company revenues		—			—			600,999			—			(600,999	)		—

Total costs and operation expenses		(11,787	)		(19,978	)		(857,705	)		(1,321,818	)		600,999			(1,610,289	)
Other operating income		—			—			2,250			140			—			2,390
Income/(loss) from subsidiaries and VIEs		(569,315	)		(561,470	)		(298,596	)		—			1,429,381			—
Income/(loss) from others		6,321			1,910			2,101			1,473			—			11,805
Income/(loss) before income tax expenses		(574,781	)		(579,538	)		(550,951	)		(296,992	)		1,429,381			(572,881	)
Less: income tax expenses		—			(293	)		(3	)		(1,604	)		—			(1,900	)

Net income/(loss)		(574,781	)		(579,831	)		(550,954	)		(298,596	)		1,429,381			(574,781	)

Net income/(loss) attributable to LAIX’s shareholders		(574,781	)		(579,831	)		(550,954	)		(298,596	)		1,429,381			(574,781	)

Table of Contents

Selected Condensed Consolidated Balance Sheets Data


	As of December 31, 2021
	LAIX Inc.			Other Subsidiaries			Primary Beneficiary of Variable Interest Entities			Variable Interest Entities			Eliminations			Consolidated Total

	(RMB in thousands)
Assets
Current assets
Cash and cash equivalents		574			9,168			50,879			2,764			—			63,385
Restricted cash		—			—			171			—			—			171
Accounts receivable, net		—			—			—			2,898			—			2,898
Amount due from subsidiaries and VIEs		895,041			154,499			143,778			3,939			(1,197,257	)		—
Prepayments and other current assets		3,255			754			6,384			32,338			—			42,731
Short-term investments		6,759			—			—			—			—			6,759

Total current assets		905,629			164,421			201,212			41,939			(1,197,257	)		115,944
Non-current assets
Property and equipment, net		—			—			5,263			9,763			—			15,026
Intangible assets, net		—			5,744			287			—			—			6,031
Operating lease right-of-use assets, net		—			—			150			9,133			—			9,283
Investment in subsidiaries		—			—			—			—			—			—
Investment in equity fund		5,580			—			—			—			—			5,580
Other non-current assets		—			—			12			—			—			12
Deferred tax assets		—			—			—			11,974			—			11,974

Total non-current assets		5,580			5,744			5,712			30,870			—			47,906

Total assets		911,209			170,165			206,924			72,809			(1,197,257	)		163,850

Liabilities
Current liabilities
Accounts payable		—			(11,925	)		(7,986	)		(45,676	)		—			(65,587	)
Amount due to subsidiaries and VIEs		(3,409	)		(865,173	)		(111,586	)		(217,089	)		1,197,257			—
Deferred revenue, current		—			—			(263	)		(530,712	)		—			(530,975	)
Salary and welfare payable		—			—			(23,649	)		(31,353	)		—			(55,002	)
Tax payable		—			—			(30,668	)		(48,988	)		—			(79,656	)
Operating lease liability-current		—			—			(59	)		(9,821	)		—			(9,880	)
Accrued liabilities and other current liabilities		(8,931	)		—			(1,904	)		(11,077	)		—			(21,912	)

Total current liabilities		(12,340	)		(877,098	)		(176,115	)		(894,716	)		1,197,257			(763,012	)
Non-current liabilities
Payables to subsidiaries and VIEs		(1,530,855	)		(821,759	)		—			—			2,352,614			—
Payables to VIEs		—			—			(852,471	)		—			852,471			—
Deferred revenue, non-current		—			—			—			(28,055	)		—			(28,055	)
Lease liability - non-current		—			—			(97	)		(129	)		—			(226	)
Other non-current liabilities		—			(2,163	)		—			(2,380	)		—			(4,543	)

Total non-current liabilities		(1,530,855	)		(823,922	)		(852,568	)		(30,564	)		3,205,085			(32,824	)

Total liabilities		(1,543,195	)		(1,701,020	)		(1,028,683	)		(925,280	)		4,402,342			(795,836	)

Total shareholders’ equity/(deficit)		631,986			1,530,855			821,759			852,471			(3,205,085	)		631,986

Total liabilities and shareholders’ equity		(911,209	)		(170,165	)		(206,924	)		(72,809	)		1,197,257			(163,850	)


	As of December 31, 2020
	LAIX Inc.		Other Subsidiaries		Primary Beneficiary of Variable Interest Entities		Variable Interest Entities		Eliminations			Consolidated Total

	(RMB in thousands)
Assets
Current assets
Cash and cash equivalents		2,888		35,483		61,952		37,673		—			137,996
Restricted cash		—		—		491		20		—			511
Accounts receivable, net		—		—		—		5,892		—			5,892
Amount due from subsidiaries and VIEs		866,102		175,434		102,899		4,254		(1,148,689	)		—
Prepayments and other current assets		5,434		541		15,999		36,298		—			58,272
Short-term investments		64,910		26,139		—		—		—			91,049

Total current assets		939,334		237,597		181,341		84,137		(1,148,689	)		293,720
Non-current assets
Property and equipment, net		—		—		14,301		15,773		—			30,074
Intangible assets, net		—		13,881		460		—		—			14,341
Operating lease right-of-use assets, net		—		—		33,626		48,862		—			82,488
Investment in subsidiaries		—		—		—		—		—			—
Investment in equity fund		5,711		—		—		—		—			5,711
Other non-current assets		—		1,223		1,133		3,510		—			5,866
Deferred tax assets		—		—		—		13,547		—			13,547

Total non-current assets		5,711		15,104		49,520		81,692		—			152,027

Total assets		945,045		252,701		230,861		165,829		(1,148,689	)		445,747

Table of Contents


	As of December 31, 2020
	LAIX Inc.			Other Subsidiaries			Primary Beneficiary of Variable Interest Entities			Variable Interest Entities			Eliminations			Consolidated Total

	(RMB in thousands)

Liabilities
Current liabilities
Accounts payable		—			(8,447	)		(24,686	)		(50,443	)		—			(83,576	)
Amount due to subsidiaries and VIEs		(3,415	)		(836,371	)		(139,186	)		(169,717	)		1,148,689			—
Deferred revenue, current		—			—			—			(689,325	)		—			(689,325	)
Salary and welfare payable		—			(240	)		(75,247	)		(56,946	)		—			(132,433	)
Tax payable		—			—			(29,269	)		(48,058	)		—			(77,327	)
Operating lease liability-current		—			—			(12,380	)		(19,465	)		—			(31,845	)
Accrued liabilities and other current liabilities		(1,543	)		(131	)		(1,303	)		(16,405	)		—			(19,382	)

Total current liabilities		(4,958	)		(845,189	)		(282,071	)		(1,050,359	)		1,148,689			(1,033,888	)
Non-current liabilities
Payables to subsidiaries and VIEs		(1,651,038	)		(1,051,928	)		—			—			2,702,966			—
Payables to VIEs		—			—			(976,748	)		—			976,748			—
Deferred revenue, non-current		—			—			—			(56,905	)		—			(56,905	)
Lease liability - non-current		—			—			(23,970	)		(32,933	)		—			(56,903	)
Other non-current liabilities		(1,612	)		(6,622	)		—			(2,380	)		—			(10,614	)

Total non-current liabilities		(1,652,650	)		(1,058,550	)		(1,000,718	)		(92,218	)		3,679,714			(124,422	)

Total liabilities		(1,657,608	)		(1,903,739	)		(1,282,789	)		(1,142,577	)		4,828,403			(1,158,310	)

Total shareholders’ equity/(deficit)		712,563			1,651,038			1,051,928			976,748			(3,679,714	)		712,563

Total liabilities and shareholders’ equity		(945,045	)		(252,701	)		(230,861	)		(165,829	)		1,148,689			(445,747	)

Selected Condensed Consolidated Cash Flows Data


	For the Year Ended December 31, 2021
	LAIX Inc.			Other Subsidiaries			Primary Beneficiary of Variable Interest Entities			Variable Interest Entities			Eliminations			Consolidated Total

	(RMB in thousands)
Cash payment related to intercompany revenue transaction		—			—			—			(228,213	)		228,213			—
Cash receipt related to intercompany revenue transaction		—			—			228,213			—			(228,213	)		—
Cash receipt/(payment) with the third parties for other operating activities		(2,778	)		(107,176	)		(239,407	)		194,209			—			(155,152	)

Net cash provided by (used in) operating activities		(2,778	)		(107,176	)		(11,194	)		(34,004	)		—			(155,152	)
Cash payment to inter-company for investing activities		(58,580	)		—			—			—			58,580			—
Cash receipt/(payment) for other investing activities with third parties		60,316			22,281			—			(925	)		—			81,672

Net cash provided by (used in) investing activities		1,736			22,281			—			(925	)		58,580			81,672
Cash receipt/(payment) with inter-company for financing activities		—			58,580			—			—			(58,580	)		—
Cash receipt/(payment) with the third parties for other financing activities		1,145			—			—			—			—			1,145

Net cash provided by (used in) financing activities		1,145			58,580			—			—			(58,580	)		1,145

Net decrease in cash and cash equivalents		103			(26,315	)		(11,194	)		(34,929	)		—			(72,335	)

Effect of exchange rate changes on cash, cash equivalents and restricted cash		(2,417	)		—			(199	)		—			—			(2,616	)
Cash, cash equivalents and restricted cash at the beginning of the year		2,888			35,483			62,443			37,693			—			138,507
Cash, cash equivalents and restricted cash at end of the year		574			9,168			51,050			2,764			—			63,556

Table of Contents


	For the Year Ended December 31, 2020
	LAIX Inc.			Other Subsidiaries			Primary Beneficiary of Variable Interest Entities			Variable Interest Entities			Eliminations			Consolidated Total

	(RMB in thousands)
Cash payment related to intercompany revenue transaction		—			—			—			(486,619	)		486,619			—
Cash receipt related to intercompany revenue transaction		—			—			486,619			—			(486,619	)		—
Cash receipt/(payment) with the third parties for other operating activities		(13,448	)		(138,136	)		(538,892	)		387,878			—			(302,598	)

Net cash provided by (used in) operating activities		(13,448	)		(138,136	)		(52,273	)		(98,741	)		—			(302,598	)
Cash payment to inter-company for investing activities		(51,282	)		—			—			—			51,282			—
Cash receipt/(payment) for other investing activities with third parties		69,458			103,980			(7,741	)		(1,030	)		—			164,667

Net cash provided by (used in) investing activities		18,176			103,980			(7,741	)		(1,030	)		51,282			164,667
Cash receipt/(payment) with inter-company for financing activities		—			—			51,282			—			(51,282	)		—
Cash receipt/(payment) with the third parties for other financing activities		4,285			—			—			—			—			4,285

Net cash provided by (used in) financing activities		4,285			—			51,282			—			(51,282	)		4,285

Net decrease in cash and cash equivalents		9,013			(34,156	)		(8,732	)		(99,771	)		—			(133,646	)

Effect of exchange rate changes on cash, cash equivalents and restricted cash		(8,153	)		—			(2,676	)		—			—			(10,829	)
Cash, cash equivalents and restricted cash at the beginning of the year		2,028			69,639			73,851			137,464			—			282,982
Cash, cash equivalents and restricted cash at end of the year		2,888			35,483			62,443			37,693			—			138,507


	For the Year Ended December 31, 2019
	LAIX Inc.			Other Subsidiaries			Primary Beneficiary of Variable Interest Entities			Variable Interest Entities			Eliminations			Consolidated Total

	(RMB in thousands)
Cash payment related to intercompany revenue transaction		—			—			—			(562,351	)		562,351			—
Cash receipt related to intercompany revenue transaction		—			—			562,351			—			(562,351	)		—
Cash receipt/(payment) with the third parties for other operating activities		(11,422	)		(36,912	)		(772,180	)		672,350			—			(148,164	)

Net cash provided by (used in) operating activities		(11,422	)		(36,912	)		(209,829	)		109,999			—			(148,164	)
Cash payment to inter-company for investing activities		(195,838	)		—			(1,000	)		—			196,838			—
Cash receipt/(payment) for other investing activities with third parties		76,398			52,668			2,783			(31,603	)		—			100,246

Net cash provided by (used in) investing activities		(119,440	)		52,668			1,783			(31,603	)		196,838			100,246
Cash receipt/(payment) with inter-company for financing activities		—			—			195,838			1,000			(196,838	)		—
Cash receipt/(payment) with the third parties for other financing activities		—			—			—			—			—			—

Net cash provided by (used in) financing activities		(16,344	)		—			195,838			1,000			(196,838	)		(16,344	)

Net increase/(decrease) in cash and cash equivalents		(147,206	)		15,756			(12,208	)		79,396			—			(64,262	)

Effect of exchange rate changes on cash, cash equivalents and restricted cash		2,121			—			401			—			—			2,522
Cash, cash equivalents and restricted cash at the beginning of the year		147,113			53,883			85,658			58,068			—			344,722
Cash, cash equivalents and restricted cash at end of the year		2,028			69,639			73,851			137,464			—			282,982

Table of Contents

Our Selected Consolidated Financial Data

The following selected consolidated comprehensive (loss)/income data for the years ended December 31, 2019, 2020 and 2021, selected consolidated balance sheet data as of December 31, 2020 and 2021 and selected cash flow data for the years ended December 31, 2019, 2020 and 2021 have been derived from our audited consolidated financial statements included elsewhere in this annual report. The selected consolidated statement of comprehensive loss data for the fiscal year ended December 31, 2017 and 2018, the selected consolidated balance sheet data as of December 31, 2017, 2018 and 2019 and the selected consolidated cash flow data for the year ended December 31, 2017 and 2018 are derived from our audited consolidated financial statements not included in this annual report. Our consolidated financial statements are prepared and presented in accordance with the accounting principles generally accepted in the United States of America, or U.S. GAAP. Our historical results do not necessarily indicate results expected for any future periods. You should read this Selected Consolidated Financial Data section together with our consolidated financial statements and the related notes and “Item 5. Operating and Financial Review and Prospects” included elsewhere in this annual report.


	Year Ended December 31,
	2017			2018			2019			2020			2021
	RMB			RMB			RMB			RMB			RMB			US$

	(in thousands, except for share and per share data)
Selected Consolidated Statement of Comprehensive (Loss)/Income
Net revenues		165,561			637,224			1,023,213			972,628			684,928			107,480
Cost of revenues (1)		(57,691	)		(174,731	)		(273,515	)		(277,240	)		(140,439	)		(22,038	)

Gross profit		107,870			462,493			749,698			695,388			544,489			85,442

Operating expenses:
Sales and marketing expenses (1)		(283,055	)		(705,414	)		(969,401	)		(801,362	)		(325,007	)		(51,001	)
Research and development expenses (1)		(53,162	)		(155,154	)		(213,866	)		(190,711	)		(105,066	)		(16,487	)
General and administrative expenses (1)		(19,807	)		(65,423	)		(153,507	)		(111,004	)		(84,154	)		(13,206	)

Total operating expenses		(356,024	)		(925,991	)		(1,336,774	)		(1,103,077	)		(514,227	)		(80,694	)

Other operating income		—			—			2,390			43			14,206			2,229
(Loss)/Income from operations		(248,154	)		(463,498	)		(584,686	)		(407,646	)		44,468			6,977

Other (expenses)/income:
Interest income/(expenses)		1,684			2,732			11,283			904			(3,790	)		(594	)
Foreign exchange related gains/(losses), net		7,144			(4,156	)		(2,533	)		4,671			(63	)		(10	)
Other income, net		2,172			1,016			3,055			9,146			21,001			3,295

Net (loss)/income before tax		(237,154	)		(463,906	)		(572,881	)		(392,925	)		61,616			9,668
Income tax expense		(5,606	)		(24,160	)		(1,900	)		(1,902	)		(1,709	)		(268	)

Net (loss)/income		(242,760	)		(488,066	)		(574,781	)		(394,827	)		59,907			9,400

Series A preferred share redemption value accretion		(3,105	)		(1,978	)		—			—			—			—

Table of Contents


	Year Ended December 31,
	2017			2018			2019			2020			2021
	RMB			RMB			RMB			RMB			RMB			US$

	(in thousands, except for share and per share data)
Series B preferred share redemption value accretion		(12,565	)		(10,140	)		—			—			—			—
Series C preferred share redemption value accretion		(11,147	)		(15,899	)		—			—			—			—

Net (loss)/income attributable to LAIX Inc.’s ordinary shareholders		(269,577	)		(516,083	)		(574,781	)		(394,827	)		59,907			9,400

Foreign currency translation adjustment, net of nil tax		(24,982	)		16,403			13,165			(19,227	)		(2,237	)		(351	)

Comprehensive (loss)/income		(267,742	)		(471,663	)		(561,616	)		(414,054	)		57,670			9,049

Net (loss)/income per ordinary share attributable to ordinary shareholders
—Basic		(13.59	)		(19.17	)		(11.64	)		(7.99	)		1.20			0.19
—Diluted		(13.59	)		(19.17	)		(11.64	)		(7.99	)		1.19			0.19
Weighted average number of ordinary shares used in per share calculation
—Basic		19,834,535			26,921,735			49,364,429			49,430,696			50,022,094			50,022,094
—Diluted		19,834,535			26,921,735			49,364,429			49,430,696			50,277,973			50,277,973

Note:

(1)	Including share-based compensation expenses as follows:


	Year Ended December 31,
	2017		2018		2019		2020		2021
	RMB		RMB		RMB		RMB		RMB		US$

	(in thousands)
Cost of revenues		1,341		667		1,657		7,154		2,176		341
Sales and marketing expenses		2,380		6,637		590		3,282		1,060		166
Research and development expenses		3,800		27,114		13,966		14,432		13,355		2,096
General and administrative expenses		997		11,055		10,470		4,159		5,454		856

Total		8,518		45,473		26,683		29,027		22,045		3,459

The following table presents our selected consolidated balance sheet data as of the dates indicated:


	As of December 31,
	2017			2018		2019 (1)			2020 (2)			2021
	RMB			RMB		RMB			RMB			RMB			US$

	(in thousands)
Selected Consolidated Balance Sheet:
Current assets:
Cash, cash equivalents and restricted cash		416,483			344,722		282,982			138,507			63,556			9,973
Short-term investments		35,422			403,107		269,643			91,049			6,759			1,061
Accounts receivable, net		7,236			14,403		7,360			5,892			2,898			455
Prepayments and other current assets		21,907			109,552		86,787			58,272			42,731			6,705
Total current assets		481,048			871,784		646,772			293,720			115,944			18,194
Total assets		494,325			950,383		919,177			445,747			163,850			25,712
Total current liabilities		288,500			730,457		1,114,417			1,033,888			763,012			119,733
Total liabilities		290,408			731,489		1,243,982			1,158,310			795,836			124,883
Total mezzanine equity		651,904			—		—			—			—			—
Total shareholders’ equity (deficits)		(447,987	)		218,894		(324,805	)		(712,563	)		(631,986	)		(99,171	)

Notes:

(1)

Effective from January 1, 2019, we adopted ASC 842, a new accounting standard on the recognition of

right-of-use

assets and operating lease liabilities issued by FASB in February 2016, and have applied this accounting standard on a modified retrospective basis and have elected not to restate comparative periods. See Note 2(u) to our audited consolidated financial statements included elsewhere in this annual report for further information.

Table of Contents

(2)

Effective from January 1, 2020, we adopted ASU

2016-13,

a new guidance for credit losses on instruments issued by FASB in June 2016. The adoption did not have a material impact on our consolidated financial statements and related disclosures. See Note 2(i) to our audited consolidated financial statements included elsewhere in this annual report for further information.

Table of Contents

The following table presents our selected consolidated cash flow data for the periods indicated:


	Year Ended December 31,
	2017			2018			2019			2020			2021
	RMB			RMB			RMB			RMB			RMB			US$

	(in thousands)
Selected Consolidated Cash Flow Data:
Net cash used in operating activities		(60,120	)		(112,942	)		(148,164	)		(302,598	)		(155,152	)		(24,346	)
Net cash provided by/(used in) investing activities		69,901			(417,716	)		100,246			164,667			81,672			12,815
Net cash provided by/(used in) financing activities		377,191			443,978			(16,344	)		4,285			1,145			180
Net (decrease)/increase in cash, cash equivalents and restricted cash		386,972			(86,680	)		(64,262	)		(133,646	)		(72,335	)		(11,351	)
Exchange rate effect on cash, cash equivalents and restricted cash		(11,790	)		14,919			2,522			(10,829	)		(2,616	)		(411	)
Cash, cash equivalents and restricted cash at the beginning of year		41,301			416,483			344,722			282,982			138,507			21,735
Cash, cash equivalents and restricted cash at the end of year		416,483			344,722			282,982			138,507			63,556			9,973

Reserved

B.	Capitalization and Indebtedness

Not applicable.

C.	Reasons for the Offer and Use of Proceeds

Not applicable.

D.	Risk Factors

Summary of Risk Factors

An investment in our ADSs or ordinary shares involves significant risks. Below is a summary of material risks we face, organized under relevant headings. These risks are discussed more fully in “Item 3. Key Information—D. Risk Factors.”

Risks Relating to Our Business

•

We have a limited operating history in a new market at the intersection of the rapidly evolving AI technology and education industries and our historical operating and financial results may not be indicative of future performance, which makes it difficult to predict our future business prospects and financial performance.

•

If we are not able to continue to attract and retain users, convert

non-paying

users into paying users, and increase spending of paying users on our products and services, our business and prospects may be materially and adversely affected.

•

The success and future growth of our business relies to a large extent on the public recognition and acceptance of our

AI-powered

education approach, the actual and perceived effectiveness of such education approach and mobile apps as learning tools.

•

We have incurred net losses, negative cash flows from operation activities and net current liabilities in prior years. Even though we generated net income for the year ended December 31, 2021, we still recorded net operating cash outflow and there can be no assurance that we are able to maintain profitability in the future. If we are not able to maintain profitability or raise sufficient capital to cover our capital needs, we may not continue as a going concern.

•

We may fail to continue to develop, innovate and utilize our technologies, especially AI technologies, which are core to our success.

•

We may not be able to develop and introduce new products and services or upgrade existing products and services to meet changing user preferences in a timely and cost-effective manner, which may adversely affect our business, financial performance and prospects.

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•

We rely on Weixin, a third-party social network program, to conduct parts of our courses and deliver a significant portion of our services.

•

If fewer users are motivated or inspired to improve their English proficiency, the demand for our products and services may decline, which may in turn adversely affect our business and results of operations.

•

We may not be able to successfully execute our strategies and implement our transition initiatives. Failure to address those risks and challenges could materially and adversely affect our business, results of operations, financial condition and future prospects.

•

We face competition from players in multiple industries and may fail to compete effectively.

•

Our business and results of operations may be harmed by any failure to maintain and enhance the value of our brand, as well as any negative or malicious publicity about us.

•

We may not be able to successfully diversify our revenue streams.

Risks Relating to our Corporate Structure

•

If the PRC government deems that our contractual arrangements with the VIEs do not comply with PRC regulatory restrictions on foreign investment in the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.

•

We rely on contractual arrangements with the VIEs and their respective shareholders to exercise control over a significant part of our business, which may not be as effective as direct ownership in providing operational control.

•

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

•

Our contractual arrangements with the VIEs may be subject to scrutiny by the PRC tax authorities and they may determine that we or the VIEs owe additional taxes, which could negatively affect our financial condition and the value of your investment.

Risks Relating to Doing Business in China

•

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

•

The PRC government’s significant oversight over our business operation could result in a material adverse change in our operations and the value of our ADSs and ordinary shares.

•

The PCAOB is currently unable to inspect our auditor in relation to their audit work performed for our financial statements and the inability of the PCAOB to conduct inspections over our auditor deprives our investors of the benefits of such inspections.

•

Our ADSs will be prohibited from trading in the United States under the Holding Foreign Companies Accountable Act, or the HFCAA, in 2024 if the PCAOB is unable to inspect or fully investigate auditors located in China, or in 2023 if proposed changes to the law are enacted. The delisting of our ADSs, or the threat of their being delisted, may materially and adversely affect the value of your investment.

•

The approval of the CSRC or other PRC government authorities may be required in connection with our offshore offerings under PRC law, and, if required, we cannot predict whether or for how long we will be able to obtain such approval.

General Risks Relating to our ADSs

•

The delisting of our ADSs is expected to have a material adverse effect on the trading and price of our ADSs, and we cannot assure you that our ADSs will be relisted, or that once relisted, they will remain listed.

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•

There can be no assurance that the proposed going-private transaction will continue to be pursued, approved or successfully consummated. Potential uncertainty involving the proposed going-private transaction may adversely affect our business and the market price of our ADSs.

•

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

•

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.

Risks Relating to Our Business

We have a limited operating history, which makes it difficult to evaluate our future prospects and ability to make profit. We launched our flagship mobile app, “English Liulishuo,” in 2013, and introduced our

AI-powered

DongNi English course in 2016. Through our mobile platform, we offer English learning products and services primarily based on AI technologies. Therefore, we operate at the intersection of AI technology and education industries, both of which are rapidly evolving. Our business model, on the basis of integration of AI technologies into language learning, is relatively new and we expect that it will continue to evolve as we grow.

We cannot assure you that we can successfully implement our business model. As the market and our business develop, we may modify our platform, products and services. These changes may not achieve expected results and may have a material and adverse impact on our results of operations and financial condition. Although our revenues have grown rapidly since we began monetization, due to our limited operating history, our past revenues and historical growth rate may not be indicative of our future performance. We cannot assure you that we will be able to achieve similar results or grow at the same rate as we had in the past or at all. Rather than relying on our historical operating and financial results to evaluate us, you should consider our business prospects in light of the risks and difficulties we may encounter as an early-stage company operating in a new market, including, among other things, our ability to expand our user base and convert

non-paying

users into paying users, provide high-quality products and services, enhance our technology and data capabilities, build our reputation and promote our brand, improve our operational efficiency, attract, retain and motivate talented employees, and anticipate and adapt to changing market conditions. We may not be able to successfully address these risks and difficulties, which could significantly harm our business, results of operations and financial condition.

If we are not able to continue to attract and retain users, convert

non-paying

users into paying users, and increase spending of paying users on our products and services, our business and prospects may be materially and adversely affected.

We generate revenues primarily from users paying for our courses and services. Therefore, our ability to attract and retain users, convert our

non-paying

users into paying users, and increase spending of paying users on our courses and services is critical to the continued success and growth of our business. Such ability primarily depends on the overall experience we provide to our users, as well as the actual or perceived effectiveness of our courses.

Although we have been able to develop a large and growing user base, to continue to do so, we must attract users by continuing to build our brand and reputation as an effective English learning platform, as well as effectively market and precisely target our products and services to prospective users. To retain and engage our user base, we must provide personalized, superior user experience, offer quality courses and content covering a wide range of interests and formats, introduce effective learning products and services, develop engaging platform features, and build and manage a sticky user community.

However, we cannot assure you that our users will consider their experience satisfactory or our products and services effective. For example, users who cannot make a progress or feel like they are not making progress may attribute such failure to the ineffectiveness of our courses. In addition, some users may encounter trouble in navigating our mobile apps or experience technical difficulties, such as failure of our mobile apps to correctly recognize and properly record speech. Further, our users may not be satisfied with their experience with Weixin-based study groups, which may be caused by our online study advisors or by other users in the group. They may not like the mechanism of having a separate Weixin-based study group, and find the social interactive features of our mobile apps inadequate.

If we fail to address, among other things, any of the foregoing challenges, users may become frustrated by or dissatisfied with our products and services, and may leave our platform without making purchases, and paying users may discontinue using our products and services. As a result, our business, results of operations and financial condition could be materially and adversely affected.

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The success and future growth of our business relies to a large extent on the public recognition and acceptance of our

AI-powered

education approach, the actual and perceived effectiveness of such education approach and mobile apps as learning tools.

Our products and services are primarily

AI-driven,

with AI technologies built into the core of our courses, which transforms the traditional approach to education. We operate our courses and services on our mobile platform, whereas it is customary in the education industry to have

in-person

teaching. The general public, many of whom are our potential users, may not recognize and accept the concept of learning on a mobile app rather than from a human teacher. They may also have concerns over the feasibility and effectiveness of our AI teacher and our products and services, considering that our business model is relatively new and there are few player with proven track records in the market. If our users are unable to experience actual improvements of their English proficiency after spending a reasonable amount of time with our AI teacher, they may consider our education approach ineffective. As a result of the foregoing, the general public may not choose our products and services, and may stick with traditional

in-person

teaching. If we fail to educate and show existing users and potential users about the value and the effectiveness of our innovative approach as well as further promote our products and services, our growth will be limited and our business, financial performance and prospects may be materially and adversely affected.

We incurred significant losses in the past. We incurred net loss of RMB574.8 million and RMB394.8 million for the year ended December 31, 2019 and 2020, respectively. Net cash used in operating activities were RMB148.2 million, RMB302.6 million and RMB155.2 million (US$24.3 million) for the year ended December 31, 2019, 2020 and 2021, respectively. As of December 31, 2021, we had a total shareholders’ deficit of RMB632.0 million (US$99.2 million) and our current liabilities exceeded the current assets by RMB647.1 million (US$101.5 million). Even though we generated net income of RMB59.9 million (US$9.4 million) for the year ended December 31, 2021, we cannot assure you that we will be able to continue to generate net income in the future. Our ability to maintain profitability will depend primarily on our ability to increase our operating margin, either by growing our revenues at a rate faster than our operating expenses increase, such as our research and development expenses, or by reducing our operating expenses as a percentage of our net revenues, especially our sales and marketing expenses. There can be no assurance that we will achieve this goal, and we may incur losses, negative cash flows from operating activities and net current liabilities in the future, which may materially and adversely affect our business, prospects, liquidity, financial condition and results of operations. If we are unable to maintain profitability or raise sufficient capital to cover our capital needs, we may not continue as a going concern. There can be no assurance that we can obtain additional financing. Our ability to obtain additional financing is subject to a number of factors, which may be beyond our control. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business—We may not be able to obtain additional capital when desired, on favorable terms or at all.”

Our consolidated financial statements for the year ended December 31, 2021 included in this annual report beginning on page

F-1

have been prepared based on the assumption that we will continue on a going concern basis. The auditors of our consolidated financial statements for the year ended December 31, 2021 have included in their audit reports an explanatory paragraph relating to substantial doubt about our ability to continue as a going concern, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business.

We may fail to continue to develop, innovate and utilize our technologies, especially AI technologies, which are core to our success.

We believe our technologies are core to our success and are critical to the implementation of our business model. Our products and services are empowered by our technologies, especially our AI technologies. We also rely on our data and technology capabilities to build and maintain our platform and infrastructure. We cannot assure you that we can keep up with the fast pace of the technology industry, and continue to develop, innovate and utilize our proprietary capabilities. In particular, the application of AI technology in education is still at an early stage and under exploration. New solutions and technologies developed and introduced by competitors could render our technology obsolete. Developing and integrating new technologies into our existing programs and algorithms could be expensive and time-consuming. We may not succeed in developing and incorporating new technologies at all. If we fail to continue to develop, innovate and utilize our technologies effectively and on a timely basis, our business, financial performance and prospects could be materially and adversely affected.

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To attract users to our platform and keep our existing users engaged, we must introduce new products and services and upgrade our existing products and services to meet users’ evolving preferences. Users come to our platform aiming to improve their English proficiency, which is a general and broad concept. It is difficult to predict the preferences of a particular user or a specific segment of users. Changes and upgrades to our existing products and services may not be well received by our users, and newly introduced products and services may not achieve success as expected. For example, we launched “Darwin English,” an upgraded version of DongNi English standard courses with substantially similar product features, in August 2019 to strengthen our products and services. Darwin English was later renamed as “DongNi English A+.” In addition, we also launched “LingoChamp,” our mobile app targeting overseas markets. Furthermore, we also launched our proprietary AI conversational coach “Alix,” who is able to stimulate real human voice with a pure American accent and engage in

one-to-one

conversional interaction via voice with our users. We may also introduce new products and services in areas beyond English learning, with which we have little or no prior experience. Such efforts may require us to make substantial investment in additional human capital and financial resources. We cannot assure you that any of such new products or services will achieve market acceptance or generate sufficient revenues to offset the costs and expenses incurred in relation to our development and promotion efforts. If we fail to improve our existing products and services and introduce new ones in a timely or cost-effective manner, our ability to attract and retain users may be impaired, and our financial performance and prospects may be adversely affected.

We rely on Weixin, a third-party social network program, to conduct parts of our courses and deliver a significant portion of our services.

We rely on Weixin, a third-party social network program, to support our

AI-powered

courses and deliver a significant portion of our communications with users. In particular, our paying users are invited to join Weixin-based study groups conducted by our online study advisors, who then provide more personalized assistance as well as engage in cross-selling efforts on Weixin. If we are not able to conduct the foregoing activities on Weixin or have to incur significant expenses in doing so, we may have to move the functions to our own platform or other third-party platform. We also previously relied on Weixin to acquire user traffic and incentive our users to use our products and services by encouraging our users to post their readings via our LiuLi Reading products in the Moment Sharing function in Weixin. Such attempts generated very good results. However, due to tightened Weixin policy related to its Moment Sharing function, we were prohibited by Weixin from encouraging our users to post such information in their Moments, which adversely affected our LiuLi Reading and DongNi English products. As a result, our efforts of user acquisition and incentive promotion via Weixin were in turn adversely affected, which in turn adversely affected our

word-of-mouth

user growth. Our results of operations were also adversely affected, especially in the second quarter of 2019, and may continue to have ongoing impact on our results of operations. Even though we have been taking swift actions to offset the revenue impact by adjusting our marketing strategy and actively exploring alternative marketing channels to grow our user community, there can be no assurance that our current strategy will be successful. Moreover, we may continue to generate significant amount of expenses for our sales and marketing activities, which may adversely affect our results of operations and financial condition. Furthermore, as Weixin is one of the largest social platforms in China, other platforms that do not have the same level of user base and user engagement may not be as effective as Weixin in performing the foregoing functions. Therefore, any interruption to or discontinuation of our cooperative relationship with the operator of Weixin may severely and negatively impact our ability to deliver our services to users.

Users choose our products and services to improve their English proficiency for various reasons. Some would like to study abroad in the future, some would like to be able to communicate in English at work, and some simply wish to improve their English pronunciation. However, without a specific target, such as standardized test preparation or improving grades at school, user demands for our products and services may be elastic. Some users may become less motivated or inspired to learn English or become occupied by work or other interests, and discontinue learning English. Some users may switch to products and services more specifically targeted at test preparation or designed to fit school curricula. If demand for our products and services decline, our business and results of operations may be adversely affected.

With our global expansion, B2G and

non-language

business initiatives, as set forth in “Item 4. Information on the Company—B. Business Overview—Our New Initiatives” of this annual report, we are executing our new business strategies and are undergoing business transition to launch additional businesses that are complementary to our major English learning business. In pursuit of our new business strategies and transition initiatives, substantial uncertainties remain. We may encounter difficulties as we execute our strategies, and expand our operations, data and technology, sales and marketing, and general and administrative functions. We expect that we will continue to make necessary expenditures in the future as we serve and maintain our users, launch new technology development projects and build additional technology infrastructure. Continued growth could also strain our ability to maintain the quality and reliability of our platform, develop and improve our operational, financial, legal and management controls, and enhance our reporting systems and procedures. Our expenses may grow faster than our revenues, and our expenses may be greater than we anticipate. We are in the process of our globalization initiatives and may expand into additional geographic areas where we do not have experience with local regulations or regulators or where local market conditions are unfavorable for our business model. Executing our strategies and implementing our transition initiatives will require significant expenditures and allocation of valuable management resources. There can be no assurance that our strategies and transition initiatives will be successful. Additionally, if our strategies and transition initiatives do not bring about the results that we anticipate, our business, results of operations and financial condition could be harmed.

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For example, we may face additional challenges as we implement our strategy to attract a more global user base. We may be subject to laws and regulations of other jurisdictions that are more stringent, which may significantly increase our compliance costs and adversely affect our results of operations and financial condition. In addition, we may not able to effectively attract global users and collect sufficient data to train our AI teacher, which may in turn impair the effectiveness of our products and services. Furthermore, we may not be able to generate sufficient revenue from the global market and offset the costs incurred by the expansion, which could negatively impact our financial performance and prospects.

We face competition from players in multiple industries and may fail to compete effectively.

We potentially could face competition not only from providers of online and offline education services, but also from technology and internet players, especially those actively developing AI technology. Our success in competing against other education services, including English learning services and mobile-enabled education services, is primarily dependent on our ability to improve users’ learning efficiency and effectiveness, provide quality learning content and promote our brand. Technology and internet players that are larger than us may devote more resources to research and development, introduce new technology faster than us or have capabilities more advanced than ours.

We also compete with them for talent with technological expertise, which is critical to the sustained development of our technology and products and services. We will also face increased competition as we expand our operations, and our competitors in new markets we expand into may have more experience than us in operating in those markets. As we gradually expand into global markets, we are also subject to additional competition in such markets. Existing or potential competitors may have substantially greater brand recognition and possess more financial, marketing and research resources than we do. If we fail to compete effectively, our business, financial performance and prospects will be materially and adversely affected.

Our business and results of operations may be harmed by any failure to maintain and enhance the value of our brand, as well as any negative or malicious publicity about us.

Market recognition of our brand is critical for us to remain competitive. Our ability to maintain and enhance brand recognition and reputation depends primarily on the perceived effectiveness and quality of courses provided by our AI teacher. We may also engage in branding efforts such as marketing campaigns and online advertising. Our branding efforts, however, may not be successful and receive anticipated results, and we may incur significant branding costs along the way. If we are unable to maintain and further enhance our brand recognition and reputation and promote awareness of our products and services, we may not be able to maintain our current level of users, and our results of operations may be materially and adversely affected. Furthermore, any negative or malicious publicity relating to our company, our products and services could harm our brand image and in turn materially and adversely affect our business and results of operations.

We may not be able to successfully diversify our revenue streams.

We generate revenues primarily from our DongNi English course, which is powered by our AI teacher. In supplement to the standard courses, we also provide DongNi Select premium services which involve contracted human teachers. In August 2019, we launched “Darwin English,” an updated version of our DongNi English standard course, which was later renamed as “DongNi English A+.” Moreover, we also generate revenues from LiuLi Reading, a paid course allowing our users to read articles from reputable overseas publishers with learning tips and quizzes. In addition to individual users, we provide enterprise services to corporate customers. Furthermore, we have been implementing our global expansion strategy and development a few new initiatives. For details, see “Item 4. Information on the Company—B. Business Overview—Our New Initiatives.” Going forward, we may further expand our offerings to diversify our revenue streams and user base. However, we may not be successful in doing so. For example, not every enterprise has an incentive to acquire training to improve their employees’ English proficiency, and the growth in our corporate clientele may reach a bottleneck. Our test-preparation, DongNi Select premium services may not reach the same level of acceptance as our standard courses. Our new offerings in areas other than English learning may fail to address the demands and preferences of users. If we cannot successfully diversify our revenue streams, our future growth will be hindered.

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Also, our efforts in diversifying our revenue streams may be affected by factors beyond our control. We historically launched a mobile app “Kids Liulishuo” in December 2018, targeting children of three to twelve years old. On July 24, 2021, the General Office of the CPC Central Committee and the General Office of the State Council issued the Opinions on Further Alleviating the Burden of Homework and After-School Tutoring for Students in Compulsory Education, or the Double Alleviating Opinions, which is intended to strengthen the supervision of discipline training institutions for the compulsory education stage and also mandates management of

off-campus

training for preschool children and high school students. For details of the Double Alleviating Opinions and implementations, see “Item 4. Information on the Company – B. Business Overview – Regulations – Regulation Related to Private Education – Regulation Related to After-school Tutoring.” In light of such regulatory developments, we ceased the operations of our “Kids Liulishuo” for the avoidance of being deemed as an institution that might be subject to the restrictive requirements of the Double Alleviating Opinions due to our content offering on Kids Liulishuo. As a result, our revenues for the year of 2021 were adversely affected and the overall

K-12

education industry was significantly undermined. We later entered into certain arrangement with Yangpu Liuli, a private

non-profit

institution established by our three founders with a private school operating permit, to operate Kids Liulishuo and collect certain amount of fees as our revenues. See “Item 4. Information on the Company—B. Business Overview—The Liulishuo Platform—Our English Learning Products and Services—Kids Liulishuo” for details. However, in light of the regulatory regime and scrutiny due to the Double Alleviating Opinions, there can be no assurance that we will be able to collect revenues in relation to Kids Liulishuo, or in an amount satisfactory to us, as we anticipate, and if the PRC governmental authorities interpret or implement their legislation or regulations in ways that our cooperation with Yangpu Liuli would be deemed to be

non-compliant

with the applicable laws and regulations, we may be required to adjust or even cease our cooperation with Yangpu Liuli, and be further subject to fines or other sanctions. See “—Risks Relating to Doing Business in China—We face risks associated with uncertainties surrounding the PRC laws and regulations governing the education industry in general, and the online

for-profit

private training in particular.”

If we fail to address the above risks and challenges, our business prospects, results of operations and financial condition may be materially and adversely affected.

Our success relies on the continuing efforts of our senior management team and qualified key personnel, and our business may be harmed if we are unable to retain or motivate them.

Our business operations depend on the continued services of our senior management team and qualified key personnel, particularly our three founders and the executive officers named in this annual report, as well as our AI scientists.

Although we have provided different incentives to our senior management team, we cannot assure you that we can continue to retain their services. One or more of our key executives may be unable or unwilling to continue in their present positions. Meanwhile, we have also provided attractive compensation packages to our qualified key personnel. However, considering the intense market demand and competition for qualified and skilled personnel, especially for AI scientists, we may not be able to hire and retain these personnel at compensation levels consistent with our existing compensation and salary structure. Some of the companies with which we compete for qualified and skilled personnel have greater resources than we have and may be able to offer more attractive terms of employment. In addition, we invest significant time and resources in training our employees, which increases their value to competitors who may seek to recruit them.

If we are unable to retain the services of our senior management team or qualified key personnel, we may not be able to find suitable replacements or may incur significant expenses in finding such replacements, thus our future growth may be constrained, our business may be severely disrupted and our results of operations and financial condition may be materially and adversely affected. In addition, although we have entered into confidentiality and

non-competition

agreements with our senior management team and qualified key personnel, there is no assurance that any member of our senior management team or any of our qualified key personnel will not join a competitor. In the event that any dispute arises between us, on one hand, and any of our senior management and qualified key personnel, on the other hand, we may have to incur substantial costs and expenses in order to enforce such agreements in China or we may be unable to enforce them at all.

Failure to effectively train and efficiently manage our online study advisors and our premium services teachers may materially and adversely affect the effectiveness of our courses, as well as harm our reputation and results of operations.

Our

in-person

services are provided primarily through our online study advisors, or OSAs. Our OSAs manage the Weixin-based study groups, which users of our products and mobile apps can join. Our OSAs help motivate users and monitor their progress, and respond to users’ queries through these study groups. As they are the ones who interact directly with our users, they are critical to the quality of user experience and our reputation. As of December 31, 2021, we had over 240 online study advisors and the average number of users managed by each online study advisor was approximately 720 in 2021. We face challenges in managing the capacity of our online study advisors and the quality of their services. We generally seek to hire and train qualified and dedicated personnel who have a strong command of the English language and are capable of delivering innovative and inspiring instructions. We train our online study advisors when they are on board and also provide continued training to ensure that they stay abreast of changes in user demands, user preference and other key matters necessary to provide services effectively. However, we may not be able to recruit, train and retain a sufficient number of them while maintaining consistent service quality. A shortage of qualified online study advisors or a decrease in the quality of their service, whether actual or perceived, or a significant increase in compensation for us to retain those qualified staff, would have a material adverse effect on our business, results of operations and financial condition.

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In addition, our DongNi Select premium services include online streaming courses with contracted human teachers. We have certain selection criteria for and provide

on-board

training to those teachers. We have also implemented performance reviews on a regular basis and users rating mechanism to monitor the teaching quality. However, we may not be able to train and effectively manage our premium services teachers, which may result in an unsatisfactory user experience. As a result, the effectiveness of our courses may be impaired and would in turn have a material adverse effect on business, results of operations and financial condition.

If our AI program or algorithms contain material defects, we may incur significant expenses to remediate such defects, which may cause reputational damage and market share loss.

Our courses are powered by our AI programs and algorithms, which address complex challenges in adaptive learning, autoscoring, speech recognition, grammar error detection, pragmatic error detection, synonym analysis and semantic understanding. If any part of our AI program or algorithms contains material defects, not only the corresponding portion of our courses would be impaired, but also the overall function of products and services. We may incur significant expenses to remediate such defects, or may not be able to correct them at all. We have not experienced any material defects to date, but there can be no assurance that our AI programs and algorithms are flawless. If any incidents of material defects took place, our user experience would be significantly harmed, and users may lose confidence and trust in our courses. As a result, we may incur significant reputational damage and market share loss.

We may incur significant expenses on and devote significant resources to generating and acquiring user traffic from third-party channels.

We may not be able to promote awareness of our brand and achieve widespread acceptance of our business model to increase direct access to our platform. Therefore, a significant portion of user traffic to our platform is generated from third-party channels, such as app stores of various major mobile brands as well as social network platforms. We have incurred significant expenses on and devoted considerable resources to branding and marketing activities and user traffic acquisition in the past. We incurred branding and marketing expenses of RMB519.7 million in 2019 and RMB442.0 million in 2020. As part of our efforts for operating costs control and operation efficiency optimization, we have been adjusting our branding and marketing strategy and spending and we managed to control our branding and marketing expenses to only RMB136.8 million (US$21.5 million) in 2021. Even though we experienced a significant decrease in branding and marketing expenses in 2021 due to our stringent cost control measures and an improvement in efficiency, there can be no assurance that we will not incur significant expenses or devote significant resources to generate or acquire user traffic in the future. In particular, increased competition for traffic acquisition led by other internet companies generally drives up the customer acquisition costs, which may further affect our user and revenue growth. Our ability to convert user traffic to registered users and retain that user base depends on users’ satisfaction with the quality of our products and services offered on our platform. Going forward, we must continue to strike a balance between our branding and marketing spending and our business expansion to ensure a healthy and sustainable growth. If we fail to meet these challenges, our business, financial performance and prospects will be materially and adversely affected.

We may face risks arising from our business operations without proper ICP License, which may materially and adversely affect our business, financial condition and operational results.

Regulation on value-added telecommunications services, or VATS, in China is strict and has been developing, while the interpretation and enforcement of relevant laws and regulations has been and continues to be uncertain. Pursuant to the PRC Regulations on Telecommunication, in order to engage in VATS, a service provider must obtain a value-added telecommunications business operating license, or VATS License, from the Ministry of Industry and Information Technology, or the MIIT, or its provincial level counterparts. According to the Administrative Measures on Internet Information Services, an internet information service provider is required to obtain a VATS License with the approved business scope of “internet information service,” or an ICP License. The operation of internet information service absent the ICP License would result in confiscation of illegal revenues generated from the provision of such service as determined by the competent government authority, imposition of fines up to several times such illegal gains, and under serious circumstances, suspension of the illegal operation.

Through one of the variable interest entities, or VIEs, Shanghai Liulishuo Information and Technology Co., Ltd., or Shanghai Liulishuo, we have provided online English learning courses and services through mobile apps since 2013. Prior to the promulgation of the Classified Catalog of Telecommunications Services (2015 Version), effective from March 2016, or the 2016 MIIT Catalog, the scope of VATS was defined in an earlier version of the catalog. Pursuant to that previous version of the catalog, information service, categorized as a type of VATS, was defined as “the voice information services (telephone information services) or online information and data retrieval and other information services directly provided for end users through the fixed networks, mobile networks or internet and other public communications networks by means of information gathering, development, processing and the construction of the information platform.” It was unclear whether information service provided through our mobile apps fell in the scope of VATS.

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The 2016 MIIT Catalog revised the definition of information service as “the information services provided for users through public communications networks or internet by means of information gathering, development, processing and the construction of the information platform.” Further, MIIT issued a Q&A to clarify certain issues in implementing the 2016 MIIT Catalog, which requires internet information service providers that provide service through mobile apps to obtain an ICP License. However, different local authorities may have different interpretations and implementation in practice.

In order to adapt to the regulatory requirements, we applied for and obtained an ICP License through Shanghai Liulishuo in May 2018 from the competent government authority, Shanghai Communications Administration, for our two currently operating mobile apps, namely “English Liulishuo” and “IELTS Liulishuo.” In 2019, we further updated the ICP License to cover our “LiuLi Reading” mobile app, “Kids Liulishuo” mobile app, “Liulishuo” website, and our certain other initiatives and websites. We are still making efforts to expand the coverage of Shanghai Liulishuo’s ICP License to cover our newly launched app. We may continue to launch new products that require an ICP License. However, we cannot assure you that we will be able to obtain approval from Shanghai Communications Administration for the expansion of existing license coverage or for new ICP License for other PRC entities in a timely manner or at all, nor can we assure you that our operations before the ICP License is duly obtained or the coverage of which is properly expanded will not be regarded by the MIIT or its local counterpart as

non-compliance,

in which case we may be subject to penalties. Our business, financial condition, expected growth and prospects would be materially and adversely affected if we were subject to such penalties.

We may fail to protect our intellectual property rights effectively, or may face intellectual property infringement claims and other claims of third-party rights, which may be expensive to defend and may disrupt our business and operations.

We possess a series of intellectual properties which are important to our business and operations. However, we cannot assure you that we will be able to protect our intellectual properties in an effective way. On the other hand, we also cannot assure you that our operations, including courses and services, our technologies and mobile platforms, or any aspects of our business do not or will not infringe upon or violate intellectual property rights (including but not limited to trademarks, patents, copyrights,

know-how)

or other rights (including but not limited to portraiture right) owned or held by third parties.

We may be subject to legal or administrative proceedings and claims relating to intellectual property rights or other rights of third parties in the future. For example, we submitted application for trademark registration for the logo “

” we previously used in our daily operation, however, such application in Class 41 (mainly related to education, training and recreational activities), which is the classification for the trademarks in terms of their use, has been rejected due to alleged similarity to existing registered trademarks. We have claimed against the Trademark Bureau for such rejection but failed. Currently, we mainly use a combination of the logo “

” and Chinese characters of “Liulishuo,” namely “

” in our daily operation, the trademark registration of which under Class 41 (mainly related to education, training and recreational activities) and Class 9 (mainly related to software and mobile apps) was successfully completed by us in late 2019. Furthermore, our trademark registration of “

流利说

,” which are the Chinese characters for “Liulishuo,” in Class 28 (mainly related to physical exercise products), Class 35 (mainly related to the advertisement service and business agency service) and Class 38 (mainly related to information delivery service) under the applicable rules has been invalidated by the Trademark Bureau as a result of an invalidation request made by a third party individual. We have challenged this invalidation decision at a PRC court, but we did not prevail at the trial that took place in December 2020. We have since filed an appeal and the appellate court eventually revoked the Trademark Bureau’s invalidation decision and required Trademark Bureau to remake new decision with regard to the invalidation request, of which the proceeding is currently pending. If we fail to successfully register any of such logos currently in use or maintain the trademarks that we have registered in any trademark classes relevant to our business operations (including Class 41), third parties would be able to use such logos or trademarks under unregistered classes without our authorization and we may even be subject to infringement claims by third parties for using such logos or trademarks. As of the date of this annual report, we have registered trademarks for material aspects of our current business operation.

There may be certain unauthorized third-party content on our platform and our products, services or other aspects of our business may infringe third-party intellectual property rights, portraiture right or other rights without our awareness. To the extent that our employees or consultants use intellectual property owned by others or unauthorized portraits in their work for us, disputes may arise as to the rights in related

know-how

and inventions, portraits and other proprietary assets. In addition, we previously had an online community open for all users on the English Liulishuo app, namely Liuliba. Although we have removed Liuliba from the English Liulishuo app, content previously posted by our users on such Liuliba platform, may expose us to allegations by third parties of infringement of intellectual property rights, invasion of privacy, defamation and other violations of third-party rights. In particular, our users were able to share English learning materials or methods with other users by posting a video, audio clip or other forms of content on Liuliba, which may subject us to claims of infringement of third-party intellectual property rights or other rights contained in the copyrighted video, audio clip or other forms of content. Although we had required our users to post only legally compliant and

non-offensive

materials, a third party may still find user-generated content used to be posted on our platform infringing intellectual property rights or other rights or offensive and take action against us in connection with such content. Holders of such intellectual property rights or other rights may seek to enforce such rights against us in China, the United States or other jurisdictions for any historical infringement by our users. If any third-party infringement claims are brought against us, we may be forced to divert management’s time and other resources from our business and operations to defend against these claims, regardless of their merits.

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The application and interpretation of China’s intellectual property right laws and the procedures and standards for granting trademarks, patents, copyrights,

know-how

or other intellectual property rights in China, and the laws governing personal rights are still evolving and remain uncertain, and we cannot assure you that PRC courts or regulatory authorities would agree with our analysis. If we were found to have violated the intellectual property rights of others, we may be subject to liability for our infringement activities or may be prohibited from using such intellectual property or relevant contents, and we may incur licensing or usage fees or be forced to develop alternatives of our own. As a result, our reputation may be harmed and our business and financial performance may be materially and adversely affected.

We may not be able to prevent others from making unauthorized use of our intellectual property, and may incur increasing costs to protect us against such infringements. If we fail to protect our intellectual property rights, our brand and business may suffer.

We regard our patents, software registrations, trademarks, domain names,

know-how,

proprietary technologies and similar intellectual property as critical to our success, and we depend, to a large extent, on our ability to develop and maintain the intellectual property rights relating to our technology and course materials. We have devoted considerable time and resources to the development and improvement of, among others, our websites, mobile apps and our course materials.

We primarily rely on a combination of intellectual property laws and contractual arrangements, including confidentiality and

non-compete

agreements with our management, employees and others, as well as the contractual arrangements with third-party consultants in connection with product or learning content development, to protect our proprietary rights. See “Item 4. Information on the Company—B. Business Overview—Intellectual Property.” However, we cannot assure you that such existing measures are sufficient and effective. Despite these measures, any of our intellectual property rights could be challenged, invalidated, circumvented or misappropriated, or such intellectual property may not be sufficient to provide us with competitive advantages. In addition, because of the rapid pace of technological change in our industry, parts of our business rely on technologies developed or licensed by third parties, and we may not be able to obtain or continue to obtain licenses and technologies from these third parties on reasonable terms, or at all.

It is often difficult to maintain and enforce intellectual property rights in China. Statutory laws and regulations are subject to judicial interpretation and enforcement and may not be applied consistently due to the lack of clear guidance on statutory interpretation. Confidentiality, invention assignment and

non-compete

agreements may be breached by counterparties, and there may not be adequate remedies available to us for any such breach.

Accordingly, we may not be able to effectively protect our intellectual property rights or to enforce our contractual rights in China. Monitoring and preventing any unauthorized use of our intellectual property is difficult and costly and the steps we take may be inadequate to prevent the misappropriation of our intellectual property. In the event that we resort to litigation to enforce our intellectual property rights, such litigation could result in substantial costs and a diversion of our managerial and financial resources. We can provide no assurance that we will prevail in such litigation. In addition, our trade secrets may be leaked or otherwise become available to, or be independently discovered by, our competitors. Any failure in protecting or enforcing our intellectual property rights could have a material adverse effect on our business, results of operations and financial condition.

Privacy concerns relating to our platform and the handling of user information could damage our reputation, and deter current and potential users and other customers from using our products and services.

Our platform collects, stores and processes certain personal and other sensitive data provided by our users. Personally identifiable and other confidential information is subject to increased regulations in domestic and international jurisdictions. PRC government authorities have enacted a series of laws and regulations relating to the protection of privacy and personal information, including but not limited to the Cyber Security Law and Personal Information Protection Law, under which internet service providers and other network operators are required to ensure the security and stability of the services provided via network and protect individuals’ privacy as well as to clearly indicate the purposes, methods and scope of any personal information collection and usage, to obtain appropriate user consent and to establish user information protection systems with appropriate remedial measures. Especially, on August 20, 2021, the SCPNC promulgated the Personal Information Protection Law, which became effective on November 1, 2021. The Personal Information Protection Law stipulates the circumstances under which a personal information processor is allowed to process personal information and the corresponding processing requirements. The Personal Information Protection Law further clarifies the scope of application, the definition of personal information and sensitive personal information, the legal basis of personal information processing and the basic requirements of notice and consent. According to the Personal Information Protection Law, where personal information is processed based on an individual’s consent, such consent shall be voluntarily and explicitly given by the individual on a fully informed basis, and the individual has the right to withdraw his or her consent without affecting the effectiveness of personal information processing activities that have been conducted based on his or her consent before. Please see “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations Related to Internet Information Security and Privacy Protection” for more details. Nonetheless, the Personal Information Protection Law raises the protection requirements for processing personal information, and many specific requirements of the Personal Information Protection Law remain to be clarified by the CAC, other regulatory authorities, and courts in practice. We may be required to make further adjustments to our business practices to comply with the personal information protection laws and regulations, which may causing substantial costs and negatively affect our business, results of operations and financial condition.

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Furthermore, the regulatory authorities are strengthening the supervisions on the protection of personal information and other lawful interest of users of mobile apps. For example, the Identification Methods of Illegal Collection and Use of Personal Information Through Apps, jointly promulgated by various governmental authorities, effective from November 28, 2019, specifies activities that can be identified as illegal collection and use of personal information through mobile apps. The Provisions on the Scope of Necessary Personal Information for Common Types of Mobile Internet Applications, which was jointly promulgated by four governmental authorities on March 12, 2021 and became effect on May 1, 2021, sets out the scope of the personal information that is considered necessary for the operations of common types of apps, and stipulates that the operator of the apps may not refuse to provide the apps’ fundamental functions to users who do not consent to provide personal information beyond the scope of necessary personal information. The Implementation of Actions to Improve the Perception of Information and Communication Services, which was promulgated by the MIIT on November 1, 2021, stipulates that enterprises should provide a list of personal information collected and a list of personal information shared with third parties, and should display such lists in the second-level menu of the APP for users’ access. Please see “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations Related to Internet Information Security and Privacy Protection” for more details. In connection with the promulgation of the foregoing regulations, relevant authorities, such as the CAC, imposed various measures on mobile apps frequently in recent years, including issuing the order of rectification and temporary removal of apps from app stores for encroaching the rights and interests of users in violation of the applicable laws and regulations. We have gone through several inspections of regulatory authorities in our daily operations and made rectifications as requested by such authorities. As of the date of this annual report, no administrative penalties were imposed on us in this respect so far. We have implemented certain technical measures to address the privacy concerns. However, this regulatory framework for privacy issues in China and worldwide is currently evolving and is likely to remain uncertain for the foreseeable future. We cannot assure you that our existing measures will be considered sufficient under applicable laws and regulations, or that we have complied with all applicable laws and regulations. For example, in order to provide targeted contents, the apps operated by us used to require the users to provide certain personal information before they can use such apps, such as professions, purpose of studying, etc., which may be deemed as beyond the scope of the necessary personal information as defined by the Provisions on the Scope of Necessary Personal Information for Common Types of Mobile Internet Applications. We have made rectifications and stopped requiring the users to provide personal information beyond the scope of the necessary personal information before they can use our apps. However, there can be no assurance that the competent authorities would take a view that our rectifications are in strict compliance with the applicable regulatory requirements, or that we will not be subject to penalties for historical violation.

Additionally, regulatory requirements regarding the protection of personal information are constantly evolving and can be subject to differing interpretations or significant changes, making the extent of our responsibilities in that regard uncertain. For example, on June 10, 2021, the Standing Committee of the National People’s Congress, or the SCNPC, promulgated the Data Security Law effective from September 1, 2021, which provides that data processing activities that affect or may affect national security should be subject to a state security review procedure. On July 6, 2021, the General Office of the CPC Central Committee and the General Office of the State Council jointly promulgated the Opinions on Strictly Cracking Down Illegal Securities Activities in Accordance with the Law,, which called for a heightened scrutiny over overseas-listed China-based companies of their compliance with the laws and regulations regarding data security, cross-border data flow and management of confidential information, and such laws and regulations are expected to undergo further changes, which may require increased information security responsibilities and stronger cross-border information management mechanism and process. We may incur substantial costs in order to comply with new laws and regulations and we could be adversely affected if legislation or regulations in China are expanded to require changes in our business practices or privacy policies, or if the PRC governmental authorities interpret or implement the existing legislation or regulations in ways that would negatively affect our business, results of operations and financial condition. In addition to laws, regulations and other applicable rules regarding privacy and privacy advocacy, industry groups or other private parties may propose new and different privacy standards. Because the interpretation and application of privacy and data protection laws and privacy standards are still uncertain, it is possible that these laws or privacy standards may be interpreted and applied in a manner that is inconsistent with our practices. Any inability to adequately address privacy concerns, even if unfounded, or to comply with applicable privacy or data protection laws, regulations and privacy standards, could result in additional cost and liability for us, damage our reputation, inhibit the use of our platform and harm our business.

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We have limited experience in international markets. If we fail to meet the challenges presented by our increasingly globalized operations, our business, financial condition and results of operations may be materially and adversely affected.

We have limited experience in international markets and we are in the process of and expect to enter into and expand our operations in international markets, primarily leveraging LingoChamp’s existing products and operations. LingoChamp’s businesses have footprint in several international markets, primarily including Japan, South Korea, East Asia and South America. Global expansion is a key growth strategy for us, which exposes us to a number of risks, including:

•

compliance with applicable laws and regulations in multiple jurisdictions, including but not limited to internet content provider licenses and other applicable licenses or governmental authorizations;

•

policies that increase restrictions on our ability to invest in certain jurisdictions, especially in the telecommunication and internet sectors;

•

challenges in identifying appropriate local business partners and establishing and maintaining good working relationships with them, including but not limited to third parties that promote our platform and applications and third parties that provide us technology support;

•

challenges in obtaining and maintaining sufficient intellectual property protection and rights;

•

challenges in commercializing LingoChamp mobile app in international markets without infringing, misappropriating or otherwise violating the intellectual property rights of third parties;

•

challenges in formulating effective marketing strategies targeting users from various jurisdictions and cultures, who have a diverse range of preferences and demands;

•

lack of acceptance of our product and service offerings, and challenges of localizing our offerings to appeal to local tastes;

•

challenges in replicating or adapting our company policies and procedures to operating environments that are different from each other, including technology infrastructure;

•

fluctuations in currency exchange rates;

•

increased competition with local players in different markets and

sub-markets;

•

political instability and general economic or political conditions in particular countries or regions, including territorial or trade disputes, war and terrorism;

•

exposure to different tax jurisdictions that may subject us to greater fluctuations in our effective tax rate and assessments in multiple jurisdictions on various

tax-related

assertions, including transfer pricing adjustments and permanent establishment;

•

challenges of maintaining efficient and consolidated internal systems, including information technology infrastructure, and of achieving customization and integration of these systems;

•

compliance with privacy laws and data security laws, including heightened restrictions and barriers on the transfer of data between different jurisdictions; and

•

increased costs associated with doing business in multiple jurisdictions.

There is no assurance we will be able to manage these risks and challenges as we continue to grow our international businesses. Failure to manage these risks and challenges could negatively affect our ability to expand our international and cross-border businesses and operations as well as materially and adversely affect our business, financial condition and results of operations.

Any breaches to our security measures, including unauthorized access, computer viruses and cyber-attack, may adversely affect our database, reduce the use of our platform, impact our users’ experience and privacy as well as damage our reputation and brand names.

The massive volume of data that we process and store makes us or third-party service providers who host our servers an attractive target and potentially vulnerable to cyber-attacks, computer viruses, physical or electronic

break-ins

or similar disruptions. While we have taken steps to protect our database, our security measures could be breached. Because techniques used to sabotage or obtain unauthorized access to systems change frequently and generally are not recognized until they are launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Even though we have not experienced any cyber-attack or other incidents of similar nature, any accidental or willful security breaches or other unauthorized access to our platform could cause confidential information to be stolen and used for criminal purposes. Security breaches or unauthorized access to confidential information could also expose us to liability related to the loss of the information, time-consuming and expensive litigation and negative publicity. If security measures are breached because of third-party action, employee error, malfeasance or otherwise, or if design flaws in our technology infrastructure are exposed and exploited, our relationships with users and other customers could be severely damaged, we could incur significant liability and our business and operations could be adversely affected.

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The PRC Cyber Security Law, effective on June 1, 2017, stipulates that a network operator, including internet information service provider among others, must adopt technical measures and other necessary measures in accordance with applicable laws and regulations as well as compulsory national and industrial standards to safeguard the safety and stability of network operations, effectively respond to network security incidents, prevent illegal and criminal activities, and maintain the integrity, confidentiality and availability of network data. The PRC Data Security Law, effective on September 1, 2021, provides that data processing activities must be in compliance with applicable laws and regulations and data processor should establish whole process data security management system, arrange data security training, and take technical measures and other necessary measures to ensure data security. Please see “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations Related to Internet Information Security and Privacy Protection” for more details. We are making efforts to comply with the applicable laws, regulations and standards, there can be no assurance that our measures will be effective and sufficient under the foregoing rules and regulations. If we were found by the regulatory authorities to have failed to comply with the applicable rules and regulations on cyber security, we would be subject to warnings, fines, confiscation of illegal revenue, revocation of licenses, cancellation of filings, shutdown of our platform or even criminal liability and our business, results of operations and financial condition would also be adversely affected. In addition, in light of the evolving regulatory framework of China for the protection of information in cyberspace, we may be subject to uncertainties of and adjustments to our business practices, which may incur additional operating expenses and adversely affect our results of operations and financial condition.

Any significant disruption in service on our platform or in our computer systems, including events beyond our control, could reduce the attractiveness of our platform and services and result in a loss of users.

In the event of a platform outage and physical data loss, the performance of our platform and services would be materially and adversely affected. The satisfactory performance, reliability and availability of our platform, services and underlying technology infrastructure are critical to our operations and reputation and our ability to retain existing and attract new users. Our servers and backup system are hosted and maintained at cloud servers by a third-party service provider. Our operations depend on the ability of such third-party service provider to protect our systems against damage or interruption from natural disasters, power or telecommunications failures, air quality issues, environmental conditions, computer viruses or attempts to harm our systems, criminal acts and similar events. If there is a lapse in service or damage to the facilities of such third-party service provider, we could experience interruptions and delays in our service and may incur losses including additional expense in arranging new facilities.

Historically, the services provided on our platform were disrupted several times due to network outage attributable to certain third-party service provider, including one incident in 2019 where our services were interrupted for nearly 12 hours, which caused disruptions to our users’ access to our mobile apps and courses. In 2020 and 2021, we did not experience any technical disruption. We cannot assure you that we will be able to always maintain the satisfactory performance, reliability and availability of our platform, services and underlying technology infrastructure in our daily operation. Any interruptions or delays in the availability of our platform or services, whether as a result of third party or our error, natural disasters or security breaches, whether accidental or willful, could harm our reputation and our relationships with users and other customers. Additionally, we do not maintain business interruption insurance or general third-party insurance. Our disaster recovery plan has not been tested under actual disaster conditions, and we may not have sufficient capacity to recover all data and services in the event of an outage.

These factors could damage our brand and reputation, divert our employees’ attention and subject us to liability, any of which could adversely affect our business, results of operations and financial condition.

We may be held liable for information or content displayed on, retrieved from or linked to our platform or posted by us on other platform, which may materially and adversely affect our business and results of operations.

The PRC government has adopted regulations governing internet access and distribution of information over the internet. Under these regulations, internet content providers and internet publishers are prohibited from posting or displaying over the internet content that, among other things, violates PRC laws and regulations, impairs the national dignity of China, contains terrorism, extremism, content of force or brutality, or is reactionary, obscene, superstitious, fraudulent or defamatory. Failure to comply with these requirements may result in the revocation of licenses to provide internet content and other licenses, the closure of the concerned websites and criminal liabilities. In the past, failure to comply with these requirements has resulted in the closure of certain websites. The website operator may also be held liable for the censored information displayed on or linked to the website.

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According to the Administrative Provisions on Mobile Internet Applications Information Services promulgated by the Cyberspace Administration of China, or CAC, effective in August 2016, providers of mobile apps may not create, copy, publish or distribute information and content that is prohibited by laws and regulations. We are required to adopt and implement management systems of information security and establish and improve procedures on content examination and administration. We must adopt such measures as warning, restricted release, suspension of updates and closure of accounts, keep relevant records, and report unlawful content to competent government authorities. We have implemented internal control procedures screening the information and content on our mobile apps to ensure their compliance with these provisions. However, there can be no assurance that all the information or content displayed on, retrieved from or linked to our mobile apps complies with the requirements of the provisions at all times. If our mobile apps were found to violate the provisions, we may be subject to administrative penalties, including warnings, service suspension or removal of our mobile apps from the relevant mobile app store, which may materially and adversely affect our business and results of operations.

Under current PRC laws and regulations, an information service provider that reposts news for internet publication shall first obtain a license from CAC or its local counterpart, and shall repost news issued by domestic news entities within such scope as prescribed by the government. The reposting of news published by foreign media is generally prohibited without prior approval. Certain learning materials we provide on our platforms, particularly the “LiuLi Reading” app, are from foreign media. Due to the ambiguity of the definition of “news” under the current PRC laws and regulations, we cannot assure you that our provision of such materials will not be deemed as illegally reposting foreign news by the relevant PRC government authorities, which will subject us to various penalties, including fines and suspension of such provision.

We may also become involved in governmental investigation or exposed to administrative penalty relating to content posted by us on our and other platforms. For example, we received a fine of RMB100,000 in 2018 due to the use of certain exaggerating and inaccurate phrases regarding our platform which violated PRC Advertisement Law. We have paid such penalty as required by the administrative order from the competent authority.

In addition, we may also be subject to intellectual property infringement claims or other allegations as the content posted by us or our users on our online platform may infringe intellectual property or other rights held by any third party. See “—Risks Relating to our Business—We may fail to protect our intellectual property rights effectively, or may face intellectual property infringement claims and other claims of third-party rights, which may be expensive to defend and may disrupt our business and operations.”

Our platform and internal systems rely on software that is highly technical, and if it contains undetected errors, our business could be adversely affected.

Our platform and internal systems rely on software that is highly technical and complex. In addition, our platform and internal systems depend on the ability of the software to store, retrieve, process and manage immense amounts of data. The software on which we rely has contained, and may now or in the future contain, undetected errors or bugs. Some errors may only be discovered after the code has been released for external or internal use. Errors or other design defects within the software on which we rely may result in a negative experience for users and other customers, delay introductions of new features or enhancements, result in errors or compromise our ability to protect data or our intellectual property. Any errors, bugs or defects discovered in the software on which we rely could result in harm to our reputation, loss of users or other customers or liability for damages, any of which could adversely affect our business, results of operations and financial condition.

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

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

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We utilize payment collection channels to collect proceeds from our paying users’ purchases. Any failure by those payment collection channels to process payments effectively and securely may materially and adversely affect our revenue realization and brand recognition.

We depend on the billing and payment systems of third parties such as online third-party payment processors to maintain accurate records of payments of sales proceeds by paying users and collect such payments. We receive periodic statements from these third parties which indicate the aggregate amount of fees that were charged to paying users of our courses and services. Our business and results of operations could be adversely affected if these third parties fail to accurately account for or calculate the revenues generated from the sales of our courses and services. If there are security breaches or failure or errors in the payment process of these third parties, our user experience may be affected and our business results may be negatively impacted.

Failure to timely collect our receivables from third parties whose billing and payment systems we use and third-party payment processors may adversely affect our cash flows. Our third-party payment processors may from time to time experience cash flow difficulties. Consequently, they may delay their payments to us or fail to pay us at all. Any delay in payment or inability of current or potential third-party payment processors to pay us may significantly harm our cash flow and results of operations.

We also do not have control over the security measures of our third-party payment service providers, and security breaches of the online payment systems that we use could expose us to litigation and possible liability for failing to secure confidential customer information and could, among other things, damage our reputation and the perceived security of all of the online payment systems that we use. If a well-publicized internet security breach were to occur, users concerned about the security of their online payments may become reluctant to purchase our products through payment service providers even if the publicized breach did not involve payment systems or methods used by us. In addition, billing software errors could damage user confidence in these payment systems. If any of the above were to occur and damage our reputation or the perceived security of the payment systems we use, we may lose paying users as they may be discouraged from purchasing products or services on our platform, which may have an adverse effect on our business and results of operations.

Our operations depend on the performance of the public communications infrastructure in China.

Almost all access to mobile and internet in China is maintained through state-owned telecommunication operators under the administrative control and regulatory supervision of the MIIT. We primarily rely on a limited number of telecommunication service providers to provide us with data communications capacity through local telecommunications lines and internet data centers to host our servers. We have limited access to alternative networks or services in the event of disruptions, failures or other problems with China’s public communications networks, such as mobile, internet or the fixed telecommunications networks. With the expansion of our business, we may be required to upgrade our technology and infrastructure to keep up with the increasing traffic on our platform. We cannot assure you that the public communications infrastructure in China will be able to support the demands associated with the continued growth in usage. In addition, we have no control over the costs of the services provided by public communications service providers. If the prices we pay for their services rise significantly, our financial performance may be adversely affected. Furthermore, if mobile access fees or other charges to mobile users increase, our user traffic may decline and our business may be harmed.

If we fail to maintain an effective system of internal control over financial reporting, we may be unable to accurately report our financial results or prevent fraud.

We are a public company in the United States subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, requires that we include a report of management on our internal control over financial reporting in our annual report on Form

20-F.

Our management has concluded that we did not maintain effective internal control over financial reporting as of December 31, 2021 due to material weakness identified. See “Item 15. Controls and Procedures—Internal Control over Financial Reporting.” In addition, if we cease to be an “emerging growth company” as such term is defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, our independent registered public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting. Our management may continue to conclude that our internal control over financial reporting is not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm, after conducting its own independent testing, may issue a report that is qualified if it is not satisfied with our internal controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. In addition, our reporting obligations as a public company 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.

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In the course of preparing and auditing our consolidated financial statements for the years ended December 31, 2019, 2020 and 2021 included in our annual report, we and our independent registered public accounting firm respectively identified one material weakness in our internal control over financial reporting as of December 31, 2021. In accordance with reporting requirements set forth by the SEC, a “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our company’s annual or interim consolidated financial statements will not be prevented or detected on a timely basis. The material weakness identified relates to lack of sufficient competent financial reporting and accounting personnel with appropriate understanding of U.S. GAAP to address complex U.S. GAAP technical accounting issues and to prepare and review our consolidated financial statements and related disclosures in accordance with U.S. GAAP and financial reporting requirements set forth by the SEC. To remedy our identified material weakness, we have taken action to and will continue to undertake steps to strengthen our internal control over financial reporting, including: (i) hiring more qualified personnel equipped with relevant U.S. GAAP and SEC reporting experience and qualifications to strengthen the financial reporting function and to set up a financial and system control framework, (ii) implementing regular and continuous U.S. GAAP accounting and financial reporting training programs for our accounting and financial reporting personnel, (iii) establishing effective oversight and clarifying reporting requirements

for non-recurring and

complex transactions to ensure consolidated financial statements and related disclosures are accurate, complete and in compliance with U.S. GAAP and SEC reporting requirements. However, such measures have not been fully implemented and we concluded that the material weakness and deficiencies in our internal control over financial reporting have not been remediated as of December 31, 2021. See “Item 15. Controls and Procedures—Internal Control over Financial Reporting.”

During the course of documenting and testing our internal control procedures, in order to satisfy the requirements of Section 404, we may identify other weaknesses and deficiencies in our internal control over financial reporting. In addition, if we fail to maintain the adequacy of our internal control over financial reporting, as these standards are modified, supplemented or amended from time to time, we may not be able to conclude that we have effective internal control over financial reporting in accordance with Section 404. Moreover, our internal control over financial reporting may not prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud will be detected.

Generally speaking, if we fail to achieve and maintain an effective internal control environment, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information. This could in turn limit our access to capital markets, harm our results of operations and lead to a decline in the trading price of our ADSs. Additionally, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets, and subject us to potential delisting from the stock exchange on which we list, regulatory investigations and civil or criminal sanctions.

Future investments in and acquisitions of complementary assets, technologies and businesses may fail, and may result in equity and earnings dilution and significant diversion of management attention.

We may invest in or acquire assets, technologies and businesses that are complementary to our existing business. This may include opportunities to expand our service offerings and strengthen our technology and data capabilities. Our investments or acquisitions may not yield the results we expect. In addition, investments and acquisitions could result in the use of substantial amounts of cash, potentially dilutive issuances of equity securities, significant amortization expenses related to intangible assets, significant diversion of management attention and exposure to potential unknown liabilities of the acquired business. Moreover, the cost of identifying and consummating investments and acquisitions, and integrating the acquired businesses into ours, may be significant, and the integration of acquired businesses may be disruptive to our existing business operations. In the event that our investments and acquisitions are not successful, our results of operations and financial condition may be materially and adversely affected.

We may not be able to obtain additional capital when desired, on favorable terms or at all.

We may make investments from time to time in facilities, hardware, software, technological systems and other projects to remain competitive. Due to the unpredictable nature of the capital markets and our industry, there can be no assurance that we will be able to raise additional capital on terms favorable to us, or at all, if and when required, especially if we experience disappointing results of operations. If adequate capital is not available to us as required, our ability to fund our operations, take advantage of unanticipated opportunities, develop or enhance our infrastructure or respond to competitive pressures could be significantly limited. If we do raise additional funds through the issuance of equity or convertible debt securities, the ownership interests of our shareholders could be significantly diluted. These newly issued securities may have rights, preferences or privileges senior to those of existing shareholders.

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Failure to comply with PRC labor laws and make adequate contributions to various employee benefits plans as required by PRC regulations may subject us to penalties.

Companies operating in China are required to register with governmental authorities and participate in various government-sponsored employee benefit plans, including certain social insurance, housing funds and other welfare-oriented payment obligations, and contribute to the plans in amounts equal to certain percentages of salaries, including bonuses and allowances, of employees up to a maximum amount specified by the local government from time to time at locations where our employees are based. In addition, companies registered in China are required to apply for work permits for their foreign employees. The requirement of employee benefit plans has not been implemented consistently by the local governments in China given the different levels of economic development in different locations. Historically, we failed in making adequate employee benefit payments in strict compliance with the relevant PRC regulations for and on behalf of our employees and had been reliant on third-party service provider to pay social benefits mainly for our employees based outside of Shanghai. Our failure in making contributions to various employee benefit plans in strict compliance with applicable PRC labor-related laws may subject us to late payment penalties, and we could be required to make up the contributions for these plans as well as to pay late fees and fines. Further, we recruit foreign employees from time to time, but we may not be able to obtain requisite work permits for all of them in a timely manner. Our failure to timely obtain work permits for our foreign employees may subject us to penalties and we may be unable to hire such foreign employees. If any of the foregoing were to occur, our financial condition and results of operations may be adversely affected.

We have granted and may continue to grant restricted shares, share options and other share-based awards in the future, which may result in increased share-based compensation expenses.

We adopted a 2014 Equity Incentive Plan, or the 2014 Plan, and a 2018 Share Incentive Plan, as amended and restated in September 2020, or the Amended and Restated 2018 Plan, for the purpose of granting share-based compensation awards to employees, directors and consultants to incentivize their performance and align their interests with ours. For further detailed information, please refer to “Item 6. Compensation—B. Share Incentive Plans.” For the years ended December 31, 2019, 2020 and 2021, we recorded RMB26.7 million, RMB29.0 million and RMB22.0 million (US$3.5 million), respectively, in share-based compensation expenses. We believe the granting of share-based compensation is of significant importance to our ability to attract and retain key personnel and employees, and we will continue to grant share-based compensation to employees in the future. As a result, our expenses associated with share-based compensation may increase, which may have an adverse effect on our results of operations.

If we are not able to control our labor-related costs in an effective way, our business, results of operations and financial condition may be adversely affected.

Our labor costs are primarily incurred in China. The economy of China has been experiencing significant growth, leading to inflation and increased labor costs, particularly in the large cities, such as Shanghai. In addition, we are required by PRC laws and regulations to pay various statutory employee benefits, including pensions, housing fund, medical insurance, work-related injury insurance, unemployment insurance and maternity insurance to designated government agencies for the benefit of our employees. If we fail to control our labor costs in China, including wages and employee benefits, our business, results of operations and financial condition may be adversely affected. Significant additional government-imposed increases in the jurisdictions where we have operations may affect our profitability and results of operations, unless we are able to pass on these costs to our users by increasing prices of our programs.

Furthermore, as we implemented cost control measures to improve our financial performance, we terminated employment relationship with certain employees. Some of those former employees initiated legal proceedings against us and claimed for compensations. As of March 31, 2022, 42 proceedings in relation to such labor disputes were pending, which involve claims for compensation in a total amount of about RMB2.9 million. If the results of such claims are unfavorable to us, we may incur additional costs to cover those claims and our financial condition and results of operations may be adversely affected.

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

The global macroeconomic environment is facing numerous challenges. The growth rate of the Chinese economy has gradually slowed since 2010 and the trend may continue. There is considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies adopted by the central banks and financial authorities of some of the world’s leading economies, including the United States and China, even before 2021. The recent conflicts in Ukraine and the imposition of broad economic sanctions on Russia could raise energy prices and disrupt global markets. Unrest, terrorist threats and the potential for war in the Middle East and elsewhere may increase market volatility across the globe. 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 trade policies, treaties, government regulations and tariffs. Economic conditions in China are sensitive to global economic conditions, as well as changes in domestic economic and political policies and the expected or perceived overall economic growth rate in China. Any severe or prolonged slowdown in the global or Chinese economy may materially and adversely affect our business, results of operations and financial condition.

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We have limited insurance coverage of our operations, which may expose us to significant costs and business disruption.

The insurance industry in China is still in an early stage of development, and insurance companies in China currently offer limited business-related insurance products. We do not maintain business interruption insurance or general third-party liability insurance, nor do we maintain property insurance, product liability insurance or

key-man

insurance. We consider this practice to be reasonable in light of the nature of our business and the insurance products that are available in China and in line with the practices of other companies in the same industry of similar size in China. Any uninsured risks may result in substantial costs and the diversion of resources, which could adversely affect our results of operations and financial condition.

We face risks related to natural disasters, health epidemics and other outbreaks, which could significantly disrupt our operations.

Our business could be adversely affected by the effects of epidemics. In recent years, there have been breakouts of epidemics in China and globally. Since December 2019,

COVID-19

has spread rapidly to many parts of the world, and the effect of the

COVID-19

continues. In response to intensifying efforts to contain the spread of the coronavirus, the Chinese government took a number of actions, which included extending the Chinese New Year holiday in 2020, quarantining individuals in China who had the

COVID-19,

asking citizens to remain at home and to avoid gathering in public, and other actions. We adjusted our operations and instructed our employees to all stay at their homes and work from home during the outbreak and experienced lower work efficiency and productivity. We gradually resumed our normal operation in February 2020. The global spread of

COVID-19

pandemic in a significant number of countries around the world has resulted in, and may intensify, global economic distress, and the duration and extent of the impact of

COVID-19

outbreak cannot be reasonably estimated at this time. In 2021 and early 2022, there were several waves of

COVID-19

pandemic in China, including an increasing number of

COVID-19

Delta and Omicron variant cases. Even though our office in Shanghai was closed during the lockdown period, our business operations was not adversely affected. However, the extent to which it may affect our results of operations, financial condition and cash flow will depend on the future developments of the pandemic, which are highly uncertain and cannot be predicted. Such uncertainty poses operational challenges to our online course service offerings. Our operations could be disrupted if one of our employees is suspected of having

COVID-19,

H1N1 flu, avian flu or another epidemic in our offices, since it could require our employees to be quarantined and/or our offices to be disinfected. In addition, our results of operations could be adversely affected to the extent that the outbreak harms the PRC economy in general.

We are also vulnerable to natural disasters and other calamities. Our servers and back system are hosted and maintained at cloud servers by a third-party service provider. We cannot assure you that such third-party service provider will have adequate measures to protect itself from the effects of fire, floods, typhoons, earthquakes, power loss, telecommunications failures,

break-ins,

war, riots, terrorist attacks or similar events. Any of the foregoing events may give rise to server interruptions, breakdowns, system failures, technology platform failures or internet failures, which could cause the loss or corruption of data or malfunctions of software or hardware as well as adversely affect our ability to provide services on our platform.

We are subject to risks relating to our leased properties

Currently, all of our offices are on leased premises. We may not be able to successfully maintain, extend or renew our leases upon expiration of the current terms on commercially reasonable terms or at all, and may therefore be forced to relocate to new offices. Besides, pursuant to relevant PRC laws and regulations, land that acquired through governmental allocation is prohibited from leasing without prior approval from competent governmental authorities. Otherwise, the relevant government authority may revoke such leases and take back these leased properties without compensation. Currently, certain of our leased properties are on land acquired through governmental allocation. If such lease agreements are revoked by the relevant government authority, we may therefore be forced to relocate to new offices.

Further, we have entered into certain lease agreements with parties who have not provided evidence of proper legal title to the leased premises or authorization from the legal owners for sublease of the premises. If such parties are not the legal owners, nor have they obtained the proper authorization from the legal owners of the premises, and the actual owners successfully challenge the validity of the relevant leases, we would be forced to relocate.

In the event we are forced to relocate, we may not be able to locate desirable alternative sites for our offices in a timely and cost-effective manner and the relocation of any of our offices may disrupt our operations and result in significant relocation expenses, which could adversely affect our business, financial condition and results of operations. In addition, although we may seek damages from the counterparties to the lease agreements, there can be no assurance that we would be able to collect such damages or the damages we collected could cover our relocation expenses.

We have not registered our lease agreements with the relevant government authorities. Under the relevant PRC laws and regulations, we may be required to register and file with the relevant government authority executed leases. The failure to register the lease agreements for our leased properties will not affect the validity of these lease agreements, but the competent housing authorities may order us to register the lease agreements in a prescribed period of time and impose a fine ranging from RMB1,000 to RMB10,000 for each

non-registered

lease if we fail to complete the registration within the prescribed timeframe.

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Risks Relating to Our Corporate Structure

Foreign ownership of internet-based businesses, such as internet information services, is subject to restrictions under current PRC laws and regulations. For example, foreign investors are not allowed to own more than 50% of the equity interests in a value-added telecommunication service provider (except

e-commerce,

domestic multi-party communication, storing and forwarding and call center which does not apply to us) and major foreign investor must typically have experience in providing value-added telecommunications services overseas and maintain a good track record in accordance with the Special Administrative Measures (Negative List) for the Access of Foreign Investment (2021 Version) promulgated in December 27, 2021, or, prior to the enactment of which, the Guidance Catalog of Industries for Foreign Investment promulgated in 2007, as amended, and other applicable laws and regulations.

We are a Cayman Islands exempted company and our PRC subsidiaries are considered foreign-invested enterprises. To comply with PRC laws and regulations, we conduct operations in China through the VIEs. Dr. Yi Wang, Mr. Zheren Hu, Dr. Hui Lin, Zhuhai Xinran Consulting and Management Co., Ltd., Ningbo Meishan Bonded Port Zhimei Fifth Equity Investment Partnership (Limited Partnership), Jiwei Enterprise Management and Consulting (Shanghai) Co., Ltd., Mr. Jiong Gu, and two other shareholders hold 37.32%, 10.51%, 6.11%, 11.88%, 11.88%, 10.38%, 5.56% and 6.36% equity interests in Shanghai Liulishuo, respectively. Shanghai Mengfan Cultural Communication Co., Ltd., or Shanghai Mengfan has the same shareholding structure as Shanghai Liulishuo. Dr. Yi Wang, Mr. Zheren Hu and Dr. Hui Lin also collectively hold all equity interests in Shanghai Mengfan Education Technology Co., Ltd. (previously known as Shanghai Mengfan Education Training Co., Ltd.), or Mengfan Education, one of the variable interest entities. We have entered into a series of contractual arrangements with each of the VIEs, their respective shareholders and Yuguan Information Technology (Shanghai) Co., Ltd., which we refer to as Yuguan or our WFOE in this annual report, which enable us to (i) exercise effective control over the VIEs, (ii) receive substantially all of the economic benefits of the VIEs, and (iii) have an exclusive call option to purchase all or part of the equity interests in the VIEs when and to the extent permitted by PRC laws. Because of these contractual arrangements, we are deemed the primary beneficiary of the VIEs, and hence consolidate their financial results as the variable interest entities under U.S. GAAP. For a detailed description of these contractual arrangements, see “Item 4. Information on the Company – A. History and Development of the Company.”

However, as we are a Cayman Islands holding company with no equity ownership in the variable interest entities, investors in our ADSs or the ordinary shares thus are not purchasing equity interest in the variable interest entities in China but instead are purchasing equity interest in a Cayman Islands holding company. If the PRC government deems that our contractual arrangements with the variable interest entities do not comply with PRC regulatory restrictions on foreign investment in the relevant industries, or if these regulations or the interpretation of existing regulations change or are interpreted differently in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations. We may not be able to repay the notes and other indebtedness, and our shares 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 contribute to 44.4% of our total assets as of December 31, 2021. Our holding company in the Cayman Islands, the variable interest entities, and investors of 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, significantly affect the financial performance of the variable interest entities and our company as a group.

In the opinion of Fangda Partners, our PRC legal counsel, (i) the ownership structure of our WFOE and the VIEs does not violate applicable PRC laws and regulations currently in effect; and (ii) the contractual arrangements between our WFOE, the VIEs and their respective shareholders governed by PRC law currently are valid and binding. However, we have been advised by our PRC legal counsel that there are substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations and rules, and there can be no assurance that the PRC regulatory authorities will take a view that is consistent with the opinion of our PRC legal counsel. Especially, on July 24, 2021, the General Office of the CPC Central Committee and the General Office of the State Council issued the Double Alleviating Opinions, which prohibits foreign investors from investing into after-school tutoring institutions providing tutoring service related to academic subjects in compulsory education stage, including through variable interest entity structure. Despite that rules and regulations have been promulgated in connection with the scope of academic subjects in compulsory education stage, it remains unclear, and subject to relevant governmental authorities’ discretion, as to whether the products and services we offer fall into the scope of academic subjects of compulsory education stage. Based on our consultation with relevant governmental authorities, we ceased the operation of the “Kids Liulishuo” mobile app in January 2022, and believe that the remaining products and services we currently offer do not constitute “tutoring service related to academic subjects of compulsory education stage” and thus not subject to the above restrictions. However, there can be no assurance that we will not be subject to penalties for historical violation, or the interpretation and implementation of relevant governmental authorities will not change in the future. Additionally, on April 7, 2021, the State Council promulgated the Amended Implementation Rules for Private Education Law, which took effective on September 1, 2021. The Amended Implementation Rules for Private Education Law stipulates that related party transactions to which a private school is a party would be required to be concluded on a fair and just basis without impediment to the interests of the state, the school, the teachers and the students, which could potentially impact our contractual arrangements with the VIEs. Please see “—Risks Relating to Doing Business in China—We face risks associated with uncertainties surrounding the PRC laws and regulations governing the education industry in general, and the online

for-profit

private training in particular.”

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Furthermore, the Foreign Investment Law promulgated by the PRC National People’s Congress in March 2019, which became effective from January 1, 2020, may impact our current variable interest entity structures. See “—Risks Relating to Doing Business in China—Substantial uncertainties exist with respect to the interpretation and implementation of the PRC Foreign Investment Law and Double Alleviating Opinions and how they may impact the viability of our current corporate structure, corporate governance and business operations.” It is also uncertain whether any new PRC laws or regulations relating to variable interest entity structures will be adopted or if adopted, what they would provide.

If the ownership structure, contractual arrangements and businesses of our PRC subsidiaries or the VIEs are found to be in violation of any existing or future PRC laws or regulations, or our PRC subsidiaries or the VIEs fail to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities would have broad discretion to take action in dealing with such violations or failures, including:

•

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

•

shutting down our servers or blocking our mobile apps, or discontinuing or placing restrictions or onerous conditions on our operation through any transactions between our PRC subsidiaries and VIEs;

•

imposing fines, confiscating the income from our PRC subsidiaries or the VIEs, or imposing other requirements with which we or the VIEs may not be able to comply;

•

requiring us to restructure our ownership structure or operations, including terminating the contractual arrangements with the VIEs and deregistering the equity pledge of the VIEs, which in turn would affect our ability to consolidate, derive economic interests from, or exert effective control over the VIEs; or

•

restricting or prohibiting our use of the proceeds of our initial public offering to finance our business and operations in China, and taking other regulatory or enforcement actions that could be harmful to our business.

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

We have relied and expect to continue to rely on variable interest entity contractual arrangements to conduct a significant part of our operations in China. We rely on contractual arrangements with Shanghai Liulishuo, Shanghai Mengfan, Mengfan Education and their respective shareholders to conduct a significant part of our operations in China. For a description of these contractual arrangements, see “Item 4. Information on the Company—C. Organizational Structure—Contractual Arrangements with the VIEs and Their Respective Shareholders.” The shareholders of the VIEs may not act in the best interests of our company or may not perform their obligations under these contracts. If we had direct ownership of the VIEs, we would be able to exercise our rights as a shareholder to effect changes in the board of directors of the VIEs, which in turn could implement changes, subject to any applicable fiduciary obligations, at the management and operational level. However, under the contractual arrangements, we would rely on legal remedies under PRC law for breach of contract in the event that the VIEs and their respective shareholders did not perform their obligations under the contracts. These legal remedies may not be as effective as direct ownership in providing us with control over the VIEs.

If the VIEs or their respective shareholders fail to perform their obligations under the contractual arrangements, we may have to incur substantial costs and expend additional resources to enforce such arrangements. All the agreements under our contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in China. Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal system in China is not as developed as in some other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. Meanwhile, there are very few precedents and little formal guidance as to how contractual arrangements in the context of a variable interest entity should be interpreted or enforced under PRC law. Significant uncertainties remain regarding the ultimate outcome of such arbitration should legal action become necessary. In addition, under PRC law, rulings by arbitrators are final, parties cannot appeal the arbitration results in courts, and if the losing parties fail to carry out the arbitration awards within a prescribed time limit, the prevailing parties may only enforce the arbitration awards in PRC courts through arbitration award recognition proceedings, which would require additional expenses and delay. In the event we are unable to enforce these contractual arrangements, or if we suffer significant delay or other obstacles in the process of enforcing these contractual arrangements, we may not be able to exert effective control over the VIEs, and our ability to conduct our business may be negatively affected.

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

A significant portion of equity interests in the VIEs are held by our founders while the remaining portion of equity interests in the VIEs are held by our

pre-IPO

investors. They may have potential conflicts of interest with us. These equity interests holders may breach, or cause the VIEs to breach, or refuse to renew, the existing contractual arrangements we have with them and the VIEs, which would have a material and adverse effect on our ability to effectively control the VIEs and receive economic benefits from them. For example, the equity interests holders may be able to cause our agreements with the VIEs to be performed in a manner adverse to us by, among other things, failing to remit payments due under the contractual arrangements to us on a timely basis. 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 equity interests holders and our company. For the equity interests holders who are also our directors and executive officers, we rely on them to abide by the laws of the Cayman Islands and China, which provide that directors owe a fiduciary duty to the company that requires them to act in what they consider in good faith to be in the best interests of our company and not to use their position for personal gains. There is currently no specific and clear guidance under PRC laws that address any conflict between PRC laws and laws of Cayman Islands in respect of any conflict relating to corporate governance. If we cannot resolve any conflict of interest or dispute between us and the equity interests holders of the VIEs, 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.

Under applicable PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities within ten years after the taxable year when the transactions are conducted. The PRC Enterprise Income Tax Law requires every enterprise in China to submit its annual enterprise income tax return together with a report on transactions with its related parties to the relevant tax authorities. The tax authorities may impose reasonable adjustments on taxation if they have identified any related party transactions that are inconsistent with arm’s length principles. We may face material and adverse tax consequences if the PRC tax authorities determine that the contractual arrangements between our WFOE, the VIEs and the VIEs’ shareholders were not entered into on an arm’s length basis in such a way as to result in an impermissible reduction in taxes under applicable PRC laws, rules and regulations, and adjust the VIEs’ income in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in a reduction of expense deductions recorded by the VIEs for PRC tax purposes, which could in turn increase its tax liabilities without reducing Yuguan’s taxable income. In addition, if Yuguan requests the shareholders of the VIEs to transfer their equity interests in or the assets of the VIEs at the price prescribed in the contractual agreements, and if such price is deemed below fair market value determined by the tax authority, or if the shareholders of the VIEs pay Yuguan any transfer price or distribution they receive in respect of the equity interests they hold in the VIEs according to the contractual arrangements, Yuguan may be subject to PRC income tax liabilities for such transactions. Furthermore, the PRC tax authorities may impose interest expenses and other penalties on the VIEs for the adjusted but unpaid taxes according to the applicable regulations. Our financial position could be materially and adversely affected if the VIEs’ tax liabilities increase or if they are required to pay interest expenses and other penalties.

We may lose the ability to use and benefit from assets held by the VIEs that are material to the operation of our business if the entities go bankrupt or becomes subject to a dissolution or liquidation proceeding.

As part of our contractual arrangements with the VIEs, these entities hold certain assets that are material to the operation of our business. If the VIEs go bankrupt and all or part of its assets become subject to liens or rights of third-party creditors, we may be unable to continue some or all of our business activities, which could materially and adversely affect our business, financial condition and results of operations. Under the contractual arrangements, the VIEs may not, in any manner, sell, transfer, dispose of any of its material assets (other than those occurring in the ordinary course of business), or create any security interest or other encumbrances on any of its assets for the benefit of any third party, without our prior written consent. If the VIEs undergo a voluntary or involuntary liquidation proceeding, unrelated third-party creditors may claim rights to some or all of these assets, thereby hindering our ability to operate our business, which could materially and adversely affect our business, financial condition, and results of operations.

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Risks Relating to Doing Business in China

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

Substantially all of our operations are conducted in China. Accordingly, our results of operations, financial condition and prospects are influenced by economic, political and legal developments in China. China’s economy differs from the economies of most developed countries in many respects, including with respect to the degree of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. The PRC government exercises significant control over China’s economic growth through strategically allocating resources, controlling the payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. While the PRC economy has experienced significant growth over the past decades, that growth has been uneven across different regions and between industry sectors and may not continue, as evidenced by the slowing of the growth of the Chinese economy since 2012. Any adverse changes in economic conditions in China, in the policies of the Chinese government or in the laws and regulations in China could have a material adverse effect on the overall economic growth of China. Such developments could adversely affect our business and operating results, lead to reduction in demand for our services and solutions and adversely affect our competitive position.

The PRC government’s significant oversight over our business operation could result in a material adverse change in our operations and the value of our ADSs and ordinary shares.

We conduct our business in China primarily through our PRC subsidiaries, the variable interest entities and their subsidiaries. Our operations in China are governed by PRC laws and regulations. PRC government has significant oversight over the conduct of our business and it has recently indicated an intent to exert more oversight over offerings that are conducted overseas and/or foreign investment in China-based issuers. Any such action could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of such securities to significantly decline or be of little or no value. Also, the PRC government has recently indicated an intent to exert more oversight over offerings that are conducted overseas and/or foreign investment in China-based issuers. Any such action could significantly limit or completely hinder our ability to offer or continue to offer securities to investors. Please see “Risk Factors—Risks Relating to Doing Business in China—The approval of the CSRC or other PRC government authorities may be required in connection with our offshore offerings under PRC law, and, if required, we cannot predict whether or for how long we will be able to obtain such approval.” In addition, implementation of industry-wide regulations directly targeting our operations could cause our securities to significantly decline in value. Therefore, investors of our company face potential uncertainty from actions taken by the PRC government affecting our business. Please see “Risk Factors—Risks Relating to Doing Business in China—We face risks associated with uncertainties surrounding the PRC laws and regulations governing the education industry in general, and the online

for-profit

private training in particular.”

Our auditor, 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. Since our auditor is located in China, a jurisdiction where the PCAOB has been unable to conduct inspections without the approval of the PRC authorities, our auditor is not currently inspected by the PCAOB. As a result, we and investors in our ADSs are deprived of the benefits of such PCAOB inspections. The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our independent registered public accounting firm’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to the PCAOB inspections, which could cause investors and potential investors in our ADSs to lose confidence in our audit procedures and reported financial information and the quality of our financial statements.

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

over-the-counter

trading market in the United States. On December 2, 2021, the SEC adopted final amendments implementing the disclosure and submission requirements of the HFCAA, pursuant to which the SEC will identify an issuer as a “Commission Identified Issuer” if the issuer has filed an annual report containing an audit report issued by a registered public accounting firm that the PCAOB has determined it is unable to inspect or investigate completely, and will then impose a trading prohibition on an issuer after it is identified as a Commission-Identified Issuer for three consecutive years. On December 16, 2021, the PCAOB issued a report to notify the SEC of its determination that the PCAOB is unable to inspect or investigate completely registered public accounting firms headquartered in mainland China and Hong Kong. The PCAOB identified our auditor as one of the registered public accounting firms that the PCAOB is unable to inspect or investigate completely. Therefore, we expect to be identified as a “Commission Identified Issuer” shortly after the filing of this annual report on Form 20-F.

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Whether the PCAOB will be able to conduct inspections of our auditor before the issuance of our financial statements on Form

20-F

for the year ending December 31, 2023 which is due by April 30, 2024, or at all, is subject to substantial uncertainty and depends on a number of factors out of our, and our auditor’s, control. If our shares and ADSs are prohibited from trading in the United States, there is no certainty that we will be able to list on a

non-U.S.

exchange or that a market for our shares will develop outside of the United States. Such a prohibition 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 raise capital on terms acceptable to us, or at all, which would have a material adverse impact on our business, financial condition, and prospects.

On June 22, 2021, the U.S. Senate passed a bill which would reduce the number of consecutive

non-inspection

years required for triggering the prohibitions under the HFCAA from three years to two. On February 4, 2022, the U.S. House of Representatives passed a bill which contained, among other things, an identical provision. If this provision is enacted into law and the number of consecutive

non-inspection

years required for triggering the prohibitions under the HFCAA is reduced from three years to two, then our shares and ADSs could be prohibited from trading in the United States in 2023.

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, requires an overseas special purpose vehicle formed for listing purposes through acquisitions of PRC domestic companies and controlled by PRC 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 historical and future 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 restrict our ability to raise funds, subject us to sanctions imposed by the CSRC or other PRC regulatory authorities, which could include fines and penalties on our operations in China, restrictions or limitations on our ability to pay dividends outside of 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 December 24, 2021, the State Council issued a draft Regulations of the State Council on the Administration of Overseas Issuance and Listing of Securities by Domestic Companies (Draft for Comments), or the Draft Provisions, and the CSRC issued a draft Measures for the Record-Filing of Overseas Securities Offering and Listing by Domestic Companies (Draft for Comments), or the Draft Administration Measures, for public comments.

Pursuant to these drafts, an overseas offering and listing by a domestic company, whether directly or indirectly, shall be filed with the CSRC. Specifically, the examination and determination of an indirect offering and listing will be conducted on a substance-over-form basis, and an offering and listing shall be considered as an indirect overseas offering and listing by a domestic company if the issuer meets the following conditions: (i) the operating income, gross profit, total assets, or net assets of the domestic enterprise in the most recent fiscal year was more than 50% of the relevant line item in the issuer’s audited consolidated financial statement for that year; and (ii) senior management personnel responsible for business operations and management are mostly PRC citizens or are ordinarily resident in the PRC, and the main place of business is in the PRC or carried out in the PRC. According to the Draft Administration Measures, the issuer or its affiliated domestic company, as the case may be, should file with the CSRC for its initial public offering,

follow-on

offering, listing of securities in another overseas market, and other equivalent offing activities. Particularly, the issuer should submit the filing with respect to its initial public offering and listing or listing of securities in another overseas market within three business days after submitting the application documents for the foregoing transactions and the issuer should submit the filing with respect to its

follow-on

offering within three business days after completion of the

follow-on

offering. Besides, direct or indirect overseas listing of assets of PRC domestic companies by merger and acquisition, share swap, allocation, or other arrangements through one of a series of transactions are also subject to filing with CSRC. Failure to comply with the filing requirements may result in fines to the relevant domestic companies, suspension of their businesses, revocation of their business licenses and operation permits and fines on the controlling shareholder and other responsible persons. The Draft Administration Measures also sets forth certain regulatory red lines for overseas offerings and listings by domestic enterprises.

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As of the date of this annual report, the Draft Provisions and the Draft Administration Measures were released for public comment only. There are uncertainties as to whether the Draft Provisions and the Draft Administration Measures would be further amended, revised or updated. Substantial uncertainties exist with respect to the enactment timetable and final content of the Draft Provisions and the Draft Administration Measures. As the CSRC may formulate and publish guidelines for filings in the future, the Draft Administration Measures does not provide for detailed requirements of the substance and form of the filing documents. In a Q&A released on its official website, the respondent CSRC official indicated that the proposed new filing requirement will start with new companies and the existing companies seeking to carry out activities like

follow-on

financing or listing of securities in another overseas market. As for the filings for the existing companies, the regulator will grant adequate transition period and apply separate arrangements. The Q&A also addressed the contractual arrangements and pointed out that if relevant domestic laws and regulations have been observed, companies with compliant variable interest entity structure may seek overseas listing after completion of the CSRC filings. Nevertheless, it does not specify what qualify as compliant variable interest entity structures and what relevant domestic laws and regulations are required to be complied with.

Given the substantial uncertainties surrounding the latest CSRC filing requirements at this stage, we cannot assure you that we will be able to complete the filings and fully comply with the relevant new rules on a timely basis, if at all.

On December 27, 2021, the NDRC and the Ministry of Commerce, jointly issued the 2021 Negative List, which became effective on January 1, 2022. Pursuant to the 2021 Negative List, 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 percentages 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 operation, financial conditions, business prospect and ability of financing, 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 or otherwise tightening the regulations on companies with a variable interest entity structure. If it is determined in the future that approval and filing from the CSRC or other regulatory authorities or other procedures, including the cyber security review under the enacted version of the Revised Measures for Cyber Security Review and Regulations on Cyber Data Security Management (Draft for Comments) or the Draft Cyber Data Security Regulations, 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 China, limit our ability to pay dividends outside of China, limit our operating privileges in China, delay or restrict the repatriation of the proceeds from our offshore offerings into 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.

We face uncertainties with respect to the interpretation and implementation of the Anti-Monopoly Guidelines for Internet Platforms and other anti-monopoly and competition laws and how it may impact our business operations.

In February 2021, the Anti-Monopoly Guidelines for Internet Platforms was promulgated by the Antimonopoly Commission of the PRC State Council. The Anti-Monopoly Guidelines for Internet Platforms is consistent with the Anti-Monopoly Law of PRC and prohibits monopoly agreements, abuse of dominant position and concentration of undertakings that may have the effect of eliminating or restricting competitions in the field of platform economy. More specifically, the Anti-Monopoly Guidelines for Internet Platforms outlines certain practices that may, if without justifiable reasons, constitute abuse of dominant position, including without limitation, tailored pricing using big data and analytics, actions or arrangements seen as exclusivity arrangements, using technology means to block competitors’ interface, using bundled services to sell services or products, and compulsory collection of user data. Besides, Anti-Monopoly Guidelines for Internet Platforms expressly states that concentration of undertaking involving contractual control structure will also be subject to antitrust filing requirements.

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In April 2021, the State Administration for Market Regulation, or the SAMR, together with certain other PRC government authorities convened an administrative guidance meeting, focusing on unfair competition acts in community group buying, self-inspection and rectification by major internet companies of possible violations of anti-monopoly, anti-unfair competition, tax and other related laws and regulations, and requesting such companies to comply with relevant laws and regulations strictly and be subject to public supervision. In addition, many internet companies, including over 30 companies which attended such administrative guidance meeting, are required to conduct a comprehensive self-inspection and make necessary rectification accordingly. The SAMR stated that it will organize and conduct inspections on the companies’ rectification results. If a company is found to conduct illegal activities, more severe penalties are expected to be imposed in accordance with the laws.

On August 17, 2021, the SAMR issued the Provisions on Preventing Unfair Online Competition (Draft for Comments), which detailed the implementation of the PRC Unfair Competition Law, including specifying certain online unfair competition behaviors that should be prohibited. As of the date of this annual report, the provisions have not been formally adopted, and due to the lack of further clarification, there are still uncertainties regarding the interpretation and implementation of the provisions.

Since the Anti-Monopoly Guidelines for Internet Platforms are relatively new and the Provisions on Preventing Unfair Online Competition (Draft for Comments) have not been formally adopted, uncertainties still exist in relation to its interpretation and implementation. Although we do not believe we engage in any foregoing situations, we cannot assure you that our business operations will comply with such regulation in all respects, and any failure or perceived failure by us to comply with such regulation may result in governmental investigations, fines and/or other sanctions on us.

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

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

In 1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general. The overall effect of legislation over the past decades has significantly enhanced the protections afforded to various forms of foreign investments in China. However, China has not developed a fully integrated legal system, and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, the interpretation and enforcement of these laws and regulations involve uncertainties. Since the PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection available to you and us.

Furthermore, the PRC legal system is based in part on government policies and internal rules, some of which are not published on a timely basis or at all, and which may have a retroactive effect. As a result, we may not be aware of our violation of any of these policies and rules until sometime after the violation. 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 China could materially and adversely affect our business and impede our ability to continue our operations.

Substantial uncertainties exist with respect to the interpretation and implementation of the PRC Foreign Investment Law and Double Alleviating Opinions and how they may impact the viability of our current corporate structure, corporate governance and business operations.

The “variable interest entity” 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 Relating to Our Corporate Structure” and “Item 4. Information on the Company—C. Organizational Structure.” The Ministry of Commerce of the People’s Republic of China published a discussion draft of the proposed Foreign Investment Law in January 2015, or the 2015 Draft FIL, according to which, variable interest entities that are controlled via contractual arrangements would also be deemed as FIEs, if they are ultimately “controlled” by foreign investors. In March 2019, the PRC National People’s Congress promulgated the Foreign Investment Law, or the 2019 FIL, which became effective from January 1, 2020 and replaced the major existing laws and regulations governing foreign investment in China. Pursuant to the 2019 FIL, “foreign investments” refer to investment activities conducted by foreign investors directly or “indirectly” in China, which include any of the following circumstances: (i) foreign investors setting up foreign-invested enterprises in China solely or jointly with other investors, (ii) foreign investors obtaining shares, equity interests, property portions or other similar rights and interests of enterprises within China, (iii) foreign investors investing in new projects in China solely or jointly with other investors, and (iv) investment in other methods as specified in laws, administrative regulations, or as stipulated by the State Council. Although the 2019 FIL does not introduce the concept of “control” in determining whether a company should be considered as a foreign-invested enterprise, nor does it provide the “variable interest entity” structure as a method of foreign investment, as the 2019 FIL is relatively new and relevant government authorities may promulgate more laws, regulations or rules on the interpretation and implementation of the 2019 FIL. The possibility cannot be ruled out that the concept of “control” as stated in the 2015 Draft FIL may be embodied in, or the “variable interest entity” structure adopted by us may be deemed as a method of foreign investment by, any of such subsequent laws, regulations and rules. For example, according to the Double Alleviating Opinions, foreign investors are prohibited from investing in after-school tutoring institutions providing tutoring service related to academic subjects of compulsory education stage through mergers and acquisitions, entrustment, franchise and variable interest entities. If our consolidated “variable interest entity” were deemed as a foreign-invested enterprise under any of such future subsequent laws, regulations and rules applicable to us, and any of the businesses that we operate would be in any “negative list” for foreign investment and therefore be subject to any foreign investment restrictions or prohibitions, further actions required to be taken by us under such laws, regulations and rules may materially and adversely affect our business and financial condition.

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We may face risks and uncertainties with respect to the licensing requirement for internet audio-visual programs.

On December 20, 2007, the State Administration of Press Publication Radio Film and Television, or SAPPRFT (currently known as the State Administration of Radio and Television), and MIIT, jointly promulgated the Administrative Provisions on Internet Audio-Visual Program Service, or the Audio-Visual Program Provisions, which became effective on January 31, 2008 and was last amended on August 28, 2015. Among other things, the Audio-Visual Program Provisions stipulated that no entities or individuals may provide internet audio-visual program services without a License for Online Transmission of Audio-Visual Programs issued by SAPPRFT or its local bureaus or completing the relevant registration procedures with SAPPRFT or its local bureaus, and only state-owned or state-controlled entities are eligible to apply for a License for Online Transmission of Audio-Visual Programs. On March 17, 2010, SAPPRFT promulgated the Tentative Categories of Internet Audio-Visual Program Services, or the Categories, clarifying the scope of internet audio-visual programs services, which was amended on March 10, 2017. The making and editing of certain specialized audio-visual programs concerning, among other things, educational content, and broadcasting such content to the general public online is covered in the Categories. However, there are still significant uncertainties relating to the interpretation and implementation of the Audio-Visual Program Provisions, in particular, the scope of “internet audio-visual programs.”

Our key English learning products are featured by AI teachers and as part of the components of our courses, we offer short English audio clips on our mobile apps for users to listen and repeat, and then user-recorded audios will be automatically generated, which can be repeatedly played by the users. In our DongNi Select premium services, which are supplemental to our standard courses, we deliver our courses in online streaming format where the foreign teachers are able to provide live courses to a limited number of specific users. The live audio/video data are transmitted through our mobile apps between the specific recipients instantly without any further redaction. We believe the

AI-powered

courseware we offer and the live courses we transmit distinguish us from general providers of internet audio-visual program services. However, we cannot assure you that the competent PRC government authorities will not take a view contrary to our opinion.

The Categories describe “internet audio-visual program services” in a very broad, vague manner and are unclear as to whether the contents we offer or are available on our platforms fall into the definition of “internet audio-visual programs.” The PRC government may find that our activities mentioned above or any other content offered on our mobile apps fall within the definition of “internet audio-visual programs” and thus are subject to the licensing requirement for internet audio-visual programs. We currently do not hold a License for Online Transmission of Audio-Visual Programs. If the PRC government determines that our content should be considered as “internet audio-visual programs” for the purpose of the Audio-Visual Program Provisions, we may be required to obtain a License for Online Transmission of Audio-Visual Programs. We are, however, not eligible to apply for such license since we are not a state-owned or state-controlled entity. If this were to occur, we may be subject to penalties, fines, legal sanctions or an order to suspend the provision of our relevant content.

We face risks associated with uncertainties surrounding the PRC laws and regulations governing the education industry in general, and the online

for-profit

private training in particular.

The principal regulations governing private education in China primarily consist of the PRC Education Law, the Law for Promoting Private Education, or Private Education Law, the Implementation Rules for Private Education Law and the Implementation Rules on the Supervision and Administration of

For-profit

Private Schools, or the Implementation Rules, as amended from time to time. These PRC laws and regulations on private education generally apply to the establishment and operation of all private schools, including schools and other education institutions, and provide that, among other things, (i) the establishment of a

for-profit

private school shall be approved by the education authorities or the authorities in charge of labor and social welfare, (ii) such

for-profit

private schools should be registered with the competent branch of the SAMR, and (iii) a duly approved private school will be granted a private school operating permit. The Implementation Rules further provide that the provisions contained therein should be applicable to

“for-profit

private training institutions” in an analogous manner. Shanghai has accordingly promulgated specific local regulations to clarify the requirements and procedures for establishing and operating private schools in December 2017, but it expressly provided that management measures and regulations applicable to private training institutions that only provide online courses would be promulgated separately. On September 7, 2021, the PRC State Council promulgated the amended version of the Implementations Rules of Private Education Law, which provides that private school engaging in online education activities using internet technology must obtain private school operating permit and comply with administration rules and regulations on internet. However, the amended version of the Implementations Rules of Private Education Law does not make it clear whether such requirements are applicable to

“for-profit

private training institutions” using internet technology.

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We operate online platform that provides online training programs through the internet, and our PRC subsidiaries and our operating entity of our online platform are registered with local counterparts of the SAMR as

for-profit

enterprises. As there lacks clear and consistent statutory interpretation regarding the implementation of the above laws and regulations, it is unclear how these regulatory requirements shall be applied to us. Based on our consultation with relevant governmental authorities, we were informed that we are not required to obtain a private school operating permit or other approval from education authorities or the authorities in charge of labor and social welfare for our operation of online education platform, provided we do not engage in tutoring service related to academic subjects of compulsory education stage. However, we cannot assure you that we will not be found in violation for our historical operations, or the government authorities will not take a different view in the future. We may be required to obtain the above-mentioned, or any other approvals, licenses, permits, or otherwise comply with additional regulatory requirements in the future, due to clarification or change in interpretation or implementation of laws and regulations in education industry, or promulgation of new regulations or guidelines regulating online education institutions.

In August 2018, the State Council issued its new Opinion on the Regulation of the Development of After-School Tutoring Institutions, or the New Opinion, which primarily regulates after-school tutoring institutions or AST Institutions targeting primary and secondary school students. The New Opinion provides certain detailed requirements for after-school tutoring institutions, including, among others, requirements for licenses and permits, training premises, safety conditions and fee collection, as well as for teaching staff and curriculum content. On December 28, 2018, nine PRC governmental authorities, including the MOE, jointly promulgated the Notice on Measures for Alleviating the Burdens on primary and secondary school students, which reiterates the above requirements. For more information, please see “Item 4. Information on the Company—B. Business Overview—Regulation—Regulation Related to Private Education—The Law for Promoting Private Education and its Implementing Rules.” The New Opinion generally does not explicitly distinguish between online training institutions and offline training institutions. Based on our consultation with relevant local governmental authorities, we were informed that the New Opinion only applies to offline training institutions, and does not apply to us. However, we cannot assure you that we will not be found in violation for our historical operations or the relevant government authorities will not take a different view in the future.

In October 2018, the MOE launched a special supervision campaign on AST Institutions and required the local competent authorities to investigate the tutoring institutions within their jurisdictions and requested such institutions to rectify any

non-compliant

activities. We have not been subject to any investigation or received inquiries by any authority during such special supervision campaign. However, we cannot assure you that our operations will not be subject to any governmental inspections, investigations or inquiries in the future.

On November 20, 2018, the General Office of the MOE, the General Office of the SAMR and the General Office of the Ministry of Emergency Management of the PRC, jointly promulgated the Notice on Several Work Mechanisms for Strengthening Special Administration and Rectification of After-School Tutoring Institutions, or the New Notice. The New Notice provides certain requirements relating to the online tutoring services, which mainly include that: (i) the competent authorities should strengthen the supervision on the online tutoring institution targeting on primary school and secondary school students in accordance with the policies and requirements applied to the offline tutoring institutions, (ii) the online tutoring institution providing the school-curriculum-related tutoring service is required to make filing with the competent authorities in respect to the name of the curriculum-related tutoring class, tutoring class content, recruitment target, tutoring class schedule and tutoring time, and (iii) name, photos, class and qualification number of teachers in such online tutoring institution providing the school-curriculum-related tutoring service should be disclosed on its website. On July 12, 2019, the MOE, together with other five PRC authorities, jointly promulgated the Implementation Opinions on the Regulation of Online After-School Tutoring, which reinstates the filing requirement of online AST Institutions and provides that the education authorities at provincial level should review the application documents submitted by online AST Institutions and approve the filing applications submitted by qualified tutoring institution and disclose such qualified tutoring institution to the public. In case of any change to the filing information, the online AST Institution will be required to make filing of such updated information. In consideration of the foregoing rules, we completed the initial filing through the management platform of Shanghai training institutions but we failed to complete subsequent filings of the statement of changes and other required materials through the platform to reflect the changes to the filed information in a timely manner. Despite that the filing requirement applicable for online AST Institutions has been replaced by the approval requirement as stipulated in the Double Alleviating Opinions, we cannot assure you that we will not be found in violation for our historical operations.

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On July 24, 2021, the General Office of the CPC Central Committee and the General Office of the State Council issued the Double Alleviating Opinions, which provides high-level polices related to requirements and restrictions on AST Institutions, especially that: (i) no new approvals shall be granted to AST Institutions providing tutoring service related to academic subjects in compulsory education stage, or Academic AST Institutions; (ii) existing Academic AST Institutions are required to convert themselves into non-profit institutions; (iii) an approval mechanism will be adopted with regard to the existing online Academic AST Institutions which previously filed with competent authorities; (iv) Academic AST Institutions are prohibited from raising funds through publicly listing or other capitalization operations; (v) listed companies are prohibited from investing in Academic AST Institution or purchase Academic AST Institutions’ assets by means of issuance of shares or by cash; (vi) foreign investors are prohibited from investing in Academic AST Institutions through mergers and acquisitions, entrustment, franchise and variable interest entities. Furthermore, any existing behaviors in violation of the above restrictions are required to be rectified. In addition, The Double Alleviating Opinions further provides that no approvals will be granted to AST Institutions providing academic subjects tutoring service to

pre-school

children (i.e. children from three to six years old) and ordinary senior high school students, that any online and offline tutoring service provided to

pre-school

children is strictly prohibited and that the administration in connection with Academic AST Institution targeting ordinary senior high school students shall be carried out by reference to the requirements and restrictions under the Double Alleviating Opinions. In addition, the Double Alleviating Opinions also provides a series of restrictions in connection with the operation of Academic AST Institutions, and relevant government authorities have promulgated a series of implementation rules regarding the requirements under the Double Alleviating Opinions. For more information, please see “Item 4. Information on the Company—B. Business Overview—Regulation—Regulation Related to After-school Tutoring”.

Further, the Amended Implementation Rules for Private Education Law, which became effective on September 1, 2021, provides that the related party transactions to which a private school is a party would be required to be concluded on a fair and just basis without impediment to the interests of the state, the school, the teachers and the students, and such related party transactions shall be under the supervision and scrutiny of applicable governmental authorities. Besides, the Notice on Strengthening the Supervision of Tuitions regarding Academic After-School Tutoring in Compulsory Education Stage promulgated on September 2, 2021 provides that the scrutiny mechanism with regard to the related party transactions to which an Academic AST Institution is a party would be strengthened and extended investigations may be applied regarding the related party transactions which are obviously not entered into on an arm’s length basis.

Pursuant to the Double Alleviating Opinions and corresponding implementation rules, our PRC subsidiaries and our operating entity of our online platform which are registered with local counterparts of the SAMR as

for-profit

enterprises shall not engage in tutoring service related to academic subjects of compulsory education stage or operate as Academic AST Institutions. In light of the requirements and restrictions of the Double Alleviating Opinions, we ceased the operation of our mobile app “Kids Liulishuo” from January 2022. However, we cannot assure you that our previous operation of “Kids Liulishuo” will not be regarded by the applicable governmental authorities as historical

non-compliance,

in which case we may be subject to penalties.

Furthermore, we later granted a private

non-profit

institution established under the laws of China, Yangpu Liuli, the right to utilize and operate “Kids Liulishuo.” In order for Yangpu Liuli to operate Kids Liulishuo, we, through Shanghai Liulishuo, entered into a software licensing agreement and service agreement with Yangpu Liuli, pursuant to which we will charge Yangpu Liuli a portion of its revenues on a monthly basis as our royalty fees for the licensing of “Kids Liulishuo” and our service fees for the provision of administrative supporting services, including legal, human resources, financial and managerial supporting services by us to Yangpu Liuli. Yangpu Liuli is established by our three founders as a private

non-profit

institution, with a private school operating permit, which is thus a related party of us. Our

co-operations

with Yangpu Liuli must comply with Double Alleviating Opinions and other applicable laws and regulations and may be subject to scrutiny by relevant governmental authorities. However, as the Double Alleviating Opinions and corresponding implementation rules are relevantly new, substantial uncertainties exist with respect to the interpretation and implementation of such rules. If the PRC governmental authorities interpret or implement their legislation or regulations in ways that our cooperation with Yangpu Liuli would be deemed to be

non-compliant

with the applicable laws and regulations, we may be required to adjust or even cease our cooperation with Yangpu Liuli, and be further subject to fines or other sanctions, all of which may adversely affect our business and financial condition.

In addition, rules and regulations have been promulgated in connection with the scope of academic subjects in compulsory education stage, including the Notice on Further Clarifying the Scope of Academic Subjects and

Non-academic

Subjects with respect to After-School Tutoring Services in Compulsory Education Stage issued by the General Office of the MOE on July 28, 2021, which categorizes English tutoring involving contents of courses contained in national curriculum standards as academic subjects in compulsory education stage. For more information, please see “Item 4. Information on the Company—B. Business Overview—Regulation—Regulation Related to After-school Tutoring”. Nonetheless, the definition of “tutoring service related to academic subjects of compulsory education stage” remains to be ambiguous and may subject to authorities’ discretion. Based on our consultation with relevant governmental authorities, we ceased the operation of the “Kids Liulishuo” mobile app in January 2022, and believe that the remaining products and services we currently offer do not constitute “tutoring service related to academic subjects of compulsory education stage” and thus not subject to the above restrictions. However, we cannot assure you that the government authorities will not take a different view in the future. We may be required to cease operation of certain part or all of our tutoring services, obtain extra approvals, licenses, permits, or otherwise comply with current or additional regulatory requirements in the future, due to clarification or change in interpretation or implementation of laws and regulations in education industry, or promulgation of new regulations or guidelines regulating tutoring institutions. Our failure to be in compliance with such regulatory requirements may subject us to sanctions or be prohibited from operations, all of which may materially and adversely affect our business, financial condition, and results of operations.

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On August 10, 2019, the MOE, together with other seven PRC authorities, jointly promulgated the Opinions on the Guidance and Regulation of Healthy and Orderly Development of Education Mobile Internet Applications, or the Education APP Opinions. The Education APP Opinions provides that all the companies providing education mobile internet applications shall make filings with the competent education authority at the provincial level and register their basic corporate information and details of education mobile internet applications. On November 11, 2019, the MOE promulgated the Administrative Measures on the Filing of Education Mobile Internet Applications, which further elaborated the provisions of the filing requirements and procedures. For more information, please see “Item 4. Information on the Company—B. Business Overview—Regulation—Regulation Related to Online and Distance Education.” As of the date of this annual report, we have made filings for most of our operating mobile apps including “English Liulishuo” and “IELTS Liulishuo” and are in the process of completing the filing procedures with respect to the rest of our apps. However, we cannot assure you that we would be able to complete the filing in a timely manner, or at all. Failure to complete the filing procedures in time or failure to comply with other regulatory requirements thereunder may subject us to governmental orders of rectification, and if we fail to rectify within the time limit as required by the authorities, the relevant apps may be suspended from operation, the filings may be revoked, and we may be blacklisted and prohibited from making new filings for six months.

If we fail to comply with any regulatory requirements, including but not limited to, obtaining any required licenses, approvals, permits or filings in a timely manner or at all, our continued business operations may be disrupted and we may be subject to various penalties or be unable to continue our operations, all of which will materially and adversely affect our business, financial condition and results of operations.

Our failure to obtain, maintain or renew other licenses, approvals, permits, registrations or filings necessary to conduct our operations in China could have a material adverse impact on our business, financial conditions and results of operations.

A number of PRC regulatory authorities, such as the SAMR, the CAC, the MIIT, the SAPPRFT, the Ministry of Civil Affairs, and the Ministry of Human Resources and Social Welfare, oversee different aspects of our business operations, and we are required to obtain a wide range of licenses, approvals, permits, registrations and filings required for conducting our business in China, which we cannot assure you that we have obtained all of them or will continue to maintain or renew all of them.

We may be deemed as providing certain restricted services or conduct certain restricted activities and thus be subject to certain licenses, approvals, permits, registrations, filings, reporting and other requirements due to lack official interpretations on certain terms under internet related PRC regulations and laws. For example, certain content posted on our mobile apps, including our course materials, may be deemed as “internet cultural products,” and our use of those contents may be regarded as “internet cultural activities,” thus we may be required to obtain an Internet Culture Business Operating License for provision of those contents through our mobile apps. Also, due to the ambiguity of the definition of “online publishing service,” the online distribution of content, including our course materials, through our mobile apps, may be regarded as “online publishing service” and therefore we may be required to obtain an Online Publishing License. In addition, we deliver certain courses in live-streaming format on our mobile apps which the relevant authorities may regard us as a live-streaming platform and may thus subject us to the requirement of making necessary filings as a live-streaming platform. Besides, some of our mobile apps provide a recharge function for users to purchase our virtual items or gift card which can be used to purchase our course packages, and thus we may be deemed as an issuer of “single-purpose commercial prepaid card,” and be required to connect our business process management system with Shanghai Single Purpose Prepaid Consuming Card Coordinated Supervision and Service Platform to report relevant information. We currently have not obtained any of the above licenses or made any such filings or reporting. Under current PRC laws and regulations, an information service provider that reposts news for internet publication shall first obtain license from CAC or its local counterpart. Certain learning materials we provide on our platform are from foreign media. Due to the ambiguity of the definition of “news” under the current PRC laws and regulations, we cannot assure you that our provision of such materials will not be deemed by the relevant PRC government authorities as reposting “news” without proper license, which will subject us to various penalties, including fines and suspension of such provision. Although we do not think we are subject to any of these licenses or filing requirements, and as of the date of this annual report, we have not been subject to any fines or other form of regulatory or administrative penalties or sanctions due to the lack of any the licenses, approvals, permits, registrations, filings and reporting, we cannot assure you that the PRC government authorities will not take a different view or will not require us to obtain any additional licenses, approvals, permits, registrations, filings and fulfill reporting obligations in the future. If we fail to do so, we may be subject to various penalties, such as confiscation of illegal revenues, fines and discontinuation or restriction of business operations, which may materially and adversely affect our business, financial condition and results of operations.

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In addition, there can be no assurance that we will be able to maintain our existing licenses, approvals, registrations or permits necessary to provide our current online services in China, renew any of them when their current term expires, or update existing licenses or obtain additional licenses, approvals, permits, registrations or filings, or fulfill reporting obligations necessary for our business expansion from time to time. If we fail to do so, our business, financial conditions and operational results may be materially and adversely affected. Please see “Item 3. Key Information—Permissions Required from the PRC Authorities for our Operations”, “Item 3. Key Information—D. Risk Factors—We may face risks arising from our business operations without proper ICP License, which may materially and adversely affect our business, financial condition and operational results”, “Item 3. Key Information—D. Risk Factors—We may face risks and uncertainties with respect to the licensing requirement for internet audio-visual programs”

，

“Item 3. Key Information—D. Risk Factors—We face risks associated with uncertainties surrounding the PRC laws and regulations governing the education industry in general, and the online

for-profit

private training in particular” for detailed information.

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

We are a holding company, and we may rely on dividends and other distributions on equity paid by our PRC subsidiaries 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. For a detailed discussion of applicable PRC regulations governing distribution of dividends, see “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations Related to Dividend Distribution,” “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations Related to Taxation” and “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Holding Company Structure.” Additionally, if our PRC subsidiaries incur debt on their own behalf in the future, the instruments governing their debt may restrict their ability to pay dividends or make other distributions to us. Furthermore, the PRC tax authorities may require our WFOE to adjust its taxable income under the contractual arrangements it currently has in place with the VIEs in a manner that would materially and adversely affect its ability to pay dividends and other distributions to us. See “—Risks Relating to Our Corporate Structure—Our contractual arrangements with the VIEs may be subject to scrutiny by the PRC tax authorities and they may determine that we or the VIEs owe additional taxes, which could negatively affect our financial condition and the value of your investment.”

Any limitation on the ability of our PRC subsidiaries to pay dividends or make other distributions to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business. See also “—Risks Relating to Doing Business in China—Governmental control of currency conversion may limit our ability to utilize our revenues effectively and affect the value of your investment” and “—Risks Relating to Doing Business in China—PRC regulations relating to investments in offshore companies by PRC residents may subject our

PRC-resident

beneficial owners or our PRC subsidiaries to liability or penalties, limit our ability to inject capital into our PRC subsidiaries or limit our PRC subsidiaries’ ability to increase their registered capital or distribute profits.”

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

The conversion of Renminbi into foreign currencies, including U.S. dollars, is based on rates set by the People’s Bank of China. The Renminbi has fluctuated against the U.S. dollar, at times significantly and unpredictably. The value of Renminbi against the U.S. dollar and other currencies is affected by changes in China’s political and economic conditions and by China’s foreign exchange policies, among other things. We cannot assure you that Renminbi will not appreciate or depreciate significantly in value against the U.S. dollar in the future. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between Renminbi and the U.S. dollar in the future. Any significant appreciation or depreciation of Renminbi may materially and adversely affect our revenues, earnings and financial position, and the value of, and any dividends payable on, our ADSs in U.S. dollars. A significant depreciation of Renminbi against the U.S. dollar may significantly reduce the U.S. dollar equivalent of our earnings, which in turn could adversely affect the price of our ADSs.

Very limited hedging options are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions 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 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.

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

Under PRC laws and regulations, we are permitted to utilize the proceeds from our initial public offering to fund our PRC entities by making additional capital contributions to our PRC subsidiaries or providing loans to our PRC subsidiaries and VIEs, subject to applicable government registration and approval requirements. Currently, there is no statutory limit to the amount of funding that we can provide to our PRC subsidiaries through capital contributions. However, the maximum amount we can loan to our PRC subsidiaries and VIEs is subject to statutory limits. According to current PRC laws and regulations, we can provide funding to our PRC subsidiaries through loans of up to either (i) the amount of the difference between the respective registered total investment amount and registered capital of each of our PRC subsidiaries, or the Total Investment and Registered Capital Balance, or (ii) two times, or the then applicable statutory multiple, the amount of their respective net assets, calculated in accordance with PRC GAAP, or the Net Assets Limit, at our election. We may also fund the VIEs through cross-border loans and the maximum amount would be their respective Net Assets Limit. Increasing the Total Investment and Registered Capital Balance of our PRC subsidiaries is subject to governmental procedures and may require a PRC subsidiary to increase its registered capital at the same time. If we choose to make a loan to a PRC entity based on its Net Assets Limit, the maximum amount we would be able to loan to the relevant PRC entity would depend on the relevant entity’s net assets and the applicable statutory multiple at the time of calculation. PRC laws and regulations may also impose more stringent limitations to cross-border loans, which will also have negative impact on our ability to fund our PRC entities. Please see “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations Related to Foreign Exchange—Regulations on Foreign Currency Exchange” and “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations Related to Foreign Exchange—Regulations on Foreign Debt.” These PRC laws and regulations may significantly limit our ability to use Renminbi converted from the net proceeds of our initial public offering to fund the establishment of new entities in China by our PRC subsidiaries, to invest in or acquire any other PRC companies through our PRC subsidiaries, to fund our existing VIEs or to establish and fund new variable interest entities in China. Moreover, we cannot assure you that we will be able to complete the necessary registrations or obtain the necessary government approvals on a timely basis, if at all, with respect to future loans to our PRC subsidiaries or the VIEs, or future capital contributions by us to our PRC subsidiaries. If we fail to complete such registrations or obtain such approvals or we are found to be in violation of any applicable laws with respect to foreign currency exchange, our ability to use the proceeds we received or expect to receive from our offshore offerings and to capitalize or otherwise fund our PRC operations may be negatively affected and we may be subject to penalties, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

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

The PRC government imposes controls on the convertibility of Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. Under existing PRC foreign exchange regulations, payments of current account items, such as profit distributions and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval from the State Administration of Foreign Exchange, or SAFE, by complying with certain procedural requirements. However, approval from or registration with appropriate governmental authorities is required where Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations Related to Foreign Exchange—Regulations on Foreign Currency Exchange.”

Since 2016, the PRC government has tightened its foreign exchange policies again and stepped up scrutiny of major outbound capital movement. More restrictions and a substantial vetting process have been put in place by SAFE to regulate cross-border transactions falling under the capital account. The PRC government may also restrict access in the future to foreign currencies for current account transactions, at its discretion. We receive substantially all of our revenues in Renminbi. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of our ADSs.

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PRC regulations relating to investments in offshore companies by PRC residents may subject our

PRC-resident

PRC residents are subject to restrictions and filing requirements when investing in offshore companies. SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, on July 4, 2014, which replaced the former circular commonly known as “SAFE Circular 75” promulgated by SAFE on October 21, 2005. SAFE Circular 37 requires PRC residents (including individuals and entities) to register with local branches 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 PRC residents’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests, referred to in SAFE Circular 37 as a “special purpose vehicle.” SAFE Circular 37 further requires amendment to the registration in the event of any significant changes with respect to the special purpose vehicle, such as increase or decrease of capital contributed by PRC individuals, share transfer or exchange, merger, division or other material event. In the event that a PRC resident holding interests in a special purpose vehicle fails to fulfill the required SAFE registration, the PRC subsidiaries of that special purpose vehicle may be prohibited from making profit distributions to the offshore parent and from carrying out subsequent cross-border foreign exchange activities, and the special purpose vehicle may be restricted in its ability to contribute additional capital into its PRC subsidiaries. Moreover, failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for evasion of foreign exchange controls. According to the Notice on Further Simplifying and Improving Policies for the Foreign Exchange Administration of Direct Investment released on February 13, 2015 by SAFE, local banks will examine and handle foreign exchange registration for overseas direct investment, including the initial foreign exchange registration and amendment registration, under SAFE Circular 37 from June 1, 2015.

Dr. Yi Wang, Mr. Zheren Hu and Dr. Hui Lin, who are our beneficial owners and PRC residents, completed the initial SAFE registration pursuant to SAFE Circular 75, and are in the process of applying for amendment of such registration reflecting the subsequent change of our shareholding structure since then.

There can be no assurance that such amendment of registration can be successfully completed in a timely manner. We have notified and requested all of our shareholders to comply with, or notify their beneficial owners who are PRC residents to comply with, applicable SAFE regulations, including their filing obligation under SAFE Circular 37 and other implementation rules. Nevertheless, we do not have control over our beneficial owners and there can be no assurance that all of our

PRC-resident

beneficial owners will comply with SAFE Circular 37 and other relevant implementation rules, and there is no assurance that the registration under SAFE Circular 37 and any amendment will be completed in a timely manner, or will be completed at all. The failure of our beneficial owners who are PRC residents to register or amend their foreign exchange registrations in a timely manner pursuant to SAFE Circular 37 and other relevant implementation rules, or the failure of future beneficial owners of our company who are PRC residents to comply with the registration procedures set forth in SAFE Circular 37 and subsequent implementation rules, may subject such beneficial owners or our PRC subsidiaries to fines and legal sanctions. Failure to register or comply with relevant requirements may also limit our ability to contribute additional capital to our PRC subsidiaries and limit our PRC subsidiaries’ ability to distribute dividends to our company or conduct other foreign exchange transactions. These risks may have a material adverse effect on our business, financial condition and results of operations.

The M&A Rules and certain other PRC regulations establish complex procedures for some acquisitions of PRC companies by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China.

A number of PRC laws and regulations have established procedures and requirements that could make merger and acquisition activities in China by foreign investors more time consuming and complex. In addition to the Anti-monopoly Law itself, these include the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, adopted by six PRC regulatory agencies, and the Rules of the Ministry of Commerce on Implementation of Security Review System of Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the Security Review Rules, promulgated in 2011, the Foreign Investment Law, which took effect on January 1, 2020, and the Measures for Security Review of Foreign Investment, or the Foreign Investment Security Review Measures, effective from January 18, 2021. These laws and regulations impose requirements in some instances that the Ministry of Commerce be notified in advance of any

change-of-control

transaction in which a foreign investor takes control of a PRC domestic enterprise. In addition, the Anti-Monopoly Law and other relevant regulations requires that filing with the SAMR in advance is required with regard to any concentration of undertaking triggering certain threshold, and the Anti-Monopoly Guidelines for Internet Platforms was promulgated by the Antimonopoly Commission of the PRC State Council in February 2021 further provides that concentration of undertaking involving contractual control structure is subject to such filing requirement as well. Moreover, the Security Review Rules specify that mergers and acquisitions by foreign investors that raise “national defense and security” concerns and mergers and acquisitions through which foreign investors may acquire de facto control over domestic enterprises that raise “national security” concerns are subject to strict review by the Ministry of Commerce, and prohibit any attempt to bypass a security review, including by structuring the transaction through a proxy or contractual control arrangement. Furthermore, the Foreign Investment Law reiterates that China establishes a foreign investment security review system to conduct a security review of foreign investment that impacts or may impact the national security, and the Foreign Investment Security Review Measures requires that foreign investment in certain key areas, including products and services of key information technology and internet, that results in acquiring the actual control of the investee, is required to obtain approval from designated governmental authorities in advance. In the future, we may grow our business by acquiring complementary businesses. Complying with the requirements of the relevant regulations to complete such transactions could be time consuming, and any required approval processes, including approval from the Ministry of Commerce, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.

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

In February 2012, SAFE promulgated the Circular of the State Administration of Foreign Exchange on Issues concerning the Administration of Foreign Exchange Used for Domestic Individuals’ Participation in Equity Incentive Plans of Companies Listed Overseas, or the Stock Option Rules. Under the Stock Option Rules, directors, supervisors, management members and other employees of PRC companies participating in any stock incentive plan of an overseas publicly listed company who are domestic individuals as defined therein are required to register and make regular periodic filings with SAFE through a domestic qualified agent, which could be a PRC subsidiary of such overseas listed company, and complete certain other procedures. Subsequent to the completion of our initial public offering, our company became an overseas listed company, we and our directors, supervisors, management members and other employees who are domestic individuals as defined under the Stock Option Rules and who have been granted options are subject to such requirements under the Stock Option Rules. We have assisted our share incentive plans participants to complete the registration and to comply with these requirements. However, there can be no assurance that all of the future share incentive plans participants can successfully register with SAFE as required by the rules in a timely manner, or at all. Failure to complete the SAFE registrations or failure to comply with other requirements under the Stock Option Rules may subject them to fines and legal sanctions and may also limit the ability to make payment under our equity incentive plans or receive dividends or sales proceeds related thereto, or our ability to contribute additional capital into our PRC subsidiaries and limit our PRC subsidiaries’ ability to distribute dividends to us or our ability to conduct other foreign exchange transactions. We also face regulatory uncertainties that could restrict our ability to adopt additional equity incentive plans for our directors and employees under PRC law.

If we are classified as a PRC resident enterprise for PRC income tax purposes or gains realized with respect to our ADSs or shares are deemed to be from PRC sources, we and our

non-PRC

shareholders or ADS holders could be subject to unfavorable tax consequences.

Under the PRC Enterprise Income Tax Law and its implementation rules, an enterprise established outside of China with a “de facto management body” within China is considered a PRC resident enterprise. The implementation rules define the term “de facto management body” as the body that exercises full and substantial control over and overall management of the business, productions, personnel, accounts and properties of an enterprise. In 2009, the State Administration of Taxation issued a circular, known as Circular 82, which provides certain specific criteria for determining whether the “de facto management body” of a

PRC-controlled

offshore incorporated enterprise is located in China. Although Circular 82 only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, the criteria set forth in the circular may reflect the State Administration of Taxation’s general position on how the “de facto management body” test should be applied in determining the tax resident status of all offshore enterprises. According to Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be regarded as a PRC tax resident by virtue of having its “de facto management body” in China and will be subject to PRC enterprise income tax on its global income only if all of the following conditions are met: (i) the primary location of the

day-to-day

operational management is in China; (ii) decisions relating to the enterprise’s financial and human resource matters are made or are subject to approval by organizations or personnel in China; (iii) the enterprise’s primary assets, accounting books and records, company seals, and board and shareholder resolutions, are located or maintained in China; and (iv) at least 50% of voting board members or senior executives habitually reside in China.

We believe that none of our entities outside of China is a PRC resident enterprise for PRC tax purposes. However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body.” If the PRC tax authorities determine that we are a PRC resident enterprise for enterprise income tax purposes, we will be subject to the enterprise income tax on our global income at the rate of 25% and we will be required to comply with PRC enterprise income tax reporting obligations. In addition, gains realized on the sale or other disposition of our ADSs or Class A ordinary shares may be subject to PRC tax, at a rate of 10% in the case of

non-PRC

enterprises or 20% in the case of

non-PRC

individuals (in each case, subject to the provisions of any applicable tax treaty), if such gains are deemed to be from PRC sources. It is unclear whether

non-PRC

shareholders of our company would be able to claim the benefits of any tax treaties between their country of tax residence and the PRC in the event that we are treated as a PRC resident enterprise. Any such tax may reduce the returns on your investment in the ADSs.

We may not be able to obtain certain benefits under the relevant tax arrangement for dividends paid by our PRC subsidiaries to us through our Hong Kong subsidiary.

We are a holding company incorporated under the laws of the Cayman Islands and as such rely on dividends and other distributions on equity from our PRC subsidiaries to satisfy part of our liquidity requirements. Pursuant to the PRC Enterprise Income Tax Law, a withholding tax rate of 10% currently applies to dividends paid by a PRC “resident enterprise” to a foreign enterprise investor, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty or similar arrangements with China that provides for preferential tax treatment. Pursuant to the Arrangement between the Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income, such withholding tax rate may be lowered to 5% if a Hong Kong resident enterprise owns no less than 25% of a PRC enterprise within the

12-month

period immediately before distribution of the dividends and the Hong Kong resident enterprise is the beneficial owner of such dividends. Furthermore, the Administrative Measures for

Non-resident

Taxpayers to Enjoy Treatment under Treaties, which became effective in January 2020, require

non-resident

enterprises to determine whether they are qualified to enjoy the preferential tax treatment under the tax treaties and file relevant report with the tax authorities. There are also other conditions for enjoying the reduced withholding tax rate according to other relevant tax rules and regulations. See “Item 10. Additional Information—E. Taxation—PRC Taxation.” We cannot assure you that our determination regarding our qualification to enjoy the preferential tax treatment will not be challenged by the relevant tax authority or we will be able to complete the necessary filings with the relevant tax authority and enjoy the preferential withholding tax rate of 5% under the arrangement with respect to any dividends to be paid by our PRC subsidiaries to our Hong Kong subsidiary.

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We and our shareholders face uncertainty with respect to indirect transfers of equity interests in PRC resident enterprises, assets attributed to a PRC establishment of a

non-PRC

company or immovable properties located in China owned by

non-PRC

companies.

In February 2015, the State Administration of Taxation issued the Bulletin on Issues of Enterprise Income Tax on Indirect Transfers of Assets by

Non-PRC

Resident Enterprises, or SAT Bulletin 7, which partially replaced and supplemented previous rules under the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by

Non-PRC

Resident Enterprises, or SAT Circular 698. In October, 2017, the State Administration of Taxation issued the Announcement on Issues Concerning the Withholding of

Non-PRC

Resident Enterprise Income Tax at Source, or SAT Bulletin 37. The SAT Bulletin 37 further clarifies the practice and procedure of the withholding of

non-PRC

resident enterprise income tax and replaced SAT Circular 698. Pursuant to SAT Bulletin 7, an “indirect transfer” of assets, including equity interests in a PRC resident enterprise, by

non-PRC

resident enterprises may be

re-characterized

and treated as a direct transfer of PRC taxable assets, if the arrangement does not have a reasonable commercial purpose and was established for the purpose of avoiding payment of PRC enterprise income tax. As a result, gains derived from the indirect transfer may be subject to PRC enterprise income tax. According to SAT Bulletin 7, “PRC taxable assets” include assets attributed to an establishment in China, immovable properties located in China, and equity investments in PRC resident enterprises. Gains derived from the transfer of PRC taxable assets by a direct holder that is a

non-PRC

resident enterprise is subject to PRC enterprise income taxes. When determining whether an arrangement has a “reasonable commercial purpose,” the following factors are considered: whether the value of the equity interests of the relevant offshore enterprise is mainly derived from PRC taxable assets; whether the assets of the relevant offshore enterprise mainly consist of direct or indirect investment in China; whether the income of the relevant offshore enterprise is mainly generated from China; whether the offshore enterprise and its subsidiaries directly or indirectly holding PRC taxable assets have real commercial nature as evidenced by actual function and risk exposure; for how long the existing business model and organizational structure of the relevant offshore enterprise has existed; the replicability of the arrangement by direct transfer of PRC taxable assets; and the tax situation of such indirect transfer and applicable tax treaties or similar arrangements. Gains derived from an indirect offshore transfer of assets which is effectively connected with the PRC establishment or place of business shall be included in the enterprise income tax filing of the PRC establishment or place of business and are subject to a PRC enterprise income tax rate of 25%. In case of a transfer of immovable properties located in China or of equity investments in a PRC resident enterprise, which is not related to a PRC establishment or place of business of a

non-resident

enterprise, a PRC enterprise income tax rate of 10% applies, subject to available preferential tax treatment under applicable tax treaties or similar arrangements. The party who is obligated to pay for the transfer has the withholding obligation with respect to the transfer. Where the payor fails to withhold sufficient tax, the transferor is required to declare and pay such tax to the tax authority by itself within the statutory time limit. Late payment of applicable tax will subject the transferor to default interest. Failure to withhold applicable tax will also subject the transferee to penalties under PRC tax laws. SAT Bulletin 7 does not apply to sales of shares by investors through a public stock exchange if the shares were acquired by the investors through a public stock exchange.

We face uncertainties as to the application of SAT Bulletin 7 and/or SAT Bulletin 37, including reporting and other obligations with respect to certain past and future transactions where PRC taxable assets are involved, such as offshore restructuring, sale of the shares in our offshore subsidiaries or investments. We may be subject to filing obligations or taxed as the transferor, or subject to withholding obligations as the transferee, in the transactions. For transfer of our shares by investors that are

non-PRC

resident enterprises, our PRC subsidiaries may be requested to assist in filings under SAT Bulletin 7 and/or SAT Bulletin 37. We may be required to allocate valuable resources to comply with SAT Bulletin 7 and/or SAT Bulletin 37, to request relevant transferors from whom we purchase taxable assets to comply with these rules, or to establish that we should not be taxed under these rules, which may have a material adverse effect on our financial condition and results of operations.

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

We are a company incorporated under the laws of the Cayman Islands, we conduct substantially all of our operations in China, and substantially all of our assets are located in China. In addition, all our senior executive officers reside within China for a significant portion of the time and all are PRC nationals. In addition, China does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts with the Cayman Islands and many other countries and regions. Even if you are successful in bringing an action of this kind, PRC laws may render you unable to enforce a judgment against our assets or the assets of our directors and officers.

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

Shareholder claims or regulatory investigation that are common in the United States generally are difficult to pursue as a matter of law or practicality in China. For example, in China, there are significant legal and other obstacles to providing information needed for regulatory investigations or litigations initiated outside China. Although the authorities in China may establish a regulatory cooperation mechanism with the securities regulatory authorities of another country or region to implement cross-border supervision and administration, such cooperation with the securities regulatory authorities in the Unities States may not be efficient in the absence of mutual and practical cooperation mechanism. Furthermore, 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 the PRC. While detailed interpretation of or implementation rules under Article 177 have yet to be promulgated, the inability for an overseas securities regulator to directly conduct investigation or evidence collection activities within China may further increase difficulties faced by you in protecting your interests. See also “—General Risks Relating 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.” for risks associated with investing in us as a Cayman Islands company.

Changes in accounting standards may affect our results of our operations.

We are required to adopt new accounting standards under FASB from time to time. Certain new accounting standards may impose significant different accounting treatments on certain line items on our consolidated financial statements, which could result in unexpected changes to our results of operation. For example, in February 2016, the FASB issued ASU

No. 2016-02,

which provides another transition method in addition to the existing transition method by allowing entities to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption consistent with preparers’ requests. The amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years for public entities. We have adopted this new guidance for the year ended December 31, 2019. The standard had a material impact on our consolidated balance sheets, but did not have a material impact on our consolidated statements of income or statements of cash flows. The most significant impact was the recognition of RMB159.7 million on our assets as operating lease

right-of-use-assets

and RMB159.7 million on our liabilities as operating lease liabilities, respectively. Even though we are not aware of any changes in accounting standards in 2020 that would have a material impact on our financial statements, there can be no assurance that there will be no material impact on our financial statements as a result of changes in accounting standards in the future.

General Risks Relating to Our ADSs

On April 7, 2022, we were notified by the NYSE that the staff of NYSE Regulation determined to commence proceedings to delist our ADSs from the NYSE. Trading in our ADSs was suspended after the market close on the NYSE on April 7, 2022. On April 22, 2022, the NYSE applied to the SEC by filing a Form 25 to delist our ADSs, which is expected to be effective ten days after filing the Form 25. Our ADSs have been quoted on the OTC Pink Limited Information under the symbol “LAIXY” after the NYSE suspended the trading of our ADSs. The delisting of our ADSs from NYSE is expected to have a material adverse effect on us by, among other things, causing investors to dispose of our ADSs and limiting:

•

the liquidity of our ADSs;

•

the market price of our ADSs;

•

the number of institutional and other investors that will consider investing in our ADSs;

•

the availability of information concerning the trading prices and volume of our ADSs;

•

the number of broker-dealers willing to execute trades in our ADSs; and

•

our ability to obtain equity or debt financing for the continuation of our operations.

The lack of an active trading market may limit the liquidity of an investment in our ADSs, meaning you may not be able to sell our ADSs you own at times, or at prices, attractive to you. Any of these factors may materially and adversely affect the price of our ADSs.

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On August 4, 2021, our board of directors received a preliminary

non-binding

proposal letter from Dr. Yi Wang, Mr. Zheren Hu, Dr. Hui Lin and PCIL IV Limited (together with its affiliated investment entities, “Primavera”, and together with the three founders, the “Buyer Group”), to acquire all of our outstanding ordinary shares, including the Class A ordinary shares represented by the ADSs that are not already held by the Buyer Group for a proposed purchase price of US$1.13 per ordinary share in cash. On August 6, 2021, our board of directors formed a special committee, or the Special Committee, consisting of two independent directors,

Dr. Li-Lan

Cheng, who serves as the chairman of the Special Committee, and Ms. Min (Jenny) Zhang, to evaluate and consider the proposed going-private transaction. As of the date of this annual report, no decisions have been made by the Special Committee with respect to our response to the proposed going-private transaction. There can be no assurance that any definitive offer will be received, that any definitive agreement will be executed relating to the proposed going-private transaction, or that the proposed going-private transaction or any other similar transaction will be approved or consummated.

The going-private transaction, whether or not pursued or consummated, presents a risk of diverting management focus, employee attention and resources from other strategic opportunities and from operational matters. In addition, if we sign any definitive agreement with the Buyer Group, we may be subject to various restrictions under those agreements on the conduct of our business prior to the completion of the transaction, which may delay or prevent us from undertaking business opportunities that may arise pending completion of the transaction. Also, any development of the transaction, such as entering into or termination of any definitive agreement, may increase volatility of the trading price of our ADSs.

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

Our ADSs were listed on the NYSE since our initial public offering in September 2018. On April 7, 2022, we were notified by the NYSE that the staff of NYSE Regulation has determined to commence proceedings to delist our ADSs. Trading in our ADSs was suspended after the market close on the NYSE on April 7, 2022. On April 22, 2022, the NYSE applied to the SEC by filing a Form 25 to delist our ADSs, which is expected to be effective ten days after filing the Form 25. Our ADSs have been quoted on the OTC Pink Limited Information under the symbol “LAIXY” since the NYSE suspended the trading of our ADSs.

The OTC Market is a significantly more limited market than NYSE. The quotation of our ADSs on the OTC Market may result in a less liquid market available for existing and potential stockholders to trade our ADSs, could depress the trading price of our ADSs and could have a long-term adverse impact on our ability to raise capital in the future.

For the period from January 1, 2021 to April 7, 2022, the date when the trading in our ADSs was suspended, the closing trading prices of our ADSs ranged from US$2.80 to US$59.92 per ADS, each ADS representing fourteen Class A ordinary shares after giving effect to the ADS-to-Class A ordinary share ratio change in March 2022. Since NYSE’s trading suspension on April 7, 2022, the closing trading prices of our ADSs quoted from the OTC marked ranged from US$1.25 to US$1.83 per ADS up to the date of this annual report.

The trading price of our ADSs has been volatile and could fluctuate widely due to factors beyond our control. This may happen because of broad market and industry factors, like the performance and fluctuation of the market prices of other companies with business operations located mainly in China that have listed their securities in the United States. A number of Chinese companies have listed or are in the process of listing their securities on U.S. stock markets. The 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 Chinese companies’ securities after their offerings may affect the attitudes of investors toward Chinese companies listed in the United States in general and consequently may impact the trading performance of our ADSs, regardless of our actual operating performance.

In addition to market and industry factors, the price and trading volume for our ADSs may be highly volatile for factors specific to our own operations, including the following:

•

variations in our revenues, earnings and cash flow;

•

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

•

announcements of new services and expansions by us or our competitors;

•

announcements of new policies, rules or regulations relating to the internet or the financial services industry in China;

•

changes in financial estimates by securities analysts;

•

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

•

additions or departures of key personnel;

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•

release of

lock-up

or other transfer restrictions on our outstanding equity securities or sales of additional equity securities; and

•

potential litigation or regulatory investigations.

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

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

We have a dual-class share structure such that our ordinary shares consist of Class A ordinary shares and Class B ordinary shares. Each Class A ordinary share shall entitle the holder thereof to one vote on all matters subject to vote at our general meetings, and each Class B ordinary share shall entitle the holder thereof to ten votes on all matters subject to vote at our general meetings. Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof, while Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. Upon any sale, transfer, assignment or disposition of any Class B ordinary share by a shareholder to any person who is not a founder, being Dr. Yi Wang, Mr. Zheren Hui and Dr. Hui Lin, or an affiliate of such founder, or upon a change of ultimate beneficial ownership of any Class B ordinary share to any person who is not a founder or an affiliate of founder, such Class B ordinary share shall be automatically and immediately converted into the same number of Class A ordinary share.

Our founders, Dr. Yi Wang, Mr. Zheren Hu, and Dr. Hui Lin, beneficially own all of our outstanding Class B ordinary shares. As of March 31, 2022, Dr. Yi Wang, Mr. Zheren Hu, and Dr. Hui Lin beneficially owned approximately 51.7%, 22.1%, and 12.8% of the aggregate voting power of our company. As a result of the dual-class share structure and the concentration of ownership, holders of our Class B ordinary shares have considerable influence over matters such as 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 have the effect of depriving our other shareholders of the opportunity to receive a premium for their shares as part of a sale of our company and may reduce the price of 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. In addition, we may incur incremental compensation expenses to the holders of Class B ordinary share as a result of their becoming entitled to high votes on each Class B ordinary share.

The dual-class structure of our ordinary shares may adversely affect the trading market for our ADSs.

S&P Dow Jones and FTSE Russell have changed their eligibility criteria for inclusion of shares of public companies on certain indices, including the S&P 500, to exclude companies with multiple classes of shares and companies whose public shareholders hold no more than 5% of total voting power from being added to such indices. In addition, several shareholder advisory firms have announced their opposition to the use of multiple class structures. As a result, the dual class structure of our ordinary shares may prevent the inclusion of our ADSs representing Class A ordinary shares in such indices and may cause shareholder advisory firms to publish negative commentary about our corporate governance practices or otherwise seek to cause us to change our capital structure. Any such exclusion from indices could result in a less active trading market for our ADSs. Any actions or publications by shareholder advisory firms critical of our corporate governance practices or capital structure could also adversely affect the value of our ADSs.

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 will be influenced by research or reports that industry or securities analysts publish about our business. If one or more analysts who cover us downgrade our ADSs, 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.

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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, we may issue additional ordinary shares or ADSs for future acquisitions. If we pay for our future acquisitions in whole or in part with additionally issued ordinary shares or ADSs, your ownership interest in our company would be diluted and this, in turn, could have a material adverse effect on the price of our ADSs.

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

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

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

There can be no assurance that we will not be classified as a passive foreign investment company, or PFIC, for U.S. federal income tax purposes for any taxable year, which could result in adverse U.S. federal income tax consequences to U.S. holders of our ADSs or Class A ordinary shares.

non-U.S.

corporation, such as our company, will be classified as a passive foreign investment company, or PFIC, for any taxable year if either (1) at least 75% of its gross income for such year consists of certain types of “passive” income; or (2) at least 50% of the value of its assets (generally determined on the basis of a quarterly average) during such year is attributable to assets that produce passive income or are held for the production of passive income, or the asset test. Although the law in this regard is not entirely clear, we treat the VIEs and their subsidiaries as being owned by us for U.S. federal income tax purposes, because we control their management decisions and we are entitled to substantially all of the economic benefits associated with these entities, and, as a result, we consolidate their results of operations in our consolidated U.S. GAAP financial statements. If it were determined, however, that we are not the owner of the VIEs and their subsidiaries for U.S. federal income tax purposes, we may be treated as a PFIC for the current taxable year and any subsequent taxable year.

Assuming that we are the owner of the VIEs and their subsidiaries for U.S. federal income tax purposes, and based on our current and expected income and assets (taking into account our current market capitalization), we do not believe that we were a PFIC for our taxable year ended December 31, 2021 and we do not expect to be a PFIC for the current taxable year or the foreseeable future. However, no assurance can be given in this regard because the determination of whether we are or will become a PFIC is a fact-intensive inquiry made on an annual basis that depends, in part, upon the composition of our income and assets. Fluctuations in the market price of our ADSs may cause us to become a PFIC for the current or subsequent taxable years because the value of our assets for the purpose of the asset test may be determined by reference to the market price of our ADSs (which may be volatile).

If we were to be or become a PFIC for any taxable year during which a U.S. Holder (as defined in “Item 10. Additional Information—E. Taxation—United States Federal Income Tax Considerations”) holds our ADSs or Class A ordinary shares, certain adverse U.S. federal income tax consequences could apply to such U.S. Holder. See “Item 10. Additional Information—E. Taxation—United States Federal Income Tax Considerations—Passive Foreign Investment Company Rules.”

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

Our sixth amended and restated memorandum and articles of association contain provisions to limit the ability of others to acquire control of our company or cause us to engage in

change-of-control

transactions. These provisions could have the effect of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transaction. Our dual-class voting structure gives disproportionate voting power to the holders of Class B ordinary shares. In addition, our board of directors will have the authority, without further action by our shareholders, to issue preferred shares in one or more series and to fix their designations, powers, preferences, privileges, and relative participating, optional or special rights and the qualifications, limitations or restrictions, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights associated with our Class A ordinary shares, in the form of ADS or otherwise. Preferred shares could be issued quickly with terms calculated to delay or prevent a change in control of our company or make removal of management more difficult. If our board of directors decides to issue preferred shares, the price of our ADSs may fall and the voting and other rights of the holders of our Class A ordinary shares and ADSs may be materially and adversely affected.

Our currently effective memorandum and articles of association provide that the United States District Court for the Southern District of New York (or, if the United States District Court for the Southern District of New York lacks subject matter jurisdiction over a particular dispute, the state courts in New York County, New York) is the exclusive forum within the United States for the resolution of any complaint asserting a cause of action arising out of or relating in any way to the federal securities laws of the United States, regardless of whether such legal suit, action, or proceeding also involves parties other than our company. The enforceability of similar federal court choice of forum provisions in other companies’ organizational documents has been challenged in legal proceedings in the United States, and it is possible that a court could find this type of provision to be inapplicable or unenforceable. If a court were to find the federal choice of forum provision contained in our currently effective memorandum and articles of association to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions. If upheld, the forum selection clause in our currently effective memorandum and articles of association may limit a security-holder’s ability to bring a claim against us, our directors and officers, the depositary, and potentially others in his or her preferred judicial forum, and this limitation may discourage such lawsuits. Holders of our shares or the ADSs will not be deemed to have waived our compliance with the federal securities laws and the regulations promulgated thereunder pursuant to the exclusive forum provision in the currently effective memorandum and articles of association.

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

We are an exempted company incorporated under the laws of the Cayman Islands. Our corporate affairs are governed by our memorandum and articles of association, the Companies Act of the Cayman Islands, as amended from time to time, 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 standing to initiate a shareholder derivative action in a federal court of the United States.

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

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

As a result of all of the above, our public shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders than they would as public shareholders of a company incorporated in the United States.

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

We are a Cayman Islands exempted company and all of our assets are located outside of the United States. Substantially all of our current operations are conducted in China. In addition, most of our current directors and officers are nationals and residents of countries other than the United States. All or a substantial portion of the assets of these persons are located outside the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the United States in the event that you believe that your rights have been infringed under the U.S. federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of China may render you unable to enforce a judgment against us, our assets, our directors and officers or their assets.

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

We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from requirements applicable to other public companies that are not emerging growth companies including, most significantly, not being required to comply with the auditor attestation requirements of Section 404 for so long as we are an emerging growth company until the fifth anniversary from the date of our initial listing.

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

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

We are a public company and expect to incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC and other applicable laws and regulations, impose various requirements on the corporate governance practices of public companies. We expect these rules and regulations to increase our legal and financial compliance costs and to make some corporate activities more time-consuming and costly. As a company with less than US$1.07 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. After we are no longer an “emerging growth company,” we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the other rules and regulations of the SEC.

As a result of becoming a public company, we increased the number of independent directors and adopt policies regarding internal controls and disclosure controls and procedures. We also expect that operating as a public company will make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. In addition, we will incur additional costs associated with our public company reporting requirements. It may also be more difficult for us to find qualified persons to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate with any degree of 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’s securities. If we were involved in a class action suit, it could divert a significant amount of our management’s attention and other resources from our business and operations, which could harm our results of operations and require us to incur significant expenses to defend the suit. Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could have a material adverse effect on our financial condition and results of operations.

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

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

•

the rules under the Exchange Act requiring the filing of quarterly reports on Form

10-Q

or current reports on Form

8-K

with the SEC;

•

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

•

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

•

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

We are required to file an annual report on Form

20-F

within four months of the end of each fiscal year. Press releases relating to financial results and material events will also be furnished to the SEC on Form

6-K. However,

the information we are required to file with or furnish to the SEC will be less extensive and less timely than that required to be filed with the SEC by U.S. domestic issuers. As a result, you may not be afforded the same protections or information that would be made available to you were you investing in a U.S. domestic issuer.

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 represented by the ADSs you hold 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 represented by the ADSs you hold in accordance with these instructions. You will not be able to directly exercise your right to vote with respect to the underlying Class A ordinary shares represented by the ADSs unless you withdraw such shares. Under our memorandum and articles of association, the minimum notice period required for convening a general meeting is ten calendar days. When a general meeting is convened, you may not receive sufficient advance notice to withdraw the underlying Class A ordinary shares represented by 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 the underlying Class A ordinary shares represented by your ADSs. 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 underlying Class A ordinary shares represented by your ADSs are not voted as you requested.

The depositary for our ADSs will give us a discretionary proxy to vote our Class A ordinary shares underlying your ADSs if you do not vote at shareholders’ meetings, except in limited circumstances, which could adversely affect your interests.

Under the deposit agreement for the ADSs, if you do not vote, the depositary will give us a discretionary proxy to vote our underlying Class A ordinary shares represented by your ADSs at shareholders’ meetings unless:

•

we have failed to timely provide the depositary with notice of meeting and related voting materials;

•

we have instructed the depositary that we do not wish a discretionary proxy to be given;

•

we have informed the depositary that there is substantial opposition as to a matter to be voted on at the meeting;

•

a matter to be voted on at the meeting would have a material adverse impact on shareholders; or

•

the voting at the meeting is to be made on a show of hands.

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The effect of this discretionary proxy is that if you do not vote at shareholders’ meetings, you cannot prevent our underlying Class A ordinary shares represented by your ADSs from being voted, except under the circumstances described above. This may make it more difficult for shareholders to influence the management of our company. Holders of our ordinary shares are not subject to this discretionary proxy.

You may not receive dividends or other distributions on our 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 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 Class A ordinary shares or any value for them if it is illegal or impractical for us to make them available to you. These restrictions may cause a material decline in the value of our ADSs.

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

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

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.

ITEM 4.

INFORMATION ON THE COMPANY

A.	History and Development of the Company

We commenced our operations and launched our flagship “English Liulishuo” mobile app in 2013. Our three founders are Dr. Yi Wang, Mr. Zheren Hu and Dr. Hui Lin.

In August 2013, we incorporated LingoChamp Inc. (currently known as LAIX Inc.) under the laws of the Cayman Islands as our offshore holding company. In the same month, LingoChamp Inc. established a wholly-owned Hong Kong subsidiary, LingoChamp (HK) Limited, or LingoChamp HK. In November 2013, LingoChamp HK established a wholly-owned PRC subsidiary, Yuguan Information Technology (Shanghai) Co., Ltd. In October 2015, LingoChamp HK also established a wholly-owned PRC subsidiary, Yuling Cultural Communication (Shanghai) Co., Ltd., or Yuling. In August 2018, we renamed our company as LAIX Inc., which stands for “life empowered by AI to reach infinite possibilities.” In February 2019, LingoChamp HK established a wholly-owned subsidiary, Shenzhen Yuguan Information and Technology Co., Ltd., or Shenzhen Yuguan.

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Due to restrictions imposed by PRC laws and regulations on foreign ownership of companies that engage in internet and other related business, we conduct such business in China through a variable interest entity structure. We currently conduct substantially all of our operations in China through Shanghai Liulishuo. We intend to further expand operations in China through Shanghai Mengfan and Mengfan Education and have established variable interest entity contractual arrangements with Shanghai Mengfan and Mengfan Education, respectively. We collectively refer to Shanghai Liulishuo, Shanghai Mengfan and Mengfan Education as the VIEs in this annual report. Shanghai Liulishuo was established in 2013 when we commenced our operations. Shanghai Mengfan was established in December 2014. Mengfan Education was established in April 2019. Our WFOE has entered into variable interest entity contractual arrangements with each of the VIEs and their respective shareholders. For more details, please see “—C. Organizational Structure—Contractual Arrangements with the VIEs and Their Respective Shareholders.” As a result of our direct ownership in our WFOE and the variable interest entity contractual arrangements, we are regarded as the primary beneficiary of the VIEs. We treat them and their subsidiaries as the variable interest entities under U.S. GAAP, and have consolidated the financial results of these entities in our consolidated financial statements in accordance with U.S. GAAP. In January 2019, Shanghai Liulishuo incorporated a wholly-owned PRC subsidiary, Wuhan Liulishuo Information and Technology Co., Ltd., or Wuhan Liulishuo.

In February 2020, we wound up Jiangsu Liulishuo Education Technology Co., Ltd., or Jiangsu Liulishuo, which was incorporated in January 2018 but did not have any business operation or financial contribution, and terminated the contractual arrangements among Yuguan, Jiangsu Liulishuo and its shareholders.

On August 4, 2021, our board of directors received a preliminary

non-binding

Dr. Li-Lan

In September 2021, we received a letter dated September 8, 2021 from the NYSE and further

e-mail

communication on the same date, notifying us that (i) we were below compliance standards due to our total market capitalization and stockholder’s equity, (ii) the due date for us to submit a business plan that demonstrates compliance is December 8, 2021 and (iii) the applicable cure period for us to regain compliance expires on March 8, 2023.

In September 2021, we received another letter dated September 17, 2021 from the NYSE and further

e-mail

communication on the same date, notifying us that (i) we were below compliance standards due to the trading price of our ADSs, and (ii) the applicable cure period for us to regain compliance expires on March 17, 2022. On March 17, 2022, we received a notification letter from the NYSE, notifying us that we have regained compliance with the NYSE continued listing standards for trading price of our ADSs.

In February 2022, we established Block X Technology Pte. Ltd., a company established under the laws of Singapore, for the purpose of our global expansion in the future.

On April 7, 2022, we were notified by the NYSE that the staff of NYSE Regulation has determined to commence proceedings to delist our ADSs. Trading in our ADSs was suspended after the market close on the NYSE on April 7, 2022. NYSE Regulation reached its decision to delist our ADSs pursuant to Section 802.01B of the NYSE’s Listed Company Manual because we had fallen below the NYSE’s continued listing standard requiring listed companies to maintain an average global market capitalization over a consecutive 30 trading day period of at least US$15,000,000. On April 22, 2022, the NYSE applied to the SEC by filing a Form 25 to delist our ADSs, which is expected to be effective ten days after filing the Form 25. Our ADSs have been quoted on the OTC Pink Limited Information under the symbol “LAIXY” after the NYSE suspended the trading of our ADSs.

The SEC maintains a web site at

www.sec.gov

that contains reports, proxy and information statements, and other information regarding registrants that make electronic filings with the SEC using its EDGAR system.

Our principal executive offices are located at Building C2, No. 1687 Changyang Road, Yangpu District, Shanghai, People’s Republic of China. Our telephone number at this address is +86

21-3511-7188.

Our registered office in the Cayman Islands is located at the office of Maples Corporate Services Limited, PO Box 309, Ugland House, Grand Cayman,

KY1-1104,

Cayman Islands. We maintain our web site at

ir.laix.com

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See “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources— Material Cash Requirements” for a discussion of our capital expenditures.

B.	Business Overview

Our proprietary AI teacher utilizes deep learning and adaptive learning technologies, big data, well-established education pedagogies and the mobile internet. Since our inception in 2013, we have built our

AI-powered

Liulishuo platform to deliver a user-centric, personalized and effective English learning experience with easy access.

We conducted analysis and integrated into our products and pedagogies developed by the world’s leading educational experts and cognitive scientists. Our AI teacher was built on the proprietary AI technologies that provide personalized teaching and guidance for all core components of a student’s language learning process, encompassing learning, practice, assessment and feedback. Our AI teacher can hear, understand, interact with and evaluate the performance of our users and has the ability to understand their learning needs. Leveraging the volume of smart user data we possess, our AI teacher will continuously evolve and deliver more personally tailored learning programs to each user.

We provide our products and services

on-demand

via our mobile apps, primarily our flagship “English Liulishuo” mobile app launched in 2013. On our platform, AI technologies are integrated with learning content incorporating well established learning pedagogies, gamified features and strong social elements. We provide a variety of courses inspired by a broad range of topics and culture themes to make English learning more interesting. Our online study advisors organize online study groups, monitor users’ learning progress answer user queries and send individualized, motivating messages to users, which adds a human touch to our users’ learning experience. We also provide enterprise learning services for corporate customers that desire to improve their employees’ skills. To better conduct

in-depth

cooperation with companies across different industries, we launched our “Enterprise Liulishuo” app in May 2021 and started to provide human resource management tools to help enterprises to monitor the training program. We also launched an overseas mobile app, “LingoChamp,” to implement our global expansion. Different from the domestic business model that is partially dependent on Weixin group in user management, LingoChamp adopts a lighter monetization model of content subscription. We are also exploring collaboration opportunities with the local governments and schools, and have initiated several projects in the development of English learning system, bilingual reading platform and other digitalization attempts.

We plan to further diversify our monetization capabilities by implementing our growth strategy and further developing our new initiatives. Built upon the accomplishments that we achieved in the language learning platform, we will continue to leverage our basic AI capabilities and diversify their application scenarios, aiming to equip our users with knowledge and techniques to help them improve communication with the society, not only in language aspect but also in vocational, cross-cultural aspects and beyond. We will further penetrate into the overseas markets to offer a variety of customized language courses not only for English learning and deepen our collaboration with local governments and schools in China to support their digitalization in the field of public services and develop our B2G business.

The Liulishuo Platform

Overview of Our Platform

We provide

AI-powered

English learning products and services for both individual users and corporate customers on our Liulishuo platform. Our AI teacher enables us to offer users a personalized learning experience through the application of deep learning and adaptive learning technologies. Our mobile platform allows users to improve their English language skills anytime and anywhere.

On our flagship app, “English Liulishuo”

(

英语流利说

), users can take paid courses as well as free lessons in various forms featuring a broad range of topics and culture themes. Our paid DongNi English (

懂你英语

) course is personalized based on learners’ English proficiency levels and focused on systemically improving their general English proficiency. As a supplement to the standard DongNi English course, we provide DongNi Select premium services that provides online streaming courses with human English teachers and conversational sessions with our full-duplex voice system AI conversational coach “Alix” that we launched in April 2021 who primarily stimulates real human with a pure American accent. Our Alix, a product demonstrating a leap forward in

AI-powered

language learning technology, can realize

one-to-one

voice interaction and it has the capability, leveraging its full-duplex voice system, to maintain long conversation with our users. Users can also access a separate, paid course focused on improving English pronunciation, namely Authentic Pronunciation (

地道发音

). Further, we launched enterprise learning services for corporate customers in 2017. As of December 31, 2021, we had 210.2 million cumulative registered users for our domestic English learning business, as well as more than 1,400 corporate customers for our enterprise service.

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Our AI Teacher

Launched in July 2016, our AI teacher is powered by our proprietary deep learning and adaptive learning technologies. It enables us to provide users a personalized learning experience and real-time language proficiency assessment and feedback.

Through the application of knowledge tracing technology, whereby a machine models the knowledge of users as they interact with coursework, our AI teacher can predict how users would perform under different settings and create optimal study plans for every user. Our AI teacher can “hear” users’ English speech, evaluate such speech and provide real-time and personalized feedback to users, covering the core functions of a human teacher in the process of spoken English training.

•

Hearing

. Our AI teacher hears through a proprietary speech recognition and scoring engine based on deep learning technology. In converting speech into text, it is able to address uncertainties introduced by background noise, as well as different speaker accents and proficiency levels.

•

Evaluation

. Our AI teacher evaluates users’ English speech through our proprietary multi-dimension, multi-granularity speech evaluation engine. By leveraging our proprietary neuro-linguistic programming capabilities, or NLP capabilities, it can evaluate users’ speech based on several criteria, including pronunciation, vocabulary, grammar, fluency and coherence.

•

Feedback.

Based on the above evaluation, our AI teacher provides various forms of real-time personalized feedback to users through an intuitive user-friendly interface. It also identifies errors and provides suggestions to users on how to improve their spoken English.

We have a massive database of English spoken by Chinese, covering a broad range of geographic distribution and proficiency levels. As of December 31, 2021, we had recorded approximately 4.1 billion minutes of conversation and 54.8 billion sentences. Our AI teacher continuously reinforces and enhances itself by leveraging this large and growing amount of data.

Our AI teacher delivers learning content incorporating well-established language learning pedagogies. In particular, our DongNi English course was initially developed based on the Recursive Hierarchical Recognition (RHR) theory, which emphasizes a scientific approach of leveraging multi-modal inputs and short, frequent and systematic practices to develop learners’ pattern recognition and language chunking skills. We have also incorporated other renowned learning approaches into our platform and will continue to seek out other applicable pedagogies and methodologies. Our learning content covers a broad range of topics, such as everyday life, business, travel, academia and entertainment. Our

AI-based

algorithms capture user data through their interactions with our AI teacher, and further analyze and study user behavior in real time, which enables us to upgrade and optimize our content in a timely manner.

Complementary to our fundamental AI teacher infrastructure, in April 2021, we launched our proprietary AI conversational coach “Alix,” a full-duplex voice system. With the goal to provide a user-centered learning experience, Alix is a leap forward in

AI-powered

language learning technology embedded with great monetization potential. Alix is able to stimulate real human voice with a pure American accent and engage in

one-to-one

conversational interaction via voice with our users. Alix also has the capability to maintain long conversion with our users. Alix is also easily adaptable that enables it to be applied to many scenarios seamlessly, which can be introduced as a standalone product or integrated into other products. We have introduced “Alix” in our English Liulishuo” mobile app for the China market, and also in our “LingoChamp” mobile app for overseas markets such as Japan, South Korea, East Asia and South America markets to cater to the local customer needs. The overall rating for Alix from our paid users was 4.7 out of 5, with over 80% of them giving a

5-star

rating.

Our English Learning Products and Services

English Liulishuo

We launched our flagship app, “English Liulishuo” in 2013. “English Liulishuo” combines a comprehensive suite of our courses, including free courses for leisure learning, the paid personalized standard courses, DongNi English, and other paid courses such as Authentic Pronunciation. The app also has additional features designed to enhance the user experience and drive user engagement.

Free courses

. On the “English Liulishuo” app, we provide various free courses, such as English speaking courses and scenario-based simulation of English conversations. These courses incorporate gamified features and cover a variety of pop culture themes. The free courses are accessible to all our registered users. They motivate and engage our users, and help us strategically promote our paid courses to users.

DongNi English

. Users wishing to systematically improve their English proficiency can take DongNi English, including the

AI-powered

standard course and the supplemental DongNi Select premium services that provide online streaming courses with human English teachers.

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DongNi English is based on our eight internally designed language levels, from the lowest level LV1 to the highest level LV8. Our eight levels map to the six levels in the classic Common European Framework of Reference for Languages (CEFR) with the lower four levels in CEFR divided into six levels of DongNi English to better fit the learning needs of Chinese English learners. Before commencing the course, each user is required to take a proprietary placement test, which gives the user a comprehensive assessment of English capabilities along several key dimensions, such as speaking, listening, reading, vocabulary and grammar, and determines the user’s English proficiency level. A series of personalized courses suitable for the user’s proficiency level is then generated for the user to learn at a customized pace.

Each level of the personalized courses is divided into two to three units, and each unit has four to five parts covering listening, vocabulary and dialogue, as well as gamified tests on the learning materials. For each part, users listen to recordings and read texts of English language materials, repeat and record their own speech and receive

AI-generated

real-time feedback on their speech, and respond to multi-choice and cloze questions. Once users have completed a part of the unit, they are graded on a scale of one to four stars. After a unit is completed, users can obtain a report on their performance covering several dimensions, such as pronunciation, rhythm, fluency and accuracy. Particular sentences, words and syllables that users can improve upon are also identified. A user can upgrade to the next higher level after completing all units at his current level. The recommended study time for each level is 50 to 80 hours, depending on specific proficiency level.

In supplement to the personalized learning path provided on the “English Liulishuo” app, users of DongNi English can participate in Weixin-based study groups led by our online study advisors (OSAs), who helps motivate and retain users. See “—Our Learning Community—OSAs and Study Groups.”

For users who would like to have more human touch in their learning experience, we also offer DongNi Select premium services to supplement the standard DongNi English course to meet these users’ needs. Users of our DongNi Select premium services have online streaming courses with contracted human teachers. We connect users with native speaking teachers experienced in teaching

non-native

speakers and improving their spoken and overall English proficiency. We have a rigorous screening and training process for contracted human teachers, and accept the top 5% of the applicants to teach in our DongNi Select premium services.

DongNi English A+

. “DongNi English A+,” formerly known as “Darwin English,” is an upgraded version of DongNi English standard courses with substantially similar product features that we launched in August 2019. Equipped with an enhanced adaptive learning engine, DongNi English A+, as compared to DongNi English standard course, is able to provide more intelligent and customized learning experience and further supplement the DongNi English product line.

Authentic Pronunciation

. This paid course is offered in the “English Liulishuo” app. It is focused on improving users’ English pronunciation. Users can watch videos of how English syllables are pronounced along with detailed explanations, practice pronouncing these syllables and receive real-time personalized feedback on their pronunciation provided by our AI algorithms. Users can also join Weixin-based study groups where our OSAs provide online instructions on systematically improving English pronunciations.

LiuLi Reading

In 2018, we launched a paid course called “LiuLi Reading,” which was previously offered in the “English Liulishuo” app. In November 2018, we launched a standalone “LiuLi Reading” mobile app with substantially the same functions and features. LiuLi Reading is designed to allow our users to read articles from reputable overseas publishers, supplemented by detailed learning tips and quizzes.

Kids Liulishuo

“Kids Liulishuo” is a mobile app we launched in December 2018, previously targeting children of three to twelve years old with courses specifically designed to enhance the reading, hearing and speaking abilities of the kids. In light of the requirements and restrictions of the Double Alleviating Opinions, we ceased the operation of Kids Liulishuo from January 2022 and granted a private

non-profit

institution established under the laws of China, namely Shanghai Yangpu District Liuli Education and Training Center, or Yangpu Liuli, the right to utilize and operate “Kids Liulishuo.” Yangpu Liuli was established by our three founders with their personal donations as registered capital and holds a private school operating permit. In order for Yangpu Liuli to operate Kids Liulishuo, we, through Shanghai Liulishuo, entered into a software licensing agreement and service agreement with Yangpu Liuli, pursuant to which we will charge Yangpu Liuli a portion of its revenues on a monthly basis as our royalty fees for the licensing of “Kids Liulishuo” and our service fees for the provision of administrative supporting services, including legal, human resources, financial and managerial supporting services by us to Yangpu Liuli. Yangpu Liuli has gradually resumed the operations of Kids Liulishuo in the first quarter of 2022 for which Yangpu Liuli records all the revenues generated from operating Kids Liulishuo.

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LingoChamp

We have been implementing our global expansion strategy since 2020. We launched our overseas mobile app, “LingoChamp,” with functions substantially similar to our flagship mobile app “English Liulishuo.” In addition to English and Chinese, “LingoChamp” currently also supports Japanese, South Korean, Spanish, Portuguese and Thai, which allows it to penetrate into a greater range of overseas markets. “LingoChamp” has started monetization and generated revenues in 2020. In 2021, the gross billings generated from our overseas business were US$3.6 million and increased with a monthly CAGR of 8% in 2021. The newly registered users also increased rapidly with a monthly CAGR of 16% in 2021. We also embedded the LingoClub, our Language Practice Community, which contains both our AI teacher and English learner in an online chatting room to provide practice and community scenarios in our LingoChamp mobile app.

Enterprise learning services

We also provide learning services for corporate customers that desire to improve their employees’ skills. Typically, a corporate customer purchases course packages from us on behalf of their employees, and the employees then use our courses with individual accounts. In addition to features available to individual users on our platform, we also regularly send employees’ detailed and personalized learning reports to our corporate customers, including hours studied and test scores, enabling our corporate customers to easily track the progress of their employees. Corporate customers can also use our platform to organize English fluency contests for their employees.

In May 2021, we launched our “Enterprise Liulishuo” app, aiming to provide enterprise learning services across different industries in their global expansion. We developed customized solutions and professional talent training systems tailored to specific industries including different courseware and vocabularies for different working scenarios. In addition, the “Enterprise Liulishuo” app provides human resource management tools to help enterprise to monitor the training program. With the exploitation of “Enterprise Liulishuo”, we can conduct

in-depth

cooperation with companies across different industries, provide more professional and differentiated services, enter into various target markets and implement our differentiation strategy.

Our New Initiatives

Technological Developments

Robotic AI conversational coach (Alix)

In April 2021, we launched our proprietary AI conversational coach “Alix,” a product demonstrating a leap forward in

AI-powered

language learning technology. Alix is powered by a full-duplex voice interaction system with our

build-in

full-stack

in-house-developed

AI technologies, including automatic speech recognition, spoken language assessment,

text-to-speech,

natural language understanding and generation, dialogue management, among others, which has received a variety of positive feedbacks by our users thus far. As of December 31, 2021, Alix has talked with over 800,000 users for more than 356,000 hours on a cumulative basis, with an average conversation time of over 12 minutes per session. Moreover, the overall rating for Alix from our paid users was 4.7 out of 5, with over 80% of them giving a

5-star

rating. Alix is also easily adaptable that enables it to be applied to many scenarios seamlessly, which can be introduced as a standalone product or integrated into other products.

New generation of DongNi English A+

The new generation of our core course, DongNi English A+, is powered by our adaptive learning system that not only supports traditional macro-adaptivity (which refers to adaptive presentation and adaptive navigation on the level of learning objects) but also micro-adaptivity such as personalized interventions and scaffoldings within a learning objective. In 2021, we have launched hundreds of A/B tests of the adaptive learning algorithms, and the optimization of the underlying reinforcement learning algorithm improves the personalized learning experience and in turn improves the renewal rate of our paying users by an overall 12% as a result.

Business Strategies

Global Expansion

We have been implementing our global expansion of our strategic direction since 2020, primarily through our overseas mobile app, “LingoChamp,” which is a localized and comprehensive language learning product focusing on AI learning based on our powerful AI technology from DongNi English and live sessions with human teachers. Different from the domestic business model that is partially dependent on Weixin group in user management, LingoChamp adopts a lighter monetization model of content subscription.

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We adopt a hybrid expansion strategy in overseas markets, targeting to capture both the individual users (B2C) and other businesses (B2B). Such strategy allows our global expansion and our overseas business to be more proactive and flexible. As for our overseas B2C business, we had a total of 965,000 cumulative overseas registered users as of December 31, 2021 with an average usage time of more than 30 minutes a day. LingoChamp achieved gross billings of US$3.6 million in 2021, which are ten times the total gross billings for LingoChamp in 2020. At present, our registered and subscribed users of “LingoChamp” are mainly from the Asia Pacific region (especially the Japanese market). As for our B2B business, we collaborate with local promoters to penetrate our English training solutions with our content and products into schools and government agencies in South America in the form of SaaS (software as a service).

In 2022, we will continue to drive our growth through our products, contents and technologies, taking content subscription as our core overseas business model, and continuously improve the competitiveness and value of our products. First, we will keep on improving the product experience of our English AI courses, our monetization capabilities and operational efficiency in order to compete effectively with our competitors in overseas markets. Second, in addition to the English AI courses, we will speed up the research and development of AI courses in other languages. In the first half of 2022, we plan to launch our Spanish AI courses to penetrate into the European and the U.S. markets. Third, we will continue to invest in the research, development and operation of our live chat community to provide users with efficient and interactive language practice scenarios. Fourth, we will continue to offer our products, content and technologies in the form of SaaS to increase the proportion of the revenues from our B2B business.

B2G Business

We are also exploring collaboration opportunities with the local governments and schools. Although the after-school tutoring of

K-9

education has been significantly reduced since July 2021 due to the Double Alleviating Opinion, there were also new initiatives and opportunities regarding digitalization in

K-9

education, both on campus and in the classrooms. We have initiated several projects through Shanghai Liulishuo, such as the development of self-adaptive English learning systems for elementary schools, the development of bilingual reading platform and content, and the production of English-learning content for public schools. We were also invited by the local governments to build AI platforms aiming to assist teachers in preparing interactive lectures, enabling

in-classroom

digital formative-assessment of each student, and generating personalized homework assignment features. With the support from the local governments, our platform and products are now being introduced in hundreds of public schools. Besides, we also collaborated with other independent third parties for certain projects. For example, in August 2021, Shanghai Xiuyue Education Technology Co., Ltd., a joint venture that we hold 40% equity interest through Shanghai Liulishuo, was established under the laws of China, through which we will carry out projects in collaboration with independent business partners.

In collaboration with the Shanghai Municipal Committee of Science and Technology, we

co-developed

a Key Laboratory of Learning and Cognitive Artificial Intelligence of Shanghai. This laboratory project aims to innovate and achieve advancement in artificial intelligence and learning science to be applied to the next-generation smart education. Leveraging AI technologies, we target to rollout universal yet personalized education, research the nature and mechanism of learning science and brain cognition. Equipped with efficient content development, our goal is to better integrate AI technologies with consent to achieve efficient education and to make studying and learning switch direction from empiricism to science.

Non-language

Business

We have been actively exploring business opportunities to apply our capabilities to

non-language

aspects. We endeavor to expand the applications of our adaptive assessment and multimodal interaction technological capabilities to more comprehensive commercial scenarios. For example, we established strategic collaboration with companies providing musical instruction sparring services, enabling the sparring services to evolve from human-driven to “human+AI” driven. In light of the regulatory-oriented focus on vocational training and lifelong learning momentum, we are also exploring opportunities with

top-tier

business schools in China, aiming to turn profound financing knowledge into easily understandable finance courses for mass population leveraging our content creation capabilities. Utilizing our well-experimented technological capabilities accumulated from our language-related business, we believe we are well-positioned to penetrate into the

non-language

business aspects and capture the market potentials.

Our Users and Customers

As of December 31, 2021, we had 210.2 million cumulative registered users for our domestic English learning business. We have experienced a downturn of user acquisition for the year ended December 31, 2021, primarily attributable to our stringent cost control in user acquisition expenditures. The number of our average MAUs for our domestic English learning business was 10.0 million in 2019, 5.6 million in 2020 and 2.8 million in 2021. The number of paying users for our domestic English learning business who purchased courses and services on our platform was approximately 3.0 million in 2019, approximately 2.4 million in 2020 and approximately 1.1 million in 2021. The decrease in our domestic English learning paying users was primarily attributable to our stringent cost control in user acquisition expenditures. Based on the information provided by our domestic English learning active users as of December 31, 2021, approximately 30.7% of those users are college students, and 38.3% are employed or working as freelancers. More than 98.5% of our domestic English learning users are located in China, and the remainder are located in foreign countries.

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As of December 31, 2021, we had a total of 965,000 cumulative overseas registered users for our overseas B2C business with an average usage time of more than 30 minutes a day. Currently, our registered and subscribed users of “LingoChamp” are mainly from the Asia Pacific region. As for our overseas B2B business, we mainly collaborate local promoters to penetrate into schools and government agencies in South America.

We primarily collaborate with public schools and the municipal government of Shanghai, including a variety of municipal authorities, for our B2G business.

As of December 31, 2021, we had more than 1,400 corporate customers for our enterprise service, primarily in finance, automobile, pharmaceutical and electrical industries, which also included leading Chinese and global companies.

Our Learning Community

OSAs and Study Groups

Our OSAs are full-time employees who are typically college graduates with good command of English and good communication skills. They play an important role in our sales and marketing efforts by making personalized recommendations to users on extending their courses or purchasing additional products and services from us. We had over 240 OSAs as of December 31, 2021.

Our OSAs also manage our Weixin-based study groups, which users of our products and mobile apps can join. They help motivate users and monitor their progress, and respond to users’ queries through the study groups they manage. Users can also interact with one another in these Weixin-based groups. As of December 31, 2021, we had over 175,000 users in our over 2,130 Weixin groups.

Our OSAs and study groups help maintain the human touch that keeps users disciplined and improves learning outcomes. To enhance our OSAs’ efficiency, we also apply our proprietary AI technologies to automate certain aspects of their work.

Our Pricing Model

On our “English Liulishuo” app, our freemium model allows us to attract users with free services and convert them into paying users. Individual users can access a number of our courses and services for free, including free courses for leisure learning and the Vocabulary Notebook. We convert

non-paying

users to paying users through a variety of means, primarily through the Weixin groups we managed. For example, after users have taken a free course or a placement test, we will provide a

three-day

free trial to our users, our OSAs will motivate users and monitor their progress, and our app prompts personalized suggestions on how users can improve their English skills with links to our paid courses.

On our overseas mobile app, “LingoChamp,” which is a localized and comprehensive language learning product focusing on AI learning based on our powerful AI technology from DongNi English and live sessions with human teachers. Different from the domestic business model that is partially dependent on Weixin group in user management, LingoChamp adopts a lighter monetization model of content subscription.

The following table sets forth the main fee scales of paid courses and services on our mobile apps. We also selectively offer performance-based or behavior-based refunds to motivate our users. For example, users who have purchased

6-month

access can get a refund by reaching a certain level within six months. Users who take our courses for a certain number of consecutive days can also get a refund. We also offer promotional activities for corporate customers purchasing our courses for their employees at a discounted price.

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DongNi English

(standard subscription)

DongNi English A+
(standard subscription)

DongNi Select

(premium services)

Authentic

Pronunciation

LiuLi Reading

Kids Course

(1)

LingoChamp

Fee Scale

• RMB499 for

180-day access

• up to RMB998 for

12-month

access

• RMB698 for

180-day access

• up to RMB1,298

for 12-month

access

• RMB4,399 for

12-month access

• RMB8,980 for

12-month

access

• RMB499 for

180-day

access

• up to RMB2,488 for

12-month

access

• RMB199 for

100-day access

• RMB488 for

180-day

access

• RMB599 for

12-month

access

• RMB998 for

12-month

access to Phonics Courses

• RMB2,198 for

12-month

access to AIX courses

• RMB3,898 for

24-month

access to AIX courses

• RMB5,298 for

36-month

access to AIX courses

• US$24.99 for

1-month

subscription

• US$124.99 for

6-month

subscription

• US$164.99 for

12-month

subscription

Note:

(1)

The fee scale for Kids Course represented the one for the year ended December 31, 2021 to the extent we operated the

K-12

business in 2021. In light of the Double Alleviating Opinions, we ceased offering the Kids Course from January 1, 2022. We granted Yangpu Liuli, a private

non-profit

institution that holds a private school operating permit established under the laws of China by our three founders with their personal donations as registered capital, the right to utilize and operate “Kids Liulishuo.” Yangpu Liuli has gradually resumed the operations of Kids Liulishuo and started to offer Kids Courses in the first quarter of 2022 for which Yangpu Liuli records all the revenues generated from operating Kids Liulishuo. In order for Yangpu Liuli to operate Kids Liulishuo, we, through Shanghai Liulishuo, entered into a software licensing agreement and service agreement with Yangpu Liuli, pursuant to which we will charge Yangpu Liuli a portion of its revenues on a monthly basis as our royalty fees for the licensing of “Kids Liulishuo” and our service fees for the provision of administrative supporting services, including legal, human resources, financial and managerial supporting services by us to Yangpu Liuli.

Learning Content Development and Management

Our learning content is a key component of our success.

We have developed our learning content based on well-established pedagogies. In particular, our DongNi English course was initially developed based on the Recursive Hierarchical Recognition (RHR) theory, which emphasizes a scientific approach of leveraging multi-modal inputs and short, frequent and systematic practices to build long-term memory. We designed DongNi English to introduce content incrementally in a methodical and systematic way, allowing users to make and feel meaningful progress in a relatively short period of time. We have also developed free learning materials tailored to various interests. We continually update them to address evolving user preferences and keep up with trends in pop culture. Our advanced

AI-based

Our

end-to-end

content management system provides a number of capabilities to enable content writers to create English learning content on our platform. For example, a content writer can use our script engine in our content management system to create content with different media formats such as texts, pictures, audio and videos. The script engine also provides convenient version control for content writers. Apart from being capable of conducting

end-to-end

automatic content checks to ensure we present the content correctly to our end users, our content management system is integrated with our big data infrastructure so that users’ learning data related to certain pieces of content can be easily explored by our content writers to improve upon the data. Furthermore, our content management system is integrated with our adaptive learning engine to help us provide a personalized learning experience for our users.

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In 2021, we made a variety of explorations in our learning content development and management efforts, integrating our content development capabilities with artificial intelligence. Taking “Alix,” our proprietary AI conversational coach, as an example, we made optimization in the following aspects:

•

in terms of the capability to understand users’ intent, we optimized our speech, natural language understanding, natural language processing and dialogue management modules, allowing us to better understand our users;

•

in terms of the education quality improvement, we not only made major adjustments to the learning content, and also optimized the correction mechanism (e.g. pronunciation correction and grammar error correction) for common mistakes of our users, which is designed to reflect the weak points of our users;

•

in terms of the flexibility of the dialogue, we added more self-adaptive strategies to the learning content and introduced casual talk dialogue into our main courses to encourage our users to express themselves as much as possible; and

•

in terms of user experience enhancement, we reduced the latency of various services of ours and made specific optimizations to common errors in full-duplex mode, so as to minimize the impairment to user experience caused by such errors and service delays.

As of December 31, 2021, we had a dedicated content development team of 52 employees. In addition to the content we developed

in-house,

we also license quality content with reputable third-party content providers. Leveraging our proprietary algorithm and online human-machine interaction infrastructure, our content development team will explore the possibility of developing interactive learning content in other language (e.g. Spanish, German, French, South Korean and Japanese), learning content targeting college students. With the learning content that we developed

in-house,

we aims to improve the learning efficiency and keep our users entertained utilizing the capabilities of our algorithms and platform.

Our Technologies

Artificial Intelligence

Speech recognition

We have developed our speech recognition engine based on deep learning technology to automatically convert spoken speech into text. It supports English and six other languages. We have a huge and growing corpus of audio recordings of learners speaking English as a second language, covering a broad range of accents and proficiency levels. The corpus continually trains and improves the accuracy of our speech recognition engine, which further enables our other AI applications such as auto-scoring and feedback and spoken dialog system.

Automatic summative and formative assessment

Our auto-assessment engine, combined with our speech recognition engine, can evaluate users’ listening, reading, writing and speaking skills for both summative and formative purposes. Our algorithms can generate assessments in the form of test scores and provide feedback to users on their strengths and weaknesses, such as pronunciation, grammar, vocabulary, fluency and coherence, to improve their English skills. Our auto-assessment engine utilizes many of our NLP capabilities developed

in-house,

including grammar error detection, pragmatic error detection, synonym analysis and semantic understanding.

Knowledge tracing and adaptive learning

Our AI teacher applies knowledge tracing technology in both placement test and personalized study plan recommendations for users, delivering personalized and adaptive learning for our users. Knowledge tracing technology models users’ knowledge over time such that we can predict how users will perform under different settings and the user data generated by our platform could train our knowledge tracing models. As a result, we can predict with approximately 90% accuracy whether users can answer certain questions correctly. Additionally, by applying knowledge tracing to model users’ learning behavior, our AI algorithm can run learning simulations and evaluate personalized learning paths without the need for continuous student assessment.

Content analysis and generation

We have developed deep learning algorithms that can automatically generate multi-media (audio, picture, and etc.) and interactive (multiple-choice questions, cloze exercises and etc.) content. For instance, we have developed proprietary

text-to-speech

technology that can generate high fidelity native English speech with

low-latency,

enabling real-time voice interaction between AI and the users.

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Multimodal

human-AI

interaction

Technologies have been developed and integrated to enable interactions between human and AI tutor via speech, touch, facial expression and other modalities. For instance, our proprietary AI conversational coach “Alix” interacts with learners using both graphic user interface and duplex voice interactions. The average conversation time between Alix and a user is over 12 minutes per session.

Data and Data Security

We utilize our rich user data to continuously improve our products and services, and we are committed to safeguarding the security of user data.

We have collected a vast amount of user data through our users’ language learning activities. We have built proprietary tools to collect user learning data in various formats, store such data in a single data lake, and ensure the quality of this data. We further process user data using various proprietary and open source tools to utilize the user data for a variety of purposes.

We are committed to protecting user data in our business and operations. We endeavor to manage and use the data collected in accordance with applicable laws and regulations, and make reasonable efforts to prevent the unauthorized use, loss or leak of user data. We have taken a number of measures to safeguard the security of user data. For example, we have encrypted sensitive user data in our storage systems and utilize data loss prevention solutions. We also limit and minimize authorized access to our system to protected user data through a variety of techniques, including network access authentication and division of network security domains. We continually improve and enhance our data and system security through regular security checks and timely system upgrades.

Technology Infrastructure

We have a scalable infrastructure that can support a large active mobile user base. Our users utilize our services by sending dynamic requests through their mobile apps. They typically generate peak traffic in evenings, which subsides after midnight. We utilize third-party cloud computing providers, such as Alibaba Cloud and Amazon Web Services, as well as our self-developed tools that are customized to better serve our needs. Such elastic infrastructure scales up and down our

back-end

capabilities according to our real-time traffic load.

Intellectual Property

We seek to protect our technology, including our proprietary AI technology and technology infrastructure, through a combination of copyrights, patents, trademarks, trade secrets and confidentiality agreements. As of March 31, 2022, we have registered approximately 110 software copyrights, over 280 written work copyrights, over 140 patents and over 940 trademarks in China. We intend to protect our technology and proprietary rights vigorously, but there can be no assurance that our efforts will be successful. Even if our efforts are successful, we may incur significant costs in defending our rights. From time to time, third parties may initiate litigations against us, alleging infringement of their proprietary rights or declaring their

non-infringement

of our intellectual property rights. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business—We may fail to protect our intellectual property rights effectively, or may face intellectual property infringement claims and other claims of third-party rights, which may be expensive to defend and may disrupt our business and operations.” In addition, we have entered into intellectual property licensing agreements with third-party content providers, including royalty agreements with Lance Knowles pursuant to which we have obtained rights to publish certain content developed by Lance Knowles through our mobile apps.

Branding, Marketing and Sales

We position ourselves as a leading AI company in China that creates and delivers products and services to popularize English learning. We have relied on and will continue

word-of-mouth

promotions, and we believe that the improvements in our services and user experience will result in a better brand image as an effective and efficient English learning platform, which will allow us to attract and retain more users. We were named on the list of “The 100 Most Promising Private AI Companies in the World” for 2018 by CB Insights, one of the seven companies from China and one of the only two education companies globally. We were also named on the list of “50 Most Innovative Companies” for 2018 by Forbes China. Since January 2017, “English Liulishuo” has consistently ranked among the top education apps in the Apple app store and the major Android app stores. In 2019, we were named on the “Technology Companies of the Year” by

T-EDGE,

one of China’s most influential technology conferences. Our Authentic Pronunciation course was named on the list of “Top 30 AI Cases in 2019” by CSDN, one of China’s largest internet forums on technology. In June 2020, we were awarded the “2020 China Golden Fingertips—Best Online Education App” at a technology conference hosted by iMedia Research, the leading data mining and analysis institution for new economy industry. In addition, we were named as the “Top 20 Chinese AI+ Education Enterprises” at the 2020 World Artificial Intelligence Conference, one of the most highly recognized events in the AI industry. Moreover, we were named as the “Top 50 Online New Economy (Shanghai).” In 2021, we and Yangpu Post Doctorate Innovative Practice Office

co-established

“Yangpu Post Doctorate Innovative Practice Centre.” The purpose of the Yangpu Post Doctorate Innovative Practice Centre is to focus on the psychological characteristics of learners, such as personality and emotions, and integrate the individual differences of learners’ behavior with AI technologies. The research is intended to potentially reduce the

drop-out

rate for online education on one hand and recommend appropriate learning resources to learners based on how well the learners master the knowledge, so as to build a more effective personalized model for English learning and realize English education in a personalized manner.

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Our brand image is further promoted as our technologies, especially our proprietary AI technologies, receive more recognition. We were selected as the official language training provider to the 2016 G20 Summit held in Hangzhou, China. We are also the only company from China to be a corporate member of the Center for the Fourth Industrial Revolution of the World Economic Forum, a distinction we have held since June 2017. We also engage in brand advertising to promote our brand.

We have initiated various marketing activities to generate traffic to our platform and grow our user base. Our sales and marketing channels include Apple and Android app stores, search engines, social media, as well as offline events such as

on-campus

events at universities.

We utilize our Weixin official accounts to attract users, promote our products and services and communicate with our users. We provide users with timely updates about our services and useful English learning tips, as well as hyperlinks to our apps.

Our free services and features help us promote our paid courses among

non-paying

users. Our OSAs play an important role in our marketing efforts by making personalized recommendations to users on signing up for a paid course, extending their existing courses or purchasing additional products and services from us. We also have a team dedicated to sales to corporate customers and catering to their needs.

Social Responsibility

We have partnered with a number of

non-profit

organizations to implement various social responsibility initiatives.

Smart Cloud Classroom

In June 2016, we provided a series of AI English courses for free to a welfare school in a remote rural area in northwest China that provides free education to orphans. After one year of study, the average score of students’ High School Entrance Examination on English subject has significantly improved. 27% of the students improved one level on our “English Liulishuo” app. From 2017 to 2021, we continued the Smart Cloud Classroom project across the country, supporting more than 24,000 students in 118 schools as of March 31, 2022.

Rural Teachers Support Plan

We have provided online AI English courses to rural teachers for free to help them improve their teaching skills. In July 2017, the first recruited group of nearly 100 village teachers started their studies. The Rural Teachers Support Plan has provided online AI English courses to over 8,800 rural teachers as of March 31, 2022. In addition to the AI English courses, we also invited teaching experts to give rural teachers offline training sessions.

AI Empowering Program

Cooperating with nonprofit organizations, we started our AI Empowering Program to provide free English courses to college students in need in 2018. As of March 31, 2022, the program has provided courses to over 4,800 students from about 600 universities across China.

Competition

Our business is characterized by innovation, rapid change and disruptive AI, big data and mobile internet technologies. As we operate at the intersection of the technology and education industries, we potentially could face competition not only from providers of online and offline education services, but also from technology and internet players, especially those actively developing AI technology.

We believe the principal competitive factors include, but are not limited to, our ability to improve users’ learning efficiency and effectiveness, provide quality learning content and promote our brand. Technology and internet players that are larger than us may devote more resources to research and development, introduce new technology faster than us or have capabilities more advanced than ours. We also compete with them for talent with technological expertise, which is critical to the sustained development of our technology and products and services.

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Insurance

We do not maintain insurance policies covering damages to our network infrastructures or information technology systems. We also do not maintain business interruption insurance or general third-party liability insurance, nor do we maintain product liability insurance or key personnel insurance. We consider our insurance coverage to be in line with that of other companies of similar size and business nature in China. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business—We have limited insurance coverage of our operations, which may expose us to significant costs and business disruption.”

Regulations

This section sets forth a summary of the most significant rules and regulations that affect our business activities in China.

Regulation Related to Online Services

Regulation Related to Foreign Investment Restrictions

Investments in China by foreign investors and foreign-invested enterprises were previously regulated by the Catalogue of Industries for Guiding Foreign Investment, repealed by the Special Management Measures (Negative List) for the Access of Foreign Investment (2021 Version), or the 2021 Negative List, which was promulgated by the National Development and Reform Commission, or the NDRC, and the Ministry of Commerce on December 27, 2021 and became effective on January 1, 2022, and the Catalogue of Industries for Encouraging Foreign Investment (2020 Version), or the Encouraging Catalogue, which was promulgated by the NDRC, and the Ministry of Commerce on December 27, 2020, and became effective on January 27, 2021. Pursuant to the Encouraging Catalogue and the 2021 Negative List, foreign investments are categorized as encouraged, restricted and prohibited. Foreign investments that are not listed in the 2021 Negative List or Encouraging Catalogue are permitted categories. According to the 2021 Negative List, foreign investors are prohibited from holding more than 50% of equity interests in an enterprise which provides value-added telecommunications services (except for

e-commerce

business, domestic multi-party communications services, store and forward services and call center services).

The Regulations on Administration of Foreign-Invested Telecommunications Enterprises, or the FITE Regulations, which took effect on January 1, 2002 and last amended on February 6, 2016, are the key regulations for foreign direct investment in telecommunications companies in China. The FITE Regulations stipulate that the foreign investor of a telecommunications enterprise is prohibited from holding more than 50% of the equity interests in a foreign-invested enterprise that provides value-added telecommunications services. In addition, for a foreign investor to acquire any equity interest in a business providing value-added telecommunications services in China, it must demonstrate a positive track record and experience in providing such services.

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

In light of the above restrictions and requirements, we conduct our value-added telecommunications businesses through the VIE, Shanghai Liulishuo.

Regulation related to Foreign Investment

On March 15, 2019, the PRC National People’s Congress, or the NPC, approved the Foreign Investment Law, which took effect on January 1, 2020 and replaces three existing laws on foreign investments in China, namely, the PRC Equity Joint Venture Law, the PRC Cooperative Joint Venture Law and the Wholly Foreign-owned Enterprise Law, together with their implementation rules and ancillary regulations. The 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 invested enterprises in China. The Foreign Investment Law establishes the basic framework for the access to, and the promotion, protection and administration of foreign investments in view of investment protection and fair competition.

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According to the Foreign Investment Law, “foreign investment” refer to investment activities directly or indirectly conducted by one or more natural persons, business entities, or otherwise organizations of a foreign country (collectively referred to as “foreign investor”) within mainland China, and the investment activities include the following situations: (i) a foreign investor, individually or collectively with other investors, establishes a foreign-invested enterprise within mainland China; (ii) a foreign investor acquires stock shares, equity shares, shares in assets, or other like rights and interests of an enterprise within mainland China; (iii) a foreign investor, individually or collectively with other investors, invests in a new project within mainland China; and (iv) investments in other means as provided by laws, administrative regulations, or the State Council.

The Foreign Investment Law grants national treatment to foreign invested entities, except for those foreign invested entities that operate in industries deemed to be either “restricted” or “prohibited” in the 2021 Negative List. The Foreign Investment Law provides that foreign invested entities operating in foreign restricted or prohibited industries will require market entry clearance and other approvals from relevant PRC governmental authorities.

Furthermore, the Foreign Investment Law provides that foreign invested enterprises established according to the existing laws regulating foreign investment may maintain their structure and corporate governance within five years after the implementing of the Foreign Investment Law, while the structure and corporate governance of newly established foreign invested enterprises should be in line with those requirements applicable to domestic invested enterprises in China.

In addition, the Foreign Investment Law also provides several protective rules and principles for foreign investors and their investments in the PRC, including, among others, that local governments shall abide by their commitments to the foreign investors; foreign-invested enterprises are allowed to issue stocks and corporate bonds; except for special circumstances, in which case statutory procedures shall be followed and fair and reasonable compensation shall be made in a timely manner, expropriation or requisition of the investment of foreign investors is prohibited; mandatory technology transfer is prohibited; and the capital contributions, profits, capital gains, proceeds out of asset disposal, licensing fees of intellectual property rights, indemnity or compensation legally obtained, or proceeds received upon settlement by foreign investors within China, may be freely remitted inward and outward in Renminbi or a foreign currency. Also, foreign investors or the foreign investment enterprise should be imposed legal liabilities for failing to report investment information in accordance with the requirements.

On December 26, 2019, the State Council promulgated the Implementation Regulations on the Foreign Investment Law, or the New Implementation Regulations, which came into effect on January 1, 2020. The New Implementation Regulations require that foreign-invested enterprises and domestic enterprises shall be treated equally with respect to policy making and implementation, and provide more detailed measures to strengthen the protection, promotion and administration of foreign investments in China. Pursuant to the New Implementation Regulations, the Ministry of Commerce and NDRC shall jointly promulgate the negative list. The 2021 Negative List was jointly promulgated by the Ministry of Commerce and NDRC on December 27, 2021, which became effective on January 1, 2022. In addition, the New Implementation Regulations provide that existing foreign-invested enterprises may adjust their organizational forms and institutions pursuant to PRC Company Law or PRC Partnership Law and amend their registrations accordingly within five years after the effectiveness of the Foreign Investment Law. If the existing foreign-invested enterprises fail to change their original organizational forms and institutions as of January 1, 2025, the competent market regulation departments will not process other registration matters for these enterprises, and may disclose relevant corporate information to the public.

On December 30, 2019, the Ministry of Commerce and the SAMR (formerly known as State Administration for Industry and Commerce, or the SAIC) jointly promulgated the Measures for Reporting of Foreign Investment Information, or the Foreign Investment Reporting Measures, which came into effect on January 1, 2020 and replaced the Interim Administrative Measures for the Record-filing of the Establishment and Modification of Foreign-invested Enterprises. The Foreign Investment Reporting Measures establish an online reporting system for foreign investment instead of the previous requirement of the Ministry of Commerce filing and/or approval procedures. Pursuant to the Foreign Investment Reporting Measures, for foreign investors carrying out investment activities directly or indirectly within the mainland China, foreign investors or foreign-invested enterprises shall submit investment information for establishments, modifications and dissolution and annual reports of the foreign-invested enterprises on the online system.

Regulations Related to Value-added Telecommunications Services

On September 25, 2000, the State Council issued the PRC Regulations on Telecommunications, or the Telecommunications Regulations, as amended on February 6, 2016, to regulate telecommunications activities in China. The Telecommunications Regulations divided the telecommunications services into two categories, namely “infrastructure telecommunications services” and “value-added telecommunications services.” Pursuant to the Telecommunications Regulations, operators of VATS must first obtain a VATS License, from the MIIT, or its provincial level counterparts. On March 1, 2009, the MIIT promulgated the Administrative Measures on Telecommunications Business Operating Licenses, as amended on July 3, 2017, which set forth more specific provisions regarding the types of licenses required to operate VATS, the qualifications and procedures for obtaining such licenses and the administration and supervision of such licenses.

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According to the Classified Catalog of Telecommunications Services (2003 Version), information service, categorized as a type of VATS, was defined as “the voice information services (telephone information services) or online information and data retrieval and other information services directly provided for end users through the fixed networks, mobile networks or internet and other public communications networks by means of information gathering, development, processing and the construction of the information platform.” The 2016 MIIT Catalog, effective from March 2016 and most recently amended on June 6, 2019, continued to classify information service as a category of VATS, and revised the definition of information services as “the information services provided for users through public communications networks or internet by means of information gathering, development, processing and the construction of the information platform.” Moreover, information services are clarified to include information release and delivery services, information search and query services, information community platform services, information real-time interactive services, and information protection and processing services by the 2016 MIIT Catalog. The Administrative Measures on Internet Information Services, or ICP Measures, promulgated by the PRC State Council on September 25, 2000 and most recently amended on January 8, 2011, set forth more specific rules on the provision of internet information services. According to ICP Measures, any company that engages in the provision of commercial internet information services shall obtain an ICP License from the relevant government authorities before providing any commercial internet information services within China. When the internet information services involve areas of news, publication, education, medical treatment, health, pharmaceuticals and medical equipment, and if required by law or relevant regulations, specific approval from the respective regulatory authorities must be obtained prior to the application for an ICP License from the MIIT or its provincial level counterpart. Pursuant to the above-mentioned regulations, “commercial internet information services” generally refers to provision of specific information content, online advertising, web page construction and other online application services through internet for profit making purpose.

In addition to the Telecommunications Regulations and the other regulations discussed above, the provision of commercial internet information services on mobile internet applications is regulated by the Administrative Provisions on Mobile Internet Applications Information Services, which was promulgated by CAC in June 2016. The providers of mobile internet applications are subject to requirements under these provisions, including acquiring the qualifications and complying with other requirements provided by laws and regulations and being responsible for information security.

Regulation Related to Online Transmission of Audio-Visual Programs

The Measures for the Administration of Publication of Audio-Visual Programs through Internet or Other Information Network, or the Audio-Visual Measures, promulgated by the State Administration of Press, Publication, Radio, Film and Television, or the SAPPRFT (currently known as the State Administration of Radio and Television), on July 6, 2004 and put into effect on October 11, 2004, apply to the activities relating to the opening, broadcasting, integration, transmission or download of audio-visual programs using internet or other information network. Under the Audio-Visual Measures, to engage in the business of transmitting audio-visual programs, a license issued by the SAPPRFT is required, and “audio-visual programs (including audio-visual products of films and televisions)” is defined under the Audio-Visual Measures as the audio-visual programs consisting of movable pictures or sounds that can be listened to continuously, which are shot and recorded using video cameras, vidicons, recorders and other audio-visual equipment for producing programs. Foreign invested enterprises are not allowed to carry out such business. On April 13, 2005, the State Council promulgated the Certain Decisions on the Entry of the

Non-state-owned

Capital into the Cultural Industry. On July 6, 2005, five PRC governmental authorities, including the SAPPRFT, jointly adopted the Several Opinions on Canvassing Foreign Investment into the Cultural Sector. According to these regulations,

non-state-owned

capital and foreign investors are not allowed to engage in the business of transmitting audio-visual programs through information networks. However, the Audio-Visual Measures was repealed according to the Administrative Provisions on Audio-Visual Program Service through Special Network and Directed Transmission that was promulgated by the SAPPRFT on April 25, 2016, effective as of June 1, 2016, which was further amended on March 23, 2021.

To further regulate the provision of audio-visual program services to the public via the internet, including through mobile networks, within the territory of China, the SAPPRFT and the MIIT jointly promulgated the Administrative Provisions on Internet Audio-Visual Program Service, or the Audio-Visual Program Provisions, on December 20, 2007, which came into effect on January 31, 2008 and was last amended on August 28, 2015. Under the Audio-Visual Program Provisions, “internet audio-visual program services” is defined as activities of producing, redacting and integrating audio-visual programs, providing them to the general public via internet, and providing service for other people to upload and transmit audio-visual programs, and providers of internet audio-visual program services are required to obtain a License for Online Transmission of Audio-Visual Programs issued by the SAPPRFT, or complete certain registration procedures with the SAPPRFT. In general, providers of internet audio-visual program services must be either state-owned or state-controlled entities, and the business to be carried out by such providers must satisfy the overall planning and guidance catalog for internet audio-visual program service determined by the SAPPRFT. On April 8, 2008, SAPPRFT issued a Notice on Relevant Issues Concerning Application and Approval of License for the Online Transmission of Audio-Visual Programs, as amended on August 28, 2015, which sets out detailed provisions concerning the application and approval process regarding the License for Online Transmission of Audio-Visual Programs. According to the above regulations, providers of internet audio-visual program services that engaged in such services prior to the promulgation of the Audio-Visual Program Provisions are eligible to apply for the license so long as those providers did not violate the relevant laws and regulations in the past or their violation of the laws and regulations is minor in scope and can be rectified in a timely manner and they have no records of violation during the last three months prior to the promulgation of the Audio-Visual Program Provisions. Further, on March 31, 2009, SAPPRFT promulgated the Notice on Strengthening the Administration of the Content of Internet Audio-Visual Programs, which reiterates the

pre-approval

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

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On March 17, 2010, the SAPPRFT promulgated Tentative Categories of Internet Audio-Visual Program Services, or the Categories, which clarified the scope of internet audio-visual programs services, which was amended on March 10, 2017. According to the Categories, there are four categories of internet 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-visual programs concerning, among other things, educational content, and broadcasting such content to the general public online. However, there are still significant uncertainties relating to the interpretation and implementation of the Audio-Visual Program Provisions, in particular, the scope of “internet audio-visual programs.”

On March 16, 2018, the SAPPRFT promulgated the Notice on Further Regulating the Transmission Order of Internet Audio-Visual Program Services, providing that the classic literary works, radio, film and television programs, internet original audio-visual programs shall not be

re-edited,

re-dubbed,

re-subtitled

or partly captured and consolidated as a new program without authorizations and providers of internet audio-visual program services shall strictly manage and supervise such

re-edited

programs uploaded by the internet users and shall not provide any transmission channel for those internet audio-visual programs which have political orientation issues, copyright issues or content issues.

Regulation Related to Internet Live Streaming Services

On September 2, 2016, the SAPPRFT promulgated the Notice on Strengthening the Administration of Live Streaming Services of Internet Audio-Visual Program, which provided that any company without a License for Online Transmission of Audio-Visual Programs shall not operate audio-visual live streaming business and the live streaming programs provided by the qualified company shall not contain any content forbidden by laws and regulations.

On November 4, 2016, the CAC promulgated the Provisions on the Administration of Internet Live Streaming Services, or the Internet Live Streaming Provisions, effective December 1, 2016. “Internet live streaming service” is defined in the Internet Live Stream Provisions as the activities of continuously releasing real-time information to the public based on the internet in such forms as videos, audios, images and texts and the “internet live streaming service provider” is defined therein as an entity providing internet live streaming platform services. The Internet Live Streaming Provisions provide that internet live streaming service providers shall examine the true identity information of each internet live-streaming issuer, and complete the filing with local counterparts of the CAC.

On July 12, 2017, the CAC issued a Notice on Development of the Filing Work for Enterprises providing Internet Live Streaming Services, which provided that all the companies providing internet live streaming services shall complete the filing procedure with its local authority since July 15, 2017, otherwise the CAC or its local counterparts may impose administrative sanctions on such company.

Regulation Related to Internet Culture Activities

On February 17, 2011, the Ministry of Culture, or MOC (currently known as the Ministry of Culture and Tourism), promulgated the Interim Administrative Provisions on Internet Culture, or the Internet Culture Provisions, which became effective on April 1, 2011 and was amended on December 15, 2017. The Internet Culture Provisions require ICP services providers engaging in commercial “internet culture activities” to obtain an Internet Culture Business Operating License from the MOC. “Internet cultural activity” is defined in the Internet Culture Provisions as an act of provision of internet cultural products and related services, which includes (i) the production, duplication, importation, and broadcasting of the internet cultural products; (ii) the online dissemination whereby cultural products are posted on the internet or transmitted via the internet to

end-users,

such as computers, fixed-line telephones, mobile phones, television sets and games machines, for online users’ browsing, use or downloading; and (iii) the exhibition and comparison of the internet cultural products. In addition, “internet cultural products” is defined in the Internet Culture Provisions as cultural products produced, broadcast and disseminated via the internet, which mainly include internet cultural products specially produced for the internet, such as online music entertainment, online games, online shows and plays (programs), online performances, online works of art and online cartoons, and internet cultural products produced from cultural products such as music entertainment, games, shows and plays (programs), performances, works of art, and cartoons through certain techniques and duplicating those to internet for dissemination. On May 14, 2019, the General Office of MOC promulgated the Notice on the Adjustment of the Scope of Internet Culture Business Operating License and Further Standardization of the Approval Work, which provides that online music, online shows and plays, online performances, online works of art, online cartoons, displays and games are the activities that fall in the scope of internet culture business operating license, and further clarifies that educational live streaming activities are not deemed as online performances.

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Regulation Related to Online Publishing

On June 27, 2002, the General Administration of Press and Publication (currently known as the SAPPRFT) and the MIIT jointly promulgated the Tentative Internet Publishing Administrative Measures, or the Internet Publishing Measures, which took effect on August 1, 2002. The Internet Publishing Measures require entities that engage in internet publishing to obtain an Internet Publishing License for engaging in internet publishing from the SAPPRFT. Pursuant to the Internet Publishing Measures, the definition of “internet publishing” is broad and refers to the act by ICP services providers to select, edit and process works created by themselves or others and subsequently post such works on the internet or transmit such works to the users’ end through internet for the public to browse. The “works” as defined under the Internet Publishing Measures include (i) contents from books, newspapers, periodicals, audio-visual products, electronic publications that have already been formally published or works that have been made public in other media, and (ii) all other edited or processed works of literatures, art, natural science, social science, engineering technology, etc.

On February 4, 2016, the SAPPRFT and the MIIT jointly issued the Administrative Provisions on Online Publishing Services, or the Online Publishing Provisions. The Online Publishing Provisions, taking effect on March 10, 2016, superseded the Internet Publishing Measures. Compared with the Internet Publishing Measures, the Online Publishing Provisions set out more detailed provisions for online publishing activities, which mainly cover issues such as defining online publishing services, licensing and approvals, the administrative and supervisory regime and legal liabilities. According to the Online Publishing Provisions, all online publishing services provided within the territory of China are subject to the Online Publishing Provisions, and an online publishing services permit shall be obtained to provide online publishing services. Pursuant to the Online Publishing Provisions, “online publishing services” refer to providing online publications to the public through information networks; and “online publications” refer to digital works with publishing features such as having been edited, produced or processed and are made available to the public through information networks, including: (i) written works, pictures, maps, games, cartoons, audio/video reading materials and other original digital works containing useful knowledge or ideas in the field of literature, art, science or other fields; (ii) digital works of which the content is identical to that of any published book, newspaper, periodical, audio/video product, electronic publication or the like; (iii) network literature databases or other digital works, derived from any of the aforesaid works by selection, arrangement, collection or other means; and (iv) other types of digital works as may be determined by the SAPPRFT. As the scope of online publication is broad, certain contents we post on our website, such as video-audio clips and course materials, may be deemed as online publications.

Regulations Related to Internet Information Security and Privacy Protection

PRC government authorities have enacted laws and regulations with respect to internet information security and protection of personal information from any abuse or unauthorized disclosure. Internet information in China is regulated and restricted from a national security standpoint. The Decisions on Maintaining Internet Security which was enacted by the Standing Committee of the PRC National People’s Congress, or the SCNPC in December 2000 and amended in August 2009, may subject violators to criminal punishment in China for any effort to: (i) gain improper entry into a computer or system of strategic importance; (ii) disseminate politically disruptive information; (iii) leak state secrets; (iv) spread false commercial information; or (v) infringe intellectual property rights. The Ministry of Public Security has promulgated measures that prohibit use of the internet in ways which, among other things, result in a leakage of state secrets or a spread of socially destabilizing content. If an information service provider violates these measures, the Ministry of Public Security and the local security bureaus may revoke its operating license and shut down its websites.

Pursuant to the Decision on Strengthening the Protection of Online Information issued by the SCNPC in December 2012, any collection and use of user personal information must be subject to the consent of the user, abide by the principles of legality, rationality and necessity and in accordance with the specified purposes, methods and scopes. Any entity collecting personal information 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, and 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 entity collecting personal information to warnings, fines, confiscation of illegal gains, revocation of licenses, cancellation of filings, closedown of websites or even criminal liabilities.

Pursuant to the Notice of the Supreme People’s Court, the Supreme People’s Procuratorate and the Ministry of Public Security on Legally Punishing Criminal Activities Infringing upon the Personal Information of Citizens, issued in 2013, and the Interpretation of the Supreme People’s Court and the Supreme People’s Procuratorate on Several Issues regarding Legal Application in Criminal Cases Infringing upon the Personal Information of Citizens, which was issued on May 8, 2017 and took effect on June 1, 2017, the following activities may constitute the crime of infringing upon a citizen’s personal information: (i) providing a citizen’s personal information to specified persons or releasing a citizen’s personal information online or through other methods in violation of relevant national provisions; (ii) providing legitimately collected information relating to a citizen to others without such citizen’s consent (unless the information is processed, not traceable to a specific person and not recoverable); (iii) collecting a citizen’s personal information in violation of applicable rules and regulations when performing a duty or providing services; or (iv) collecting a citizen’s personal information by purchasing, accepting or exchanging such information in violation of applicable rules and regulations.

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Pursuant to the Order for the Protection of Telecommunication and Internet User Personal Information issued by the MIIT on July 16, 2013, which became effective from September 1, 2013, any collection and use of user personal information must be subject to the consent of the user, abide by the principles of legality, rationality and necessity and be within the specified purposes, methods and scopes. “Personal information” is defined as information that identifies a citizen, the time or location for his/her use of telecommunication and internet services, or involves privacy of any citizen such as his/her birth date, ID card number, and address. An internet information service provider must also keep information collected strictly confidential, and is further prohibited from divulging, tampering or destroying of any such information, or selling or providing such information to other parties. Any violation of the above decision or order may subject the internet information service provider to warnings, fines, confiscation of illegal gains, revocation of licenses, cancellation of filings, closedown of websites or even criminal liabilities.

Pursuant to the Ninth Amendment to the Criminal Law issued by the SCNPC in August 2015, which became effective in November 2015, any person or entity that fails to fulfill the obligations related to internet information security administration as required by applicable laws and refuses to rectify upon orders is subject to criminal penalty for the result of (i) any dissemination of illegal information in large scale; (ii) any severe effect due to the leakage of the client’s information; (iii) any serious loss of criminal evidence; or (iv) other severe situation, and any individual or entity that (i) sells or provides personal information to others in a way violating the applicable law, or (ii) steals or illegally obtain any personal information is subject to criminal penalty in severe situation.

Pursuant to the PRC Cyber Security Law issued by the SCNPC in November 2016, effective June 2017, personal information refers to all kinds of information recorded by electronic or otherwise that can be used to independently identify or be combined with other information to identify natural persons’ personal information including but not limited to: natural persons’ names, dates of birth, ID numbers, biologically identified personal information, addresses and telephone numbers, etc. The Cyber Security Law also provides that: (i) to collect and use personal information, network operators shall follow the principles of legitimacy, rightfulness and necessity, disclose their rules of data collection and use, clearly express the purposes, means and scope of collecting and using the information, and obtain the consent of the persons whose data is gathered; (ii) network operators shall neither gather personal information unrelated to the services they provide, nor gather or use personal information in violation of the provisions of laws and administrative regulations or the scopes of consent given by the persons whose data is gathered; and shall dispose of personal information they have saved in accordance with the provisions of laws and administrative regulations and agreements reached with users; (iii) network operators shall not divulge, tamper with or damage the personal information they have collected, and shall not provide the personal information to others without the consent of the persons whose data is collected. However, if the information has been processed and cannot be recovered and thus it is impossible to match such information with specific persons, such circumstance is an exception.

Pursuant to the Provisions on Online Protection of Children’s Personal Information issued by the CAC on August 22, 2019, effective from October 1, 2019, network operators, who collect, store, use, transfer and disclose personal information of children under the age of 14, or the Children, via the internet shall establish special rules and user agreements, designate specific personnel to take charge of the protection of Children’s personal information, inform the Children’s guardians in a noticeable and clear manner, and obtain the consent of the Children’s guardians. When obtaining the consent of the Children’s guardians, network operators shall explicitly inform several matters, including but not limited to the purposes, methods and scope of collection, storage, use, transfer and disclosure of the personal information of Children, and methods for correcting and deleting Children’s personal information. The Provisions on Online Protection of Children’s Personal Information also requires that the network operators shall comply with certain regulatory requirements, including without limitation, that network operators shall collect Children’s personal information that is only related to the services they provide, and shall adopt and strictly implement minimal authorization principal with respect to their staff’s access authority to the Children’s personal information.

In addition, the Identification Method of Illegal Collection and Use of Personal Information Through Apps jointly promulgated by the Secretary Bureau of the CAC, the General Office of the MIIT, the General Office of the Ministry of Public Security and the General Office of the SAMR in November 2019 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. The Identification Method of Illegal Collection and Use of Personal Information Through Apps lists six types of acts conducted by app operators through app which may be identified as illegal, including, (i) failure to make public the rules of collection and use of personal information, (ii) failure to explicitly inform the purposes, methods and scope of collection and use of personal information; (iii) failure to obtain users’ consent to collect and use their personal information; (iv) collection of personal information which is irrelevant to the services the app provides against the principle of necessity; (v) failure to obtain users’ prior consent before providing users’ personal information to the third parties; and (vi) failure to provide the function of deleting or correcting personal information in accordance with the laws and regulations, or failure to publish information such as ways for complaint and whistle-blowing.

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On May 28, 2020, the National People’s Congress promulgated the PRC Civil Code, which regulates the legal relationships between private parties. The Civil Code took effect on January 1, 2021. Among other provisions, the Civil Code provides that personal information of individuals is protected under the laws, and the collection, storage, use, processing, transmission, provision and disclosure of personal information shall observe the principles of legitimacy, rightfulness and necessity. On March 12, 2021, the Secretary Bureau of the CAC, the General Office of the MIIT, the General Office of the Ministry of Public Security and the General Office of the SAMR jointly promulgated the Provisions on the Scope of Necessary Personal Information for Common Types of Mobile Internet Applications, which became effective from May 1, 2021. By promulgating the Provisions on the Scope of Necessary Personal Information for Common Types of Mobile Internet Applications, the PRC governmental authorities reiterate the principle of necessity in collection of personal information and the restrictions that network operators shall not collect personal information unrelated to the services they provide, and further stipulates that the scope of necessary personal information for education apps is limited to the user’s mobile phone numbers, and the operator of education app shall not refuse to provide the app’s fundamental functions, which is online training, to users who refuse to provide personal information beyond the scope of the necessary personal information.

On June 10, 2021, the SCNPC promulgated the PRC Data Security Law, or the Data Security Law, which took effect in September 2021. The Data Security Law imposes data security and privacy obligations on entities and individuals carrying out data activities, including but not limited to the collection, storage, use, processing, transmission, provision, and public disclosure of data. The Data Security Law, among other things, provides for a security review procedure for the data activities that may affect national security and imposes export restrictions on certain data and information. Furthermore, the Data Security Law provides that no entity or individual within the territory of the PRC may provide foreign judicial or law enforcement authorities with the data stored within the territory of the PRC without the approval of the competent PRC authorities.

On July 30, 2021, the State Council of the PRC promulgated the Provisions on Protection of the Security of Critical Information Infrastructure, which took effect on September 1, 2021. Pursuant to the Provisions on Protection of the Security of Critical Information Infrastructure, critical information infrastructure or the CII shall mean any important network facilities or information systems of the important industry or field such as public communication and information service, energy, communications, water conservation, finance, public services,

e-government

affairs and national defense science, which 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, which are referred to as the “Protection Departments,” shall be responsible for formulating eligibility criteria and identifying the critical information infrastructure operator, or the CIIO, in the respective industry or sector. The CIIOs shall take the responsibility to protect the CII’s security by performing certain prescribed obligations, including conducting network security test and risk assessment, reporting the assessment results to relevant regulatory authorities.

On August 20, 2021, the SCPNC adopted the Personal Information Protection Law, which became effective on November 1, 2021. The Personal Information Protection Law reiterates the circumstances under which a personal information processor could process personal information and the requirements for such circumstances. The Personal Information Protection Law clarifies the scope of application, the definition of personal information and sensitive personal information, the legal basis of personal information processing and the basic requirements of notice and consent. According to the Personal Information Protection Law, where personal information is processed based on an individual’s consent, such consent shall be voluntarily and explicitly given by the individual on a fully informed basis, and the individual shall have the right to withdraw his or her consent without affecting the effectiveness of personal information processing activities that have been conducted based on his or her consent before. Furthermore, the Personal Information Protection Law clarifies that personal information of minors under the age of fourteen is sensitive information, and such sensitive information may not be processed unless there are specific purposes and sufficient necessity and strict protection measures are taken.

On September 10, 2021, the General office of MOE, together with other five governmental authorities promulgated the Notice on the Conversion of Filing Mechanism to Approval Mechanism regarding Existing Online Academic After-school Tutoring Institutions, which among other things, require online academic after-school tutoring institutions to be in compliance with Cyber Security Law and Data Security Law and to adopt grade three or higher cyber security protection standard. Moreover, the service provider of education app shall establish data protection mechanism with regard to collection, storage, transmission, and use of personal information and education apps operated by online academic after-school tutoring institutions which store personal information of more than one million people shall pass the impact assessment, certification, or compliance audit on personal information protection.

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On October 29, 2021, the draft Measures on Security Assessment of Cross-Border Transfer of Data was promulgated by the CAC, which stipulates that data processors shall make self-assessment of the risks before cross-border data transfer, and shall apply for security assessment for cross-border data transfer under certain circumstances. On November 14, 2021, the CAC published for public comment the Regulations on Cyber Data Security Management (Draft for Comments) or the Draft Cyber Data Security Regulations, which applies to activities relating to the use of networks to carry out data processing activities within the territory of the PRC and the requirement of cyber security review, including in case of data processors who process personal information of more than one million people seeking for listing abroad. As of the date of this annual report, there are uncertainties as to whether the draft Measures on Security Assessment of Cross-Border Transfer of Data and the Draft Cyber Data Security Regulations would be further amended, revised or updated and substantial uncertainties exist with respect to the enactment timetable and final content of such drafts.

On November 1, 2021, the MIIT published the Notice on the Implementation of Actions to Improve the Perception of Information and Communication Services, which stipulates that enterprises shall provide a list of personal information collected and a list of personal information shared with third parties, and shall display such lists in the second-level menu of the APP for users’ access (“Dual Lists Obligation”). Furthermore, the Notice on the Implementation of Actions to Improve the Perception of Information and Communication Services requires certain enterprises as enumerated in its schedule to fulfill the Dual Lists Obligation by the end of 2021, but it does not provide a clear deadline for other enterprises.

On December 28, 2021, the CAC published the Revised Measures for Cyber Security Review, or the Revised CAC Measures, which became effective on February 15, 2022 and repeals the Measures for Cyber Security Review promulgated on April 13, 2020. The Revised CAC Measures provides that a CIIO purchasing network products and services, and platform operators carrying out data processing activities, which affect or may affect national security, shall apply for cyber security review and that a platform operator with more than one million users’ personal information aiming to list abroad must apply for cyber security review.

On January 4, 2022, the CAC published the Administrative Provisions on Internet Information Services Algorithm Recommendation, or the Algorithm Recommendation Provisions, which became effective on March 1, 2022. The Algorithm Recommendation Provisions requires that internet information service providers who apply algorithm recommendation technologies to provide users with options to disable algorithmic recommendation services. On September 4, 1991, the SCNPC promulgated the Minors Protection Law, which was latest amended on June 1, 2021. The amended Minors Protection Law requires that information processor must follow the principles of legality, legitimacy and necessity while processing the personal information of minors through the internet, and the information processor must obtain the consent of the parents or the guardians of the minors if processing the person information of minors under the age of fourteen.

Regulation Related to Private Education

The laws and regulations governing foreign investments in private education institutions in China are complex and have been developing. Pursuant to the 2021 Negative List, which is the principal regulation governing foreign investment activities in China, foreign investments in

pre-school

education institutions, ordinary senior high schools and institutions of higher education fall within the foreign restricted category (limited to the form of sino-foreign cooperative joint ventures), and foreign investments in compulsory education institutions are prohibited. The 2021 Negative List does not provide specific restrictions on foreign investments in institutions like us that provide English learning products and services to the public, while according to the Double Alleviating Opinions, foreign investors are prohibited from investing in after-school tutoring institutions providing tutoring service related to academic subjects of compulsory education stage through mergers and acquisitions, entrustment, franchise and variable interest entities. Besides, pursuant to the PRC Regulations on Sino-foreign Cooperative Education (2019 Revision) and other education-related laws and regulations in China, foreign education institutions and other foreign organizations or individuals may not by themselves alone establish schools or other education institutions within China which mainly enroll Chinese citizens, and sino-foreign cooperative education institutions shall have corresponding qualifications and relatively high education quality.

Education Law of China

On March 18, 1995, the PRC National People’s Congress promulgated the PRC Education Law, or the Education Law, which was further amended on December 27, 2015 and April 29, 2021. The Education Law stipulates that the government formulates plans for the development of education, establishes and operates schools and other types of educational institutions, and in principle, enterprises, institutions, social organizations and individuals are encouraged to operate schools and other types of educational organizations. It is provided in the Education Law that no school or any other educational institution founded with governmental funds or donated assets shall be established for commercial purposes.

The Law for Promoting Private Education and its Implementing Rules

On December 28, 2002, the SCNPC promulgated the Law for Promoting Private Education, or the Private Education Law which was last amended on December 29, 2018. On March 5, 2004, the PRC State Council promulgated the Implementation Rules for the Law for Promoting Private Education or the PE Implementation Rules, which became effective on April 1, 2004, and was last amended on September 7, 2021. The Private Education Law and the PE Implementation Rules provide rules for social organizations or individuals, other than state-owned entities, to establish schools or other educational organizations using

non-government

funds in China, such schools or educational organizations established using

non-government

funds are referred to as “private schools.”

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According to the amended Private Education Law, establishment of private schools for academic education,

pre-school

education, self-taught examination support and other cultural education shall be subject to approval by the authorities in charge of education, while establishment of private schools for vocational qualification training and vocational skill training shall be subject to approvals from the authorities in charge of labor and social welfare. A duly approved private school will be granted a private school operating permit. Entities and individuals may choose to establish

non-profit

private schools or

for-profit

private schools at their own discretion.

Non-profit

private school shall be registered with the Ministry of Civil Affairs, or MCA, or its local counterparts as a private

non-enterprise

institution while

for-profit

private school may be registered with SAMR or its local counterparts as a company. Nonetheless,

for-profit

private schools that are engaged in compulsory education are not allowed. Furthermore, the amended PE Implementation Rules provides that private school engaging in online education activities using internet technology shall obtain private school operating permit and comply with administration rules and regulations on internet.

On December 30, 2016, the MOE, the SAIC and the Ministry of Human Resources and Social Welfare jointly issued the Implementation Rules on the Supervision and Administration of

For-profit

Private Schools. Pursuant such rules, the establishment, division, merger and other material changes of a

for-profit

private school shall first be approved by the education authorities or the authorities in charge of labor and social welfare, and then be registered with the competent branch of SAIC. In addition, it also provides that

for-profit

private tutoring institutions shall be analogically governed by these Implementation Rules on the Supervision and Administration of

For-profit

Private Schools.

On August 31, 2017, SAIC and MOE jointly promulgated the Notice of the State Administration for Industry and Commerce and the Ministry of Education on the Work Concerning the Administration of the Name Registration for

For-profit

Private Schools, which came into effect on September 1, 2017. Such notice provides that the industry expression in the name of the private culture education institutions shall typically include “tutoring school /center,” such as “curriculum tutoring school/center,” “extra-class education school/center,” “self-learning school/center,” “tutorship school/center,” “extra tutoring for examinations school/center” and “extra tutoring school/center” and such industry expression is allowed to embody the disciplines and characteristics of such education institution, such as “English tutoring school.”

Regulation Related to After-school Tutoring

On February 13, 2018, the MOE, the MCA, the Ministry of Human Resources and Social Security and the SAMR jointly promulgated the Circular on Alleviating After-school Burden on Primary and Secondary School Students and Implementing Governance Actions on After-School Tutoring Institutions or the Circular on Alleviating After-school Burden, pursuant to which the government authorities carry out a series of governance actions with regard to after-school tutoring institutions targeting primary and secondary school students, or the AST Institutions and order AST Institutions with material potential safety risks to suspend business for self-inspection and rectification and those without proper establishment licenses or school operating permits to apply for relevant qualifications and certificates under the guidance of competent government authorities. Moreover, the Circular on Alleviating After-school Burden requires that: (i) AST Institutions must file with the local education authorities and publicly disclose the classes, courses, target students, class hours and other information relating to their academic tutoring courses (primarily including courses on Chinese and mathematics); (ii) AST Institutions are prohibited from providing academic tutoring services beyond the scope or above the level of school textbooks, or organizing any academic competitions or level tests for students of primary and secondary schools and (iii) primary and secondary schools may not take into consideration of the student’s performance in the AST Institutions as one of the admission criteria.

In August 2018, the State Council issued the Opinion on the Regulation of the Development of After-School Tutoring Institutions or the New Opinion, which primarily regulates AST Institutions targeting primary and secondary school students. The New Opinion reiterates the requirement under the Circular on Alleviating After-school Burden that AST Institutions must obtain a private school operating permit, and further requires such institutions to meet certain minimum requirements; for example, AST Institutions are required to (i) have a fixed tutoring premise that conforms to specified safety criteria, with an average area per student of no less than 3 square meters during the applicable tutoring period; (ii) comply with relevant fire safety, environmental protection, hygiene, food operation and other specified requirements; (iii) purchase personal safety insurance for students to reduce safety risks; and (iv) not hire any teachers who are working concurrently in primary or secondary schools. AST Institutions are prohibited from carrying out exam-oriented tutoring, tutoring that goes beyond the school syllabus, tutoring in advance of the corresponding school schedule and any tutoring activities associated with student admission. The tutoring content of AST Institutions is not to exceed the corresponding national curricular standards and tutoring progress is not to be more accelerated than the corresponding progress of local schools. According to the New Opinion, AST Institutions are also required to disclose relevant information regarding the institution, including their tutoring content, schedule, targeted students and school schedule to the relevant education authority, and their tutoring classes must end before 20:30 each day. Tuition can only be collected for courses in three months or a shorter installment. Additionally, the New Opinion requests that competent local authorities formulate relevant local standards for AST Institutions within their administrative area. On December 28, 2018, nine PRC governmental authorities, including the MOE, jointly promulgated the Notice on Measures for Alleviating the Burdens on primary and secondary school students, which reiterates the above requirements.

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The General Office of the MOE enacted the Notice of Strengthening the Administration of School Homework in Compulsory Education Stage on April 8, 2021, which requires that the local government shall implement prohibition measures on leaving homework as an important part of the daily supervision on AST Institutions in accordance with relevant regulations and requires that AST Institutions shall not leave homework to primary and secondary school students.

On September 4, 1991 the SCNPC promulgated the Minors Protection Law, which was last amended on June 1, 2021. The amended Minors Protection Law requires that schools shall not engage in supplemental tutoring during holidays, weekends and school breaks to minors in compulsory education stage and

pre-school

stage and AST Institutions shall not provide tutoring services on primary school curriculums to minors in

pre-school

stage.

non-profit

institutions; (iii) an approval mechanism will be adopted with regard to the existing online Academic AST Institutions which previously filed with competent authorities; (iv) Academic AST Institutions are prohibited from raising funds through publicly listing or other capitalization operations; (v) listed companies are prohibited from investing in Academic AST Institution or purchase Academic AST Institutions’ assets by means of issuance of shares or by cash; (vi) foreign investors are prohibited from investing in Academic AST Institutions through mergers and acquisitions, entrustment, franchise and variable interest entities. Furthermore, any existing behaviors in violation of the above restrictions are required to be rectified. In addition, The Double Alleviating Opinions further provides that no approvals will be granted to AST Institutions providing academic subjects tutoring service to

pre-school

children (i.e. children from three to six years old) and ordinary senior high school students, that any online and offline tutoring service provided to

pre-school

In addition, the Double Alleviating Opinions also provide a series of restrictions in connection with the operation of Academic AST Institutions, especially that: (i) a filing and inspection system and administration rules shall be adopted in connection with the training content provided and tutoring materials used by Academic AST Institutions and providing foreign training courses is prohibited; (ii) Academic AST Institutions shall not provide tutoring service during public holidays, weekends and school breaks; (iii) Academic AST Institutions shall not solicit teachers who works in the schools by making high salary commitment and staffs engaging in academic AST service must obtain teacher qualification certificates, and copies of such qualifications must be prominently displayed on Academic AST Institutions’ premises and website; (iv) Academic AST Institutions shall not disclose the parents’ and students’ personal information; (v) Academic AST Institutions shall adopt tuition standard based on market demands, costs and other factors and disclose such tuition standards for the public’s supervision; (vi) Academic AST Institutions shall adopt the form of service contract for after-school tutoring services provided to primary and secondary school students as formulated by governmental authorities; (vii) online after-school tutoring service shall not be provided after 21:00 each day with each lesson’s length of no more than thirty minutes and each lesson break’s length of no less than ten minutes; and (viii) the employment of foreign teachers shall be in compliance with relevant rules and regulations and employment of foreign teachers outside the PRC is prohibited. On August 24, 2021, Shanghai Municipal Education Commission promulgated the Implementation Opinions on Further Alleviating the Burden of Homework and After-School Tutoring for Students in Compulsory Education Stage, which reiterates the requirements and restrictions under the Double Alleviating Opinions and provides several implementation rules applicable to AST Institutions in Shanghai.

Following the promulgation of the Double Alleviating Opinions, government authorities including the MOE and their corresponding local counterparts issued a series rules and regulations to implement the Double Alleviating Opinions:

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Regulations related to classification of academic subjects and

non-academic

subjects in compulsory education stage

On July 28, 2021, the General Office of the MOE promulgated the Notice on Further Clarifying the Scope of Academic Subjects and

Non-academic

Subjects with respect to After-School Tutoring Services in Compulsory Education Stage, which categorizes English tutoring services involving contents of courses contained in national curriculum standards as tutoring services on academic subjects.

On September 3, 2021, the General Office of MOE promulgated the Notice on Investigating and Handling of Disguised Academic After-School Tutoring Service which reiterates the requirements and restrictions under the Double Alleviating Opinions and further provides that the local government authorities shall identify disguised academic after-school tutoring services and impose penalties on illegal academic after-school tutoring services under the guise of summer camp, crowdfunded private teacher and etc.

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On November 8, 2021, the General Office of MOE promulgated the Guide for Classification of After-School Tutoring Programs in Compulsory Education Stage or the AST Classification Guide. The AST Classification Guide requires provincial counterparts of the MOE to establish classification guidance system and expert identification system with regard to the scope of academic subject and

non-academic

subjects and proposes to adopt tutoring objectives, tutoring content, tutoring methods and tutoring evaluation methods as the factors in identification.

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Regulations related to the registration and conversion of existing Academic AST Institutions

On August 24, 2021, the General Office of the MCA issued the Notice on Further Strengthening the Registration Administration of After-School Tutoring Institutions, which requires local counterparts of the MCA to promote the registration and administration of Academic AST Institutions in accordance with the Double Alleviating Opinions and the local counterparts of the MCA shall no longer grant approvals to any new AST Institutions providing service to

pre-school

children, and primary school and secondary school students.

On August 30, 2021, the General Office of MOE, together with the General Office of MCA and the General Office of SAMR issued the Notice on the Unified Registration of Academic After-School Tutoring Institutions in Compulsory Education Stage as

Non-profit

Institutions, which requires that: (i) existing

for-profit

Academic AST Institutions shall conduct

de-registration

procedure as

for-profit

entities and either stop providing academic AST service or covert themselves into a

non-profit

institutions through registration process with local counterparts of the MCA; and (ii) the ICP license held by existing online

for-profit

Academic AST Institutions who fail to rectify or to obtain approval as a

non-profit

institution shall be cancelled and such institutions shall be prohibited from online tutoring activities.

On September 10, 2021, the General Office of MOE, together with five other governmental authorities promulgated the Notice on the Conversion of Filing Mechanism to Approval Mechanism regarding Existing Online Academic AST Institutions, which reiterates that an approval mechanism will be adopted with regard to the existing online Academic AST Institutions which previously filed with competent authorities and requires all existing online Academic AST Institutions shall convert themselves into

non-profit

institutions by registration with local counterparts of the MCA by the end of 2021.

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Regulation related to tuitions and costs

On September 2, 2021, the NDRC, the MOE and the SAMR jointly promulgated the Notice on Strengthening the Supervision of Tuitions regarding Academic After-School Tutoring in Compulsory Education Stage, or the Notice on AST Tuitions. The Notice on AST Tuitions requires that the tutoring tuitions charged by Academic AST Institutions shall be subject to government guidance price standard and local government authorities shall formulate applicable base tuition standard and permitted fluctuation rate range, which shall be no more than ten percent in case of an upward fluctuation. Furthermore, the Notice on AST Tuitions requires strict control with regard to the costs incurred by Academic AST Institutions, especially that the average salary of any Academic AST Institution’s staffs may not be higher than the average salary of the staffs hired by urban

non-private

entities in the local education sector as released by the statistics authorities and that the promotion costs shall be no more than three percent of the tutoring service revenues generated by the Academic AST Institution. Nonetheless, as of the date of this annual report, no implementation rules have been promulgated to identify the scope of promotion costs. Besides, the Notice on AST Tuitions also requires the Academic AST Institutions to disclose the tuition standards to the public and file information such as tuition standard, and revenue and profits generated and costs incurred in previous year to the local education authorities by the end of the June every year.

On October 21, 2021, the General Office of MOE, together with five other governmental authorities, jointly promulgated the Notice on Strengthening the Supervision on Tuitions

Pre-Charged

by After-School Tutoring Institutions, which reiterates the tuitions charged by AST Institutions shall be subject to government guidance price standard and Academic AST Institutions shall prominently display the tuition standard on the Academic AST Institutions’ premises and website. Besides, the tuitions

pre-charged

by AST Institutions shall be deposited in an escrow account under the supervision of the bank and AST Institutions shall not

pre-charge

tuitions which cover training terms more than six months or more than sixty classes.

On December 31, 2021 the local counterpart of NDRC and MOE in Shanghai promulgated the Notice on Matters Concerning the Tuitions regarding Academic After-School Tutoring in Compulsory Education in Shanghai, or the Notice on AST Tutoring Tuitions in Shanghai, which became effective on February 17, 2022. The Notice on AST Tuitions in Shanghai further requires that the base tuition standard applicable to Academic AST Institutions in Shanghai shall be RMB twenty yuan per student for each lesson lasting for thirty minutes and Academic AST Institutions shall have discretion to apply for an upward fluctuation rate no more than ten percent with regard to the base tuition standard.

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•

Regulation related to adoption of form contract

On June 10, 2020, the General Office of MOE and the General Office of SAMR promulgated the Notice on Issuing the Form of Service Contract for After-School Tutoring Service Provided to Primary and Secondary School Students or the Notice on Form Contract, which requires the local competent regulatory authorities to guide the relevant parties to use the form service contract for after-school tutoring activities provided to primary and secondary school students (or the Form Service Contract). The Form Service Contract covers the obligations and rights of parties involved in the after-school tutoring services, including detailed provisions on tutoring tuitions, refund arrangement and default liabilities. For the purpose of implementing the Double Alleviating Opinions, on September 27, 2021, the General Office of MOE and the General Office of SAMR amended the content of the Form Service Contract. On October 21, 2021, the General Office of MOE, together with five other governmental authorities, jointly promulgated the Notice on Strengthening the Supervision on Tutoring Tuitions

Pre-Charged

by After-School Tutoring Institutions, which requires that AST Institutions shall use the Form Service Contract in business operation.

•

Regulation related to tutoring materials and personnel

On August 25, 2021, the General Office of MOE published the Measures for the Administration of After-School Tutoring Materials for Primary and Secondary School Students (For Trial Implementation), which provides that Academic Tutoring institutions shall conduct internal reviews regarding the tutoring materials used and file such materials to the competent education authorities for external review, and that Academic Tutoring institutions shall keep all tutoring materials for further review with a retention period for no less than three years after the tutoring materials been used.

On September 9, 2021, the General Office of MOE, together with the General Office of Ministry of Human Resources and Social Security, issued the Measures for the Administration of Employees of After-School Tutoring Institutions (for Trial Implementation), which provides that the teachers and curricular design staff hired by Academic AST Institutions must obtain teacher qualification certificate and the

in-service

teachers in primary and secondary schools and kindergartens are not permitted to be employed as Academic AST Institutions’ teachers or curricular design staff. Furthermore, Academic AST Institutions shall prominently display the basic information, teacher qualification certificates, teaching experience and other information of the hired teachers and curricular design staffs on the Academic AST Institutions’ premises and website, and file such information with competent authorities in a timely manner.

Regulation Related to Online and Distance Education

Pursuant to the Interim Administrative Regulations on Educational Websites and Online and Distance Education Schools issued by the MOE, on July 5, 2000, educational websites may provide educational services in relation to higher education, elementary education,

pre-school

education, teaching education, occupational education, adult 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 internet or an educational television station through an internet service provider. Setting up education websites is subject to approval from relevant education authorities, depending on the specific types of education. Any educational website 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 “educational websites” was not retained.

On February 3, 2016, the State Council promulgated the Decision on canceling the Second Batch of 152 Items Subject to Administrative Examination and Approval by Local Governments Designated by the Central Government, further explicitly withdrew the approval requirements for operating educational websites as provided by the Administrative Regulations on Educational Websites and Online Education Schools, and reiterated the principle that administrative approval requirements may only be imposed in accordance with the PRC Administrative Licensing Law.

In December 2017, Shanghai Municipal Government promulgated the Management Methods of Classified Registration of Private Schools, the Setting Standards for Private Tutoring Institutions of Shanghai, the Management Measures for the

For-profit

Private Tutoring Institutions of Shanghai, and the Management Methods for the

Non-Profit

Private Tutoring Institutions of Shanghai (collectively, the “Shanghai Implementation Regulations”). Pursuant to the Shanghai Implementation Regulations, any management measures and regulations applied to the institutions that provide tutoring services only through internet will be further promulgated separately. On February 24, 2020, Shanghai Municipal Education Commission, together with six other Shanghai authorities, jointly promulgated the Rules of Shanghai for Filings of Online After-School Tutoring, which came into effect on April 1, 2020. Such rules aim at regulating the school-curriculum-related tutoring provided to primary school and secondary school students and require the online tutoring institution providing the school-curriculum-related tutoring service to make filing through the management platform of Shanghai tutoring institutions, in respect to the tutoring class content, tutoring class schedule, recruitment target, operational management and information management in such online tutoring institution and require the online tutoring institution to make subsequent filing of statement of changes and other materials in case of any changes with respect to the filed information.

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On November 20, 2018, the General Office of the MOE, the General Office of the SAMR and the General Office of the Ministry of Emergency Management of the PRC, jointly promulgated the Notice on Several Work Mechanisms for Strengthening Special Administration and Rectification of After-School Tutoring Institutions, or the New Notice. The New Notice provides certain requirements relating to the online tutoring services, which mainly include that: (i) the competent authorities shall strengthen the supervision on the online tutoring institution targeting on primary school and secondary school students in accordance with the policies and requirements applied to the offline tutoring institutions, (ii) the online tutoring institution providing the school-curriculum-related tutoring service is required to make filing with the competent authorities in respect to the name of the curriculum-related tutoring class, tutoring class content, recruitment target, tutoring class schedule and tutoring time, and (iii) name, photos, class and qualification number of teachers in such online tutoring institution providing the school-curriculum-related tutoring service shall be disclosed on its website. On July 12, 2019, the MOE, together with other five PRC authorities, joint promulgated the Implementation Opinions on the Regulation of Online After-School Tutoring, which reinstate the filing requirement of online AST Institution and provides that the education authorities at provincial level should review the application documents submitted by online AST Institution and approve the filing applications submitted by qualified tutoring institution and disclose such qualified tutoring institution to the public. In case of any change to the filing information, the online AST Institution will be required to make filing of such updated information.

On September 19, 2019, the MOE, together with other nine PRC authorities, jointly promulgated the Opinions on the Promotion of Healthy Development of Online Education, which embody an expected PRC regulatory trend to strengthen the supervision of online education, such as improving online education access system, formulating negative list for online education access, establishing filing and review system for online education resources, and protecting personal information security of teachers and students.

On September 7, 2021 the PRC State Council promulgated Amended PE Implementations Rules, which provides private school engaging in online education activities using internet technology shall obtain private school operating permit and comply with administration rules and regulations on internet.

On July 24, 2021, the General Office of the CPC Central Committee and the General Office of the State Council issued the Double Alleviating Opinions, which among other things requires that: (i) no new approvals shall be granted to Academic AST Institutions, including online Academic AST Institutions ; (ii) all existing Academic AST Institutions, including online Academic AST Institutions are required to convert themselves into

non-profit

institutions; (iii) an approval mechanism will be adopted to replace the filing mechanism applicable to online Academic AST Institutions, and all existing online Academic AST Institutions are subject to examination before being granted with private school operating permits. On August 24, 2021, the General Office of the MCA issued the Notice on Further Strengthening the Registration Management of After-School Tutoring Institutions, which reiterates that existing online Academic AST Institutions are required to convert themselves into

non-profit

institutions under the Double Alleviating Opinions. On September 10, 2021, the General Office of MOE, together with other five governmental authorities promulgated the Notice on the Conversion of Filing Mechanism to Approval Mechanism regarding Existing Online Academic AST Institutions, which reiterates the requirements to adopt approval mechanism with regard to the existing online Academic AST Institutions previously filed with competent authorities under the Double Alleviating Opinions and further requires that the online AST Institution shall:(i) establish physical offices and tutoring premise within the location where it is registered; (ii) own or lease performance-reliable server within mainland China; (iii) be in compliance with Cyber Security Law and Data Security Law and adopt grade three or higher cyber security protection standard. Moreover, the service provider of education app shall establish data protection mechanism with regard to collection, storage, transmission, and use of personal information and education apps operated by online Academic AST Institutions which store personal information of more than one million people shall pass the impact assessment, certification, or compliance audit on personal information protection.

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Regulations Related to Intellectual Property Rights

The SCNPC, the State Council and the National Copyright Administration, or the NCAC, have promulgated various rules and regulations relating to the protection of software in China, including without limitation the PRC Copyright Law, adopted in 1990 and revised in 2001, 2010 and 2020, with the latest revision in 2020 taking effect on June 1, 2021. The implementation rules of the Copyright Law were adopted in 1991 and revised in 2002, 2011 and 2013 respectively. The amended Copyright Law and its implementation rules extend 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. To address the problem of copyright infringement related to the content posted or transmitted over the internet, the NCAC and the MIIT jointly promulgated the Measures for Administrative Protection of Copyright Related to Internet on April 29, 2005, which became effective on May 30, 2005.

On December 20, 2001, the State Council promulgated Computer Software Protection Regulations which came into effect on January 1, 2002 and was later amended on January 8, 2011 and January 30, 2013. These regulations are formulated for protecting the rights and interests of computer software copyright owners, encouraging the development and application of computer software and promoting the development of software business. In order to further implement the Computer Software Protection Regulations, the NCAC issued the Computer Software Copyright Registration Procedures on February 20, 2002, which apply to software copyright registration, license contract registration and transfer contract registration.

Under these rules and regulations, software owners, licensees and transferees may register their rights in software with the NCAC or its local branches and obtain software copyright registration certificates. Although such registration is not mandatory under PRC laws, software owners, licensees and transferees are encouraged to go through the registration process to enjoy the better protections afforded to registered software rights.

Patents

The SCNPC adopted the Patent Law of the People’s Republic of China in 1984 and amended it in 1992, 2000, 2008 and 2020 respectively. The latest revision in 2020 became effective from June 1, 2021. A patentable invention, utility model or design must meet three conditions, namely novelty, inventiveness and practical applicability. Patents cannot be granted for scientific discoveries, rules and methods for intellectual activities, methods used to diagnose or treat diseases, animal and plant breeds or substances obtained by means of nuclear transformation. The Patent Office under the State Intellectual Property Office is responsible for receiving, examining and approving patent applications. A patent is valid for a twenty-year term for an invention, a

ten-year

term for a utility model, and a fifteen-year term for a design, starting from the application date. Except under certain specific circumstances provided by law, any third-party user must obtain consent or a proper license from the patent owner to use the patent, otherwise the use will constitute an infringement of the rights of the patent holder.

Trademark

The PRC Trademark Law, adopted in 1982 and revised in 1993, 2001, 2013 and 2019 respectively, with its implementation rules adopted in 2002 and revised in 2014, protects registered trademarks. The PRC Trademark Office of the State Administration for Industry and Commerce, currently known as PRC State Intellectual Property Office of the State Administration for Market Regulation, or the Trademark Office, handles trademark registrations and grants a protection term of ten years to registered trademarks which may be renewed for consecutive

ten-year

periods upon request by the trademark owner. 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 which 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.

Domain Name

The MIIT promulgated its Administrative Measures on Internet Domain Names in 2017. According to these measures, the MIIT is in charge of the overall administration of domain names in China. The registration of domain names in China is on a “first-apply-first-registration” basis. A domain name applicant will become the domain name holder upon the completion of the application procedure.

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Regulations Related to Employment

On June 29, 2007, the SCNPC, adopted the Labor Contract Law, which became effective as of January 1, 2008 and was revised in 2012. The Labor Contract Law requires employers to enter into written contracts with their employees, restricts the use of temporary workers and aims to give employees long-term job security. Pursuant to the Labor Contract Law, employment contracts lawfully executed prior to the implementation of the Labor Contract Law and continuing as of the date of its implementation will continue to be performed. Where an employment relationship was established prior to the implementation of the Labor Contract Law but no written employment contract was concluded, a contract must be concluded within one month after the Labor Contract Law’s implementation. All PRC enterprises are generally required to implement a standard working time system of eight hours a day and forty hours a week, and if the implementation of such standard working time system is not appropriate due to the nature of the job or the characteristics of business operation, the enterprise may implement a flexible working time system or comprehensive working time system after obtaining approvals from the relevant authorities. According to the Social Insurance Law which was promulgated by SCNPC and effective from July 1, 2011 and was amended in 2018, the Regulation of Insurance for Work-Related Injury, the Provisional Measures on Insurance for Maternity of Employees, Regulation of Unemployment Insurance, the Decision of the State Council on Setting Up Basic Medical Insurance System for Staff Members and Workers in Cities and Towns, and the Interim Regulation on the Collection and Payment of Social Insurance Premiums, an employer is required to contribute the social insurance for its employees in China, including the basic pension insurance, basic medical insurance, unemployment insurance, maternity insurance and injury insurance. Under the Regulations on the Administration of Housing Funds, promulgated by the State Council on April 3, 1999 and as latest amended on March 24, 2019, an employer is required to make contributions to a housing fund for its employees.

Regulations Related to Foreign Exchange

Regulations on Foreign Currency Exchange

The principal regulations governing foreign currency exchange in China are the Foreign Exchange Administration Regulations, as last amended in August 2008. Under the PRC foreign exchange regulations, payments of current account items, such as profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval from State Administration of Foreign Exchange, or SAFE, by complying with certain procedural requirements. By contrast, approval from or registration with appropriate government authorities is required where Renminbi is to be converted into foreign currency and remitted out of China to pay capital account items, such as direct investments, repayment of foreign currency-denominated loans, repatriation of investments and investments in securities outside of China.

In November 2012, SAFE promulgated the Circular of Further Improving and Adjusting Foreign Exchange Administration Policies on Foreign Direct Investment, as amended on May 4, 2015, October 10, 2018 and December 30, 2019 respectively, which substantially amends and simplifies the

pre-existing

foreign exchange procedure. Pursuant to this Circular, the opening of various special purpose foreign exchange accounts, such as

pre-establishment

expenses accounts, foreign exchange capital accounts and guarantee accounts, the reinvestment of Renminbi proceeds derived by foreign investors in China, and remittance of foreign exchange profits and dividends by a foreign-invested enterprise to its foreign shareholders no longer require the approval or verification of SAFE, and multiple capital accounts for the same entity may be opened in different provinces, which was not possible previously. In addition, SAFE promulgated the Provisions on Foreign Exchange Administration over Direct Investment Made by Foreign Investors in China in May 2013, which specifies that the administration by SAFE or its local branches over direct investment by foreign investors in China must be conducted by way of registration and banks must process foreign exchange business relating to the direct investment in China based on the registration information provided by SAFE and its branches. On February 28, 2015, SAFE promulgated the Notice on Further Simplifying and Improving the Administration of the Foreign Exchange Concerning Direct Investment, or SAFE Notice 13. After SAFE Notice 13 became effective on June 1, 2015, instead of applying for approvals regarding foreign exchange registrations of foreign direct investment and overseas direct investment from SAFE, entities and individuals may apply for such foreign exchange registrations from qualified banks. The qualified banks, under the supervision of SAFE, may directly review the applications and conduct the registration.

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On March 30, 2015, SAFE promulgated the Circular of the SAFE on Reforming the Management Approach regarding the Settlement of Foreign Capital of Foreign-invested Enterprise, or 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, which came into force on June 1, 2015, replaced both the Circular of the State Administration of Foreign Exchange on Issues Relating to the Improvement of Business Operations with Respect to the Administration of Foreign Exchange Capital Payment and Settlement of Foreign-invested Enterprises, or Circular 142 and the Circular of the State Administration of Foreign Exchange on Issues concerning the Pilot Reform of the Administrative Approach Regarding the Settlement of the Foreign Exchange Capitals of Foreign-invested Enterprises in Certain Areas, or Circular 36. Circular 19 allows foreign-invested enterprises established in China whose main business is investment to use their foreign exchange capitals to make equity investment and removes certain other restrictions had been provided in Circular 142. However, Circular 19 continues to prohibit foreign-invested enterprises from, among other things, using Renminbi fund converted from its foreign exchange capitals for expenditure beyond its business scope and providing entrusted loans or repaying loans between

non-financial

enterprises. Subsequent to the issuance of Circular 19, SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming and Standardizing the Foreign Exchange Settlement Management Policy of Capital Account, or Circular 16, which took effect in June 2016. Circular 16 reiterates some of the rules set forth in Circular 19, but compared to Circular 19, Circular 16 provides that discretionary foreign exchange settlement applies to foreign exchange capital, foreign debt offering proceeds and remitted foreign listing proceeds, and the corresponding Renminbi capital converted from foreign exchange are not restricted from extending loans to related parties or repaying the inter-company loans (including advances by third parties). SAFE further promulgated Notice of the State Administration of Foreign Exchange on Further Facilitating Cross-border Trade and Investment, or Circular 28, effective from January 2020, which allows all foreign-invested enterprises to make domestic equity investments using their foreign exchange capitals or Renminbi fund converted from its foreign exchange capitals with limited preconditions. On April 10, 2020, SAFE promulgated the Notice on Optimizing Foreign Exchange Administration to Support the Development of Foreign-related Business, or Circular 8. According to Circular 8, under the condition that the use of funds is genuine and compliant with current administrative provisions on use of capital account incomes, enterprises are allowed to use incomes under the capital account, such as capital funds and foreign debts and proceeds from overseas listings, for domestic payments, without the need to submit materials evidencing the veracity of such payments to the banks before every single transaction. However, there exist substantial uncertainties with respect to the interpretation and implementation in practice with respect to Circular 16 of 2016, Circular 28 of 2020, Circular 8 of 2020 and other laws and regulations related to foreign currency exchange. Circular 19 of 2015, Circular 16 of 2016, Circular 28 of 2020, Circular 8 of 2020 and other related regulations may delay or limit us from using the proceeds of offshore offerings to make additional capital contributions or loans to our PRC subsidiaries and any violations of these circulars could result in severe monetary or other penalties.

In January 2017, SAFE promulgated the Circular on Further Improving Reform of Foreign Exchange Administration and Optimizing Genuineness and Compliance Verification, or Circular 3, which stipulates several capital control measures with respect to the outbound remittance of profit from domestic entities to offshore entities, including (i) under the principle of genuine transaction, banks shall check board resolutions regarding profit distribution, the original version of tax filing records and audited financial statements; and (ii) domestic entities shall hold income to account for previous years’ losses before remitting the profits. Moreover, pursuant to Circular 3, domestic entities shall make detailed explanations of the sources of capital and utilization arrangements, and provide board resolutions, contracts and other proof when completing the registration procedures in connection with an outbound investment.

Regulations on Foreign Debt

A loan made by a foreign entity as direct or indirect shareholder in a foreign-invested enterprise is considered to be foreign debt in China and is regulated by various laws and regulations, including the Regulation of the People’s Republic of China on Foreign Exchange Administration, the Interim Provisions on the Management of Foreign Debts, the Statistical Monitoring of Foreign Debts Tentative Provisions, the Detailed Rules for the Implementation of Provisional Regulations on Statistics and Supervision of Foreign Debts, and the Administrative Measures for Registration of Foreign Debts. Under these rules and regulations, a shareholder loan in the form of foreign debt made to a PRC entity does not require the prior approval of SAFE. However, such foreign debt must be registered with and recorded by SAFE or its local branches within 15 business days after entering into each foreign debt contract. Pursuant to these rules and regulations, the maximum amount of the aggregate of (i) the outstanding balance of foreign debts with a term not longer than one year, and (ii) the accumulated amount of foreign debts with a term longer than one year, of a foreign-invested enterprise shall not exceed the difference between its registered total investment and its registered capital, or Total Investment and Registered Capital Balance. In addition, on January 11, 2017, the People’s Bank of China, or PBOC, promulgated the Notice of the People’s Bank of China on Full-coverage Macro-prudent Management of Cross-border Financing, or PBOC Circular 9, which sets forth an upper limit for PRC entities, including foreign-invested enterprises and domestic-invested enterprises, regarding their foreign debts. Pursuant to PBOC Circular 9, the limit of foreign debts for enterprises shall be calculated based on the following formula: the limit of foreign debt = net assets * cross-border financing leverage ratio * macro-prudent regulation parameter. Net assets is calculated as the net assets value stated in the relevant entity’s latest audited financial statement. The cross-border financing leverage ratio for enterprises is two (2). The macro-prudent regulation parameter is one (1). The PBOC Circular 9 does not supersede the Interim Provisions on the Management of Foreign Debts, but rather serves as a supplement to it. PBOC Circular 9 provided for a

one-year

transitional period, or the Transitional Period, from its promulgation date for foreign-invested enterprises, during which period foreign-invested enterprise could choose to calculate their maximum amount of foreign debt based on either (i) the Total Investment and Registered Capital Balance, or (ii) the Net Assets Limit. After the Transition Period, the maximum amount applicable to foreign-invested enterprises is to be determined by PBOC and SAFE separately. However, although the Transitional Period ended on January 10, 2018, as of the date of this annual report, neither PBOC nor SAFE has issued any new regulations regarding the appropriate means of calculating the maximum amount of foreign debt for foreign-invested enterprises. Domestic-invested enterprises, have only been subject to the Net Assets Limit in calculating the maximum amount of foreign debt they may hold from the date of promulgation of PBOC Circular 9. Further, Circular 28, effective from January 2020, establishes a pilot program that a

non-financial

enterprise in pilot regions may register foreign debts up to two times of its net assets with local branch of SAFE, and it then may borrow several tranches of foreign debts within the registered amount, without registration of each foreign debt. The macro-prudent regulation parameter, which was first introduced in Circular 9, has also been adjusted by later regulations. However, the Notice on Adjustment of Macro-prudent Regulation Parameter Cross-border Financing, promulgated by PBOC and SAFE on January 7, 2021 and currently in force,

re-adjusts

the parameter to one (1).

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Regulations on Foreign Exchange Registration of Overseas Investment by PRC Residents

SAFE issued SAFE Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, which became effective in July 2014, replacing the Circular of the State Administration of Foreign Exchange on Issues Concerning the Regulation of Foreign Exchange in Equity Finance and Return Investments by Domestic Residents through Offshore Special Purpose Vehicles, or SAFE Circular 75. SAFE Circular 37 regulates foreign exchange matters in relation to the use of special purpose vehicles, or SPVs, by PRC residents or entities to seek offshore investment and financing or conduct round trip investment in China. Under SAFE Circular 37, an SPV refers to an offshore entity established or controlled, directly or indirectly, by PRC residents (including individuals and entities) for the purpose of seeking offshore financing or making offshore investment, using legitimate onshore or offshore assets or interests, while “round trip investment” refers to direct investment in China by PRC residents through SPVs, namely, establishing foreign-invested enterprises to obtain the ownership, control rights and management rights. SAFE Circular 37 provides that, before making contribution into an SPV, PRC residents are required to complete foreign exchange registration with SAFE or its local branch. SAFE promulgated the Notice on Further Simplifying and Improving the Administration of the Foreign Exchange Concerning Direct Investment in February 2015, which took effect on June 1, 2015. This notice has amended SAFE Circular 37 requiring PRC residents or entities to register with qualified banks rather than SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing.

PRC residents who had contributed legitimate onshore or offshore interests or assets to SPVs but had not obtained registration as required before the implementation of the SAFE Circular 37 must register their ownership interests or control in the SPVs with qualified banks. An amendment to the registration is required if there is a material change with respect to the SPV registered, such as any change of basic information (including change of the PRC residents, name and operation term), increases or decreases in investment amount, transfers or exchanges of shares, and mergers or divisions. Failure to comply with the registration procedures set forth in SAFE Circular 37 and the subsequent notice, or making misrepresentation on or failure to disclose controllers of the foreign-invested enterprise that is established through round-trip investment, may result in restrictions being imposed on the foreign exchange activities of the relevant foreign-invested enterprise, including payment of dividends and other distributions, such as proceeds from any reduction in capital, share transfer or liquidation, to its offshore parent or affiliate, and the capital inflow from the offshore parent, and may also subject relevant PRC residents or entities to penalties under PRC foreign exchange administration regulations.

Regulations Related to Stock Incentive Plans

SAFE promulgated the Circular of the State Administration of Foreign Exchange on Issues concerning the Administration of Foreign Exchange Used for Domestic Individuals’ Participation in Equity Incentive Plans of Companies Listed Overseas, or the Stock Option Rules in February 2012, replacing the previous rules issued by SAFE in March 2007. Under the Stock Option Rules and other relevant rules and regulations, PRC residents as defined therein who participate in stock incentive plan in an overseas publicly-listed company are required to register with SAFE or its local branches and complete certain other procedures. Participants of a stock incentive plan who are PRC residents must retain a qualified PRC agent, which could be a PRC subsidiary of the overseas publicly listed company or another qualified institution selected by the PRC subsidiary, to conduct the SAFE registration and other procedures with respect to the stock incentive plan on behalf of the participants. In addition, the PRC 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 PRC agent or other material changes. The PRC agent must, on behalf of the PRC residents who have the right to exercise the employee share options, apply to SAFE or its local branches for an annual quota for the payment of foreign currencies in connection with the PRC residents’ exercise of the employee share options. The foreign exchange proceeds received by the PRC 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 China opened by the PRC agents before distribution to such PRC residents.

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

Regulations Related to Dividend Distribution

The principal regulations governing distribution of dividends of foreign holding companies include the PRC Company Law that was promulgated in 1993 and latest amended in 2018, and the Foreign Investment Law that was effective from January 1, 2020. Under these regulations, foreign investment enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, foreign investment enterprises in China are required to set aside as statutory reserve funds at least 10% of its

after-tax

profit, until the cumulative amount of such reserve funds reaches 50% of its registered capital. A PRC company is not permitted to distribute any profits until any losses from prior fiscal years have been offset. Profits retained from prior fiscal years may be distributed together with distributable profits from the current fiscal year.

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Regulations Related to Taxation

Enterprise Income Tax

In March 2007, the National People’s Congress enacted the Enterprise Income Tax Law, and in December 2007, the State Council promulgated the Implementing Rules of the Enterprise Income Tax Law, or the Implementing Rules, both of which became effective on January 1, 2008, while the Enterprise Income Tax Law was further amended by SCNPC on February 24, 2017 and on December 29, 2018, and the Implementing Rules was last amended on April 23, 2019. The Enterprise Income Tax Law (i) reduces the top rate of enterprise income tax from 33% to a uniform 25% rate applicable to both foreign-invested enterprises and domestic enterprises and eliminates many of the preferential tax policies afforded to foreign investors, (ii) permits companies to continue to enjoy their existing tax incentives, subject to certain transitional

phase-out

rules and (iii) introduces new tax incentives, subject to various qualification criteria. Enterprises qualified as “High-Tech Enterprises” are entitled to a 15% enterprise income tax rate rather than the 25% uniform statutory tax rate. The preferential tax treatment continues as long as an enterprise can retain its “High-Tech Enterprise” status.

The Enterprise Income Tax Law also provides that enterprises organized under the laws of jurisdictions outside China with their “de facto management bodies” located within China may be considered PRC resident enterprises and therefore be subject to PRC enterprise income tax at the rate of 25% on their worldwide income. The Implementing Rules further define the term “de facto management body” as the management body that exercises substantial and overall management and control over the production and operations, personnel, accounts and properties of an enterprise. If an enterprise organized under the laws of jurisdiction outside China is considered a PRC resident enterprise for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, it would be subject to the PRC enterprise income tax at the rate of 25% on its worldwide income. Second, a 10% withholding tax would be imposed on dividends it pays to its

non-PRC

enterprise shareholders and a 10% tax would apply with respect to gains derived by its

non-PRC

enterprise shareholders from transfer of its shares. In addition,

non-PRC

resident enterprises without any branches in China are subject to enterprise income tax in connection with their gains from PRC source at a rate of 10%.

According to the Enterprise Income Tax Law, dividends generated after January 1, 2008 and payable by a foreign-invested enterprise in China to its foreign enterprise investors are subject to a 10% withholding tax, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for a preferential withholding arrangement. Pursuant to the Notice of the State Administration of Taxation on Negotiated Reduction of Dividends and Interest Rates, which was issued on January 29, 2008 and supplemented and revised on February 29, 2008, and 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, which became effective on December 8, 2006 and applies to income derived in any year of assessment commencing on or after April 1, 2007 in Hong Kong and in any year commencing on or after January 1, 2007 in China, such withholding tax rate may be lowered to 5% if a Hong Kong enterprise is deemed the beneficial owner of any dividend paid by a PRC subsidiary by PRC tax authorities and holds at least 25% of the equity interests in that particular PRC subsidiary at all times within the

12-month

period immediately before distribution of the dividends. The SAT issued the Announcement of the State Administration of Taxation on Issues concerning “Beneficial Owners” in Tax Treaties, or SAT Announcement 9, which became effective from April 1 2018, replacing Notice on the Interpretation and Recognition of Beneficial Owners in Tax Treaties, or SAT Notice 601, SAT Announcement 9 stipulates that in determining whether a

non-resident

enterprise has the status as a beneficial owner, comprehensive analysis shall be conducted based on the factors listed therein and the actual circumstances of the specific case shall be taken into consideration. Specifically, it expressly excludes an agent or a designated payee from being considered as a “beneficial owner.” Pursuant to the Notice of the State Administration of Taxation on the Issues concerning the Application of the Dividend Clauses of Tax Agreements, or SAT Circular 81, a Hong Kong resident enterprise must meet the following conditions, among others, in order to apply the reduced withholding tax rate: (i) it must be a company; (ii) it must directly own the required percentage of equity interests and voting rights in the PRC resident enterprise; and (iii) it must have directly owned such required percentage in the PRC resident enterprise throughout the 12 months prior to receiving the dividends. In August 2015, the State Administration of Taxation promulgated the Administrative Measures for

Non-resident

Taxpayers to Enjoy Treatment under Tax Treaties, or SAT Circular 60, which became effective on November 1, 2015. SAT Circular 60 provides that

non-resident

enterprises are not required to

obtain pre-approval from

the relevant tax authority in order to enjoy the reduced withholding tax. 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. The State Administration of Taxation promulgated the Administrative Measures for

Non-resident

Taxpayers to Enjoy Treatment under Treaties, or SAT Circular 35, which became effective on January 1, 2020 and replaced the Circular 60. SAT Circular 35 reiterates that that

non-resident

enterprises are not required to

obtain pre-approval from

the relevant tax authority in order to enjoy the reduced withholding tax and may apply the reduced withholding tax rate upon self-assessment. Comparing to the SAT Circular 60, the SAT Circular 35 does not require the

non-resident

enterprises to file the supporting documents when performing tax filing, instead, the

non-resident

enterprises are required to retain the supporting documents for the

post-tax

filing examinations by the relevant tax authorities. Accordingly, LingoChamp (HK) Limited may be able to benefit from the 5% withholding tax rate for the dividends it receives from Yuguan, Yuling and Shenzhen Yuguan, if it satisfies the conditions prescribed under SAT Circular 81 and other relevant tax rules and regulations. However, according to SAT Circular 81 and SAT Circular 35, if the relevant tax authorities consider the transactions or arrangements we have are for the primary purpose of enjoying a favorable tax treatment, the relevant tax authorities may adjust the favorable withholding tax in the future.

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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 entities that have direct obligation to make certain payments to a

non-resident

enterprise shall be the relevant tax withholders for such

non-resident

enterprise. Further, the

Non-resident

Enterprises Measures provides that, in case of an equity transfer between two

non-resident

enterprises which occurs outside China, the

non-resident

enterprise which receives the equity transfer payment shall, by itself or engage an agent to, file a tax declaration with the PRC tax authority located at the place of the PRC company whose equity has been transferred, and the PRC company whose equity has been transferred shall assist the tax authorities to collect taxes from the relevant

non-resident

enterprise. On April 30, 2009, the Ministry of Finance and the SAT jointly issued the Notice on Issues Concerning Process of Enterprise Income Tax in Enterprise Restructuring Business, or Circular 59. On December 10, 2009, the SAT issued the Notice on Strengthening the Administration of the Enterprise Income Tax concerning Proceeds from Equity Transfers by

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 PRC resident enterprise by a

non-resident

enterprise.

On February 3, 2015, the SAT issued the Announcement of the State Administration of Taxation on Several Issues Concerning the Enterprise Income Tax on Indirect Property Transfer by

Non-resident

Enterprises, or SAT Bulletin 7, to supersede the provisions in relation to the Indirect Transfer as set forth in Circular 698. SAT Bulletin 7 introduces a new tax regime that is significantly different from that under Circular 698. Public Notice extends its tax jurisdiction to capture not only Indirect Transfer as set forth under Circular 698 but also transactions involving transfer of immovable property in China and assets held under the establishment and place in China of a foreign company through the offshore transfer of a foreign intermediate holding company. SAT Bulletin 7 also addresses transfer of the equity interests in a foreign intermediate holding company widely.

In addition, SAT Bulletin 7 provides clearer criteria than Circular 698 on how to assess reasonable commercial purposes and introduces safe harbor scenarios applicable to internal group restructurings. However, it also brings challenges to both the foreign transferor and transferee of the Indirect Transfer as set forth in Circular 698 as they have to make self-assessment on whether the transaction should be subject to PRC tax and to file or withhold the PRC tax accordingly.

On October 17, 2017, the SAT issued the Announcement of the State Administration of Taxation on Issues Concerning the Withholding of

Non-resident

Enterprise Income Tax at Source, or SAT Bulletin 37, which came into effect and superseded Circular 698 on December 1, 2017. The SAT Bulletin 37 further clarifies the practice and procedure of the withholding of

non-resident

enterprise income tax. Among other things, the SAT Bulletin 37 provides that:

•

for the income from equity investment assets, the competent tax authority for the income tax of the invested enterprise shall be the competent tax authority, while for the income from the dividends, extra dividends and other equity investment, the competent tax authority for the income tax of the enterprise distributing the income shall be the competent tax authority;

•

the withholding obligator shall declare and pay the withheld tax to the competent tax authority in the place where such withholding obligator is located within 7 days from the date of occurrence of the withholding obligation;

•

where the income obtained by the withholding obligator and required to be withheld at source is in the form of dividends, extra dividends or any other equity investment gains, the date of occurrence of the obligation for withholding relevant payable tax is the date of actual payment of the dividends, extra dividends or other equity investment gains;

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•

for the income tax required to be withheld under Article 37 of the Enterprise Income Tax Law, if the withholding obligator fails to withhold in accordance with the law or is unable to perform withholding obligation, the

non-resident

enterprise obtaining the income shall declare and pay the tax not withheld to the competent tax authority of the place of the occurrence of the income in accordance with Article 39 of the Enterprise Income Tax Law and complete the Form of Report on Withholding of Enterprise Income Tax of the People’s Republic of China; where the

non-resident

enterprise fails to declare and pay tax in accordance with Article 39 of the Enterprise Income Tax Law, the tax authority may order it to pay the tax within a specified time limit and the

non-resident

enterprise shall declare and pay the tax within the time limit determined by the tax authority; the

non-resident

enterprise that declares and pays the tax voluntarily before the tax authority orders it to pay tax within a specified time limit shall be deemed as having paid tax as scheduled;

•

the competent tax authority may require the taxpayer, withholding obligator and relevant parties with knowledge of relevant information to provide the contracts and other relevant materials relating to the withholding of tax;

•

where the withholding obligator fails to withhold the tax required to be withheld under Article 37 of the Enterprise Income Tax Law, the competent tax authority of the place where the withholding agent is located shall order the withholding obligator to make up for the withholding of tax in accordance with Article 23 of the Administrative Punishment Law of the People’s Republic of China and hold the withholding agent liable in accordance with the law; if recovery of tax payment from the taxpayer is necessary, the competent tax authority of the place where the income occurs shall implement the recovery in accordance with the law. If the place where the withholding obligator is located is different from the place where the income occurs, the competent tax authority of the place of occurrence of the income that is responsible for recovering the tax payment shall give notice to the competent tax authority of the place where the withholding obligator is located for verifying relevant information. The competent tax authority of the place where the withholding agent is located shall, within 5 working days from the date.

Value-Added Tax and Business Tax

Pursuant to applicable PRC tax regulations, any entity or individual conducting business in the service industry was generally required to pay a business tax at the rate of 5% on the revenues generated from providing such services. However, if the services provided are related to technology development and transfer, such business tax may be exempted subject to approval by the relevant tax authorities. Whereas, pursuant to the Provisional Regulations on PRC Value-Added Tax and its implementation regulations, unless otherwise specified by relevant laws and regulations, any entity or individual engaged in the sales of goods, provision of processing, repairs and replacement services and importation of goods into China is generally required to pay a value-added tax, or VAT, for revenues generated from sales of products, while qualified input VAT paid on taxable purchase can be offset against such output VAT.

In November 2011, the Ministry of Finance and the State Administration of Taxation promulgated the Pilot Plan for Imposition of Value-Added Tax to Replace Business Tax. In March 2016, the Ministry of Finance and the State Administration of Taxation further promulgated the Notice on Fully Promoting the Pilot Plan for Replacing Business Tax by Value-Added Tax, which became effective on May 1, 2016 and was subsequently amended on July 11, 2017 and March 20, 2019. Pursuant to the pilot plan and relevant notices, VAT is generally imposed in lieu of business tax in the modern service industries, including the value-added telecommunications services, on a nationwide basis. VAT of a rate of 6% applies to revenue derived from the provision of some modern services. Unlike business tax, a taxpayer is allowed to offset the qualified input VAT paid on taxable purchases against the output VAT chargeable on the modern services provided.

Regulations Related to Anti-Monopoly and Unfair Competition

The Anti-Monopoly Law of PRC promulgated by the SCNPC on August 30, 2007, which became effective on August 1, 2008, and the Interim Provisions on the Review of Concentrations of Undertakings promulgated by the SAMR on October 23, 2020, which became effective on December 1, 2020, require that transactions which are deemed concentrations and involve parties with specified turnover thresholds must be cleared by the SAMR before they can be completed. On October 23, 2021, the SCNPC published the draft amended Anti-Monopoly Law of PRC for public comment, or the Draft Amended Anti-Monopoly Law, which provides that, among others, business operators should not exclude or limit competition by abusing data, algorithms, technology, capital advantages and platform rules. The Draft Revised Anti-Monopoly Law also requires relevant government authorities to strengthen the examination of concentration of undertakings in areas such as finance, media, science and technology. On February 7, 2021, the Anti-Monopoly Guidelines for Internet Platforms was promulgated by the Antimonopoly Commission of the PRC State Council which specifies certain activities of internet platforms should be identified as monopolistic and concentrations of undertakings involving contractual control structure are subject to anti-monopoly scrutiny as well.

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According to the Law of the People’s Republic of China against Unfair Competition, or the Anti-Unfair Competition Law promulgated by the SCNPC on September 2, 1993 and latest amended on April 23, 2019, operators should not undermine their competitors by engaging in improper activities, including but not limited to, taking advantage of powers or influence to affect a transaction, market confusion, commercial bribery, misleading false publicity, infringement of trade secrets, illegitimate premium sale and commercial libel. Any operators who violate the Anti-Unfair Competition Law by engaging in the foregoing unfair competitive activities will be ordered to cease such illegal activities, eliminate the influence of such activities or compensate for the damages caused to any party. The competent supervision and inspection authorities may also confiscate the illegal gains or impose fines on such operators. On April 2021, the State Administration for Market Regulation, or the SAMR, together with certain other PRC government authorities convened an administrative guidance meeting, focusing on unfair competition acts in community group buying, self-inspection and rectification by major internet companies of possible violations of anti-monopoly, anti-unfair competition, tax and other related laws and regulations, and requesting such companies to comply with relevant laws and regulations strictly and be subject to public supervision. In addition, many internet companies, including over 30 companies which attended such administrative guidance meeting, are required to conduct a comprehensive self-inspection and make necessary rectification accordingly. The SAMR stated that it will organize and conduct inspections on the companies’ rectification results. If a company is found to conduct illegal activities, more severe penalties are expected to be imposed in accordance with the laws. On August 17, 2021, the SAMR issued the Provisions on Preventing Unfair Online Competition (Draft for Comments), which detailed the implementation of the PRC Unfair Competition Law, including specifying certain online unfair competition behaviors that should be prohibited. As of the date of this annual report, the provisions have not been formally adopted, and due to the lack of further clarification, there are still uncertainties regarding the interpretation and implementation of the provisions.

Regulations Related to M&A and Overseas Listings

On August 8, 2006, six PRC regulatory agencies, including the Ministry of Commerce, the State-owned Assets Supervision and Administration Commission, the SAT, the SAIC, the CSRC, and SAFE, jointly issued the M&A Rules, which became effective on September 8, 2006 and was amended on June 22, 2009. The M&A Rules, among other things, require that (i) PRC entities or individuals obtain the Ministry of Commerce approval before they establish or control an SPV overseas, provided that they intend to use the SPV to acquire their equity interests in a PRC company at the consideration of newly issued share of the SPV, or Share Swap, and list their equity interests in the PRC company overseas by listing the SPV in an overseas market; (ii) the SPV obtains the Ministry of Commerce’s approval before it acquires the equity interests held by the PRC entities or PRC individual in the PRC company by Share Swap; and (iii) the SPV obtains CSRC approval before it lists overseas.

The Anti-Monopoly Law promulgated by the SCNPC on August 30, 2007 and effective on August 1, 2008 requires that transactions which are deemed concentrations and involve parties with specified turnover thresholds must be cleared by the governmental authorities before they can be completed. In addition, on February 3, 2011, the General Office of the State Council promulgated a Notice on Establishing the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or Circular 6, which officially established a security review system for mergers and acquisitions of domestic enterprises by foreign investors. Further, on August 25, 2011, the Ministry of Commerce promulgated the Regulations on Implementation of Security Review System for the Merger and Acquisition of Domestic Enterprises by Foreign Investors, or the Ministry of Commerce Security Review Regulations, which became effective on September 1, 2011, to implement Circular 6. Under Circular 6, a security review is required for mergers and acquisitions by foreign investors having “national defense and security” concerns and mergers and acquisitions by which foreign investors may acquire the “de facto control” of domestic enterprises with “national security” concerns. Under the Ministry of Commerce Security Review Regulations, the Ministry of Commerce will focus on the substance and actual impact of the transaction when deciding whether a specific merger or acquisition is subject to security review. If the Ministry of Commerce decides that a specific merger or acquisition is subject to security review, it will submit it to the Inter-Ministerial Panel, an authority established under the Circular 6 led by the NDRC, and the Ministry of Commerce under the leadership of the State Council, to carry out the security review. The regulations prohibit foreign investors from bypassing the security review by structuring transactions through trusts, indirect investments, leases, loans, control through contractual arrangements or offshore transactions. The Foreign Investment Law, promulgated by the SCNPC on March 15, 2019 and effective from January 1, 2020, reiterates that China establishes a foreign investment security review system to conduct a security review of foreign investment that impacts or may impact the national security. Further, on December 19, 2020, the NDRC and the Ministry of Commerce promulgated the Measures for Security Review of Foreign Investment, or the Foreign Investment Security Review Measures, which took effect on January 18, 2021. Under the Foreign Investment Security Review Measures, foreign investment in certain key areas, including products and services of key information technology and internet, that results in acquiring the actual control of the investee, is required to obtain approval from designated governmental authorities in advance.

On July 6, 2021, the relevant PRC government authorities issued Opinions on Strictly Cracking Down Illegal Securities Activities in Accordance with the Law, or the Opinions on Security Activities, which calls for 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.

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On December 24, 2021, the State Council issued a draft Regulations of the State Council on the Administration of Overseas Issuance and Listing of Securities by Domestic Companies (Draft for Comments), or the Draft Provisions, and the CSRC issued a draft Measures for the Record-Filing of Overseas Securities Offering and Listing by Domestic Companies (Draft for Comments), for public comments. Pursuant to these drafts, PRC domestic companies that seek to directly or indirectly offer and list their securities, including overseas, should file with the CSRC certain required documents. Among the other things, “directly overseas offering and listing by PRC domestic companies” are defined as overseas offering and listing of the securities of PRC companies limited by shares, and “indirectly overseas offering and listing by PRC domestic companies” are defined as overseas offering and listing of the securities of offshore-incorporated companies whose main business operations are in mainland China, based on their onshore equity, assets or similar interests. Specifically, the examination and determination of an indirect offering and listing will be conducted on a substance-over-form basis, and an offering and listing shall be considered as an indirect overseas offering and listing by a domestic company if the issuer meets the following conditions: (i) the operating income, gross profit, total assets, or net assets of the domestic enterprise in the most recent fiscal year was more than 50% of the relevant line item in the issuer’s audited consolidated financial statement for that year; and (ii) senior management personnel responsible for business operations and management are mostly PRC citizens or are ordinarily resident in the PRC, and the main place of business is in the PRC or carried out in the PRC. According to the Draft Administration Measures, the issuer or its affiliated domestic company, as the case may be, should file with the CSRC for its initial public offering,

follow-on

offering within three business days after completion of the

follow-on

offering. Besides, direct or indirect overseas listing of assets of PRC domestic companies by merger and acquisition, share swap, allocation, or other arrangements through one of a series of transactions are also subject to filing with the CSRC. Failure to comply with the filing requirements may result in fines to the relevant domestic companies, suspension of their businesses, revocation of their business licenses and operation permits and fines on the controlling shareholder and other responsible persons. The Draft Administration Measures also sets forth certain regulatory red lines for overseas offerings and listings by domestic enterprises.

follow-on

mutatis mutandis

On April 2, 2022, the CSRC published the amended version of the Provisions on Strengthening the Confidentiality and Archives Administration Related to Overseas Issuance and Listing of Securities (Draft for Comments), or the Draft Amended Provisions on Confidentiality. According to the Draft Amended Provisions on Confidentiality, (i) domestic companies directly or indirectly listed overseas should obtain the approvals from the competent governmental authorities and file with secret administration authorities in advance, if such domestic companies intend to provide or disclose documents or files involving state secrets or government authorities’ secrets to securities companies, securities service providers or offshore regulators, and (ii) such domestic companies must comply with relevant rules and regulations and follow the applicable procedures in case of providing or disclosing documents or files, which may cause negative impacts to national interests or public interests in case of leakage, to securities companies, securities service providers or offshore regulators. Furthermore, the Draft Amended Provisions on Confidentiality provides that the oversea securities regulatory authorities and relevant competent authorities that intend to conduct investigations or inspections on domestic companies in relation to their overseas securities issuance and listing-related activities, will be subject to the cross-border regulatory cooperation mechanism, and the domestic companies involved should file reports to CSRC or competent authorities in advance before cooperating with such investigations or inspections. As of the date of this annual report, the Draft Amended Provisions on Confidentiality was released for public comment only. There are substantial uncertainties as to whether the Draft Amended Provisions on Confidentiality would further amended, revised or updated.

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C.	Organizational Structure

The chart below summarizes our corporate legal structure and identifies our significant subsidiaries and other entities that are material to our business as of the date of this annual report:

Notes:

(1)	As of the date of this annual report, Dr. Yi Wang, Mr. Zheren Hu and Dr. Hui Lin collectively hold a majority of the equity interests in Shanghai Liulishuo and Shanghai Mengfan, respectively.

(2)	As of the date of this annual report, Dr. Yi Wang, Mr. Zheren Hu and Dr. Hui Lin collectively hold all of the equity interests in Mengfan Education.

Contractual Arrangements with the VIEs and Their Respective Shareholders

The following is a summary of the currently effective contractual arrangements by and among our wholly-owned subsidiary, Yuguan (our WFOE), the VIEs and their respective shareholders. Terms contained in each set of contractual arrangements with the VIEs and their respective shareholders are substantially similar. These contractual arrangements enable us to (i) exercise effective control over the VIEs; (ii) receive substantially all of the economic benefits of the VIEs; and (iii) have an exclusive call option to purchase all or part of the equity interests in and assets of the VIEs when and to the extent permitted by PRC law.

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Proxy Agreements

Pursuant to the proxy agreements among Yuguan, the VIEs and their respective shareholders, each shareholder of the VIEs irrevocably undertakes to appoint a PRC citizen designated by Yuguan as his/its

attorney-in-fact

to exercise all of his/its rights as a shareholder of the VIEs, including, but not limited to, the right to convene and attend shareholders’ meeting, vote on any resolution that requires a shareholder vote, such as appoint or remove directors and other senior management, other voting rights pursuant to the then-effective articles of association (subject to the amendments) of the VIEs, and execute relevant equity transfer agreements and other instruments and obtain necessary governmental approval, registration or filing on behalf of the shareholders when the equity interests held by such shareholders are transferred pursuant to the exclusive call option agreements. Each proxy agreement has an initial term of 30 years and shall be automatically renewed unless otherwise notified by our WFOE.

Equity Pledge Agreements.

Pursuant to the equity pledge agreements among Yuguan, the VIEs and their respective shareholders, shareholders of the VIEs shall pledge all of their respective equity interests in the VIEs to Yuguan to guarantee their and the VIEs’ performance of their and the VIEs’ obligations under the exclusive technology service agreements, the proxy agreements, the exclusive call option agreements, the equity pledge agreements and the loan agreement in relation to Mengfan Education. As of the date of this annual report, we have registered the equity pledges for Shanghai Liulishuo, Shanghai Mengfan and Mengfan Education with the local branch of the SAMR in accordance with PRC laws to perfect their respective equity pledges. After the completion of the equity pledge registrations, in the event of a breach by the VIEs or their shareholders of contractual obligations under these agreements, Yuguan, as pledgee, will have the right to dispose of the pledged equity interests in the VIEs. The shareholders of the VIEs also undertake that, during the term of the equity pledge agreement, unless otherwise approved by Yuguan in writing, they will not transfer the pledged equity interests or create or allow any new pledge or other encumbrance on the pledged equity interests.

Spousal Consent Letters.

Pursuant to the spousal consent letters, each of the spouses of the individual shareholders of the VIEs unconditionally and irrevocably agrees that the equity interests in the VIEs held by and registered in the name of her respective spouse will be disposed of pursuant to the relevant equity pledge agreement, the exclusive call option agreement and the proxy agreement, without her consent. In addition, each of them agrees not to assert any rights over the equity interests in the VIEs held by her respective spouse. In addition, in the event that any of them obtains any equity interests in the VIEs held by her respective spouse for any reason, such spouse agrees to be bound by similar obligations and agreed to enter into similar contractual arrangements.

Exclusive Technology Service Agreements.

Pursuant to the exclusive technology service agreements between Yuguan and the VIEs, respectively, Yuguan has the exclusive right to provide to the VIEs services related to, among other things, technology, internet support, operation consulting, intellectual property licensing and product development. Yuguan has the exclusive ownership of intellectual property rights created as a result of the performance of this agreement. Each of the VIEs agrees to pay Yuguan a service fee every year, at an amount reasonably determined by Yuguan considering relevant VIE’s revenue and other circumstances. This agreement will remain effective for an initial

30-year

term and will be renewed automatically except that Yuguan is entitled to terminate the agreement upon the expiration of such

30-year

term as long as a

30-day

prior written termination notice is provided to the VIEs.

Exclusive Call Option Agreements.

Pursuant to the exclusive call option agreements among Yuguan, the VIEs and their respective shareholders, the shareholders of the VIEs irrevocably grant Yuguan an exclusive option to purchase, or have its designated person to purchase, at its discretion, to the extent permitted under PRC law, all or part of their equity interests and/or assets in the VIEs, and the purchase price shall be the higher of capital contribution amount for their equity interests or net book value of such assets, as the case may be, or the lowest price permitted by applicable PRC law. The shareholders further undertake to pay to Yuguan any purchase price or other distributions they receive in relation to the equity interests they held in the VIEs, to the extent permitted by PRC law. The shareholders of the VIEs undertake that, without prior written consent of Yuguan, they will not create any pledge or encumbrance on their equity interests in the VIEs, approve any transfer or in any manner disposal of their equity interests, dispose of or cause our company management to dispose of any material assets (other than those occurring in the ordinary course of business). The shareholders of each of the VIEs agree, among other things, without prior written consent of Yuguan, not to cause the relevant VIE to merge with any other entities, increase or decrease its registered capital, declare or distribute dividends, amend its articles of association, terminate any material contract or enter into any other contract which is in conflict with any existing material contract, appoint or remove its directors, supervisors or other management, be terminated, liquidated or dissolved, lend or borrow money or provide guarantee, or undertake any substantial obligation other than those occurred during the ordinary course of business. This agreement will remain effective till all of the equity interests and other assets of the relevant VIE have been transferred to Yuguan and/or its designated person.

Loan Agreement.

The equity interests holders of Mengfan Education and Yuguan also entered into a loan agreement. Pursuant to the loan agreement, Yuguan has agreed to extend an interest-free loan in an aggregate amount of RMB1.0 million to the shareholders of Mengfan Education solely for the capitalization of Mengfan Education. Pursuant to the loan agreements, Yuguan has the right to require repayment of the loans upon delivery of

thirty-day’s

prior notice to the shareholders, and the shareholders shall repay the loans by sale of their equity interests in Mengfan Education to Yuguan or its designated person(s) if required by Yuguan, or other methods as determined by the board of Yuguan.

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In the opinions of Fangda Partners, our PRC legal counsel:

•

the ownership structures of Yuguan and the VIEs do not violate applicable PRC laws or regulations currently in effect; and

•

the contractual arrangements among Yuguan, the VIEs and their respective shareholders governed by PRC law are valid and binding.

However, we have been further advised by our PRC legal counsel that there are substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations and rules. Accordingly, the PRC regulatory authorities may in the future take a view that is contrary to or otherwise different from the above opinions of our PRC legal counsel. Especially, on July 24, 2021, the General Office of the CPC Central Committee and the General Office of the State Council issued the Double Alleviating Opinions, which prohibits foreign investors from investing into after-school tutoring institutions providing tutoring service related to academic subjects in compulsory education stage, including through variable interest entity structure. Despite that rules and regulations have been promulgated in connection with the scope of academic subjects in compulsory education stage, it remains to be ambiguous, and subject to relevant governmental authorities’ discretion, as to whether the products and services we offer fall into the scope of academic subjects of compulsory education stage. Based on our consultation with relevant governmental authorities, we ceased the operation of the “Kids Liulishuo” mobile app in January 2022, and believe that the remaining products and services we currently offer do not constitute “tutoring service related to academic subjects of compulsory education stage” and thus not subject to the above restrictions. However, there can be no assurance that we will not be subject to penalties for historical violation, or the interpretation and implementation of relevant governmental authorities will not change in the future. If the PRC government finds that the agreements that establish the structure for operating our education business do not comply with PRC government restrictions on foreign investment in our businesses, we could be subject to severe penalties including being prohibited from continuing operations. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Corporate Structure—We rely on contractual arrangements with the VIEs and their respective shareholders to exercise control over a significant part of our business, which may not be as effective as direct ownership in providing operational control.” And “Item 3. Key Information—D. Risk Factors—Risks Relating to Doing Business in China—Our failure to obtain, maintain or renew other licenses, approvals, permits, registrations or filings necessary to conduct our operations in China could have a material adverse impact on our business, financial conditions and results of operations.”

D.	Property, Plant and Equipment

Our headquarters is located in Shanghai, where we lease and occupy office space with an aggregate floor area of approximately 9,000 square meters. A substantial majority of our employees are based at our headquarters in Shanghai. We also lease and occupy office space located in Beijing and Hangzhou of China with insignificant floor area. For operational efficiency purpose, in the year ended December 31, 2021 and up to the date of this annual report, we terminated several long-term leases before the end of their terms with respect to an aggregate floor are of approximately 9,400 square meters of our office space at our headquarters.

ITEM 4A.

UNRESOLVED STAFF COMMENTS

None.

ITEM 5.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

You should read the following discussion together with our consolidated financial statements and the related notes included elsewhere in this annual report on Form

20-F.

This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those we currently anticipate as a result of various factors, include those we describe under “Item 3. Key Information

—

D. Risk Factors” and elsewhere in this annual report on Form

20-F.

See “Forward-Looking Statements.”

A.	Operating Results

We incurred net losses of RMB574.8 million in 2019, RMB394.8 million in 2020 and generated net income of RMB59.9 million (US$9.4 million) in 2021. We turned profit for the first time since our inception in 2021, despite China’s current market condition in the online education sector. We generate our revenue primarily from providing English learning services. Our revenues were RMB1,023.2 million in 2019, RMB972.6 million in 2020 and RMB684.9 million (US$107.5 million) in 2021.

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In 2021, our gross profit margin increased to 79.5% from 71.5% in 2020. Compared with a net loss of RMB574.8 million in 2019 and RMB394.8 million in 2020, we experienced a substantial improvement and turned into a net income in 2021 for the first time since our inception, amounting to RMB59.9 million (US$9.4 million), primarily due to (i) the improvement to our sales and marketing efficiency, and (ii) the effectiveness of a series of cost control measures that we implemented to enhance our profitability. In particular, we improved our sales and marketing efficiency by increasing our

return-on-investment

(ROI, calculated by dividing an estimate of the average gross billings that a paying user will generate throughout his/her lifespan by our user acquisition cost) of our adult English business from 120% in 2020 to 210% in 2021. As for cost control measures, we started reducing our headcount and office space in the fourth quarter of 2021, which contributed to the decrease in the monthly expenditures of general and administrative expenses on salary and welfare by RMB8.0 million and rental expenses by RMB2.0 million since October 2021.

In 2021, due to the impact of the Double Alleviating Opinion to the overall education industry, our monetization capabilities were negatively affected as we had to cease our product and service offerings, originally designed for kids, that might fall into the scope of restrictions imposed by the Double Alleviating Opinion. As a result, our revenues from such business were adversely affected. Nevertheless, the positive effects provided by new initiatives led by our overseas expansion and B2G business, our sales and marketing efficiency improvement and cost control measures effectively mitigated the adverse effect of the Double Alleviating Opinions to our overall results of operations.

Going forward, we plan to further improve our gross margin and maintain a sustainable growth strategy. We believe that the effective measures that we have been taking will further contribute to the improvement in our bottom line performance in 2022.

Key Factors Affecting Our Results of Operations

Our results of operations and financial condition are affected by the general factors driving China’s adult private education industry. We have benefited from the rapid economic growth, significant urbanization, and higher per capita disposable income of urban households in China, which has allowed many adults in China to spend more disposable income on education, a category of great importance given the considerable value Chinese culture traditionally places on education. We anticipate that there are vast potentials and opportunities in the adult education market. We have also benefited from the increasing mobile internet penetration in China. In light of the evolving regulatory regime applicable to the education industry and the impact of the Double Alleviating Opinions, we also implemented several transition initiatives. While our business is influenced by factors affecting the adult private education industry in China generally, we believe that our results of operations are more directly affected by company-specific factors, including the following factors.

Market acceptance of

AI-powered

educational products and services

Our products and services are primarily

AI-driven,

with AI technologies built into the core of our courses, transforming the traditional approach to education. We operate our courses and services on the mobile platform, whereas it is customary in the education industry to have

in-person

teaching in physical classrooms. The market recognition and acceptance of the concept of learning on a mobile app and from an AI teacher affects the growth of our business and revenues. Our ability to educate and show existing and potential users the value and the effectiveness of our innovative approach is and will continue to be crucial for our business growth, financial performance and prospects. Our success in competing against other education services, including English learning services and mobile-enabled education services, is primarily dependent on our ability to improve users’ learning efficiency and effectiveness, provide quality learning content and promote our brand and products and services.

Our ability to grow net revenues and gross billings

We currently derive substantially all of our net revenues from fees that we charge our users for providing online English learning services. In addition to net revenues, we consider gross billings an important indicator of the health of our business as it measures cash received from providing online English learning services, net of cash refunds paid to users. Through gross billings, we can better understand and evaluate our business performance and gain visibility of future revenues. Our net revenues and gross billings are driven by the number of our paying users and the average revenues per paying user. The growth of our paying user base is driven primarily by the growth of the number of active users and our ability to convert a greater portion of our active users into paying users. Our average revenue per paying user is primarily affected by the pricing of our courses and services and our revenue mix.

We analyze the following financial and operating metrics to evaluate our business results and operating performance, and make business plans and strategic decisions.

2019

2020

2021

Gross billings

RMB1,294.3 million

RMB1,087.1 million

RMB533.7 million

Net revenues

RMB1,023.2 million

RMB972.6 million

RMB684.9 million

Paying users for our domestic English learning business

3.0 million

2.4 million

1.1 million

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We plan to diversify our monetization capabilities by implementing our growth strategy and further developing our new initiatives. Built upon the accomplishments that we achieved in the language learning platform, we will continue to leverage our basic AI capabilities and diversify their application scenarios, aiming to equip our users with knowledge and techniques to help them improve communication with the society, not only in language aspect but also in vocational, cross-cultural aspects and beyond. We will further penetrate into the overseas markets to offer a variety of customized language courses not only for English learning and deepen our collaboration with local governments and schools in China to support their digitalization in the field of public services and develop our B2G business.

Our ability to manage our cost of revenues

Our ability to manage cost of revenues directly affects our profitability. We had cost of revenues of RMB273.5 million, RMB277.2 million and RMB140.4 million (US$22.0 million) in 2019, 2020 and 2021, respectively. Our cost of revenues mainly consist of IT service cost, salaries and benefits for content development employees and content-related cost. We expect to continue to optimize our spending on IT service cost, streamline our staffing and improve our productivity and efficiency, aiming to maintain or gradually reduce our cost as a percentage of our revenues.

Our ability to improve sales and marketing efficiency

Sales and marketing is critical to our business as we need to educate the market about the benefits of our

AI-powered

learning products and services as well as grow our user base. We had sales and marketing expenses of RMB969.4 million, RMB801.4 million and RMB325.0 million (US$51.0 million) in 2019, 2020 and 2021, respectively. Our sales and marketing expenses have become a significant majority of our total operating expenses. Our ability to lower such expenses as a percentage of net revenues depends on our ability to improve sales and marketing efficiency, such as acquiring users in a cost-effective manner, automating certain tasks performed by OSAs, and leveraging existing brand value and

word-of-mouth

promotions. We expect our sales and marketing expenses as a percentage of our revenues to gradually decrease as we continue to enhance our brand image and grow our user base, reduce our user acquisition costs through diversifying our means of user acquisition, and increase the productivity of our OSAs through more effective and optimized management.

Our ability to develop and leverage our AI capabilities in a cost-effective manner

We have developed proprietary AI technologies and built a team of AI experts. Our ability to leverage our AI capabilities to develop and enhance our products and services in a cost-effective manner affects our revenues and results of operations. Our research and development expenses were RMB213.9 million, RMB190.7 million and RMB105.1 million (US$16.5 million) in 2019, 2020 and 2021, respectively. Since AI technologies serve as the cornerstone of our business, we continue to enhance the adaptability and portability of our fundamental AI capabilities to empower us to integrate our AI technologies with different application scenarios. As we are implementing a more sustainable growth strategy, we will dynamically manage our research and development expenses based on the overall research and development progress. For example, the relatively low research and development expenses in 2021 was primarily because the underlying projects have not reached the stage where comprehensive research and development resources and capital need to be devoted. Nevertheless, we are still dedicated to research and development as we are a scientific and technological company viewing technological advancement as our value proposition, and it is expected that our research and development expenses will grow gradually in line with the development of our new business.

Regulatory environment in China

Our results of operations are further affected by the changes in existing laws, regulations and policies and the issuance of new laws, regulations, policies and standards in China applicable to us, such as the Double Alleviating Opinions. See “Item 4. Information on the Company—B. Business Overview—Regulations—Regulation Related to Private Education—Regulation Related to After-school Tutoring” for more details.

Due to China’s more stringent regulation applicable to our business operations, we had to adjust or transform our business operations. As a result, we ceased the operation of our mobile app “Kids Liulishuo” from January 2022, which may have an adverse impact on our business, results of operations and financial condition. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business—We may not be able to successfully diversify our revenue streams” and “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business—Substantial uncertainties exist with respect to the interpretation and implementation of the PRC Foreign Investment Law and Double Alleviating Opinions and how they may impact the viability of our current corporate structure, corporate governance and business operations” In light of the evolving regulatory regime, we also implemented several transition initiatives. See “Item 4. Information on the Company—B. Business Overview—New Initiatives” for details. All of our efforts to adjust or transform our business, and/or failure to fully comply with the regulatory requirements will have a material impact to our business, prospects, results of operations and financial condition.

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Impact of

COVID-19

on Our Operations

In response to the initial spread of

COVID-19,

the Chinese government has taken a number of actions, which included compulsory quarantine arrangement, travel restrictions, remote work arrangement and public activities restrictions, among others.

COVID-19

also resulted in temporary closure of many corporate offices, retail stores, manufacturing facilities and factories across China and around the world from time to time. Although China had substantially controlled the spread of

COVID-19

in 2021, there has been an increasing number of

COVID-19

cases in early 2022, including the

COVID-19

Delta and Omicron variant cases, in various cities in China, and the Chinese local authorities have reinstated certain measures to keep

COVID-19

in check, including travel restrictions and

stay-at-home

orders. In addition, the highly-transmissible variant of

COVID-19

has caused authorities in various countries to reimpose restrictions such as mask mandates, curfews and prohibitions on large gatherings.

We have taken measures to reduce the impact of the

COVID-19

pandemic, including strictly implementing self-quarantine and disinfection measures at our headquarters in accordance with government-issued protocols. Other than that, we have not experienced material disruption or adverse impact caused by

COVID-19

to our business, results of operation or financial condition. Substantial uncertainties remain whether our results of operations and financial condition may be affected by the spread of

COVID-19,

and the extent to which

COVID-19

impacts our results of operations will depend on the future developments of the pandemic which are highly uncertain.

Key Components of Results of Operations

Net revenues

Our revenues are generated from providing online English learning services, both in the domestic market and the overseas market. We primarily offer two types of course packages, namely prepaid standard courses and prepaid multiple course packages. Prepaid standard courses, such as DongNi English, DongNi English A+ and Kids Course, allow users to purchase courses to be consumed over a certain period of time. Our DongNi Select premium services are provided in the form of prepaid multiple course packages, including prepaid standard courses, and course credits for online streaming courses with contracted human teachers. Such packages allow users to purchase multiple courses for use before a certain expiration date. Our paying users purchase the services by subscribing to our course packages directly from our platform or through online commerce platform partners. Subscription fees are generally paid in advance, initially recorded as deferred revenues and recognized as revenues when revenue recognition criteria are met. In 2019, 2020 and 2021, we generated net revenues of RMB1,023.2 million, RMB972.6 million and RMB684.9 million (US$107.5 million), respectively. As of December 31, 2019, 2020 and 2021, we had RMB696.0 million, RMB746.2 million and RMB559.0 million (US$87.7 million) of deferred revenues and long-term deferred revenue, respectively.

Due to the Double Alleviating Opinion, we ceased to offering Kids Course starting from January 1, 2022. As required by the Double Alleviating Opinion, all relevant business has to be operated by a private

non-profit

institution. We have granted Yangpu Liuli, a private

non-profit

Cost of revenues

Our cost of revenues primarily consist of expenditures incurred in the generation of our revenue, mainly consisting of IT service cost, salaries and benefits for content development employees, rental expenses and content-related cost. We had cost of revenues of RMB273.5 million, RMB277.2 million and RMB140.4 million (US$22.0 million) in 2019, 2020 and 2021, respectively.

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Operating expenses

The following table sets forth the components of our operating expenses by amounts and percentages of net revenues for the periods presented:


	Year Ended December 31,
	2019						2020						2021
	RMB			%			RMB			%			RMB			US$			%

	(in thousands, except for percentages)
Operating expenses:
Sales and marketing expenses		(969,401	)		(94.7	)		(801,362	)		(82.4	)		(325,007	)		(51,001	)		(47.5	)
Research and development expenses		(213,866	)		(20.9	)		(190,711	)		(19.6	)		(105,066	)		(16,487	)		(15.3	)
General and administrative expenses		(153,507	)		(15.0	)		(111,004	)		(11.4	)		(84,154	)		(13,206	)		(12.3	)

Total operating expenses		(1,336,774	)		(130.6	)		(1,103,077	)		(113.4	)		(514,227	)		(80,694	)		(75.1	)

We implemented a series of cost control measures to enhance our profitability. Especially, we started reducing our headcount and office space in the fourth quarter of 2021, which contributed to the decrease in the monthly expenditures of general and administrative expenses on salary and welfare by RMB8.0 million and rental expenses by RMB2.0 million since October 2021.

Our sales and marketing expenses consist primarily of (i) branding and marketing expenses, (ii) salaries and benefits for sales and marketing personnel including OSAs, (iii) commissions to online commerce platform partners for operations of our

e-stores

on their platforms and commissions to distribution channels (app stores), (iv) payment processing expenses, (v) rewards to users related to our user incentive programs and (vi) rental expenses associated with sales and marketing personnel. We had sales and marketing expenses of RMB969.4 million, RMB801.4 million and RMB325.0 million (US$51.0 million) in 2019, 2020 and 2021, respectively. We expect our sales and marketing expenses as a percentage of our revenues to gradually decrease as we continue to enhance our brand image and grow our user base, reduce our user acquisition costs through diversifying our means of user acquisition, and increase the productivity of our OSAs through more effective and optimized management.

Our research and development expenses consist primarily of (i) salaries and benefits for research and development personnel, (ii) rental expenses associated with research and development personnel and (iii) depreciation of office premise and servers utilized by research and development personnel. Our research and development expenses were RMB213.9 million, RMB190.7 million and RMB105.1 million (US$16.5 million) in 2019, 2020 and 2021, respectively. Since AI technologies serve as the cornerstone of our business, we continue to enhance the adaptability and portability of our fundamental AI capabilities to empower us to integrate our AI technologies with different application scenarios. As we are implementing a more sustainable growth strategy, we will dynamically manage our research and development expenses based on the overall research and development progress. For example, the relatively low proportion of our research and development expenses in 2021 was primarily because the underlying projects have not reached the stage where comprehensive research and development resources and capital need to be devoted. Nevertheless, we are still dedicated to research and development as we are a scientific and technological company viewing technological advancement as our value proposition, and it is expected that our research and development expenses will grow gradually in line with the development of our new business.

Our general and administrative expenses consist primarily of (i) salaries and benefits for general and administrative personnel, (ii) rental expenses associated with general and administrative personnel, (iii) general office expenses and (iv) professional service fees. Our general and administrative expenses were RMB153.5 million, RMB111.0 million and RMB84.2 million (US$13.2 million) in 2019, 2020 and 2021, respectively. We expect our general and administrative expenses as a percentage to our revenues to gradually decrease as we continue to improve the efficiency of our operational management.

Taxation

We are subject to various rates of income tax under different jurisdictions. The following summarizes major factors affecting our applicable tax rates in the Cayman Islands, Hong Kong, the United States and the PRC.

Cayman Islands

According to Maples and Calder (Hong Kong) LLP, our Cayman Islands counsel, 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 likely to be material to us levied by the government of the Cayman Islands except for stamp duties which may be applicable on instruments executed in, or after execution, brought within the jurisdiction of the Cayman Islands. In addition, the Cayman Islands does not impose withholding tax on dividend payments.

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Hong Kong

Our subsidiary in Hong Kong is subject to Hong Kong profits tax rate of 16.5% on its estimated assessable profit for its activities conducted in Hong Kong. Dividends income received from subsidiaries in China are not subject to Hong Kong profits tax.

United States

Our subsidiary incorporated in Delaware, LingoChamp US Inc., is subject to U.S. corporate income tax on its taxable income at a rate of up to 21% for taxable years beginning after December 31, 2017 and U.S. corporate income tax on its taxable income of up to 35% for prior tax years.

PRC

Generally, our PRC subsidiaries and VIEs are subject to enterprise income tax on their taxable income at a statutory rate of 25% in China. The enterprise income tax is calculated based on the entity’s global income as determined under PRC tax laws and accounting standards. Yuguan and Shanghai Liulishuo each obtained its certificate of “High and New Technology Enterprises,” or HNTE, with a valid period of three years in 2017. Each is therefore eligible to enjoy a preferential tax rate of 15% from 2017 to 2019 to the extent it has taxable income under the PRC Enterprise Income Tax Law, as long as it maintains the HNTE qualification and duly conducts relevant enterprise income tax filing procedures with the relevant tax authority. Yuguan and Shanghai Liulishuo each renewed its HNTE qualification in 2020 with a valid period of three years from 2020 to 2022. Certain PRC subsidiary and VIE are entitled to a preferential tax treatment as a “Small-scaled Enterprise” and thus enjoy a reduced tax rate of 20% on 50% of its taxable income in 2017. In 2018 and 2019, such subsidiary and VIE did not meet the standards of “Small-scaled Enterprise” and were subject to tax rate of 25% of its taxable income. In 2021, certain PRC subsidiary and VIEs of our company are entitled to a preferential tax treatment as a “Small and Thin Profit Enterprise” and enjoyed a reduced tax rate of 20% on 12.5% or 50% of its taxable income, as appropriate, in 2021.

We are subject to value-added tax at a rate of 6%, less any deductible value-added tax we have already paid or borne. We are also subject to surcharges on value-added tax payments in accordance with PRC law. Besides, certain PRC subsidiaries and VIEs of our company are small-scale taxpayers, which are subject to 3% VAT rate without deductible VAT in 2021.

Dividends paid by our wholly foreign-owned subsidiaries in China to our intermediary holding company in Hong Kong will be subject to a withholding tax rate of 10%, unless the relevant Hong Kong entity satisfies all the requirements under the Arrangement between China and the Hong Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect to Taxes on Income and Capital and receives approval from the relevant tax authority. If our Hong Kong subsidiary satisfies all the requirements under the tax arrangement and receives approval from the relevant tax authority, then the dividends paid to the Hong Kong subsidiary would be subject to withholding tax at the standard rate of 5%. Effective from November 1, 2015, the above mentioned approval requirement has been abolished, but a Hong Kong entity is still required to file an application package with the relevant tax authority, and settle the overdue taxes if the preferential 5% tax rate is denied based on the subsequent review of the application package by the relevant tax authority. Effective from 1 January 2020, the non-resident taxpayers could enjoy tax treaty benefits via “self-assessment, claim for treaty benefits, documents preservation for reference” mechanism without pre-approval or record filling acknowledgement from the PRC tax authorities. The non-resident taxpayers or the dividend payer should well preserve the required supporting documents for the tax authorities’ future reference. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Corporate Structure—We may not be able to obtain certain benefits under the relevant tax arrangement for dividends paid by our PRC subsidiaries to us through our Hong Kong subsidiary.”

If our holding company in the Cayman Islands or any of our subsidiaries outside of China were deemed to be a “resident enterprise” under the PRC Enterprise Income Tax Law, it would be subject to enterprise income tax on its worldwide income at a rate of 25%. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Doing Business in China—If we are classified as a PRC resident enterprise for PRC income tax purposes or gains realized with respect to our ADSs or shares are deemed to be from PRC sources, we and our

non-PRC

shareholders or ADS holders could be subject to unfavorable tax consequences.”

Critical Accounting Policies and Management Estimates

An accounting policy is considered critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time such estimate is made, and if different accounting estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the consolidated financial statements.

We prepare our financial statements in conformity with U.S. GAAP, which requires us to make judgments, estimates and assumptions. We continually evaluate these estimates and assumptions based on the most recently available information, our own historical experience and various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from our expectations as a result of changes in our estimates. Some of our accounting policies require a higher degree of judgment than others in their application and require us to make significant accounting estimates.

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The following descriptions of critical accounting policies, judgments and estimates should be read in conjunction with our consolidated financial statements and accompanying notes and other disclosures included in this annual report. When reviewing our financial statements, you should consider (i) our selection of critical accounting policies, (ii) the judgments and other uncertainties affecting the application of such policies and (iii) the sensitivity of reported results to changes in conditions and assumptions.

Consolidation of VIEs

Our consolidated financial statements include the financial statements of LAIX Inc. (formerly known as LingoChamp Inc.), its subsidiaries and the VIEs. All profits, transactions and balances among the foregoing entities have been eliminated upon consolidation.

PRC laws and regulations restrict foreign ownership in value-added telecommunication services and other internet-related business. Due to these restrictions, we conduct substantially all of our operations in China through contractual arrangements among our WFOE, the VIEs and the shareholders of the VIEs. As a result of these contractual arrangements, the shareholders of the VIEs irrevocably granted our WFOE the power to exercise all voting rights to which they were entitled. In addition, our WFOE has the option to acquire all of the equity interests in the VIEs, to the extent permitted by then-effective PRC laws and regulations, for

pre-agreed

consideration, who shall in turn pay such consideration back to our WFOE. Finally, our WFOE is entitled to receive service fees for certain services to be provided to the VIEs in an amount at our WFOE’s discretion. We therefore concluded that we are the primary beneficiary of the VIEs. As such, we consolidate the results of operations of the VIEs in our consolidated financial statements.

Revenue recognition

We primarily offer two types of prepaid course packages, namely prepaid standard courses and prepaid multiple course packages. Our DongNi English standard courses, DongNi English A+ and Kids Course allow users to purchase courses to be consumed over a certain period of time. Our DongNi Select premium services are provided in the form of prepaid multiple course packages, including prepaid standard courses and course credits for online streaming courses with contracted human teachers. Such packages allow users to purchase multiple courses for their use before a certain expiration date. Our users purchase the courses by subscribing to them either directly from our platform or through our online commerce platform partners. Subscription fees are generally paid in advance and are initially recorded as deferred revenue.

For users who withdraw from contracts with us, we refund subscription fees corresponding to any remaining undelivered learning services. Withdrawals are recorded as reductions of the deferred revenue related to subscription fees received in advance and have no impact on recognized revenue.

We have assessed all variable considerations identified when determining the transaction price, taking into account the various forms that such variable considerations may take. We selectively offer performance-based or behavior-based refunds to incentivize our registered users to purchase prepaid course packages. The amount of refund is fixed and

pre-determined

which may be larger than the subscription fee. In the case that refund amount is larger than customer’s individual cumulative revenue basis, we recognize such negative revenue as selling expenses. We have two types of revenue models—the

non-refundable

course model and the refundable course model. Revenues for the

non-refundable

course model are recognized ratably over the contractual course period as services are provided. Under the refundable course model, a user is eligible to obtain a refund if the user achieves certain agreed performance goals or behavior goals, including completing a minimum number of learning hours within a set period of time, sharing a minimum number of courses on social media within the contractual course period, achieving various measures of learning efficiency and receiving a certain overall score for each course in the package. Based on our historical records of performance-based or behavior-based refunds, we estimate a refund rate that constitutes a reduction of the transaction price when recognizing revenues ratably as services are provided over the contractual course period we review and supervise the refund rate on a periodic basis. By adjusting the difficulty level of the exams in the packages, we are able to maintain a stable performance-based refund rate, which constitutes a reasonable and reliable basis for us to estimate and calculate the amount of the refund. When there are no sufficient historical records for our estimation on behavior-based funds rate, revenue will not be recognized until uncertainty associated with the variable considerations is resolved. Except for the aforementioned performance-based or behavior-based refunds to our customers, no other circumstance causes variability in the consideration promised in the online courses offered by us.

We recognize revenue on a gross basis as we meet the standard of a principal having control over the service or directing the service.

Prepaid standard courses

Prepaid standard courses range from 30 days to 1,080 days. A user can access the standard courses without limit within such user’s fixed contract period. Revenue is recognized on a straight-line basis over the contractual course period.

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Prepaid multiple course packages

Prepaid multiple course packages typically range from 180 days to 720 days. Each type of course is a separate unit of accounting, as each type has a distinct nature with different patterns and measurements of transfer to users.

We determine the standalone selling price for each type of course in the package and allocate the transaction price based on the relative value of each type of course in the arrangement, if applicable. The best evidence of standalone selling price is the price we charge for a certain type of course when we sell it separately under similar circumstances to similar users. For a type of course that is not being sold separately, we determine the value of each type based on its cost plus an expected margin.

For the standard courses included in prepaid multiple course packages, revenue is recognized on a straight-line basis over the contractual course period. For those online streaming courses, revenue is recognized when the course credit is consumed with estimates for breakage from unconsumed courses at contract expiration. The expected breakage amount is recognized as revenue in proportion to the pattern of course credits consumed by the customers based on actual breakage data we have accumulated. The expected breakage amount is updated on a periodic basis.

Other courses

We also provide other courses, such as Authentic Pronunciation and IELTS speaking practice tests. Revenues are recognized ratably over a fixed term of the agreement or an estimated viewership period as services are provided.

User Incentive Program

We have incentive programs for our registered users to enhance user stickiness and to incentivize users. We offer points to registered users who refer new users to our platform, or when they participate in various activities in our mobile app. Users can redeem the points for free gifts. The estimated incremental costs related to free gifts are recognized as sales and marketing expenses.

Results of Operations

The following table summarizes our consolidated results of operations and as percentages of our total revenues for the periods presented.


	Year Ended December 31,
	2019						2020						2021
	RMB			%			RMB			%			RMB			US$			%

	(in thousands, except for percentages)
Net revenues		1,023,213			100.0			972,628			100.0			684,928			107,480			100.0
Cost of revenues (1)		(273,515	)		(26.7	)		(277,240	)		(28.5	)		(140,439	)		(22,038	)		(20.5	)

Gross profit		749,698			73.3			695,388			71.5			544,489			85,442			79.5
Operating expenses:
Sales and marketing expenses (1)		(969,401	)		(94.7	)		(801,362	)		(82.4	)		(325,007	)		(51,001	)		(47.5	)
Research and development expenses (1)		(213,866	)		(20.9	)		(190,711	)		(19.6	)		(105,066	)		(16,487	)		(15.3	)
General and administrative expenses (1)`		(153,507	)		(15.0	)		(111,004	)		(11.4	)		(84,154	)		(13,206	)		(12.3	)

Total operating expenses		(1,336,774	)		(130.6	)		(1,103,077	)		(113.4	)		(514,227	)		(80,694	)		(75.1	)

Other operating income		2,390			0.2			43			0.0			14,206			2,229			2.1

Other income/(expenses):
Interest income/(expenses)		11,283			1.1			904			0.1			(3,790	)		(594	)		(0.6	)
Foreign exchange related (losses)/gains, net		(2,533	)		(0.2	)		4,671			0.5			(63	)		(10	)		(0.0	)
Other income, net		3,055			0.3			9,146			0.9			21,001			3,295			3.1
Net income/(loss) before tax		(572,881	)		(56.0	)		(392,925	)		(40.4	)		61,616			9,668			9.0
Income tax expense		(1,900	)		(0.2	)		(1,902	)		(0.2	)		(1,709	)		(268	)		(0.2	)

Net income/(loss)		(574,781	)		(56.2	)		(394,827	)		(40.6	)		59,907			9,400			8.8

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Note:

(1)	Including share-based compensation expenses as follows:


	Year Ended December 31,
	2019		2020		2021
	RMB		RMB		RMB		US$

	(in thousands)
Cost of revenues		1,657		7,154		2,176		341
Sales and marketing expenses		590		3,282		1,060		166
Research and development expenses		13,966		14,432		13,355		2,096
General and administrative expenses		10,470		4,159		5,454		856

Total		26,683		29,027		22,045		3,459

Year ended December 31, 2021 compared with year ended December 31, 2020

Net revenues

Our net revenues decreased by 29.6% from RMB972.6 million in 2020 to RMB684.9 million (US$107.5 million) in 2021, primarily attributable to a decrease in gross billings caused by our stringent cost control in user acquisition expenditures and the decrease in the number of paying users, partially as a result of the adverse impact caused by the Double Alleviating Opinion to the overall education industry. The number of paying users who purchased courses and services of our domestic English learning business was approximately 1.1 million in 2021, as compared with approximately 2.4 million in 2020.

Cost of revenues

Our cost of revenues decreased by 49.3% from RMB277.2 million in 2020 to RMB140.4 million (US$22.0 million) in 2021, primarily due to the decrease in salaries and benefits for certain full-time employees and the decrease in IT service cost at a result of our stringent cost control measures. Salaries and benefits for certain full-time employees, including share-based compensation expense, decreased from RMB147.8 million in 2020 to RMB68.6 million (US$10.8 million) in 2021. Our IT service cost decreased from RMB80.2 million in 2020 to RMB34.8 million (US$5.5 million) in 2021.

Gross profit

As a result of the foregoing, our gross profit decreased from RMB695.4 million, representing a gross margin of 71.5%, in 2020, to RMB544.5 million (US$85.4 million), representing a gross margin of 79.5%, in 2021. The increase in our gross profit margin was primarily attributable to our stringent cost control measures.

Operating expenses

Our total operating expenses decreased by 53.4% from RMB1,103.1 million in 2020 to RMB514.2 million (US$80.7 million) in 2021, primarily due to our stringent cost control measures, especially in advertising and user acquisition expenditures and personnel-related expenses.

Sales and marketing expenses

. Our sales and marketing expenses decreased by 59.4% from RMB801.4 million in 2020 to RMB325.0 million (US$51.0 million) in 2021, primarily due to the cost control in advertising and user acquisition expenditures by increasing our

return-on-investment

(ROI) and the optimization of our sales and marketing efficiency. Our branding and marketing expenses decreased from RMB442.0 million in 2020 to RMB136.8 million (US$21.5 million) in 2021. Salaries and benefits for sales and marketing personnel decreased from RMB246.0 million in 2020 to RMB119.5 million (US$18.8 million) in 2021 mainly due to a decrease in the headcount of our OSA and other operation team.

Research and development expenses

. Our research and development expenses decreased by 44.9% from RMB190.7 million in 2020 to RMB105.1 million (US$16.5 million) in 2021, primarily due to a decrease in salaries and benefits for research and development personnel from RMB161.9 million in 2020 to RMB84.2 million (US$13.2 million) in 2021. Such decrease was mainly due to a decrease in headcount of our research and development personnel in 2021, as compared to such headcount in 2020.

General and administrative expenses

. Our general and administrative expenses decreased by 24.2% from RMB111.0 million in 2020 to RMB84.2 million (US$13.2 million) in 2021, primarily attributable to the decrease in salaries and benefits for general and administrative personnel and the cost control on office expenses. Such decrease was mainly due to a decrease in headcount of our general and administrative personnel in 2021, as compared to such headcount in 2020.

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(Loss)/Income from operations

As a result of the factors set out above, we generated income from operation of RMB44.5 million (US$7.0 million) in 2021, as compared to a loss from operation of RMB407.6 million in 2020.

Interest income/(expenses)

We had interest expenses of RMB3.8 million (US$0.6 million) in 2021, as compared to interest income of RMB0.9 million in 2020.

Foreign exchange related (losses)/gains, net

We had a foreign exchange related loss of RMB63 thousand (US$10 thousand) in 2021, as compared to a foreign exchange related gain of RMB4.7 million in 2020, primarily due to the fluctuation of the foreign exchange rate of RMB against U.S. dollar.

Other income, net

We had net other income of RMB21.0 million (US$3.3 million) in 2021, as compared to net other income of RMB9.1 million in 2020, primarily due to the increase in government grants.

Income tax expense

We incurred income tax expense of RMB1.7 million (US$0.3 million) in 2021, as compared to RMB1.9 million in 2020, mainly resulted from the movement in advertising expenses carry-forwards. Although we generated net income before income tax expenses in 2021 and incurred net loss before income tax expenses in 2020, it had no impact on the income tax expense given the accumulated tax loss carryforwards offset the taxable income.

Net (loss)/Income

As a result of the foregoing, we generated a net income of RMB59.9 million (US$9.4 million) in 2021, as compared to a net loss of RMB394.8 million in 2020.

Year ended December 31, 2020 compared with year ended December 31, 2019

Net revenues

Our net revenues decreased by 4.9% from RMB1,023.2 million in 2019 to RMB972.6 million in 2020, primarily attributable to a decrease in gross billings caused by our stringent cost control in user acquisition expenditures and the decrease in the number of paying users. The number of paying users who purchased courses and services on our platform was approximately 2.4 million in 2020, as compared with approximately 3.0 million in 2019.

Cost of revenues

Our cost of revenues increased by 1.4% from RMB273.5 million in 2019 to RMB277.2 million in 2020, primarily due to the increase in content-related costs and salaries and benefits for certain full-time employees due to the expansion of our business in the first half of 2020 and partially offset by the decrease in IT service cost due to our stringent cost control. Salaries and benefits for full-time employees, including share-based compensation expense, increased from RMB137.1 million in 2019 to RMB147.8 million in 2020. Our IT service cost decreased from RMB94.3 million in 2019 to RMB80.2 million in 2020.

Gross profit

As a result of the foregoing, our gross profit decreased from RMB749.7 million, representing a gross margin of 73.3%, in 2019, to RMB695.4 million, representing a gross margin of 71.5%, in 2020.

Operating expenses

Our total operating expenses decreased by 17.5% from RMB1,336.8 million in 2019 to RMB1,103.1 million in 2020, primarily due to stringent cost control in advertising and user acquisition expenditures and the optimization of the operational structure.

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Sales and marketing expenses

. Our sales and marketing expenses decreased by 17.3% from RMB969.4 million in 2019 to RMB801.4 million in 2020, primarily due to our stringent cost control in advertising and user acquisition expenditures and the optimization of our efficiency in personnel management. Our branding and marketing expenses decreased from RMB519.7 million in 2019 to RMB442.0 million in 2020 due to our cost control measures. Salaries and benefits for sales and marketing personnel decreased from RMB286.2 million in 2019 to RMB246.0 million in 2020 mainly due to a decrease in our OSA headcount in 2020, as compared to such headcount in 2019.

Research and development expenses

. Our research and development expenses decreased by 10.8% from RMB213.9 million in 2019 to RMB190.7 million in 2020, primarily due to a decrease in salaries and benefits for research and development personnel from RMB183.4 million in 2019 to RMB161.9 million in 2020. Such decrease was mainly due to a decrease in headcount of our research and development personnel in 2020, as compared to such headcount in 2019.

General and administrative expenses

. Our general and administrative expenses decreased by 27.7% from RMB153.5 million in 2019 to RMB111.0 million in 2020, primarily attributable to the decrease in salaries and benefits for general and administrative personnel. Such decrease was mainly due to a decrease in headcount of our general and administrative personnel in 2020, as compared to such headcount in 2019.

Loss from operations

As a result of the factors set out above, we incurred loss from operation of RMB407.6 million in 2020, as compared to RMB584.7 million in 2019.

Interest income

We had interest income of RMB0.9 million in 2020, as compared to RMB11.3 million in 2019, as the IPO proceeds generated significant bank interest income in 2019.

Foreign exchange related (losses)/gains, net

We had a foreign exchange related gain of RMB4.7 million in 2020, as compared to a foreign exchange related loss of RMB2.5 million in 2019, primarily due to the appreciation the of RMB against U.S. dollar.

Other income, net

We had net other income of RMB9.1 million in 2020, as compared to net other income of RMB3.1 million in 2019.

Income tax expense

We incurred income tax expense of RMB1.9 million in 2020, as compared to RMB1.9 million in 2019.

Net loss

As a result of the foregoing, we incurred a net loss of RMB394.8 million in 2020, as compared to a net loss of RMB574.8 million in 2019.

Recent Accounting Pronouncements

A list of recently adopted and issued accounting pronouncements that are relevant to us is included in Notes 2(af) and 2(ag) of our audited consolidated financial statements included elsewhere in this annual report.

B.	Liquidity and Capital Resources

Cash Flows and Working Capital

To date, we have financed our operating and investing activities through IPO proceeds, cash generated by historical sales of convertible redeemable preferred shares. As of December 31, 2019, 2020 and 2021, our cash, cash equivalents and restricted cash were RMB283.0 million, RMB138.5 million and RMB63.6 million (US$10.0 million), respectively. Our cash and cash equivalents primarily consist of cash placed with banks or other financial institutions, which have original maturities of three months or less at the time of purchase and are readily convertible to known amounts of cash.

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Net decreases in our cash, cash equivalents, restricted cash and short-term investments in 2019, 2020 and 2021 amounted to RMB195.2 million, RMB323.1 million and RMB159.2 million (US$25.0 million), respectively. Net cash outflow decreased significantly from RMB57.0 million in the first quarter to RMB4.9 million in the fourth quarter of 2021. We have achieved net cash inflow in the first quarter of 2022. We will continue to implement our corporate strategy, take various financing measures and use cash and capital more effectively through our management of working capital. For example, we obtained a

one-year

revolving credit loan facility for up to RMB10.0 million from a commercial bank in the first quarter of 2022. We believe that we will be able to further improve our cash flow working capital condition on a continuous basis.

We incurred net loss of RMB574.8 million, RMB394.8 million and generated net income of RMB59.9 million (US$9.4 million) for the year ended December 31, 2019, 2020 and 2021, respectively. Net cash used in operating activities were RMB148.2 million, RMB302.6 million and RMB155.2 million (US$24.3 million) for the year ended December 31, 2019, 2020 and 2021, respectively. As of December 31, 2021, we had a total shareholders’ deficit of RMB632.0 million (US$99.2 million) and negative working capital (current liabilities exceeded the current assets) in the amount of RMB647.1 million (US$101.5 million). See “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business—We have incurred net losses, negative cash flows from operation activities and net current liabilities in prior years. Even though we generated net income for the year ended December 31, 2021, we still recorded net operating cash outflow and there can be no assurance that we are able to maintain profitability in the future. If we are not able to maintain profitability or raised sufficient capital to cover our capital needs, we may not continue as a going concern.”

Our ability to continue as a going concern is dependent on management’s ability to successfully execute our plans, which include a business plan to adjust the pace of our new business implementation in the overseas market, control operating costs and optimize operational efficiency to improve our cash flow from operations, and a financial plan to raise external equity or debt financing to fund the continuous operations. To implement the business plan, we will continue to enhance user engagement and retention by offering higher quality and diversified content while optimizing our traffic acquisition strategy to efficiently control and reduce the user related costs. We will further preserve liquidity and manage cash flows by reducing various discretional expenditures. Additionally, we will continue to seek external financing to improve our liquidity position, even though there can be no assurance that we will be successful in obtaining sufficient funding on terms acceptable to us to fund continuing operations.

Accordingly, the uncertainties relating to the successful execution of our business plan in light of the COVID-19 pandemic and the evolving regulatory requirements as well as the uncertainties relating to the possibility of securing sufficient funding raised substantial doubt as to our ability to continue as a going concern for a period of one year from the issuance of the financial statements included elsewhere in this annual report. The consolidated financial statements included elsewhere in this annual report have been prepared on a going concern basis, and do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might result from such uncertainty.

Although we consolidate the results of the VIEs, we only have access to the assets or earnings of the VIEs through our contractual arrangements with the VIEs and their shareholders. See “Item 4. Information on the Company—C. Organizational Structure—Contractual Arrangements with the VIEs and Their Respective Shareholders.” For restrictions and limitations on liquidity and capital resources as a result of our corporate structure, see “—Holding Company Structure.”

We expect that substantially all of our future revenues will be denominated in Renminbi. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior SAFE approval as long as certain routine procedural requirements are fulfilled. Therefore, our PRC subsidiaries are allowed to pay dividends in foreign currencies to us without prior SAFE approval by following certain routine procedural requirements. However, approval from or registration with competent government authorities is required where the Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may at its discretion restrict access to foreign currencies for current account transactions in the future.

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


	Year Ended December 31,
	2019			2020			2021
	RMB			RMB			RMB			US$

	(in thousands)
Net cash used in operating activities		(148,164	)		(302,598	)		(155,152	)		(24,346	)
Net cash (used in)/provided by investing activities		100,246			164,667			81,672			12,815
Net cash provided by/(used in) financing activities		(16,344	)		4,285			1,145			180

Net decrease in cash, cash equivalents and restricted cash		(64,262	)		(133,646	)		(72,335	)		(11,351	)
Exchange rate effect on cash, cash equivalents and restricted cash		2,522			(10,829	)		(2,616	)		(411	)
Cash, cash equivalents and restricted cash at beginning of the year		344,722			282,982			138,507			21,735

Cash, cash equivalents and restricted cash at end of the year		282,982			138,507			63,556			9,973

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Operating activities

Net cash used in operating activities in 2021 was RMB155.2 million (US$24.3 million), as compared to net income of RMB59.9 million (US$9.4 million) in 2021. The difference was primarily due to (i) a decrease in deferred revenue, current and

non-current,

of RMB187.2 million (US$29.4 million), (ii) a decrease in salary and welfare payable of RMB77.4 million (US$12.2 million), (iii) a decrease in operating lease liability, current and

non-current,

of RMB27.6 million (US$4.3 million), (iv) a decrease in accounts payable of RMB16.4 million (US$2.6 million), and was partially offset by those adjustments for

non-cash

items that primarily consisted of share-based compensation expenses of RMB22.0 million (US$3.5 million), amortization of operating lease right of use asset of RMB19.1 million (US$3.0 million), and impairment of certain current assets and

non-current

assets of RMB19.1 million (US$3.0 million). The decreases in salary and welfare payable, accounts payable and operating lease liability were attributable to our stringent cost control.

Net cash used in operating activities in 2020 was RMB302.6 million, as compared to net loss of RMB394.8 million in 2020. The difference was primarily due to adjustments for

non-cash

items that primarily consisted of amortization of operating lease right of use asset of RMB31.2 million, share-based compensation expenses of RMB29.0 million, impairment of property and equipment of RMB21.4 million and depreciation of property and equipment of RMB21.3 million, and cash used for working capital resulted from (i) a decrease in accounts payable of RMB55.3 million, (ii) a decrease in operating lease liability, current and

non-current,

of RMB29.7 million, (iii) a decrease in salary and welfare payable of RMB21.5 million, and was partially offset by an increase in deferred revenue, current and

non-current,

of RMB50.3 million and a decrease in prepayments and other current assets of RMB23.7 million. The decrease in accounts payable and salary and welfare payable were attributable to our stringent cost control. The decrease in operating lease liability, representing lease payments arising from operating leases.

Net cash used in operating activities in 2019 was RMB148.2 million, as compared to net loss of RMB574.8 million in 2019. The difference was primarily due to (i) an increase in deferred revenue of RMB218.3 million, (ii) an increase in accounts payable of RMB61.4 million, (iii) an increase in salary and welfare payable of RMB45.7 million (iv) a decrease in prepayments and other current assets of RMB30.0 million, and was partially offset by an decrease in operating lease liability, current and

non-current,

of RMB42.2 million. The increases in deferred revenue, accounts payable, and salary and welfare payable were attributable to the growth of our business. In particular, the increase in deferred revenue was attributable to growth in fees collected from paying users. The decrease in operating lease liability, representing lease payments arising from operating leases. The principal

non-cash

items affecting the difference between our net loss and our net cash used in operating activities in 2019 were RMB32.3 million in amortization operating lease right of use asset, RMB26.7 million in share-based compensation expenses and RMB20.3 in depreciation of property and equipment.

Investing activities

Net cash provided by investing activities was RMB81.7 million (US$12.8 million) in 2021, which was primarily attributable to proceeds from maturity of short-term investments of RMB162.7 million, partially offset by purchase of short-term investments of RMB78.4 million.

Net cash provided by investing activities was RMB164.7 million in 2020, which was primarily attributable to proceeds from maturity of short-term investments of RMB224.9 million, partially offset by (i) purchase of short-term investments of RMB51.0 million and (ii) purchase of intangible assets of RMB7.3 million.

Net cash provided by investing activities was RMB100.2 million in 2019, which was primarily attributable to proceeds from maturity of short-term investments of RMB187.7 million, partially offset by (i) purchase of property and equipment of RMB49.4 million and (ii) purchase of short-term investments of RMB35.8 million.

Financing activities

Net cash provided by financing activities was RMB1.1 million in 2021.

Net cash provided by financing activities was RMB4.3 million in 2020.

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Net cash used in financing activities was RMB16.3 million in 2019, which was primarily attributable to cash payment and prepayment of RMB17.4 million for ordinary shares repurchase.

Material Cash Requirements

Our material cash requirements as of December 31, 2021 and any subsequent interim period primarily include our operating lease obligations, capital expenditures and debt obligations.

Our operating lease obligations consist of lease of offices under

non-cancelable

operating lease agreements, which expire at various dates through July 2024. Payment due by December 31, 2021 for our operating lease obligations amounted to RMB10.4 million (US$1.6 million).

Our capital expenditures are primarily incurred for purchases of property and equipment and lease improvement. Our capital expenditures were RMB49.4 million in 2019, RMB2.0 million in 2020 and RMB1.7 million (US$0.3 million) in 2021. We do not expect to incur significant capital expenditures in the near future.

The following table sets forth our contractual obligations as of December 31, 2021:

Payment Due by Period

Total

Less
than 1
year

1-3

years

3-5

years

More
than 5
years

(RMB in thousands)

Operating lease obligations

10,367

10,137

230

—

In the first quarter of 2022, we obtained a

one-year

revolving credit loan facility for up to RMB10.0 million from a commercial bank. Each drawdown has a term of six months and bears an interest rate of 4.125% per annum. As of the date of this annual report, we made drawdown of RMB5.4 million under such facility.

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

Other than the obligations set forth above, we did not have any significant operating lease obligations, purchase obligations or other long-term obligations as of December 31, 2021.

Holding Company Structure

LAIX Inc. is a holding company with no material operations of its own. We conduct our operations primarily through our PRC subsidiaries and the VIEs in China. As a result, LAIX Inc.’s ability to pay dividends depends upon dividends paid by our PRC subsidiaries. If our existing PRC subsidiaries or any newly formed ones incur debt on their own behalf in the future, the instruments governing their debt may restrict their ability to pay dividends to us. In addition, our wholly foreign-owned subsidiaries in China are permitted to pay dividends to us only out of its retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. Under PRC law, each of our subsidiaries and the VIEs in China is required to set aside at least 10% of its

after-tax

profits each year, if any, to fund certain statutory reserve funds until such reserve funds reach 50% of their registered capital. Also, each of our subsidiaries and the VIEs in China may allocate a portion of its

after-tax

profits based on PRC accounting standards to a surplus fund at their discretion. The statutory reserve funds and the discretionary funds are not distributable as cash dividends. Remittance of dividends by a wholly foreign-owned company out of China is subject to examination by the banks designated by SAFE. Our PRC subsidiaries have not paid dividends and will not be able to pay dividends until they generate accumulated profits and meet the requirements for statutory reserve funds.

C.	Research and Development

See “Item 4. Information on the Company—B. Business Overview—Our Technologies.” And “Item 4. Information On the Company—B. Business Overview—Intellectual Property.”

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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 year ended December 31, 2021 that are reasonably likely to have a material and adverse 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 results of operations or financial conditions.

E.	Critical Accounting Estimates

For our critical accounting estimates, see “Item 5. Operating And Financial Review And Prospects—Critical Accounting Policies and Management Estimates.”

ITEM 6.

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A.	Directors and Senior Management

The following table sets forth information regarding our directors and executive officers as of the date of this annual report.


Directors and Executive Officers	Age	Position/Title
Yi Wang	41	Chairman of the Board of Directors and Chief Executive Officer
Zheren Hu	37	Director and Chief Technology Officer
Hui Lin	40	Director and Chief Scientist
Li-Lan Cheng	57	Independent Director
Tiak Koon Loh	63	Independent Director
Min (Jenny) Zhang	50	Independent Director
Bing Sun	51	Chief Financial Officer

Yi Wang

is one of our founders, and has served as the chairman of our board of directors and our chief executive officer since the inception of our company. Currently, Dr. Wang also oversees our financial and reporting matters. Prior to that, Dr. Wang served as a product director at AdChina, a leading online advertising platform in China, from April 2011 to August 2012. From July 2009 to April 2011, he served as a product manager at Google and was responsible for various key features and systems of Google Analytics and Google’s cloud infrastructure. He received his bachelor’s degree and master’s degree in electrical engineering from Tsinghua University in 2003 and 2005, respectively, and his Ph.D. degree in computer science from Princeton University in 2009.

Zheren Hu

is one of our founders, and has served as our director and chief technology officer since the inception of our company. He has also been in charge of our English for Adults business since April 2018. From 2010 to 2011, Mr. Hu served as an engineer at Quantcast, an

AI-driven

data analytics company. Mr. Hu received his bachelor’s degree of engineering in computer science from Shanghai Jiao Tong University in 2006 and his master’s degree of science in management information systems from the University of Arizona in 2008.

Hui Lin

is one of our founders, and has served as our director and chief scientist since the inception of our company. Prior to that, Dr. Lin served as a research scientist at Google from 2012 to 2013. Dr. Lin received his bachelor’s degree and master’s degree in electrical engineering from Tsinghua University in 2003 and in 2006, respectively, and his Ph.D. degree in electrical engineering from the University of Washington in 2011.

Li-Lan

Cheng

has served as our independent director since September 2018. Dr. Cheng has served as the acting chief financial officer of Leju Holdings Limited (NYSE: LEJU), since June 2017. Dr. Cheng has also served as the chief operating officer of

E-House

(China) Holdings Limited, a real estate services company in China, since 2012, and an executive director of

E-House

(China) Enterprise Holdings Limited (SEHK: 02048) since March 2018. From 2006 to 2012, Dr. Cheng served as chief financial officer of

E-House

(China) Holdings Limited. From 2005 to 2006, Dr. Cheng served as the chief financial officer of SouFun Holdings Limited, a leading real estate internet portal and a leading home furnishing website in China. From 2002 to 2004, he served as an executive director and the chief financial officer of SOHO China Limited, a real estate developer in China. Currently, Dr. Cheng also serves as an independent director of 51job, Inc. (Nasdaq: JOBS) and an independent director of Yunji Inc. (Nasdaq: YJ). Dr. Cheng received his bachelor’s degree in economics from Swarthmore College and his Ph.D. degree in economics from the Massachusetts Institute of Technology. Dr. Cheng is a chartered financial analyst (CFA).

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Tiak Koon Loh

has served as our independent director since December 2018. Mr. Loh has more than 30 years’ experience in leading technology investments and building information technology-focused businesses. Mr. Loh has served as a director and the chief executive officer of Pactera International Limited (formerly known as HiSoft Technology International Ltd before its merger with Vancelnfo in 2012) since 2006. Prior to that, he was the corporate vice president of Hewlett Packard from 2004 to 2006, responsible for expanding its consulting and technology services business in China and Hong Kong. He also served as the financial services industry lead for HP Services during the same period. From 2001 to 2004, Mr. Loh served as the chief executive officer of Vanda Systems & Communications Holdings (currently known as Hutchison Global Communications Holdings). Mr. Loh received his bachelor’s degree in electrical engineering from National University of Singapore.

Min (Jenny) Zhang

has served as our independent director since May 2020. Ms. Min (Jenny) Zhang has served as the executive vice-chairlady of Huazhu Group Limited (“Huazhu”), a company listed on both the Nasdaq Stock Market (Nasdaq: HTHT) and the Hong Kong Stock Exchange (SEHK: 01179), since November 8, 2019 and subsequently as vice charlady since July 20, 2020. She served as the chief executive officer of Huazhu from May 2015 to November 2019, and previously as the president. She also served as chief financial officer and chief strategy officer of Huazhu from March 2008 to May 2015, and from November 2013 to January 2015, respectively. She has also served as an independent director of Yum China Holdings, Inc. (NYSE: YUMC) since May 2021. Ms. Min (Jenny) Zhang has more than 15 years of experience in finance and consulting with multinational companies. Prior to joining Huazhu in 2007, she was the finance director of Eli Lilly (Asia) Inc., Thailand branch and the chief financial officer of ASIMCO Casting (Beijing) Company, Ltd. She also worked previously with McKinsey & Company, Inc. as a consultant. Ms. Min (Jenny) Zhang received her MBA from Harvard Business School and received her master’s and bachelor’s degrees from the University of International Business and Economics.

Bing Sun

has served as our chief financial officer since May 2020. Mr. Sun has more than 20 years of experience in finance and accounting along with significant experience as chief financial officer at both public and private China-based companies. He most recently served as chief financial officer and deputy general manager at Wanxiang A123 Systems Co., Ltd. His prior experience includes chief financial officer position at Daqo New Energy (NYSE: DQ) and Jiangsu Shunda Holdings Co., Ltd. In the early stage of his career, he also served as a controller at BCD Semiconductor, as an internal audit manager at The Brinks Company, and as an audit manager at Deloitte Touche Tohmatsu Limited. Mr. Sun is an MBA and a certified public accountant in the U.S.

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 of our confidential information or trade secrets, 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.

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 one year 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 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.

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B.	Compensation

For the fiscal year ended December 31, 2021, we paid an aggregate of RMB6.3 million (US$1.0 million) in cash to our directors and executive officers. We have not set aside or accrued any amount to provide pension, retirement or other similar benefits to our executive officers and directors. Our PRC subsidiaries and VIEs are required by law to make contributions equal to certain percentages of each employee’s salary for his or her pension insurance, medical insurance, unemployment insurance and other statutory benefits and a housing provident fund.

Share Incentive Plans

2014 Equity Incentive Plan

In May 2014, our board of directors and shareholders adopted the 2014 Equity Incentive Plan, which we refer to as the 2014 Plan, to secure and retain the services of valuable employees, directors or consultants, and provide incentives for such persons to exert their best efforts for the success of our business. As of the date of this annual report, the maximum aggregate number of Class A ordinary shares which may be issued pursuant to all awards under the 2014 Plan is 5,456,192, subject to further amendment. As of March 31, 2022, awards to purchase 774,310 Class A ordinary shares under the 2014 Plan have been granted and outstanding, excluding awards that were forfeited, canceled or exercised after the relevant grant dates.

The following paragraphs describe the principal terms of the 2014 Plan.

Types of awards

. The 2014 Plan permits the awards of options, share appreciation rights, restricted share awards, restricted share unit awards, and any other type of awards approved by the plan administrator.

Plan administration

. Our board of directors or a committee of one or more members of the board of directors will administer the 2014 Plan. The board of directors or the committee, as applicable, will determine, among other things, the participants to receive awards, the date and the method of each award to be granted, the type and number of awards to be granted to each participant, and the terms and conditions of each award grant.

Award agreement

. Awards granted under the 2014 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, the provisions applicable in the event of the grantee’s employment or service terminates, and our authority to unilaterally or bilaterally amend, modify, suspend, cancel or rescind the award.

Eligibility

. We may grant awards to our employees, directors and consultants of our company.

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 ten years from the date of a grant or such shorter period specified in the award agreement.

Transfer restrictions

. Awards may not be transferred in any manner by the participant other than in accordance with the exceptions provided in the 2014 Plan or the relevant award agreement or otherwise determined by the plan administrator, such as transfers by will or the laws of descent and distribution.

Termination and amendment of the 2014 Plan

. Unless terminated earlier, the 2014 Plan has a term of ten years. The plan administrator has the authority to terminate, amend or modify the plan, subject to the limitations of applicable laws. Except with respect to amendments made by the plan administrator, no termination, amendment or modification may adversely affect in any material way any awards previously granted pursuant to the 2014 Plan unless agreed by the participant.

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Amended and Restated 2018 Share Incentive Plan

In July 2018, our board of directors adopted the 2018 Share Incentive Plan to attract and retain the best available personnel, provide additional incentives to employees, directors and consultants and promote the success of our business. In September 2020, we adopted an amended and restated 2018 Share Incentive Plan, or the Amended and Restated 2018 Plan, to amend and restate the 2018 Share Incentive Plan in its entirety and assume all awards granted under the 2018 Share Incentive Plan. Under the Amended and Restated 2018 Plan, the maximum aggregate number of shares available for grant of awards is initially 4,860,412 Class A ordinary shares, plus an annual increase on the first day of each fiscal year during the term of the Amended and Restated 2018 Plan commencing with the fiscal year beginning January 1, 2021, by (i) an amount equal to 2.0% of the total number of issued and outstanding shares on the last day of the immediately preceding fiscal year, or (ii) such number of shares as may be determined by the our board of directors. As of March 31, 2022, the maximum aggregate number of shares which may be issued under the Amended and Restated 2018 Plan is 6,854,132, subject to further adjustments. As of March 31, 2022, awards to purchase 1,076,579 Class A ordinary shares under the Amended and Restated 2018 Plan have been granted and outstanding, excluding awards that were forfeited, canceled or exercised after the relevant grant dates.

The following paragraphs describe the principal terms of the Amended and Restated 2018 Plan.

Types of Awards

. The Amended and Restated 2018 Plan permits the awards of options, restricted shares, restricted share units or any other type of awards approved by the plan administrator.

Plan Administration

. Our board of directors or a committee of one or more members of the board of directors will administer the Amended and Restated 2018 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.

Award Agreement

. Awards granted under the Amended and Restated 2018 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, the provisions applicable in the event that the grantee’s employment or service terminates, and our authority to unilaterally or bilaterally amend, modify, suspend, cancel or rescind the award.

Eligibility

. We may grant awards to our employees, directors and consultants of our company. 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.

Vesting Schedule

. In general, the plan administrator determines the vesting schedule, which is specified in the relevant award agreement.

Exercise of Options

Transfer Restrictions

. Awards may not be transferred in any manner by the participants other than in accordance with the exceptions provided in the Amended and Restated 2018 Plan, such as transfers by will or the laws of descent and distribution.

Termination and Amendment of the Amended and Restated 2018 Plan

. Unless terminated earlier, the Amended and Restated 2018 Plan has a term of ten years commencing from the original effective date of the 2018 Share Incentive Plan. Our board of directors has the authority to amend or terminate the plan. However, no such action may adversely affect in any material way any awards previously granted unless agreed by the participants.

The following table summarizes, as of March 31, 2022, the outstanding awards granted under the 2014 Plan and Amended and Restated 2018 Plan to several of our directors and executive officers, excluding awards that were forfeited or canceled after the relevant grant dates.

Name

Class A Ordinary
Shares
Underlying
Options Awarded

Exercise Price
(US$/Share)

Date of Grant

Date of Expiration

Zheren Hu

0.60

2018/7/31

2028/7/30

Hui Lin

0.60

2018/7/31

2028/7/30

Li-Lan

Cheng

0.60

2018/9/27

2028/9/26

Tiak Koon Loh

0.60

2019/2/27

2029/2/26

Min (Jenny) Zhang

0.60

2020/5/22

2030/5/21

Bing Sun

0.01-3.24

2020/5/22

2030/5/21

Other grantees

1,016,519

0.01~0.60

2016/7/1—2020/11/20

2026/6/30—2030/11/19

Total

1,870,389

*	Less than 1% of our total outstanding shares.

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Equity Incentive Trust

Ace Creation Global Trust was established under a trust deed between us and Vistra Trust (Singapore) Pte. Limited, or Vistra Trust, as trustee, dated July 31, 2018. Through Ace Creation Global Trust, our Class A ordinary shares and other rights and interests under awards granted pursuant to our 2014 Plan may be provided to certain grant recipients. As of the date of this annual report, some of our grantees under the 2014 Plan, who are all our employees, participated in the Ace Creation Global Trust.

Participants in Ace Creation Global Trust transfer their equity awards to Vistra Trust to be held for their benefit. Upon satisfaction of vesting conditions and request by grant recipients, Vistra Trust will exercise the equity awards and transfer the relevant Class A ordinary shares and other rights and interest under the equity awards to the relevant grant participants upon the written direction of the trust administrator. The trust deed provides that Vistra Trust shall not exercise the voting rights attached to such Class A ordinary shares unless otherwise directed by the trust administrator, which is an advisory committee consisting of authorized representatives of our company.

C.	Board Practices

Board of Directors

Our board of directors consists of six directors. A director is not required to hold any shares in our company by way of qualification. A director who is in any way, whether directly or indirectly, interested in a contract or transaction or proposed contract or transaction with our company is required to declare the nature of his interest at a meeting of our directors. A director may vote in respect of any contract or transaction or proposed contract or transaction notwithstanding that he may be interested therein, and if he does so his vote shall be counted and he shall be counted in the quorum at any meeting of our directors at which any such contract or transaction or proposed contract or transaction is considered. Our directors may exercise all the powers of our company to issue debentures, debenture stock, bonds and other securities, whether outright or as collateral security for any debt, liability or obligation of our company or of any third party.

Committees of the Board of Directors

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

Audit Committee

. Our audit committee consists of

Li-Lan

Cheng, Tiak Koon Loh and Min (Jenny) Zhang.

Li-Lan

Cheng is the chairperson of our audit committee. We have determined that

Li-Lan

Cheng, Tiak Koon Loh and Min (Jenny) Zhang meet the independence standards under Rule

10A-3

under the Exchange Act, as amended. We have determined that each of

Li-Lan

Cheng and Min (Jenny) Zhang qualifies as an “audit committee financial expert” within the meaning of the SEC rules. 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:

•

appointing the independent auditors and

pre-approving

all auditing and

non-auditing

services permitted to be performed by the independent auditors;

•

reviewing with the independent auditors any audit problems or difficulties and management’s response;

•

discussing the annual audited financial statements with management and the independent auditors;

•

reviewing the adequacy and effectiveness of our accounting and internal control policies and procedures and any steps taken to monitor and control major financial risk exposures;

•

reviewing and approving all proposed related party transactions;

•

meeting separately and periodically with management and the independent auditors; and

•

monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our procedures to ensure proper compliance.

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Compensation Committee

. Our compensation committee consists of Tiak Koon Loh and Min (Jenny) Zhang. Tiak Koon Loh is the chairperson of our compensation committee. 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 his compensation is deliberated. 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 periodically and approving any incentive compensation or equity plans, programs or similar arrangements; and

•

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 Min (Jenny) Zhang and

Li-Lan

Cheng. Min (Jenny) Zhang is the chairperson of our nominating and corporate governance committee. The nominating and corporate governance committee assists the board of directors 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:

•

selecting and recommending to the board nominees for election by the shareholders or appointment by the board;

•

reviewing annually with the board the current composition of the board with regards to characteristics such as independence, knowledge, skills, experience and diversity;

•

making recommendations on the frequency and structure of board meetings and monitoring the functioning of the committees of the board; and

•

advising the board periodically with regards to significant developments in the law and practice of corporate governance as well as our compliance with applicable laws and regulations, and making recommendations to the board on all matters of corporate governance and on any remedial action to be taken.

Duties of Directors

Under Cayman Islands law, our directors owe fiduciary duties to our company, including a duty of loyalty, a duty to act honestly, and a duty to act in what they consider in good faith to be in our best interests. Our directors must also exercise their powers only for a proper purpose. Our directors also have a duty to exercise skills they actually possess and such care and diligence that a reasonably prudent person would exercise in comparable circumstances. It was previously considered that a director need not exhibit in the performance of his duties a greater degree of skill than what may reasonably be expected from a person of his knowledge and experience. However, English and Commonwealth courts have moved towards an objective standard with regard to the required skill and care, and these authorities are likely to be followed in the Cayman Islands. In fulfilling their duty of care to us, our directors must ensure compliance with our memorandum and articles of association, as amended and restated from time to time, and the class rights vested thereunder in the holders of the shares. Our company has the right to seek damages if a duty owed by our directors is breached. A shareholder may in certain circumstances have rights to damages if a duty owed by the directors is breached.

Our board of directors has all the powers necessary for managing, and for directing and supervising, our business affairs. The functions and powers of our board of directors include, among others:

•

convening shareholders’ annual general meetings and reporting its work to shareholders at such meetings;

•

declaring dividends and distributions;

•

appointing officers and determining the term of office of the officers;

•

exercising the borrowing powers of our company and mortgaging the property of our company; and approving the transfer of shares in our company, including the registration of such shares in our share register.

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Terms of Directors and Officers

Our directors may be appointed by a resolution of our board of directors, or by an ordinary resolution of our shareholders. Unless otherwise approved by our board of directors, our directors are not subject to a term of office and hold office until such time as they are removed from office by ordinary resolution of the shareholders. As approved by our board of directors and nominating and corporate governance committee, our independent directors have an initial term of two years, each starting from their respective commencement date, and each of our independent directors is subject to

re-election

by our board of directors for another

two-year

term upon the expiration of his/her current term.

Dr. Li-Lan

Cheng was

re-elected

as our independent director in September 2020 and is currently serving his

two-year

term until September 30, 2022, subject to

re-election.

Mr. Tiak Koon Loh was

re-elected

as our independent director in April 2021 and is currently serving his

two-year

term until March 31, 2023, subject to

re-election.

Ms. Min (Jenny) Zhang is serving her

two-year

term until September 30, 2022.

A director will be removed from office automatically if, among other things, the director (i) becomes bankrupt or makes any arrangement or composition with his creditors; (ii) is found by our company to be or becomes of unsound mind; (iii) resigns his office by notice in writing to the company; or (iv) without special leave of absence from our board, is absent from three consecutive board meetings and our directors resolve that his office be vacated. Our officers are elected by and serve at the discretion of the board of directors.

Employees

As of December 31, 2019, 2020 and 2021, we had a total of 3,214, 1,684 and 736 employees, respectively. The following table sets forth the numbers of our employees categorized by function as of December 31, 2021:


	As of December 31, 2021
Function:
Research and development		92
Platform operation		153
Content development		52
Sales and marketing		359
Others		80

Total		736

As required by laws and regulations in China, we participate in various employee social security plans that are organized by municipal and provincial governments, including housing, pension, medical insurance and unemployment insurance. We are required under Chinese law to make contributions 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 from time to time.

We enter into standard labor agreements with our employees; in addition, we enter into confidentiality and intellectual property rights agreements with our key employees. We believe that we have maintained a good working relationship with our employees, and we have not experienced any major 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, 2022 by:

•

each of our directors and executive officers; and

•

each person known to us owning beneficially more than 5% of our ordinary shares.

The calculations in the table below are based on 50,100,625 ordinary shares outstanding as of March 31, 2022, including (i) 30,424,951 Class A ordinary shares, and (ii) 19,675,674 Class B ordinary shares.

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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, subject to certain conditions. 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 aggregate voting power†
Directors and Executive Officers**:
Yi Wang (1)		—			11,753,847		11,753,847			23.5			51.7
Zheren Hu (2)			*		5,010,931		5,160,931			10.3			22.1
Hui Lin (3)			*		2,910,896		2,970,896			5.9			12.8
Li-Lan Cheng (4)			*		—			*			*		—
Tiak Koon Loh (5)			*		—			*			*		*
Min (Jenny) Zhang			*		—			*			*		—
Bing Sun			*		—			*			*		—
All Directors and Executive Officers as a Group		762,377			19,675,674		20,438,051			40.4			86.7
Principal Shareholders:
Yi Wang (1)		—			11,753,847		11,753,847			23.5			51.7
GGV entities (6)		5,282,497			—		5,282,497			10.5			2.3
Zheren Hu (2)			*		5,010,931		5,160,931			10.3			22.1
TB Alternative Assets Ltd (7)		3,703,164			—		3,703,164			7.4			1.6
IDG entities (8)		3,370,003			—		3,370,003			6.7			1.5
Hui Lin (3)			*		2,910,896		2,970,896			5.9			12.8
CMC Lullaby Holdings Limited (9)		2,760,325			—		2,760,325			5.5			1.2

Notes:

*	Except as otherwise indicated below, the business address of our directors and executive officers is Building C2, No. 1687 Changyang Road, Yangpu District, Shanghai, People’s Republic of China.

†

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 11,753,847 Class B ordinary shares directly held by Joyx Holdings Ltd., a British Virgin Islands business company limited by shares beneficially owned by Dr. Wang. Joyx Holdings Ltd. is ultimately held by Joyx Trust, a trust established under the laws of British Virgin Islands and managed by UBS Trustees (B.V.I.) Limited as the trustee. Under the terms of this trust, Dr. Wang has the power to direct the trustee with respect to the retention or disposal of, and the exercise of any voting and other rights attached to, the shares held by Joyx Holdings Ltd. in our company.

(2)

Represents (i) 5,010,931 Class B ordinary shares directly held by Muang Holdings Ltd., a British Virgin Islands business company limited by shares beneficially owned by Mr. Hu, and (ii) 150,000 Class A ordinary shares issuable upon the exercise of the options held by Mr. Hu that are vested or will be vested within 60 days after March 31, 2022. Muang Holdings Ltd. is ultimately held by Muang Trust, a trust established under the laws of British Virgin Islands and managed by UBS Trustees (B.V.I.) Limited as the trustee. Under the terms of this trust, Mr. Hu has the power to direct the trustee with respect to the retention or disposal of, and the exercise of any voting and other rights attached to, the shares held by Muang Holdings Ltd. in our company.

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(3)

Represents (i) 2,910,896 Class B ordinary shares directly held by Ulingo Holdings Ltd., a British Virgin Islands business company limited by shares beneficially owned by Dr. Lin, and (ii) 60,000 Class A ordinary shares issuable upon the exercise of the options held by Dr. Hui Lin that are vested or will be vested within 60 days after March 31, 2022. Ulingo Holdings Ltd. is ultimately held by The Lin Family Trust, a trust established under the laws of British Virgin Islands and managed by UBS Trustees (B.V.I.) Limited as the trustee. Under the terms of this trust, Dr. Lin has the power to direct the trustee with respect to the retention or disposal of, and the exercise of any voting and other rights attached to, the shares held by Ulingo Holdings Ltd. in our company.

(4)	The business address of Mr. Cheng is 11/F, Yinli Building, No. 788 Guangzhong Road, Shanghai, People’s Republic of China.

(5)	The business address of Mr. Loh is Room 9/F, Block B, Repulse Bay Apartment, 101 Repulse Bay Road, Hong Kong.

(6)

Represents 5,282,497 Class A ordinary shares represented by ADSs directly held by entities managed by GGV Capital LLC. Information regarding beneficial ownership is reported as of December 31, 2021, based on the information contained in the Form

13F-HR

filed by GGV Capital LLC with SEC on February 14, 2022. Please see the Form

13F-HR

filed by GGV Capital LLC with the SEC on February 14, 2022 for information related to the holdings of GGV Capital LLC. The registered address of GGV Capital LLC is 3000 Sand Hill Road, Suite

4-230,

Menlo Park, CA 94025, the United States.

(7)

Represents 3,703,164 Class A ordinary shares directly held by Trustbridge Partners V, L.P. as of December 31, 2021, which was controlled by TB Alternative Assets Ltd., the investment adviser of Trustbridge Partners V L.P. Information regarding beneficial ownership is reported as of December 31, 2021, based on the information contained in the Schedule 13G filed by TB Alternative Assets Ltd. with SEC on February 11, 2022. Please see the Schedule 13G filed by TB Alternative Assets Ltd. with the SEC on February 11, 2022 for information related to TB Alternative Assets Ltd. and Trustbridge Partners V L.P. The registered address of TB Alternative Assets Ltd. is c/o Maples Corporate Services Limited, Ugland House, Grand Cayman, Cayman Islands,

KY1-1104.

(8)

Represents an aggregate of 3,370,003 Class A ordinary shares directly held by IDG Technology Venture Investment IV, L.P., IDG Technology Venture Investment V, L.P.,

IDG-Accel

China Growth Fund III L.P. and

IDG-Accel

China III Investors L.P. as of December 31, 2021. Those entities are collectively referred to as IDG entities. Information regarding beneficial ownership is reported as of December 31, 2021, based on the information contained in the Schedule 13G/A filed by the IDG entities with SEC on February 25, 2022. Please see the Schedule 13G/A jointly filed by the IDG entities and other reporting persons with the SEC on February 25, 2022 for information related to the IDG entities. The principal business address of each of IDG entities is c/o IDG Capital Management (HK) Limited, Unit 5505, The Center, 99 Queen’s Road Central, Hong Kong.

(9)

Represents 2,760,325 Class A ordinary shares represented by ADSs directly held by CMC Lullaby Holdings Limited as of December 31, 2021. Information regarding beneficial ownership is reported as of December 31, 2021, based on the information contained in the Schedule 13G/A jointly filed by CMC Lullaby Holdings Limited and other reporting persons with SEC on February 14, 2022. Please see the Schedule 13G/A filed by CMC Lullaby Holdings Limited with the SEC on February 14, 2022 for information related to CMC Lullaby Holdings Limited. The principal business address of CMC Lullaby Holdings Limited is c/o CMC Capital Partners HK Limited, Suite 302, 3/F., Cheung Kong Centre, No. 2 Queen’s Road, Central, Hong Kong.

Based on a review of the register of members maintained by our Cayman Islands registrar, we believe that as of March 31, 2022, 31,276,557 Class A ordinary shares (including 276,620 Class A ordinary shares issued to our depositary bank for bulk issuance of ADSs reserved for future issuances upon the exercise or vesting of awards granted under our 2014 Plan and the Amended and Restated 2018 Plan and treasury ADSs) were held by one record holder, Deutsche Bank Trust Company Americas, the depositary of our ADS program, in the United States. 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.

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 are not aware of any arrangement that may, at a subsequent date, result in a change of control of our company.

ITEM 7.

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A.	Major Shareholders

Please refer to “Item 6. Directors, Senior Management and Employees—E. Share Ownership.”

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B.	Related Party Transactions

Transactions with Shareholders and Affiliates

Contractual Arrangements with the VIEs and Their Respective Shareholders

See “Item 4. Information on the Company—C. Organizational Structure—Contractual Arrangements with The VIEs and Their Respective Shareholders.”

Shareholders Agreement

We entered into our shareholders agreement on June 16, 2017 with our shareholders, which consisted of holders of ordinary shares and preferred shares at that time.

The shareholders agreement provide for certain special rights, including right of first refusal,

co-sale

rights, preemptive rights and contains provisions governing the board of directors and other corporate governance matters. Those special rights, as well as the corporate governance provisions, were automatically terminated upon the completion of our initial public offering.

Registration Rights

Pursuant to our shareholders agreement dated June 16, 2017, we have granted certain registration rights to our shareholders. Set forth below is a description of the registration rights granted under the agreement.

Demand Registration Rights

. At any time or from time to time after the earlier of (i) the date that is six months after the completion of our initial public offering, or (ii) the date that the

lock-up

by underwriters is partially or wholly released, holders holding 30% or more of the voting power of the then outstanding registrable securities held by all holders are entitled to request in writing that we effect a registration for at least 20% of the then outstanding registrable securities held by all holders (together with the registrable securities which the other holders elect to include in such registration) or any lesser percentage if the anticipated gross receipts from our initial public offering exceed US$20,000,000. We have the right to defer filing of a registration statement for a period of not more than 90 days if our board of directors determines in good faith that filing of a registration statement in the near future will be materially detrimental to us or our shareholders, but we cannot exercise the deferral right more than once during any twelve-month period and cannot register any other securities during such period. We are not obligated to effect more than two demand registrations. Further, if the registrable securities are offered by means of an underwritten offering, and the managing underwriter advises us that marketing factors require a limitation of the number of securities to be underwritten, the underwriters may decide to exclude up to 75% of the registrable securities and the number of the registrable securities will be allocated among the holders on a pro rata basis according to the number of registrable securities then outstanding held by each holder requesting registration, provided that all other equity securities are first excluded.

Registration on Form

F-3

or Form

S-3

. Any holder may request us to file a registration statement on Form

F-3

or Form

S-3

if we qualify for registration on Form

F-3

or Form

S-3.

The holders are entitled to an unlimited number of registrations on Form

F-3

or Form

S-3

so long as such registration offerings are in excess of US$1,000,000. We, however, are not obligated to consummate a registration if we have consummated two registrations within any twelve month period. We have the right to defer filing of a registration statement for a period of not more than 60 days if our board of directors determines in good faith that filing of a registration statement in the near future will be materially detrimental to us or our shareholders, but we cannot exercise the deferral right more than once during any twelve-month period and cannot register any other securities during such period.

Piggyback Registration Rights.

If we propose to register for a public offering or our securities other than relating to any share incentive plan or a corporate reorganization, we must offer holders of our registrable securities an opportunity to be included in such registration. If the underwriters advise in writing that market factors require a limitation of the number of registrable securities to be underwritten, the underwriters may decide to exclude up to 75% of the registrable securities and the number of the registrable securities will be allocated among the holders on a pro rata basis according to the number of registrable securities then outstanding held by each holder requesting registration, provided that all other equity securities are first excluded (except for securities sold for the account of our company).

Expenses of Registration.

We will bear all registration expenses, other than (i) the underwriting discounts and selling commissions applicable to the sale of registrable securities, (ii) the special auditing fees exceeding US$25,000, (iii) fees and disbursement of the counsel(s) engaged by each holder, and (iv) fees and expenses charged by the depositary bank and transfer tax applicable to the sale of registrable securities, incurred in connection with registrations, filings or qualification pursuant to the shareholders agreement.

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Termination of Obligations.

We have no obligation to effect any demand, piggyback or

Form F-3

or Form

S-3

registration upon the later of (i) the fifth anniversary from the date of closing of an IPO as defined in the shareholders agreement, and (ii) with respect to any holder, the date on which such holder may sell with registration, all of such holder’s registrable securities under Rule 144 of the Securities Act in any

90-day

period.

Transactions with our Directors and Executive Officers

non-profit

institution. We have granted Yangpu Liuli, a private

non-profit

In February 2022, Shanghai Liulishuo also entered into a loan agreement with Yangpu Liuli, pursuant to which Shanghai Liulishuo extended a loan at an aggregate principal amount of up to RMB2.0 million. The loan extended to Yangpu Liuli bears a fixed interest rate of 4.25% per annum, and its maturity date should be the earlier of January 31, 2032 or the expiration of Yangpu Liuli’s operational period. The repayment should be made in cash or other form as determined by Shanghai Liulishuo.

Employment Agreements and Indemnification Agreements

See “Item 6. Directors, Senior Management and Employees—A. Directors and Senior Management—Employment Agreements and Indemnification Agreements.”

Share Incentive Plans

See “Item 6. Directors, Senior Management and Employees—B. Compensation—Share Incentive Plans.”

C.	Interest 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 are currently not a party to any material legal or administrative proceedings. We may from time to time be subject to various legal or administrative claims and proceedings arising from the ordinary course of business. Litigation or any other legal or administrative proceeding, regardless of the outcome, is likely to result in substantial cost and diversion of our resources, including our management’s time and attention.

Dividend Policy

Our board of directors has discretion on whether to distribute dividends, subject to certain requirements of Cayman Islands law. In addition, our shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our board of directors. In either case, all dividends are subject to certain restrictions under Cayman Islands law, namely that our company may only pay dividends out of profits or share premium, and provided always that in no circumstances may a dividend be paid if this would result in our company being unable to pay its debts as they fall due in the ordinary course of business. Even if we decide to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant.

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We do not have any present plan to pay any cash dividends on our Class A ordinary shares in the foreseeable future. We currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.

We are a holding company incorporated in the Cayman Islands. We may rely on dividends from our subsidiaries in China for our cash requirements, including any payment of dividends to our shareholders. PRC regulations may restrict the ability of our PRC subsidiaries to pay dividends to us. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations Related to Dividend Distributions.”

If we pay any dividends on our Class A ordinary shares, we will pay those dividends which are payable in respect of the Class A ordinary shares underlying our ADSs to the depositary, as the registered holder of such Class A ordinary shares, and the depositary then will pay such amounts to our ADS holders in proportion to Class A ordinary shares underlying the ADSs held by such ADS holders, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. Cash dividends on our Class A 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.	Offer and Listing Details

Our ADSs, each currently representing fourteen Class A ordinary share of our company, were listed on the New York Stock Exchange under the symbol “LAIX,” starting from September 2018. Effective March 4, 2022, we effected a change of the ratio of the ADS to our Class A ordinary shares from one ADS representing one Class A ordinary share to one ADS representing fourteen Class A ordinary shares. The change in the ratio of the ADS to our Class A ordinary shares had no impact on our underlying Class A ordinary shares, and no Class A ordinary shares were issued or cancelled in connection with the change in the ratio of the ADS to our Class A ordinary shares. On April 7, 2022, we were notified by the NYSE that the staff of NYSE Regulation has determined to commence proceedings to delist our ADSs. Trading in our ADSs was suspended after the market close on the NYSE on April 7, 2022. On April 22, 2022, the NYSE applied to the SEC by filing a Form 25 to delist our ADSs, which is expected to be effective ten days after filing the Form 25.

Our ADSs have been quoted on the OTC Pink Limited Information under the symbol “LAIXY” after the NYSE suspended the trading of our ADSs.

B.	Plan of Distribution

Not applicable.

Markets

Our ADSs were listed on the New York Stock Exchange under the symbol “LAIX,” starting from September 2018. Our ADSs have been quoted on the OTC Pink Limited Information under the symbol “LAIXY” after the NYSE suspended the trading of our ADSs.

D.	Selling Shareholders

Not applicable.

Dilution

Not applicable.

F.	Expenses of the Issue

Not applicable.

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ITEM 10.

ADDITIONAL INFORMATION

A.	Share Capital

Not applicable.

B.	Memorandum and Articles of Association

The following are summaries of material provisions of our sixth amended and restated memorandum and articles of association and the Companies Act as they relate to the material terms of our shares.

Objects of Our Company

. Under our sixth amended and restated memorandum and articles of association, the objects of our company are unrestricted and we have the full power and authority to carry out any object not prohibited by the law of the Cayman Islands.

Ordinary Shares

. Our ordinary shares are issued in registered form. We may not issue shares to bearer. Our shareholders who are

non-residents

of the Cayman Islands may freely hold and vote their shares. Our ordinary shares are divided into Class A ordinary shares and Class B ordinary shares. Holders of our Class A ordinary shares and Class B ordinary shares will have the same rights except for voting and conversion rights. Each Class A Ordinary Share shall entitle the holder thereof to one (1) vote on all matters subject to vote at our general meetings, and each Class B ordinary share shall entitle the holder thereof to ten (10) votes on all matters subject to vote at our general meetings. Our ordinary shares are issued in registered form and are issued when registered in our register of members.

Conversion.

Each Class B ordinary share is convertible into one Class A ordinary share at any time at the option of the holder thereof. Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. Upon any sale, transfer, assignment or disposition of Class B ordinary shares by a holder thereof to any person other than our three founders or an affiliate of any of them, or upon a change of ultimate beneficial ownership of any Class B ordinary share to any person who is not our founder or an affiliate of any of them, such Class B ordinary shares shall be automatically and immediately converted into the same number of Class A ordinary shares.

Dividends

. The holders of our ordinary shares are entitled to such dividends as may be declared by our board of directors. In addition, our shareholders may declare dividends by ordinary resolution, but no dividend shall exceed the amount recommended by our directors. Our sixth amended and restated articles of association provide that dividends may be declared and paid out of the funds of our company lawfully available therefor. Under the laws of the Cayman islands, our 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 our company being unable to pay its debts as they fall due in the ordinary course of business.

Voting Rights

. Holders of our Class A ordinary shares and our Class B ordinary shares shall, at all times, vote together as one class on all matters submitted to a vote by our shareholders at any general meeting of our company. Each Class A ordinary share shall be entitled to one vote, and each Class B ordinary share shall be entitled to ten votes, on all matters subject to a vote at general meetings of our company. Voting at any meeting of shareholders is by show of hands unless a poll is demanded. A poll may be demanded by the chairman of such meeting or any one shareholder present in person or by proxy.

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. A special resolution requires the affirmative vote of no less than

two-thirds

of the votes cast attaching to the outstanding shares at a meeting, or with a written resolution signed by all members entitled to vote. A special resolution will be required for important matters such as a change of name or making changes to our sixth amended and restated memorandum and articles of association.

General Meetings of Shareholders

. As a Cayman Islands exempted company, we are not obliged by the Companies Act to call shareholders’ annual general meetings. Our sixth amended and restated memorandum and articles of association provide that we may (but are not obliged to) in each year hold a general meeting as our annual general meeting in which case we shall specify the meeting as such in the notices calling it, and the annual general meeting shall be held at such time and place as may be determined by our directors.

Shareholders’ general meetings may be convened by the chairman of our board of directors or by a majority of our directors. Advance notice of at least ten calendar days is required for the convening of our annual general shareholders’ meeting (if any) and any other general meeting of our shareholders. A quorum required for any general meeting of shareholders consists of, at the time when the meeting proceeds to business, one or more of our shareholders holding shares which carry in aggregate (or representing by proxy) not less than

one-third

of all votes attaching to all of our shares in issue and entitled to vote at such general meeting.

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The Companies Act provides shareholders with only limited rights to requisition a general meeting, and does not provide shareholders with any right to put any proposal before a general meeting. However, these rights may be provided in a company’s articles of association. Our sixth amended and restated memorandum and articles of association provide that upon the requisition of shareholders holding shares which carry in aggregate not less than

one-third

of all votes attaching to all issued and outstanding shares of our company entitled to vote at general meetings, our board will convene an extraordinary general meeting and put the resolutions so requisitioned to a vote at such meeting. However, our sixth amended and restated memorandum and articles of association do not provide our shareholders with any right to put any proposals before annual general meetings or extraordinary general meetings not called by such shareholders.

Transfer of Ordinary Shares

. Subject to the restrictions set out below, any of our shareholders may transfer all or any of his or her ordinary shares by an instrument of transfer in writing, and shall be executed by or on behalf of the transferor, and if the directors so requires, signed by the transferee.

Our board of directors may, in its absolute discretion, decline to register any transfer of any shares 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 shares unless:

•

the instrument of transfer is lodged with us, accompanied by the certificate for the 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 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 share is to be transferred does not exceed four; and

•

a fee of such maximum sum as the applicable designated stock exchange or 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 calendar 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, on ten calendar days’ notice being given by advertisement in such one or more newspapers, by electronic means or by any other means in accordance with the applicable rules of the designated stock exchange or 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 30 calendar days in any calendar year as our board of directors may determine.

Liquidation

. On the winding up of our company, if the assets available for distribution amongst our shareholders shall be more than sufficient to repay the whole of the share capital at the commencement of the winding up, the surplus shall be distributed amongst our shareholders in proportion to the par value of the shares held by them at the commencement of the winding up, subject to a deduction from those shares in respect of which there are monies due, of all monies payable to our company for unpaid calls or otherwise. 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 in proportion to the par value of the shares held by them.

Calls on Shares and Forfeiture of Shares

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

Redemption, Repurchase and Surrender of Shares

. We may issue shares on terms that such shares are subject to redemption, at our option or at the option of the holders of these shares, on such terms and in such manner as may be determined by our board of directors or by our shareholders by special resolution. Our Company may also repurchase any of our shares on such terms and in such manner as have been approved by our board of directors or by an ordinary resolution of our shareholders. Under the Companies Act, the redemption or repurchase of any share may be paid out of our company’s profits or out of the proceeds of a new issue of shares made for the purpose of such redemption or repurchase, or out of capital (including share premium account and capital redemption reserve) if our company can, immediately following such payment, pay its debts as they fall due in the ordinary course of business. In addition, under the Companies Act no such share may be redeemed or repurchased (a) unless it is fully paid up, (b) if such redemption or repurchase would result in there being no shares outstanding or (c) if the company has commenced liquidation. In addition, our company may accept the surrender of any fully paid share for no consideration.

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Variations of Rights of Shares

. Whenever the capital of our company is divided into different classes, the rights attached to any such class may, subject to any rights or restrictions for the time being attached to any class, only be materially adversely varied with the consent in writing of the holders of

two-thirds

of the issued shares of that class or with the sanction of a special resolution passed at a separate meeting of the holders of the shares of that class. The rights conferred upon the holders of the shares of any class issued with preferred or other rights shall not, subject to any rights or restrictions for the time being attached to the shares of that class, be deemed to be materially adversely varied by the creation, allotment or issue of further shares ranking

pari passu

with or subsequent to them or the redemption or purchase of any shares of any class by our company. The rights of the holders of shares shall not be deemed to be materially adversely varied by the creation or issue of shares with preferred or other rights including, without limitation, the creation of shares with enhanced or weighted voting rights.

Issuance of Additional Shares

. Our sixth amended and restated memorandum of association authorizes our board of directors to issue additional shares (including, without limitation, preferred shares) from time to time as our board of directors shall determine, to the extent of available authorized but unissued shares.

Our sixth amended and restated memorandum of association also authorizes our board of directors to establish from time to time one or more series of preference shares and to determine, with respect to any series of preference 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, conversion rights, voting rights; and

•

the rights and terms of redemption and liquidation preferences.

Our board of directors may issue preference 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.

Inspection of Books and Records

. Holders of our ordinary shares will have no general right under Cayman Islands law to inspect or obtain copies of our list of shareholders or our corporate records (other than our memorandum and articles of association, our register of mortgages and charges and special resolutions of our shareholders). However, we will provide our shareholders with annual audited financial statements.

Anti-Takeover Provisions

. Some provisions of our sixth 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 preference shares in one or more series and to designate the price, rights, preferences, privileges and restrictions of such preference shares without any further vote or action by our shareholders; and

•

limit the ability of shareholders to requisition and convene general meetings of shareholders.

However, under Cayman Islands law, our directors may only exercise the rights and powers granted to them under our sixth amended and restated memorandum and articles of association for a proper purpose and for what they believe in good faith to be in the best interests of our company.

Exempted Company

. We are an exempted company with limited liability under the Companies Act. The Companies Act 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;

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•

may issue negotiable or bearer shares or shares with no par value;

•

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 register as a limited duration company; and

•

may register as a segregated portfolio company.

“Limited liability” means that the liability of each shareholder is limited to the amount unpaid by the shareholder on that shareholder’s shares of the company (except in exceptional circumstances, such as involving fraud, the establishment of an agency relationship or an illegal or improper purpose or other circumstances in which a court may be prepared to pierce or lift the corporate veil).

Exclusive Forum

. Unless we consent in writing to the selection of an alternative forum, the United States District Court for the Southern District of New York (or, if the United States District Court for the Southern District of New York lacks subject matter jurisdiction over a particular dispute, the state courts in New York County, New York) shall be the exclusive forum within the United States for the resolution of any complaint asserting a cause of action arising out of or relating in any way to the federal securities laws of the United States, regardless of whether such legal suit, action, or proceeding also involves parties other than us. Any person or entity purchasing or otherwise acquiring any share or other securities in our company, or purchasing or otherwise acquiring American depositary shares issued pursuant to deposit agreements, shall be deemed to have notice of and consented to the provisions of this article. Without prejudice to the foregoing, if the provision in this article is held to be illegal, invalid or unenforceable under applicable law, the legality, validity or enforceability of the rest of articles of association shall not be affected and this article shall be interpreted and construed to the maximum extent possible to apply in the relevant jurisdiction with whatever modification or deletion may be necessary so as best to give effect to our intention.

C.	Material Contracts

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

Form 20-F.

D.	Exchange Controls

See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations on Foreign Currency Exchange.”

Taxation

The following summary of the material Cayman Islands, PRC and U.S. federal income tax consequences of an investment in our ADSs or Class A ordinary shares is based upon laws and relevant interpretations thereof in effect as of the date of this registration statement, all of which are subject to change. This summary does not deal with all possible tax consequences relating to an investment in our ADSs or Class A ordinary shares, such as the tax consequences under U.S. state and local tax laws or under the tax laws of jurisdictions other than the Cayman Islands, China and the United States.

Cayman Islands Taxation

According to Maples and Calder (Hong Kong) LLP, our Cayman Islands counsel, 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 likely to be material to us levied by the government of the Cayman Islands except for stamp duties which may be applicable on instruments executed in, or after execution, brought within the jurisdiction of the Cayman Islands. The Cayman Islands is not party to any double tax treaties that are applicable to any payments made to or by our company. There are no exchange control regulations or currency restrictions in the Cayman Islands.

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

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PRC Taxation

Under the PRC Enterprise Income Tax Law and its implementation rules, an enterprise established outside China with “de facto management body” within China is considered a resident enterprise. The implementation rules define the term “de facto management body” as the body that exercises full and substantial control and overall management over the business, productions, personnel, accounts and properties of an enterprise. In April 2009, the State Administration of Taxation issued a circular, known as Circular 82, which provides certain specific criteria for determining whether the “de facto management body” of a

PRC-controlled

enterprise that is incorporated offshore is located in China. Although this circular only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreigners, the criteria set forth in the circular may reflect the State Administration of Taxation’s general position on how the “de facto management body” text should be applied in determining the tax resident status of all offshore enterprises. According to Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be regarded as a PRC tax resident by virtue of having its “de facto management body” in China only if all of the following conditions are met: (i) the primary location of the

day-to-day

We believe that LAIX Inc. is not a PRC resident enterprise for PRC tax purposes. LAIX Inc. is not controlled by a PRC enterprise or PRC enterprise group and we do not believe that LAIX Inc. meets all of the conditions above. LAIX Inc. is a company incorporated outside China. As a holding company, its key assets are its ownership interests in its subsidiaries, and its key assets are located, and its records (including the resolutions of its board of directors and the resolutions of its shareholders) are maintained, outside China. In addition, we are not aware of any offshore holding companies with a similar corporate structure as ours ever having been deemed a PRC “resident enterprise” by the PRC tax authorities. However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body.”

If the PRC tax authorities determine that LAIX Inc. is a PRC resident enterprise for enterprise income tax purposes, we may be required to withhold a 10% withholding tax from dividends we pay to our shareholders that are

non-resident

enterprises, including the holders of our ADSs. In addition,

non-resident

enterprise shareholders (including our ADS holders) may be subject to a 10% PRC tax on gains realized on the sale or other disposition of ADSs or Class A ordinary shares, if such income is treated as sourced from within China. It is unclear whether our

non-PRC

individual shareholders (including our ADS holders) would be subject to any PRC tax on dividends or gains obtained by such

non-PRC

individual shareholders in the event we are determined to be a PRC resident enterprise or such income is treated as sourced from within China. If any PRC tax were to apply to such dividends or gains, it would generally apply at a rate of 20% unless a reduced rate is available under an applicable tax treaty. However, it is also unclear whether

non-PRC

shareholders of LAIX Inc. would be able to claim the benefits of any tax treaties between their country of tax residence and China in the event that LAIX Inc. is treated as a PRC resident enterprise. See “Risk Factors—Risks Relating to Doing Business in China—If we are classified as a PRC resident enterprise for PRC income tax purposes or gains realized with respect to our ADSs or shares are deemed to be from PRC sources, we and our

non-PRC

shareholders or ADS holders could be subject to unfavorable tax consequences.”

United States Federal Income Tax Considerations

The following discussion is a summary of U.S. federal income tax considerations relating to the ownership and disposition of our ADSs or Class A ordinary shares by a U.S. Holder (as defined below) that holds our ADSs or Class A ordinary shares as “capital assets” (generally, property held for investment) under the Internal Revenue Code of 1986, as amended, or the Code. This discussion is based upon existing U.S. federal tax law, which is subject to differing interpretations or change, possibly with retroactive effect. There can be no assurance that the IRS or a court will not take a contrary position. This discussion does not discuss all aspects of U.S. federal income taxation that may be important to particular investors in light of their individual investment circumstances, including investors subject to special tax rules (including, for example, financial institutions, insurance companies, regulated investment companies, real estate investment trusts, broker-dealers, traders in securities that elect

mark-to-market

treatment,

tax-exempt

organizations (including private foundations), certain former U.S. citizens or long-term residents, investors who own (directly, indirectly or constructively) 10% or more of our stock (by vote or value), investors 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, 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, or investors that have a functional currency other than the U.S. dollar), all of whom may be subject to tax rules that differ significantly from those discussed below. This discussion, moreover, does not address the U.S. federal estate and gift tax or alternative minimum tax consequences of the ownership or disposition of our ADSs or Class A ordinary shares, the Medicare tax on net investment income or certain information reporting requirements that may apply to certain U.S. Holders. Each U.S. Holder is urged to consult its tax advisor regarding the U.S. federal, state, local and

non-U.S.

income and other tax considerations of an investment in our ADSs or Class A ordinary shares.

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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 U.S. federal income tax purposes, (i) an individual who is a citizen or resident of the United States, (ii) a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created in, or organized under the law of, the United States or any state thereof or the District of Columbia, (iii) an estate the income of which is includible in gross income for U.S. federal income tax purposes regardless of its source, or (iv) 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 U.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 partner and the partnership. Partnerships 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.

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 of the underlying shares represented by the ADSs. The remainder of this discussion assumes that a U.S. Holder of our ADSs will be treated as the beneficial owner of the underlying shares represented by the ADSs. Accordingly, 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

non-U.S.

corporation, such as our company, will be classified as a PFIC for U.S. federal income tax purposes for any 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 determined on the basis of a quarterly average) during such year is attributable to assets that produce or are held for the production of passive income. For this purpose, cash and assets readily convertible into cash are each categorized as a passive asset and the company’s goodwill and other unbooked intangibles are taken into account. Passive income generally includes, among other things, dividends, interest, rents, royalties, and gains from the disposition of passive assets. We will be treated as owning a proportionate share of the assets and earning a proportionate share of the income of any other corporation in which we own, directly or indirectly, at least 25% (by value) of the stock.

Although the law in this regard is not entirely clear, we treat the VIEs and their subsidiaries as being owned by us for U.S. federal income tax purposes, because we control their management decisions and we are entitled to substantially all of the economic benefits associated with these entities, and, as a result, we consolidate their results of operations in our consolidated U.S. GAAP financial statements. If it were determined, however, that we are not the owner of the VIEs and their subsidiaries for U.S. federal income tax purposes, we may be treated as a PFIC for the current taxable year and any subsequent taxable year.

Assuming that we are the owner of the VIEs and their subsidiaries for U.S. federal income tax purposes, and based upon our current income and assets, we do not believe we were a PFIC for the taxable year ended December 31, 2021 and we do not expect to be a PFIC for the current taxable year or in the foreseeable future. While we do not expect to be or become a PFIC in the current or future taxable years, no assurance can be given in this regard because the determination of PFIC status is a fact-intensive inquiry made on an annual basis and will depend upon the composition of our assets and income, and the continued existence of our goodwill at that time. Fluctuations in the market price of our ADSs may cause us to become a PFIC for the current or future taxable years because the value of assets for the purpose of the asset test, including the value of our goodwill and other unbooked intangibles, may be determined by reference to the market value of our ADSs from

time-to-time

(which may be volatile). In addition, the composition of our income and our assets will be affected by how, and how quickly, we spend our liquid assets. Under circumstances where we determine not to deploy significant amounts of cash for capital expenditures and other general corporate purposes, our risk of becoming classified as a PFIC may substantially increase.

If we are classified as a PFIC for any year during which a U.S. Holder holds our ADSs or Class A 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 Class A ordinary shares.

The discussion below under “Dividends” and “Sale or Other Disposition of ADSs or Class A Ordinary Shares” is written on the basis that we will not be classified as a PFIC for U.S. federal income tax purposes. The U.S. federal income tax rules that apply if we are treated as a PFIC are generally discussed below under “Passive Foreign Investment Company Rules.”

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Dividends

Any cash distributions (including the amount of any tax withheld) paid on our ADSs or Class A ordinary shares out of our current or accumulated earnings and profits, as determined under U.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. Because we do not intend to determine our earnings and profits on the basis of U.S. federal income tax principles, any distribution we pay will generally be treated as a “dividend” for U.S. federal income tax purposes.

non-corporate

U.S. Holder will generally be subject to tax on 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 requirements are met. A

non-U.S.

corporation (other than a corporation that is classified as a PFIC for the taxable year in which the dividend is paid or the preceding taxable year) will generally be considered to be a qualified foreign corporation (i) 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 (ii) 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. Our ADSs, but not our Class A ordinary shares, were traded on the New York Stock Exchange, which is an established securities market in the United States, from September 2018 to April 2022. On April 7, 2022, we were notified by the NYSE that the staff of NYSE Regulation determined to commence proceedings to delist our ADSs from the NYSE. Trading in our ADSs was suspended after the market close on the NYSE on April 7, 2022. On April 22, 2022, the NYSE applied to the SEC by filing a Form 25 to delist our ADSs, which is expected to be effective ten days after filing the Form 25. Our ADSs have been quoted on the OTC Pink Limited Information, which are not considered established securities markets in the United States for these purposes, under the symbol “LAIXY” after the NYSE suspended the trading of our ADSs. See “Item 3. Key Information—D. Risk Factors —General Risks Relating to Our ADSs— The delisting of our ADSs is expected to have a material adverse effect on the trading and price of our ADSs, and we cannot assure you that our ADSs will be relisted, or that once relisted, they will remain listed.” If our ADSs remain delisted from the New York Stock Exchange and are not otherwise readily tradable on an established securities market in the United States, dividends received on our ADSs would generally not be eligible to be taxed as dividend income from a qualified foreign corporation.

In the event that we are deemed to be a PRC resident enterprise under the PRC Enterprise Income Tax Law, we may be eligible for the benefits of the

U.S.-PRC

income tax treaty (which the U.S. Treasury Department has determined is satisfactory for this purpose) and in that case we would be treated as a qualified foreign corporation with respect to dividends paid on our Class A ordinary shares or ADSs, regardless of whether the ADSs are readily tradable on an established securities market in the United States and regardless of whether ordinary shares are represented by the ADSs. Each

non-corporate

U.S. Holder is advised to consult its tax advisors regarding the availability of the reduced tax rate applicable to qualified dividend income for any dividends we pay with respect to our ADSs or Class A ordinary shares. Dividends received on our ADSs or Class A ordinary shares will not be eligible for the dividends received deduction allowed to corporations.

Dividends will generally be treated as income from foreign sources for U.S. foreign tax credit purposes and will generally constitute passive category income. In the event that we are deemed to be a PRC resident enterprise under the PRC Enterprise Income Tax Law, a U.S. Holder may be subject to PRC withholding taxes on dividends paid on our ADSs or Class A ordinary shares. See “Taxation—PRC Taxation.” In that case, depending on the U.S. Holder’s individual facts and circumstances, a U.S. Holder may be eligible, subject to a number of complex limitations, to claim a foreign tax credit not in excess of any applicable treaty rate in respect of any foreign withholding taxes imposed on dividends received on our ADSs or Class A ordinary shares. A U.S. Holder who does not elect to claim a foreign tax credit for foreign tax withheld may instead claim a deduction, for U.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 and their outcome depends in large part on the U.S. Holder’s individual facts and circumstances. Accordingly, U.S. Holders are urged to consult their tax advisors regarding the availability of the foreign tax credit under their particular circumstances.

Sale or Other Disposition of ADSs or Class A Ordinary Shares

A U.S. Holder will generally recognize capital gain or loss upon the sale or other disposition of 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 capital gain or loss will be long-term if the ADSs or Class A ordinary shares have been held for more than one year and will generally be U.S. source gain or loss for U.S. foreign tax credit purposes, which may limit the ability to receive a foreign tax credit. Long-term capital gain of

non-corporate

U.S. Holders is generally eligible for a reduced rate of taxation. The deductibility of a capital loss may be subject to limitations.

In the event that we are treated as a PRC “resident enterprise” under the Enterprise Income Tax Law and gain from the disposition of the ADSs or Class A ordinary shares is subject to tax in China, a U.S. Holder that is eligible for the benefits of the income tax treaty between the United States and China may elect to treat the gain as PRC source income. Pursuant to recently issued United States Treasury Regulations, however, if a U.S. Holder is not eligible for the benefits of the income tax treaty or does not elect to apply the treaty, then such U.S. Holder may not be able to claim a foreign tax credit arising from any PRC tax imposed on the disposition of the ADSs or Class A ordinary shares. U.S. Holders are urged to consult their tax advisors regarding the tax consequences if a foreign tax is imposed on a disposition of our ADSs or Class A ordinary shares, including the availability of the foreign tax credit under their particular circumstances, including their eligibility for benefits under the income tax treaty between the United States and China and the potential impact of the recently issued United States Treasury Regulations.

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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 paid during a taxable year to a U.S. Holder that is greater than 125 percent of the average annual distributions paid 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 a pledge, of ADSs or Class A ordinary shares. Under the PFIC rules:

•

the excess distribution or gain will be allocated ratably over the U.S. Holder’s holding period for the ADSs or Class A ordinary shares;

•

the amount allocated to the current taxable year and any taxable years in the U.S. Holder’s holding period prior to the first taxable year in which we are classified as a PFIC (each, a

“pre-PFIC

year”), will be taxable as ordinary income;

•

the amount allocated to each prior taxable year, other than a

pre-PFIC

year, will be subject to tax at the highest tax rate in effect for individuals or corporations, as appropriate, for that year; and

•

the interest charge generally applicable to underpayments of tax will be imposed on the tax attributable to each prior taxable year, other than a

pre-PFIC

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 subsidiaries, the VIEs or any 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. U.S. Holders are urged to consult their tax advisors regarding the application of the PFIC rules to any of our subsidiaries, the VIEs or any subsidiaries of the VIEs.

As an alternative to the foregoing rules, a U.S. Holder of “marketable stock” in a PFIC may make a

mark-to-market

election with respect to such stock. The

mark-to-market

election is available only for stock that is regularly traded on a qualified exchange or other market, which for these purposes generally means a national securities exchange that is registered with the SEC, or a foreign exchange or market that the IRS determines is a qualified exchange that has rules sufficient to ensure that the market price represents a legitimate and sound fair market value. Our ADSs were traded on the New York Stock Exchange, which is an established securities market in the United States, from September 2018 to April 2022. . On April 7, 2022, we were notified by the NYSE that the staff of NYSE Regulation determined to commence proceedings to delist our ADSs from the NYSE. Trading in our ADSs was suspended after the market close on the NYSE on April 7, 2022. On April 22, 2022, the NYSE applied to the SEC by filing a Form 25 to delist our ADSs, which is expected to be effective ten days after filing the Form 25. Our ADSs have been quoted on the OTC Pink Limited Information, which are not considered established securities markets in the United States for these purposes, under the symbol “LAIXY” after the NYSE suspended the trading of our ADSs. See “Item 3. Key Information—D. Risk Factors —General Risks Relating to Our ADSs— The delisting of our ADSs is expected to have a material adverse effect on the trading and price of our ADSs, and we cannot assure you that our ADSs will be relisted, or that once relisted, they will remain listed.” If our ADSs remain delisted from the New York Stock Exchange 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, the holder 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 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 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 a

mark-to-market

election in respect of a corporation classified as a PFIC and such corporation ceases 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 such corporation is not classified as a PFIC. If a U.S. Holder makes a

mark-to-market

election, any gain such U.S. Holder recognizes upon the sale or other disposition of our 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. If a U.S. Holder makes a

mark-to-market

election it will be effective for the taxable year for which the election is made and all subsequent taxable years unless the ADSs are no longer treated as marketable stock or the IRS consents to the revocation of the election. It should also be noted that only the ADSs and not the Class A ordinary shares were listed on the New York Stock Exchange. Consequently, if a U.S. Holder holds Class A ordinary shares that are not represented by ADSs, such holder generally will not be eligible to make a

mark-to-market

election if we are or were to become a PFIC.

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Because a

mark-to-market

election cannot technically be made for any lower-tier PFICs that we may own, a U.S. Holder may continue to be subject to the PFIC rules with respect to such U.S. Holder’s indirect interest in any investments held by us that are treated as an equity interest in a 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 the general tax treatment for PFICs described above.

If 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 IRS Form 8621 or other such form as is required by the United States Treasury Department. Each U.S. Holder is urged to consult its tax advisor concerning the U.S. federal income tax consequences of purchasing, holding and disposing of ADSs or Class A ordinary shares if we are or become treated as a PFIC, including the possibility of making a

mark-to-market

election.

F.	Dividends and Paying Agents

Not applicable.

G.	Statement by Experts

Not applicable.

H.	Documents on Display

We are subject to the periodic reporting and other informational requirements of 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

no later than four months after the close of each fiscal year. 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 SEC 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 SEC at

1-800-SEC-0330.

The SEC also maintains a web site at

www.sec.gov

that contains reports, proxy and information statements, and other information regarding registrants that make electronic filings with the SEC using its EDGAR system.

As a foreign private issuer, we are exempt from the rules 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. In addition, we will not be required under the Exchange Act to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act. However, we will furnish Deutsche Bank Trust Company Americas, the depositary of our ADSs, with our annual reports, which will include a review of operations and annual audited consolidated financial statements prepared in conformity with U.S. GAAP, and all notices of shareholders’ meetings and other reports and communications that are made generally available to our shareholders. The depositary will make such notices, reports and communications available to holders of ADSs and, upon our request, will mail to all record holders of ADSs the information contained in any notice of a shareholders’ meeting received by the depositary from us.

I.	Subsidiary Information

Not applicable.

ITEM 11.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Exchange Risk

Substantially all of our revenues and expenses are denominated in Renminbi. We do not believe that we currently have any significant direct foreign exchange risk and have not used any derivative financial instruments to hedge exposure to such risk. Although our exposure to foreign exchange risks should be limited in general, the value of your investment in our ADSs will be affected by the exchange rate between U.S. dollar and Renminbi because the value of our business is effectively denominated in Renminbi, while our ADSs will be traded in U.S. dollars.

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The conversion of Renminbi into foreign currencies, including U.S. dollars, is based on rates set by the People’s Bank of China. The Renminbi has fluctuated against the U.S. dollar, at times significantly and unpredictably. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between Renminbi and the U.S. dollar in the future.

To the extent that we need to convert U.S. dollars into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we receive from the conversion. Conversely, if we decide to convert Renminbi 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 Renminbi would have a negative effect on the U.S. dollar amounts available to us.

As of December 31, 2021, we had Renminbi-denominated cash and cash equivalents of RMB44.4 million. A 10% depreciation of Renminbi against the U.S. dollar based on the foreign exchange rate on December 31, 2021 would result in a decrease of US$0.7 million in cash and cash equivalents. A 10% appreciation of Renminbi against the U.S. dollar based on the foreign exchange rate on December 31, 2021 would result in an increase of US$0.7 million in cash and cash equivalents.

Interest Rate Risk

Our exposure to interest rate risk primarily relates to the interest income generated by excess cash, which is mostly held in interest-bearing bank deposits and fixed-income securities. Interest-earning instruments carry a degree of interest rate risk. We have not been exposed to material risks due to changes in interest rates, and we have not used any derivative financial instruments to manage our interest risk exposure. However, our future interest income may fall short of expectations due to changes in market interest rates.

Inflation

To date, inflation in China has not materially affected 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 2019, 2020 and 2021 were increases of 4.5%, 0.2% and 1.2%, respectively. Although we have not been materially affected by inflation in the past, we may be affected if China experiences higher rates of inflation in the future.

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.

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D.	American Depositary Shares

Fees and Expenses

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


Service		Fees

• To any person to which ADSs are issued or to any person to which a distribution is made in respect of ADS distributions pursuant to stock dividends or other free distributions of stock, bonus distributions, stock splits or other distributions (except where converted to cash)		Up to US$0.05 per ADS issued

• Cancellation of ADSs, including the case of termination of the deposit agreement		Up to US$0.05 per ADS canceled

• Distribution of cash dividends		Up to US$0.05 per ADS held

• Distribution of cash entitlements (other than cash dividends) and/or cash proceeds from the sale of rights, securities and other entitlements		Up to US$0.05 per ADS held

• Distribution of ADSs pursuant to exercise of rights.		Up to US$0.05 per ADS held

• Distribution of securities other than ADSs or rights to purchase additional ADSs		Up to US$0.05 per ADS held

• Depositary services		Up to US$0.05 per ADS held on the applicable record date(s) established by the depositary bank

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

•

Fees for the transfer and registration of Class A ordinary shares charged by the registrar and transfer agent for the Class A ordinary shares in the Cayman Islands (i.e., upon deposit and withdrawal of Class A 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, including any applicable stamp duties, any stock transfer charges or withholding taxes (i.e., when Class A ordinary shares are deposited or withdrawn from deposit).

•

Fees and expenses incurred in connection with the delivery or servicing of Class A ordinary shares on deposit.

•

Fees and expenses incurred in connection with complying with exchange control regulations and other regulatory requirements applicable to Class A ordinary shares, deposited securities, ADSs and ADRs.

•

Any applicable fees and penalties thereon.

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

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

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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.

Fees and Other Payments Made by the Depositary to Us

The depositary may make payments to us or reimburse us for certain costs and expenses, by making available a portion of the ADS fees collected in respect of the ADR program or otherwise, upon such terms and conditions as we and the depositary bank agree from time to time. We have not received any reimbursement from the depositary in the year ended December 31, 2021.

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

See “Item 10. Additional Information—B. Memorandum and Articles of Association—Ordinary Shares” for a description of the rights of securities holders, which remain unchanged.

ITEM 15.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our chief executive officer and our principal accounting officer, we carried out an evaluation of the effectiveness of our disclosure controls and procedures, which is defined in

Rules 13a-15(e) of

the Exchange Act, as of December 31, 2021. Based upon that evaluation, our management, with the participation of our chief executive officer and principal accounting officer, has concluded that, as of the end of the period covered by this annual report, we did not maintain effective disclosure controls and procedures as of December 31, 2021 due to the material weakness identified in our internal control over financial reporting as described below under “Internal Control over Financial Reporting.” We have taken action to and will continue to undertake remedial steps to address such material weakness as set forth below under “Internal Control over Financial Reporting.”

Management’s Report on 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) under the Exchange Act. Our management, with the participation of our chief executive officer and our principal accounting officer, evaluated the effectiveness of our internal control over financial reporting based on criteria established in the framework in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management has concluded that we did not maintain effective internal control over financial reporting as of December 31, 2021 due to a material weakness identified in our internal control over financial reporting as described below under “Internal Control over Financial Reporting.”

Notwithstanding management’s assessment that we did not maintain effective internal control over financial reporting as of December 31, 2021 due to the material weakness identified, we believe that the consolidated financial statements included in this annual report fairly present our financial position, results of operations and cash flows for the fiscal years covered thereby in all material respects.

Internal Control over Financial Reporting

In the course of preparing and auditing our consolidated financial statements for the years ended December 31, 2019, 2020 and 2021, we and our independent registered public accounting firm respectively identified one material weakness in our internal control over financial reporting as of December 31, 2021. In accordance with reporting requirements set forth by the SEC, a “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our company’s annual or interim consolidated financial statements will not be prevented or detected on a timely basis.

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The material weakness identified relates to lack of sufficient competent financial reporting and accounting personnel with appropriate understanding of U.S. GAAP to address complex U.S. GAAP technical accounting issues and to prepare and review our consolidated financial statements and related disclosures in accordance with U.S. GAAP and financial reporting requirements set forth by the SEC.

To remedy our identified material weakness, we have taken action to and will continue to undertake steps to strengthen our internal control over financial reporting, including:

(i)

hiring more qualified personnel equipped with relevant U.S. GAAP and SEC reporting experience and qualifications to strengthen the financial reporting function and to set up a financial and system control framework;

(ii)

implementing regular and continuous U.S. GAAP accounting and financial reporting training programs for our accounting and financial reporting personnel; and

(iii)

establishing effective oversight and clarifying reporting requirements for

non-recurring

and complex transactions to ensure consolidated financial statements and related disclosures are accurate, complete and in compliance with U.S. GAAP and SEC reporting requirements.

However, such measures have not been fully implemented and we concluded that the material weakness and deficiencies in our internal control over financial reporting have not been remediated as of December 31, 2021.

Attestation Report of the Registered Public Accounting Firm

We qualified as an “emerging growth company” pursuant to the JOBS Act as of December 31, 2021. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002, in the assessment of the emerging growth company’s internal control over financial reporting. This annual report on Form

20-F

does not include an attestation report of our independent registered public accounting firm.

Changes in Internal Control over Financial Reporting

Other than as described above, there were no changes in our internal controls over financial reporting that occurred during the period covered by this annual report on Form

20-F

that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 16A.

AUDIT COMMITTEE FINANCIAL EXPERT

See “Item 6. Directors, Senior Management and Employees—C. Board Practices.”

ITEM 16B.

CODE OF ETHICS

Our board of directors adopted a code of business conduct and ethics that applies to our directors, officers, employees and advisors in August 2018. We have posted a copy of our code of business conduct and ethics on our website at

http://ir.laix.com.

ITEM 16C.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following table sets forth the aggregate fees billed by PricewaterhouseCoopers Zhong Tian LLP and its affiliates, our principal auditor or accountant for the periods indicated. We did not pay any other fees to our principal auditor during the periods indicated below.


	Year Ended December 31,
	2020		2021

	(US$ in thousands)
Audit fees (1)		1,015		811
Tax fees (2)		35		—
All other fees		—		—

(1)	“Audit fees” means the aggregate fees billed in each of the fiscal years listed for professional services rendered by our principal auditors for the audit of our annual financial statements.

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(2)	“Tax fees” means the aggregate fees billed in each of the fiscal years listed for professional services rendered by our principal auditors for tax compliance and tax advice services.

The policy of our audit committee is to

pre-approve

all audit and

non-audit

services provided by PricewaterhouseCoopers Zhong Tian LLP and its affiliates, including audit services, audit-related services, tax services and other services as described above, other than those for

de minimis

services which are approved by the audit committee prior to the completion of the audit.

ITEM 16D.

EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

See “Item 16G. Corporate Governance.”

ITEM 16E.

PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

None.

ITEM 16F.

CHANGE IN REGISTRANT

’

S CERTIFYING ACCOUNTANT

Not applicable.

ITEM 16G.

CORPORATE GOVERNANCE

We were subject to the New York Stock Exchange corporate governance listing standards to the extent we were listed on the New York Stock Exchange. However, New York Stock Exchange rules permit a foreign private issuer like us to follow the corporate governance practices of its home country. Certain corporate governance practices in the Cayman Islands, which is our home country, may differ significantly from the New York Stock Exchange corporate governance listing standards. Historically, we followed our home country practice with respect to our board composition in lieu of the requirement of NYSE Listed Company Manual Section 303A.01 to have a majority of independent directors as defined in the NYSE Listed Company Manual. In addition, we followed our home country practice with respect to the approval for adoption and material amendment to our equity-compensation plans in lieu of the requirement of NYSE Listed Company Manual Section 303.08 to obtain shareholder approval on all equity-compensation plans and material revisions thereto. Furthermore, we also followed our home country practice with respect to the annual general meeting in lieu of the requirement of NYSE Listed Company Manual Section 302.00 to hold an annual shareholders’ meeting during each fiscal year. If we choose to follow home country practice in the future, our shareholders may be afforded less protection than they otherwise would under the applicable corporate governance listing standards applicable to U.S. domestic issuers. See “Item 3. Key Information—D. Risk Factors—General Risks Relating 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.” On April 22, 2022, the NYSE applied to the SEC by filing a Form 25 to delist our ADSs, which is expected to be effective ten days after filing the Form 25.

ITEM 16H.

MINE SAFETY DISCLOSURE

Not applicable.

ITEM 16I.

DISCLOSURE REGARDING FOREIGN JURISDICTION 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 LAIX Inc. and its subsidiaries and VIEs are included at the end of this annual report.

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ITEM 19.

EXHIBITS


Exhibit Number		Description of Document

1.1		Sixth Amended and Restated Memorandum and Articles of Association of the Registrant (incorporated herein by reference to Exhibit 99.2 to the current report on Form 6-K filed on December 31, 2020 (File No. 001-38657))

2.1		Registrant’s Specimen American Depositary Receipt (included in Exhibit A) (incorporated herein by reference to Exhibit (a)(ii) to the post-effective amendment No. 1 to Form F-6 filed on March 4, 2022 (File No. 333-227151))

2.2		Registrant’s Specimen Certificate for Class A ordinary shares (incorporated herein by reference to Exhibit 4.2 to the registration statement on Form F-1 filed on September 14, 2018 (File No. 333-227151))

2.3		Form of Deposit Agreement among the Registrant, the depositary and holder of the American Depositary Receipts (incorporated herein by reference to Exhibit 4.3 to the registration statement on Form F-1 filed on September 14, 2018 (File No. 333-227151))

2.4		Form of Amendment No. 1 to the Deposit Agreement (incorporated herein by reference to Exhibit (a)(ii) to the post-effective amendment No. 1 to Form F-6 filed on March 4, 2022 (File No. 333-227151))

2.5*		Description of Securities

4.1		2014 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the registration statement on Form F-1 filed on August 31, 2018 (File No. 333-227151))

4.2		Amended and Restated 2018 Share Incentive Plan (incorporated herein by reference to Exhibit 99.1 to the current report on Form 6-K filed on September 8, 2020 (File No. 001-38657))

4.3		Third Amended and Restated Shareholders’ Agreement between the Registrant and other parties thereto dated June 16, 2017 (incorporated herein by reference to Exhibit 4.4 to the registration statement on Form F-1 filed on August 31, 2018 (File No. 333-227151))

4.4		Form of Indemnification Agreement between the Registrant and its directors and executive officers (incorporated herein by reference to Exhibit 10.3 to the registration statement on Form F-1 filed on August 31, 2018 (File No. 333-227151))

4.5		Form of Employment Agreement between the Registrant and its executive officers (incorporated herein by reference to Exhibit 10.4 to the registration statement on Form F-1 filed on August 31, 2018 (File No. 333-227151))

4.6		English translation of executed form of proxy agreement among a VIE of the Registrant, its shareholders and the WFOE of the Registrant as currently in effect, and a schedule of all executed proxy agreements adopting the same form in respect of a VIE of the Registrant (incorporated herein by reference to Exhibit 4.6 to the annual report on Form 20-F filed on April 16, 2020 (File No. 001-38657))

4.7		English translation of executed form of equity pledge agreement among a VIE of the Registrant, its shareholders, and the WFOE of the Registrant, as currently in effect, and a schedule of all executed equity pledge agreements adopting the same form in respect of a VIE of the Registrant (incorporated herein by reference to Exhibit 4.7 to the annual report on Form 20-F filed on April 16, 2020 (File No. 001-38657))

4.8		English translation of executed form of exclusive technology service agreement between a VIE and the WFOE of the Registrant, as currently in effect, and a schedule of all executed exclusive technology service agreements adopting the same form in respect of a VIE of the Registrant (incorporated herein by reference to Exhibit 4.8 to the annual report on Form 20-F filed on April 16, 2020 (File No. 001-38657))

4.9		English translation of executed form of exclusive call option agreement among a VIE of the Registrant, its shareholders, and the WFOE of the Registrant, as currently in effect, and a schedule of all executed exclusive call option agreements adopting the same form in respect of a VIE of the Registrant (incorporated herein by reference to Exhibit 4.9 to the annual report on Form 20-F filed on April 16, 2020 (File No. 001-38657))

4.10		English translation of executed form of Spousal Consent Letter granted by the spouse of each individual shareholder of a VIE of the Registrant, as currently in effect (incorporate herein by reference to Exhibit 10.9 to the registration statement on Form F-1 filed on August 31, 2018 (File No. 333-227151))

4.11		English translation of Loan Agreement dated April 22, 2019 among the WFOE and the shareholders of Shanghai Mengfan Education Training Co., Ltd. (incorporated herein by reference to Exhibit 4.11 to the annual report on Form 20-F filed on April 16, 2020 (File No. 001-38657))

8.1*		Principal Subsidiaries and Variable Interest Entities of the Registrant

11.1		Code of Business Conduct and Ethics of the Registrant (incorporated herein by reference to Exhibit 99.1 to the registration statement on Form F-1 filed on August 31, 2018 (File No. 333-227151))

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*		Consent of Fangda Partners

130

Table of Contents


Exhibit Number		Description of Document

15.2*		Consent of PricewaterhouseCoopers Zhong Tian LLP, an independent registered public accounting firm

15.3*		Consent of Maples and Calder (Hong Kong) LLP

101.INS*		Inline XBRL Instance Document — the instance document does not appear in the Interactive Data File because its XBRL tags are 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 Definition Linkbase Document

101.PRE*		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 with this annual report on Form 20-F

**	Furnished with this annual report on Form 20-F

131

Table of Contents

SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on

Form 20-F

and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.


LAIX Inc.

By:	/s/ Yi Wang
	Name:	Yi Wang
	Title:	Chairman of the Board of Directors
		and Chief Executive Officer

Date: April 26, 2022

132

Table of Contents

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


Report of Independent Registered Public Accounting Firm (PCAOB ID Number is 01424)			F-2
Consolidated Balance Sheets as of December 31, 2020 and 2021			F-3
Consolidated Statements of Comprehensive (Loss)/Income for the years ended December 31, 2019, 2020 and 2021			F-5
Consolidated Statements of Changes in Shareholders’ Deficit for the years ended December 31, 2019, 2020 and 2021			F-6
Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2020 and 2021			F-8
Notes to the Consolidated Financial Statements			F-10

F-1

Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of LAIX Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of LAIX Inc. and its subsidiaries (the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of comprehensive (loss)/income, of changes in shareholders’ deficit and of cash flows for each of the three years in the period ended December 31, 2021, including the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021

in conformity with accounting principles generally accepted in the United States of America.

Substantial Doubt about the Company’s Ability to Continue as a Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2(a) to the consolidated financial statements, the Company has a total shareholder’s deficit and negative working capital as of December 31, 2021 and has incurred negative cash outflows from operating activities in each of the three years in the period ended December 31, 2021. These matters raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2 (a). The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

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

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

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

/s/ PricewaterhouseCoopers Zhong Tian LLP

Shanghai, the People’s Republic of China

April 26, 2022

We have served as the Company’s auditor since 2017.

F-2

Table of Contents

LAIX Inc.

CONSOLIDATED BALANCE SHEETS

As of December 31, 2020 and 2021

(Amount in thousands of RMB and US$, except share data and per share data, or otherwise noted)


				As of December 31,
	Note			2020		2021
				RMB		RMB		US$ (Note 2(e))
ASSETS
Current assets:
Cash and cash equivalents		5			137,996		63,385		9,946
Restricted cash		6			511		171		27
Short-term investments		2	(h)		91,049		6,759		1,061
Accounts receivable, net		7			5,892		2,898		455
Prepayments and other current assets		8 , 22			58,272		42,731		6,705

Total current assets					293,720		115,944		18,194

Non-current assets:
Property and equipment, net		9			30,074		15,026		2,358
Investment in equity fund		2	(j)		5,711		5,580		876
Intangible assets, net		10			14,341		6,031		946
Operating lease right-of-use assets, net		13			82,488		9,283		1,457
Other non-current assets		8			5,866		12		2
Deferred tax assets		1 8			13,547		11,974		1,879

Total non-current assets					152,027		47,906		7,518

Total assets					445,747		163,850		25,712

LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current liabilities
Accounts payable (including accounts payable of the consolidated variable interest entities (“VIEs”) without recourse to the Company of RMB 50,443 and RMB 45,676 as of December 31, 2020 and 2021, respectively)					83,576		65,587		10,292
Customer deposits and deferred revenue, current (including customer deposits and deferred revenue, current of the VIEs without recourse to the Company of RM B 689,325 and RMB 530,712 as of December 31, 2020 and 2021, respectively)					689,325		530,975		83,322
Salary and welfare payable (including salary and welfare payable of the VIEs without recourse to the Company of RMB 56,946 and RMB 31,353 as of December 31, 2020 and 2021, respectively)					132,433		55,002		8,631
Tax payable (including tax payable of the VIEs without recourse to the Company of RMB 48,058 and RMB 48,988 as of December 31, 2020 and 2021, respectively)		11			77,327		79,656		12,500
Operating lease liability, current (including operating lease liability, current of the VIEs without recourse to the Company of RMB 19,465 and RMB 9,821 as of December 31, 2020 and 2021, respectively)		13			31,845		9,880		1,550
Accrued liabilities and other current liabilities (including accrued liabilities and other current liabilities of the VIEs without recourse to the Company of RMB 16,405 and RMB 11,077 as of December 31, 2020 and 2021, respectively)		12			19,382		21,912		3,438

Total current liabilities					1,033,888		763,012		119,733

Non-current liabilities
Customer deposits and deferred revenue, non-current (including customer deposits and deferred revenue, non-current of the VIEs without recourse to the Company o f 56,905 and RMB 28,055 as of December 31, 2020 and December 31, 2021)					56,905		28,055		4,402
Operating lease liability, non-current (including operating lease liability, non-current of the VIEs without recourse to the Company of RMB 32,933 and RMB 129 as of December 31, 2020 and 2021, respectively)		13			56,903		226		35
Other non-current liabilities (including other non-current liabilities of the VIEs without recourse to the Company of RMB 2,380 and RMB 2,380 as of December 31, 2020 and 2021, respectively)		12			10,614		4,543		713

Total non-current liabilities					124,422		32,824		5,150

Total liabilities					1,158,310		795,836		124,883

F-3

Table of Contents

			As of December 31,
	Note		2020			2021
			RMB			RMB			US$ (Note 2(e))
Shareholders’ deficit:
Class A ordinary shares (US$0.001 par value; 200,000,000 shares authorized, 29,926,647 and 30,408,054 shares issued and outstanding as of December 31, 2020 and 2021, respectively)		14		212			215			34
Class B ordinary shares (US$0.001 par value; 25,000,000 shares authorized, 19,675,674 shares issued and outstanding as of December 31, 2020 and 2021, respectively)		14		121			121			19
Subscriptions receivable from founding shareholders				(201	)		(279	)		(44	)
Treasury stock (US$0.001 par value; 781,011 shares as of December 31, 2020 and December 31, 2021, respectively)				(15,327	)		(15,327	)		(2,405	)
Additional paid-in capital				1,198,852			1,221,834			191,733
Accumulated other comprehensive income				10,256			8,019			1,258
Accumulated deficit				(1,906,476	)		(1,846,569	)		(289,766	)

Total shareholders’ deficit				(712,563	)		(631,986	)		(99,171	)

Total liabilities and shareholders’ deficit				445,747			163,850			25,712

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

F-4

Table of Contents

LAIX Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)/INCOME

For the years ended December 31, 2019, 2020 and 2021

(Amount in thousands of RMB and US$, except share data and per share data, or otherwise noted)


				For the years ended December 31,
	Note			2019			2020			2021
				RMB			RMB			RMB			US$(Note 2 (e))
Net revenues		1 6			1,023,213			972,628			684,928			107,480
Cost of revenues (including share-based compensation expenses of RMB 1,657, RMB 7,154 and RMB 2,176 for the years ended December 31, 2019, 2020 and 2021, respectively)					(273,515	)		(277,240	)		(140,439	)		(22,038	)

Gross profit					749,698			695,388			544,489			85,442

Operating expenses:
Sales and marketing expenses (including share-based compensation expenses of RMB 590, RMB 3,282 and RMB 1,060 for the years ended December 31, 2019, 2020 and 2021, respectively)					(969,401	)		(801,362	)		(325,007	)		(51,001	)
Research and development expenses (including share-based compensation expenses of RMB 13,966, RMB 14,432 and RMB 13,355 for the years ended December 31, 2019, 2020 and 2021, respectively)					(213,866	)		(190,711	)		(105,066	)		(16,487	)
General and administrative expenses (including share-based compensation expenses of RMB 10,470, RMB 4,159 and RMB 5,454 for the years ended December 31, 2019, 2020 and 2021, respectively)					(153,507	)		(111,004	)		(84,154	)		(13,206	)

Total operating expenses					(1,336,774	)		(1,103,077	)		(514,227	)		(80,694	)

Other operating income					2,390			43			14,206			2,229
(Loss)/income from operations					(584,686	)		(407,646	)		44,468			6,977

Interest income/(expenses)					11,283			904			(3,790	)		(594	)
Foreign exchange related (losses)/gains, net					(2,533	)		4,671			(63	)		(10	)
Other income, net		2 ( j ) , (t	)		3,055			9,146			21,001			3,295

(Loss)/income before income tax expenses					(572,881	)		(392,925	)		61,616			9,668
Income tax expense		1 8			(1,900	)		(1,902	)		(1,709	)		(268	)

Net (loss)/income					(574,781	)		(394,827	)		59,907			9,400

Net (loss)/income attributable to LAIX Inc.’s ordinary shareholders					(574,781	)		(394,827	)		59,907			9,400

Net (loss)/income					(574,781	)		(394,827	)		59,907			9,400
Other comprehensive income/(loss) —Foreign currency translation adjustment, net of nil tax					13,165			(19,227	)		(2,237	)		(351	)

Comprehensive (loss)/income					(561,616	)		(414,054	)		57,670			9,049

Net (loss)/income per Class A and Class B ordinary shares
—Basic		19			(11.64	)		(7.99	)		1.20			0.19
—Diluted		19			(11.64	)		(7.99	)		1.19			0.19
Weighted average number of Class A and Class B ordinary shares used in per share calculation
—Basic		19			49,364,429			49,430,696			50,022,094			50,022,094
—Diluted		19			49,364,429			49,430,696			50,277,973			50,277,973

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

F-5

Table of Contents

LAIX Inc.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIT

For the years ended December 31, 2019, 2020 and 2021

(Amount in thousands of RMB and US$, except share data and per share data, or otherwise noted)

	Class A ordinary shares					Class B ordinary shares				Treasury stock					Subscriptions receivable			Additional paid-in capital		Accumulated other comprehensive income/(loss)			Accumulated deficit			Total shareholders’ equity (deficit)
	Number of Shares			Amount		Number of Shares		Amount		Number of Shares		Amount
Balance as of January 1, 2019		28,276,557			195		19,675,674		121		—		—			(122	)		1,139,250		16,318			(936,868	)		218,894
Repurchase of ordinary shares (Note 14)		(591,200	)		—		—		—		591,200		(10,730	)		—			—		—			—			(10,730	)
Share-based compensation expense (Note 15)		—			—		—		—		—		—			—			26,683		—			—			26,683
Exercise of option (Note 15)		1,894,994			13		—		—		—		—			—			1,951		—			—			1,964
Net loss for the year		—			—		—		—		—		—			—			—		—			(574,781	)		(574,781	)
Foreign currency translation		—			—		—		—		—		—			—			—		13,165			—			13,165

Balance as of December 31, 2019		29,580,351			208		19,675,674		121		591,200		(10,730	)		(122	)		1,167,884		29,483			(1,511,649	)		(324,805	)

Repurchase of ordinary shares (Note 14)		(189,811	)		—		—		—		189,811		(4,597	)		—			—		—			—			(4,597	)
Share-based compensation expense (Note 15)		—			—		—		—		—		—			—			29,027		—			—			29,027
Exercise of option (Note 15)		536,107			4		—		—		—		—			(79	)		1,941		—			—			1,866
Net loss for the year		—			—		—		—		—		—			—			—		—			(394,827	)		(394,827	)
Foreign currency translation		—			—		—		—		—		—			—			—		(19,227	)		—			(19,227	)

Balance as of December 31, 2020		29,926,647			212		19,675,674		121		781,011		(15,327	)		(201	)		1,198,852		10,256			(1,906,476	)		(712,563	)

F-6

Table of Contents

	Class A ordinary shares				Class B ordinary shares				Treasury stock					Subscriptions receivable			Additional paid-in capital		Accumulated other comprehensive income			Accumulated deficit			Total shareholders’ equity (deficit)
	Number of Shares		Amount		Number of Shares		Amount		Number of Shares		Amount
Share-based compensation expense (Note 1 5 )		—		—		—		—		—		—			—			22,045		—			—			22,045
Exercise of option (Note 1 5 )		481,407		3		—		—		—		—			(78	)		937		—			—			862
Net income for the year		—		—		—		—		—		—			—			—		—			59,907			59,907
Foreign currency translation		—		—		—		—		—		—			—			—		(2,237	)		—			(2,237	)

Balance as of December 31, 2021		30,408,054		215		19,675,674		121		781,011		(15,327	)		(279	)		1,221,834		8,019			(1,846,569	)		(631,986	)

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

F-7

Table of Contents

LAIX Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended December 31, 2019, 2020 and 2021

(Amount in thousands of RMB and US$, except share data and per share data, or otherwise noted)


	For the years ended December 31,
	2019			2020			2021			2021
	RMB			RMB			RMB			US$(Note 2 (e))
Cash flows from operating activities
Net (loss)/income		(574,781	)		(394,827	)		59,907			9,400
Adjustments for:
Depreciation of property and equipment (Note 9)		20,287			21,256			11,547			1,814
Amortization of intangible assets (Note 10)		1,300			6,047			5,346			839
Amortization of prepaid interest expense and service fees to loan companies		304			—			—			—
Foreign exchange losses		2,221			1,358			199			31
Share-based compensation (Note 1 5 )		26,683			29,027			22,045			3,459
Amortization of operating lease right-of-use asset (Note 13)		32,301			31,177			19,123			3,001
Interest expense of operating lease liability (Note 13)		8,480			6,182			2,995			470
Investment income		(10,116	)		(3,658	)		(2,149	)		(337	)
Impairment of property and equipment (Note 2 (m))		6,857			21,390			3,356			527
Impairment of intangible assets (Note 10)		—			—			2,396			376
Impairment of other current assets (Note 8)		—			—			12,104			1,899
Impairment of other non-current assets (Note 8)		—			—			1,232			194
Disposal gain on property and equipment		—			(165	)		(712	)		(112	)
Changes in assets and liabilities:
Accounts receivable		7,043			1,468			2,994			470
Prepayments and other current assets		29,983			23,661			1,921			301
Other non-current assets		(1,077	)		1,758			5,854			919
Deferred tax assets		1,604			1,789			1,573			247
Accounts payable		61,391			(55,255	)		(16,427	)		(2,578	)
Salary and welfare payable		45,652			(21,536	)		(77,431	)		(12,151	)
Tax payable		15,459			2,987			2,329			365
Accrued liabilities and other current liabilities		(606	)		3,932			2,530			397
Operating lease liability		(42,228	)		(29,706	)		(27,556	)		(4,324	)
Other non-current liabilities		2,735			258			(1,128	)		(177	)
Customer deposits and deferred revenue, current and non-current		218,344			50,259			(187,200	)		(29,376	)

Net cash used in operating activities		(148,164	)		(302,598	)		(155,152	)		(24,346	)

Cash flows from investing activities:
Purchase of short-term investments		(35,841	)		(51,019	)		(78,424	)		(12,306	)
Proceeds from maturity of short-term investments		187,737			224,890			162,721			25,534
Purchase of property and equipment		(49,386	)		(2,039	)		(1,742	)		(273	)
Purchase of intangible assets		(2,278	)		(7,304	)		(4,017	)		(630	)
Proceeds from disposition of property and equipment		—			329			985			153
Purchase of investment in equity fund (Note 2(j))		(73	)		(190	)		—			—
Proceeds from return of investment in equity fund (Note 2(j))		87			—			2,149			337

Net cash provided by investing activities		100,246			164,667			81,672			12,815

F-8

Table of Contents


	For the years ended December 31,
	2019			2020			2021			2021
	RMB			RMB			RMB			US$(Note 2 (e))
Cash flows from financing activities:
Proceeds from exercise of share options		1,097			2,131			1,145			180
Cash payment for repurchase ordinary shares (Note 1 4 )		(10,730	)		—			—			—
(Prepayment)/cash receipt for the repurchase of ordinary shares program (Note 1 4 )		(6,711	)		2,154			—			—

Net cash (used in)/provided by financing activities		(16,344	)		4,285			1,145			180

Net decrease in cash, cash equivalents and restricted cash		(64,262	)		(133,646	)		(72,335	)		(11,351	)
Effect of exchange rate changes on cash, cash equivalents and restricted cash		2,522			(10,829	)		(2,616	)		(411	)
Cash, cash equivalents and restricted cash at the beginning of year		344,722			282,982			138,507			21,735

Cash, cash equivalents and restricted cash at the end of year		282,982			138,507			63,556			9,973

Supplemental schedule of non-cash investing and financing activities:
Accounts payable related to the purchase of property and equipment		2,533			1,761			147			23
Payables related to the purchase of copyright		13,295			13,130			8,652			1,358
Non - cash settlement related to repayment of loan and corresponding de-recognition of related receivables		7,187			—			—			—
Other receivables related to share options settlement (Note 8)		867			602			319			50

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

F-9

Table of Contents

LAIX Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amount expressed in thousands of RMB and US$, except share data and per share data, or otherwise noted)

1.	Organization and Principal Activities

(a)

Principal activities

LAIX Inc. (the “Company”) was incorporated on August 19, 2013 under the law of Cayman Islands as an exempted company with limited liability. LAIX Inc., through its subsidiaries and the consolidated variable interest entities (“VIEs”) (collectively referred to as the “Group”) is primarily engaged in providing online English learning services through its Liulishuo mobile apps in the People’s Republic of China (the “PRC”). Users can purchase the Group’s services by subscribing the courses either directly from the Group or through authorized online commerce platform partners.

As of December 31, 2021, the Company’s major subsidiaries, the major VIEs and VIE’s subsidiary are as follows:

Company Name

Date of establishment

Place of
incorporation

Percentage of
direct or indirect
economic
ownership

Principal activities

Wholly owned subsidiaries of the Company:

LingoChamp US Inc.

Established on
August 15, 2017

100

AI lab operation

LingoChamp (HK) Limited

Established on
August 29, 2013

Hong Kong

100

Investment holding

Yuguan Information Technology (Shanghai) Co., Ltd.
(“Yuguan WFOE”)

Established on
November 19, 2013

PRC

100

Technology development

Yuling Culture Communication (Shanghai) Co., Ltd.

Established on
October 13, 2015

PRC

100

Provision of

cross-border

loan arrangement

Variable Interest Entity (“VIEs”)

Shanghai Liulishuo Information and Technology Co., Ltd.
(“Shanghai Liulishuo” or “Shanghai Liulishuo VIE”)

Established on
May 17, 2013

PRC

100

Provision of English
learning services

Shanghai Mengfan Culture Communication Co., Ltd.
(“Mengfan”)

Established on
December 8, 2014

PRC

100

Provision of marketing
support services

Shanghai Mengfan Education Technology Co., Ltd.
(“Mengfan Education”)

Established on
April 18, 2019

PRC

100

Provision of English
learning service

Subsidiary of Variable Interest Entity (“VIE’s
subsidiary”)

Wuhan Liulishuo Information and Technology Co., Ltd.

Established on
January 14, 2019

PRC

100

Provision of marketing
support service

(b)

Organization Structure

To facilitate offshore financing, an offshore corporate structure was formed in 2013, which was carried out as follows:

On August 19, 2013,

pon

AIX Inc.

was incorporated in the Cayman Islands by the founders.

On August 29, 2013, LingoChamp HK was incorporated in Hong Kong with 100% ownership by

LAIX Inc

On November 19, 2013, Yuguan WFOE was incorporated in the PRC with 100% ownership by LingoChamp HK.

By entering into a series of commercial agreements in 2013, 2014 (revised in May 2018), 2018 and 2019 (the “VIE Agreements”), Shanghai Liulishuo, Mengfan, Jiangsu Liulishuo Education Technology Co., Ltd. (the “Jiangsu Liulishuo”, terminated in 2019) and Mengfan Education became VIEs on December 19, 2013, December 8, 2014, May 29, 2018 and April 22, 2019, respectively, whose primary beneficiaries are Yuguan WFOE and shareholders of Shanghai Liulishuo, Mengfan, Jiangsu Liulishuo and Mengfan Education became the “Nominee Shareholders” of Shanghai Liulishuo, Mengfan, Jiangsu Liulishuo and Mengfan Education, respectively. The Company has therefore consolidated the financial statements of VIEs.

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LAIX Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amount expressed in thousands of RMB and US$, except share data and per share data, or otherwise noted)

Please refer to below discussions for the contractual agreements.

(c)

VIE arrangements

There are some uncertainties as to whether applicable PRC laws and regulations prohibit foreign investors from providing internet and other business in the PRC. To comply with the relevant PRC laws and regulations, the Company operates substantially all of its business through the VIEs. To provide the Company the control of the VIEs, Yuguan WFOE entered into a series of contractual arrangements with the VIEs or its equity holders as follows:

Contractual Agreements with VIEs

Exclusive Technology Services Agreements

Under the exclusive technology services agreements entered into between the VIEs and Yuguan WFOE, Yuguan WFOE has the exclusive right to provide to the VIEs technology support, business management consulting, marketing consultation, products research and development and technology services which are related to all of the business operations of the VIEs. Yuguan WFOE owns the exclusive ownership of intellectual property rights created because of the performance of this agreement. In return for these services, the VIEs shall pay Yuguan WFOE an annual service fee, which subject to the determination by Yuguan WFOE at its sole discretion. The term of this agreement will expire in 30 years from its establishment and then be automatically renewed except that Yuguan WFOE is entitled to terminate the agreement upon the expiration of such

30-year

term as long as a

30-day

prior written termination notice is provided to the VIEs. The service fee charged by Yuguan WFOE to the VIEs for the years ended December 31, 2019, 2020 and 2021 was RMB 600,999, RMB 426,886 and RMB 233,868, respectively. As of December 31, 2021, RMB 93,506 service fee was remaining to be paid by the VIEs.

Exclusive Call Option Agreements

Under the exclusive call option agreements entered into among the VIEs, Yuguan WFOE and each of the equity holders of the VIEs, each of the equity holders of the VIEs irrevocably granted Yuguan WFOE an exclusive option to purchase, or have its designated representatives to purchase, to the extent permitted under the PRC law, all or part of his or its equity interests in the VIEs and all or part of assets of the VIEs. Yuguan WFOE or its designated representatives have sole discretion as to when to exercise such options, either in part or in full. The exercise prices for the VIEs shall be the higher of the capital contribution amount for the relevant equity interests, or net book value of such assets, or the lowest allowable purchase amount permitted by the PRC law. Without Yuguan WFOE’s prior written consent, the VIEs’ equity holders shall not sell, transfer, mortgage or otherwise dispose their equity interests in the VIEs. The agreements expire upon transfer of all equity interest and assets of the VIEs to Yuguan WFOE or its designated representatives.

Proxy Agreements

Pursuant to the proxy agreements entered into among Yuguan WFOE, the VIEs and each of the equity holders of the VIEs, each equity holder of the VIEs irrevocably undertakes to appoint a PRC citizen designated by Yuguan WFOE as the

attorney-in-fact

to act on his behalf to exercise all of his rights as equity holders of the VIEs, including but not limited to the right to convene and attend shareholders’ meeting, voting on all matters of the VIEs under their Articles of Association, nominating and appointing the directors and other senior management members of the VIEs. Each proxy agreement has an initial term of 30 years and shall be automatically renewed unless otherwise notified by Yuguan WFOE.

Equity Pledge Agreements

Pursuant to the equity pledge agreements among Yuguan WFOE, the VIEs and the equity holders of the VIEs, the equity holders of the VIEs shall pledge all of their equity interests in the VIEs to Yuguan WFOE to guarantee the performance by the VIEs and the equity holders’ performance of their respective obligations under the exclusive call option agreements, exclusive technology services agreements, the proxy agreements, the equity pledge agreements entered among Yuguan WFOE, the VIEs and the equity holders of the VIEs and the loan agreement entered by Yuguan WFOE and Mengfan Education. The pledge will be effective upon registration with the local branch of the SAMR. In enforcing the pledge, if the VIEs and/or their shareholders breach their contractual obligations under those agreements, Yuguan WFOE, as pledgee, will be entitled to certain rights, including the right to dispose of the pledged equity interests.

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LAIX Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amount expressed in thousands of RMB and US$, except share data and per share data, or otherwise noted)

Spousal Consent Letters

Each spouse of the married equity holders of the VIEs entered into a Spousal Consent Letter, which unconditionally and irrevocably agreed that the equity interests in the VIEs held by and registered in the name of their spouse will be disposed of pursuant to the equity pledge agreements, the exclusive call option agreements, and the proxy agreements. Each spouse agreed not to assert any rights over the equity interests in the VIEs held by their spouse. In addition, in the event that any of them obtains any equity interests in the VIEs held by their spouse for any reason, they agreed to be bound by similar obligations and agreed to enter into similar contractual agreements.

Loan Agreement

The equity holders of Mengfan Education and Yuguan WFOE also entered into a loan agreement. Pursuant to the loan agreement, Yuguan WFOE has agreed to extend an interest-free loan in an aggregate amount of

RMB1.0 million

to the shareholders of Mengfan Education solely for the capitalization of Mengfan Education. Pursuant to the loan agreements, Yuguan WFOE has the right to require repayment of the loans upon delivery of

thirty-day’s

prior notice to the shareholders, and the shareholders shall repay the loans by sale of their equity interests in Mengfan Education to Yuguan WFOE or its designated persons if required by Yuguan WFOE, or other methods as determined by the board of Yuguan WFOE.

Through the aforementioned contractual agreements, the Company has the ability to:

•

exercise effective control over the VIEs whereby having the power to direct Shanghai Liulishuo, Mengfan and Mengfan Education’s activities that most significantly drive the economic results of them;

•

receive substantially all of the economic benefits and residual returns, and absorb substantially all the risks and expected losses from Shanghai Liulishuo, Mengfan

and Mengfan Education as if it was their sole shareholder; and

•

have an exclusive option to purchase all of the equity interests in Shanghai Liulishuo,

Mengfan

and Mengfan Education.

Management therefore concluded that the Company, through the above contractual arrangements, has the power to direct the activities that most significantly impact the VIEs’ economic performance, bears the risks of and enjoys the rewards normally associated with ownership of the VIEs, and therefore the Company is the ultimate primary beneficiary of these VIEs. Consequently, the financial results of the VIEs were included in the Group’s consolidated financial statements.

(d)

Combined financial information of the VIEs and VIEs’ subsidiary

The following combined financial information of the Company’s VIEs and VIEs’ subsidiary as of December 31, 2020 and 2021 and for the years ended December 31, 2019, 2020 and 2021 was included in the accompanying consolidated financial statements of the Group as follows:


	As of December 31,
	2020		2021
Assets
Current assets
Cash and cash equivalents		37,673		2,764
Restricted cash		20		—
Accounts receivable, net		5,892		2,898
Amounts due from inter-company entities		4,254		3,939
Prepayments and other current assets		36,298		32,338

Total current assets		84,137		41,939

Non-current assets
Property and equipment, net		15,773		9,763
Operating lease right-of-use assets, net		48,862		9,133
Other non-current assets		3,510		—
Deferred tax assets		13,547		11,974

Total non-current assets		81,692		30,870

Total assets		165,829		72,809

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LAIX Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amount expressed in thousands of RMB and US$, except share data and per share data, or otherwise noted)


	As of December 31,
	2020		2021
Liabilities
Current liabilities
Accounts payable		50,443		45,676
Amounts due to inter-company entities		169,717		217,089
Customer deposits and deferred revenue, current		689,325		530,712
Salary and welfare payable		56,946		31,353
Tax payable		48,058		48,988
Operating lease liability, current		19,465		9,821
Accrued liabilities and other current liabilities		16,405		11,077

Total current liabilities		1,050,359		894,716

Customer deposits and deferred revenue, non-current		56,905		28,055
Operating lease liability, non-current		32,933		129
Other non-current liabilities		2,380		2,380

Total non-current liabilities		92,218		30,564

Total liabilities		1,142,577		925,280


	For the years ended December 31,
	2019			2020			2021
Net revenues		1,023,213			972,628			684,635
Net (loss)/income (includes inter-company service fee charges incurred in the amounts of RMB 600,999, RMB 426,886 and RMB 233,868, respectively)		(298,596	)		(101,843	)		124,277


	For the years ended December 31,
	2019			2020			2021
Net cash provided by/(used in) operating activities		109,999			(98,741	)		(34,004	)
Net cash used in investing activities		(31,603	)		(1,030	)		(925	)
Net cash provided by financing activities		1,000			—			—

Net increase/(decrease) in cash, cash equivalents and restricted cash		79,396			(99,771	)		(34,929	)

In accordance with the aforementioned agreements, the Company has power to direct activities of the VIEs, and can have assets transferred freely out of the VIEs without restrictions. Therefore, the Company considers that there is no asset in the VIEs that can be used only to settle obligations of the respective VIE, except for registered capital, as of December 31, 2020 and 2021. As the VIEs are incorporated as limited liability companies under the PRC Company Law, the 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. As the Company is conducting certain businesses in the PRC through the VIEs, the Company may provide additional financial support on a discretionary basis in the future, which could expose the Company to a loss.

The VIEs’ assets comprise both recognized and unrecognized revenue-producing assets. The recognized revenue-producing assets mainly include leasehold improvements, computers and network equipment. The unrecognized revenue-producing assets mainly consist of patents, trademarks and assembled workforce which are not recorded in the financial statements of the VIEs as it did not meet the recognition criteria set in

ASC 350-30-25.

There is no VIE where the Company has variable interest but is not the primary beneficiary.

(e)

Risks associated with VIE arrangements

Though the PRC has, since 1978, implemented a wide range of market-oriented economic reforms, continued reforms and progress towards a full market-oriented economy are uncertain. In addition, the telecommunication, information, and media industries remain highly regulated. Restrictions are currently in place and are unclear with respect to which segments of these industries foreign owned entities, like the Company, may operate. The Chinese government may issue from time to time new laws or new interpretations on existing laws to regulate areas such as telecommunication, information and media. Regulatory risk also encompasses the interpretation by the tax authorities of current tax laws, and the Company’s legal structure and scope of operations in the PRC, which could be subject to further restrictions resulting in limitations on the Company’s ability to conduct business in the PRC.

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LAIX Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amount expressed in thousands of RMB and US$, except share data and per share data, or otherwise noted)

There are uncertainties regarding the interpretation and application of current and future PRC laws, rules and regulations, including but not limited to the laws, rules and regulations governing the validity and enforcement of the contractual arrangements with consolidated VIEs. Although the Company believes that the contractual arrangements among its equity holders and Yuguan WFOE comply with PRC law and are legally enforceable. However, the Company cannot assure that the PRC regulatory authorities will not adopt any new regulation to restrict or prohibit foreign investments in the internet related business through contractual arrangements in the future or that it will not determine that the ownership structure and contractual arrangements violate PRC laws, rules or regulations. If the Company and its consolidated VIEs are found to be in violation of any existing or future PRC laws or regulations, or fail to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities would have broad discretion in dealing with such violations, including:

(a)

revoking the business licenses of such entities;

(b)

discontinuing or restricting the conduct of any transactions between the Company’s PRC subsidiaries and the VIEs;

(c)

imposing fines, confiscating the income of the VIEs or the Company’s PRC subsidiaries, or imposing other requirements with which the Company or its PRC subsidiaries and consolidated VIEs may not be able to comply;

(d)

requiring the Company to restructure its ownership structure or operations, including terminating the contractual arrangements with the VIEs and deregistering the equity pledges of the VIEs, which in turn would affect its ability to consolidate, derive economic interests from, or exert effective control over the VIEs; or

(e)

restricting or prohibiting its use of the proceeds of any offering to finance its business and operations in China.

If the imposition of any of these penalties precludes the Company from operating its business, it would no longer be in a position to generate revenue or cash from it. If the imposition of any of these penalties causes the Company to lose its rights to direct the activities of its consolidated VIEs or its rights to receive its economic benefits, the Company would no longer be able to consolidate these entities, and its financial statements would no longer reflect the results of operations from the business conducted by VIEs except to the extent that the Company receives payments from VIEs under the contractual arrangements. Either of these results, or any other significant penalties that might be imposed on the Company in this event, would have a material adverse effect on its financial condition and results of operations.

On January 19, 2015, the Ministry of Commerce of the PRC, or (the “MOFCOM”) released on its Website for public comment a proposed PRC law (the “Draft FIE Law”), according to which, variable interest entities that are controlled via contractual arrangements would also be deemed as FIEs, if they are ultimately “controlled” by foreign investors.

In March 2019, the PRC National People’s Congress promulgated the Foreign Investment Law, or the 2019 PRC Foreign Investment Law, which became effective on January 1, 2020 and replaced the major existing laws and regulations governing foreign investment in the PRC. The approved Foreign Investment Law does not touch upon the relevant concepts and regulatory regimes that were historically suggested for the regulation of VIE structures, and thus this regulatory topic remains unclear under the Foreign Investment Law. As the 2019 PRC Foreign Investment Law is newly adopted and relevant government authorities may promulgate more laws, regulations or rules on the interpretation and implementation of the 2019 PRC Foreign Investment Law, the possibility can’t be ruled out that the VIE structure adopted by the Group may be deemed as a method of foreign investment by, any of such future laws, regulations and rules, which cause significant uncertainties as to whether the Group’s VIE structures would be treated as a method of foreign investment. If the Group’s VIE structure would be deemed as a method of foreign investment under any of such future laws, regulations and rules, and any of the Group’s businesses operation would fall in the “negative list” for foreign investment that is subject to any foreign investment restrictions or prohibitions, the Group would be required to take further actions to comply with such laws, regulations and rules, which may materially and adversely affect the Group’s current corporate structure, corporate governance, business, financial conditions and results of operations.

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LAIX Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amount expressed in thousands of RMB and US$, except share data and per share data, or otherwise noted)

2.	Principal Accounting Policies

(a)

Basis of preparation and going concern

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).

The

Group’s

financial statements have been prepared assuming that the

Group

will continue as a going concern, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The

Group

incurred net losses of RMB574,781, RMB394,827 and generated net income of RMB59,907 for the years ended December 31, 2019, 2020 and 2021, respectively. Net cash used in operating activities was approximately RMB148,164, RMB302,598 and RMB155,152 for the years ended December 31, 2019, 2020 and 2021, respectively. As of December 31, 2021, the

Group’s

total shareholders’ deficit was RMB631,986 and

it had negative working capital (current liabilities exceeded the current assets) in the amount of

RMB647,068.

The Group’s ability to continue as a going concern is dependent on management’s ability to successfully execute its plans, which include a business plan to adjust the pace of the Group’s new business implementation in the

overseas

market, control operating costs and optimize operational efficiency to improve the Group’s cash flow from operations, and a financial plan to raise external equity or debt financing to fund the continuous operations. To implement the business plan, the Group will continue to enhance user engagement and retention by offering higher quality and diversified content while optimizing its traffic acquisition strategy to efficiently control and reduce the user related costs. The Group will further preserve liquidity and manage cash flows by reducing various discretional expenditures. Additionally, the Group will continue to seek external financing to improve its liquidity position, though there is no assurance that the Group will be successful in obtaining sufficient funding on terms acceptable to the Group to fund continuing operations.

Accordingly, these factors of uncertainties relating to the successful execution of the Group’s business plan in light of the COVID-19 pandemic and the evolving regulatory requirements as well as the uncertainties relating to the possibility of securing sufficient funding raised substantial doubt as to the Group’s ability to continue as a going concern for a period of one year from the issuance of these financial statements. Management has prepared the Group’s consolidated financial statements on going concern basis. These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might result from this uncertainty.

Significant accounting policies followed by the Group in the preparation of the accompanying consolidated financial statements are summarized below.

(b)

Use of estimates

The preparation of the Group’s consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the balance sheet date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

The Group believes that revenue recognition, liabilities related to incentive programs, consolidation of VIEs, allowance for credit loss, determination of share-based compensation, impairment assessment of long lived assets, the valuation allowance of deferred tax assets and income tax expenses reflect more significant estimates used in the preparation of its consolidated financial statements.

Management makes the estimates on historical experience and on various other assumptions as discussed elsewhere to the consolidated financial statements that are believed to be reasonable, the results of which form the basis for making estimates about the carrying values of assets and liabilities. Actual results could materially differ from these estimates.

(c)

Consolidation

The Group’s consolidated financial statements include the financial statements of LAIX Inc., its subsidiaries and the VIEs for which the Company or its subsidiary is the primary beneficiary. All transactions and balances among the Company, its subsidiaries and the VIEs have been eliminated upon consolidation.

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LAIX Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amount expressed in thousands of RMB and US$, except share data and per share data, or otherwise noted)

Subsidiaries are those entities in which the Company, directly or indirectly, controls more than one half of the voting powers; has the power to appoint or remove the majority of the members of the board of directors; or to cast a majority of votes at the meeting of directors; or has the power to govern the financial and operating policies of the investee under a statute or agreement among the shareholders or equity holders.

A consolidated VIE is an entity in which the Company, or its subsidiary, through contractual agreements, bears the risks of, and enjoys the rewards normally associated with ownership of the entity. In determining whether the Company or its subsidiaries are the primary beneficiary, the Company considered whether it has the power to direct activities that are significant to the VIE’s economic performance, and also the Group’s obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. The Company, through Yuguan WFOE holds all the variable interests of the VIEs, and has been determined to be the primary beneficiary of the VIEs.

(d)

Functional Currency and Foreign Currency Translation

The Group uses Renminbi (“RMB”) as its reporting currency. The functional currency of the Company and its subsidiaries incorporated outside of the PRC is the United States dollar (“US$”), while the functional currency of the PRC entities in the Group is RMB as determined based on the criteria of ASC 830, Foreign Currency Matters.

Transactions denominated in other than the functional currencies are

re-measured

into the functional currency of the entity at the exchange rates prevailing on the transaction dates. Financial assets and liabilities denominated in other than the functional currency are

re-measured

at the balance sheet date exchange rate. The resulting exchange differences are recorded in the consolidated statements of comprehensive (loss)/income as foreign exchange related gain / loss.

The financial statements of the Group are translated from the functional currency to the reporting currency, RMB. Assets and liabilities of the Company and its subsidiaries incorporated outside of the PRC are translated into RMB at fiscal year-end exchange rates, income and expense items are translated at the average exchange rates prevailing during the fiscal year, representing the index rates stipulated by the People’s Bank of China. Translation adjustments arising from these are reported as foreign currency translation adjustments and are shown as a separate component of shareholders’ equity (deficit) on the consolidated financial statements. The exchange rates used for translation on December 31, 2020 and 2021 were US$1.00=RMB

6.5249 and RMB 6.3757,

respectively, representing the index rates stipulated by the People’s Bank of China.

(e)

Convenience Translation

The unaudited US$ amounts disclosed in the accompanying financial statements are presented solely for the convenience of the readers. Translations of amounts from RMB into US$ for the convenience of the reader were calculated at the rate of US$1 = RMB

6.3726

on December 30, 2021, representing the noon buying rate in The City of New York for cable transfers of RMB as certified for customs purposes by the Federal Reserve Board. No representation is made that the RMB amounts could have been, or could be, converted, realized or settled into US$ at that rate on December 31, 2021, or at any other rate.

(f)

Fair value of financial instruments

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

The established fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

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LAIX Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amount expressed in thousands of RMB and US$, except share data and per share data, or otherwise noted)

The three levels of inputs that may be used to measure fair value include:

Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2: Observable, market-based inputs, other than quoted prices, in active markets for identical assets or liabilities.

Level 3: Unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

Accounting guidance also describes three main approaches to measuring the fair value of assets and liabilities: (1) market approach; (2) income approach and (3) cost approach. The market approach uses prices and other relevant information generated from market transactions involving identical or comparable assets or liabilities. The income approach uses valuation techniques to convert future amounts to a single present value amount. The measurement is based on the value indicated by current market expectations about those future amounts. The cost approach is based on the amount that would currently be required to replace an asset.

The Group does not have any

non-financial

assets or liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis.

The Group’s financial instruments consist principally of cash and cash equivalents, restricted cash, short-term investments, accounts receivable, prepayment and other receivable, accounts payable, operating lease liabilities and accrued liabilities and other liabilities.

As of December 31, 2020 and 2021, the carrying values of cash and cash equivalents, restricted cash, accounts receivable, prepayment and other receivable, accounts payable, operating lease liabilities and accrued liabilities and other liabilities approximated their fair values reported in the consolidated balance sheets due to the short-term maturities of these instruments.

On a recurring basis, the Group measures its short-term investments at fair value.

The following table sets forth the Group’s assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy:


	Level 1		Level 2		Level 3		Balance at fair value
As of December 31, 2020
Assets
Short-term investments—Wealth management products		—		91,049		—		91,049

As of December 31, 2021
Assets
Short-term investments—Wealth management products		—		6,759		—		6,759

(g)

Cash and Cash Equivalents

Cash and cash equivalents include cash in bank placed with banks or other financial institutions, which have original maturities of three months or less at the time of purchase and are readily convertible to known amounts of cash.

(h)

Short-term investments

Short-term investments include time deposits with original maturities between

three months and one year

with banks in the PRC, and investments in wealth management products issued by certain banks with maturities between three months and one year. The wealth management products are unsecured with variable interest rates. In accordance with ASC 825, for investments in financial instruments with a variable interest rate referenced to performance of underlying assets, the Group elected the fair value method at the date of initial recognition and carried these investments at fair value. Changes in the fair value are reflected in the consolidated statements of operations and comprehensive (loss)/income as unrealized gains in investments. Fair value is estimated based on quoted prices of similar products provided by banks at the end of each period. The Group classifies the valuation techniques that use these inputs as Level 2 of fair value measurements.

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LAIX Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amount expressed in thousands of RMB and US$, except share data and per share data, or otherwise noted)

(i)

Accounts receivable, net

Accounts receivable primarily consists of the subscription fee for the courses that have been consumed by customers, while still due from distribution channels and online commerce platform partners (collectively, the “Third Parties”), respectively, mainly due to timing difference between the Group’s receipts from the Third Parties versus the Third Parties’ cash receipts from customers. The subscription fee for the courses that have not been consumed by customers but received by Third Parties is recorded as other current assets (Note 8).

Accounts receivable are presented net of allowance for any potentially uncollectible amounts. The Group makes estimates of expected credit and collectability trends for the allowance for credit losses based upon its assessment of various factors, including historical experience, the age of the accounts receivable balances, credit quality of its Third Parties, current economic conditions, reasonable and supportable forecasts of future economic conditions that may vary by geography, customer-type, or industry

sub-vertical,

and other factors that may affect its ability to collect from the Third Parties. Expected credit losses are recorded as general and administrative expenses on the Group’s consolidated statements of comprehensive (loss)/income.

The Group adopted ASU 2016-13 on January 1, 2020 and the adoption did not have a material impact on the Group’s consolidated financial statements and related disclosures. Under the new guidance, the Company measures credit losses for financial assets held at the reporting date (including accounts receivable) based on historical experience, current conditions, and reasonable and supportable forecasts. Although the Group has historically not experienced any credit losses, it may experience increasing credit loss risks from accounts receivable in future periods if its third parties are adversely affected by economic pressures or uncertainty associated with local or global economic recessions, disruption associated with the current

COVID-19

pandemic, or other specific factors, and actual experience in the future may differ from their past experiences or current assessment.

(j)

Investment in equity fund

Investment in equity fund represents the Group’s investment in private equity fund as a limited partnerships. The Group’s limited partnership interest is considered as minor with no virtually influence over the operating and financial policies of the fund. The investment is therefore measured at cost less impairment since its fair value is not readily determinable, and is adjusted for subsequent observable price changes, if any. Gains are recognized as other income when distribution are declared by the fund.

(k)

Intangible assets

Intangible assets purchased and intangible assets arising from acquisitions of subsidiaries are recognized and measured at fair value upon acquisition. The Group’s purchased intangible assets include computer software, domain name and copyright. Computer software and copyright are amortized on a straight-line basis over their useful lives, ranging from

2 to 5

years. Domain name is the intangible assets with indefinite life. The estimated life of intangible assets subject to amortization is reassessed if circumstances occur that indicate the life has changed. Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The Group recorded impairment charges of nil, nil and RMB 2,396 for intangible assets for the year ended December 31, 2019, 2020 and 2021 respectively.

(l)

Property and equipment, net

Property and equipment are stated at historical cost less accumulated depreciation and impairment loss, if any. Depreciation is calculated using the straight-line method over their estimated useful lives. The estimated useful lives are as follows:


Leasehold improvements		over the shorter of lease terms or estimated useful lives of the assets
Office equipment		3-5 years
Software		3 years

Expenditures for maintenance and repairs are expensed as incurred. The gain or loss on the disposal of property and equipment is the difference between the net sales proceeds and the carrying amount of the relevant assets and is recognized in the consolidated statements of comprehensive (loss)/income. The disposal gain or (loss) for the years ended December 31, 2019, 2020 and 2021 was not material.

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LAIX Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amount expressed in thousands of RMB and US$, except share data and per share data, or otherwise noted)

(m)

Impairment of long-lived assets

For other long-lived assets including property and equipment and other non-current assets, the Group evaluates for impairment whenever events or changes (triggering events) indicate that the carrying amount of an asset may no longer be recoverable. The Group assesses the recoverability of the long-lived assets by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to receive from use of the assets and their eventual disposition. Such assets are considered to be impaired if the sum of the expected undiscounted cash flows is less than the carrying amount of the assets. The impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. The Group recorded impairment charges of RMB

6,857

RMB 21,390 and RMB 3,356 for leasehold improvements related to rental office spaces which had been vacant and unused by the Group for operation in general and administrative expenses for the year ended December 31, 2019, 2020 and 2021, respectively.

(n)

Customer Deposits and Deferred Revenue

Cash proceeds received from customers for

on-line

courses and services provided are initially recorded as customer deposits and deferred revenue and are recognized as revenues when revenue recognition criteria are met. For cash proceeds expected to be consumed within 12 months, customer deposits and deferred revenue will be recorded as current liability, otherwise it is recorded as

non-current

liability.

Approximately 45.0

and 61.2

percent of total revenue recognized in the year ended December 31, 2020 and 2021, respectively is from the customer deposits and deferred revenue balance as of January 1, 2020 and 2021. Remaining performance obligation represents contracted revenue that has not yet been recognized and is equal to the balance of customer deposits and deferred revenue after consideration of estimated refunds, except for

RMB 86,718

related to Kids Liulishuo which represents contracted service revenue that has not yet been recognized and liabilities to the customer because the Company ceased the operation of Kids Liulishuo. The Company plans to satisfy the liabilities for customer deposits by transferring its contracts to Yangpu Liuli (a related party), at the same carry-over basis. The Company expects to retain a portion of the deferred revenue through service charge arrangements with Yangpu Liuli, as more fully explained in Note 21 (1). The majority of the Group’s noncurrent remaining performance obligation is expected to be recognized in the next 13 to 27 months.

(o)

Revenue recognition

The Group adopted ASC 606, “Revenue from Contracts with Customers” for all periods presented. Consistent with the criteria of Topic 606, the Group follows five steps for its revenue recognition: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation.

The Group provides online English learning service to customers through its self-developed mobile apps, English Liulishuo, Liuli Reading and Kids Liulishuo. The Group generates revenue by offering a variety of courses to its customers. The Group primarily offers two types of course packages, namely prepaid standard courses and prepaid multiple course packages. Prepaid standard courses, such as DongNi English, DongNi English A+ and Kids Course, allow customers to purchase courses to be consumed over a certain period of time. Prepaid multiple course packages which contain prepaid standard courses and course credits for

one-to-one

tutoring sessions with contract human teachers are provided as the Group’s premium services, and allow customers to purchase multiple courses for use before a certain expiration date. The customers purchase the services by subscribing to prepaid standard courses, prepaid multiple course packages or other courses either directly from the Group or through online commerce platform partners. Subscription fees are generally paid in advance and initially recorded as customer deposits and deferred revenue.

The Group refunds subscription fees corresponding to any remaining undelivered learning services when customers withdraw contracts with the Group. Withdrawals are recorded as reductions of the customer deposits and deferred revenue related to subscription fees received in advance and have no impact on recognized revenue.

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LAIX Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amount expressed in thousands of RMB and US$, except share data and per share data, or otherwise noted)

The Group has assessed all variable considerations identified when determining the transaction price and such assessment requires the Group to consider various forms that the variable considerations may take. To incentivize the subscription of its prepaid courses, the Group selectively offers performance-based or behavior-based refunds to its customers who subscribe the prepaid courses. The amount of refund is fixed and

pre-determined

and may be larger than the subscription fee. In the case that the refund amount is larger than customer’s individual cumulative revenue basis, the Group recognizes such negative revenue as selling expenses. There were negative revenue amounts of

RMB

2,353, nil and nil

recorded in selling expenses for the years ended December 31, 2019, 2020 and 2021, respectively. Prepaid courses consist of two types of revenue models—the

non-refundable

course model and the refundable course model. Revenues for the

non-refundable

course model are recognized ratably over the contractual course period as services are provided. Under the refundable course model, a customer is eligible to obtain a refund if the customer achieves certain agreed performance goals or behavior goals, including but not limited to completing a minimum number of learning hours within a set period of time, achieving a minimum number of course sharing on social networking apps within the contractual course period, achieving various measures of learning efficiency, and receiving a certain overall score for each course in the package. Based on the historical records of performance-based or behavior-based refunds, the Group estimates a refund rate that constitutes a reduction of the transaction price to recognize the revenues ratably as services are provided over the contractual course period. When there are no sufficient historical records for the Group’s estimation, revenue will not be recognized until uncertainty associated with the variable considerations is resolved. Except for the aforementioned performance-based or behavior-based refunds to its customers, there is no other circumstances that cause variability in the considerations.

The Group has concluded that it is responsible for the designation and production of all the online courses and the Group is the party contractually and substantively holding all rights to the service of delivering the courses. Therefore, the Group meets the criteria under ASC 606 of having control of the service and should be viewed as the principal in the arrangements. The Group therefore recognizes revenue on a gross basis.

Prepaid standard courses

Prepaid standard courses include the Group’s standard DongNi English, DongNi English A+ and Kids Course corresponding to customers’ proficiency levels. Such courses range from 30 days to 1,080 days. A customer can access the standard course without limit within such customer’s fixed contract period. Revenue is recognized on a straight-line basis over the contractual course period.

Prepaid multiple course packages

Prepaid multiple course packages range are provided as the Group’s premium services, including the standard DongNi English course and course credits for

one-to-one

courses with contracted human teachers. Such course packages typically from 180 days to 720 days. Each type of course is a separate unit of accounting, as each type has a distinct nature with different patterns and measurements of transfer to the customers.

The Group determines the standalone selling price for each type of course in the package and allocates the transaction price based on the relative value of each type of course in the arrangement, if applicable. The best evidence of standalone selling price is the price the Group charges for a certain type of course when the Group sells it separately in similar circumstances to similar users. For a type of course that is not being sold separately, the Group determines the value for each course based on its cost, plus an expected margin.

For the standard courses included in prepaid multiple course packages, revenue is recognized on a straight-line basis over the contractual course period. For

one-to-one

courses, revenue is recognized when the course credit is consumed, with the estimated breakage from unconsumed courses at contract expiration. The expected breakage amount is recognized as revenue in proportion to the pattern of course credits consumed by the customers based on actual breakage data the Group has accumulated. The expected breakage amount is updated on a periodic basis.

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LAIX Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amount expressed in thousands of RMB and US$, except share data and per share data, or otherwise noted)

Other courses and services

The Group also provides other courses and services, such as pronunciation training and practice tests. Revenues are recognized ratably over a fixed term of the agreement or an estimated viewership period as services are provided.

The Group offers free courses to customers upon registration. Customers are not obligated to subscribe any course packages with the Group to obtain the free courses. The Group records the content related costs incurred in providing the free courses as sales and marketing expenses.

User Incentive Program

The Group’s customers are registered users of its mobile app who have subscribed for the courses of the Group. The Group has incentive programs for its registered users to enhance user engagement and to incentivize the use of the Group’s platform. The Group offers points or cash rewards to the registered users who refer new registered users to its mobile app, or when they participate in various free activities in the Group’s mobile app. The points can be redeemed for free gifts and the cash rewards can be withdrawn at the discretion of the registered users with no threshold. Both the offering and the use of the points, and the grant of the cash rewards are not associated with revenue transactions. The estimated incremental costs related to free gifts and cash rewards are recognized as a component of the Group’s sales and marketing expenses.

Value-added tax

The Group’s revenue is subject to value-added tax (“VAT”) for the periods presented. The Group also pays VAT for costs and expenses (“input VAT”). VAT payable is permitted to be offset against input VAT, when supported by valid VAT invoices received from vendors against their VAT liability. VAT on the invoiced amount collected by the Group on behalf of tax authorities in respect of services provided, net of VAT paid for purchases, is recorded as a liability until it is paid to the tax authorities.

(p)

Cost of revenues

Cost of revenues consist of expenditures incurred in the generation of the Group’s revenue, including but not limited to the course content related costs, service fees paid to contract human teachers in

one-to-one

courses, rental expenses, IT service costs and depreciation of property and equipment.

(q)

Research and development expense

Research and development expenses consist primarily of (i) salary and welfare for research and development personnel, (ii) rental expenses for office space associated with research and development personnel, and (iii) depreciation of office premises and servers utilized by research and development personnel. Research and development costs are expensed as incurred.

The Group accounts for internal use software development costs in accordance with guidance on intangible assets and internal use software. This requires capitalization of qualifying costs incurred during the software’s application development stage and to expense costs as they are incurred during the preliminary project and post implementation/operation stages. No cost for developing such software application was capitalized for the periods presented.

(r)

Sales and marketing expenses

Sales and marketing expenses consist primarily of branding and marketing expenses, salary and welfare for sales and marketing personnel, commissions to distribution channels (mobile app stores) and online commerce platform partners, payment processing expenses, rewards to registered users related to incentive programs, and rental expenses for office space associated with sales and marketing personnel. The branding and marketing expenses amounted to RMB 519,719 and RMB 442,012 and RMB 136,833 for the years ended December 31, 2019, 2020 and 2021, respectively.

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LAIX Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amount expressed in thousands of RMB and US$, except share data and per share data, or otherwise noted)

The incremental costs of obtaining a contract are those costs that the Group incurs to obtain a contract with the customer that it would not have incurred if the contract had not been obtained. The Group recognizes the incremental costs of obtaining a contract, including the commission to distribution channels (mobile app stores) and online commerce platform partners, as an asset, and amortizes the related cost over the period of expected benefit. Upon the election of the practical expedient under ASC

340-40-25-4,

the incremental costs of obtaining a contract are expensed when incurred if the amortization period of the asset that the entity otherwise would have recognized is one year or less. For the years ended December 31, 2019, 2020 and 2021, the incremental costs capitalized as assets were not material.

(s)

General and administrative expenses

General and administrative expenses consist primarily of salary and welfare for general and administrative personnel, rental expenses for office space associated with general and administrative personnel, general office expenses, and professional service fees.

(t)

Government subsidies

Government subsidies primarily consist of financial subsidies received from local governments for operating a business in their jurisdictions and in compliance with specific policies promoted by the local governments. There are no defined rules and regulations to govern the criteria necessary for companies to receive such benefits, and the amount of financial subsidy is determined at the discretion of the relevant government authorities. The government subsidies with no further conditions to be met are recorded as “Other income, net” when received. The government subsidies with certain operating conditions are recorded as liabilities when received and will be recorded as operating income when the conditions are met.

(u)

Operating leases

The Group adopted ASU

2016-02,

Leases, on January 1, 2019.

The Group determines if an arrangement is a lease at inception. Operating leases are included in operating lease

right-of-use

(“ROU”) assets and operating lease liability, current and

non-current

in the Group’s consolidated balance sheets.

ROU assets represent the Group’s right to use an underlying asset for the lease term and lease liabilities represent the Group’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. When determining the lease term, the Group includes options to extend or terminate the lease when it is reasonably certain that it will exercise that option, if any. As the Group’s leases do not provide an implicit interest rate, the Group uses its incremental borrowing rate to compute the present value of lease liabilities, which it calculates based on the credit quality of the Group and by comparing interest rates available in the market for similar borrowings, and adjusting this amount based on the impact of collateral over the term of each lease.

The Group adopted ASU

2016-02

using the modified retrospective transition approach, to be applied to leases existing as of, or entered into after, January 1, 2019. Prior to the adoption, leases where substantially all the rewards and risks of ownership of assets remain with the lessor were accounted for as operating leases. Payments made under operating leases were recognized as an expense on a straight-line basis over the lease term. The Group had no capital leases in any period presented.

The Group has elected to adopt the following lease policies in conjunction with the adoption of ASU

2016-02:

(i) elect for each lease not to separate

non-lease

components from lease components and instead to account for each separate lease component and the

non-lease

components associated with that lease component as a single lease component; (ii) for leases that have lease term of 12 months or less and do not include a purchase option that is reasonably certain to exercise, the Group elected not to apply ASC 842 recognition requirements; and (iii) the Group elected to apply the package of practical expedients for existing arrangements entered into prior to January 1, 2019 to not reassess (a) whether an arrangement is or contain a lease, b) the lease classification applied to existing leases, and (c) initial direct costs.

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LAIX Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amount expressed in thousands of RMB and US$, except share data and per share data, or otherwise noted)

(v)

Employee social security and welfare benefits

Employees of the Group in the PRC are entitled to staff welfare benefits including pension, work-related injury benefits, maternity insurance, medical insurance, unemployment benefit and housing fund plans through a PRC government-mandated multi-employer defined contribution plan. The Group is required to contribute to the plan based on certain percentages of the employees’ salaries, up to a maximum amount specified by the local government.

The PRC government is responsible for the medical benefits and the pension liability to be paid to these employees. The Group’s obligations are limited to the amounts contributed and no there is no legal obligation beyond the contributions made.

(w)

Income taxes

Current income taxes are provided on the basis of net income for financial reporting purposes, adjusted for income and expense items which are not assessable or deductible for income tax purposes, in accordance with the regulations of the relevant tax jurisdictions.

Deferred income taxes are accounted for using an asset and liability method. Under this method, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The tax base of an asset or liability is the amount attributed to that asset or liability for tax purpose. The effect on deferred taxes of a change in tax rates is recognized in the consolidated statements of comprehensive (loss)/income in the period of change. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more likely than not that some portion of, or all of the deferred tax assets will not be realized.

Uncertain tax positions

The guidance on accounting for uncertainties in income taxes prescribes a more likely than not threshold for financial statements recognition and measurement of a tax position taken or expected to be taken in a tax return. Guidance was also provided on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods, and income tax disclosures. Significant judgment is required in evaluating the Group’s uncertain tax positions and determining its provision for income taxes. No income tax expenses due to uncertain tax position has been recognized for the years ended December 31, 2019, 2020 and 2021 (Note 18).

(x)

Share-based compensation

Share-based compensation costs are measured at the grant date. The share-based compensation expenses have been categorized as either cost of revenue, general and administrative expenses, selling and marketing expenses or research and development expenses, depending on the job functions of the grantees. The compensation expense in connection with the options granted to employees is recognized using the straight-line method over the requisite service period. Forfeitures are estimated at the time of grant, with such estimate updated periodically and with actual forfeitures recognized currently to the extent they differ from the estimate. In determining the fair value of the Company’s share options, the binomial option pricing model has been applied.

(y)

Treasury stock

Effective November 8, 2019, the Board of Directors approved a share repurchase program to repurchase in the open market up to

US$20 million worth of outstanding ADSs of the Company, every one of which represents one class A ordinary

share, the ADS ratio before the subsequent event disclosed in Note 21. The program expired in November, 2020.

Repurchased ADSs were recorded as treasury stock and were accounted for under the cost method. Under the cost method, when the Company’s shares are acquired for purposes other than retirement, the costs of the acquired stock will be shown separately as a deduction from the total of capital stock. No repurchased shares of common stock have been retired. Up to December 31, 2021, 781,011 outstanding ADSs (781,011 shares

), every one of which represents one class A ordinary share, the ADS ratio before the subsequent event disclosed in Note 21,

were repurchased with a total consideration of US$

2,196

(RMB

15,327)

on the open market, at a weighted average price of US$

2.81

per ADS.

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LAIX Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amount expressed in thousands of RMB and US$, except share data and per share data, or otherwise noted)

(z)

Statutory reserves

The

Company

’s subsidiaries and consolidated VIE and its subsidiaries that are incorporated in the PRC are required on an annual basis to make appropriations of retained earnings set at certain percentage of

after-tax

profit determined in accordance with the PRC accounting standards and regulations (“PRC GAAP”).

Appropriation to the statutory general reserve should be at least 10%

of the after tax net income determined in accordance with the legal requirements in the PRC until the reserve is equal to

50%

of the entities’ registered capital. The Group is not required to make appropriation to other reserve funds and the Group does not have any intentions to make appropriations to any other reserve funds.

The general reserve fund can only be used for specific purposes, such as setting off the accumulated losses, enterprise expansion or increasing the registered capital. Appropriations to the general reserve funds are classified in the consolidated balance sheets as statutory reserves.

There are no legal requirements in the PRC to fund these reserves by transfer of cash to restricted accounts, and the Group was not done so.

Relevant laws and regulations permit payments of dividends by the PRC subsidiaries and affiliated companies only out of their retained earnings, if any, as determined in accordance with respective accounting standards and regulations. Accordingly, the above balances are not allowed to be transferred to the Company in terms of cash dividends, loans or advances.

(aa)

Related parties

Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or significant influence, such as a family member or relative, shareholder, or a related corporation.

(ab)

Dividends

Dividends are recognized when declared. No

dividends were declared for the years ended December 31, 2019, 2020 and 2021, respectively. The Group does not have any present plan to pay any dividends on ordinary shares in the foreseeable future. The Group currently intends to retain the available funds and any future earnings to operate and expand its business.

(ac)

(Loss)/income per share

Basic (loss)/income per share is computed by dividing net (loss)/income attributable to holders of ordinary shares by the weighted average number of ordinary shares outstanding during the year using the two class method. Using the two class method, net (loss)/income is allocated between ordinary shares and other participating securities (i.e. preferred shares) based on their participating rights.

Diluted (loss)/income per share is calculated by dividing net (loss)/income attributable to ordinary shareholders as adjusted for the effect of dilutive ordinary equivalent shares, if any, by the weighted average number of ordinary and dilutive ordinary equivalents shares outstanding during the year. Dilutive equivalent shares are excluded from the computation of diluted (loss)/income per share if their effects would be anti-dilutive. Ordinary share equivalents consist of the ordinary shares issuable upon the conversion of the stock options, using the treasury stock method.

(ad)

Comprehensive (loss)/income

Comprehensive (loss)/income is defined as the change in shareholders’ deficit of the Group during a period arising from transactions and other events and circumstances excluding transactions resulting from investments by shareholders and distributions to shareholders.

Comprehensive (loss)/income is reported in the consolidated statements of comprehensive (loss)/income. Accumulated other comprehensive (losses)/income of the Group include the foreign currency translation adjustments.

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LAIX Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amount expressed in thousands of RMB and US$, except share data and per share data, or otherwise noted)

(ae)

Segment reporting

Operating segments are defined as components of an enterprise engaging in businesses activities for which separate financial information is available that is regularly evaluated by the Group’s chief operating decision makers in deciding how to allocate resources and assess performance. The Group’s chief operating decision maker has been identified as the Chief Executive Officer, who reviews operating results including revenue, gross profit and operating profit at a consolidated level only. The Group does not distinguish between markets for the purpose of making decisions about resources allocation and performance assessment.

The Group does not have any other geography besides the PRC that has above 10% of revenues or long-lived assets.

Hence, the Group has only

one operating segment and one reportable segment.

(af)

Recently adopted accounting pronouncements

In June 2016, the FASB issued ASU

No. 2016-13,

“Financial Instruments—Credit Losses” (“ASU

2016-13”),

which introduces new guidance for credit losses on instruments within its scope. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments, modify the impairment model for

available-for-sale

debt securities and provide for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The ASU is effective for public companies for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted for all entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.

The FASB further issued Accounting Standards Update

No. 2018-19,

“Codification Improvements to Topic 326, Financial Instruments—Credit Losses,” or ASU

2018-19,

Accounting Standards Update

No. 2019-04,

“Codification Improvements to Topic 326, Financial Instruments—Credit Losses,” or ASU

2019-04,

Accounting Standards Update

No. 2019-05,

“Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief,” or ASU

2019-05,

Accounting Standards Update

No. 2019-10,

“Financial Instruments—Credit Losses (Topic 326): Effective Dates,” or ASU

2019-10

and Accounting Standards Update

No. 2019-11,

“Codification Improvements to Topic 326, Financial Instruments—Credit Losses,” or ASU

2019-11.

The amendments in these ASUs provide clarifications to ASU

2016-13.

The Group adopted ASU

2016-13

on January 1, 2020 and the adoption did not have a material impact on the Group’s consolidated financial statements and related disclosures.

In August 2018 the FASB issued ASU

No. 2018-13,

Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. This standard eliminates, adds and modifies certain disclosure requirements for fair value measurements in ASC 820, Fair Value Measurement, as part of its disclosure framework project. ASU

2018-13

is effective for the Group beginning January 1, 2020. The amendments in ASU

2018-13

that relate to changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments in ASU

2018-13

should be applied retrospectively to all periods presented upon their effective date. The Group adopted ASU

2018-13

on January 1, 2020 and the adoption did not have a material impact on the Group’s disclosures.

In December 2019, the FASB issued ASU

No. 2019-12,

Simplifying the Accounting for Income Taxes

, as part of its initiative to reduce complexity in accounting standards. For the Group, amendments in the ASU are effective for fiscal years beginning after December 15, 2020, including interim periods therein. Early adoption of the standard is permitted, including adoption in interim or annual periods for which financial statements have not yet been issued. The Group adopted the ASU prospectively on January 1, 2021. The ASU did not have a material impact on the consolidated financial statements.

(ag)

Recently issued accounting pronouncements not yet adopted

In May 2021, the FASB issued ASU

No. 2021-04,

Earnings Per Share (Topic 260), Debt — Modifications and Extinguishments (Subtopic

470-50),

Compensation — Stock Compensation (Topic 718), and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic

815-40)

to clarify and reduce diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. The amendments in this update are effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. An entity should apply the amendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments. The Group is currently evaluating the impact of the new guidance on the consolidated financial statements.

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LAIX Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amount expressed in thousands of RMB and US$, except share data and per share data, or otherwise noted)

In October 2021, the FASB issued ASU

No. 2021-08,

Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (ASU

2021-08),

which clarifies that an acquirer of a business should recognize and measure contract assets and contract liabilities in a business combination in accordance with Topic 606, Revenue from Contracts with Customers. The new amendments are effective for the Group are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The amendments should be applied prospectively to business combinations occurring on or after the effective date of the amendments, with early adoption permitted. The Group is currently evaluating the impact of the new guidance on the consolidated financial statements.

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LAIX Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amount expressed in thousands of RMB and US$, except share data and per share data, or otherwise noted)

3.	Risks and Concentration

(a)

PRC regulations

(1)

Historical

non-compliance

due to lack of ICP license

Pursuant to the PRC Regulations on Telecommunication, in order to engage in value-added telecommunications services, or VATS, a service provider must obtain a value-added telecommunications business operating license, or VATS License, from the Ministry of Industry and Information Technology, or the MIIT or its provincial level counterparts. According to the Administrative Measures on Internet Information Services, an internet information service provider is required to obtain a VATS License with the approved business scope of “internet information service”, or an ICP License. The operation of internet information service absent the ICP License would result in confiscation of illegal revenues generated from the provision of such service as determined by the competent government authority, imposition of fines up to several times such illegal gains, and under serious circumstances, suspension of the

non-compliance

operation.

Through Shanghai Liulishuo VIE, the Company has provided online English learning courses and services through mobile apps since 2013. Prior to the promulgation of the Classified Catalog of Telecommunications Services (2015 Version), effective from March 2016, or the 2016 MIIT Catalog, the scope of VATS was defined in an earlier version of the catalog. Pursuant to that previous version of the catalog, information service, categorized as a type of VATS, was defined as “the voice information services (telephone information services) or online information and data retrieval and other information services directly provided for end users through the fixed networks, mobile networks or internet and other public communications networks by means of information gathering, development, processing and the construction of the information platform”. It was unclear whether information service provided through the Company’s mobile apps fell in the scope of VATS. The 2016 MIIT Catalog revised the definition of information service as “the information services provided for users through public communications networks or internet by means of information gathering, development, processing and the construction of the information platform.” Further, MIIT issued a Q&A to clarify certain issues in implementing the 2016 MIIT Catalog, which requires internet information service providers that provide service through mobile apps to obtain an ICP License. However, different local authorities may have different interpretations and implementation in practice.

In order to adapt to the new regulatory requirements, the Company applied and obtained ICP Licenses from the relevant government authority since 2018 for its currently operating mobile apps, namely “English Liulishuo”, “IELTS Liulishuo”, “LiuLi Reading” and “Kids Liulishuo”, also covered “Liulishuo” website and certain other new initiatives and websites. The Company also may continue to launch new products that require an ICP License. However, the Company cannot assure that its services provided before obtaining the ICP License will not be regarded by the MIIT or its local counterpart as historical

non-compliance,

in which case the Company may be subject to penalties including fines and confiscation of any gain during its operating history generated from the services as regarded by the relevant governmental authority as historical

non-compliance.

Either of these results, or any other significant penalties that might be imposed on the Company in this event, would have a material adverse effect on its financial condition and results of operations.

The Group believes that the risks of material loss related to historical

non-compliance

due to lack of ICP license and penalties are remote.

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LAIX Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amount expressed in thousands of RMB and US$, except share data and per share data, or otherwise noted)

(2)

Violation of intellectual property rights of others

Certain of the Company’s courses, in particular its free course featuring pop culture themes, contain unauthorized third-party content. The Company is in the process of removing unauthorized content from its platform and/or obtaining rights to use such content from the copyright holders. Additionally, there is the possibility that there may be third-party intellectual property rights, portraiture right or other rights that are infringed by the Company’s services or other aspects of the Company’s business of which the Company is unawarene. To the extent that the Company’s employees or consultants use intellectual property owned by others or unauthorized portraits in their work, disputes may arise as to the rights in related

know-how

and inventions, portraits and other proprietary assets. In addition, the Company’s platform is open to all users. Content posted by users on platform, may expose the Company to allegations by third parties of infringement of intellectual property rights, invasion of privacy, defamation and other violations of third-party rights. In particular, users may share English learning materials or methods with other users by posting a video, audio clip or other forms of content on platform, which may subject the Company to claims of infringement of third-party intellectual property rights or other rights contained in the copyrighted video, audio clip or other forms of content. Although the Company has required users to post only legally compliant and

non-offensive

materials, a third party may still find user-generated content posted on the Company’s platform to infringe on intellectual property rights or other rights, or to be offensive and take action against the Company in connection with such content. Holders of such intellectual property rights or other rights may seek to enforce such rights against the Company in China, the United States or other jurisdictions. If any third-party infringement claims are brought against the Company, the Company may be forced to divert management’s time and other resources from their business and operations to defend against these claims, regardless of their merits.

The application and interpretation of China’s intellectual property right laws and the procedures and standards for granting trademarks, patents, copyrights,

know-how

or other intellectual property rights in China, and the laws governing personal rights are still evolving and remain uncertain, and the Company cannot assure that PRC courts or regulatory authorities would agree with the analysis. If the Company was found to have violated the intellectual property rights of others, they may be subject to liability for their infringement activities or may be prohibited from using such intellectual property or relevant contents, and the Company may incur licensing or using fees or be forced to develop alternatives of their own.

The Group believes that the risks of material loss related to the use of unauthorized third-party contents are remote.

(

)

Impact of Double Alleviating Opinions

On July 24, 2021, the General Office of the CPC Central Committee and the General Office of the State Council issued the Opinions on Further Alleviating the Burden of Homework and After-School Tutoring (“AST”) for Students in Compulsory Education, or the Double Alleviating Opinions, which is intended to strengthen the supervision of discipline training institutions for the compulsory education stage and also mandates management of

off-campus

training for preschool children and high school students, especially that: (i) no new approvals shall be granted to AST Institutions providing tutoring service related to academic subjects in compulsory education stage, or Academic AST Institutions; (ii) existing Academic AST Institutions are required to convert themselves into

non-profit

institutions; (iii) an approval mechanism will be adopted with regard to the existing online Academic AST Institutions which previously filed with competent authorities; (iv) Academic AST Institutions are prohibited from raising funds through publicly listing or other capitalization operations; (v) listed companies are prohibited from investing in Academic AST institution or purchase Academic AST Institutions’ assets by means of issuance of shares or by cash; (vi) foreign investors are prohibited from investing in Academic AST Institutions through mergers and acquisitions, entrustment, franchise and variable interest entities. Furthermore, any existing behaviors in violation of the above restrictions are required to be rectified. In addition, The Double Alleviating Opinions further provides that no approvals will be granted to AST Institutions providing academic subjects tutoring service to

pre-school

children (i.e. children from three to six years old) and ordinary senior high school students, that any online and offline tutoring service provided to

pre-school

On August 30, 2021, additional regulation has been announced that requires that: (i) existing

for-profit

Academic AST Institutions shall conduct

de-registration

procedure as

for-profit

entities and either stop providing academic AST service or covert themselves into a

non-profit

institutions through registration process with local counterparts of the MCA by the end of 2021; and (ii) the ICP license held by existing online

for-profit

Academic AST Institutions who fail to rectify or to obtain approval as a

non-profit

institution shall be cancelled and such institutions shall be prohibited from online tutoring activities.

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LAIX Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amount expressed in thousands of RMB and US$, except share data and per share data, or otherwise noted)

For the avoidance of being deemed as an institution that might be subject to the restrictive requirements of the Double Alleviating Opinions due to the content offering on Kids Liulishuo, the Company ceased offering such content from January 2022 and management believes that the remaining products and services the Company currently offers do not constitute “tutoring service related to academic subjects of compulsory education stage” and thus would not be subject to the above restrictions. Yangpu Liuli, a private non-profit institution that holds a private school operating permit and established by the Company’s three founders with their personal donations as registered capital, was granted the right by the Company to utilize and operate “Kids Liulishuo” for which the Company will charge a licensing fee. As result, the Group believes that the risks of non-compliance resulted by the impact of Double Alleviating Opinions are remote. However, the Group cannot assure that the government authorities will not take a different view in the future, or whether they would agree that the fee being charged for the license is “just and fair”. The Group’s previous operation of “Kids Liulishuo” may be regarded by the applicable governmental authorities as historical non-compliance and be subject to penalties. The Group may be required to cease operation of certain part or all of the tutoring services or cease cooperation with Yangpu Liuli, and be further subject to fines or other sanctions, or be required to obtain extra approvals, licenses, permits, or otherwise comply with current or additional regulatory requirements in the future, due to clarification or change in interpretation or implementation of laws and regulations in the education industry, or promulgation of new regulations or guidelines regulating tutoring institutions. As part of the arrangement with Yangpu Liuli, the Company obtained the agreement of its customers to transfer its performance obligations (in the amount of approximately RMB 86,718 as of December 31, 2021) to be fulfilled by Yangpu Liuli, effective January 1, 2022. If the contemplated arrangement is ultimately deemed unacceptable by regulation, the Company would be unable to satisfy its performance obligation to customers and may then be required to refund the unused portion of the customer deposits. Refer to Note 2(a) regarding the Company’s financial resources and going concern.

(b)

Foreign exchange risk

The Group’s sales, purchase and expense transactions are generally denominated in RMB and a significant portion of the Group’s liabilities are denominated in RMB. RMB is not freely convertible into foreign currencies.

In the PRC, foreign exchange transactions are required by law to be transacted only by authorized financial institutions at exchange rates set by the People’s Bank of China. In addition, the Group’s cash denominated in US$ subject the Group to risks associated with changes in the exchange rate of RMB against US$ and may affect the Group’s results of operations going forward.

(c)

Credit and concentration risk

The Group’s credit risk arises from cash and cash equivalents, restricted cash, short-term investments, prepayments and other current assets, and accounts receivable. The carrying amounts of these financial instruments represent the maximum amount of loss due to credit risk.

The Group expects that there is no significant credit risk associated with the cash and cash equivalents and short-term investments which are held by reputable financial institutions in the jurisdictions where the Company, its subsidiaries and VIEs are located. The Group believes that it is not exposed to unusual risks as these financial institutions have high credit quality.

The Group has no significant concentrations of credit risk with respect to its prepayments.

Accounts receivable is typically unsecured and are derived from revenue earned either directly from customers or through distribution channels and online commerce platform partners. The Group’s business model requires the users to make full prepayment for the course subscribed and the payment collection is made through reputable distribution channels and online commerce platform partners. The risk with respect to accounts receivable is low and mitigated by credit evaluations performed by the Group.

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LAIX Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amount expressed in thousands of RMB and US$, except share data and per share data, or otherwise noted)

(i)

Concentration of revenues

No single customer represented 10%

or more of the Group’s net revenues for the years ended December 31, 2019, 2020 and 2021.

(ii)

Concentration of accounts receivable

The Group has not experienced any significant recoverability issue with respect to its accounts receivable. The Group conducts credit evaluations on its distribution channels, online commerce platform partners and customers and generally does not require collateral or other security from such distribution channels, online commerce platform partners and customers.

The Group periodically evaluates the creditworthiness of the existing distribution channels, online commerce platform partners and customers in determining an allowance for doubtful accounts primarily based upon the age of the receivables and factors surrounding the credit risk of specific customers.

The following table summarized entities with greater than 10% of the accounts receivable:


	As of December 31,
	2020			2021
Distribution channel A		50	%		34	%
Distribution channel B		20	%		20	%

4	Significant equity transactions

Initial public offering (“IPO”)

On October 1, 2018, the Company completed its IPO on the New York Stock Exchange under the symbol of “LAIX”. The Company offered 5,750,000 American Depositary Shares (“ADS”). Each ADS represents one Class A ordinary

share, the ADS ratio before the subsequent event disclosed in Note 21

and was sold to the public at US$12.50 per ADS. Net proceeds raised by the Company from the IPO in total amounted to approximately RMB 441,166 (US$64,130) after deducting underwriting discounts and commissions and other offering expenses.

Upon the completion of the IPO, all classes of preferred shares of the Company were converted and designated as Class A ordinary shares on a

one-for-one

basis.

Upon the completion of the IPO, each holder of Class A ordinary share is entitled to one vote and each holder of Class B ordinary share is entitled to ten votes. Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof. Class A ordinary share is not convertible into Class B ordinary share under any circumstances. Upon any sale, transfer, assignment or disposition of Class B ordinary shares by a holder thereof to any person other than the founders or any entity which is not ultimately controlled by any of them, such Class B ordinary share shall be automatically and immediately converted into the same number of Class A ordinary share.

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LAIX Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amount expressed in thousands of RMB and US$, except share data and per share data, or otherwise noted)

5.	Cash and cash equivalents

Cash and cash equivalents represent cash on hand and demand deposits placed with banks or other financial institutions, which are unrestricted as to withdrawal or use. The following table sets forth a breakdown of cash and cash equivalents by currency denomination and jurisdiction as of December 31, 2020 and 2021. The overseas cash and cash equivalents are primarily held by the Company and its subsidiaries in Hong Kong and US.


	RMB amount (RMB denominated)						RMB equivalent amount (US$ denominated)						Total
	Overseas		China				Overseas		China
			Non VIE		VIE				Non VIE		VIE
December 31, 2020		5,668		33,310		37,673		32,702		28,643		—		137,996
December 31, 2021		3,184		38,457		2,764		6,558		12,422		—		63,385

6.	Restricted cash

Restricted cash mainly represents the cash proceeds from the exercise of share options by the Group’s employee, executives and directors held in a bank account which have yet to be transmitted to them.


	As of December 31,
	2020		2021
Restricted cash for exercise of share options to be transmitted to employees		491		171
Cash deposit held in designated bank account		20		—

Total restricted cash		511		171

7.	Accounts receivable, net

	As of December 31,
	2020		2021
Accounts receivable, gross		5,892		2,898
Less: allowance for credit losses		—		—

Accounts receivable, net		5,892		2,898

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LAIX Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amount expressed in thousands of RMB and US$, except share data and per share data, or otherwise noted)

8.	Other assets

The other assets consist of the following:


	As of December 31,
	2020		2021
Prepayment and other current assets
Subscription fees receivables due from distribution channels and online commerce platform partners for unconsumed courses		9,587		19,689
Rental deposits refundable within one year		2,009		4,093
Receivables from payment- processing- service providers		5,255		3,890
Prepaid advertising fees		4,551		3,854
Prepaid insurance fees		5,099		3,111
Gift goods to be used in promotion and incentive programs (c)		9,346		2,320
Prepayments of service fees		3,060		1,961
Prepayment of software license fee		2,500		1,195
Loan receivables from shareholders (Note 22)		—		1,000
Payment for digital contents (a) (c)		6,621		435
Loans and advance to employees (b) (c)		2,899		425
Prepaid rental fee		72		126
Value-added tax receivable		3,797		49
Printing course materials (c)		1,906		—
Others		1,570		583

Total prepayment and other current assets		58,272		42,731

Non-current assets
Long-term rental deposits		4,643		12
Prepayment for courses copyright (c)		1,223		—

Total non-current assets		5,866		12

(a)

Payment for digital contents represent the payment to a publisher for the access to digital books of which the control has been obtained. The respective content costs will be realized into cost of revenue along with the revenue recognition of the subscription to the courses.

(b)

As of December 31, 2021, loans and advance to employees consists of 1) advance to employees of RMB 106 (US$17) for future travel and other business

related purpose; and 2) receivables from employees for the option exercised price of RMB319 (US$ 50)

(c)

The other assets represent the net amount after the impairment. Write-down of the carrying amount of the other assets was nil, nil, and

RMB13,336

(US$2,093) for the years ended December 31, 2019, 2020 and 2021, respectively on gift goods to be used in promotion and incentive programs, payment for digital contents, loans and advance to employees, printing course materials and prepayment for course copyright.

9.	Property and equipment, net

Property and equipment consist of the following:


	As of December 31,
	2020			2021
Cost:
Leasehold improvements		45,020			30,045
Office equipment		31,539			25,652
Software		1,651			1,651

Total cost		78,210			57,348
Less: Accumulated depreciation		(40,427	)		(42,220	)
Less: Impairment loss		(7,709	)		(102	)

Property and equipment, net		30,074			15,026

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LAIX Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amount expressed in thousands of RMB and US$, except share data and per share data, or otherwise noted)

Depreciation expense recognized for the years ended December 31, 2019, 2020 and 2021 are summarized as follows:


	For the years ended December 31,
	2019		2020		2021
Cost of revenues		4,095		5,189		2,731
Sales and marketing expenses		12,801		11,350		6,233
Research and development		2,729		2,837		1,692
General and administrative expenses		662		1,880		891

Total		20,287		21,256		11,547

10.	Intangible assets

	As of December 31,
	2020			2021
Copyright (Note 12(a))		20,242			17,191
Computer software		862			805
Domain name		484			485
Less: Accumulated amortization		(7,404	)		(10,029	)
Less: Impairment loss		—			(2,396	)
Add: translation difference		157			(25	)

Intangible assets, net		14,341			6,031

Amortization expense was RMB 1,300, RMB 6,047 and RMB 5,346 for the years ended December 31, 2019, 2020 and 2021, respectively. The

Group

will record estimated amortization expenses of RMB 2,737, RMB 2,081, RMB 700, RMB 64 and nil for the years ended December 31, 2022, 2023, 2024, 2025 and 2026

respectively.

11.	Tax payable

	As of December 31,
	2020		2021
Uncertain tax position (Note 1 8 )		41,100		41,100
Withholding individual income tax		36,226		35,185
Value added tax		1		3,347
Other tax		—		24

Total		77,327		79,656

The Group’s revenues are subject to value-added tax at a rate o

6%.

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LAIX Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amount expressed in thousands of RMB and US$, except share data and per share data, or otherwise noted)

12.	Accrued liabilities and other liabilities

	As of December 31,
	2020		2021
Accrued liabilities and other current liabilities
Payables related to professional service fee		6,753		9,394
Accrual for exchange golden coins and membership credits		5,156		5,181
Due to depository bank - current		945		4,619
Government grant		5,450		1,125
Payables to employees related to net proceeds from share options exercised (Note 6)		491		171
Others		587		1,422

Total		19,382		21,912

Non-Current
Payables related to copyright (a)		6,622		2,163
Government grant		2,380		2,380
Due to depository bank - non-current		1,612		—

Total		10,614		4,543

(a)

The Group purchased copyrights from third party copyright owners for the purpose of new product development and recorded liability for the payment not yet settled.

13.

Leases

The Group leases facilities under non-cancellable operating leases expiring on different dates. The terms of substantially all of these leases are five years or less. When determining the lease term, the Group includes options to extend or terminate the lease when it is reasonably certain that it will exercise that option, if any. All of the Group’s leases qualify as operating leases and the Group has recorded a right-of-use asset and corresponding lease liability, by calculating the present value of future lease payments, discounted at

5.7%,

the Group’s incremental borrowing rate, over the expected term. Variable lease cost and short-term leases (lease terms less than 12 months) are recognized as incurred.

Information related to operating leases as of December 31, 2020 and 2021 are as follows (in thousands, except for percentages and years).


	As of December 31,			As of December 31,
	2020			2021
Assets
Operating lease right of use assets, net		82,488			9,283
Liabilities
Operating lease liabilities, current		31,845			9,880
Operating lease liabilities, non-current		56,903			226
Weighted average remaining lease term (years)		3.20			0.92
Weighted average discount rate		5.70	%		5.70	%

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LAIX Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amount expressed in thousands of RMB and US$, except share data and per share data, or otherwise noted)

Information related to operating lease activity during the year ended December 31, 2020 and 2021 are as follows:


	As of December 31,		As of December 31,
	2020		2021
Operating lease rental expense
Amortization of right of use assets		31,177		19,123
Expense for short-term leases within 12 months		1,743		341
Interest of lease liabilities		6,182		2,995

		39,102		22,459

Supplemental cash flow information related to leases was as follows:


	For the Year ended December 31,		For the Year ended December 31,
	2020		2021
Cash paid for amounts included in the measurement of lease liabilities:
Operating lease payment		29,706		27,556
Right-of-use assets obtained in exchange for lease obligations:
Operating lease liabilities		1,330		1,335

Maturities of lease liabilities are as follows:


	As of December 31,
	2021
2022		10,070
2023		195
2024		35

Total undiscounted lease payment		10,300
Less: imputed interest		(194	)

Total lease liabilities		10,106

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LAIX Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amount expressed in thousands of RMB and US$, except share data and per share data, or otherwise noted)

14.	Ordinary shares

On August 19, 2013, the Company was incorporated as limited liability company with authorized share capital of US$50 divided into 50,000,000 shares with par value US$0.001 each. On June 6, 2014, the Company’s shareholders and Board of Directors approved an increase in its authorized share capital from 50,000,000 to 100,000,000 shares. On August 30, 2018, the Company’s shareholders and Board of Directors approved an increase in its authorized share capital from 100,000,000 to 250,000,000 shares, in which 25,000,000 shares of such class or classes (however designated) as the board of directors may determine in accordance with Article of Association of the Company.

The Company has a dual class voting structure under which all of the ordinary shares held by the founders are designated as Class B ordinary shares and all of the other ordinary shares, including the shares held by others shareholders and automatic converted outstanding preferred shares, are designated as Class A ordinary shares. Class A and Class B ordinary shares have the same rights except for voting and conversion rights. Both of the Class A and Class B ordinary shares will be entitled to one vote per share before the qualified IPO. While upon the closing of the qualified IPO, holders of Class B ordinary shares would be entitled to ten votes per share. 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.

After the Company’s incorporation and till the Company’s IPO

October 1, 2018, the Company had a series of issuance and

re-designation

of ordinary shares and preferred shares.

Immediately prior to the Company’s IPO on October 1, 2018, the Company had 158,861 Class A ordinary shares, 19,675,674 Class B ordinary shares and 22,367,696 Preferred Shares issued and outstanding.

On October 1, 2018, the Company consummated its IPO on the New York Stock Exchange with a total 5,750,000 Class A ordinary shares issued at a price of US$12.5 per share. After deducting underwriting discounts and commissions and other offering expenses, the net proceeds raised from the IPO amounted to approximately RMB441,166 (US$64,130). Immediately prior to the completion of the Company’s IPO, all of the Preferred Shares were converted to Class A ordinary shares based on the conversion price. Immediately after the IPO, the Company had 177,473,443 Class A ordinary shares and 5,324,326 Class B ordinary shares authorized but unissued, 25,000,000 shares authorized were not designated and unissued, 22,526,257 Class A ordinary shares and 19,675,674 Class B ordinary shares issued and outstanding.

The proceeds of the subscription capital from founding shareholders and the share options exercised by employees of RMB201 (US$31) and

RMB279

(US$44) were remained outstanding as of December 31, 2020 and 2021 respectively, and such amount was presented as subscriptions receivable, a contra-equity balance on the consolidated balance sheets.

On November 14, 2019, the Board of Directors approved a share repurchase program to repurchase in the open market up to US$20 million worth of outstanding ADSs of the Company, every one of which represents one Class A ordinary share,

the ADS ratio before the subsequent event as disclosed in Note 21,

from time to time over the next 12 months. In 2019, the Company paid total prepayment of US$2,500 (RMB17,441) for share repurchase. For the years ended of 2019 and 2020, 591,200 and 189,811 outstanding ADSs (591,200 and 189,811 shares) were repurchased with a total consideration of US$1,541 (RMB 10,730) and US$655 (RMB 4,597), on the open market at a weighted average price of US$2.61 and US$3.45 per ADS (per share), respectively. On May 20, 2020, the Company terminated the share repurchase program and withdrew the residual prepayment of US$304 (RMB2,154).

15.	Share-based compensation

On May 26, 2014, the Company adopted an Equity Incentive Plan (the “2014 Plan”), which permitted the grant of restricted shares, restricted share units, options and share appreciation rights to the employees, directors and consultants of the Company. Under the 2014 Plan, a total of 2,627,250 Class A ordinary shares were initially reserved for issuance. The 2014 Plan is valid and effective for a term of 10 years commencing from its adoption. On July 14, 2015, the Board of Director passed a resolution to increase the number of shares reserved for issuance under the 2014 Plan by 957,405 Class A ordinary shares to 3,584,655 Class A ordinary shares. On July 14, 2015, the Company repurchased and canceled vested 44,000 options. On June 13, 2017, the number of ordinary shares reserved for option issuance under the 2014 Plan increased to 5,519,737 Class A ordinary shares. Concurrently, the Company repurchased and canceled 63,545 options. After which, a total of 5,456,192 Class A ordinary shares are reserved for option issuance pursuant to the 2014 Plan.

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LAIX Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amount expressed in thousands of RMB and US$, except share data and per share data, or otherwise noted)

On July 31, 2018, the Board of Directors of the Company approved its 2018 Share Incentive Plan (the “2018 Plan”). Under the 2018 Plan, share-based awards such as share options, restricted shares, restricted share units and share appreciation rights may be granted. The 2018 Plan is valid and effective for a term of ten years commencing from its adoption. The maximum aggregate number of ordinary shares which may be issued pursuant to all share-based awards under the 2018 Plan is (i) initially 5% of total authorized ordinary shares after completion of the Company’s IPO, and (ii) an increase not exceeding 1.5% of the total issued and outstanding ordinary shares as of December 31 of the respective preceding year. The aggregate size shall not exceed 5% of the total number of issued and outstanding shares at any given time.

On September 8, 2020, pursuant to the board resolution, Amended and Restated 2018 Share Incentive Plan (the “2018 Amended Plan”) was approved by the Board of Directors of the Company to replace the 2018 Plan and increase the initial aggregate number of Class A ordinary shares to 4,860,412, plus an increasing of (i) an amount equal to 2% of the total number of issued and outstanding Shares of the immediately preceding year, or (ii) such number of Shares as may be determined by the Board.

The

number of shares remaining reserved for issuance under the 2018 Amended Plan

4,542,562

as of December 31, 202

The options granted to the Group’s employees and directors under the 2014 Plan and the 2018 Amended Plan are vested upon satisfaction of service condition, which is generally satisfied over one or four years.

The granted option are annually vested on the last day of each anniversary.

Share-based compensation expense related to the option awards granted amounted to RMB 26,683, RMB 29,027 and RMB 22,045 for the years ended December 31, 2019, 2020 and 2021.

The following table sets forth the summary of employee option activity for the years ended December 31, 2019, 2020 and 2021:


	Number of options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life		Aggregate Intrinsic Value		Weighted Average Grant Date Fair Value
				USD		In years		USD’000		USD
Outstanding at January 1, 2019		4,980,394			0.3806		8.19		35,875		7.13
Granted		490,759			0.6000						7.27
Exercised		(1,894,994	)		0.1484
Forfeited		(937,438	)		0.5477

Outstanding at December 31, 2019		2,638,721			0.5288		8.39		11,429		8.76

Outstanding at January 1, 2020		2,638,721			0.5288		8.39		11,429		8.76
Granted		2,983,730			0.6633						2.38
Exercised		(536,107	)		0.5246
Forfeited		(1,920,717	)		0.4849

Outstanding at December 31, 2020		3,165,627			0.6829		8.74		3,070		4.95

Outstanding at January 1, 2021		3,165,627			0.6829		8.74		3,070		4.95
Granted		110,000			0.6000						1.85
Exercised		(481,407	)		0.3016
Forfeited		(854,470	)		0.5611

Outstanding at December 31, 2021		1,939,750			0.8265		7.74		190		5.35

Vested and expected to vest at December 31, 2021		1,591,307			0.8630		7.64		187		5.64
Exercisable at December 31, 2021		1,004,010			0.6207		7.32		130		6.88

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LAIX Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amount expressed in thousands of RMB and US$, except share data and per share data, or otherwise noted)

The aggregate intrinsic value per share is calculated as the difference between the exercise price of the options and the fair value of the underlying shares of RMB34.37 (US$4.86), RMB 9.92 (US$ 1.52) and RMB 3.58 (US$ 0.56) at December 31, 2019, 2020 and 2021.

The total fair value of share options vested during the years ended December 31, 2019, 2020 and 2021 was RMB 48,978, RMB 35,652 and RMB 24,376, respectively.

As of December 31, 2021, there were RMB 20,854 of unrecognized share-based compensation expenses related to share options granted to the employees, which were expected to be recognized over a weighted-average vesting period of 1.46 years.

To the extent the actual forfeiture rate is different from the Group’s estimate, the actual share-based compensation related to these awards may be different from the expectation.

The binomial option pricing model is used to determine the fair value of the share options granted to employees and directors. The fair values of share options granted during the years ended December 31, 2019, 2020

and 2021.


	2019	2020	2021
Expected volatility (i)	45.82%~47.20%	46.8%~53.05%	55.30%
Risk-free interest rate (ii)	1.75%~2.82%	0.78%~0.99%	1.89%
Exercise multiple	2.8	2.2~2.8	2.2
Expected dividend yield (iii)	0%	0%	0%
Contractual term	10	10	10
Expected forfeiture rate (post-vesting)	5%	5%	5%
Exercise price	US$0.60	US$0.01US$0.60US$3.24	US$0.60
Fair value of the common share on the date of option grant (US$) (iv)	US$2.90-US$11.94	US$1.26~US$4.11	US$1.85

Notes:

(i)	Expected volatility is estimated based on the average of historical volatilities of the comparable companies in the same industry as at the valuation dates.

(ii)	The risk-free interest rate of periods within the contractual life of the share option is based on the market yield of the US Treasury Strip Bond with a maturity life equal to the expected life to expiration.

(iii)

The Company has no history or expectation of paying dividends on its ordinary shares.

(iv)	Before the IPO, the estimated fair value of the Company’s ordinary shares at their respective grant dates, was determined with the assistance of an independent third party valuation firm by using income approach.

16.

Revenue

For the years ended December 31, 2019, 2020 and 2021, the majority of the Group’s revenue was generated in the PRC. The Group also generated revenue from overseas markets; however, the associated revenue amount was not material for the years ended December 31, 2019, 2020 and 2021. The disaggregated revenues by course plans were as follows:


	For the years ended December 31,
	2019		2020		2021
Prepaid standard courses		997,794		924,695		551,836
Prepaid multiple course packages		13,139		44,876		115,356
Other courses		12,280		3,057		17,736

Net revenues		1,023,213		972,628		684,928

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LAIX Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amount expressed in thousands of RMB and US$, ex

ept share data and per share data, or otherwise noted)

17.	Employee benefits

The full-time employees of the Company’s subsidiaries and VIEs that are incorporated in the PRC are entitled to staff welfare benefits including medical insurance, basic pensions, unemployment insurance, work injury insurance, maternity insurance and housing funds. These companies are required to contribute to these benefits based on certain percentages of the employees’ salaries in accordance with the relevant regulations and charge the amount contributed to these benefit schemes to the consolidated statements of comprehensive (loss)/income. The total amounts charged to the consolidated statements of comprehensive (loss)/income for such employee benefits amounted to RMB 122,064 and RMB 80,285 and RMB 37,425 for the years ended December 31, 2019, 2020 and 2021, respectively. The PRC government is responsible for the welfare and medical benefits and ultimate pension liability to these employees.

18.	Income Taxes

(a)

Cayman Islands

Under the current tax laws of Cayman Islands, the Company is not subject to income, corporation or capital gains tax, and no withholding tax is imposed upon the payment of dividends.

(b)

Hong Kong Profits Tax

The Company’s subsidiary incorporated in Hong Kong is subject to Hong Kong profits tax rate of 16.5% on its estimated assessable profit for the years ended December 31, 2019, 2020 and 2021. Dividends income received from subsidiaries in China are not subject to Hong Kong profits tax while subject withholding tax.

(c)

U.S. Corporate Income Tax

One of the Company’s subsidiaries, Lingochamp US Inc. (“Lingochamp US”) is a Delaware corporation that is subject to U.S. federal corporate income tax and California corporate franchise tax on its taxable income. The applicable U.S. federal corporate tax rate is 21% for taxable years beginning after December 31, 2017. The California corporate franchise tax rate is 8.84%.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code including, but not limited to: (1) reducing the U.S. federal corporate tax rate from 35% to 21%; (2) requiring companies to pay a

one-time

transition tax on certain unrepatriated earnings of foreign subsidiaries;
(3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; (5) eliminating the corporate alternative minimum tax (“AMT”) and changing how existing AMT credits can be realized; (6) creating the base erosion anti-abuse tax (“BEAT”), a new minimum tax; (7) creating a new limitation on deductible interest expense; and (8) changing rules related to uses and limitations of net operating loss carry-forwards created in tax years beginning after December 31, 2017. See the tax loss carry-forwards disclosure below for the impact of the Tax Act on the

Group

. In addition, the California corporate franchise tax remained the same after the enactment of the Tax Act.

(d)

PRC Enterprise Income Tax (“EIT”)

On March 16, 2007, the National People’s Congress of the PRC enacted an Enterprise Income Tax Law (“EIT Law”), under which Foreign Investment Enterprises (“FIEs”) and domestic companies would be subject to EIT at a uniform rate of 25%.

Yuguan WFOE and Shanghai Liulishuo VIE obtained the High and New Technology Enterprises (the “HNTE”) certificate in 2017 and renewed the HNTE certificate in November 2020 with a valid period of three years. Therefore, Yuguan WFOE and Shanghai Liulishuo VIE are eligible to enjoy a preferential tax rate of 15% from 2017 to 2022 to the extent it has taxable income under the EIT Law, as long as they maintain the HNTE qualification and duly conducts relevant EIT filing procedures with the relevant tax authority.

All other subsidiaries and VIEs of the Company established in the PRC are subject to EIT at 25%.

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LAIX Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amount expressed in thousands of RMB and US$, except share data and per share data, or otherwise noted)

The EIT Law also imposes a withholding income tax of 10% on dividends distributed by a FIE to its immediate holding company outside of China, if such immediate holding company is considered as a

non-resident

enterprise without any establishment or place within China or if the received dividends have no connection with the establishment or place of such immediate holding company within China, unless such immediate holding company’s jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement. The Cayman Islands, where the Company incorporated, does not have such tax treaty with China. According to the arrangement between Mainland China and Hong Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion in August 2006, dividends paid by a FIE in China to its immediate holding company in Hong Kong will be subject to withholding tax at a rate of no more than 5% if the immediate holding company in Hong Kong owns directly at least 25% of the shares of the FIE and could be recognized as a Beneficial Owner of the dividend from PRC tax perspective.

No dividend was distributed by the PRC entities within the Group outside China for the periods presented.

A reconciliation between the effective income tax rate and the PRC statutory income tax rate is as follows:


	For the years ended December 31,
	2019			2020			2021
	%			%			%
PRC Statutory income tax rates		25.0	%		25.0	%		25.0	%
Change in valuation allowance		(20.2	)%		(24.9	)%		25.6	%
Super deduction of research and development expenses		3.9	%		6.1	%		(22.0	)%
Non-deductible expenses		(0.6	)%		(0.2	)%		(0.7	) %
Difference in EIT rates of certain overseas entities		(1.0	)%		(2.0	)%		4.4	%
Tax filing difference		0.7	%		0.1	%		—
Effect of tax holiday (Note)		(8.1	)%		(4.6	)%		(29.6	)%

Total		(0.3	)%		(0.5	)%		2.7	%

Note: The provisions for income taxes for the years ended December 31, 2019, 2020 and 2021 differ from the amounts computed by applying the EIT primarily due to preferential tax rate enjoyed by certain subsidiaries and VIEs of the Company.

(Gain)/Loss from domestic and foreign components before income tax expenses


	For the years ended December 31,
	2019		2020		2021
Domestic		560,503		383,730		(75,618	)
Foreign		12,378		9,195		14,002

Total		572,881		392,925		(61,616	)

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LAIX Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amount expressed in thousands of RMB and US$, except share data and per share data, or otherwise noted)

Composition of income tax expense

The current and deferred portions of income tax expense included in the consolidated statements of comprehensive (loss)/income are as follows:


	For the years ended December 31,
	2019		2020		2021
Current income tax expense		296		113		136
Deferred income tax expense		1,604		1,789		1,573

Income tax expense		1,900		1,902		1,709

Deferred tax assets and liabilities

Deferred taxes were measured using the enacted tax rates for the periods in which they are expected to be reversed. The tax effects of temporary differences that give rise to the deferred tax asset balances as of December 31, 2020 and 2021 are as follows:


	As of December 31,
	2020			2021
Deferred tax assets
Deductible temporary difference related to advertising expenses		128,756			122,141
Deductible temporary difference related to accruals and other payables		24,954			21,192
Tax losses carried forward		163,998			186,963

Total deferred tax assets		317,708			330,296
Less: valuation allowance		(304,161	)		(318,322	)

Total deferred tax assets		13,547			11,974

As of December 31, 2021, the PRC entities of the

Group

had tax loss carryforwards of RMB 995,502, which can be carried forward to offset taxable income. The carryforwards period for tax losses under the EIT Law is five years generally or ten years for HNTE entities. The tax losses carry forward of the

Group

will start to expire in 2022 for the amount of RMB

if not utilized. The remaining tax losses carryforwards will expire in varying amounts between 2023 and 2031. Other than the expiration, there are no other limitations or restrictions upon the

Group

’s ability to use these tax losses carryforwards. There is no expiration for the advertising expenses carry-forwards.

As of December 31, 2021, the Company’s subsidiary incorporated in Hong Kong had tax loss carryforwards of RMB 1,484, which can be carried forward to offset taxable income indefinitely.

As of December 31, 2021, the Company’s US subsidiary, Lingochamp US which is a Delaware corporation, had U.S. federal net operating loss (the “NOL”) carry-forwards of RMB 3,015. Under the U.S. tax law, federal NOL carry-forwards arising in tax years beginning after December 31, 2017 can be carried forward indefinitely but the maximum deduction is reduced to 80% of the taxable income, while NOL carry-forwards arising in 2017 or prior can be carried back two tax years and carried forward up to 20 years. Thus, Lingochamp US federal net operating loss arisen in 2017 amounted to RMB 212 will expire in 2038.

On March 27, 2020, US President Trump signed into law “Coronavirus Aid, Relief, and Economic Security Act” (“CARES Act”), which modifies the treatment of NOL generated and utilised in 2018, 2019 and 2020. For the taxable

years of 2018, 2019

and 2020, Lingochamp US will be entitled to an NOL deduction equal to 100% of the taxable income. For taxable years beginning after 2021, the NOL deduction of Lingochamp US will be limited to 80% of taxable income when utilizing NOL generated after December 31, 2017. According to CARES Act, the NOL arisen in 2018

and 2020 amounted to RMB 2,753 can be carried forward indefinitely.

A valuation allowance is provided against deferred tax assets when the Group determines that it is more likely than not that the deferred tax assets will not be utilized in the future. In making such determination, the Group considered factors including future taxable income exclusive of reversing temporary differences and tax loss carry forwards. A valuation allowance was provided for the tax loss carry forwards because it was more likely than not that such deferred tax assets will not be realized due to lack of profitable history to support the Group’s estimate of its future taxable income. If events occur in the future that allow the Group to realize part or all of its deferred income tax, an adjustment to the valuation allowances will result in a decrease in tax expense when those events occur.

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LAIX Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amount expressed in thousands of RMB and US$, except share data and per share data, or otherwise noted)

As of December 31, 2020 and 2021, valuation allowances of RMB 304,161 and RMB 318,322

were provided because it was more likely than not that the Group will not be able to utilize certain tax losses carry-forwards and other deferred tax assets generated by its subsidiaries

and the VIEs.

Movement of valuation allowance is as follows:


	For the years ended December 31,
	2019			2020			2021
Beginning balance		90,979			206,471			304,161
Additions		137,122			103,399			36,061
Reversals		(21,630	)		(5,709	)		(21,900	)

Ending balance		206,471			304,161			318,322

Uncertain Tax Positions

The following table summarizes activity of the total amounts of unrecognized tax benefits:


	For the years ended December 31,
	2019		2020		2021
Beginning balance		41,100		41,100		41,100
Increases related to tax positions taken during the current year		—		—		—

Total		41,100		41,100		41,100

The Company operates its business through its PRC subsidiaries. Under the current PRC tax laws and regulations, certain operating expenses incurred by PRC subsidiaries are not deductible from taxable income until the Company obtains the approval from local tax authorities. The Company believes it is more likely than not that such operating expenses is not deductible and would possibly be subject to income taxes. In 2018, the Company provided uncertain tax provision with amount of RMB 41,100 for the aforementioned operating expenses with amount of RMB 324,701. The associated income tax expense was calculated by applying the applicable tax rate to the deemed nondeductible operating expenses amount and includes the late payment interest based on the applicable tax rules. The unrecognized tax benefits are recorded in tax payable in the consolidated balance sheets.

19.	Basic and diluted net (loss)/income per share

(a)

Basic and diluted net (loss)/income per share

Basic (loss)/income per share and diluted (loss)/income per share have been calculated in accordance with ASC 260 on computation of the (loss)/income per share for the years ended December 31, 2019, 2020 and 2021 are as follows:


	For the years ended December 31,
	2019			2020			2021
Numerator:
Net (loss)/income		(574,781	)		(394,827	)		59,907

Net (loss)/income attributable to ordinary shareholders-Basic and diluted		(574,781	)		(394,827	)		59,907

Denominator:
Denominator for basic and diluted (loss)/income per share weighted-average ordinary shares outstanding (Note 1 and 2)
Basic		49,364,429			49,430,696			50,022,094
diluted		49,364,429			49,430,696			50,277,973
Basic (loss)/income per share		(11.64	)		(7.99	)		1.20
Diluted (loss)/income per share		(11.64	)		(7.99	)		1.19

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LAIX Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amount expressed in thousands of RMB and US$, except share data and per share data, or

otherwise noted)


Denominator for basic and diluted (loss)/income per ADS weighted-average ADS outstanding (Note *3)
Basic	3,526,031		3,530,764		3,573,007
diluted	3,526,031		3,530,764		3,591,284
Basic (loss)/income per ADS	(162.96	)	(111.86	)	16.80
Diluted (loss)/income per ADS	(162.96	)	(111.86	)	16.66

Note(*):

(1)	The effects of all outstanding share options of 1,051,152 in 2019 and 372,273 in 2020 have been excluded from the computation of diluted loss per share as their effects would be anti-dilutive.

(2)

Options exercisable for a minimal exercise price are included in the denominator of basic loss per share calculation once there are no further vesting conditions or contingencies associated with them, as they are considered contingently issuable shares. Accordingly, the weighted average number of shares of nil, nil and 215,684 related to these options, for which the exercise price is US$0.01 per share, are included in the denominator for the computation of basic net (loss)/income per share for the years ended December 31, 2019, 2020 and 2021, respectively.

(3)	Basic and diluted net (loss)/income per ADS calculation was given the retroactive effect per the subsequent event disclosed in Note 21. The ADS in this Note represents the new ADS ratio of one (1) ADS to fourteen (14) Class A ordinary share.

20.	Contingencies

Litigation

In the ordinary course of the business, the Group is subject to periodic legal or administrative proceedings. As of December 31, 2020 and 2021, the Group is not a party to any legal or administrative proceedings which will have a material adverse effect on the Group’s financial position, results of operations and cash flows.

21.	Subsequent events

The Group has evaluated the subsequent events through April 26, 2022, the date on which the consolidated financial statements were reissued with no significant subsequent events identified except for the events disclosed below.

(1)

From January 2022, the Company ceased the operation of Kids Liulishuo in light of the requirements of the Double Alleviating Opinions and granted Yangpu Liuli a private non-profit after-school tutoring institution founded by the Company’s founders, the right to utilize and operate Kids Liulishuo for which the Company will charge Yangpu Liuli on a monthly basis: (i) a royalty fee of

% of its revenues through a software licensing arrangement, and (ii)

% of its revenues through a service agreement for the provision of administrative supporting services, including legal, human resources, financial and managerial supporting services by the Company. Given that the royalty fees and service fees charged under the related-party agreements must be “fair”, “just” and “reasonable”, while no specific guidance has been issued so far as to how these terms should be implemented. The Group has no assurance that the fee going to be charged between the Company and Yangpu Liuli would be determined to be “fair, just and reasonable” by the relevant government authorities absent further guidance or administrative practice. The Group may be required to cease cooperation with Yangpu Liuli and be further subject to fines or other sanctions. Refer to Note 2(a) regarding the Company’s financial resources and going concern.

(2)

In February 2022, the Company announced the ratio of its American Depositary Shares (“ADSs”) to its Class A ordinary shares (the “ADS Ratio”), par value US$0.001 per share, would change from the current ADS Ratio of one (1) ADS to one (1) Class A ordinary share to a new ADS Ratio of one (1) ADS to fourteen (14) Class A ordinary shares. The change became effective on March 4, 2022.

(3)

April 7, 2022, the NYSE commenced proceedings to delist the Company’s ADSs and suspended the trading of these ADSs which have been then quoted on the OTC Pink Limited Information under the symbol “LAIXY”. The delisting will become effective ten days after the NYSE’s application to SEC which was submitted on April 22, 2022.

22.	Related party transaction and balance

Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operational decisions. Parties are also considered to be related if they are subject to common control or common significant influence. Related parties may be individuals or corporate entities. The table below sets forth the related parties and their relationships with the Company as of December 31, 2021:


Name of related parties		Relationship with the Company
Yi Wang		Shareholder of the Company
Zheren Hu		Shareholder of the Company
Hui Lin		Shareholder of the Company

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LAIX Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amount expressed in thousands of RMB and US$, except share data and per share data, or otherwise noted)

The related parties’ transactions for the years ended December 31, 2019, 2020 and 2021 and related parties balances as of December 31, 2020 and 2021 were as follows:


	For the years ended December 31,
	2019		2020		2021
Transaction amount with related parties
Loan to shareholders
Yi Wang		—		—		600
Zheren Hu		—		—		250
Hui Lin		—		—		150

In December of 2021, Yuguan WFOE entered into an interest-free loan agreement with the shareholders of RMB1,000 in total, which was unsecured and repayable upon the

Grou

s demanding.


	As of December 31, 2021
	2020		2021
Balance amount with related parties
Prepayments and other current assets
Yi Wang		—		600
Zheren Hu		—		250
Hui Lin		—		150

23.	Restricted net assets

Relevant

PRC laws and regulations permit payments of dividends by the

Company

’s subsidiar

ies

and the VIE incorporated in the PRC only out of their retained earnings, if any, as determined in accordance with the PRC accounting standards and regulations. In addition, the subsidiaries and the VIEs of the Company established in the PRC are required to annually appropriate

% of their net

after-tax

income to the statutory general reserve fund prior to payment of any dividends, unless such reserve funds have reached

% of their respective registered capital. As a result of these and other restrictions under PRC laws and regulations, the Company’s subsidiaries and the VIEs incorporated in the PRC are restricted in their ability to transfer a portion of their net assets to the Company either in the form of dividends, loans or advances. There are no significant differences between US GAAP and PRC accounting standards in connection with the reported net assets of the legally owned subsidiary in the PRC and the VIE. Even though the Company currently does not require any such dividends, loans or advances from the PRC entities for working capital and other funding purposes, the Company may in the future require additional cash resources from them due to changes in business conditions, to fund future acquisitions and development, or merely to declare and pay dividends or distributions to its shareholders. Except for the above, there is no other restriction on use of proceeds generated by the

Company

’s subsidiaries and the VIEs to satisfy any obligations of the Company.

Since the

Group

has a consolidated shareholders’ deficit, its net asset base for purposes of calculating the proportionate share of restricted net assets of consolidated subsidiaries should be zero. Therefore, the restrictions placed on the net assets of the Company’s PRC subsidiaries with positive equity would result in the 25 percent threshold being exceeded and a corresponding requirement to provide parent company financial information (Note 24).

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LAIX Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amount expressed in thousands of RMB and US$, except share data and per share data, or otherwise noted)

24.	ADDITIONAL INFORMATION: CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY

Rules

12-04(a)

and

4-08(e)(3)

of Regulation

S-X

require condensed financial information as to the financial position, cash flows and results of operations of a parent company as of and for the same periods for which the audited consolidated financial statements have been presented when the restricted net assets of the consolidated and unconsolidated subsidiaries together are material to consolidated net assets as of the end of the most recently completed fiscal year.

The following condensed financial statements of the Company have been prepared using the same accounting policies as set out in the Group’s consolidated financial statements except that the Parent Company used the equity method to account for its investment in its subsidiaries and VIEs. Such investment is presented on the separate condensed balance sheets of the Parent Company as “Payables to subsidiaries and VIEs”. The Company, its subsidiaries and VIEs were included in the consolidated financial statements whereby the inter-company balances and transactions were eliminated upon consolidation. The Company’s share of income from its subsidiaries and VIEs is reported as share of income from subsidiaries and VIEs in the condensed financial statements.

The Company is a Cayman Islands company and, therefore, is not subjected to income taxes for all years presented. The footnote disclosures contain supplemental information relating to the operations of the Company and, as such, these statements should be read in conjunction with the notes to the consolidated financial statements of the Group. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted.

As of December 31, 2021, there were no material commitments or contingencies, significant provisions for long-term obligations or guarantees of the Company, except for those which have been separately disclosed in the consolidated financial statements.

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LAIX Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amount expressed in thousands of RMB and US$, except share data and per share data, or otherwise noted)

Condensed Financial Information of the Company

BALANCE SHEETS


	As of December 31,
	2020			2021
	RMB			RMB			US$ (Note 2 (e))
ASSETS
Current assets:
Cash and cash equivalents		2,888			574			90
Amounts due from subsidiaries and VIEs		866,102			895,041			140,451
Prepayments and other current assets		5,434			3,255			511
Short-term investment		64,910			6,759			1,061

Total current assets		939,334			905,629			142,113

Non-current assets:
Investment in equity fund		5,711			5,580			876

Total non-current assets		5,711			5,580			876

Total assets		945,045			911,209			142,989

LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current liabilities:
Payables to subsidiaries and VIEs		3,415			3,409			535
Accrued expenses and other current liabilities		1,543			8,931			1,401

Total current liabilities		4,958			12,340			1,936

Non-current liabilities:
Investment deficit in subsidiaries and VIEs		1,651,038			1,530,855			240,224
Other non-current liabilities		1,612			—			—

Total non-current liabilities		1,652,650			1,530,855			240,224

Total liabilities		1,657,608			1,543,195			242,160

Shareholders’ deficit
Class A ordinary shares (US$0.001 par value; 200,000,000 shares authorized; 29,926,647 and 30,408,054 shares issued and outstanding as of December 31, 2020 and 2021, respectively)		212			215			34
Class B ordinary shares (US$0.001 par value; 25,000,000 shares authorized, 19,675,674 shares issued and outstanding as of December 31, 2020 and 2021, respectively)		121			121			19
Subscriptions receivable from founding shareholders		(201	)		(279	)		(44	)
Treasury stock (US$0.001 par value; 781,011 shares as of December 31, 2020 and December 31, 2021, respectively)		(15,327	)		(15,327	)		(2,405	)
Additional paid-in capital		1,198,852			1,221,834			191,733
Accumulated other comprehensive income		10,256			8,019			1,258
Accumulated deficit		(1,906,476	)		(1,846,569	)		(289,766	)

Total shareholders’ deficit		(712,563	)		(631,986	)		(99,171	)

Total liabilities and shareholders’ deficit		945,045			911,209			142,989

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LAIX Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amount expressed in thousands of RMB and US$, except share data and per share data, or otherwise noted)

STATEMENTS OF COMPREHENSIVE (LOSS)/INCOME


	For the years ended December 31,
	2019			2020			2021
	RMB			RMB			RMB			US$ (Note 2 (e))
Operating expenses:
General and administrative expenses		(11,787	)		(12,549	)		(12,640	)		(1,985	)

Total operating expenses		(11,787	)		(12,549	)		(12,640	)		(1,985	)

Loss from operations		(11,787	)		(12,549	)		(12,640	)		(1,985	)
Interest income		6,280			2,797			47			7
Investment income		87			—			—			—
Other (loss)/income, net		(46	)		—			2,149			338
(Loss)/income from subsidiaries and VIEs		(569,315	)		(385,075	)		70,351			11,040

(Loss)/income before provision for income taxes		(574,781	)		(394,827	)		59,907			9,400
Provision for income taxes		—			—			—			—

Net (loss)/income		(574,781	)		(394,827	)		59,907			9,400

Net (loss)/income attributable to ordinary shareholders		(574,781	)		(394,827	)		59,907			9,400

Net (loss)/income		(574,781	)		(394,827	)		59,907			9,400
Other comprehensive income/(loss)
—Foreign currency translation adjustment, net of nil tax		13,165			(19,227	)		(2,237	)		(351	)

Comprehensive (loss)/income		(561,616	)		(414,054	)		57,670			9,049

STATEMENTS OF CASH FLOWS


	For the years ended December 31,
	2019			2020			2021
	RMB			RMB			RMB			US$ (Note 2 (e))
Cash flows used in operating activities		(11,422	)		(13,448	)		(2,778	)		(436	)
Cash flows (used in)/provided by investing activities		(119,440	)		18,176			1,736			272
Cash flows (used in)/provided by financing activities		(16,344	)		4,285			1,145			180
Effect of exchange rate changes on cash		2,121			(8,153	)		(2,417	)		(379	)

Net (decrease)/increase in cash and cash equivalents		(145,085	)		860			(2,314	)		(363	)
Cash and cash equivalents, beginning of year		147,113			2,028			2,888			453

Cash and cash equivalents, end of year		2,028			2,888			574			90

F-47

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