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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

 

 

OR

 

 

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

 

For the fiscal year ended December 31, 2021

 

 

OR

 

 

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

 

For the transition period fromto

 

OR

 

 

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

Commission file number: 001-39742

17 Education & Technology Group Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

N/A

(Translation of Registrant’s Name into English)

 

Cayman Islands

(Jurisdiction of Incorporation or Organization)

 

16/F, Block B, Wangjing Greenland Center

Chaoyang District, Beijing 100102

People’s Republic of China

(Address of Principal Executive Offices)

 

Michael Chao Du, Chief Financial Officer

Telephone: +86 10 5945 1082

Email: michael.du@17zuoye.com

16/F, Block B, Wangjing Greenland Center

Chaoyang District, Beijing 100102

People’s Republic of China

(Name, Telephone, Email 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(s)

 

Name of each exchange on which registered

American Depositary Shares, each representing ten Class A ordinary shares, par value US$0.0001 per share

 

YQ

 

The Nasdaq Stock Market LLC

(The Nasdaq Global Select Market)

Class A ordinary shares, par value US$0.0001 per share*

 

 

 

The Nasdaq Stock Market LLC

(The Nasdaq Global Select Market)

 

*

Not for trading, but only in connection with the listing our American depositary shares on the Nasdaq Global Select Market, each American depositary shares representing ten Class A ordinary shares.


 

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 508,031,685 ordinary shares outstanding, being the sum of 449,578,517 Class A ordinary shares and 58,453,168 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   No

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   No

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 definition of “accelerated filer and large 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 prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 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.
Yes   No

Indicate by check mark which basis of accounting the registrant has been 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   No

(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. Yes   No

 

 

 

 


 

 

TABLE OF CONTENTS

 

INTRODUCTION

1

 

 

 

 

 

FORWARD-LOOKING INFORMATION

3

 

 

 

 

 

PART I.

4

 

 

 

 

 

 

ITEM 1.

 

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

4

 

ITEM 2.

 

OFFER STATISTICS AND EXPECTED TIMETABLE

4

 

ITEM 3.

 

KEY INFORMATION

4

 

ITEM 4.

 

INFORMATION ON THE COMPANY

72

 

ITEM 4.A.

 

UNRESOLVED STAFF COMMENTS

114

 

ITEM 5.

 

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

114

 

ITEM 6.

 

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

134

 

ITEM 7.

 

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

147

 

ITEM 8.

 

FINANCIAL INFORMATION

149

 

ITEM 9.

 

THE OFFER AND LISTING

150

 

ITEM 10.

 

ADDITIONAL INFORMATION

151

 

ITEM 11.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

166

 

ITEM 12.

 

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

167

 

 

 

 

 

PART II.

169

 

 

 

 

 

 

ITEM 13.

 

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

169

 

ITEM 14.

 

MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

169

 

ITEM 15.

 

CONTROLS AND PROCEDURES

169

 

ITEM 16.A.

 

AUDIT COMMITTEE FINANCIAL EXPERT

170

 

ITEM 16.B.

 

CODE OF ETHICS

170

 

ITEM 16.C.

 

PRINCIPAL ACCOUNTANT FEES AND SERVICES

171

 

ITEM 16.D.

 

EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

171

 

ITEM 16.E.

 

PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

171

 

ITEM 16.F.

 

CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

171

 

ITEM 16.G.

 

CORPORATE GOVERNANCE

172

 

ITEM 16.H.

 

MINE SAFETY DISCLOSURE

172

 

ITEM 16.I.

 

DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS

172

 

 

 

 

 

PART III.

173

 

 

 

 

 

 

ITEM 17.

 

FINANCIAL STATEMENTS

173

 

ITEM 18.

 

FINANCIAL STATEMENTS

173

 

ITEM 19.

 

EXHIBITS

173

 

 

 

i


 

 

INTRODUCTION

Unless otherwise indicated or the context otherwise requires, references in this annual report on Form 20-F to:

 

“17 Education & Technology,” “we,” “us,” “our company” and “our” are to 17 Education & Technology Group Inc., our Cayman Islands holding company and its subsidiaries, and, in the context of describing our operations and consolidated financial information, the VIEs and the subsidiaries of the VIEs;

 

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

 

“ADSs” are to the American depositary shares, each of which represent ten Class A ordinary shares. Except as otherwise indicated, all ADS and per ADS data in this annual report give retroactive effect to the change in the ratio of ADSs to Class A ordinary shares (the “ADS Ratio”) from two ADSs to five Class A ordinary shares to one ADS to ten Class A ordinary shares, which became effective on November 17, 2021;

 

“average MAUs” for a certain period is calculated by dividing (i) the sum of MAUs for each month of such period by (ii) the number of months in such period;

 

“average number of homework assignments each active verified teacher user issued per week” for any period is calculated by dividing (i) the sum of number of homework assignments issued per active verified teacher user using our in-school teacher applications for each week of such period, by (ii) the number of weeks in such period;

 

“average number of sessions of use each active student user maintained per week” for any period is calculated by dividing (i) the sum of number of times of launching our in-school student applications per active user for each week of such period, by (ii) the number of weeks in such period;

 

“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;

 

“CGI” are to computer-generated imagery;

 

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

 

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

 

“gross billings” for a specific period are to the sum of cash received from each enrollment of our online K-12 tutoring courses in such period inclusive of the applicable VAT and surcharges, net of the total amount of refunds in such period;

 

“MAUs” are to monthly active users, which is the number of users that logged in to the relevant in-school application(s) in a given month at least once. We treat each account as a distinct user when calculating MAUs;

 

“our WFOEs” are to Shanghai Yiqi Zuoye Information Technology Co., Ltd., Guangzhou Qixiang Technology Co., Ltd., Guangzhou Qixuan Education & Technology Co., Ltd., Beijing Yiqi Education & Technology Co., Ltd. and Beijing Yiqi Hangfan Technology Co., Ltd. (each of which, “our WFOE”);

 

“paid courses” are to our online K-12 large-class after-school tutoring courses that are charged not less than RMB99.00 per course;

1


 

 

paid course enrollments” for a certain period are to the cumulative number of paid courses enrolled in and paid for by our students, including multiple paid courses enrolled in and paid for by the same student;

 

“primary beneficiary of VIEs” are to Shanghai Yiqi Zuoye Information Technology Co., Ltd., Guangzhou Qixiang Technology Co., Ltd., Guangzhou Qixuan Education & Technology Co., Ltd., and Beijing Yiqi Hangfan Technology Co., Ltd.;

 

“promotional courses” are to our online K-12 large-class after-school tutoring courses that are free;

 

“registered parent users” are to users that have registered and logged onto our in-school parent application at least once since registration;

 

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

 

“SaaS” are to software as a service;

 

“shares” or “ordinary shares” are to our Class A and Class B ordinary shares, par value US$0.0001 per share;

 

“trial courses” are to our online K-12 large-class after-school tutoring courses that are free or priced lower than RMB99.00 per course;

 

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

 

“verified student users” are to users of our in-school student applications that have completed at least three homework assignments;

 

“verified teacher users” are to users of our in-school teacher applications that have fulfilled our verification requirements with respect to user information provided, number of students enrolled in his or her virtual class(es) and level of student activity, such as having at least three homework assignments issued and completed by at least eight student users enrolled in his or her virtual class(es); and

 

“VIEs” are to variable interest entities, and “the VIEs” are to Shanghai Hexu Information Technology Co., Ltd., Beijing Yiqi Education Information Consultation Co., Ltd., Beijing Qili Technology Co., Ltd., and Beijing Yiqi Education Technology Development Co., Ltd. (each of which, “a VIE”).

Any discrepancies in any table between the amounts identified as total amounts and the sum of the amounts listed therein are due to rounding.

Our reporting currency is Renminbi because our business is mainly conducted through the VIEs and their subsidiaries in China. This annual report on Form 20-F contains translations from RMB to U.S. dollars solely for the convenience of the reader. Unless otherwise noted, all translations from Renminbi to U.S. dollars and from U.S. dollars to Renminbi in this annual report are made at a rate of RMB6.3726 to US$1.00, the exchange rate in effect as of 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, or at all.


2


 

 

FORWARD-LOOKING INFORMATION

This annual report on Form 20-F contains forward-looking statements that reflect our current expectations and views of future events. The forward looking statements are contained principally in the sections entitled “Item 3. Key Information—D. Risk Factors,” “Item 4. Information on the Company—B. Business Overview,” and “Item 5. Operating and Financial Review and Prospects.” 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 statements relating to:

 

relevant government policies and regulations relating to our industry;

 

our mission, goals and strategies;

 

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

 

the expected growth of the industries we operate in;

 

our expectations regarding the prospects of our business model and the demand for and market acceptance of our products and services;

 

our expectations regarding maintaining and strengthening our relationships with students, teachers, parents, schools, business partners and other stakeholders;

 

competition in the industries we operate in;

 

general economic and business conditions globally and in China; and

 

assumptions underlying or related to any of the foregoing.

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.

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 this annual report completely and with the understanding that our actual future results may be materially different from what we expect.

3


 

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 VIEs

17 Education & Technology is not an operating company in China but a Cayman Islands holding company with no equity ownership in the VIEs. We conduct our business in China through (i) our PRC subsidiaries and (ii) the VIEs with which we have maintained contractual arrangements, and (iii) the subsidiaries of the VIEs. PRC laws and regulations restrict and impose conditions on foreign investment in value-added telecommunications services and certain other businesses. Accordingly, we operate these businesses in China through the VIEs, and rely on contractual arrangements among our PRC subsidiaries, the VIEs and their respective shareholders to control the business operations of the VIEs and their subsidiaries. Revenues contributed by the VIEs and their subsidiaries accounted for 89.2%, 95.0% and 99.2% of our total revenues for 2019, 2020 and 2021, respectively. As used in this annual report, “we,” “us,” “our company” and “our” refers to 17 Education & Technology, our Cayman Islands holding company and its subsidiaries, and, in the context of describing our operations and consolidated financial information, the VIEs and the subsidiaries of the VIEs. Investors in the ADSs are not purchasing equity interest in the VIEs in China but instead are purchasing equity interest in a holding company incorporated in the Cayman Islands.

A series of contractual agreements, including proxy agreement and powers of attorney, equity interest pledge agreement, exclusive management services and business cooperation agreement, and exclusive call option agreement, have been entered into by and among our WFOEs, the VIEs and their respective shareholders. Terms contained in each set of contractual arrangements with the VIEs 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 the VIEs, and we have consolidated the financial results of the VIEs in our consolidated financial statements. For more details of these contractual arrangements, see “Item 4. Information on the Company—C. Organizational Structure.”

However, the contractual arrangements may not be as effective as direct ownership in providing us with control over the VIEs 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 Related to Our Corporate Structure—We rely on contractual arrangements with the VIEs and their shareholders for our business operations, which may not be as effective as direct ownership in providing operational control.” and “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure—The shareholders of the VIEs may have actual or 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 VIEs and their respective shareholders. It is uncertain whether any new PRC laws or regulations relating to VIE structures will be adopted or if adopted, what they would provide. If we or the 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 to take action in dealing with such violations or failures. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure—If the PRC government finds that the agreements that establish the structure for operating certain of our operations in China do not comply with PRC regulations relating to the

4


 

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.”

Our corporate structure is subject to risks associated with our contractual arrangements with the VIEs. 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 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 the VIEs, 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 VIEs and, consequently, significantly affect the financial performance of the VIEs 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 Related to Our Corporate Structure.”

Other Risks related to Our PRC Operations

We face various risks and uncertainties related to doing business in China. Our business operations are primarily conducted in China through the VIEs and their subsidiaries, 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 as determined by the announcement of the PCAOB issued on December 16, 2021. This may impact our ability to conduct certain businesses, accept foreign investments, or list in the United States. 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. 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 Related 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. For more details, see “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—The PRC government’s significant oversight over our business operations could result in a material adverse change in our operations and the value of our ADSs.”

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 Related 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

Our operations in China are governed by PRC laws and regulations. As of the date of this annual report, our PRC subsidiaries and VIEs have obtained the requisite licenses and permits from the PRC government authorities that are material for the business operations of our holding company and the VIEs in China, including, among others, a Value-added Telecommunications Business Operating License and a Publication Operation License. Given the uncertainties of interpretation and implementation of relevant laws and regulations and the enforcement practice by relevant government authorities, we may 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 Related to Our Business and Industry—We face uncertainties with respect to the development of regulatory requirements on operating licenses and permits for our online education services in China. Failure to renew and maintain requested licenses or permits in a timely manner or obtain newly required ones due to adverse changes in regulations or policies could have a material adverse impact on our business, financial condition and results of operations.”

5


 

Furthermore, recent legal developments in China mainland have created compliance uncertainty regarding issuances of securities to foreign investors. The PRC governmental authorities have recently promulgated PRC laws, regulations and regulatory rules (as well as draft versions of the foregoing, which have been issued for public comment), relating to cybersecurity review and overseas listing. In connection with our historical issuance of securities to foreign investors, under current PRC laws, regulations and regulatory rules, as of the date of this annual report, we, our PRC subsidiaries and the VIEs, (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 any 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 by, and foreign investment in, China-based issuers, such that we may be required to complete filing with or obtain permissions from the CSRC, CAC or other PRC authorities in connection with any future overseas capital raising activities. Any such action could significantly limit or completely hinder our ability to conduct future offerings of securities to investors and accept foreign investments. We cannot assure you that we would be able to comply with such regulatory guidance or any other new requirements relating to any of our potential future overseas capital raising activities. Any failure to obtain or delay in obtaining such approval or completing such procedures would subject us to sanctions by the CSRC, the CAC or other PRC regulatory authorities. These regulatory authorities may impose fines and penalties on our PRC subsidiaries or the VIEs 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 ADSs.

For more information, see “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—The approval and/or other requirements of the CSRC or other PRC governmental authorities may be required in connection with an offering under PRC rules, regulations or policies, and, if required, we cannot predict whether or how soon we will be able to obtain such approval or complete such other requirements.” and “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry—We are subject to a variety of laws and other obligations regarding data protection. Many of these laws and regulations are subject to change and uncertain interpretation, and any actual or alleged failure to comply with applicable laws and obligations could have a material adverse effect on our business, financial condition and results of operations.”

The Holding Foreign Companies Accountable Act

The Holding Foreign Companies Accountable Act, or the HFCAA, was enacted on December 18, 2020. The HFCAA states that if the SEC determines that we have filed audit reports issued by a registered public accounting firm that has not been subject to inspection by the PCAOB for three consecutive years beginning in 2021, the SEC shall prohibit our shares or ADSs from being traded on a national securities exchange. Since our auditor is located in China mainland, a jurisdiction where the PCAOB has been unable to conduct inspections without the approval of the Chinese authorities, our auditor is not currently inspected by the PCAOB, which may impact our ability to remain listed in the United States. The related risks and uncertainties could cause the value of our ADSs to significantly decline or become worthless.

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. Furthermore, on December 2, 2021, the SEC adopted final amendments implementing the disclosure and submission requirements under the HFCAA, pursuant to which the SEC will identify a “Commission-Identified Issuer” if an 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 because of a position taken by an authority in the foreign jurisdiction, and will then impose a trading prohibition on an issuer after it is identified as a Commission-Identified Issuer for three consecutive years. For more details, see “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—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 with the benefits of such inspections”

6


 

and “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—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.”

Cash Flows through Our Organization

17 Education & Technology is a holding company with no operations of its own. We conduct our business in China through our subsidiaries and the VIEs in China. As a result, although other means are available for us to obtain financing at the holding company level, 17 Education & Technology’s ability to pay dividends to the shareholders and to service any debt it may incur may depend upon dividends paid by our PRC subsidiaries and service fees paid by the VIEs. If any of our subsidiaries incurs debt on its own behalf in the future, the instruments governing such debt may restrict its ability to pay dividends to 17 Education & Technology. In addition, our PRC subsidiaries are permitted to pay dividends to 17 Education & Technology only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. Further, our PRC subsidiaries and VIEs are 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.”

Under PRC laws and regulations, our PRC subsidiaries and VIEs are subject to certain restrictions with respect to paying dividends or otherwise transferring any of their net assets to us. Remittance of dividends by a wholly foreign-owned enterprise out of China is also subject to examination by the banks designated by the State Administration of Foreign Exchange, or the SAFE. The amounts restricted include the paid-in capital and the statutory reserve funds of our PRC subsidiaries and the VIEs in which we have no legal ownership, totaling RMB1,602.5 million, RMB2,632.6 million and RMB4,117.3 million (US$646.1 million) as of December 31, 2019, 2020 and 2021, respectively. For risks relating to the fund flows of our operations in China, see “Item 3. Key Information— D. Risk Factors—Risks Related to Doing Business in China—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 have established stringent controls and procedures for cash flows within our organization. Each transfer of cash between our Cayman Islands holding company and a subsidiary, the VIEs or the subsidiaries of the VIEs is subject to internal approval. Under PRC law, 17 Education & Technology may provide funding to our PRC subsidiaries only through capital contributions or loans, and to the VIEs only through loans, subject to satisfaction of applicable government registration and approval requirements. For the years ended December 31, 2019, 2020 and 2021, 17 Education & Technology made capital contributions in the amount of RMB671.6 million, RMB1,024.6 million and RMB1,478.5 million (US$232.0 million) to our subsidiaries, respectively. For the years ended December 31, 2019, 2020 and 2021, the VIEs received debt financing of nil, nil and RMB18.4 million (US$2.9 million) from the primary beneficiary of VIEs, respectively. The VIEs may transfer cash to the primary beneficiary of the VIEs by paying service fees according to the exclusive management services and business cooperation agreements. For the years ended December 31, 2019, 2020 and 2021, cash paid by the VIEs to the primary beneficiary of the VIEs for service fees were RMB15.6 million, RMB337.8 million and RMB618.6 million (US$97.0 million), respectively. The relevant WFOEs will determine the service fees payable by the VIEs based on the factors stipulated in the VIE agreements. If there is any amount payable to the relevant WFOEs under the VIE agreements, the VIEs will settle the amount accordingly, in compliance with PRC laws and regulations.


7


 

 

17 Education & Technology has not declared or paid any cash dividends, nor does it have any present plan to pay any cash dividends on our 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. See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Dividend Policy.” For PRC and United States federal income tax considerations of an investment in our ADSs, see “Item 10. Additional Information—E. Taxation.”

For purposes of illustration, the following discussion reflects the hypothetical taxes that might be required to be paid within China mainland, assuming that: (i) we have taxable earnings, and (ii) we determine to pay a dividend in the future:

 

 

 

Tax

calculation(1)

 

Hypothetical pre-tax earnings(2)

 

 

100

%

Tax on earnings at statutory rate of 25%(3)

 

 

(25

)%

Net earnings available for distribution 75%

 

 

75

%

Withholding tax at standard rate of 10%(4)

 

 

(7.5

)%

Net distribution to Parent/Shareholders

 

 

67.5

%

 

Note:

(1)

For purposes of this example, the tax calculation has been simplified. The hypothetical book pre-tax earnings amount, not considering timing differences, is assumed to equal taxable income in China.

(2)

Under the terms of VIE contractual arrangements, our WFOEs may charge the VIEs for services provided to VIEs. These service fees shall be recognized as expenses of the VIEs, with a corresponding amount as service income by our WFOEs and eliminate in consolidation. For income tax purposes, our WFOEs and VIEs file income tax returns on a separate company basis. The service fees paid are recognized as a tax deduction by the VIEs and as income by our WFOEs and are tax neutral.

(3)

Certain of our subsidiaries and VIEs qualifies for a 15% preferential income tax rate in China. However, such rate is subject to qualification, is temporary in nature, and may not be available in a future period. For purposes of this hypothetical example, the table above reflects a maximum tax scenario under which the full statutory rate would be effective.

(4)

The PRC Enterprise Income Tax Law imposes a withholding income tax of 10% on dividends distributed by a foreign invested enterprise, or FIE, to its immediate holding company outside of China. A lower withholding income tax rate of 5% is applied if the FIE’s immediate holding company is registered in Hong Kong and certain other conditions are satisfied, subject to a qualification review at the time of the distribution. For purposes of this hypothetical example, the table above assumes a maximum tax scenario under which the full withholding tax would be applied.

The table above has been prepared under the assumption that all profits of the VIEs will be distributed as fees to our WFOEs under tax neutral contractual arrangements. If, in the future, the accumulated earnings of the VIEs exceed the service fees paid to our WFOEs (or if the current and contemplated fee structure between the intercompany entities is determined to be non-substantive and disallowed by Chinese tax authorities), the VIEs could make a non-deductible transfer to our WFOEs for the amounts of the stranded cash in the VIEs. This would result in such transfer being non-deductible expenses for the VIEs but still taxable income for the WFOEs. Such a transfer and the related tax burdens would reduce our after-tax income to approximately 50.6% of the pre-tax income. Our management believes that there is only a remote possibility that this scenario would happen.

Financial Information Related to the VIEs

The following tables provide condensed consolidating schedules depicting the results of operations, financial position and cash flows for 17 Education & Technology, its subsidiaries, the consolidated VIEs, and any eliminating adjustments and consolidated totals (in thousands of RMB) as of and for the dates presented.

8


 

Selected Condensed Consolidated Statements of Operations Information

 

 

 

For the Year Ended December 31, 2021

 

 

 

17

Education

&

Technology

 

 

Other

Subsidiaries

 

 

Primary

Beneficiary

of VIEs

 

 

VIEs and

VIEs’

Subsidiaries

 

 

Eliminations

 

 

Consolidated

Total

 

 

 

(RMB in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Third-party net revenues

 

 

 

 

 

354

 

 

 

17,839

 

 

 

2,166,327

 

 

 

 

 

 

2,184,520

 

Inter-company net

   revenues

 

 

 

 

 

195,115

 

 

 

734,075

 

 

 

 

 

 

(929,190

)

 

 

 

Total costs and expenses

 

 

(204,594

)

 

 

(643,314

)

 

 

(1,455,387

)

 

 

(1,354,711

)

 

 

 

 

 

(3,658,006

)

Inter-company costs and

   expenses

 

 

 

 

 

 

 

 

 

 

 

(929,190

)

 

 

929,190

 

 

 

 

Income (loss) from

   non-operations

 

 

4,002

 

 

 

2,187

 

 

 

39,133

 

 

 

(13,749

)

 

 

 

 

 

31,573

 

Share of loss from

   subsidiaries, VIEs

   and VIEs' subsidiaries

 

 

(1,241,321

)

 

 

(795,663

)

 

 

(131,323

)

 

 

 

 

 

2,168,307

 

 

 

 

Loss before income

   tax expenses

 

 

(1,441,913

)

 

 

(1,241,321

)

 

 

(795,663

)

 

 

(131,323

)

 

 

2,168,307

 

 

 

(1,441,913

)

Less: income tax

   expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

(1,441,913

)

 

 

(1,241,321

)

 

 

(795,663

)

 

 

(131,323

)

 

 

2,168,307

 

 

 

(1,441,913

)

 

 

 

For the Year Ended December 31, 2020

 

 

 

17

Education

&

Technology

 

 

Other

Subsidiaries

 

 

Primary

Beneficiary

of VIEs

 

 

VIEs and

VIEs’

Subsidiaries

 

 

Eliminations

 

 

Consolidated

Total

 

 

 

(RMB in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Third-party net revenues

 

 

 

 

 

 

 

 

65,245

 

 

 

1,229,126

 

 

 

 

 

 

1,294,371

 

Inter-company net

   revenues

 

 

 

 

 

23,350

 

 

 

481,248

 

 

 

 

 

 

(504,598

)

 

 

 

Total costs and expenses

 

 

(361,638

)

 

 

(245,309

)

 

 

(1,081,229

)

 

 

(940,311

)

 

 

 

 

 

(2,628,487

)

Inter-company costs and

   expenses

 

 

 

 

 

(8,609

)

 

 

 

 

 

(495,989

)

 

 

504,598

 

 

 

 

Income (loss) from

   non-operations

 

 

2,744

 

 

 

(9,041

)

 

 

(11,776

)

 

 

12,281

 

 

 

 

 

 

(5,792

)

Share of loss from

   subsidiaries, VIEs

   and VIEs' subsidiaries

 

 

(981,014

)

 

 

(741,405

)

 

 

(194,893

)

 

 

 

 

 

1,917,312

 

 

 

 

Loss before income

   tax expenses

 

 

(1,339,908

)

 

 

(981,014

)

 

 

(741,405

)

 

 

(194,893

)

 

 

1,917,312

 

 

 

(1,339,908

)

Less: income tax

   expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

(1,339,908

)

 

 

(981,014

)

 

 

(741,405

)

 

 

(194,893

)

 

 

1,917,312

 

 

 

(1,339,908

)

9


 

 

 

 

 

For the Year Ended December 31, 2019

 

 

 

17

Education

&

Technology

 

 

Other

Subsidiaries

 

 

Primary

Beneficiary

of VIEs

 

 

VIEs and

VIEs’

Subsidiaries

 

 

Eliminations

 

 

Consolidated

Total

 

 

 

(RMB in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Third-party net revenues

 

 

 

 

 

 

 

 

43,963

 

 

 

362,282

 

 

 

 

 

 

406,245

 

Inter-company net

   revenues

 

 

 

 

 

 

 

 

104,940

 

 

 

 

 

 

(104,940

)

 

 

 

Total costs and expenses

 

 

(96,631

)

 

 

 

 

 

(846,861

)

 

 

(462,861

)

 

 

 

 

 

(1,406,353

)

Inter-company costs and

   expense

 

 

 

 

 

 

 

 

 

 

 

(104,940

)

 

 

104,940

 

 

 

 

Income (loss) from

   non-operations

 

 

12,863

 

 

 

(326

)

 

 

23,215

 

 

 

606

 

 

 

 

 

 

36,358

 

Share of loss from

   subsidiaries, VIEs

   and VIEs' subsidiaries

 

 

(879,982

)

 

 

(879,656

)

 

 

(204,913

)

 

 

 

 

 

1,964,551

 

 

 

 

Loss before income

   tax expenses

 

 

(963,750

)

 

 

(879,982

)

 

 

(879,656

)

 

 

(204,913

)

 

 

1,964,551

 

 

 

(963,750

)

Less: income tax

   expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

(963,750

)

 

 

(879,982

)

 

 

(879,656

)

 

 

(204,913

)

 

 

1,964,551

 

 

 

(963,750

)

 

10


 

 

Selected Condensed Consolidated Balance Sheets Information

 

 

 

For the Year Ended December 31, 2021

 

 

 

17

Education

&

Technology

 

 

Other

Subsidiaries

 

 

Primary

Beneficiary

of VIEs

 

 

VIEs and

VIEs’

Subsidiaries

 

 

Eliminations

 

 

Consolidated

Total

 

 

 

(RMB in thousands)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

597,522

 

 

 

91,994

 

 

 

251,862

 

 

 

239,520

 

 

 

 

 

 

1,180,898

 

Prepaid expenses and other

   current assets

 

 

 

 

 

9,538

 

 

 

36,955

 

 

 

115,333

 

 

 

 

 

 

161,826

 

Amount due from

   inter-companies

 

 

733,763

 

 

 

148,096

 

 

 

664,542

 

 

 

118,073

 

 

 

(1,664,474

)

 

 

 

Property and equipment, net

 

 

 

 

 

33,357

 

 

 

2,600

 

 

 

33,854

 

 

 

 

 

 

69,811

 

Right-of-use assets

 

 

 

 

 

61,356

 

 

 

2,754

 

 

 

89,853

 

 

 

 

 

 

153,963

 

Other non-current assets

 

 

 

 

 

5,104

 

 

 

681

 

 

 

8,138

 

 

 

 

 

 

13,923

 

Total assets

 

 

1,331,285

 

 

 

349,445

 

 

 

959,394

 

 

 

604,771

 

 

 

(1,664,474

)

 

 

1,580,421

 

Accrued expenses and other

   current liabilities

 

 

59

 

 

 

64,504

 

 

 

234,615

 

 

 

93,115

 

 

 

 

 

 

392,293

 

Deferred revenue current

   and non-current

 

 

 

 

 

 

 

 

4,611

 

 

 

239,267

 

 

 

 

 

 

243,878

 

Amount due to

   inter-companies

 

 

 

 

 

257,133

 

 

 

607,714

 

 

 

799,627

 

 

 

(1,664,474

)

 

 

 

Deficits of investments in

   subsidiaries, VIEs and

   VIEs' subsidiaries

 

 

534,190

 

 

 

743,732

 

 

 

1,543,504

 

 

 

 

 

 

(2,821,426

)

 

 

 

Operating lease liabilities

   current and non-current

 

 

 

 

 

57,440

 

 

 

2,755

 

 

 

87,019

 

 

 

 

 

 

147,214

 

Total liabilities

 

 

534,249

 

 

 

1,122,809

 

 

 

2,393,199

 

 

 

1,219,028

 

 

 

(4,485,900

)

 

 

783,385

 

Total shareholders’ equity

   (deficit)

 

 

797,036

 

 

 

(773,364

)

 

 

(1,433,805

)

 

 

(614,257

)

 

 

2,821,426

 

 

 

797,036

 

Total liabilities and

   shareholders’ equity

   (deficit)

 

 

1,331,285

 

 

 

349,445

 

 

 

959,394

 

 

 

604,771

 

 

 

(1,664,474

)

 

 

1,580,421

 

11


 

 

 

 

 

For the Year Ended December 31, 2020

 

 

 

17

Education

&

Technology

 

 

Other

Subsidiaries

 

 

Primary

Beneficiary

of VIEs

 

 

VIEs and

VIEs’

Subsidiaries

 

 

Eliminations

 

 

Consolidated

Total

 

 

 

(RMB in thousands)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

2,108,582

 

 

 

165,094

 

 

 

141,316

 

 

 

419,970

 

 

 

 

 

 

2,834,962

 

Restricted cash

 

 

 

 

 

 

 

 

 

 

 

170

 

 

 

 

 

 

170

 

Prepaid expenses and other

   current assets

 

 

 

 

 

2,020

 

 

 

34,426

 

 

 

175,002

 

 

 

 

 

 

211,448

 

Amount due from

   inter-companies

 

 

716,696

 

 

 

37,633

 

 

 

524,072

 

 

 

116,194

 

 

 

(1,394,595

)

 

 

 

Property and equipment, net

 

 

 

 

 

10,889

 

 

 

13,415

 

 

 

80,919

 

 

 

 

 

 

105,223

 

Right-of-use assets

 

 

 

 

 

79,947

 

 

 

9,271

 

 

 

110,939

 

 

 

 

 

 

200,157

 

Other non-current assets

 

 

 

 

 

7,175

 

 

 

132

 

 

 

30,475

 

 

 

 

 

 

37,782

 

Total assets

 

 

2,825,278

 

 

 

302,758

 

 

 

722,632

 

 

 

933,669

 

 

 

(1,394,595

)

 

 

3,389,742

 

Accrued expenses and other

   current liabilities

 

 

3,768

 

 

 

61,206

 

 

 

261,332

 

 

 

213,481

 

 

 

 

 

 

539,787

 

Deferred revenue current

   and non-current

 

 

 

 

 

 

 

 

24,480

 

 

 

573,809

 

 

 

 

 

 

598,289

 

Amount due to

   inter-companies

 

 

 

 

 

262,490

 

 

 

606,054

 

 

 

526,051

 

 

 

(1,394,595

)

 

 

 

Deficits of investments in

   subsidiaries, VIEs and

   VIEs' subsidiaries

 

 

757,360

 

 

 

926,687

 

 

 

989,860