China Online Education Group Announces First Quarter 2020 Results

BEIJING,May26,2020 -- China Online Education Group ("51Talk" or the "Company") (NYSE:COE),a leading online education platform in China,with core expertise in English education,announced its unaudited financial results for the first quarter ended March31,2020.

FirstQuarter 2020Financial and Operating Highlights

Net revenues were RMB487.1 million (US$68.8 million),a 52.2% increase from RMB320.1 million for the first quarter of 2019.

Gross margin was 70.4%,compared with 67.0% for the first quarter of 2019.

GAAP net income was RMB50.8million,compared with GAAP net loss RMB66.2 million for the first quarter of 2019.

Non-GAAP net income was RMB57.0 million,compared with non-GAAP net loss RMB62.4 million for the first quarter of 2019.

Operating cash inflow was RMB172.7 million (US$24.4 million),compared with RMB8.4 million cash inflow for the first quarter of 2019.

Cash,cash equivalents,time deposits and short-term investments balance reached RMB1,214.0 million (US$171.5 million) as of March 31,2020.

Grossbillings[1]were RMB596.9 million (US$84.3 million),a 31.9% increase from RMB452.5 million for the first quarter of 2019.

Key Financial and Operating Data

For the three months ended

Mar. 31,

Mar. 31,

Y-o-Y

2019

2020

Change

Net Revenues(in RMB millions)

320.1

487.1

52.2%

K-12 one-on-one mass market offering

228.7

404.2

76.7%

K-12 small class offering

27.5

22.7

(17.6%)

One-on-One others

63.9

60.2

(5.8%)

Gross billings(in RMB millions)

452.5

596.9

31.9%

K-12 one-on-one mass market offering

389.7

563.5

44.6%

K-12 small class offering

14.9

11.5

(22.8%)

One-on-One others

47.9

21.9

(54.3%)

Active students[2] (in thousands)

227.4

286.6

26.0%

"We started 2020 with strong,52.2%,year-over-year growth in net revenues,10 percentage points higher than the growth rate implied by the high end of our guidance. In particular,K-12 one-on-one mass market net revenues increased 76.7% year-over-year to RMB404.2 million. This performance was driven by our continued strategic focus and successful execution of our K-12 one-on-one mass market offerings in non-tier-one cities[3],in addition to a direct incremental revenue boost from students spending more time at home amidst the COVID-19 outbreak and an increasing awareness of both our brandand online education," said Mr. Jack Jiajia Huang,Founder,Chairman and Chief Executive Officer of 51Talk. "Benefitting from these factors,our gross billings grew sequentially to RMB596.9 million. This growth was even more impressive in that it came versus our fourth quarter peak season. Our K-12 one-on-one mass market gross billings increased 44.6% year-over-year to RMB563.5 million,reaching 94.4% of our total gross billings. For the first quarter of 2020,our active students increased to 286,600 from 257,200 for the last quarter,up 11.4% sequentially.

"During the COVID-19 pandemic,aside from our previously announced donation of online classes and one-on-one English lessons to K-12 students in Wuhan and other impacted regions in China,we also donated medical supplies to the Philippines,in an effort to contribute to the country's pandemic recovery efforts.

"Our employees,especially those in Wuhan,overcame many difficulties arising from COVID-19 outbreak. In the first quarter of 2020,almost all of our colleagues in Wuhan worked from home,while only about half of the colleagues in other regions could come to the Company office. I am very proud of our employees who have made extraordinary efforts to help students maintain their study continuity during the COVID-19 outbreak. With their extraordinary efforts,we were able to largely preserve productivity and operational efficiencies during the lockdown period. We worked closely with our Filipino teachers to ensure they could conduct classes effectively at home to meet the rising demands of our students,promoting further integration of the education resources of China and the Philippines. These unprecedented times have further highlighted and deepened both the value and natural progression of online education in China. We have seen increasing penetration of online education in non-tier-one cities due to the COVID-19 outbreak. This,together with our strong performance in the first quarter,provides us even further confidence in our chosen pathway to sustained top-line growth and profitability,especially as we further fine tune our products and services,and continue to enhance our core business focus on K-12 one-on-one mass market offerings in non-tier-one cities," concluded Mr. Huang.

"Solid first quarter financial and operating performance helped us begin 2020 on a positive note," said Mr. Min Xu,Chief Financial Officer of 51Talk. "I am excited to report that in addition to robust growth in net revenues and gross billings,we delivered another profitable quarter with GAAP net income of RMB50.8 million and non-GAAP net income of RMB57.0 million. Excluding RMB16.9million favorable impact of coronavirus relief policies,our GAAP and non-GAAP net profit margin was 7.0% and 8.2%,compared with GAAP and non-GAAP net loss margin of 20.7% and 19.5% for the same period last year,primarily resulting from significantly higher lesson consumption and operating efficiency gains. Additionally,we achieved record high operating cash flow of RMB172.7 million. To keep the Company on track for healthy growth and profitability,we have been proactively adapting our operational strategy. This has allowed us to minimize the potential business impact caused by the COVID-19 outbreak and maintain high efficiency at all levels,ultimately stimulating organic growth in brand recognition as a leading and dependable online education platform in China."

[1] Gross billings for a specific period,which is one of the Company's key operating data,is defined as the total amount of cash received for the sale of course packagesand servicesin such period,net of the total amount of refunds in such period.

[2] An "active student" for a specifiedperiod refers to a student who booked at least one paid lesson,excluding those students who only attended paid live broadcasting lessons or trial lessons.

[3] Tier-one cities include Beijing,Shanghai,Shenzhen,Guangzhou and Tianjin.

First Quarter 2020Financial Results

Net Revenues

Net revenues for the first quarter of 2020 were RMB487.1million (US$68.8million),a 52.2% increase from RMB320.1million for the same quarter last year. The increase was primarily attributed to theincreasesin the average revenue per active studentand the number of active students. The average revenue per active student in the first quarter of 2020 increased by 20.7% year-over-year. The number of active students in the first quarter of 2020 was 286,600,a 26.0% increase from 227,400for the same quarter last year.

Net revenues from one-on-one offerings for the first quarter of 2020 were RMB464.4 million (US$65.6 million),a 58.7% increase from RMB292.6 million for the same quarter last year. Net revenues from small class offerings for the first quarter of 2020 were RMB22.7 million (US$3.2 million),a 17.6% decrease from RMB27.5 million for the same quarter last year.

Cost of Revenues

Cost of revenues for the first quarter of 2020 was RMB144.0million (US$20.3 million),a 36.2% increase from RMB105.7 million for the same quarter last year. The increase was primarily driven by an increase in total service fees paid to teachers,mainly due to an increased number of paid lessons.

As part of Chinese government's effort to ease the burden of businesses affected by the coronavirus (COVID-19)outbreak,the Ministry of Human Resources and Social Security,the Ministry of Finance and the State Taxation Administrationtemporarilyreducedand exempted employer obligation on social security contributionsfrom February 2020.The impact of coronavirus policies on cost of revenues was RMB0.3million in the first quarter. Excluding the impact,total cost of revenuesfor the first quarter would have been RMB144.3million (US$20.4million),representing a 36.5% year-over-year increase.

Cost of revenues of one-on-one offerings for the first quarter of 2020 was RMB133.6 million (US$18.9 million),a 47.2% increase from RMB90.8 million for the same quarter last year. Cost of revenues of small class offering for the first quarter of 2020 was RMB10.4 million (US$1.5 million),a 30.2% decrease from RMB14.9 million for the same quarter last year.

Gross Profit and Gross Margin

Gross profit for the first quarter of 2020 was RMB343.1million (US$48.4million),a60.0% increase from RMB214.3 million for the same quarter last year. Gross margin for the first quarter of 2020 was 70.4%,compared with 67.0% for the same quarter last year.

Excluding the positive impact of the coronavirus related social security contribution exemption,gross profit and gross marginfor the first quarter would have been RMB342.8million (US$48.4million) and 70.4% respectively.

Gross margin for one-on-one offerings in the first quarter of 2020 was 71.2%,compared with 69.0% for the same quarter last year.The increase was mainly attributable to 1) price increases and,2) a favorable mix of higher margin products. 51Talk's small class offering gross marginfor the firstquarter of 2020 was 54.0%,compared with 45.7% for the firstquarter of 2019. The increase wasmainly due tothe optimization of product structure of small class offerings by reducing the lower margined products.

Operating Expenses

Total operating expenses for the first quarter of 2020 were RMB314.9 million (US$44.5million),a13.2% increase from RMB278.1million for the same quarter last year. The increase was the result of an increase in sales and marketing expenses,partially offset by decreases of product development expensesand general and administrative expenses.

Sales and marketing expenses for the first quarter of 2020 were RMB228.4 million (US$32.3million),a22.6% increase from RMB186.3million for the same quarter last year.The increase was mainly due to highermarketing expenses and higher sales personnel costs related to increases in the number of sales and marketing personnel. Excluding share-based compensation expenses,non-GAAP salesand marketing expensesfor the first quarter of 2020 were RMB226.1million (US$31.9 million),a 21.5% increase from RMB186.0 million for the same quarter last year. Non-GAAP sales and marketing expenses,excluding branding expenses,were 32.3% of the gross billings for the first quarter of 2020,compared with 34.0 % for the same quarter last year. The impact of coronavirus policy related the exemptionofemployer obligation on social security contributions on sales and marketing expensewas RMB3.7million in the first quarter. Excluding the impact,sales and marketing expensesfor the first quarter would have been RMB232.1million (US$32.8million),representing a 24.6% year-over-year increase.

Product development expenses for the first quarter of 2020 were RMB35.9 million (US$5.1 million),an11.9% decrease from RMB40.7million for the same quarter last year. Thedecrease was primarilydue to a decrease in the number of personnel. Excluding share-based compensation expenses,non-GAAPproduct developmentexpensesfor the first quarter of 2020were RMB36.0 million (US$5.1 million),a 10.4% decrease from RMB40.1 millionfor the same quarter last year. The impact of coronavirus policy related the exemptionofemployer obligation on social security contributions on product development expenses was RMB1.6million in the first quarter. Excluding the impact,product development expenses for the first quarter would have been RMB37.5million (US$5.3million),representing a 7.9% year-over-year decrease.

General and administrative expenses for the first quarter of 2020 were RMB50.7 million (US$7.2million),a 0.9% decrease from RMB51.2million for the same quarter last year.Excluding share-based compensation expenses,non-GAAP general and administrative expenses for the first quarter of 2020 were RMB46.7 million (US$6.6million),a 3.0% decrease from RMB48.1million for the same quarter last year. The impact of coronavirus policy related the exemptionofemployer obligation on social security contributions on general and administrative expenses was RMB1.0million in the first quarter. Excluding the impact,general and administrative expenses for the first quarter would have been RMB51.7million (US$7.3million),representing a 1.0% year-over-year increase.

Other income

As part of Chinese government's effort to ease the burden of businesses affected by the coronavirus (COVID-19) outbreak,the State Taxation Administration (STA) exempted a wide range of consumer services from value added tax (VAT)from January 2020.The income obtained by taxpayers from providing public living servicesshall be exempt from VAT. The favorable impact of coronavirus relief policies was RMB10.3million in the first quarter.

On the September 30,2019,Ministry of Finance and the State Taxation Administration announced that from October 1,2019 to December 31,2021,the taxpayers engaging in the provision of life servicesare allowed to deduct an extra 15% of the deductible input tax for the current period from the payable tax.The impact of the policy of additional value-added tax creditfor the income generated by the life services provided by enterprises was RMB6.5 million in the first quarter.

Income/(loss) from Operations

Operating income for the first quarter of 2020 was RMB44.9 million (US$6.3 million),compared with loss from operations of RMB63.8 million for the same quarter last year. Operating income margin for the first quarter was 9.2%,compared with operating loss margin 19.9% for the same quarter last year.

Non-GAAP operating income for the first quarter of 2020 was RMB51.1 million (US$7.2 million),compared with non-GAAP loss from operations of RMB59.9 million for the same quarter last year. Non-GAAP operating income margin for the first quarter was10.5%,compared with operating loss margin 18.7% for the same quarter last year.

The favorable impact of coronavirus relief policies was RMB16.9million in the first quarter. Excluding the favorable impact,incomefrom operationsand non-GAAP income from operations for the first quarter would have been RMB28.0million (US$4.0million) and RMB34.2million (US$4.8million) respectively,representing 5.8% and 7.0% operating income margin.

Net income/(loss)

Net incomefor the first quarter of 2020 was RMB50.8million (US$7.2 million),compared with net loss of RMB66.2 million for the same quarter last year. Net income margin for the first quarter was 10.4%,compared net loss margin with 20.7% for the same quarter last year.

Non-GAAP net incomefor the first quarter of 2020 was RMB57.0million (US$8.0million),compared with non-GAAP loss of RMB62.4million for the same quarter last year.

The favorable impact of coronavirus relief policies was RMB16.9million in the first quarter. Excluding the favorable impact,net income and non-GAAP net income for the first quarter would have been RMB33.9million (US$4.8million) and RMB40.1million (US$5.7million) respectively,representing 7.0% and 8.2% netincome margin.

Basic net incomeper American depositary share ("ADS")attributable to ordinary shareholders for the first quarter of 2020 was RMB2.43 (US$0.34),compared with basic net loss per ADS of RMB3.25for the same quarter last year. Diluted net incomeper American depositary share ("ADS")attributable to ordinary shareholders for the first quarter of 2020 was RMB2.26 (US$0.32),compared with basic and diluted net loss per ADS of RMB3.25for the same quarter last year.Each ADS represents 15 Class A ordinary shares.

Non-GAAP basic net incomeper ADSattributable to ordinary shareholders for the first quarter of 2020 was RMB2.73 (US$0.39),compared withnon-GAAP basic net loss per ADS attributable to ordinary shareholders of RMB3.06for the same quarter last year. Non-GAAP dilutednet incomeper ADSattributable to ordinary shareholders for the first quarter of 2020 was RMB2.54 (US$0.36),compared withnon-GAAP dilutednet loss per ADS attributable to ordinary shareholders of RMB3.06for the same quarter last year.

The favorable impact of coronavirus relief policies was RMB16.9million in the first quarter. Excluding the favorable impact,basic net incomeper American depositary share ("ADS")attributable to ordinary shareholders for the first quarter of 2020 was RMB1.63 (US$0.23) and non-GAAP basic net incomeper American depositary share ("ADS")attributable to ordinary shareholders for the first quarter of 2020 was RMB1.92 (US$0.27),respectively.

Excluding the favorable impact,dilutednet incomeper American depositary share ("ADS")attributable to ordinary shareholders for the first quarter of 2020 was RMB1.51 (US$0.21) and non-GAAP dilutednet incomeper American depositary share ("ADS")attributable to ordinary shareholders for the first quarter of 2020 was RMB1.79 (US$0.25),respectively.

Balance Sheet

As of March 31,2020,the Company had total cash,time deposits and short-term investments of RMB1,214.0million (US$171.5million),compared with RMB1,053.4 million as of December 31,2019.

The Company had advances from students[4] (current and non-current) of RMB2,262.6 million (US$319.5 million) as of March 31,compared with RMB2,186.6 million as of December 31,2019.

[4]"Advances from students",which is defined as the amount of obligation to transfer good or service to students or business partners for which consideration has been received from students in advance.The deposits from students are also presented in the total amount of "advances from students".

Outlook

We cannot predict whether the incremental revenue boost from students spending more time at home amidst the COVID-19 outbreak will continue during the remainder of 2020. However,based on latest information available at the time of this release,for the second quarter of 2020,the company currently expects net revenues to be between RMB460 million to RMB470 million,which would represent an increase of approximately 30.5% to 33.3% from RMB352.6 million for the same quarter last year;

The above outlook is based on the current market conditions and reflects the Company's current and preliminary estimates of market and operating conditions and customer demand,which are all subject to change.

Management Change

Ms. Ting Shu had resigned as a senior vice president of the Company. She will remain a director of the Company. Her resignation as a senior vice president did not result from any disagreement with the Company.

Conference Call

The Company's management will host an earnings conference call at 8:00 AM U.S. Eastern Time on May26,2020 (8:00 PM Beijing/Hong Kong time on May 26,2019).

Dial-in details for the earnings conference call are as follows:

United States (toll free):

1-866-264-5888

International:

1-412-317-5226

Mainland China:

400-120-1203

Hong Kong (toll free):

800-905-945

Hong Kong:

852-3018-4992

Participants should dial-in at least 5 minutes before the scheduled start time and ask to be connected to the call for "China Online Education Group."

Additionally,a live and archived webcast of the conference call will be available on the Company's investor relations website at http://ir.51talk.com.

A replay of the conference call will be accessible until June 2,by dialing the following telephone numbers:

United States (toll free):

1-877-344-7529

International:

1-412-317-0088

Replay Access Code:

10144351

About China Online Education Group

China Online Education Group (NYSE: COE) is a leading online education platform in China,with core expertise in English education. The Company's mission is to make quality education accessible and affordable. The Company's online and mobile education platforms enable students across China to take live interactive English lessons with overseas foreign teachers,on demand. The Company connects its students with a large pool of highly qualified foreign teachers that it assembled using a shared economy approach,and employs student and teacher feedback and data analytics to deliver a personalized learning experience to its students.

Use of Non-GAAP Financial Measures

In evaluating its business,51Talk considers and uses the following measures defined as non-GAAP financial measures by the SEC as supplemental metrics to review and assess its operating performance: non-GAAP sales and marketing expenses,non-GAAP product development expenses,non-GAAP general and administrative expenses,non-GAAP operating expenses,non-GAAP operating income/(loss),non-GAAP net income/(loss),non-GAAP net income/(loss) attributable to ordinary shareholders,and non-GAAP net income/(loss) attributable to ordinary shareholders per share and per ADS. To present each of these non-GAAP measures,the Company excludes share-based compensation expenses. The presentation of these non-GAAP financial measures is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP. For more information on these non-GAAP financial measures,please see the table captioned "Reconciliations of non-GAAP measures to the most comparable GAAP measures" set forth at the end of this press release.

51Talk believes that these non-GAAP financial measures provide meaningful supplemental information regarding its performance by excluding share-based compensation expenses that may not be indicative of its operating performance from a cash perspective. 51Talk believes that both management and investors benefit from these non-GAAP financial measures in assessing its performance and when planning and forecasting future periods. These non-GAAP financial measures also facilitate management's internal comparisons to 51Talk's historical performance. 51Talk computes its non-GAAP financial measures using the same consistent method from quarter to quarter and from period to period. 51Talk believes these non-GAAP financial measures are useful to investors in allowing for greater transparency with respect to supplemental information used by management in its financial and operational decision-making. A limitation of using non-GAAP measures is that these non-GAAP measures exclude share-based compensation expenses that have been and will continue to be for the foreseeable future a significant recurring expense in the 51Talk's business. Management compensates for these limitations by providing specific information regarding the GAAP amounts excluded from each non-GAAP measure. The accompanying table at the end of this press release provides more details on the reconciliations between GAAP financial measures that are most directly comparable to non-GAAP financial measures.

Exchange Rate Information

This announcement contains translations of certain RMB amounts into U.S. dollars at a specified rate solely for the convenience of the reader.Unless otherwise noted,all translations from RMB to U.S. dollars are made at a rate of RMB7.0808to US$1.00,the rate in effect as of March 31,2020as certified for customs purposes by the Federal Reserve Bank of New York.

Safe Harbor Statement

This press release contains statements that may constitute "forward-looking" statements pursuant to the "safe harbor" provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as "will","expects","anticipates","aims","future","intends","plans","believes","estimates","likely to" and similar statements. Among other things,51Talk's business outlook and quotations from management in this announcement,as well as 51Talk's strategic and operational plans,contain forward-looking statements. 51Talk may also make written or oral forward-looking statements in its periodic reports to the Securities and Exchange Commission ("SEC"),in its annual report to shareholders,in press releases and other written materials and in oral statements made by its officers,directors or employees to third parties. Statements that are not historical facts,including statements about 51Talk's beliefs and expectations,are forward-looking statements. Forward-looking statements involve inherent risks and uncertainties. A number of factors could cause actual results to differ materially from those contained in any forward-looking statement,including but not limited to the following: 51Talk's goals and strategies; 51Talk's expectations regarding demand for and market acceptance of its brand and platform; 51Talk's ability to retain and increase its student enrollment; 51Talk's ability to offer new courses; 51Talk's ability to engage,train and retain new teachers; 51Talk's future business development,results of operations and financial condition; 51Talk's ability to maintain and improve infrastructure necessary to operate its education platform; competition in the online education industry in China; the expected growth of,and trends in,the markets for 51Talk's course offerings in China; relevant government policies and regulations relating to 51Talk's corporate structure,business and industry; general economic and business condition in China,the Philippines and elsewhere and assumptions underlying or related to any of the foregoing. Further information regarding these and other risks is included in 51Talk's filings with the SEC. All information provided in this press release is as of the date of this press release,and 51Talk does not undertake any obligation to update any forward-looking statement,except as required under applicable law.

For investor and media inquiries,please contact:

China Online Education Group

Investor Relations

+86 (10) 8342-6262

ir@51talk.com

The Piacente Group,Inc.

Brandi Piacente

+86 (10) 6508-0677

+1 (212) 481-2050

51talk@tpg-ir.com

CHINA ONLINE EDUCATION GROUP

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

As of

Dec. 31,

2019

2020

2020

RMB

RMB

US$

ASSETS

Current assets

Cash and cash equivalents

342,951

331,227

46,778

Time deposits

144,093

212,875

30,064

Short-term investment

452,936

452,716

63,936

Inventory

308

671

95

Prepaid expenses and other current assets

250,215

247,773

34,992

Total current assets

1,190,503

1,245,262

175,865

Non-current assets

Property and equipment,net

20,336

18,862

2,664

Intangible assets,net

9,918

8,711

1,230

Goodwill

4,223

4,223

596

Right-of-use assets

56,638

62,168

8,780

Time deposits

113,415

217,186

30,673

Other non-current assets

6,784

8,469

1,196

Total non-current assets

211,314

319,619

45,139

Total assets

1,401,817

1,564,881

221,004

LIABILITIES

AND SHAREHOLDERS' DEFICIT

Current liabilities

Short-term loan

16,578

-

-

Advances from students

2,181,808

2,258,697

318,989

Accrued expenses and other current liabilities

166,955

199,784

28,215

Lease liability

31,550

35,020

4,946

Taxes payable

21,661

19,207

2,713

Total current liabilities

2,418,552

2,512,708

354,863

Non-current liabilities

Advances from students

4,783

3,912

552

Lease liability

23,545

26,881

3,796

Other non-current liabilities

1,595

1,679

237

Total non-current liabilities

29,923

32,472

4,585

Total liabilities

2,448,475

2,545,180

359,448

Total shareholders' deficit

(1,046,658)

(980,299)

(138,444)

Total liabilities and shareholders' deficit

1,004

CHINA ONLINE EDUCATION GROUP

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)

(In thousands except for number of shares and per share data)

For the three months ended

Mar. 31,

Dec. 31,

2019

2019

2020

2020

RMB

RMB

RMB

US$

Net revenues[5]

320,074

397,154

487,084

68,789

Cost of revenues

(105,728)

(110,648)

(144,031)

(20,341)

Gross profit

214,346

286,506

343,053

48,448

Operating expenses

Sales and marketing expenses

(186,287)

(202,520)

(228,387)

(32,254)

Product development expenses

(40,701)

(37,046)

(35,867)

(5,065)

General and administrative expenses

(51,159)

(48,883)

(50,689)

(7,159)

Total operating expenses

(278,147)

(288,449)

(314,943)

(44,478)

Other income

-

-

16,761

2,367

Income/(loss) from operations

(63,801)

(1,943)

44,871

6,337

Interest income

3,051

5,977

7,577

1,070

Interest expenses and other expenses,net

(4,338)

(1,918)

(209)

(30)

Income/(loss) before income tax expenses

(65,088)

2,116

52,239

7,377

Income tax expenses

(1,148)

(1,307)

(1,447)

(204)

Netincome/(loss),all attributable to the Company's

ordinary shareholders

(66,236)

809

50,792

7,173

Weighted average number of ordinary shares used in computing basic

income/(loss)per share

306,042,465

311,064,347

313,197,499

313,499

Weighted average number of ordinary shares used in computing diluted

income/(loss)per share

306,465

337,511,364

336,903,081

336,081

[5] By performing our last year-end financial closing procedures,we discovered an oversight in our process for evaluating the status of lessons that caused us to overstate net revenues during 2018 and in interim periods of 2019. The amounts were reflecting RMB2.9 million (including RMB 2.5 million out-of-period adjustment attributed to the year of 2018) and RMB0.7 million decreases to net revenues for the three months ended March 31,2019 and December 31,respectively. Based on our quantitative and qualitative analysis,we do not consider the out of period impact to be material to our financial position or results of operations for any prior periods or for the quarter or year ended December 31,2019.

CHINA ONLINE EDUCATION GROUP

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)

(In thousands except for number of shares and per share data)

For the three months ended

Mar. 31,

2019

2019

2020

2020

RMB

RMB

RMB

US$

Net income/(loss) per share attributable to ordinary shareholders

basic

(0.22)

0.00

0.16

0.02

diluted

(0.22)

0.00

0.15

0.02

Net income/(loss) per ADS attributable to ordinary shareholders

basic

(3.25)

0.04

2.43

0.34

diluted

(3.25)

0.04

2.26

0.32

Comprehensive income/(loss):

Net income/(loss)

(66,173

Other comprehensive income/(loss)

Foreign currency translation adjustments

(5,716)

(4,045)

4,544

642

Total comprehensive income/(loss)

(71,952)

(3,236)

55,336

7,815

Share-based compensation expenses are included in the operating expenses as follows:

Sales and marketing expenses

(284)

(939)

(2,302)

(325)

Product development expenses

(574)

(218)

101

14

General and administrative expenses

(3,012)

(2,582)

(4,000)

(565)

CHINA ONLINE EDUCATION GROUP

Reconciliation of Non-GAAP Measures to the Most Comparable GAAP Measures

(In thousands except for number of shares and per share data)

For the three months ended

Mar. 31,

2019

2019

2020

2020

RMB

RMB

RMB

US$

Sales and marketing expenses

(186,254)

Less: Share-based compensation expenses

(284)

(939)

(2,302)

(325)

Non-GAAP sales and marketing expenses

(186,003)

(201,581)

(226,085)

(31,929)

Product development expenses

(40,065)

Less: Share-based compensation expenses

(574)

(218)

101

14

Non-GAAP product development expenses

(40,127)

(36,828)

(35,968)

(5,079)

General and administrative expenses

(51,159)

Less: Share-based compensation expenses

(3,000)

(565)

Non-GAAP general and administrative expenses

(48,147)

(46,301)

(46,689)

(6,594)

Operating expenses

(278,478)

Less: Share-based compensation expenses

(3,870)

(3,739)

(6,201)

(876)

Non-GAAP operating expenses

(274,277)

(284,710)

(308,742)

(43,602)

Income/(loss) from operations

(63,337

Less: Share-based compensation expenses

(3,201)

(876)

Non-GAAP income/(loss) from operations

(59,931)

1,796

51,072

7,213

CHINA ONLINE EDUCATION GROUP

Reconciliation of Non-GAAP Measures to the Most Comparable GAAP Measures

(In thousands except for number of shares and per share data)

For the three months ended

Mar. 31,

2019

2019

2020

2020

RMB

RMB

RMB

US$

Income tax expenses

(1,447)

(204)

Less: Tax impact of Share-based compensation expenses

-

-

-

-

Non-GAAP income tax expenses

(1,447)

(204)

Net income/(loss),all attributable to the Company's ordinary shareholders

(66,173

Less: Share-based compensation expenses

(3,201)

(876)

Non-GAAP net income/(loss),all attributable to the Company's ordinary shareholders

(62,366)

4,548

56,993

8,049

Weighted average number of ordinary shares used in computing basic income/(loss)

per share

306,499

Weighted average number of ordinary shares used in computing diluted income/(loss)

per share

306,081

Non-GAAP net income/(loss) per share attributable to ordinary shareholders

basic

(0.20)

0.01

0.18

0.03

diluted

(0.20)

0.01

0.17

0.02

Non-GAAP net income/(loss) per ADS attributable to ordinary shareholders

basic

(3.06)

0.22

2.73

0.39

diluted

(3.06)

0.20

2.54

0.36

CHINA ONLINE EDUCATION GROUP

UNAUDITED ADDITIONAL INFORMATION

(In thousands except for number of shares and per share data)

For the three months ended

Mar. 31,

2019

2019

2020

2020

RMB

RMB

RMB

US$

Net revenues

One-on-one offerings

292,558

370,763

464,424

65,589

Small class offerings

27,516

26,391

22,660

3,200

Total net revenues

320,789

Cost of revenues

One-on-one offerings

(90,791)

(98,178)

(133,607)

(18,869)

Small class offerings

(14,937)

(12,470)

(10,424)

(1,472)

Total cost of revenues

(105,341)

Gross profit

One-on-one offerings

201,767

272,585

330,817

46,720

Small class offerings

12,579

13,921

12,236

1,728

Total gross profit

214,448

Gross margin

One-on-one offerings

69.0%

73.5%

71.2%

71.2%

Small class offerings

45.7%

52.7%

54.0%

54.0%

Total gross margin

67.0%

72.1%

70.4%

70.4%

CHINA ONLINE EDUCATION GROUP

UNAUDITEDADDITIONAL INFORMATION

(In thousands except for number of shares and per share data)

For the three months ended

Mar. 31,

2019

2019

2020

2020

RMB

RMB

RMB

US$

Sales and marketing expenses

One-on-one offerings

(170,849)

(189,502)

(215,510)

(30,435)

Small class offerings

(15,438)

(13,018)

(12,877)

(1,819)

Total sales and marketing expenses[6]

(186,254)

Product development expenses

One-on-one offerings

(35,169)

(32,860)

(31,982)

(4,516)

Small class offerings

(5,532)

(4,186)

(3,885)

(549)

Total product development expenses[7]

(40,065)

General and administrative expenses

One-on-one offerings

(44,934)

(45,576)

(47,297)

(6,680)

Small class offerings

(6,225)

(3,307)

(3,392)

(479)

Total general and administrative expenses[8]

(51,159)

Operating expenses

One-on-one offerings

(250,952)

(267,938)

(294,789)

(41,631)

Small class offerings

(27,195)

(20,511)

(20,154)

(2,847)

Total operating expenses

(278,478)

Other income

One-on-one offerings

-

-

15,536

2,194

Small class offerings

-

-

1,225

173

Total other income

-

-

16,367

Income/(loss) from operations

One-on-one offerings

(49,185)

4,647

51,564

7,283

Small class offerings

(14,616)

(6,590)

(6,693)

(946)

Total income/(loss) from operations

(63,337

[6] Share-based compensation expenses included in the sales and marketing expenses for one-on-one offerings and small class offerings were

RMB2,147 and RMB156 respectively for the first quarter of 2020,and RMB279 and RMB5 respectively for the first quarter of 2019.

[7] Share-based compensation expenses,included in the product development expenses for one-on-one offerings and small class offerings were

negative RMB611 and RMB510 respectively for the first quarter of 2020,and RMB300 and RMB274 respectively for the first quarter of 2019.

[8] Share-based compensation expenses,included in the general and administrative expenses for one-on-one offerings and small class offerings w

ere RMB3,962 and RMB38 respectively for the first quarter of 2020,and RMB2,938 and RMB74 respectively for the first quarter of 2019.

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