Securities registered or to be registered pursuant to Section 12(b) of
the Act:
*Not for trading, but only in connection with the listing
on the NYSE American
Securities registered or to be registered pursuant to Section 12(g) of
the Act:
Indicate the number of outstanding shares of each of the issuer’s
classes of capital stock as of the close of the period covered by this report.
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
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.
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.
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).
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.
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 which basis of accounting the registrant
has used to prepare the financial statements included in this filing:
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.
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).
Except where the context requires otherwise
and for purposes of this annual report only:
This annual report on Form 20-F includes
forward-looking statements that relate to future events or our future financial performance and involve known and unknown risks,
uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially
from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.
Words such as, but not limited to, “believe”, “expect”, “anticipate”, “estimate”,
“intend”, “plan”, “likely”, “will”, “would”, “could”, and
similar expressions or phrases identify forward-looking statements. We have based these forward-looking statements largely on our
current expectations and future events and financial trends that we believe may affect our financial condition, results of operation,
business strategy and financial needs. Forward-looking statements include, but are not limited to, statements about:
All forward-looking statements involve risks,
assumptions and uncertainties. You should not rely upon forward-looking statements as predictors of future events. The occurrence
of the events described, and the achievement of the expected results, depend on many events, some or all of which are not predictable
or within our control. Actual results may differ materially from expected results. See the information under “Item 3.D Key
Information—Risk Factors” and elsewhere in this annual report for a more complete discussion of these risks, assumptions
and uncertainties and for other risks and uncertainties. These risks, assumptions and uncertainties are not necessarily all of
the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements.
Other unknown or unpredictable factors also could harm our results. We undertake no obligation to update publicly or revise any
forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties
and assumptions, the forward-looking events discussed in this annual report might not occur.
PART I
Item 1.
|
Identity of Directors, Senior Management and Advisers
|
Not applicable.
Item 2.
|
Offer Statistics and Expected Timetable
|
Not applicable.
A.
|
Selected Financial Data
|
The selected consolidated financial data
presented below for the years ended December 31, 2017, 2018 and 2019 and as of December 31, 2018 and 2019 is derived
from our audited consolidated financial statements included elsewhere in this annual report, which were prepared in accordance
with U.S. GAAP. The selected consolidated financial data presented below for the years ended December 31, 2015 and 2016 and
as of December 31, 2015, 2016 and 2017, have been derived from our audited consolidated financial statements for the years ended
December 31, 2015, 2016 and 2017, which are not included in this annual report.
|
|
For the Years Ended December 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2019
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in thousands, except share, per share and per ADS information)
|
|
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Educational programs and services
|
|
|
395,715
|
|
|
|
412,016
|
|
|
|
432,754
|
|
|
|
525,134
|
|
|
|
582,706
|
|
|
|
83,700
|
|
- Intellectualized operational services
|
|
|
-
|
|
|
|
-
|
|
|
|
11,170
|
|
|
|
6,374
|
|
|
|
1,203
|
|
|
|
173
|
|
Total net revenues
|
|
|
395,715
|
|
|
|
412,016
|
|
|
|
443,924
|
|
|
|
531,508
|
|
|
|
583,909
|
|
|
|
83,873
|
|
COST OF REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Education programs and services
|
|
|
(245,945
|
)
|
|
|
(238,742
|
)
|
|
|
(249,400
|
)
|
|
|
(331,939
|
)
|
|
|
(383,635
|
)
|
|
|
(55,106
|
)
|
- Intellectualized operational services
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,995
|
)
|
|
|
(6,204
|
)
|
|
|
(5,259
|
)
|
|
|
(755
|
)
|
Total costs of revenues
|
|
|
(245,945
|
)
|
|
|
(238,742
|
)
|
|
|
(256,395
|
)
|
|
|
(338,143
|
)
|
|
|
(388,894
|
)
|
|
|
(55,861
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
149,770
|
|
|
|
173,274
|
|
|
|
187,529
|
|
|
|
193,365
|
|
|
|
195,015
|
|
|
|
28,012
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing (1)
|
|
|
(55,511
|
)
|
|
|
(41,818
|
)
|
|
|
(36,710
|
)
|
|
|
(43,751
|
)
|
|
|
(55,721
|
)
|
|
|
(8,004
|
)
|
General and administrative (1)
|
|
|
(280,634
|
)
|
|
|
(145,513
|
)
|
|
|
(142,252
|
)
|
|
|
(132,718
|
)
|
|
|
(194,417
|
)
|
|
|
(27,926
|
)
|
Research and development (1)
|
|
|
(7,308
|
)
|
|
|
(7,572
|
)
|
|
|
(6,262
|
)
|
|
|
(1,513
|
)
|
|
|
(3,793
|
)
|
|
|
(545
|
)
|
Impairment loss from continuing operations
|
|
|
(162,351
|
)
|
|
|
(22,402
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(38,754
|
)
|
|
|
(5,567
|
)
|
Total operating expenses
|
|
|
(505,804
|
)
|
|
|
(217,305
|
)
|
|
|
(185,224
|
)
|
|
|
(177,982
|
)
|
|
|
(292,685
|
)
|
|
|
(42,042
|
)
|
OPERATING (LOSS)/INCOME
|
|
|
(356,034
|
)
|
|
|
(44,031
|
)
|
|
|
2,305
|
|
|
|
15,383
|
|
|
|
(97,670
|
)
|
|
|
(14,030
|
)
|
OTHER (EXPENSE)/INCOME
|
|
|
(39,371
|
)
|
|
|
12,924
|
|
|
|
53,234
|
|
|
|
33,055
|
|
|
|
10,161
|
|
|
|
1,459
|
|
(LOSS)/INCOME BEFORE INCOME TAX, NON-CONTROLLING INTEREST, AND DISCONTINUED OPERATIONS
|
|
|
(395,405
|
)
|
|
|
(31,107
|
)
|
|
|
55,539
|
|
|
|
48,438
|
|
|
|
(87,509
|
)
|
|
|
(12,571
|
)
|
Income tax benefit/(expense)
|
|
|
118,963
|
|
|
|
(5,911
|
)
|
|
|
(9,614
|
)
|
|
|
(3,498
|
)
|
|
|
(12,917
|
)
|
|
|
(1,855
|
)
|
(LOSS)/INCOME FROM CONTINUING OPERATIONS
|
|
|
(276,442
|
)
|
|
|
(37,018
|
)
|
|
|
45,925
|
|
|
|
44,940
|
|
|
|
(100,426
|
)
|
|
|
(14,426
|
)
|
Income from and on sale of discontinued operations, net of income tax
|
|
|
340,798
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME/(LOSS)
|
|
|
64,356
|
|
|
|
(37,018
|
)
|
|
|
45,925
|
|
|
|
44,940
|
|
|
|
(100,426
|
)
|
|
|
(14,426
|
)
|
Less: Net income/(loss) contributable to non-controlling interest from continuing operating
|
|
|
617
|
|
|
|
(1,318
|
)
|
|
|
(538
|
)
|
|
|
(50
|
)
|
|
|
(485
|
)
|
|
|
(70
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME/(LOSS) ATTRIBUTABLE TO ORDINARY SHAREHOLDERS
|
|
|
63,739
|
|
|
|
(35,700
|
)
|
|
|
46,463
|
|
|
|
44,990
|
|
|
|
(99,941
|
)
|
|
|
(14,356
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income from continuing operations per ordinary share: (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(7.52
|
)
|
|
|
(0.93
|
)
|
|
|
1.20
|
|
|
|
1.09
|
|
|
|
(2.30
|
)
|
|
|
(0.33
|
)
|
Diluted
|
|
|
(7.52
|
)
|
|
|
(0.93
|
)
|
|
|
1.18
|
|
|
|
1.08
|
|
|
|
(2.30
|
)
|
|
|
(0.33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from discontinued operations per ordinary share: (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
9.25
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Diluted
|
|
|
9.25
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income from continuing operations per ADS: (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(15.04
|
)
|
|
|
(1.86
|
)
|
|
|
2.40
|
|
|
|
2.18
|
|
|
|
(4.60
|
)
|
|
|
(0.66
|
)
|
Diluted
|
|
|
(15.04
|
)
|
|
|
(1.86
|
)
|
|
|
2.36
|
|
|
|
2.16
|
|
|
|
(4.60
|
)
|
|
|
(0.66
|
)
|
Net income from discontinued operations per ADS: (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
18.50
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Diluted
|
|
|
18.50
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in calculating net income/(loss) per share (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
36,848,816
|
|
|
|
38,469,234
|
|
|
|
38,826,800
|
|
|
|
41,342,597
|
|
|
|
43,505,175
|
|
|
|
43,505,175
|
|
Diluted
|
|
|
36,848,816
|
|
|
|
38,469,234
|
|
|
|
39,303,760
|
|
|
|
41,671,763
|
|
|
|
43,505,175
|
|
|
|
43,505,175
|
|
(1)
|
Share-based compensation expense included in:
|
|
|
For the Years Ended December 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2019
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in thousands)
|
|
Selling and marketing
|
|
|
(457
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
General and administrative
|
|
|
(49,371
|
)
|
|
|
(7,828
|
)
|
|
|
(4,640
|
)
|
|
|
(8,121
|
)
|
|
|
(1,624
|
)
|
|
|
(233
|
)
|
Research and development
|
|
|
(289
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
(2)
|
Basic and diluted net income/(loss) from continuing operations per ordinary share is computed
by dividing net income/(loss) from continuing operations by the weighted average number of shares outstanding for the period.
Basic and diluted net income/(loss) from discontinued operations per ordinary share is computed by dividing net income/(loss)
from discontinued operations by the weighted average number of shares outstanding for the period. The potentially dilutive
options and restricted shares were excluded from the calculation of diluted net income/(loss) from continuing/discontinued
operations per share in those periods where their inclusion would be anti-dilutive.
|
|
|
As of December 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2019
|
|
|
|
(in thousands)
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
246,303
|
|
|
|
196,900
|
|
|
|
195,303
|
|
|
|
211,436
|
|
|
|
157,600
|
|
|
|
22,638
|
|
Total current assets
|
|
|
682,624
|
|
|
|
616,527
|
|
|
|
572,723
|
|
|
|
555,400
|
|
|
|
399,640
|
|
|
|
57,405
|
|
Total assets
|
|
|
982,204
|
|
|
|
953,023
|
|
|
|
977,420
|
|
|
|
910,219
|
|
|
|
1,020,799
|
|
|
|
146,628
|
|
Total current liabilities
|
|
|
839,381
|
|
|
|
838,002
|
|
|
|
762,552
|
|
|
|
645,147
|
|
|
|
608,984
|
|
|
|
87,475
|
|
Total liabilities
|
|
|
839,381
|
|
|
|
838,002
|
|
|
|
811,461
|
|
|
|
647,448
|
|
|
|
857,203
|
|
|
|
123,129
|
|
Total equity
|
|
|
142,823
|
|
|
|
115,021
|
|
|
|
165,959
|
|
|
|
262,771
|
|
|
|
163,596
|
|
|
|
23,499
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2019
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in thousands)
|
|
Consolidated Statement of Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in)/provided by operating activities
|
|
|
(40,119
|
)
|
|
|
17,535
|
|
|
|
20,210
|
|
|
|
25,445
|
|
|
|
(10,210
|
)
|
|
|
(1,468
|
)
|
Net cash provided by/(used in) investing activities
|
|
|
58,214
|
|
|
|
(65,218
|
)
|
|
|
(61,078
|
)
|
|
|
(28,520
|
)
|
|
|
(33,153
|
)
|
|
|
(4,761
|
)
|
Net cash provided by/(used in) financing activities
|
|
|
12,830
|
|
|
|
(1,504
|
)
|
|
|
39,205
|
|
|
|
46,872
|
|
|
|
(40,620
|
)
|
|
|
(5,835
|
)
|
Exchange Rates
Our business is primarily conducted in China
and substantially most of our revenues are denominated in RMB. This annual report contains translations of certain RMB amounts
into U.S. dollars at specified rates solely for the convenience of the reader. All translations from RMB to U.S. dollars were made
at the noon buying rate as set forth in the H.10 statistical release of the U.S. Federal Reserve Board. Unless otherwise stated,
the translation of RMB into U.S. dollars has been made at the noon buying rate on December 31, 2019, which was RMB 6.9618 to US$
1.00. We make no representation that the RMB or U.S. dollar amounts referred to in this annual report could have been converted
into U.S. dollars or RMB, as the case may be, at any particular rate or at all. The PRC government imposes control over its foreign
currency reserves in part through direct regulation of the conversion of RMB into foreign exchange and through restrictions on
foreign trade. On February 18, 2020, the daily exchange rate reported by the Federal Reserve Board was RMB 6.9949 to US$ 1.00.
The following table sets forth information
concerning exchange rates between the RMB and the U.S. dollar for the periods indicated. These rates are provided solely for your
convenience and are not necessarily the exchange rates that we used in this annual report or will use in the preparation of our
periodic reports or any other information to be provided to you. The source of these rates is the Federal Reserve Board.
Period
|
|
Average (1)
|
|
2015
|
|
|
6.2827
|
|
2016
|
|
|
6.6400
|
|
2017
|
|
|
6.7595
|
|
2018
|
|
|
6.6090
|
|
2019
|
|
|
6.9072
|
|
Period
|
|
High (1)
|
|
|
Low (1)
|
|
2019
|
|
|
|
|
|
|
|
|
September
|
|
|
7.1786
|
|
|
|
7.0659
|
|
October
|
|
|
7.1473
|
|
|
|
7.0379
|
|
November
|
|
|
7.0389
|
|
|
|
6.9766
|
|
December
|
|
|
7.0609
|
|
|
|
6.9618
|
|
2020
|
|
|
|
|
|
|
|
|
January
|
|
|
6.9749
|
|
|
|
6.8589
|
|
February
|
|
|
7.0286
|
|
|
|
6.9650
|
|
(1)
|
Annual and monthly lows and highs are calculated from daily noon buying rates in the city of New York as published by the Federal Reserve Bank.
|
B.
|
Capitalization and Indebtedness
|
Not applicable.
C.
|
Reasons for the Offer and Use of Proceeds
|
Not applicable.
Risks related to our business and industry
If we are not able to continue to attract students to
enroll in our programs, our net revenues may decline and we may not be able to maintain profitability.
The success of our business largely depends
on the number of student enrollments in our programs and the amount of fees that our students are willing to pay for our courses.
Therefore, our ability to continue to attract students to enroll in our programs without significantly decreasing course fees is
critical to the continued success and growth of our business. This will depend on several factors, including our ability to develop
new programs and enhance existing programs to respond to changes in market trends and student demands, expanding our geographic
reach, managing our growth while maintaining the consistency of our teaching quality, effectively marketing our programs to a broader
base of prospective students, developing and licensing additional high-quality educational content and responding to competitive
pressures. It also depends on macroeconomic factors like unemployment and the resulting lower confidence in job prospects, and
many of the regulatory risks discussed as below. Our enrollment in future years will be affected by legislative uncertainty, regulatory
activity, and macroeconomic conditions. It is likely that legislative, regulatory, and economic uncertainties will continue for
the foreseeable future, and thus it is difficult to assess our long-term growth prospects. Our partner schools are subject to the
government imposed annual enrollment quota limit. If we were to violate requirements to which we are subject the Ministry of Education
of the People’s Republic of China (“MOE”), could reduce the annual enrollment quota at our partner schools or
restrict the programs we offer at our partner schools or the methods by which we recruit new students. If we are unable to continue
to attract students to enroll in our programs without significantly decreasing course fees, our net revenues may decline and we
may not be able to achieve profitability, either of which could result in a material adverse effect on our business, results of
operations and financial condition.
If we are not able to continue to attract and retain qualified
education professionals, we may not be able to maintain consistent teaching quality throughout our school and learning center network
and our brand, business and results of operations may be materially and adversely affected.
Our education professionals are critical
to maintaining the quality of our services, software products and programs, and maintaining our brand and reputation, as they interact
with our students on a regular basis. We must continue to attract qualified education professionals who have a strong command of
the subject areas to be taught and who meet our qualifications. There are a limited number of education professionals in China
with the necessary experience to satisfy our qualifications, and we must provide competitive compensation packages to attract and
retain qualified teachers and tutors. Some of our education professionals are teachers of public schools that are working at our
tutoring centers on a part-time basis. Paid tutoring by teachers of public schools has received more regulatory scrutiny recently.
On January 11, 2014, MOE promulgated the Measures for Punishment for Violation of Professional Ethics of Primary and Secondary
School Teachers (the “Measures”) related to some of our substantial business operations in provinces and cities such
as Beijing, Tianjin, Chengdu, Jiangsu, Hunan and Hubei. The Measures prohibit teachers of primary and secondary schools from teaching,
on a part-time basis, in schools or in out-of-school learning centers during the work week or at any time. Public school teachers
may join private schools only after ending their employment with public schools. Some of our teachers also work in public schools.
If these education professionals choose to leave, or are forced to leave, our learning centers to comply with relevant local regulations,
we will need to seek new teachers to replace them which we may not be able to do at a reasonable cost or at all. If these regulations
become the trend and are adopted in more provinces and cities or become more restrictive, we may need to seek additional new teachers
in more places, which will further increase the difficulty of our recruiting efforts. While there have been no existing nationwide
regulations imposing any penalty on private schools like ours for hiring teachers who also teach at public schools, we cannot assure
you that such regulations will not be adopted in the future. In addition, we may not be able to hire and retain enough qualified
education professionals to keep pace with our anticipated growth or at acceptable costs while maintaining consistent teaching quality
across many different schools, learning centers and programs in different geographic locations. Shortages of qualified education
professionals, or decreases in the quality of our instruction, whether actual or perceived in one or more of our markets, or an
increase in hiring costs, may have a material and adverse effect on our business and our reputation. Further, our inability to
retain our education professionals may hurt our existing brands and those brands we are trying to develop, and retaining qualified
teachers at additional costs may have a material adverse effect on our business and results of operations.
Our business depends on the strength of our brands in
the marketplace. We may not be able to retain existing students or attract new students if we cannot continue to use, protect and
enhance our brands successfully in the marketplace.
Our operational and financial performance
and the successful growth of our business are highly dependent on market awareness of our “Ambow” brand and the regional
brands that we have acquired. We believe that maintaining and enhancing the “Ambow” brand is critical to maintaining
and enhancing our competitive advantage and growing our business. In order to retain existing students and attract new students,
we plan to continue to make expenditures to create and maintain our positive brand awareness and create brand loyalty. The diverse
set of services and products that we offer to K-12 students, college students and other adults throughout many provinces in China
places significant demands on us to maintain the consistency and quality of our services and products to ensure that our brands
do not suffer from any actual or perceived decrease in the quality of our services and products. As we continue to grow in size,
expand our services and products and extend our geographical reach, maintaining the quality and consistency of our services and
products may be more difficult. Any negative publicity about our services, products, schools or learning centers, regardless of
its veracity, could harm our brand image and have a material adverse effect on our business and results of operations.
We face significant competition in each major program
we offer and each geographic market in which we operate, and if we fail to compete effectively, we may lose our market share and
our profitability may be adversely affected.
The private education sector in China is
rapidly evolving, highly fragmented and competitive, and we expect competition in this sector to persist and intensify. In addition,
our K-12 schools compete with public schools in China, which are generally viewed to be superior to private schools within the
Chinese market. We face competition in each major program we offer and each geographic market in which we operate. Moreover, competition
is particularly intense in some of the key geographic markets in which we operate, such as Beijing and Shanghai.
We also face competition from many different
companies that focus on one area of our business and are able to devote all of their resources to that business line, and these
companies may be able to more quickly adapt to changing technology, student preferences and market conditions in these markets
than we can. These companies may, therefore, have a competitive advantage over us with respect to these business areas.
The increasing use of the Internet and advances
in Internet and computer-related technologies are eliminating geographic and cost-entry barriers to providing private educational
services. As a result, many international companies that offer online test preparation and language training courses may decide
to expand their presence in China or to try to penetrate the China market. Many of these international companies have strong education
brands, and students and parents in China may be attracted to the offerings based in the country that the student wishes to study
in or in which the selected language is widely spoken. In addition, many Chinese and smaller companies are able to use the Internet
to quickly and cost-effectively offer their services and products to a large number of students with less capital expenditures
than previously required.
Post-secondary education in the United
States is highly competitive. Our Boston-based subsidiary, Bay State College, competes with traditional public and private two-year
and four-year colleges, other for-profit schools, and alternatives to higher education, such as employment and military service.
Public colleges may offer programs similar to those of Bay State College at a lower tuition level as a result of government subsidies,
government and foundation grants, tax-deductible contributions, and other financial sources not available to proprietary institutions.
Some of our competitors in both the public and private sectors have substantially greater financial and other resources than we
do. Congress, the Department of Education, and other agencies have required increasing disclosure of information to consumers.
While we believe that Bay State College provides valuable education to its students, we may not always accurately predict the drivers
of a student or potential students’ decisions to choose among the range of educational and other options available to them.
This strong competition could adversely affect our business.
Competition could result in loss of market
share and revenue, lower profit margins and limit our future growth. A number of our current and potential future competitors may
have greater financial and other resources than we have. These competitors may be able to devote greater resources than we can
to the development, promotion and sale of their services and products, and respond more quickly than we can to changes in student
needs, testing materials, admissions standards, market needs or new technologies.
Our student enrollments may decrease due
to intense competition, and we may be required to reduce course fees or increase spending in response to competition in order to
retain or attract students or pursue new market opportunities. As a result, our net revenues and profitability may decrease. We
cannot assure you that we will be able to compete successfully against current or future competitors. If we are unable to maintain
our competitive position or otherwise respond to competitive pressures effectively, we may lose our market share and our profitability
may be materially adversely affected.
We may have acquisitions in the future, which involve
risks and uncertainties, and if we don’t manage those risks well, it may harm our business.
In the future, we may establish and maintain
joint ventures and strategic relationships with third parties. Strategic acquisitions, investments and relationships with third
parties involve substantial risks and uncertainties, including:
|
·
|
Our ability to identify and acquire targets in a cost-effective manner;
|
|
·
|
Our ability to obtain approval from relevant governmental authorities for the acquisitions and comply with applicable rules and regulations for such acquisitions;
|
|
·
|
Potential ongoing financial obligations in connection with acquisitions;
|
|
·
|
Potential unforeseen or hidden liabilities, including litigation claims or tax liabilities, associated with acquired companies or schools;
|
|
·
|
The diversion of resources and management attention from our existing businesses;
|
|
·
|
Failure to achieve the intended objectives, benefits or revenue-enhancing opportunities expected from the acquisitions;
|
|
·
|
Our ability to generate sufficient revenues to offset the costs and expenses of strategic acquisitions, investments, joint venture formations, or other strategic relationships; and
|
|
·
|
Potential loss of, or harm to, employee or customer relationships as a result of ownership changes.
|
In particular, while we typically would
perform due diligence on each entity that we acquire before the acquisition, some of the acquired entities may not maintain their
historical documents and records properly and such documents and records may be unavailable for our review. As such, there may
be hidden liabilities and risks relating to the business and operation of such entities that we fail to identify before the acquisition.
If we acquire such entity and any such hidden liability is found or any such risk materializes in the future, we may not have any
remedy against the sellers and may have to assume the liabilities and losses as a result.
If any one or more of these risks or uncertainties
were to occur or if any of the strategic objectives we contemplated is not achieved, our ability to manage our business could be
impaired. It could result in our failure to derive the intended benefits of these strategic acquisitions, investments, joint ventures
or strategic relationships, or otherwise have a material adverse effect on our business, financial condition and results of operations.
In addition, if we fail to successfully pursue our future acquisition strategy, our plans for further market penetration, revenue
growth and improved results of operations could be harmed.
We may not be able to successfully integrate businesses
that we acquire, which may cause us to lose anticipated benefits from such acquisitions and to incur significant additional expenses.
It is challenging to integrate business
operations, infrastructure and management philosophies of acquired schools and companies. The benefits of our past and future acquisitions
depend in significant part on our ability to integrate technology, operations and personnel. The integration of acquired schools
and companies is a complex, time-consuming and expensive process that, without proper planning and implementation, could significantly
disrupt our business and operations. The main challenges involved in integrating acquired entities include the following:
|
·
|
Ensuring and demonstrating to our students that the acquisitions will not result in adverse changes in service standards or business focus;
|
|
·
|
Consolidating and rationalizing corporate IT and administrative infrastructures;
|
|
·
|
Retaining qualified education professionals for our acquired entities;
|
|
·
|
Consolidating service and product offerings;
|
|
·
|
Coordinating and rationalizing research and development activities to enhance introduction of new products and technologies with reduced cost;
|
|
·
|
Preserving strategic, marketing or other important relationships of the acquired entity and resolving potential conflicts that may arise with our key relationships; and
|
|
·
|
Minimizing the diversion of management attention from ongoing business concerns.
|
We may not successfully integrate our operations
and the operations of entities we acquire in a timely manner, or at all, and we may not realize the anticipated benefits or synergies
of the acquisitions to the extent, or in the timeframe, anticipated which would have a material adverse effect on our results of
operations.
Our results of operations may fluctuate, which makes our
financial results difficult to forecast, and could cause our results to fall short of expectations.
Our results of operations may fluctuate
as a result of a number of factors, many of which are outside of our control. Our net revenues increased from RMB 443.9 million
in 2017 to RMB 531.5 million in 2018, and further increased to RMB 583.9 million (US$ 83.9 million) in 2019. Comparing our results
of operations on a period-to-period basis may not be meaningful, and you should not rely on our past results as an indication
of our future performance. Our quarterly and annual net revenues and costs and expenses as a percentage of net revenues may be
significantly different from our historical or projected rates. Our quarterly and annual net revenues and gross margins may fluctuate
due to a number of factors, including:
|
·
|
The mix of our net revenues across our operating segments;
|
|
·
|
The increase of costs associated with our strategic expansion plans;
|
|
·
|
The revenue and gross margin profiles of our acquisitions in a given period;
|
|
·
|
Our ability to successfully integrate our acquisitions and the timing of our post-integration activities;
|
|
·
|
Our ability to reduce our costs as a percentage of our net revenues;
|
|
·
|
Increased competition; and
|
|
·
|
Our ability to manage our financial resources, including administration of bank loans and bank accounts.
|
As a result of these and other factors,
we may not sustain our past growth rates in future periods, and we may not sustain profitability on a quarterly or annual basis
in the future.
Our business depends on the continuing efforts of our
senior management team and other key personnel and our business may be harmed if we lose their services.
Our future success depends heavily upon
the continuing services of the members of our senior management team and, in particular, upon our retaining the services of our
founder, Chairman and Chief Executive Officer, Dr. Jin Huang. If one or more of our senior executives or other key personnel are
unable or unwilling to continue in their present positions, we may not be able to replace them easily or at all, and as a result
our business may be disrupted and our financial condition and results of operations may be materially and adversely affected. In
addition, if any member of our senior management team or any of our other key personnel joins a competitor or forms a competing
company, we may lose teachers, students, key professionals and staff members. Competition for experienced management personnel
in the private education sector is intense, the pool of qualified candidates is very limited, and we may not be able to retain
the services of our senior executives or key personnel, or attract and retain high-quality senior executives or key personnel in
the future, which could have a material adverse effect on our business and results of operations.
If we are not able to continually enhance our online programs,
services and products and adapt them to rapid technological changes and student needs, we may lose market share and our business
could be adversely affected.
Our online programs, services and products
are vital to the success of our business. The market for such programs, services and products is characterized by rapid technological
changes and innovation, unpredictable product life cycles and user preferences. We must quickly modify our online programs, services
and products to adapt to changing student needs and preferences, technological advances and evolving Internet practices. Ongoing
enhancement of our online offerings and related technologies may entail significant expense and technical risk. We may use new
technologies ineffectively or fail to adapt our online services or products and related technologies on a timely and cost-effective
basis. If our improvements to our online offerings and the related technology are delayed, if they result in systems interruptions
or are not aligned with market expectations or preferences, we may lose market share and our business could be materially adversely
affected.
If we fail to successfully develop and introduce new services
and products in time, our competitive position and ability to generate revenues could be harmed.
Our future success depends partly on our
ability to develop new services and products. The planned timing or introduction of new services and products is subject to risks
and uncertainties. Actual timing may differ materially from original plans. Unexpected technical, operational or other problems
could delay or prevent the introduction of one or more of our new services or products. Moreover, we cannot assure you that any
of our new services and products will achieve widespread market acceptance or generate incremental revenue. If our efforts to develop,
market and sell new services and products to the market are not successful, our financial position, results of operations and cash
flows could be materially adversely affected.
Failure to adequately and promptly respond to industry
changes in curriculum, testing materials and standards could cause our services and products to be less attractive to our students.
Our success depends in part on our ability
to continually update and expand the content, curriculum and test preparation materials of our academic programs, develop new programs
and our teaching methods in a cost-effective manner, and meet students’ needs in a timely manner. Any inability to track
and respond to the industry changes in a timely and cost-effective manner would make our services and products less attractive
to students, which may materially and adversely affect our reputation and ability to continue to attract students without a significant
decrease in course fees. Further, we understand the MOE has been discussing reforms to curriculum of K-12 schools. Therefore, school
curriculum will likely undergo changes and our tutoring and test preparation programs and materials will need to adapt to such
changes. Failure to timely respond to such changes will adversely impact our tutoring services.
Failure to respond to changes to the current assessment
and testing systems and admission standards in China could have a material adverse effect on our business and results of operations.
A substantial majority of the net revenues
generated in our College Preparation & Career Enhancement Programs (“CP&CE Programs”) segment in the year ended
December 31, 2019 were generated from tutoring services focused on preparing for ZhongKao and GaoKao. There have been changes in
some areas in the way ZhongKao is administered. For example, Yunnan Province has stopped administering ZhongKao. Instead, high
schools will admit students based on a combination of a comprehensive evaluation of the students’ aptitude (provided by their
middle schools) and the students’ middle school academic performance. To ensure the success of the educational reform and
cultivate students’ comprehensive abilities, Yunnan Province also prohibits subject competitions in elementary and middle
schools, including Olympic math competitions, and standardizes admission policies regarding adding points to middle school test
scores based on a student’s extracurricular activities. As for GaoKao, some top universities such as Peking University have
been allowed to recruit students through independently administered tests and admission procedures in recent years. The candidates
still need to take GaoKao and their scores in GaoKao may not be lower than certain thresholds, but such GaoKao scores will not
be the sole determining factor in the admission process. Students admitted in this manner generally should not exceed 5% of the
annual enrollment quotas of these universities as approved by the MOE. To the extent ZhongKao, or even GaoKao, becomes less prevalent
throughout China, our business and results of operations may be materially adversely affected.
If we are unable to obtain new loans, at all or on terms
that are acceptable to us, our growth pace will be impacted.
We may seek to obtain additional bank loans
in the future. We cannot assure you that we will be able to obtain new loans or credit facilities, at all or on terms that are
acceptable to us. Our ability to obtain financing may be affected by our financial position and leverage, our credit rating and
investor perception of the education industry, as well as by prevailing economic conditions and the cost of financing in general.
In addition, factors beyond our control, such as recent global market and economic conditions and the tightening of credit markets
may result in a diminished availability of financing and increased volatility in credit and equity markets, which may materially
adversely affect our ability to secure financing at reasonable costs or at all. We cannot assure you that the People’s Bank
of China (“PBOC”) will not in the future take actions that may result in a tightening of the credit market in China.
Our ability to obtain bank loans from domestic Chinese banks will be significantly impacted by the PBOC’s policies, over
which we have no control. If we were unable to obtain financing in the future on terms acceptable to us, our business operations
and our growth plans would be materially harmed.
Our business is subject to seasonal fluctuations, which
may cause our operating results to fluctuate from quarter to quarter.
We have experienced, and expect to continue
to experience, seasonal fluctuations in our revenues and results of operations, primarily due to seasonal changes in service days
and student enrollments. Historically, the number of days on which our students attend our courses is lower in the first and third
quarters due to school closures for the celebration of the Chinese New Year and summer vacation. Because we recognize revenue in
our K-12 Schools segment based on the number of service days in the quarter, we expect our revenue in the first and third quarters
to be negatively impacted. Our costs and expenses, however, vary significantly and do not necessarily correspond with changes in
our student enrollments, service days or net revenues. We make investments in marketing and promotion, teacher recruitment and
training, and product development throughout the year. We expect quarterly fluctuations in our revenues and results of operations
to continue. As our revenues grow in our K-12 Schools segment, these seasonal fluctuations may become more pronounced.
We may not be able to adequately protect our intellectual
property, which could cause us to be less competitive.
Our trademarks, trade names, copyrights,
trade secrets and other intellectual property rights are important to our success. Unauthorized use of any of our intellectual
property may adversely affect our business and reputation. We rely on a combination of copyright, trademark and trade secrets laws
and confidentiality agreements with our employees, consultants and others, including our partner schools, to protect our intellectual
property rights. Nevertheless, it may be possible for third parties to obtain and use our intellectual property without authorization.
The unauthorized use of intellectual property is widespread in China, and enforcement of intellectual property rights by Chinese
regulatory agencies is inconsistent. Moreover, litigation may be necessary in the future to enforce our intellectual property rights.
Future litigation could result in substantial costs and diversion of our management’s attention and resources and could disrupt
our business. If we are unable to enforce our intellectual property rights, it could have a material adverse effect on our financial
condition and results of operations. Given the relative unpredictability of China’s legal system and potential difficulties
enforcing a court judgment in China, we may be unable to halt the unauthorized use of our intellectual property through litigation.
Failure to adequately protect our intellectual property could materially adversely affect our competitive position, our ability
to attract students and our results of operations.
We may be exposed to infringement and misappropriation
claims by third parties, which, if successful, could cause us to pay significant damage awards.
Third parties may initiate litigation against
us alleging infringement upon their intellectual property rights.
In the event of a future successful claim
of infringement or misappropriation and our failure or inability to develop non-infringing technology or license the infringed
or misappropriated or similar technology on a timely basis, our business could be harmed. In addition, even if we are able to license
the infringed or misappropriated or similar technology, license fees could be substantial and may adversely affect our results
of operations.
We rely heavily on our information systems, and if we
fail to further develop our technologies, or if our systems, software, applications, database or source code contain “bugs”
or other undetected errors, our operations may be seriously disrupted.
The successful development and maintenance
of our systems, software, applications and database, such as our school management software and system, learning engine and student
database, is critical to the attractiveness of our online and offline programs and the management of our business operations. In
order to achieve our strategic objectives and to remain competitive, we must continue to develop and enhance our technology. This
may require us to acquire additional equipment and software and to develop new applications. In addition, our technology platform
upon which our management systems and online programs operate, and our other databases, products, systems and source codes could
contain undetected errors or “bugs” that could adversely affect their performance.
To date, our information systems have not
encountered material errors or technical issues that have adversely affected or disrupted our operations. If we encounter errors
or other service quality or reliability issues, or if we are unable to design, develop, implement and utilize information systems
and the data derived from these systems, our ability to realize our strategic objectives and our profitability could be adversely
affected, and this may cause us to lose market share, harm our reputation and brand names, and materially adversely affect our
business and results of operations.
Unexpected network interruptions, security breaches or
computer virus attacks and system failures could have a material adverse effect on our business, financial condition and results
of operations.
Any failure to maintain satisfactory performance,
reliability, security or availability of our network infrastructure may cause significant damage to our reputation and our ability
to attract and maintain students. Major risks involving our network structure include:
|
·
|
Breakdowns or system failures resulting in a prolonged shutdown of our servers, including failures attributable to power shutdowns, or attempts to gain unauthorized access to our systems, which may cause loss or corruption of data, including customer data, or malfunctions of software or hardware;
|
|
·
|
Disruption or failure in the national backbone network, which would make it impossible for visitors and students to log on to our websites;
|
|
·
|
Damage from fire, flood, power loss and telecommunications failures; and
|
|
·
|
Any infection by or spread of computer viruses.
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Any network interruption or inadequacy that
causes interruptions in the availability of our websites or deterioration in the quality of access to our websites could reduce
customer satisfaction and result in a reduction in the number of students using our services. If sustained or repeated, these performance
issues could reduce the attractiveness of our online and offline programs. In addition, we may be subject to a security breach
caused by a computer hacker, which could involve attempts to gain unauthorized access to our systems or personal information stored
in our systems, or to cause intentional malfunctions or loss or corruption of data, software, hardware or other computer equipment.
A user who circumvents our security measures could misappropriate proprietary information or cause interruptions or malfunctions
in our operations. As a result, we may be required to expend significant resources to protect against the threat of these security
breaches or to alleviate problems caused by these breaches.
Furthermore, increases in the volume of
traffic on our websites could also strain the capacity of our existing computer systems, which could lead to slower response times
or system failures. This would cause a disruption or suspension in our online course programs, which would hurt our brand and reputation,
and thus negatively affect our net revenue growth. We may need to incur additional costs to upgrade our computer systems in order
to accommodate increased demand if we anticipate that our systems cannot handle higher volumes of traffic in the future.
Approximately half of our servers and routers
including backup servers are currently hosted by third-party service providers within China, and the rest are currently hosted
by us. Bay State College self-hosts all of its production and backup servers in Boston and its Disaster Recovery location in Taunton. A
growing number of services are SAAS and these servers are hosted by a third party in different locations inside and outside the
United States. To improve the performance and to prevent the disruption of our services, we may have to make substantial investments
to deploy additional servers or one or more copies of our websites to mirror our online resources.
Our legal right to lease certain properties could be challenged
by property owners or other third parties, which may cause interruptions to business operations of the affected schools, tutoring
centers and career enhancement centers and adversely affect our financial results.
We lease most of the premises used for the
operation of our schools, tutoring centers and career enhancement centers. As a result, we are dependent on the property rights
of these properties held by their owners to enable us to use the premises. We cannot assure you that all lessors of our leased
business premises have the relevant land use right certificates or building ownership certificates of the premises they lease to
us or otherwise have the right to lease the premises to us.
We are not aware of any actions, claims
or investigations being contemplated by the competent governmental entities with respect to the defects in our leased real properties.
However, if we are unable to use the existing properties, enter new leases or renew our current leases in a timely basis and on
terms favorable to us, our business, results of operations and financial condition could be materially adversely affected. No impairment
loss was made against the operating and finance lease right-of-use assets in 2019.
We do not possess building ownership certificates for
some of the properties owned by us, and certain of the properties that we own have potential defects or issues that may not be
easily remedied, which could cause us to incur significant additional expenses or could disrupt certain aspects of our business.
Some of the real properties that we own
have defects or potential issues such as missing title certificates.
To the extent competent governmental entities
were to detect these defects and we were found not to be in compliance with the applicable regulations, we may be subject to fines
or incur significant additional expenses, our legal title to some of our properties may be challenged. If we are required to find
alternative locations for our schools and learning centers, we may be required to pay increased rent for the new locations and
the new locations, especially for our K-12 schools, may be less convenient and accessible to our students and teachers, which may
materially adversely affect our business, results of operations and financial condition.
We are in the process of applying for the
building ownership certificates for buildings for which we do not yet hold effective title certificates, and are trying to remedy
the defects and issues that prevent us from obtaining such certificates. We expect to complete the application process and obtain
the certificates in a reasonable period of time, but do not have an exact time frame. However, we cannot assure you that these
applications will be approved in a timely fashion or at all. If we are not able to remedy these defects in a timely manner, we
may be required to find alternative locations for our schools and learning centers or may be subject to fines or penalties, either
of which could have a material adverse effect on our business or results of operations.
We may need to record a significant charge to earnings
if our goodwill or intangible assets arising from acquisitions become impaired, which would adversely affect our net income.
In accordance with U.S. GAAP, we account
for our acquisitions using the acquisition method of accounting, and such acquisitions have resulted in significant goodwill and
intangible assets. These assets may become impaired in the future, which could have a material adverse effect on our results of
operations following such acquisitions. We are required under U.S. GAAP to review our amortizable intangible assets for impairment
when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be tested for
impairment annually, or more frequently, if facts and circumstances warrant a review. Factors that may be considered a change in
circumstances indicating that the carrying value of our amortizable intangible assets may not be recoverable include a decline
in stock price and market capitalization and slower or declining growth rates in our industry. During 2019, we recognized impairment
loss of RMB 38.8 million (US$ 5.6 million). In the future, we may be required to record a significant charge to earnings in our
financial statements during the period in which any impairment of our goodwill or amortizable intangible assets is determined,
which could have a material adverse effect on our results of operations.
Our grant of employee share options, restricted shares
or other share-based compensation and any future grants could have an adverse effect on our net income.
We adopted an equity incentive plan in 2010,
the 2010 Equity Incentive Plan, which was amended and restated in November 2018, the Amended and Restated 2010 Plan. We have granted
options and restricted shares under these plans to our employees and consultants. U.S. GAAP prescribes how we account for share-based
compensation, which may have an adverse or negative impact on our results of operations. U.S. GAAP requires us to recognize share-based
compensation as compensation expense in the statement of operations based on the fair value of equity awards on the date of the
grant, with the compensation expense recognized over the period in which the recipient is required to provide service in exchange
for the equity award. These statements also require us to adopt a fair value-based method for measuring the compensation expense
related to share-based compensation. During the year ended December 31, 2019, we recorded share-based compensation expenses of
RMB 1.6 million (US$ 0.2 million) for the restricted stock and the unrecognized share-based compensation expenses amounted to RMB
2.7 million as of December 31, 2019. The expenses associated with share-based compensation may reduce the attractiveness of issuing
share options or restricted shares under our equity incentive plan. However, if we do not grant share options or restricted shares,
or reduce the number of share options or restricted shares that we grant, we may not be able to attract and retain key personnel.
If we grant more share options or restricted shares to attract and retain key personnel, the expenses associated with share-based
compensation may adversely affect our net income.
Changes to accounting standards or taxation rules or
practices or greater than anticipated tax liabilities may adversely affect our reported results of operations or how we conduct
our business.
A change in accounting standards or taxation
rules or practices can have a significant effect on our reported results and may even affect our reporting of transactions
completed before the change is effective. New accounting standards or taxation rules, such as FASB Interpretation No. 48 “Accounting
for Uncertainty in Income Taxes”, or FIN 48 (now codified as ASC 740), the Enterprise Income Tax Law in China which was effective
January 1, 2008, or the EIT Law, and various interpretations of accounting standards or taxation practice have been adopted
and may be adopted in the future. These accounting standard and tax regulation changes, future changes and the uncertainties surrounding
current practices and implementation procedures may adversely affect our reported financial results or the way we conduct our business.
We are subject to income tax, value-added tax and other taxes in many provinces and cities in China and our tax structure is subject
to review by various local tax authorities. The determination of our provision for income tax and other tax liabilities requires
significant judgment and, in the ordinary course of our business, there are many transactions and calculations where the ultimate
tax determination is uncertain. Although we believe our estimates are reasonable, the ultimate decisions by the relevant tax authorities
may differ from the amounts recorded in our financial statements and may materially affect our financial results in the period
or periods for which such determination is made. Moreover, we may lose the tax benefits we are currently receiving or we may be
forced to disgorge prior tax benefits we have enjoyed and pay additional taxes and possibly penalties for prior tax years, any
of which would harm our results of operations.
Private schools or colleges operated for
reasonable returns they were normally subject to income taxes at 33% prior to 2008 and 25% after January 1, 2008 but were,
under certain circumstances, subject to deemed amounts or rates of income tax to be determined by the relevant tax authorities.
According to the Implementing Rules of the Law for Promoting Private Education and other relevant tax rules, prior to January 1,
2008, had our schools and colleges been registered as not requiring reasonable returns, they would generally have been exempt from
income taxes. To date, no separate regulations or guidelines have been released on how to define reasonable return for the purposes
of assessing a school’s tax status prior to January 1, 2008. Moreover, the EIT Law includes specific criteria that need
to be met by an entity to qualify as a not-for-profit organization in order to be exempt from corporate income tax. An official
circular was issued in January 2014 to set out further clarification of the requirements for not-for-profit organizations,
and the circular stipulated that only not-for-profit organizations certified jointly by finance and taxation authorities are entitled
to tax exemption and the circular shall go into effect retrospectively as of January 1, 2013. While we currently do not believe
it is likely that our schools and college would qualify as not-for-profit organizations and therefore be exempt from corporate
income tax under the EIT Law, the detailed implementation guidance has not been provided to local tax authorities on how to apply
these changes to schools and colleges. We intend to engage an external tax consultant to conduct comprehensive tax planning once
further guidance from the tax authorities is released. This consultant may be expensive and the results of the guidance may not
be favorable on our tax rates in the future.
If the slowdown in China’s economy continues or
worsens, it may adversely impact our business.
The growth rate of China’s domestic
product in 2019 was 6.1%, compared to a growth rate of 6.6% in 2018 and 6.9% in 2017. A number of factors contributed to this slowdown
in China’s economy, including tightening macroeconomic measures and monetary policies adopted by the PRC government aimed
at preventing overheating of China’s economy and controlling China’s high level of inflation. Since we derive substantially
most of our revenues from students in China, any prolonged slowdown in the Chinese economy may have a negative impact on our business,
results of operations and financial condition in a number of ways. For example, our students may decrease or delay spending with
us, while we may have difficulty expanding our customer base fast enough, or at all, to offset the impact of decreased spending
by our existing students. The adverse economic conditions, if they continue or worsen, will affect consumer spending generally,
which could result in decreased demand for our services and products within our target markets.
If we fail to implement and maintain an effective system
of internal controls, we may be unable to accurately report our results of operations or prevent fraud, and investor confidence
may be materially and adversely affected.
As a public company in the United States,
we are subject to the reporting obligations under the U.S. securities laws. The Securities and Exchange Commission (“SEC”),
as required under Section 404 of the Sarbanes-Oxley Act of 2002, has adopted rules requiring every public company to
include a report of management on the effectiveness of such company’s internal control over financial reporting in its annual
report. As a non-accelerated filer, we are not required to have an independent registered public accounting firm issue an attestation
report on the effectiveness of our internal control over financial reporting. However, we are still required to include a report
of management on the effectiveness of our company’s internal control over financial reporting in our annual report. Our management
has performed an evaluation of the effectiveness of our internal controls over financial reporting as of December 31, 2019 and
concluded that our internal control over financial reporting was effective as of December 31, 2019. See “Item 15. Control
and Procedures.”
Nevertheless, we cannot assure you that
we will maintain effective internal control over financial reporting on an ongoing basis. If we fail to maintain effective internal
controls over financial reporting in the future, our management may not be able to conclude that we have effective internal control
over financial reporting at a reasonable assurance level. Any failure to maintain effective internal control over financial reporting
could result in the loss of investor confidence in the reliability of our financial statements, which in turn could have a material
and adverse effect on the trading price of our ADSs. Furthermore, we have incurred and anticipate that we will continue to incur
considerable costs, management time and other resources in an effort to comply with Section 404 and other requirements of the Sarbanes-Oxley
Act.
Risks related to regulation of our business and our corporate
structure
All aspects of our business are subject to extensive regulation
in China, we may not be in full compliance with these regulations and our ability to conduct business is highly dependent on our
compliance with this regulatory framework. If the PRC government finds that the agreements that establish the structure for operating
our business do not comply with applicable PRC laws and regulations, we could be subject to severe penalties.
The Chinese government regulates all aspects
of our business and operations, including licensing of parties to perform various services, pricing of tuition and other fees,
curriculum content, standards for the operations of schools, tutoring centers, college and career enhancement centers and foreign
investments in the education industry. The laws and regulations applicable to the education sector are subject to frequent change,
and new laws and regulations may be adopted, some of which may have a negative effect on our business, either retroactively or
prospectively.
Currently, PRC laws and regulations do not
explicitly impose restrictions on foreign investment in the tutoring service sector in China. However, some local government authorities
in the PRC have adopted different approaches in granting licenses and permits (particularly, imposing more stringent restrictions
on foreign-invested entities) for entities providing tutoring services. In some areas, local government authorities do not allow
foreign-invested entities to establish private schools to engage in tutoring services, other than in the forms of Sino-foreign
cooperative schools or international schools. Under current PRC laws, the foreign contributors of Sino-foreign cooperative schools
shall be foreign educational institutions such as universities or colleges instead of foreign companies. As a foreign company,
we are not qualified to run Sino-foreign cooperative schools in China. International schools are schools only for children of non-Chinese
citizens in China and may not admit any children of Chinese citizens.
We conduct our K-12 Schools and CP&CE
Programs business in China primarily through contractual arrangements between Beijing Ambow Shengying Education and Technology
Co., Ltd. (“Ambow Shengying”) and Beijing Ambow Chuangying Education and Technology Co., Ltd. (“Ambow Chuangying”),
our principal operating subsidiaries in China, and our VIEs, and their respective shareholders.
According to the Foreign Investment Industries
Guidance Catalog, or Foreign Investment Catalog, which was amended and promulgated by the National Development and Reform Commission
(“NDRC”), and the Ministry of Commerce (“MOFCOM”) on March 10, 2015 and became effective on April 10, 2015,
foreign investment is encouraged to participate in vocational training services beyond educational services. The foreign investment
in higher education, ordinary senior high school education and pre-school education has to take the form of a Sino-foreign cooperative
joint venture led by Chinese parties. Foreign investment is banned from compulsory education, which means grades 1-9. Foreign investment
is allowed to invest in after-school tutoring services, which do not grant diplomas. NDRC and MOFCOM promulgated The Foreign Investment
Industries Guidance Catalog on June 28, 2017, which will come into effect on July 28, 2017, and the abovementioned policy does
not change. However, many local government authorities do not allow foreign-invested entities to establish private schools to engage
in tutoring services, other than in the forms of Sino-foreign cooperative schools or international schools. Under current PRC laws,
the foreign contributors of Sino-foreign cooperative schools shall be foreign educational institutions such as universities or
colleges instead of foreign companies. As of December 31, 2019, we had a total of 60 centers and schools, comprised of 25 tutoring
centers, 3 K-12 schools, 5 career enhancement centers, 1 career enhancement college and 26 training offices. We conduct our education
business in China primarily through contractual arrangements among our subsidiaries in China and VIEs. The majority of our VIEs
and their respective subsidiaries, as PRC domestic entities, hold the requisite licenses and permits necessary to conduct our education
business in China and operate our tutoring centers, K-12 schools and career enhancement centers.
We conduct our intellectualized operational
services business in China through IValley Beijing. IValley Beijing is a foreign invested entity controlled by a Taiwanese entity
IValley Co., Ltd. ("IValley"). IValley is operated through contractual arrangements between Ambow Education Management
and its respective shareholders. Foreign investment is encouraged to participate in the intellectualized operational service business
in the Foreign Investment Catalog.
If our ownership structure and contractual
arrangements are found to be in violation of any existing or future PRC laws or regulations or we fail to obtain any of the required
permits or approvals, the relevant PRC regulatory authorities including the MOE, the MOFCOM, the Ministry of Civil Affairs (“MCA”)
and the MIIT, which regulate the education industry, foreign investment in China and Internet business, respectively, would have
broad discretion in dealing with such violations, including:
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Revoking the business and operating licenses of our PRC subsidiaries and affiliated entities;
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Discontinuing or restricting the operations of any related-party transactions among our PRC subsidiaries and affiliated entities;
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Imposing fines or other requirements with which we or our PRC subsidiaries and affiliated entities may not be able to comply;
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Revoking the preferential tax treatment enjoyed by our PRC subsidiaries and affiliated entities; or
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Requiring us or our PRC subsidiaries and affiliated entities to restructure the relevant ownership structure or operations;
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Restricting or prohibiting the use of any proceeds from our additional public offering to finance our business and operations in China;
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Similar ownership structure and contractual
arrangements have been used by many China-based companies listed overseas, including in the United States. However, we cannot assure
you that penalties will not be imposed on any other companies or us in the future. If any of the above penalties is imposed on
us, our business operations and expansion, financial condition and results of operations will be materially and adversely affected.
We may be classified as "organization
of the Mainland Area" under the Act Governing Relations between the People of the Taiwan Area and the Mainland Area, which
may prohibit us from investing or conducting business in Taiwan.
Under the Act Governing Relations Between
The People Of The Taiwan Area And The Mainland Area issued by the Taiwan Executive Yuan in July 31, 1992 and revised in June 17,
2015, together with the Method Allowing Investment In Taiwan From People Of The Mainland Area, any individual, organization, or
other institution of the Mainland Area, or any company it invests in any third area may not engage in any investment activity in
the Taiwan Area unless permitted by the competent authorities. Hong Kong is considered a third area under Taiwan law. Any company
in the third area with over 30% direct or indirect shareholding from the Mainland Area or substantially controlled by people from
the Mainland Area is treated as an "organization of the Mainland Area". Therefore Ambow Education Management is not qualified
to engage in any investment activities in Taiwan without approval. We set up a VIE structure to obtain necessary licenses and permits
to establish a Taiwan company that is currently subject to PRC investment restrictions for future business development in Taiwan.
However we still face uncertainties as to whether we can maintain our VIE structure in the future. If we are classified as "organization
of the Mainland Area", there may be a material impact to the viability to our current corporate structure, corporate governance
and business operations. We may potentially be subject to fines and/or administrative or criminal liabilities.
We have chosen to operate the business in
PRC through a Taiwan company because the technology and resources of intellectualized operational services are much more developed
in Taiwan. Most of the designers and engineers are from Taiwan and we have purchased some of the equipment and materials from Taiwan
to perform our services. We therefore believe that setting up a Taiwan company is very convenient for the company to recruit professionals,
make procurement and settle payment accordingly.
We rely on contractual arrangements with our VIEs and
their respective shareholders for a substantial portion of our China operations, which may not be as effective in providing operational
control as direct ownership.
On March 15, 2019, the new Foreign Investment
Law of PRC (the “2018 Foreign Investment Law”) was passed by the Second Session of the thirteenth National People's
Congress and will come into force on January 1, 2020. The 2018 Foreign Investment Law does not mention concepts including “de
facto control”, “controlling through contractual arrangements” or “variable interest entity”, nor
does it specify the regulation on controlling through contractual arrangements or variable interest entity. Furthermore, the 2018
Foreign Investment Law does not specifically stipulate rules on the education industry. Therefore, we believe that the 2018 Foreign
Investment Law will not have any material adverse effect on our VIE structure and our business operations.
The “variable interest entity”
structure, or VIE structure, has been adopted by many PRC-based companies, to obtain necessary licenses and permits in the industries
that are currently subject to foreign investment restrictions in China. We set up the VIE structure to address the uncertainties
for securing licenses and permits which may be required for our business operation. See “Risk Factors - Risks Related to
regulation of our business and our corporate structure—Our VIEs and their respective subsidiaries may be subject to significant
limitations on their ability to operate private schools or make payments to related parties or otherwise be materially and adversely
affected by changes in PRC laws and regulations. See “Regulations - Foreign investment in education service industry”
and “Regulations - Regulations on Chinese-foreign cooperation in operating schools”.
We have relied and expect to continue to
rely on contractual arrangements with our VIEs and their respective shareholders to operate a substantial portion of our education
business. For a description of these contractual arrangements, see “Item 4.C — Information on the Company — Organizational
Structure” and “Item 7.B — Related Party Transactions—Contractual arrangements with our VIEs and their
respective subsidiaries and shareholders.” These contractual arrangements may not be as effective in providing us with control
over our VIEs and their respective subsidiaries as direct ownership. If we had direct ownership of our VIEs and their respective
subsidiaries, we would be able to exercise our rights as a shareholder to effect changes in the board of directors of our VIEs
and their respective subsidiaries, which could affect changes, subject to any applicable fiduciary duties, at the management level.
As a legal matter, if our VIEs or any of their respective shareholders fails to perform its or his or her respective obligations
under these contractual arrangements, we may have to incur substantial costs and expend significant resources to enforce such arrangements.
We may also rely on legal remedies under PRC or Taiwan law, including seeking specific performance or injunctive relief, and claiming
damages, but these remedies may not be effective. For example, if the shareholders of any of our VIEs were to refuse to transfer
their equity interest in such VIEs to us or our designee when we exercise the call option pursuant to these contractual arrangements,
or if they were otherwise to act in bad faith toward us, then we may have to take legal action to compel them to fulfill their
contractual obligations. In addition, we may not be able to renew these contracts with our VIEs and/or their respective shareholders.
If VIEs or their shareholders fail to perform the obligations secured by the pledges under the equity pledge agreements, one of
the remedies for default is to require the pledgors to sell the equity interests of VIEs in an auction or sale of the shares and
remit the proceeds to Ambow Shengying, Ambow Chuangying and Ambow Education Management, net of all related taxes and expenses.
Such an auction or sale of the shares may not result in our receipt of the full value of the equity interests or the business of
VIEs.
In addition, these contractual arrangements
are governed by PRC or Taiwan law and provide for the resolution of disputes through arbitration in the PRC or Taiwan. Accordingly,
these contracts would be interpreted in accordance with PRC or Taiwan law and any disputes would be resolved in accordance with
PRC or Taiwan legal procedures. The legal environment in the PRC and Taiwan may not be as developed as in some other jurisdictions,
such as the United States. As a result, uncertainties in the PRC and Taiwan legal system could limit our ability to enforce these
contractual arrangements. In the event we are unable to enforce these contractual arrangements, we may not be able to exert effective
control over our VIEs, and our ability to conduct our business would be materially adversely affected.
The shareholders of our VIEs may have potential conflicts
of interest with us, which may harm our business and financial condition.
The shareholders of our VIEs are also employees
of our company, and one of them, Xuejun Xie, is a director of certain of our VIEs as well as the vice president of our company.
Conflicts of interest between their dual roles may arise. We cannot assure you that when conflicts of interest arise, any or all
of these individuals will act in the best interests of our company or that conflicts of interest will be resolved in our favor.
In addition, these individuals may breach or cause our VIEs or their respective subsidiaries to breach or refuse to renew the existing
contractual arrangements that allow us to effectively control our VIEs and their respective subsidiaries and to receive economic
benefits from them. Currently, we do not have existing arrangements to address potential conflicts of interest between these individuals
and our company. We rely on these individuals to abide by the laws of the Cayman Islands, PRC and Taiwan, both of which provide
that directors owe a fiduciary duty to the company, which requires them to act in good faith and in the best interests of the company
and not to use their positions for personal gain. If we cannot resolve any conflicts of interest or disputes between us and the
beneficial owners of our VIEs, we would have to rely on legal proceedings, which could result in disruption of our business and
substantial uncertainty as to the outcome of any such legal proceedings.
Our VIEs and their respective subsidiaries may be subject
to significant limitations on their ability to operate private schools or make payments to related parties or otherwise be materially
and adversely affected by changes in PRC laws and regulations.
The principal regulations governing private
education in China are The Law for Promoting Private Education and The Implementing Rules for the Law for Promoting Private Education,
or 2004 Implementing Rules. Under the current laws and regulations, a private school may elect to be a school that does not require
reasonable returns or a school that requires reasonable returns. According to 2004 Implementing Rules, at the end of each fiscal
year, every private school is required to allocate a certain amount to its development fund for the construction or maintenance
of the school or procurement or upgrading of educational equipment. In the case of a private school that requires reasonable returns,
this amount shall be no less than 25% of the annual net income of the schools, while in the case of a private school that does
not require reasonable returns, this amount shall be equivalent to no less than 25% of the annual increase of net assets of the
school (as determined under generally accepted accounting principles in the PRC). All of the private schools operated by our VIEs
and their respective subsidiaries currently comply with the existing laws and regulations regarding the allocation of their development
funds. A private school that requires reasonable returns must publicly disclose such election and additional information required
under the regulations. A private school shall consider factors such as the school’s tuition fees, ratio of the funds used
for education-related activities to the course fees collected, admission standards and educational quality when determining the
percentage of the school’s net income that would be distributed to the investors as reasonable returns.
The Standing Committee of the National People's
Congress promulgated an amendment to The Law for Promoting Private Education on November 7, 2016, which went into effect on September
1, 2017. Pursuant to this amendment, sponsors of private schools may choose to establish schools as either non-profit or for-profit
schools. Sponsors are not permitted to establish for-profit schools that provide compulsory education services, which covers grades
one to nine and accounted for a significant portion of our students as well as revenue during the reporting period. Sponsors of
for-profit private schools are entitled to retain the profits from their schools and the operating surplus may be allocated to
the sponsors pursuant to the PRC company law and other relevant laws and regulations. Sponsors of non-profit private schools are
not entitled to any distribution of profits from their schools and all revenue must be used for the operation of the schools.
We cannot predict the timing and effects
of any amendments or new laws and regulations. Changes in PRC laws and regulations governing private education or otherwise affecting
our VIEs’, and their respective subsidiaries’, operations could have a material adverse effect on our business, prospects
and results of operations.
As of December 31, 2019, we had a total of 31 schools that were
registered as private schools as opposed to companies. Of the 31 schools, 4 schools were registered as schools not requiring reasonable
returns. The other 27 schools were registered as schools requiring reasonable returns. The total net revenue of the schools requiring
reasonable returns accounted for 65.9% of our consolidated total net revenue for the year ended December 31, 2019. The total net
revenue of the schools not requiring reasonable returns accounted for 1.3% of our consolidated total net revenue for the year ended
December 31, 2019.
Regulatory agencies may commence investigations of the
tutoring centers, K-12 schools and career enhancement centers controlled and operated by our VIEs. If the results of the investigations
are unfavorable to us, we may be subject to fines, penalties, injunctions or other censure that could have an adverse impact on
our reputation and results of operations.
Our VIEs control and operate tutoring centers,
K-12 schools and career enhancement centers. As the provision of these services is heavily regulated in China, especially primary
and secondary schools, these schools and companies that our VIEs or their respective subsidiaries currently own or operate or may
acquire or establish in the future may be subject from time to time to inspections and investigations, claims of non-compliance
or lawsuits by governmental agencies, which may allege statutory violations, regulatory infractions or other causes of action.
For example, if an independent college is found unable to satisfy one or more conditions for running a college, the MOE may impose
limitation on the annual enrollment quota or even suspend recruiting by the college. If the results of any such investigations
or lawsuits are unfavorable to us, we may be subject to fines, penalties, injunctions or other censure that could have an adverse
impact on our reputation and results of operations. Even if we adequately address the issues raised by a government investigation,
we may have to devote significant financial and management resources to resolve these issues, which could have a material adverse
effect on our business.
Contractual arrangements we have entered into among our
subsidiaries and our VIEs and their respective shareholders may result in adverse tax consequences to us; such arrangements may
be subject to scrutiny by the PRC and Taiwan tax authorities and a finding that we or our VIEs and their respective shareholders
owe additional taxes could substantially reduce our consolidated net income and the value of your investment.
Under PRC and Taiwan laws and regulations,
arrangements and transactions among related parties should be priced on an arm’s length basis and may be subject to audit
or challenge by the PRC and Taiwan tax authorities. We could face material adverse tax consequences if the PRC or Taiwan tax authorities
determine that the contractual arrangements between Ambow Shengying, Ambow Chuangying, Ambow Education Management and our VIEs
and their respective shareholders do not represent an arm’s-length price and adjust our VIEs’ or any of their respective
subsidiaries’ income in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things,
result in, for PRC or Taiwan tax purposes, increased tax liabilities for our VIEs or any of their respective subsidiaries. In addition,
the PRC and Taiwan tax authorities may require us to disgorge our prior tax benefits, and require us to pay additional taxes for
prior tax years and impose late payment fees and other penalties on our affiliated entities for underpayment of prior taxes. To
date, similar contractual arrangements have been used by many other public companies. However, we cannot assure you that such penalties
will not be imposed on any other companies or us in the future. Our consolidated net income may be harmed if our affiliated entities’
tax liabilities increase or if they are found to be subject to additional taxes, late payment fees or other penalties.
The tuition, accommodation and other fees charged by our
degree programs and our K-12 schools and student enrollment at these schools are subject to regulation by the Chinese government,
and our revenue is highly dependent on the level of these fees and our student enrollment.
We are highly dependent upon revenue generated
from our three K-12 schools which was 52.4%, 52.3% and 53.7% for the year ended December 31, 2017, 2018 and 2019, respectively.
Chinese regulators have broad powers to regulate the tuition, accommodation and other fees charged by primary, secondary and other
schools and student enrollment levels at these schools. As a result, new regulations could adversely impact the fees we receive
from the schools to which we provide course materials and software products and the student enrollments at our directly-operated
schools and at our partner schools, as well as the returns from the K-12 schools operated by our Chinese affiliated entities. The
tuition, accommodation and other fees charged by our degree programs and our K-12 schools are subject to various price controls
administered by local price-control authorities and our student enrollment in our independent college is subject to annual enrollment
quotas established by the MOE. In light of the substantial increase in tuitions and other education-related fees in China in recent
years, China’s price-control authorities may impose stricter price control on tuition changes in the future. As of the date
of this annual report, there is no indication from the MOE or the relevant authorities that the government would significantly
change the tuition charges or student annual enrollment quotas. If the tuition charges were to be decreased or if they were not
allowed to increase in line with increases in our costs because of the actions of China’s administrative price controls or
if student enrollments at private schools were restricted, our net revenue and profitability would be materially adversely affected.
The regulation of Internet website operators in China
is subject to interpretation, and our operation of online education programs could be harmed if we are deemed to have violated
applicable laws and regulations.
The interpretation and application of existing
Chinese laws and regulations, the stated positions of the main governing authority, the MIIT, and the possibility of adopting new
laws or regulations have created significant uncertainties regarding the legality of the businesses and activities of Chinese companies
with Internet operations. In particular, according to the Internet Information Services Administrative Measures promulgated by
the State Council on September 25, 2000, the activities of Internet content providers are regulated by various Chinese governmental
authorities, including, the MOE, the State Administration of Radio, Film and Television, the General Administration of Press and
Publication, or GAPP, and the Ministry of Culture, or MOC, depending on the specific activities conducted by the Internet content
provider. In addition, MIIT promulgated a notice titled “Notice on Strengthening Management of Foreign Investment in Operating
Value-Added Telecom Services” on July 13, 2006, which prohibits PRC Internet content providers from leasing, transferring
or selling their ICP licenses or providing facilities or other resources to foreign investors. The notice states that PRC Internet
content providers (or their shareholders) should directly own the trademarks and domain names for websites operated by them, as
well as servers and other infrastructure used to support these websites and a PRC Internet content provider’s failure to
comply with the notice by November 1, 2006 may result in revocation of its ICP license.
Beijing Ambow Shida Education Technology
Co., Ltd. (“Ambow Shida”) held an ICP license issued by Beijing Communications Administration, the local counterpart
of the MIIT. Ambow Shida is now in the process of reapplying its ICP license. Due to the uncertainties of implementation of relevant
regulations by different authorities, we cannot assure you that Ambow Shida could satisfy or will be able to satisfy all the requirements
for a PRC Internet content provider.
If we fail to reapply our ICP license, we
may be required to cease providing relevant online materials, which would harm our net revenues and results of operations. If we
are deemed to have violated applicable Chinese Internet regulations, we could be subject to severe penalties, including confiscation
of illegal gains, fines ranging from three to five times the illegal gains, suspension of certain types of services provided or
orders to shut down the relevant websites.
Risks related to doing business in China
PRC economic, political and social conditions, as well
as changes in any government policies, laws and regulations, could adversely affect the overall economy in China or the education
or career enhancement market, which could harm our business.
Substantially most of our operations are
conducted in China, and substantially most of our net revenues are derived from China. Accordingly, our business, financial condition,
results of operations, prospects and certain transactions we may undertake are subject, to a significant extent, to economic, political
and legal developments in China.
The PRC economy differs from the economies
of most developed countries in many respects, including the amount of government involvement, level of development, growth rate,
control of foreign exchange and allocation of resources. While the PRC economy has experienced significant growth in the past two
to three decades, growth has been uneven, both geographically and among various sectors of the economy. Demand for our services
and products depends, in large part, on economic conditions in China. Any slowdown in China’s economic growth may cause our
potential customers to delay or cancel their plans to purchase our services and products, which in turn could reduce our net revenues.
Although the PRC economy has been transitioning
from a planned economy to a more market-oriented economy since the late 1970s, the PRC government continues to play a significant
role in regulating industry development by imposing industrial policies. The PRC government also exercises significant control
over China’s economic growth through allocating resources, controlling the incurrence and payment of foreign currency-denominated
obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Changes in any
of these policies, laws and regulations could adversely affect the economy in China or the education or career enhancement market,
which could harm our business.
The PRC government has implemented various
measures to encourage foreign investment and sustainable economic growth and to guide the allocation of financial and other resources,
which have for the most part had a positive effect on our business and growth. However, we cannot assure you that the PRC government
will not repeal or alter these measures or introduce new measures that will have a negative effect on us. China’s social
and political conditions may also not be as stable as those of the United States and other developed countries. Any sudden changes
to China’s political system or the occurrence of widespread social unrest could have a material adverse effect on our business
and results of operations.
Uncertainties with respect to the PRC legal system could
harm us.
Our operations in China are governed by
PRC laws and regulations. The PRC legal system is a civil law system based on written statutes. Unlike common law systems, prior
court decisions have limited precedential value. Ambow Shengying, Ambow Chuangying and our other wholly-owned subsidiaries in China
are generally subject to PRC laws and regulations, in particular, laws applicable to foreign invested enterprises.
Since 1979, PRC legislation and regulations
have 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, because these laws and regulations are relatively new, and because of the limited volume of published
decisions, the interpretation and enforcement of these laws and regulations involve uncertainties. In addition, 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) that may
have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until sometime after the
violation. Moreover, some regulatory requirements issued by certain PRC government authorities may not be consistently applied
by other government authorities, including local government authorities, thus making strict compliance with all regulatory requirements
impractical, or in some circumstances, impossible. In addition, any litigation in China may be protracted and result in substantial
costs and diversion of resources and management attention.
If the chops of our subsidiaries and VIEs in China are
not kept safely, are stolen or are used by unauthorized persons or for unauthorized purposes, the corporate governance of those
entities could be severely and adversely compromised.
In China, a company chop or seal serves
as the legal representation of the company towards third parties even when unaccompanied by a signature. Each legally registered
company in China is required to have a company chop, which must be registered with the local Public Security Bureau. Our company
chops, or chops, are kept securely at our President Office under the direction of Chief Executive Officer at the headquarters level
or held securely by personnel designated and approved by the General Manager or Headmaster at subsidiaries or VIEs level. Use of
chops requires proper approvals in accordance with our internal control procedures. The custodian at the President Office also
maintains a log to keep detailed record of each use of the chops. Moreover, the President Office is always locked after office
hours and only authorized persons have the access to the keys.
We have implemented various measures to
control the location and usage of the chops, as well as new mechanisms for retaining control over the chops used by the VIEs, such
as: (i) centralizing the chop monitoring procedure through our President’s office in our headquarters located in Beijing,
PRC, where we maintain a ledger to strictly monitor and review the usage of the chops; (ii) employed new management teams to individual
schools to replace management positions previously governed by the former owners of the deconsolidated entities; (iii) centralizing
the operations of each school and tutoring center by (x) setting up Financial Share Service Centers across the company and standardizing
the company’s Finance and Operation Policies throughout the company, and (y) Implementing new ERP systems to standardize
operations, enhance central controls, and create synergy of the company’s resources; and (iv) streamlining the internal control
structure with effective communication channels and regular management meetings. We however cannot assure you that unauthorized
access to or use of those chops can be totally precluded. To the extent those chops are stolen or are used by unauthorized persons
or for unauthorized purposes, the corporate governance of these entities could be severely and adversely compromised and the operations
of these entities could be significantly and adversely impacted.
Our subsidiaries and affiliated entities in China are
subject to restrictions on making dividends and other payments to us or any other affiliated company.
We are a holding company and rely principally
on dividends paid by our subsidiaries established in China for our cash needs, including the funds necessary to pay dividends and
other cash distributions to our shareholders to the extent we choose to do so, to service any debt we may incur and to pay our
operating expenses. Our PRC subsidiaries’ income in turn depends on the service and other fees paid by our VIEs. Current
PRC regulations permit our subsidiaries in China to pay dividends to us only out of their accumulated profits, if any, determined
in accordance with Chinese accounting standards and regulations. In addition, under the applicable requirements of PRC law, our
PRC subsidiaries and affiliated entities incorporated as companies may only distribute dividends after they have made allowances
to fund certain statutory reserves. These reserves are not distributable as cash dividends.
In addition, under the EIT Law, which became
effective on January 1, 2008 and its implementation rules, dividends paid to us by our PRC subsidiaries are subject to withholding
tax. The withholding tax on dividends may be exempted or reduced by the PRC State Council. Currently, the withholding tax rate
is 10% unless reduced or exempted by treaty between the PRC and the tax residence of the holder of the PRC subsidiary.
Furthermore, if our subsidiaries and affiliated
entities in China incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to
pay dividends or make other payments to us. In addition, the PRC tax authorities may require us to adjust our taxable income under
the contractual arrangements we currently have in place in a manner that would restrict our subsidiaries’ ability to pay
dividends and make other distributions to us.
In addition, at the end of each fiscal year,
each of our affiliated entities that are private schools in China is required to allocate a certain amount to its development fund
for the construction or maintenance of the school or procurement or upgrade of educational equipment. In the case of a private
school that requires reasonable returns, this amount shall be no less than 25% of the annual net income of the school, while in
the case of a private school that does not require reasonable returns, this amount shall be equivalent to no less than 25% of the
annual increase in the net assets of the school, if any. Pursuant to an amendment to The Law for Promoting Private Education on
November 7, 2016, which went into effect on September 1, 2017, sponsors of for-profit private schools are entitled to retain the
profits from their schools and the operating surplus may be allocated to the sponsors pursuant to the PRC company law and other
relevant laws and regulations.
Entities registered as schools not requiring
reasonable returns are restricted from directly distributing to us any dividends or profits.
To date, our PRC subsidiaries have not paid
dividends to us out of their accumulated profits. In the near future, we do not expect to receive dividends from our PRC subsidiaries
because the accumulated profits of these PRC subsidiaries are expected to be used for their own business or expansions. If we are
unable to extract the earnings and profits of some of our schools and learning centers, it could have a material adverse effect
on our liquidity and financial condition.
PRC regulation of loans and direct investment by offshore
holding companies to PRC entities may delay or prevent us from making loans or additional capital contributions to our PRC operating
subsidiaries and affiliated entities, which could harm our liquidity and our ability to fund and expand our business.
As an offshore holding company of our PRC
operating subsidiaries and affiliated entities, we may make loans to our PRC subsidiaries and VIEs or we may make additional capital
contributions to our PRC subsidiaries. Any loans to our PRC subsidiaries or consolidated PRC affiliated entities are subject to
PRC regulations. For example:
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Loans by us to our wholly-owned subsidiaries in China, each of which is a foreign-invested enterprise, to finance their activities cannot exceed statutory limits and must be registered with the PRC State Administration of Foreign Exchange (“SAFE”), or its local counterparts; and
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Loans by us to our VIEs and their respective subsidiaries, which are domestic PRC entities, must be approved by the relevant government authorities and must also be registered with SAFE or its local counterparts.
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We may also decide to finance our wholly-owned
subsidiaries by means of capital contributions. These capital contributions shall be registered with or approved by the PRC Ministry
of Commerce or its local counterparts. We are not likely, however, to finance the activities of our VIEs and their respective subsidiaries
by means of capital contributions due to regulatory issues related to foreign investment in domestic PRC entities, as well as the
licensing and other regulatory issues discussed in the “Regulation” section of this annual report. We cannot assure
you that we will be able to obtain these government registrations or approvals on a timely basis, if at all, with respect to future
loans or capital contributions by us to our subsidiaries or our VIEs or any of their respective subsidiaries. If we fail to receive
such registrations or approvals, our ability to capitalize our PRC operations may be negatively affected, which could adversely
affect our liquidity and our ability to fund and expand our business.
On March 30, 2015, SAFE promulgated Circular
of the State Administration of Foreign Exchange on Reforming the Management Approach Regarding the Foreign Exchange Capital Settlement
of Foreign-invested Enterprises, or Circular 19, which became effective on June 1, 2015. Circular 19 facilitates foreign-invested
enterprises’ domestic equity investment with the amount obtained from foreign exchange settlement. Other than to transfer
equity investment funds in the original currencies, the foreign-invested enterprises whose main business is investment (including
foreign-invested investment companies, foreign-invested venture capital enterprises and foreign-invested equity investment enterprises)
are allowed to directly settle their foreign exchange capitals and transfer the amount therefrom to the account of an invested
enterprise according to the actual amount of investment. Ordinary foreign-invested enterprises other than those of the aforesaid
types shall make domestic equity investments by capital transfer in the original currencies governed by the prevailing provisions
on domestic re-investment.
Presently none of Ambow Shengying, Ambow
Chuangying or our other subsidiaries wholly owned by equities is registered as an investment company. We do not intend to turn
these entities into investment companies because to do so these subsidiaries would have to satisfy criteria promulgated by MOFCOM
and be approved by MOFCOM or its provincial counterparts before registration with the administration for industries and commerce,
which is difficult to accomplish and time consuming. As a result, if capital is injected into Ambow Shengying, Ambow Chuangying
and our other subsidiaries as increased registered capital, we may not convert such proceeds into RMB to fund acquisitions of the
VIEs and their respective subsidiaries, and our ability to expand our business may be adversely affected.
If we use our capital for the business of
Ambow Shengying, Ambow Chuangying or our other wholly-owned subsidiaries, we are also required to apply to the authority of commerce
for approval for an increase of their respective registered capital given that the original registered capital of these subsidiaries
have been fully paid. We cannot assure you that we can obtain such approvals in a timely manner or at all. If we are unable to
use our capital to fund our PRC operating entities or their subsidiaries or to make strategic acquisitions, it could have a material
adverse effect on our expansion plans and future growth.
It is unclear whether we will be considered a PRC “resident
enterprise” under the EIT Law and, depending on the determination of our PRC “resident enterprise” status, dividends
paid to us by our PRC subsidiaries may be subject to PRC withholding tax, we may be subject to 25% PRC income tax on our worldwide
income, and holders of our ADSs or ordinary shares may be subject to PRC withholding tax on dividends paid by us and gains realized
on their transfer of our ADSs or ordinary shares.
The EIT Law and its Implementing Regulations,
which became effective on January 1, 2008, provide that enterprises established outside of China whose “de facto management
bodies” are located in China are considered “resident enterprises.” The Implementing Regulations of the PRC EIT
Law define the term “de facto management bodies” as a body which substantially manages, or has control over the business,
personnel, finance and assets of an enterprise. The SAT issued the Notice Regarding the Determination of Chinese-Controlled Offshore
Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, or Circular 82, on April 22,
2009. Circular 82 provides certain specific criteria for determining whether the “de facto management body” of a Chinese-controlled
offshore incorporated enterprise is located in China. Following Circular 82, on July 27, 2011, the SAT issued Administrative
Measures on Income Taxes of Resident Enterprises Incorporated outside Mainland China and Are Controlled by Chinese Enterprises
(Trial Implementation), or Resident Enterprise Administrative Measure, which was effective as of September 1, 2011. This Resident
Enterprise Administrative Measures provide clarification of resident status determination, post-determination administration, as
well as competent tax authorities. Circular 82 further provides that, among other things, an entity that is classified as a “resident
enterprise” in accordance with the circular shall file the application for classifying its status of residential enterprise
with the local tax authorities where its main domestic investors are registered. From the year in which the entity is determined
as a “resident enterprise,” any dividend, profit and other equity investment gain shall be taxed in accordance with
the Enterprise Income Tax Law and its implementing rules. However, Circular 82 and Resident Enterprise Administrative Measures
apply only to offshore enterprises controlled by PRC enterprises, not those invested in by PRC individuals, like our company. Currently
there are no further detailed rules or precedents applicable to us governing the procedures and specific criteria for determining
“de facto management bodies” and it is still unclear if the PRC tax authorities would determine that we should be classified
as a PRC “resident enterprise”.
If we are treated as a PRC “resident
enterprise”, however, we will be subject to PRC income tax on our worldwide income at the 25% uniform tax rate, which could
have an impact on our effective tax rate and an adverse effect on our net income and results of operations and our income tax expenses
will increase and the amount of dividends, if any, we may pay to our shareholders and ADS holders may be decreased, although dividends
distributed from our PRC subsidiaries to us could be exempt from the PRC dividend withholding tax, since such income is exempted
under the EIT Law and its Implementing Regulations to a PRC resident recipient.
In addition, if we are considered a PRC
“resident enterprise”, dividends we pay with respect to our ADSs or ordinary shares and the gains realized from the
transfer of our ADSs or ordinary shares may be considered income derived from sources within the PRC for PRC tax purposes and be
subject to PRC withholding tax.
We face uncertainties with respect to indirect transfers
of the equity interests in PRC resident enterprises by their non-PRC holding companies.
Pursuant to the Notice on Strengthening
Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises, or Circular 698, issued by the State
Administration of Taxation on December 10, 2009, where a non-PRC resident enterprise transfers its equity interests in a PRC resident
enterprise to its related parties at a price lower than the fair market value, the competent tax authority has the power to make
a reasonable adjustment to the taxable income of the transaction. Circular 698 is retroactively effective from January 1, 2008.
There is uncertainty as to the application of Circular 698. For example, while the term “indirect transfer” is not
clearly defined, it is understood that the relevant PRC tax authorities have jurisdiction regarding requests for information over
a wide range of foreign entities having no direct contact with China. Moreover, the relevant authority has not yet promulgated
any formal provisions or formally declared or stated how to calculate the effective tax rates in foreign tax jurisdictions, and
the process and format of the reporting of an Indirect Transfer to the competent tax authority of the relevant PRC resident enterprise
remain unclear. In addition, there are no formal declarations with regard to how to determine whether a foreign investor has adopted
an abusive arrangement in order to reduce, avoid or defer PRC tax.
The State Administration of Taxation issued
Bulletin on Several Issues concerning the Enterprise Income Tax on the Indirect Transfers of Properties by Non-Resident Enterprises,
or Bulletin 7, on February 3, 2015, which replaced or supplemented certain previous rules under Circular 698. Under 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 such 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 such indirect transfer may be subject to PRC enterprise income tax. According to Bulletin 7, “PRC taxable assets”
include assets attributed to an establishment in China, immoveable properties in China, and equity investments in PRC resident
enterprises. In respect of an indirect offshore transfer of assets of a PRC establishment, the relevant gain is to be regarded
as effectively connected with the PRC establishment and therefore included in its enterprise income tax filing, and would consequently
be subject to PRC enterprise income tax at a rate of 25.0%. Where the underlying transfer relates to the immoveable properties
in China or to equity investments in a PRC resident enterprise, which is not effectively connected to a PRC establishment of a
non-resident enterprise, a PRC enterprise income tax at 10.0% would apply, subject to available preferential tax treatment under
applicable tax treaties or similar arrangements, and the party who is obligated to make the transfer payments has the withholding
obligation. There is uncertainty as to the implementation details of Bulletin 7. If Bulletin 7 was determined by the tax authorities
to be applicable to some of our transactions involving PRC taxable assets, our offshore subsidiaries conducting the relevant transactions
might be required to spend valuable resources to comply with Bulletin 7 or to establish that the relevant transactions should not
be taxed under Bulletin 7.
As a result, we and our non-PRC shareholders
may have the risk of being taxed for the disposition of our ordinary shares or ADS and may be required to spend valuable resources
to comply with Circular 698 and Bulletin 7 or to establish that we or our non-PRC shareholders should not be taxed as an indirect
transfer, which may have a material adverse effect on our financial condition and results of operations or the investment by non-PRC
investors in us.
Restrictions on currency exchange may limit our ability
to receive and use our revenue effectively.
Because substantially most of our revenue
is denominated in RMB, restrictions on currency exchange may limit our ability to use revenue generated in RMB to fund any business
activities we may have outside China or to make dividend payments to our shareholders and ADS holders in U.S. dollars. The principal
regulation governing foreign currency exchange in China is the Foreign Currency Administration Rules (1996), as amended. Under
these rules, RMB is freely convertible for trade and service-related foreign exchange transactions, but not for direct investment,
loan or investment in securities outside China unless the prior approval of SAFE is obtained. Although the PRC government regulations
now allow greater convertibility of RMB for current account transactions, significant restrictions still remain. For example, foreign
exchange transactions under our subsidiaries capital accounts, including principal payments in respect of foreign currency-denominated
obligations, remain subject to significant foreign exchange controls. These limitations could affect our ability to obtain foreign
exchange for capital expenditures. We cannot be certain that the PRC regulatory authorities will not impose more stringent restrictions
on the convertibility of RMB, especially with respect to foreign exchange transactions.
In November 2017, we acquired 100% of the
outstanding shares of common stock of Bay State College in the United States to expand our career-oriented international education
portfolio. In 2017, the review and approval process from SAFE with respect to obtaining foreign currency denominated borrowings
and making direct overseas investment became more stringent in China. The review and approval from SAFE takes a longer period of
time, and more supporting files are required. As a result, the new restrictions on foreign exchange for capital expenditure prevented
us from raising enough US dollars for the acquisition of Bay State College. In order to fund the acquisition costs and the operational
needs of the company, we borrowed a one-year interest-free US dollar loan of US$ 6.0 million from Sino Accord Investments Limited
(“Sino Accord”), a non-affiliated third party lender. At the same time, we provided a one-year interest-free RMB loan
of RMB 42.7 million to Suzhou Zhixinliren Investment Co., Limited (“Suzhou Zhixinliren”), another non-affiliated party
finance company. It was the understanding among the parties that the US dollar loan was correlated to the RMB loan, and when the
US dollar loan was repaid, the RMB loan would similarly be collected. Without providing an RMB loan to Suzhou Zhixinliren, we would
not be able to obtain the US dollar loan from Sino Accord in compliance with applicable regulations, mainly the Regulations for
the Implementation of Foreign Exchange Management in People’s Republic of China. In light of the capital from US dollar loan
and its operational cash flow, Bay State College was able to generate enough liquidity to support its future operations in the
near term. Therefore we did not intend to rely on US dollar borrowings to continue funding Bay State College’s operations.
On March 7, 2018, we mutually agreed with Sino Accord and Suzhou Zhixinliren to extend the maturity date for repayment of the loans
for an additional year. The extended maturity date of the loan was April 4, 2019. As of December 31, 2019, we fully repaid the
borrowing due to Sino Accord, and fully collected the loan receivable, current from Suzhou Zhixinliren. If there are other significant
overseas capital expenditures in the future requiring currencies other than RMB, we may either apply for a permit from the SAFE
to purchase foreign currencies or pursue other offerings resulting in US dollar proceeds to obtain enough US dollars to meet such
shortage in foreign currency. We have not been a lender of funds to non-affiliated parties historically, and we do not intend to
do so in the future.
If we fail to settle our RMB and US dollar loans properly,
it may be considered as unauthorized currency exchange arrangement and we may face penalties from local authorities.
In order to fund the acquisition costs and
working capital needs in US dollars, on April 5, 2017, we entered into an agreement to receive a one-year interest-free US dollar
loan from Sino Accord. This short-term loan was considered correlated to our one-year interest-free RMB loan to Suzhou Zhixinliren,
and when we repay the US dollar loan, the RMB loan will be repaid. Without providing an RMB loan to Suzhou Zhixinliren, we would
not be able to obtain the US dollar loan from Sino Accord in compliance with applicable regulations, mainly the Regulations for
the Implementation of Foreign Exchange Management in People’s Republic of China. On March 7, 2018, we mutually agreed with
Sino Accord and Suzhou Zhixinliren to extend the maturity date for repayment of the loans for an additional year. The extended
maturity date of the loan was April 4, 2019.
The loan agreements are not individually
regulated by the foreign currency exchange and cross border guarantee rules of China. However if we fail to repay the US dollar
loan to Sino Accord or collect the RMB loan from Suzhou Zhixinliren when the agreements due, these transactions may be considered
as unauthorized foreign exchange arrangements by the SAFE. The regulatory authority may deem the transactions as, in substance,
a currency exchange arrangement or an onshore guarantee for an offshore loan, and we may be subject to severe monetary penalties
under such circumstances. According to Regulations for the Implementation of Foreign Exchange Management in People's Republic of
China, the upper limits of the monetary penalties can range from 30 to 100 percent of the deemed illegal loan amounts. As of December
31, 2019, we fully repaid the borrowing due to Sino Accord, and fully collected the loan receivable, current from Suzhou Zhixinliren. Please
refer to Note 8 and Note 14 to audited consolidated financial statements for details.
Fluctuations in the value of the RMB may have a material
adverse effect on your investment.
The change in value of the RMB against the
U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economic conditions.
On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar. Under
the policy, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies.
It is difficult to predict how the RMB exchange rates may change in the future. There remains significant international pressure
on the PRC government to adopt a more flexible currency policy, which could result in a further and more significant adjustment
of the RMB against the U.S. dollar.
Any significant revaluation of the RMB may
have a material adverse effect on the value of, and any dividends payable on, our ADSs in foreign currency terms. More specifically,
if we decide to convert our RMB into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs
or for other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar
amount available to us. To the extent that we need to convert U.S. dollars denominated financial assets into RMB for our operations,
appreciation of the RMB against the U.S. dollar would have an adverse effect on the RMB amount we would receive from the conversion.
Consequently, appreciation or depreciation in the value of the RMB relative to the U.S. dollar could materially adversely affect
our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of
operations.
Recent PRC regulations relating to offshore investment
activities by PRC residents and employee stock options granted by overseas-listed companies may increase our administrative burden,
restrict our overseas and cross-border investment activity or otherwise adversely affect the implementation of our acquisition
strategy. If our shareholders who are PRC residents, or our PRC employees who are granted or exercise stock options, fail to make
any required registrations or filings under such regulations, we may be unable to distribute profits and may become subject to
liability under PRC laws.
SAFE promulgated the Circular on Relevant
Issues Concerning Foreign Exchange Control on Domestic Residents’ Off-shore 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 to register with local branches
of SAFE in connection with their direct establishment or indirect control of an off shore entity, for the purpose of overseas investment
and financing, with such PRC residents’ legally owned assets or equity interests in domestic enterprises or off shore 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 off-shore 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 subsidiary. 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. SAFE promulgated the Notice of SAFE on
Further Simplifying and Improving Policies for the Foreign Exchange Administration of Direct Investment, or SAFE Circular 13, on
February 13, 2015, which was effective on June 1, 2015. SAFE Circular 13 cancels two administrative approval items: foreign exchange
registration under domestic direct investment and foreign exchange registration under overseas direct investment, instead. Banks
shall directly examine and handle foreign exchange registration under domestic direct investment and foreign exchange registration
under overseas direct investment, and SAFE and its branch shall indirectly regulate the foreign exchange registration of direct
investment through banks.
We cannot provide any assurances that all
of our shareholders who are PRC residents will comply with these SAFE regulations. The failure or inability of our PRC resident
shareholders to comply with the registration procedures set forth in the SAFE regulations may subject our PRC subsidiaries to fines
and legal sanctions, restrict our cross-border investment activities, or limit our PRC subsidiaries’ ability to distribute
dividends to or obtain foreign-exchange denominated loans from our company.
As it is uncertain how the SAFE regulations
will be interpreted or implemented, we cannot predict how these regulations will affect our business operations or future strategy.
For example, we may be subject to a more stringent review and approval process with respect to our foreign exchange activities,
such as remittance of dividends and obtaining foreign currency denominated borrowings, which may harm our results of operations
and financial condition. In addition, if we decide to acquire a PRC domestic company, we cannot assure you that we or the owners
of such company, as the case may be, will be able to obtain the necessary approvals or complete the necessary filings and registrations
required by the SAFE regulations. This may restrict our ability to implement our acquisition strategy and could adversely affect
our business and prospects.
On February 15, 2012, SAFE promulgated
the Notice of the State Administration of Foreign Exchange on Issues Related to Foreign Exchange Administration in Domestic Individuals’
Participation in Equity Incentive Plans of Companies Listed Abroad, or the No. 7 Notice, which supersedes the Operation Rules on
Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Holding Plan or Stock Option Plan of Overseas-Listed
Company, or the Stock Option Rule, in its entirety and immediately became effective upon circulation. According to the No. 7
Notice, domestic individuals, which include any directors, supervisors, senior managerial personnel or other employees of a domestic
company who are Chinese citizens (including citizens of Hong Kong, Macao and Taiwan) or foreign individuals who consecutively reside
in the territory of the PRC for one year, who participate in the same equity incentive plan of an overseas-listed company shall,
through the domestic companies they serve, collectively entrust a domestic agency to handle issues like foreign exchange registration,
account opening, funds transfer and remittance, and entrust an overseas institution to handle issues like exercise of options,
purchasing and sale of related stocks or equity, and funds transfer. As an overseas publicly listed company, we and our employees
who have been granted stock options or any type of equity awards may be subject to the No. 7 Notice. If we or our employees
who are subject to the No. 7 Notice fail to comply with these regulations, we may be subject to fines and legal sanctions.
See “Item 4.B — Information on the Company — Business Overview — Regulation—SAFE regulations on employee
share options.”
The failure to comply with PRC regulations relating to
mergers and acquisitions of domestic enterprises by off shore special purpose vehicles may subject the combined company to severe
fines or penalties and create other regulatory uncertainties regarding the combined company’s corporate structure.
On August 8, 2006, six PRC regulatory
agencies, including the China Securities Regulatory Commission (“CSRC”), promulgated the Regulation on Mergers and
Acquisitions of Domestic Companies by Foreign Investors (“M&A Rules”), which became effective on September 8,
2006 and was amended by the MOFCOM on June 22, 2009. The M&A Rules, among other things, has certain provisions that require
off-shore companies formed for the purpose of acquiring PRC domestic companies and controlled directly or indirectly by PRC individuals
and companies which are the related parties with the PRC domestic companies, to obtain the approval of MOFCOM prior to engaging
in such acquisitions and to obtain the approval of the CSRC prior to publicly listing special purpose vehicles’ securities
on an overseas stock market. On September 21, 2006, the CSRC published on its official website a notice specifying the documents
and materials that are required to be submitted for obtaining CSRC approval.
There remains some uncertainty as to how
this regulation will be interpreted or implemented in the context of an overseas offering. If the MOFCOM, CSRC or another PRC regulatory
agency subsequently determines that the MOFCOM, CSRC approvals were required for our listings, we may face sanctions by the MOFCOM,
CSRC or another PRC regulatory agency. If this happens, these regulatory agencies may impose fines and penalties on our operations
in the PRC, limit our operating privileges in the PRC, delay or restrict the repatriation of the proceeds from our listings into
the PRC, restrict or prohibit payment or remittance of dividends by our PRC subsidiaries to us or take other actions that could
have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as
the trading price of our ordinary shares.
PRC laws and regulations have established more complex
procedures for certain acquisitions of Chinese companies by foreign investors, which could make it more difficult for the combined
company to pursue growth through acquisitions in China.
M&A Rules established additional procedures
and requirements that could make merger and acquisition activities by foreign investors more time-consuming and complex. Further
to the M&A Rules, the Anti-monopoly Law of the PRC, the Rules of Ministry of Commerce on Implementation of Security Review
System of Mergers and Acquisitions of Domestic Enterprises by Foreign Investors , or the MOFCOM Security Review Rules, was promulgated
by MOFCOM in August 2011, which establishes additional procedures and requirements that are expected to make merger and acquisition
activities in China by foreign investors more time-consuming and complex, including requirements in some instances that MOFCOM
be notified in advance of any change of control transaction in which a foreign investor takes control of a PRC enterprise, or that
the approval from MOFCOM be obtained in circumstances where overseas companies established or controlled by PRC enterprises or
residents acquire affiliated domestic companies. PRC laws and regulations also require certain merger and acquisition transactions
to be subject to merger control review and/or security review. The MOFCOM Security Review Rules, effective from September 1, 2011,
which implements the Notice of the General Office of the State Council on Establishing the Security Review System for Mergers and
Acquisitions of Domestic Enterprises by Foreign Investors promulgated on February 3, 2011, further provides that, when deciding
whether a specific merger or acquisition of a domestic enterprise by foreign investors is subject to the security review by MOFCOM,
the principle of substance over form should be applied and foreign investors are prohibited from bypassing the security review
requirement by structuring transactions through proxies, trusts, indirect investments, leases, loans, control through agreements
control or off shore transactions. Further, if the business of any target company that the combined company seek to acquire falls
into the scope of security review, the combined company may not be able to successfully acquire such company either by equity or
by asset acquisition, capital contribution or through any VIE Agreement. The combined company may grow its business in part by
acquiring other companies operating in its industry. Complying with the requirements of the relevant regulations to complete such
transactions could be time consuming, and any required approval processes, including approvals from MOFCOM, may delay or inhibit
its ability to complete such transactions, which could affect its ability to maintain or expand its market share.
We do not have business insurance coverage in China, which
could harm our business.
We could be held liable for accidents that
occur at our learning centers and other facilities. In the event of on-site food poisoning, personal injuries, fires or other accidents
suffered by students or other people, we could face claims alleging that we were negligent, provided insufficient supervision or
instruments or were otherwise liable for the injuries. Such accidents may adversely affect our reputation and financial results.
The insurance industry in China is still at an early stage of development. Insurance companies in China offer limited business
insurance products. As a result, we do not have any business liability or disruption insurance coverage for our operations. Any
business disruption, litigation or natural disaster would result in substantial costs and diversion of our resources.
We face risks related to natural disasters and health
epidemics in China, which could have a material adverse effect on our business and results of operations.
Our business could be severely disrupted
and materially adversely affected by natural disasters or the outbreak of health epidemics in China. For example, in May 2008,
Sichuan Province suffered a strong earthquake measuring approximately 8.0 on the Richter scale that caused widespread damage and
casualties. In addition, in the last decade, the PRC has suffered health epidemics related to the outbreak of avian influenza and
severe acute respiratory syndrome, or SARS. In April 2009, an outbreak of the H1N1 virus, also commonly referred to as “swine
flu”, occurred in Mexico and spread to other countries, including Hong Kong and mainland China. The Chinese government and
certain regional governments within China have enacted regulations to address the H1N1 virus specifically within the education
services market, which may have an effect on our business. Most recently, from the beginning of 2020, in response to the global
spread of a novel coronavirus pandemic, also known as COVID-19, businesses and schools in China have been suspended since the end
of January 2020 as part of quarantine measures to contain the pandemic. Our K-12 schools and training centers in China have been
closed since then. Bay State College in U.S. is currently moving all courses online in response to social distancing needs and
precautionary measures. The COVID-19 pandemic did not have an impact on our fiscal 2019 results as all of our K-12 schools and training
centers were operational, consequently may adversely affect our business operations, financial condition and operating results
for 2020, including but not limited to negative impact to the Group’s total revenues, delayed collection of tuition and fees,
slower collection of accounts receivables and additional allowance for doubtful accounts and impairment to the Group’s long-lived
assets.
We have taken a series of measures to respond
to the negative impact from the pandemic, including offering online programs and services, cut down compensation cost, reducing
other costs and expenses for savings, negotiating for relief or postpone of rentals for this special period of time and seeking
for certain credit facilities etc. Moreover, along with the control of the epidemic in China, local authority of Jiangsu Province
have announced the reopening time schedule of local K-12 schools in the beginning of April 2020, which include Shuyang K-12 within
the Group. Other provinces of China are estimated to follow and announce their own reopening time schedule of schools in the next.
The collection of tuition and fees are expected to gradually recover accordingly. Because of the significant uncertainties surrounding
the COVID-19 pandemic, the extent of the business disruption and the related financial impact cannot be reasonably estimated at
this time. Any future natural disasters or health epidemics in the PRC could also severely disrupt our business operations and
have a material adverse effect on our business and results of operations.
Labor laws in the PRC may adversely affect our results
of operations.
On June 29, 2007, the PRC government
promulgated a labor law, namely the Labor Contract Law of the PRC, or the Labor Contract Law, which became effective on January 1,
2008. The Labor Contract Law imposes greater liabilities on employers and significantly affects the cost of an employer’s
decision to reduce its workforce. Further, it requires certain terminations be based upon seniority and not merit. In the event
we decide to significantly change or decrease our workforce, the Labor Contract Law could adversely affect our ability to enact
such changes in a manner that is most advantageous to our business or in a timely and cost-effective manner, thus materially adversely
affecting our financial condition and results of operations.
Risks Related to Regulations of Bay State College
If we fail to comply with the extensive U.S. regulatory
requirements related to operating a US higher education institution, we could face significant monetary liabilities, fines and
penalties, including loss of access to federal student loans and grants for our students.
As a provider of higher education in the
United States at Bay State College, we are subject to extensive regulation on both the federal and state levels. In particular,
the Higher Education Act and related regulations subject Bay State College and all other higher education institutions that participate
in the various Title IV programs to significant regulatory scrutiny.
The Higher Education Act mandates specific
regulatory responsibilities for each of the following components of the higher education regulatory triad: (1) the federal government
through the Department of Education; (2) the accrediting agencies recognized by the Secretary of Education; and (3) state education
regulatory bodies. In addition, other federal agencies such as the Consumer Financial Protection Bureau and Federal Trade Commission,
and various state agencies and state attorneys general enforce consumer protection laws applicable to post-secondary educational
institutions.
The regulations, standards, and policies
of these regulatory agencies frequently change, and changes in, or new interpretations of, applicable laws, regulations, standards,
or policies could have a material adverse effect on our accreditation, authorization to operate in various states, permissible
activities, receipt of funds under Title IV programs, or costs of doing business.
Title IV requirements are enforced by the
Department of Education and, in some instances, by private plaintiffs. If we are found not to be in compliance with these laws,
regulations, standards, or policies, we could lose our access to Title IV program funds, which would have a material adverse effect
on Bay State College’s operations. Findings of noncompliance also could result in our being required to pay monetary damages,
or being subjected to fines, penalties, injunctions, restrictions on our access to Title IV program funds, or other censure that
could have a material adverse effect on our business.
Our failure to comply with the Department of Education’s
gainful employment regulations could result in heightened disclosure requirements and loss of Title IV eligibility.
To be eligible for Title IV funding, academic
programs offered by proprietary institutions of higher education must prepare students for gainful employment in a recognized occupation.
On October 31, 2014, the Department of Education published the final regulations on gainful employment, which, with the exception
of certain disclosure requirements, generally became effective July 1, 2015. The regulations include two debt-to-earnings measures,
consisting of an annual income rate and a discretionary income rate. The annual income rate measures student debt in relation to
earnings, and the discretionary income rate measures student debt in relation to discretionary income.
A program passes if the program’s graduates:
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Have an annual income rate that does not exceed 8%; or
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Have a discretionary income rate that does not exceed 20%.
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A program that does not pass either of the
debt-to-earnings metrics, and that has an annual income rate between 8% and 12%, or a discretionary income rate between 20% and
30%, is considered to be in a warning zone. A program fails if the program’s graduates have an annual income rate of 12%
or greater and a discretionary income rate of 30% or greater. A program would become Title IV-ineligible for three years if it
failed both metrics for two out of three consecutive years, or fails to pass at least one metric for four consecutive award years.
The regulations provide a means by which an institution may challenge the Department of Education’s calculation of any of
the debt metrics prior to loss of Title IV eligibility.
The requirements associated with the gainful
employment regulations may substantially increase our administrative burdens and could affect our program offerings, student enrollment,
persistence, and retention. Further, although the regulations provide opportunities for an institution to correct any potential
deficiencies in a program prior to the loss of Title IV eligibility, the continuing eligibility of our academic programs will be
affected by factors beyond management’s control, such as changes in our graduates’ employment and income levels, changes
in student borrowing levels, increases in interest rates, and various other factors. Even if we were able to correct any deficiency
in the gainful employment metrics in a timely manner, the disclosure requirements associated with a program’s failure to
meet at least one metric may adversely affect student enrollments in that program and may adversely affect the reputation of our
institution.
On August 10, 2018, the Department of Education
announced a notice of proposed rulemaking that proposes to rescind the gainful employment regulations. The notice states that these
regulations would be replaced with other regulations designed to require all higher education institutions provide useful, transparent
data to students.
On July 1, 2019, the Department of Education
issued a new federal rule which rescinds the entirety of the gainful employment regulations effective July 1, 2020. In addition,
the Department of Education allowed for the new federal rule to be early adopted as of July 1, 2019. Bay State College adopted
these new federal rules as of July 1, 2019 and, as such, is no longer subject to the gainful employment regulations.
Congressional examination of for-profit post-secondary
education could lead to legislation or other governmental action that may negatively affect the industry.
Since 2010, Congress has increased its focus
on for-profit higher education institutions, including regarding participation in Title IV programs and oversight by the Department
of Defense of tuition assistance and by the Veterans Administration of veterans education benefits for military service members
and veterans, respectively, attending for-profit colleges. The Senate HELP Committee and other congressional committees have held
hearings into, among other things, the proprietary education sector and its participation in Title IV programs, the standards and
procedures of accrediting agencies, credit hours and program length, the portion of federal student financial aid going to proprietary
institutions, and the receipt of veterans and military education benefits by students enrolled at proprietary institutions. A number
of legislators have requested the Government Accountability Office to review and make recommendations regarding, among other things,
recruitment practices, educational quality, student outcomes, the sufficiency of integrity safeguards against waste, fraud, and
abuse in Title IV programs, and the percentage of proprietary institutions’ revenue coming from Title IV and other federal
funding sources.
This activity may result in legislation,
further rulemaking affecting participation in Title IV programs, and other governmental actions. In addition, concerns generated
by congressional activity may adversely affect enrollment in, and revenues of for-profit educational institutions. Limitations
on the amount of federal student financial aid for which our students are eligible under Title IV could materially and adversely
affect our business.
We are dependent on the renewal and maintenance of Title
IV programs.
The Higher Education Act, which is the
law authorizing Title IV programs, is subject to periodic reauthorization. Congress completed the most recent reauthorization
through multiple pieces of legislation and may reauthorize the HEA in a piecemeal manner in the future. Additionally, Congress
determines the funding level for each Title IV program on an annual basis. Any action by Congress that significantly reduces funding
for Title IV programs or the ability of our school or students to participate in these programs could materially harm our business.
A reduction in government funding levels could lead to lower enrollments at our school and require us to arrange for alternative
sources of financial aid for our students. Lower student enrollments or our inability to arrange such alternative sources of funding
could adversely affect our business.
We are subject to compliance reviews, which, if they resulted
in a material finding of noncompliance, could affect our ability to participate in Title IV programs.
Because we operate in a highly regulated
industry, we are subject to compliance reviews and claims of noncompliance and related lawsuits by government agencies, accrediting
agencies, and third parties, including claims brought by third parties on behalf of the federal government. For example, the Department
of Education regularly conducts program reviews of educational institutions that are participating in Title IV programs, and the
Office of Inspector General of the Department of Education regularly conducts audits and investigations of such institutions. The
Department of Education could limit, suspend, or terminate our participation in Title IV programs or impose other penalties such
as requiring us to make refunds, pay liabilities, or pay an administrative fine upon a material finding of noncompliance.
For the year ended December 31, 2019, no
material isolated issues were found during regulatory reviews of Bay State College.
If we fail to maintain our institutional accreditation
or if our institutional accrediting body loses recognition by the Department of Education, we would lose our ability to participate
in Title IV programs.
The loss of Bay State College’s accreditation
by New England Association of Schools and Colleges, or New England Association’s loss of recognition by the Department of
Education would render Bay State College ineligible to participate in Title IV programs and would have a material adverse effect
on our US educational business. In addition, an adverse action by the New England Association other than loss of accreditation,
such as issuance of a warning, could have a material adverse effect on our business. In November 2015, the Department of Education
announced a set of executive actions and legislative proposals to increase transparency and rigor in accreditation. On January
20, 2016, the Department of Education issued additional recommendations related to accreditation.
On July 31, 2018, the Department of Education
issued a public notice of proposed rulemaking on several topics, one of which is accreditation. Pursuant to such notice, public
hearings were held on these topics, including accreditation, on September 6, September 11 and 13, 2018. On December 19, 2018, the
Department of Education hosted a summit on rethinking career and technical education the focus of which was to consider alternatives
ways in which to educate students for jobs of the future.
If we fail to maintain any of our state authorizations,
we would lose our ability to operate in that state and to participate in Title IV programs there.
Each Bay State College campus is authorized
to operate and to grant degrees, diplomas, or certificates by the Massachusetts Department of Higher Education. Such state authorization
is required for students at the campus to participate in Title IV programs. The loss of state authorization would, among other
things, render Bay State College ineligible to participate in Title IV programs at least at those state campus locations, limit
Bay State College’s ability to operate in that state and could have a material adverse effect on our business.
Effective July 1, 2011, Department of Education
regulations provide that an institution is considered legally authorized by a state if the state has a process to review and appropriately
act on complaints concerning the institution, including enforcing applicable state laws, and the institution complies with any
applicable state approval or licensure requirements consistent with the new rules. If the Commonwealth of Massachusetts fails to
comply in the future with the provisions of the new rule or fails to provide Bay State College with legal authorization, it could
limit Bay State College’s ability to operate in that state and have a material adverse effect on our US operations.
On December 19, 2016, the Department of Education
published final regulations addressing, among other issues, state authorization of programs offered through distance education.
The final regulations, which are effective July 1, 2018, require an institution offering distance education programs to be authorized
by each state in which the institution enrolls students, if such authorization is required by the state, in order to award Title
IV aid to such students. An institution could obtain such authorization directly from the state or through a state authorization
reciprocity agreement. On January 30, 2017, the Department of Education announced that it intends to take unspecified regulatory
actions regarding certain regulations that have been published but have not yet taken effect, including regulations related to
state authorization of distance education. As of February 2020, the Department had taken no action with respect to the state authorization
of distance education regulations. If we fail to obtain or maintain required state authorization to provide post-secondary distance
education in a specific state, the institution could lose its ability to award Title IV aid to online students in that state and
could lose its ability to provide distance education in that state.
On May 25, 2018, the Department of Education
announced that it proposed to delay until July 1, 2020, the effective date of regulations requesting distance education. The subject
of distance education is one of the topics included in the Department of Education’s proposed rulemaking of July 31, 2018.
Bay State College participates in the State
Authorization Reciprocity Agreement (“SARA”), which allows Bay State College to enroll students in distance education
programs in each SARA member state. Bay State College applies separately to non-SARA member states for authorization to enroll
students, if such authorization is required by the state. If Bay State College failed to comply with the requirements to participate
in SARA or state licensing or authorization requirements to provide distance education in a non-SARA state, Bay State College could
lose its ability to participate in SARA or may be subject to the loss of state licensure or authorization to provide distance education
in that non-SARA state, respectively.
If we fail to obtain recertification by the Department
of Education when required, we would lose our ability to participate in Title IV programs.
An institution generally must seek recertification
from the Department of Education at least every six years and possibly more frequently depending on various factors, such as whether
it is provisionally certified. The Department of Education may also review an institution’s continued eligibility and certification
to participate in Title IV programs, or scope of eligibility and certification, in the event the institution undergoes a change
in ownership resulting in a change of control or expands its activities in certain ways, such as the addition of certain types
of new programs, or, in certain cases, changes to the academic credentials that it offers. In certain circumstances, the Department
of Education must provisionally certify an institution. The Department of Education may withdraw our certification if it determines
that we are not fulfilling material requirements for continued participation in Title IV programs. If the Department of Education
does not renew, or withdraws our certification to participate in Title IV programs, our students would no longer be able to receive
Title IV program funds, which would have a material adverse effect on our business.
Each institution participating in Title IV
programs must enter into a Program Participation Agreement with the Department of Education. Under the agreement, the institution
agrees to follow the Department of Education’s rules and regulations governing Title IV programs. On March 1, 2018, the Department
and Bay State College executed a new Provisional Program Participation Agreement, approving Bay State College’s continued
participation in Title IV programs with full certification through December 31, 2020.
Student loan defaults could result in the loss of eligibility
to participate in Title IV programs.
In general, under the Higher Education Act,
an educational institution may lose its eligibility to participate in some or all Title IV programs if, for three consecutive federal
fiscal years, 30% or more of its students who were required to begin repaying their student loans in the relevant federal fiscal
year default on their payment by the end of the second federal fiscal year following that fiscal year. Institutions with a cohort
default rate equal to or greater than 15% for any of the three most recent fiscal years for which data are available are subject
to a 30-day delayed disbursement period for first-year, first-time borrowers.
If we lose eligibility to participate in
Title IV programs because of high student loan default rates, it would have a material adverse effect on our business. Bay State
College’s most recent three-year cohort default rate for federal fiscal year 2016 published by the Department of Education
was 6.5%.
Bay State College could lose its eligibility to participate
in federal student financial aid programs or be provisionally certified with respect to such participation if the percentage of
our revenues derived from those programs were too high.
A proprietary institution may lose its eligibility
to participate in the federal Title IV student financial aid program if it derives more than 90% of its revenues, on a cash basis,
from Title IV programs for two consecutive fiscal years. A proprietary institution of higher education that violates the 90/10
Rule for any fiscal year will be placed on provisional status for up to two fiscal years. Using the formula specified in the Higher
Education Act, Bay State College derived approximately 62%, of its cash-basis revenues from these programs in 2019. Certain
members of Congress have proposed to revise the 90/10 Rule to count tuition assistance provided by the Department of Defense and
veterans education benefits, along with Title IV revenue, toward the 90% limit and to reduce the limit to 85% of total revenue.
Such proposals could make it difficult for us to comply with the 90/10 rule. If we were to violate the 90/10 Rule, the loss of
eligibility to participate in the federal student financial aid programs would have a material adverse effect on our business.
Our failure to demonstrate financial responsibility or
administrative capability may result in the loss of eligibility to participate in Title IV programs.
All Title IV Institutions are subject to
meeting financial and administrative standards. These standards are assessed through annual compliance audits, periodic renewal
of institutional PPAs, periodic program reviews and ad hoc events which may lead the Department of Education to evaluate an institution’s
financial responsibility or administrative capability. The administrative capability criteria require, among other things, that
our institution (1) has an adequate number of qualified personnel to administer Title IV programs, (2) has adequate procedures
for disbursing and safeguarding Title IV funds and for maintaining records, (3) submits all required reports and consolidated financial
statements in a timely manner, and (4) not has significant problems that affect the institution’s ability to administer Title
IV programs.
A financial responsibility test is required
for continued participation by an institution’s students in U.S. federal financial assistance programs. The test is based
upon a composite score of three ratios: an equity ratio that measures the institution’s capital resources; a primary reserve
ratio that measures an institution’s ability to fund its operations from current resources; and a net income ratio that measures
an institution’s ability to operate profitably. A minimum score of 1.5 is necessary to meet ED’s financial standards.
Institutions with scores of less than 1.5 but greater than or equal to 1.0 are considered financially responsible, but require
additional oversight. These schools are subject to heightened cash monitoring and other participation requirements. An institution
with a score of less than 1.0 is considered not financially responsible. However, a school with a score of less than 1.0 may continue
to participate in the Title IV programs under provisional certification. In addition, this lower score typically requires that
the school be subject to heightened cash monitoring requirements and post a letter of credit (equal to a minimum of 10% of the
Title IV aid it received in the institution's most recent fiscal year). For the fiscal year of 2019, Bay State College had a composite
score equal to 1.5.
If the Department of Education determines,
in its judgment, that Bay State College has failed to demonstrate either financial responsibility or administrative capability,
we could be subject to sanctions, including, among other things, a requirement to post a letter of credit, fines, suspension or
termination of our eligibility to participate in Title IV programs or repayment of funds received under Title IV programs, any
of which could have a material adverse effect on our business, financial condition, results of operation and cash flows and result
in the imposition of significant restrictions on us and our ability to operate. The Department of Education has considerable discretion
under the regulations to impose the foregoing sanctions and, in some cases, such sanctions could be imposed without advance notice
or any prior right of review or appeal.
Our failure to comply with the Department of Education’s
incentive compensation rules could result in sanctions and other liability.
If we pay a bonus, commission, or other incentive
payment in violation of applicable Department of Education rules or if the Department of Education or other third parties interpret
our compensation practices as such, we could be subject to sanctions or other liability, which could have a material adverse effect
on our business.
Our failure to comply with the Department of Education’s
misrepresentation rules could result in sanctions and other liability.
The Higher Education Act prohibits an institution
that participates in Title IV programs from engaging in “substantial misrepresentation” of the nature of its educational
program, its financial charges, or the employability of its graduates. The Department’s Program Integrity Regulations, which
took effect July 1, 2011, interpret this provision to prohibit any statement on those topics made by the institution or a third
party that provides educational programs, marketing, advertising, recruiting, or admissions services to the institution that has
the likelihood or tendency to confuse. The U.S. Court of Appeals for the District of Columbia held on June 5, 2012, that the term
“substantial misrepresentation” could not include true, nondeceitful statements that are merely confusing. Final regulations
to expand the definition of misrepresentation to include “any statement that has the likelihood or tendency to mislead under
the circumstances” were scheduled to take effect July 1, 2017. The definition also would have been expanded to include “any
statement that omits information in such a way as to make the statement false, erroneous, or misleading.” On June 16, 2017,
the Department of Education announced that it had decided to postpone indefinitely the implementation of certain provisions, including
the revised definition. The Department has delayed implementation until July 1, 2019. On July 31, 2018, the Department published a notice of proposed
rulemaking that, among other things, revisits the definition of misrepresentation.
In the event of substantial misrepresentation,
the Department of Education may revoke an institution’s program participation agreement, limit the institution’s participation
in Title IV programs, deny applications from the institution, such as to add new programs or locations, initiate proceedings to
fine the institution or limit, suspend, or terminate its eligibility to participate in Title IV programs. If the Department of
Education or other third parties interpret statements made by us or on our behalf to be in violation of the new regulations, we
could be subject to sanctions and other liability, which could have a material adverse effect on our business.
Our failure to comply with the Department of Education’s
credit hour rule could result in sanctions and other liability.
Effective July 1, 2011, Title IV regulations
define the term “credit hour” and require accrediting agencies and state authorization agencies to review the reliability
and accuracy of an institution’s credit hour assignments. If an accreditor does not comply with this requirement, its recognition
by the Department of Education could be jeopardized. If an accreditor identifies systematic or significant noncompliance in one
or more of an institution’s programs, the accreditor must notify the Secretary of Education. If the Department of Education
determines that an institution is out of compliance with the credit hour definition, the Department of Education could impose liabilities
or other sanctions, which could have a material adverse effect on our business.
Our failure to comply with the Jeanne Clery Disclosure
of Campus Security Policy and Campus Crime Statistics Act or Title IX of the Education Amendments of 1972 could result in sanctions
and other liability.
Bay State College must comply with the campus
safety and security reporting requirements as well as other requirements in the Jeanne Clery Disclosure of Campus Security Policy
and Campus Crime Statistics Act (“Clery Act”), including changes made to the Clery Act by the Violence Against Women
Reauthorization Act of 2013. On October 20, 2014, the Department of Education promulgated final regulations implementing amendments
to the Clery Act. In addition, the Department of Education has interpreted Title IX to categorize sexual violence as a form of
prohibited sex discrimination and to require institutions to follow certain disciplinary procedures with respect to such offenses.
Failure to comply with the Clery Act or Title IX requirements or regulations thereunder could result in action by the Department
of Education to require corrective action, fine Bay State College, or limit or suspend its participation in Title IV programs,
which could lead to litigation and could harm the Bay State College’s reputation.
Our failure to comply with the Borrower Defense to Repayment
Regulations could result in sanctions and other liability.
On July 25, 2018, the Department of Education
issued proposed regulations to change the borrower defense to repayment regulations. Under the proposed regulations, mandatory
and discretionary triggers exist which would allow the Department of Education to impose a letter of credit on an institution
prior to their submission or annual financial statements in the event of certain negative events. The regulations were subject
to a thirty-day comment period and need to be issued in final form prior to November 1, 2018 to be effective as of July 1, 2019.
On October 2, 2018, the Department of Education indicated that the proposed regulations will not be issued by the November 1,
2018 federal calendar deadline and the Department of Education is still committed to issuing the regulations. However, the Department
of Education was sued for delaying the borrower defense to repayment regulations and a federal judge ruled on October 12, 2018
that the borrower defense to repayment regulations are effective immediately. On March 15, 2019, the Department of Education issued
guidance in regard to the implementation of the BDTR 2016 regulations. On August 30, 2019, the Department of Education issued
new final regulations to change the BDTR regulation. Under these final 2019 BDTR regulations, significant revisions were maintained
related the financial responsibility standards, closed school loan discharge and false certification discharge, and provisions
concerning pre-dispute arbitration clauses and class action waivers. The 2019 BDTR regulations will be effective as of July 2,
2020. Bay State College is in process of determining the impact on the institution.
We are subject to sanctions if we fail to calculate accurately
and make timely payment of refunds of Title IV program funds for students who withdraw before completing their educational program.
The Higher Education Act and Department of
Education regulations require us to calculate refunds of unearned Title IV program funds disbursed to students who withdraw from
their educational program before completing it. If refunds are not properly calculated or timely paid, we may be required to post
a letter of credit with the Department of Education or be subject to sanctions or other adverse actions by the Department of Education,
which could have a material adverse effect on our business.
Investigations, legislative and regulatory developments,
and general credit market conditions related to the student loan industry may result in fewer lenders and loan products and increased
regulatory burdens and costs.
The Higher Education Act regulates relationships
between lenders to students and post-secondary education institutions. In 2009, the Department of Education promulgated regulations
that address these relationships, and state legislators have also passed or may be considering legislation related to relationships
between lenders and institutions. In addition, new procedures introduced and recommendations made by the Consumer Financial Protection
Bureau create uncertainty about whether Congress will impose new burdens on private student lenders. These developments, as well
as legislative and regulatory changes, such as those relating to gainful employment and repayment rates, creating uncertainty in
the industry and general credit market conditions, may cause some lenders to decide not to provide certain loan products and may
impose increased administrative and regulatory costs. Such actions could reduce demand for, and/or availability of private education
loans, decrease Bay State College’s non-Title IV revenue, and thereby increase Bay State College’s 90/10 ratio, and
have a material adverse effect on our business.
The Bay State College business operations could be harmed
if we experience a disruption in our ability to process student loans under the Federal Direct Loan Program.
Any processing disruptions by the Department
of Education may affect our students’ ability to obtain student loans on a timely basis. If we experience a disruption in
our ability to process student loans through the Federal Direct Loan Program, either because of administrative challenges on our
part or the inability of the Department of Education to process the volume of direct loans on a timely basis, our business, financial
condition, results of operations, and cash flows related to Bay State College could be adversely and materially affected.
Bay State College’s business operations could be
harmed if Congress makes changes to the availability of Title IV funds.
We collected 18.6% of the consolidated net
revenue in our CP&CE Programs segment from receipt by Bay State College of Title IV financial aid program funds, principally
from federal student loans under the Federal Direct Loan Program. Changes in the availability of these funds or a reduction in
the amount of funds disbursed may have a material adverse effect on our enrollment, financial condition, results of operations,
and cash flows. Congress eliminated further federal direct subsidized loans for graduate and professional students as of July
1, 2012. On August 9, 2013, Congress passed legislation that ties interest rates on Title IV loans to the rate paid on U.S. Treasury
bonds. Interest rates are set every July 1 for loans taken out from July 1 to June 30 of the following year. In July 2012, Congress
reduced eligibility for Pell Grants from 18 semesters to 12 semesters. To date, these changes have not had a material impact on
our business, but future changes in the availability of Title IV funds could impact students’ ability to fund their education
and thus may have a material adverse effect on our enrollment, financial condition, results of operations, and cash flows.
Enforcement of laws related to the accessibility of technology
continues to evolve, which could result in increased information technology development costs and compliance risks.
Bay State College’s online education
programs are made available to students through personal computers and other technological devices. For each of these programs,
the curriculum makes use of a combination of graphics, pictures, videos, animations, sounds, and interactive content. Federal agencies,
including the Department of Education and the Department of Justice, have considered or are considering how electronic and information
technology should be made accessible to persons with disabilities. For example, Section 504 of the Rehabilitation Act of 1973,
or Section 504, prohibits discrimination against a person with a disability by any organization that receives federal financial
assistance. The Americans with Disabilities Act, or the ADA, prohibits discrimination based on disability in several areas, including
public accommodations. In 2010, the Department of Education’s Office for Civil Rights, which enforces Section 504, together
with the Department of Justice, asserted that requiring the use of technology in a classroom environment when such technology is
inaccessible to individuals with disabilities violates Section 504, unless those individuals are provided accommodations or modifications
that permit them to receive all the educational benefits provided by the technology in an equally effective and integrated manner.
If Bay State College is found to have violated Section 504, it may be required to modify existing content and functionality of
its online classroom or other uses of technology, including through adoption of specific technical standards. As a result of such
enforcement action, or as a result of new laws and regulations that require greater accessibility, Bay State College may have to
modify its online classrooms and other uses of technology to satisfy applicable requirements, which could require substantial financial
investment. As with all nondiscrimination laws that apply to recipients of federal financial assistance, an institution may lose
access to federal financial assistance if it does not comply with Section 504 requirements. In addition, private parties may file
or threaten to file lawsuits alleging failure to comply with laws that prohibit discrimination on the basis of disability, such
as the ADA, and defending against such actions may require Bay State College to incur costs to modify its online classrooms and
other uses of technology and costs of litigation.
Risks related to ownership of our ADSs
We cannot assure you that the ADSs
will not be delisted from the NYSE American, which could negatively impact the price of the ADSs and our ability to access the
capital markets.
In June 2018, we completed
our public offering of 2,070,000 ADSs at US$4.25 per ADS. Each ADS represents two Class A ordinary shares of the company. On June
1, 2018, the company’s ADSs commenced trading on the NYSE American under the symbol “AMBO”. We cannot give you
any assurance that a broader or more active public trading market for the ADSs will develop on the NYSE American or be sustained,
or that current trading levels in ADSs will be sustained. In addition, if we fail to meet the criteria set forth in SEC regulations,
by law, various requirements would be imposed on broker-dealers who sell our securities to persons other than established customers
and accredited investors. Consequently, such regulations may deter broker-dealers from recommending or selling the ADSs, which
may further affect the liquidity of the ADSs.
The listing standards of the NYSE American
provide that a company, in order to qualify for continued listing, must maintain a minimum share price of $1.00 and satisfy standards
relative to minimum shareholders’ equity, minimum market value of publicly held shares and various additional requirements.
If we fail to comply with all listing standards applicable to issuers listed on the NYSE American, the ADSs may be delisted. If
the ADSs are delisted, it could reduce the price of the ADSs and the levels of liquidity available to our shareholders. In addition,
the delisting of the ADSs could materially and adversely affect our access to the capital markets and any limitation on liquidity
or reduction in the price of the ADSs could materially and adversely affect our ability to raise capital. Delisting from the NYSE
American could also result in other negative consequences, including the potential loss of confidence by suppliers, customers and
employees, the loss of institutional investor interest and fewer business development opportunities.
The market price of our ordinary
shares and the ADSs could be subject to volatility.
The market price of
our ordinary shares and the ADSs is likely to be highly volatile and subject to wide fluctuations in response to factors such as:
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variations in our actual and perceived operating results;
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announcements of new products or services by us or our competitors;
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technological breakthroughs by us or our competitors;
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news regarding gains or losses of customers or partners by us or our competitors;
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news regarding gains or losses of key personnel by us or our competitors;
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announcements of competitive developments, acquisitions or strategic alliances in our industry by us or our competitors;
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changes in earnings estimates or buy/sell recommendations by financial analysts;
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general market conditions or other developments affecting us or our industry; and
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the operating and stock price performance of other companies, other industries and other events or factors beyond our control.
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In addition, the securities markets have
from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular
companies. These market fluctuations may also materially and adversely affect the market price of the ordinary shares and the ADSs.
We may not be able to pay any dividends on our Class A
ordinary shares and, correspondingly, the ADSs.
Under China law, we may only pay dividends
subject to our ability to service our debts as they become due and provided that our assets will exceed our liabilities after the
dividend. Our ability to pay dividends will therefore depend on our ability to generate sufficient profits.
We can give no assurance that we will declare
dividends of any amounts, at any rate or at all in the future. Our historical dividend payments are not indicative of the amount
or timing of the payment of dividends that may be payable in the future and should not be used as a reference or basis to determine
the amount of such dividends. The declaration of future dividends, if any, will be at the discretion of our board of directors
and will depend upon our future operations and earnings, capital requirements, general financial conditions, legal and contractual
restrictions and other factors that our board of directors may deem relevant.
Insiders have substantial control over us, which could
adversely affect the market price of our ADSs.
Under our Sixth Amended and Restated Memorandum
and Articles of Association, our ordinary shares are divided into Class A Ordinary Shares and Class C Ordinary Shares.
Holders of Class A Ordinary Shares are entitled to one vote per share, while holders of Class C Ordinary Shares are entitled
to ten votes per share. Shareholdings of our executive officers and directors, and their respective affiliates, give them the power
to control any actions that require shareholder approval under Cayman Islands law, our Sixth Amended and Restated Memorandum and
Articles of Association, including the election and removal of any member of our board of directors, mergers, consolidations and
other business combinations, changes to our Sixth Amended and Restated Memorandum and Articles of Association, the number of shares
available for issuance under share incentive plans and the issuance of significant amounts of our ordinary shares in private placements.
Our executive officers and directors and their respective affiliates have sufficient voting rights to determine the outcome of
all matters requiring shareholder approval.
As a result of our executive officers and
directors and their respective affiliates’ ownership of a majority of our ordinary shares, their voting power may cause transactions
to occur that might not be beneficial to you as a holder of ADSs and may prevent transactions that would be beneficial to you.
For example, their voting power may prevent a transaction involving a change of control of us, including transactions in which
you as a holder of our ADSs might otherwise receive a premium for your securities over the then-current market price. Similarly,
our executive officers and directors and their respective affiliates may approve a merger or consolidation of our company which
may result in you receiving a stake (either in the form of shares, debt obligations or other securities) in the surviving or new
consolidated company which may not operate our current business model and dissenters’ rights may not be available to you
in such an event. This concentration of ownership could also adversely affect the market price of our ADSs or lessen any premium
over market price that an acquirer might otherwise pay.
If we cease to qualify as a foreign private issuer, we
would be required to comply fully with the reporting requirements of the Exchange Act applicable to U.S. domestic issuers, and
we would incur significant legal, accounting and other expenses that we would not incur as a foreign private issuer.
As a foreign private issuer, we are exempt
from the rules under the Securities Exchange Act of 1934, or the Exchange Act, prescribing the furnishing and content of proxy
statements, and our officers, directors and principal shareholders will be exempt from the reporting and short-swing profit recovery
provisions contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to file periodic
reports and financial statements with the SEC as frequently or as promptly as U.S. domestic issuers, and we are not required to
disclose in our periodic reports all of the information that U.S. domestic issuers are required to disclose. While we currently
qualify as a foreign private issuer, we may cease to qualify as a foreign private issuer in the future. If we do not qualify as
a foreign private issuer, we will be required to comply fully with the reporting requirements of the Exchange Act applicable to
U.S. domestic issuers, and we will incur significant legal, accounting and other expenses that we would not incur as a foreign
private issuer.
We may need additional capital, and the sale of
additional ADSs or other equity securities would result in additional dilution to our shareholders.
We believe that our current cash and cash
equivalents and anticipated cash flow from operations will be sufficient to meet our anticipated cash needs for more than the next
twelve months. We may, however, require additional cash resources due to changed business conditions or other future developments.
If our resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or
obtain a credit facility. To consummate these transactions, we may issue additional shares in these acquisitions that will dilute
our shareholders. The sale of additional equity securities could result in additional dilution to our shareholders. The incurrence
of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would
restrict our operations or our ability to pay dividends. Our ability to raise additional funds in the future is subject to a variety
of uncertainties, including:
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Our future financial condition, results of operations and cash flows;
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General market conditions for capital raising activities; and
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Economic, political and other conditions in China and elsewhere.
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We cannot assure you that if we need additional
cash financing it will be available in amounts or on terms acceptable to us, or at all.
We may be classified as a passive foreign investment company,
which could result in adverse U.S. federal income tax consequence to U.S. holders of our ADSs or ordinary shares.
We believe we were not a “passive
foreign investment company”, or PFIC, for U.S. federal income tax purposes for our taxable year ended December 31, 2019.
However, a separate determination must be made each year as to whether we are a PFIC (after the close of each taxable year) and
we cannot assure you that we will not be a PFIC for the year ending December 31, 2020 or any future taxable year. A foreign (non-U.S.)
corporation will be considered a PFIC for any taxable year if either (1) at least 75% of its gross income is passive income
or (2) or least 50% of the value of its assets (generally based on an average of the quarterly values of the assets during
a taxable year) is attributable to assets that produce or are held for the production of passive income. PFIC status depends on
the composition of our assets and income and the value of our assets (including, among others, a pro rata portion of the income
and assets of each subsidiary in which we own, directly or indirectly, at least 25% (by value) of the equity interest) from time
to time. Because we currently hold, and expect to continue to hold, a substantial amount of cash or cash equivalents, which are
generally treated as passive assets, and, because the calculation of the value of our assets may be based in part on the value
of our ADSs, which is likely to fluctuate, we may be a PFIC for any taxable year. If we were treated as a PFIC for any taxable
year during which a U.S. Holder (as defined in the section entitled “Taxation – U.S. Federal Income Taxation –
General”) held an ADS or an ordinary share, certain adverse U.S. federal income tax consequences could apply to such U.S.
Holder. See “Item 10.E—Taxation—United States federal income taxation—Passive foreign investment company.”
Anti-takeover provisions in our Sixth Amended and Restated
Memorandum and Articles of Association may discourage, delay or prevent a change in control.
Some provisions of our Sixth Amended and
Restated Memorandum and Articles of Association may discourage, delay or prevent a change in control of our company or management
that shareholders may consider favorable, including, among other things, the following:
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Provisions that authorize our board of directors to issue preferred shares in one or more series and to designate the price, rights, preferences, privileges and restrictions of such preferred shares without any further vote or action by our shareholders; and
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Provisions that restrict the ability of our shareholders to call meetings and to propose special matters for consideration at shareholder meetings.
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The laws of the Cayman Islands may not provide our shareholders
with benefits comparable to those provided to shareholders of corporations incorporated in the United States.
Our corporate affairs are governed by our
Sixth Amended and Restated Memorandum and Articles of Association, by the Companies Law (as amended) of the Cayman Islands and
by the common law of the Cayman Islands. The rights of shareholders to take action against our 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 in the Cayman Islands is derived in part from comparatively limited judicial precedent
in the Cayman Islands and from English common law. Decisions of the Privy Council (which is the final Court of Appeal for British
overseas territories such as the Cayman Islands) are binding on a court in the Cayman Islands. Decisions of the English courts,
and particularly the House of Lords and the Court of Appeal are generally of persuasive authority but are not binding in the courts
of 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 precedents in the United States. In particular,
the Cayman Islands have a less developed body of securities laws relative to the United States. Therefore, our public shareholders
may have more difficulty protecting their interests in the face of actions by our management, directors or controlling shareholders
than would shareholders of a corporation incorporated in a jurisdiction in the United States. In addition, shareholders of Cayman
Islands companies may not have standing to initiate a shareholder derivative action before the federal courts of the United States.
The Cayman Island courts are also unlikely to impose liability against us, in original actions brought in the Cayman Islands, based
on certain civil liabilities provisions of U.S. securities laws. See “Item 10.B—Additional Information—Memorandum
and Articles of Association.”
It may be difficult for you to enforce any judgment obtained
in the United States against our company, which may limit the remedies otherwise available to our shareholders.
Most of our current operations are conducted
in China. A majority of our directors and officers reside outside the United States and a substantial portion of their assets are
located outside of the United States. As a result, it may be difficult or impossible for you to bring an action against us or against
these directors and officers in the Cayman Islands or in China in the event that you believe that your rights have been infringed
under the securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands
and of China may render you unable to enforce a judgment against our assets or the assets of our directors and officers. There
is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the courts of the Cayman
Islands will in certain circumstances recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction without
retrial on the merits. While there is no binding authority on this point, this is likely to include, in certain circumstances,
a non-penal judgment of a United States court imposing a monetary award based on the civil liability provisions of the U.S. federal
securities laws. The Grand Court of the Cayman Islands (“the Court”) may stay proceedings if concurrent proceedings
are being brought elsewhere. Moreover, the PRC does not have treaties with the United States or many other countries providing
for the reciprocal recognition and enforcement of judgment of courts. As a result of all of the above, our public shareholders
may have more difficulty in protecting their interests through actions against us or our officers, directors or major shareholders
than would shareholders of a corporation incorporated in a jurisdiction in the United States.
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 the ordinary shares underlying your ADSs.
Holders of our ADSs will only be able to
exercise the voting rights with respect to the underlying ordinary shares in accordance with the provisions of the deposit agreement.
Under the deposit agreement, you must vote by giving voting instructions to the depositary. Upon receipt of your voting instructions,
the depositary will vote the underlying ordinary shares in accordance with these instructions. You will not be able to directly
exercise your right to vote with respect to the underlying ordinary shares unless you withdraw the shares. Under our Sixth Amended
and Restated Memorandum and Articles of Association, the minimum notice period required for convening a shareholder meeting is
ten days. When a shareholder meeting is convened, you may not receive sufficient advance notice to withdraw the ordinary shares
underlying your ADSs to allow you to vote with respect to any specific matter. If we ask for your instructions, the depositary
will notify you of the upcoming vote and will arrange to deliver our voting materials to you. We cannot assure you that you will
receive the voting materials in time to ensure that you can instruct the depositary to vote your shares. In addition, the depositary
and its agents are not responsible for failing to carry out voting instructions or for their manner of carrying out your voting
instructions. This means that you may not be able to exercise your right to vote and you may have no legal remedy if the shares
underlying your ADSs are not voted as you requested.
Holders of our ADSs may not be able to participate in
rights offerings and may experience dilution of your holdings as a result.
We may from time to time distribute rights
to our shareholders, including rights to acquire our securities. Under the deposit agreement for the ADSs, the depositary will
not offer those rights to ADS holders unless both the rights and the underlying securities to be distributed to ADS holders are
either registered under the Securities Act, or exempt from registration under the Securities Act with respect to all holders of
ADSs. We are under no obligation to file a registration statement with respect to any such rights or underlying securities or to
endeavor to cause such a registration statement to be declared effective. In addition, we may not be able to take advantage of
any exemptions from registration under the Securities Act. Accordingly, holders of our ADSs may be unable to participate in rights
offerings we make and may experience dilution in their holdings as a result.
Holders of our ADSs may not receive distributions on our
ordinary shares or any value for them if such distribution is illegal or if any required government approval cannot be obtained
in order to make such distribution available to you.
The depositary of our ADSs has agreed to
pay to you the cash dividends or other distributions it or the custodian receives on 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
ordinary shares your ADSs represent. However, the depositary is not responsible if it decides that it is unlawful or impractical
to make a distribution available to any holders of ADSs. For example, it would be unlawful to make a distribution to a holder of
ADSs if it consists of securities that require registration under the Securities Act but that are not properly registered or distributed
under an applicable exemption from registration. The depositary may also determine that it is not feasible to distribute certain
property through the mail. Additionally, the value of certain distributions may be less than the cost of mailing them. In these
cases, the depositary may determine not to distribute such property. We have no obligation to register under U.S. securities laws
any ADSs, ordinary shares, rights or other securities received through such distributions. We also have no obligation to take any
other action to permit the distribution of ADSs, ordinary shares, rights or anything else to holders of ADSs. This means that you
may not receive distributions we make on our ordinary shares or any value for them if it is illegal or impractical for us to make
them available to you. These restrictions may cause a material decline in the value of our ADSs.
You may 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 transfer books at any time or from time to time when it deems expedient
in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers
of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deem it 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.
All of our PRC corporate entities, including
Ambow Shengying, Ambow Chuangying, Tianjin Ambow Yuhua Software Information Co., Ltd. (“Ambow Yuhua”), our VIEs and
their subsidiaries, maintain corporate records and filings with industry and commerce administration authorities where such PRC
entities are registered. Information contained in such corporate records and filings includes, among others, business address,
registered capital, business scope, articles of association, equity interest holders, legal representative, changes to the above
information, annual financial reports, matters relating to termination or dissolution, information relating to penalties imposed,
and annual inspection records.
There have been regulations promulgated
by various government authorities in PRC that govern the public access to corporate records and filings. Pursuant to the Company
Law and Regulations of the People’s Republic of China on the Registration Administration of Companies, the company registration
authority shall record the registered items of companies in a company recording book for the consultation and reproduction purposes
of the public. The general public may apply to the company registration authority for inspection of the registered items of companies.
Under the Measures for Accessing Corporate Records and Filings promulgated on December 16, 1996 by the State Administration
for Industry and Commerce (“SAIC”), or the SAIC Measures, a wide range of basic corporate records, except for such
restricted information as business results and financial reports, can be inspected by the public without restrictions. Under these
SAIC Measures, a company’s restricted information can only be inspected by authorized government officers and officials from
judicial authorities or lawyers involved in pending litigation relating to such company and with court-issued proof of such litigation.
In practice, local industry and commerce administration authorities in different cities have adopted various regional regulations,
which impose more stringent restrictions than the SAIC Measures by expanding the scope of restricted information that the public
cannot freely access. Many local industry and commerce administration authorities only allow unrestricted public access to such
basic corporate information as name, legal representative, registered capital and business scope of a company. Under these local
regulations, access to the other corporate records and filings (many of which are not restricted information under the SAIC Measures)
is only granted to authorized government officers and officials from judicial authorities or lawyers involved in pending litigation
relating to such company and with court-issued proof of such litigation.
However, neither the SAIC nor the local
industry and commerce administration authorities have strictly implemented the restrictions under either the SAIC Measures or the
various regional regulations before early 2012. As a result, before early 2012, the public was able to access all or most corporate
records and filings of these listed companies’ PRC affiliates maintained with the industry and commerce administration authorities.
Such records and filings were reported to have formed important components of research reports on certain China-based, U.S.-listed
companies, which were claimed to have uncovered wrongdoings and fraud committed by these companies.
It was reported that, since the first half
of 2012, local industry and commerce administration authorities in a number of cities had started strictly implementing the above
restrictions and had significantly curtailed public access to corporate records and filings. There have also been reports that
only the limited scope of basic corporate records and filings are still accessible by the public, and much of the previously publicly
accessible information, such as financial reports and changes to equity interests, now can only be accessed by the parties specified
in, and in strict accordance with the restrictions under, the various regional regulations. Individuals other than the parties
specified in the various regional regulations may get access to the corporate records and filings including, but not limited to,
financial reports, shareholder changes and assets transfers with the permission of the PRC subject companies with reference letters
issued by the companies. Such reported limitation on the public access to corporate records and filings and the resulting concerns
over the loss of, or limit in, an otherwise available source of information to verify and evaluate the soundness of China-based
U.S.-listed companies’ business operations in China may have a significant adverse effect on the overall investor confidence
in such companies’ reported results or other disclosures, including those of our company, and may cause the trading price
of our ADSs to decline.
Item 4. Information on the
Company
A.
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History and Development of the Company
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Our founder, Dr. Jin Huang, established
Ambow Corporation, a California company, in 2000. From 2000 through January 2005, our business was conducted through (1) Beijing
Ambow Online Software Co., Ltd., or Ambow Online, which was established as a wholly foreign owned enterprise under the laws
of the PRC in 2000 by Ambow Corporation, and (2) Beijing Shida Ambow Education Technology Co., Ltd., or Ambow Shida,
a limited liability company established under the laws of the PRC in 2004, which was initially operated as a joint venture among
Ambow Technology Company Limited, or Ambow Technology, Jianguo Xue, Xiaogang Feng, Xuejun Xie and Beijing Normal University Tech-Zone
Technology Development Co., Ltd.
In May 2005, our prior holding company,
AMBOW EDUCATION CO., LTD., or AECL, which was formed in January 2005 as an exempted company incorporated with limited liability
under the laws of the Cayman Islands, acquired 100% of the outstanding equity interests in Ambow Online from Ambow Corporation.
In April 2010, AECL transferred the 100% outstanding equity interest in Ambow Online to Ambow Education Management.
Through a series of transfers in May 2005
and December 2008, Ambow Technology, Xiaogang Feng and Beijing Normal University Tech-Zone Technology Development Co., Ltd.
transferred all their equity interest in Ambow Shida to Xuejun Xie so that Xuejun Xie and Jianguo Xue currently own 100% of the
equity interest in Ambow Shida.
Our current holding company, Ambow, an exempted
company incorporated with limited liability under the laws of the Cayman Islands, was established in June 2007. On July 18,
2007, Ambow entered into a share exchange agreement with AECL and its shareholders. Pursuant to this share exchange agreement,
(1) all shareholders of AECL exchanged their shares in AECL for shares in Ambow, and (2) AECL became a wholly-owned subsidiary
of Ambow.
Following the share exchange described above,
we also established certain wholly-owned subsidiaries in Hong Kong, including Ambow Education Management and Ambow Education (Hong
Kong) Limited. In furtherance of our business development in China, a number of PRC domestic companies were also incorporated in
a number of cities. From January 2005 until now, we have conducted our education business in China primarily through contractual
arrangements among our subsidiaries in China and our VIEs. In 2017, we have established IValley in Taiwan and use its subsidiaries
in China to conduct the intellectualized operational services.
From 2008 to 2012,
we made a total of 31 separate acquisitions through business combinations and one acquisition of long-term operating rights. On
November 20, 2017, we acquired 100% of the outstanding shares of common stock of Bay State College Inc. (“Bay State College”).
Bay State College is a Massachusetts corporation that owns and operates Bay State College, a higher education institution offering
career-focused post-secondary education with Associates and Bachelor’s programs in Business, Information Technology, Healthcare,
Criminal Justice and Fashion. Bay State College was founded in 1946, is accredited by the New England Association of Schools and
Colleges, Commission on Institutions of Higher Education and eligible to participate in federal student aid programs under Title
IV of the U.S. Higher Education Act. Bay State College’s academic programs are delivered at its main campus in Boston, Massachusetts,
a branch campus in Taunton, Massachusetts and online. Please refer to Note 23 to the audited consolidated financial statements
for details.
On August 31, 2017, we sold the 100% equity
interest in Ambow Online to a third party, with nil consideration, After the disposal, Ambow Online and its remaining VIE Suzhou
Wenjian Venture Investment Management Consulting Co., Ltd. (“Suzhou Wenjian”) were not consolidated by the Company.
On September 30, 2017, the Company sold the 100% equity interest in 21st Century Training Center to a third party, with
a consideration of RMB 1 yuan. After the disposal, 21st Century Training Center was not consolidated by the Company.
Refer to Note 26 to the audited consolidated financial statements for details.
We established IValley on March 13, 2017.
IValley is a VIE of Ambow Education Management (Hong Kong) Limited. We established IValley Beijing Technology Co. Ltd. (“IValley
Beijing”) on September 15, 2017. IValley Beijing is a wholly owned subsidiary of IValley. IValley Beijing’s business
is to design, purchase, modify and integrate electronic equipment and devices, and develop mobile APP, performed by engineers and
IT development and operational personnel, for end users to utilize office facilities, manage resources and administrative matters.
We established Ambow BSC Inc. on February
14, 2017. Ambow BSC Inc. is a 100% subsidiary of us. On November 20, 2017, Ambow BSC Inc. acquired 100% of the outstanding shares
of common stock of Bay State College Inc. Bay State College Inc. is a Massachusetts corporation that owns and operates Bay State
College, a higher education institution offering career-focused post-secondary educational services.
In March 2018, we closed Ambow (Dalian)
Education and Technology Co., Ltd. and completed its deregistration procedures of local governmental and corporate service institutions.
In June 2018, we completed a public offering
of 2,070,000 ADSs at US$4.25 per ADS. Each ADS represents two Class A ordinary shares of the Company. On June 1, 2018, our ADSs
commenced trading on the NYSE American under the symbol “AMBO”.
We established Ambow NSAD Inc. on May 8,
2019 with intention to acquire and hold 100% interest of NewSchool of Architecture and Design, LLC. Please refer to Note 31 to
audited consolidated financial statements for further information.
In 2019, we also established a series of
new subsidiaries and branch companies, and completed deregistration procedures of two subsidiaries and one branch company in China.
Please refer to Note 1(c) to the audited consolidated financial statements for details.
In 2019, in response to the shift of business
development focus, we changed our management approach to organize reportable segments to make operating decisions and assess performance.
New reportable segments include K-12 Schools and CP&CE Programs. Please refer to Note 21 to audited consolidated financial
statements for details.
Joint Provisional Liquidators (“JPLs”)
appointment and dismissal
In 2012, two former employees of the company
made allegations of financial impropriety and wrongful conduct in connection with the company’s prior year acquisitions of
training schools. The Audit Committee of the Board of Directors of the company determined that it would conduct an internal investigation
to thoroughly review these allegations. This investigation was conducted with the assistance of independent outside counsel.
On June 7, 2013, JPLs were appointed
as provisional liquidators of the company by the Cayman Court following the filing of a winding up petition by GL Asia Mauritius
II Cayman Limited (the “Petitioner”).
On September 23, 2013, the JPLs formed
a committee comprising creditors and shareholders of the company (the “Stakeholder Committee”). On November 13,
2013, the Cayman Court sanctioned the recommencement of the Audit Committee Investigation following an application, which was brought
by the JPLs with the support of the members of the Stakeholder Committee. Engagement letters were subsequently finalized with DLA
Piper LLP (“DLA”) and Deloitte Financial Advisory Services LLP (“Deloitte”) to complete the Audit Committee
Investigation, with the assistance of third party funding which the JPLs negotiated on the company’s behalf.
On February 20, 2014, the JPLs received
the report on the Audit Committee Investigation from DLA. In summary, this report concluded that there was insufficient evidence
to substantiate the allegations as to questionable or inappropriate conduct, which had been made against the directors, officers
and employees of the company. However, the report advised that the company’s corporate governance structure needed improvement.
Shortly after receiving this report, the JPLs re-commenced negotiations with parties who had previously expressed an interest in
providing long term funding to the company.
Upon the satisfaction of conditions and
deliverables under the restructuring agreement and associated agreements to implement the core parts of the restructuring plan
sanctioned by the Cayman Court pursuant to its order dated May 7, 2014 (the “Restructuring Plan”), the Court approved
the return of management to our Board of Directors (as reconstituted pursuant to the Restructuring Plan).
The JPLs appointment has caused significant
disruptions to the operations of the company. The company has since enhanced its corporate governance structure and internal control
procedures. It is quite likely that the company is able to realize certain financial gains from its previous business with the
strengthening of the company’s operations policy and procedures in the near future.
As of December 31, 2019, our Board consists
of five members: Dr. Jin Huang, Mr. Justin Chen, Mr. Ping Wu, Mr. John Porter and Dr. Yanhui Ma.
Principal Executive Office
Our principal executive offices are located
at 12th Floor, Tower 1, Financial Street, Chang’an Center, Shijingshan District, Beijing 100043, People’s Republic
of China. Our telephone number at this address is +86 (10) 6206-8000. Our registered office in the Cayman Islands is located
at Maples Corporate Services Limited, P.O. Box 309, Ugland House, Grand Cayman KY1-1104, Cayman Islands. Our telephone number
at this address is +1 (345) 949-8066. Our agent for service of process in the United States is CT Corporation System, located at
111 Eighth Avenue, New York, New York 10011.
Our business addresses three critical demands
in China’s education market: the desire for students to be admitted into top secondary and post-secondary schools, the desire
for graduates of those schools to obtain more attractive jobs and the need of schools and corporate clients in optimizing their
teaching and operating environment. We offer high quality, individualized services and products through our integrated online and
offline delivery model powered by our proprietary technologies and infrastructure.
We have two reportable segments, which
are K-12 Schools, and CP&CE Programs. Our tutoring centers, training offices, career enhancement centers and college are within
the CP&CE Programs segment.
We currently deliver a wide range of educational
and career enhancement services and products through integrated offline and online channels in an interactive learning environment,
powered by our proprietary technology platform that has enabled us to provide individualized content and learning solutions tailored
to each of our students’ needs, and to develop standards-based and individualized curricula with consistent high-quality
across our schools, tutoring centers, career enhancement centers, training offices and career enhancement college.
As of December 31, 2019, we had a total
of 60 learning centers and schools, including:
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3 directly-operated K-12 schools
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5 career enhancement centers
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1 career enhancement college (in Boston U.S.)
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The following map sets forth the service
coverage and the geographic coverage of our K-12 schools, tutoring centers, career enhancement centers and training offices as
of December 31, 2019:
Revenues from our K-12 Schools segment
accounted for 52.4%, 52.3% and 53.7% of our total net revenues in the fiscal years of 2017, 2018 and 2019, respectively. Revenues
from our CP&CE Programs accounted for 47.6%, 47.7% and 46.3% of our total net revenues in 2017, 2018 and 2019, respectively.
We recorded total net revenues of RMB 443.9 million, RMB 531.5 million and RMB 583.9 million (US$ 83.9 million) in 2017, 2018
and 2019, respectively.
Our services and products
We offer a variety of educational and career
enhancement services and products to students, recent graduates, corporate employees and management in China. Our educational services
cover K-12 programs and tutoring services that provide test preparation and tutoring programs, which are offered in our tutoring
centers as part of our primary educational services and product offerings to help students enroll in better schools. Our K-12 schools
also help to support our tutoring programs by providing strong local brand names and reputations, local educational content expertise
and potential student customers. In addition, we offer international education programs, which are designed to prepare students
to study abroad while specifically addressing the study needs in terms of both language and academics. Our career enhancement services
designed to assist students and graduates in obtaining better jobs are offered through our dedicated career enhancement centers
and training offices on campus, as well as through our online programs. Our corporate training services that are designed to improve
employees and management’s soft skills are typically offered in our training offices, the corporate clients’ offices
or hotel conference centers. In order to support our educational and career enhancement services and products, we provide a cloud-based
learning engine to accommodate our students’ individual learning habits and enrich their learning experience. We also offer
career-oriented post-secondary educational services to undergraduate through Bay State College in U.S.
K-12 Schools
Our K-12 Schools segment provides educational
services of K-12 programs. We have three directly-operated K-12 schools located in the following locations: one in the Hunan province
in central China; one in the Liaoning province in northeast China; and, one in the Jiangsu province in eastern China, all of which
are accredited by the Chinese Ministry of Education. As of December 31, 2019, there were approximately 1,200 full-time teaching
faculty and support staff supporting over 16,000 students.
Our K-12 schools provide full-subject national
curricula, including mathematics, language, history, sciences and arts. Students are required to take our admission tests to enroll
in our K-12 schools. To graduate from our K-12 schools, students must pass the exams required by the local MOE, upon which, they
will earn a certificate recognized by the local public school system. Our international education programs provide curricula mandated
by the PRC regulatory authorities and in addition, curricula with a focus on preparing students to study abroad. We intend to enhance
our international education programs to capitalize on students’ growing demand to study abroad, while addressing the study
needs of students in terms of both language and academics.
CP&CE Programs
Our College Preparation & CE Programs
offer tutoring services and career enhancement services.
Our tutoring centers are designed to help
students perform better in school and prepare for important tests, specifically high school and university entrance exams, namely
ZhongKao and GaoKao in China. In addition to our classroom-based teaching services, we offer educational curriculum on our web-based
applications to provide our students access to our tutoring services from anywhere at any time. Powered by our proprietary cloud-based
“learning engine”, our web-based applications feature a variety of functions such as online video classes, practice
questions, discussion forums and prior actual tests. Our educational software products include eBoPo (meaning “energy and
impact” in Chinese), which offers full subjects, online practice tests and instructions for K-12 level students. Our web-based
applications complement our in-person classes and offer individualized services and tailored content based on each student’s
specific learning needs. Our tutoring centers offer the classroom instruction, small class and one-on-one tutoring.
Our career enhancement services are targeting
undergraduates and recent graduates of universities and colleges, as well as employees and managers at businesses and corporations.
We are the premium brand in China’s educational and career enhancement services market, notable for helping undergraduates
and recent graduates enhance their practical job skills and improve their competitive positioning. Our career enhancement programs
are mainly offered through our career enhancement service networks, which are strategically located in key economic centers across
China where there is a high concentration of companies in high-growth industries.
Our Genesis Career Enhancement (“Genesis”)
business provides outbound and in-house management trainings for corporate clients. These corporate training programs are jointly
designed with our corporate partners to specifically tailor the training for their employees. We had provided training services
to approximately 4,000 corporate clients. Genesis has 26 training centers across China and more than 200 professional trainers.
We operate three-year polytechnic joint
programs and four-year degree joint programs with universities and colleges to provide career enhancement services to students,
primarily focusing on majors related to computer software outsourcing management. Under the joint programs, we provide and update
courseware content, recruit and provide highly qualified teachers, as well as offer job placement channels, while our partnering
universities and colleges ensure student enrollment, provide teaching facilities, and offer program degrees. As such, the joint
programs will bring us a large base of customers to whom we can offer our services and products. Certain courses or classes of
the joint programs will take place at our career enhancement centers and campus, and our students can also earn credits towards
the degree programs from these courses or classes.
Our career enhancement centers currently
focus on IT majors, including software engineering, graphic design, digital media, communication technology, big data analysis
and Internet technology. The curriculum provides students with hands-on training in professional skills, including case studies,
job environment simulation and specific technical skills needed to succeed in jobs, as well as “soft skills” training,
including courses on time management, presentation, leadership and interview techniques. We design our career enhancement curriculum
based on the understanding of the target industries and the actual recruiting needs of the employers. In addition, we intend to
partner with universities and establish joint colleges to offer educational and training programs to extend our current career
enhancement curriculum to additional subject areas.
On November 20, 2017, the company acquired
Bay State College, a higher education institution offering career-focused post-secondary education with Associates and Bachelor’s
programs in Business, Information Technology, Healthcare, Criminal Justice and Fashion. Bay State College was founded in 1946,
is accredited by the New England Association of Schools and Colleges, Commission on Institutions of Higher Education and eligible
to participate in federal student aid programs under Title IV of the U.S. Higher Education Act. Bay State College’s academic
programs are delivered at its main campus in Boston, Massachusetts, a branch campus in Taunton, Massachusetts and online.
In November 2018, we announced the launch
of a new Cross-Border College Program between Chinese and U.S. colleges. This program is based on a model instituted at Bay State
College, which will allow Chinese students to receive a three-year diploma from a Chinese college, equivalent to an associate degree
from a U.S. college, and continue with a two-year advanced education program at Bay State College or another U.S. college.
In early 2015, we signed a strategic agreement
with Synopsys, Inc., the world’s largest integrated circuit design software provider, and formed an exclusive partnership
to establish the Synopsys-Ambow School. In 2017, aligning with the Chinese government’s new initiative of transforming the
engineering education system, we further partnered with Synopsys to establish college-enterprise cooperation programs, which aim
to cooperate with career-oriented universities and colleges to cultivate technical and skilled talents with high qualities, who
will serve in the front line of production, infrastructure and management for advanced microelectronics industry. These programs
combine our professional-grade IT professional education courses and career enhancement services with practical training, teacher
training, career-oriented education and recruitment services to foster talent of China’s Integrated Circuit(IC) industry.
In 2018 and 2019, we continued the partnership with Synopsys to provide a guideline for the development of China’s microelectronics
industry while grooming talent in this field.
In December 2019, for the third consecutive
year, we jointly published a Whitepaper titled 2018-2019 Professionals for China’s Integrated Circuit (IC) Industry.
The Whitepaper provides a comprehensive study and analysis on the supply and demand of professionals in China’s IC industry.
The report aims to lay a solid foundation for the reform and development of the educational requirements and training for this
fast-growing industry.
Ambow initiated a new business to provide
intellectualized operational services to corporate clients, colleges and universities in 2017. Our intellectualized operational
services integrate electronic equipment and devices with software applications, data analytics and wireless technology to transform
operational networks enhancing efficiency, lower costs and improving experiences. The services consist of advisory services such
as design and architecture, implementation services such as hardware deployment and application development, as well as optimization
services. The services aim to leverage smart technologies to enhance the management experience with facilities, lighting, security,
and staff. We developed mobile applications for users to punch time clocks, open and close lockers, turn on and off office gates,
lights, air conditioners, set up remote visual conferences and manage other office administrative services through the applications.
Intelligent technology is changing education
as students are no longer restricted by the traditional learning environment. Intelligent campuses and classes are becoming the
trend leading to efficiency improvement, cost savings and enhanced experiences for students and staff. We will proactively introduce
our intellectualized operational services to more universities and colleges to provide students access to educational resources
regardless of the location or device, increasing the potential for learning and teaching through cooperation with peers and experts
worldwide and optimizing facilities to create a sustainable campus.
Student recruitment and retention
We employ a variety of marketing and recruiting
methods to attract students and increase student enrollment in our learning centers and schools. We recruit students to our tutoring
centers and K-12 schools from the local areas near these centers and schools while recruiting students to our career enhancement
centers nationally throughout China. We recruit returning students from our tutoring centers and K-12 schools to our career enhancement
programs by leveraging our vast student and corporate resources. We believe prospective students are attracted to our learning
centers and schools due to our strong brand name, innovative teaching and learning models and practices, and high-quality, individualized
services. Our proprietary cloud-based learning engine technology combined with offline teacher instruction ensures that students
to receive individualized orientation, instruction and progress assessment in a student-centered environment. By analyzing the
accumulated data stored in each student’s learning records, our learning engine optimizes learning strategies and methods,
and provides personalized educational content for each student. The longer and more frequently a student uses our services and
products, the more effective and efficient services and content we are able to provide, thus enhancing the students’ stickiness
to utilize our services throughout their learning cycle. Students in our tutoring centers and K-12 schools have significantly improved
their results in ZhongKao and GaoKao exams and we believe this has enhanced our reputation and increased our word-of-mouth referrals
in the markets that we participate in. Our career enhancement centers help students to identify their career goals early in their
life, and provide them with project-based training to improve their employment opportunities.
Our technology infrastructure
We believe our proprietary technologies
are one of our major strengths and we have devoted significant resources to the development of technologies for the delivery of
our educational and career enhancement services. These include our educational services platform, operational management platform
and development and deployment platform. The educational services platform is the backbone that supports our educational and career
enhancement services and product offerings to our students. The operational management platform supports our internal management
and administrative applications for tutoring centers, K-12 schools, career enhancement centers and joint college programs. The
development and deployment platform support our educational services platform and operational management platform, and standardize
the development of and communication among our IT products and applications.
Educational services platform
Our educational services platform is built
around and driven by our core proprietary technology, the “Learning Engine.” Utilizing advanced Internet and multi-media
technologies, the cloud-based learning engine enables us to embed educational materials and cognitive theories, including memory
curve and competency model theories, into our interactive learning products and services, such as the “eBoPo” series
for educational services and “Career GPS System” for career enhancement services. Our learning engine creates an environment
in which personalized courses and instructions can be customized based on each student’s knowledge level, goals and learning
needs. Our platform provides video streaming, PowerPoint and interactive testing functions, via an open interface and multi-language
channels. We have received a patent for our innovative Adaptive Computer-Assisted Learning System and Method platform from the
United States Patent and Trademark Office, making us the first China-based education company to receive a U.S. patent in the field
of adaptive learning methods.
Continued tracking
As part of the cloud-based learning engine,
our learning tracking system comprehensively records a student’s progress and achievements throughout the learning cycle.
The system assesses a student’s knowledge and competency level at the beginning of the learning cycle, and continually monitors
the interactions between the student and our system, keeping on file the student’s learning process and progress. The system
is able to capture and memorize the way a student learns and creates a unique learning profile, which we refer to as each student’s
“Learning Passport.” The system is also able to compare the student’s current performance with past achievements,
both at an individual and at a peer group level, which gives the student a clear understanding of his or her current learning status,
and helps them to adapt accordingly with course materials and feedback.
Individualized learning experience to students
Our interactive learning engine customizes
each student’s learning experience, then tracks and evaluates the learning performance as it happens. By leveraging our learning
tracking system and analyzing the cumulated data stored in the Learning Passports, the learning engine can optimize learning strategies
and methods and provide personalized education content, recursive exercise and study guidance for each student. The learning engine
can set learning targets based on personal goals and requirements and adjust individual learning profiles and learning paths as
it learns and perceives more about the student, delivering the appropriate learning materials to optimize the student’s education
outcome.
High quality
Our personalized educational framework ensures
that students receive high-quality educational experiences tailored to their individual needs. Our educational content and services
are not linked to one teacher, but rather to many highly-qualified and experienced educational experts, who work closely with us
to ensure that materials are of the highest quality and relevance for students. This means that wherever students live, in urban
centers or rural villages across China, they can be ensured to receive the same high standard of resources and support at all times.
Operational management platform
We have built up an operational management
platform to integrate our key management and administrative functions. We are developing additional functionality within our operational
management platform to allow us to track revenues and expenses across each of our schools and learning centers through sub-segments
within our operating segments. This will allow us to have better period-to-period insights into the underlying drivers of our business
within our distinct operating segments.
We have established an integrated service
center to support the operation team by sharing resources across finance, human resources and IT departments. We also built up
an Enterprise Resource Planning (ERP) system to standardize operating procedures. The establishment of the service center and the
on-going integration of our Company-wide ERP system and continued enhancements to our Standard Operating Procedure and transparent
Vendor Evaluation System will provide an efficient platform to maximize internal resources, lower costs and integrate Standard
Operating Procedures, while unifying the Ambow brand and corporate culture. In 2018 and 2019, we expanded the integrated service
center across the Group wide. In addition, we have integrated Internet of Things (“IoTs”) technology into our facility
modernization and development programs. This supports our intelligent classroom concept, boosts resource utilization efficiency
and promotes greener energy usage.
Development and deployment platform
Our research, development and deployment
efforts are greatly facilitated by our Enterprise Service Bus, or ESB. As a widely-used software architecture, an ESB acts as a
message broker between different business applications, reducing the number of point-to-point connections required to allow applications
to communicate, which makes it easier to adapt a system to changes in one or more of its components. Through our standards-based
ESB, our technology platform allows the rapid development and deployment of highly reliable, scalable and stable Internet-based
cross-platform applications. We have also adopted the Model-View-Controller design pattern for our platform, which allows the layering
of the data, presentation and control modules, thereby making the system more nimble, robust and manageable. The adaptor between
the data and control layers easily allows for the integration of our services and products with third-party systems.
Intellectual property
We have developed our proprietary technology
over the past decade. Our trademarks, copyrights, trade secrets and other intellectual property rights distinguish our services
and products from those of our competitors, and contribute to our competitive advantage in our target markets. To protect our brand
and other intellectual property, we rely on a combination of trademark, copyright and trade secret laws as well as confidentiality
agreements with our employees, contractors and others.
We have been awarded
by the United States Patent and Trademark Office a patent (with No. US 8838016B2) for our innovative Adaptive Computer-Assisted
Learning System and Method platform for enhancing learning outcomes.
Our main website is www.ambow.com. In addition,
we have registered certain domain names, including www.ambow.net. In addition to building “Ambow” as a stand-alone
brand, we intend to continue to co-brand “Ambow” with the brands of our acquired schools and programs for the foreseeable
future in order to fully leverage their established local presence and reputation.
We cannot be certain that our efforts to
protect our intellectual property rights will be adequate or that third parties will not infringe or misappropriate these rights.
In addition, there can be no assurance that competitors will not independently develop similar intellectual properties. If others
are able to copy and use our programs and services, we may not be able to maintain our competitive position. Furthermore, the application
of laws governing intellectual property rights in China and abroad is uncertain and evolving and could involve substantial risk
to us. If litigation is necessary to enforce our intellectual property rights or determine the scope of the proprietary rights
of others, we may have to incur substantial costs or divert other resources, which could harm our business.
Selling and marketing
To promote our brands in the fragmented
domestic education market, we selectively and systematically market our products and build our brand names through a number of
different marketing programs. By doing so, we intend to continue to implement a standard corporate identity across all Ambow schools,
tutoring centers, career enhancement centers and campus. Our marketing efforts, which include national marketing by our corporate
headquarters and local marketing by individual schools, tutoring centers, career enhancement centers and campus, focus primarily
on:
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Sponsoring charity and social events and forums around key educational events to build up our corporate image as the most trustworthy, life-long education and career enhancement partner in China;
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Buying airtime on national and local media programs as well as advertising space on billboards and buses to raise the awareness of our educational and career enhancement services and programs;
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Hosting industry summits with key corporate partners and participating in prestigious education conferences and events;
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Partnering with local governments to provide positive support for local schools and the local job market; and
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Further enhancing the brand promotion through Internet search engines and mobile social media platform like Wechat, Weibo and QQ to keep close interactions with potential users.
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Partner schools and corporate entities
We have business relationships with colleges
and universities not directly owned or operated by us. Our direct partnerships are primarily with colleges and universities, which
send their students to our career enhancement centers. These colleges and universities that we have direct partnerships with are
under no contractual obligation to recommend our services or products. We also partner with corporate clients, including Fortune
500 enterprises, which send their employees to our career enhancement centers for training purposes.
Competition
The educational and career enhancement services
market in China is rapidly evolving, highly fragmented and competitive, and we expect competition in this sector to persist and
intensify. We face direct competition in each geographic market and each business segment in which we operate, though no single
competitor operates in all of our business segments. The competition in our tutoring programs is from other education companies,
and in our K-12 schools is from both public and private schools. To date, we have not faced significant, direct competition in
our career enhancement centers, but we expect this to change as companies have begun to enter this market. We believe that the
principal competitive factors in our markets include the following:
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Alignment of individualized programs, services and products to specific needs of students, parents, educators and employers;
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Overall customer experience;
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Scope and quality of program, service and product offerings;
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Proximity of services to the customers;
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Brand recognition and reputation of service providers; and
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Ability to effectively market programs, services and products to a broad base of prospective students.
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We believe that our primary competitive
advantages are our well-known “Ambow” brand in K-12 education and career enhancement services in China. Our core proprietary
technology, “Learning Engine” is unique to the education service industry. Having received a patent for our innovative
Adaptive Computer-Assisted Learning System and Method platform from the United States Patent and Trademark Office, we are the first
China-based education company to receive a U.S. patent in the field of adaptive learning methods. We are also recognized by our
ability to deliver standards-based, individualized curriculum with consistently high quality across our schools, tutoring centers,
training offices, career enhancement centers and campus. However, some of our existing and potential competitors may have more
resources than we do. These competitors may be able to devote greater resources than we can to the development, promotion and sale
of their programs, services and products and respond more quickly than we can to changes in customer demands, market needs or new
technologies. In addition, we face competition from many different organizations that focus on some of our targeted markets, which
may be more responsive to changes in student preferences in these markets.
In addition, the spread of the Internet
and advancement in Internet and information technologies are eliminating geographic and cost-entry barriers to providing private
educational and career enhancement services. Many smaller companies are able to use the Internet to quickly and cost-effectively
offer their programs, services and products to a large number of students with less capital expenditure than was previously required.
Seasonality
Our business is subject to seasonal variations.
Historically, educational service activities in our K-12 schools are lower during the first quarter due to school closures in January or
February for Chinese New Year and winter break, and during the third quarter due to summer break. Our tutoring and our career
enhancement segments are affected by seasonal variations in the first quarter due to Chinese New Year and winter break, although
this seasonal impact is to a lesser extent than the impact on our K-12 schools.
Regulations
We operate our business in China under a
legal regime consisting of the State Council, which is the highest authority of the executive branch of the PRC central government,
and several ministries and agencies under its authority, including the MOE, the MIIT, the SAIC, the Ministry of Civil Affairs (“MCA”),
the MOFCOM, the SAFE, and their respective authorized local counterparts. This section summarizes the principal PRC regulations
relating to our business.
Regulations on private education
The principal regulations governing private
education in China consist of the Education Law of the PRC, the Law for Promoting Private Education and The Implementing Rules for
the Law for Promoting Private Education and the Regulations on Chinese-Foreign Cooperation in Operating Schools. Below is a summary
of relevant provisions of these regulations.
Education Law of the PRC
On March 18, 1995, the National People’s
Congress (“NPC”) enacted the Education Law of the PRC, or the Education Law. The Education Law sets forth provisions
relating to the fundamental education systems of the PRC, including a school system of pre-school education, primary education,
secondary education and higher education, a system of nine-year compulsory education and a system of education certificates. The
Education Law stipulates that the government formulates plans for the development of education and establishes and operates schools
and other institutions of education and, in principle, enterprises, social organizations and individuals are encouraged to operate
schools and other types of education organizations in accordance with PRC laws and regulations. According to the revision of the
Education Law on December 27, 2015, schools and other educational institutions which are founded totally or partly by the government’s
appropriation or donated assets shall not be established as profit-making organizations. However, according to the Law for Promoting
Private Education revised on November 7, 2016, private schools may be operated as nonprofit schools or profit-making schools, but
the nine-year compulsory education schools cannot be operated as profit-making schools.
The Law for Promoting Private Education and the Implementing
Rules for the Law for Promoting Private Education
The Law for Promoting Private Education
(“the Amendment”) became effective on September 1, 2003 and was revised on November 7, 2016, effective on September
1, 2017 and the Implementing Rules for the Law for Promoting Private Education became effective on April 1, 2004. Under
this law and these regulations, “private schools” are defined as schools established by social organizations or individuals
using non-government funds. In addition, private schools providing certifications, pre-school education, education for self-study
aid and other academic education shall be subject to approval by the education authorities, while private schools engaging in occupational
qualification training and occupational 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 Operation License by local or provincial-level
counterparts of the MOE for operating a private school, and shall be registered with the local or provincial-level counterparts
of the MCA as a privately run non-enterprise institution and be issued a Private Non-enterprise Organization Registration Certificate.
The durations of our Private School Operation Licenses vary from one year to eight years and the durations of our Private Non-enterprise
Organization Registration Certificates vary from one year to five years, depending on the location of our private schools with
permission for renewal upon expiration.
Under the law and regulations discussed
above, private schools have the same status as public schools, though private schools are prohibited from providing military, police,
political and other kinds of education which are of a special nature. Government-run schools that provide compulsory education
are not permitted to be converted into private schools. In addition, the operation of a private school is highly regulated. For
example, the items and criteria of fees charged by a private school on those students need to be approved by the governmental pricing
authority and are required to be publicly disclosed.
Private schools are divided into three
categories: private schools established with donated funds; profit-making private schools and nonprofit private schools. Investors
of profit-making schools may require profit from the annual net balance of the school according to the Company Law of PRC and other
regulations.
The establishment and operation of profit-making
private schools shall be in accordance with the Rules for the implementation of supervision and administration of profit-making
private schools promulgated and became effective on December 30, 2016.
According to the Company Law of PRC, where
a profit-making school distributes its annual net balance for the current financial year, it shall draw 10% of its annual net balance
as the school's statutory common reserve, provided that a school with an aggregate common reserve of more than 50% of the school's
registered capital may elect not to draw any statutory common reserve any more. Where the aggregate balance of the school's statutory
common reserve is insufficient to cover any loss the school made in the previous financial year, the current financial year's annual
net balance shall first be used to cover the loss before any statutory common reserve is drawn therefrom in accordance with the
provisions of the preceding paragraph. Where losses have been covered and the statutory and discretionary common reserves have
been drawn, any remaining annual net balance shall be distributed to investors.
Nonprofit private schools shall be entitled
to the same preferential tax treatment as public schools, while the preferential tax treatment policies applicable to profit-making
private schools shall be formulated by the relevant PRC authorities. However, ever since then, no such regulations in respect of
tax preferential policy for profit-making private schools have been promulgated.
As of December 31, 2019, we had, across
our two reportable segments, a total of 31 schools that are registered as private schools as opposed to companies, of which 4 schools
are registered as schools not requiring reasonable returns, while all other schools are registered as schools requiring reasonable
returns.
According to the Amendment, the term “reasonable
return” is no longer used and sponsors of private schools may choose to establish non-profit or for-profit private schools
at their own discretion. School sponsors are not allowed to establish for-profit private schools that are engaged in compulsory
education. We have three K-12 schools, consisting of kindergarten, primary schools, middle schools and high schools education.
Currently all of the three schools are requiring reasonable returns.
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Primary and middle schools’ education is considered compulsory education, which will be transitioned to be operated as non-profit schools to comply with the Amendment.
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The kindergarten and high schools are not compulsory education and we will elect for those schools to be for-profit schools.
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The detailed implementation methods for
transitioning of K-12 schools to non-profit schools have not been issued by local government authorities. We are communicating
with local authorities regarding the impact on the operation and registration of the schools. Since we can still maintain control
over the daily operation of the schools and have the right to appoint key management, we believe there will not be any significant
impact on the operation of these schools before any official reply is issued by local authorities. Although turning into non-profit
schools will prohibit the distribution of retained earnings as dividends from these schools, we can still control and allocate
the financial resources of the schools in its daily operation. Therefore we believe there will be no significant financial impact
to us as of the date of this report.
B.
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Tutoring and career enhancement centers
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Our tutoring and career enhancement centers
including training offices are not compulsory education, the Company intends to elect those currently requiring reasonable returns
to be for-profit for the schools; and to elect those currently not requiring reasonable returns to be non-profit.
Generally, if a private school chooses to
register as a non-profit school, it shall amend its articles of association, continue its operation and complete the new registration
process. If a private school chooses to register as a for-profit school, it shall conduct a financial liquidation process, have
the property rights of its assets such as land, school buildings authenticated by relevant government authorities, they shall pay
up relevant taxes, apply for a new Permit for Operating a Private School, re-register as a for-profit school and continue operation.
Specific provisions related to this process have not yet been introduced by the people’s governments at the provincial level.
The Company does not expect its operations to be impacted materially if all the registration requirements are met and the procedures
are fully performed.
Foreign investment in education service industry
According to the Foreign Investment Industries
Guidance Catalog, or Foreign Investment Catalog, which was amended and promulgated by the NDRC, and the MOFCOM on March 10, 2015
and became effective on April 10, 2015, foreign investment is encouraged to participate in vocational training services beyond
educational services. The foreign investment in higher education, ordinary senior high school education and pre-school education
has to take the form of a Sino-foreign cooperative joint venture led by Chinese parties. Foreign investment is banned from compulsory
education, which means grades 1-9. Foreign investment is allowed to invest in after-school tutoring services, which do not grant
diplomas. However, many local government authorities do not allow foreign-invested entities to establish private schools to engage
in tutoring services, other than in the forms of Sino-foreign cooperative schools or international schools. Under current PRC laws,
the foreign contributors of Sino-foreign cooperative schools shall be foreign educational institutions such as universities or
colleges instead of foreign companies. As of December 31, 2019, we had a total of 60 centers and schools, comprised of 25 tutoring
centers, 3 K-12 schools, 5 career enhancement centers, 1 career enhancement college and 26 training offices. We conduct our education
business in China primarily through contractual arrangements among our subsidiaries in China and VIEs. The majority of our VIEs
and their respective subsidiaries, as PRC domestic entities, hold the requisite licenses and permits necessary to conduct our education
business in China and operate our tutoring centers, K-12 schools, career enhancement centers and training offices.
Regulations on Chinese-foreign cooperation in operating
schools
Chinese-foreign cooperation in operating
schools or training programs is specifically governed by the Regulations on Operating Chinese-foreign Schools, promulgated in 2003
and revised in 2013 by the State Council and the Implementing Rules for the Regulations on Operating Chinese-foreign Schools,
or the Implementing Rules, which were issued by the MOE in 2004.
The regulations on Operating Chinese-foreign
Schools and its Implementing Rules encourage substantive cooperation between overseas educational organizations with relevant
qualifications and experience in providing high-quality education and Chinese educational organizations to jointly operate various
types of schools in the PRC, with such cooperation in the areas of higher education and occupational education being encouraged.
Chinese-foreign cooperative schools are not permitted, however, to engage in compulsory education and military, police, political
and other kinds of education that are of a special nature in the PRC.
Permits for Chinese-foreign Cooperation
in Operating Schools or Chinese-foreign Cooperation Project shall be obtained from the relevant education authorities or from the
authorities that regulate labor and social welfare in the PRC.
Regulations on online and distance education
Pursuant to the Administrative Regulations
on Educational Websites and Online and Distance Education Schools issued by MOE in 2000, or the Online Education Regulations, educational
websites and online education schools may provide education services in relation to higher education, elementary education, pre-school
education, teacher education, occupational education, adult education and other educational services. Under the Online Education
Regulations, “educational websites” refers to education websites providing education or education-related information
services to website visitors by means of a database or an online education platform connected to the Internet or an educational
television station through an Internet service provider, or ISP. Under the Online Education Regulations, “online education
schools” refer to organizations providing academic education services or training services online and issuing various certificates.
According to the Administrative License
Law promulgated by the Standing Committee of NPC, on August 27, 2003 and effective as of July 1, 2004, only laws promulgated
by the NPC and regulations and decisions promulgated by the State Council may establish administrative license requirements. On
February 3, 2016, the State Council promulgated the Decision of the State Council on Cancelling the Second Group of 152 Administrative
Approval Items Designated by the Central Government for Implementation by Local Governments, which has cancelled the approvals
of the education administrative department for online education schools and the educational websites.
Regulation of the software industry
Policies to Encourage the Development of Software
On June 24, 2000, the State Council
issued Certain Policies to Encourage the Development of Software and Integrated Circuit Industries, or the Policies, to encourage
the development of the software and integrated circuit industries in China and to enhance the competitiveness of the PRC information
technology industry in the international market. The Policies encourage the development of the software and integrated circuit
industries in China through various methods, including:
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Encouraging venture capital investment in the software industry and providing capital to software enterprises or assisting such software enterprises to raise capital overseas;
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Providing tax incentives, including an immediate tax rebate for taxpayers who sell self-developed software products, before 2010, of the amount of the statutory value-added tax that exceeds 3% and a number of exemptions and reduced corporate income tax rates;
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Providing government support, such as government funding in the development of software technology;
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Providing preferential treatments, such as credit facilities with low interest rates to enterprises that export software products;
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Taking various strategies to ensure that the software industry has sufficient expertise; and
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Implementing measures to enhance intellectual property protection in China.
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Software products administration
On October 27, 2000, the MIIT issued
and enforced the Measures Concerning Software Products Administration to regulate and administer software products and promote
the development of the software industry in China. Pursuant to the Measures Concerning Software Products Administration, all software
products operated or sold in China must be duly registered with and recorded by the relevant authorities, and no entity or individual
is allowed to sell or distribute any unregistered and unrecorded software products.
On March 1, 2009, the MIIT promulgated
the new Measures Concerning Software Products Administration, or the New Measures, which became effective on April 10, 2009.
Under the New Measures, software products operated or sold in China are not required to be registered or recorded by relevant authorities,
and software products developed in China (including those developed in China on the basis of imported software) can enjoy certain
favorable policies when they have been registered and recorded. The New Measures was repealed in May 26, 2016 by the MITT. As such,
from May 26, 2016, all software products operated or sold in China are not required to be registered or recorded by the relevant
authorities.
Software copyright
The State Council promulgated the Regulations
on the Protection of Computer Software, or the Software Protection Regulations, on December 20, 2001, which became effective
on January 1, 2002. The Software Protection Regulations were promulgated, among other things, to protect the copyright of
computer software in China. According to the Software Protection Regulations, computer software that is independently developed
is attached to physical goods will be protected. However, such protection does not apply to any ideas, mathematical concepts, processing
and operation methods used in the development of software solutions. Under the Software Protection Regulations, PRC citizens, legal
persons and organizations will enjoy copyright protection for computer software that they have developed, regardless of whether
the software has been published. Foreigners or any person without a nationality shall enjoy copyright protection over computer
software that they have developed, as long as such computer software was first distributed in China. Software of foreigners or
any person without a nationality will enjoy copyright protection in China under these regulations in accordance with a bilateral
agreement, if any, executed by and between China and the country to which the developer is a citizen of or in which the developer
habitually resides, or in accordance with an international treaty to which China is a party. Under the Software Protection Regulations,
owners of software copyright will enjoy the rights of publication, authorship, modification, duplication, issuance, lease, transmission
on the information network, translation, licensing and transfer. Software copyright protection takes effect on the day of completion
of the software’s development. The protection period for software developed by legal persons and other organizations is 50
years and ends on December 31 of the fiftieth year from the date the software solution was first published. However, the Software
Protection Regulations will not protect the software if it is not published within 50 years from the date of the completion of
its development. Civil remedies available under the Software Protection Regulations against infringements of copyright include
cessation of the infringement, elimination of the effects, apology and compensation for losses. The copyright administrative authorities
will order the infringer of software copyright to stop all infringing acts, confiscate illegal gains, confiscate and destroy infringing
copies, and may impose a fine on the offender under certain circumstances.
Software copyright registration
On February 20, 2002, the State Copyright
Administration of the PRC promulgated and enforced the Measures Concerning Registration of Computer Software Copyright Procedures,
or the Registration Procedures, to implement the Software Protection Regulations and to promote the development of China’s
software industry. The Registration Procedures apply to the registration of software copyrights and software copyright exclusive
licensing contracts and assignment contracts. The registrant of a software copyright will either be the copyright owner or another
person (whether a natural person, legal person or an organization) in whom the software copyright becomes vested through succession,
assignment or inheritance. Upon registration, the registrant shall be granted a registration certificate by the China Copyright
Protection Center. As of December 31, 2019, we have been issued 91 registration certificates for computer software copyrights,
of which we use 91 of such registration certificates to operate our business.
Regulations on Internet information services
Subsequent to the State Council’s
promulgation of the Telecom Regulations and the Internet Information Services Administrative Measures on September 25, 2000,
or the Internet Information Measures, the MIIT and other regulatory authorities formulated and implemented a number of Internet-related
regulations, including but not limited to the Internet Electronic Bulletin Board Service Administrative Measures, or the BBS Measures.
The Internet Information Measures require
that commercial Internet content providers, or ICP providers, obtain a license for Internet information services, or ICP license,
from the appropriate telecommunications regulatory authorities in order to provide any commercial Internet information services
in the PRC. ICP providers are required to display their ICP license number in a conspicuous location on their home page. In addition,
the Internet Information Measures also provide that ICP providers that operate in sensitive and strategic sectors, including news,
publishing, education, health care, medicine and medical devices, must also obtain additional approvals from the relevant authorities
in charge of those sectors. The BBS Measures provide that any ICP provider engaged in providing online bulletin board services,
or BBS, is subject to a special approval and filing process with the relevant telecommunications regulatory authorities.
In July 2006, the MIIT posted on its
website the “Notice on Strengthening Management of Foreign Investment in Operating Value-Added Telecom Services.” The
notice prohibits PRC ICP providers from leasing, transferring or selling their ICP licenses or providing facilities or other resources
to any illegal foreign investors. The notice states that PRC ICP providers or their shareholders should directly own the trademarks
and domain names for websites operated by them, as well as servers and other infrastructure used to support these websites.
Regulations on broadcasting audio-video programs through
the Internet or other information network
The State Administration of Radio, Film
and Television (“SARFT”), promulgated the Rules for Administration of Broadcasting of Audio-Video Programs through
the Internet and Other Information Networks, or the Broadcasting Rules, in 2004, which became effective on October 11, 2004.
The Broadcasting Rules apply to the activities of broadcasting, integrating, transmitting and downloading of audio-video programs
with computers, televisions or mobile phones and through various types of information networks. Pursuant to the Broadcasting Rules,
a Permit for Broadcasting Audio-Video Programs via Information Network is required to engage in these Internet broadcasting activities.
On April 13, 2005, the State Council announced a policy on private investments in businesses in China relating to cultural
matters that prohibits private investments in businesses relating to the dissemination of audio-video programs through information
networks.
On December 20, 2007, SARFT and MIIT
issued the Internet Audio-Video Program Measures, which became effective on January 31, 2008. Among other things, the Internet
Audio-Video Program Measures stipulate that no entities or individuals may provide Internet audio-video program services without
a License for Disseminating Audio-Video Programs through Information Network issued by SARFT or its local counterparts or completing
the relevant registration with SARFT or its local counterparts; and only entities wholly owned or controlled by the PRC government
may engage in the production, editing, integration or consolidation, and transfer to the public through the Internet, of audio-video
programs, and the provision of audio-video program uploading and transmission services. On February 3, 2008, SARFT and MIIT
jointly held a press conference in response to inquiries related to the Internet Audio-Video Program Measures, during which SARFT
and MIIT officials indicated that providers of audio-video program services established prior to the promulgation date of the Internet
Audio-Video Program Measures that do not have any regulatory non-compliance records can re-register with the relevant government
authorities to continue their current business operations. After the conference, the two authorities published a press release
that confirms the above guidelines. There remain significant uncertainties relating to the interpretation and implementation of
both the Internet Audio-Video Program Measures and the press release, in particularly with respect to the scope of “Internet
Audio-Video Programs.” On April 1, 2010, SARFT promulgated the Tentative Categories of Internet Audio-Visual Program
Service (“Categories”), which clarified the scope of Internet Audio-Video Programs. According to the Categories, there
are four categories of Internet audio-visual program service which in turn are divided into seventeen sub-categories. The third
sub-category of the second category covers the making and broadcasting of certain specialized audio-visual programs concerning
art, culture, technology, entertainment, finance, sports and education.
We do not believe that we are required to
apply for a License for Disseminating Audio-Video Programs through Information Network as an enterprise providing online education
and test preparation courses. As an online education services provider, we transmit our audio-video educational courses and programs
through the Internet only to enrolled course participants, not to the general public. The limited scope of our audience distinguishes
us from general online audio-video broadcasting companies, such as companies operating user-generated content websites. In addition,
we do not provide audio-video program uploading and transmission services. As a result, we believe that we are not one of those
providers of audio-video program services covered under the Internet Audio-Video Program Measures. In the event that we are deemed
to be a provider of audio-video program services covered under the Internet Audio-Video Program Measures, we believe that pursuant
to the press release it is possible that we may be allowed to continue our current operations and re-register with SARFT or MIIT
in accordance with the published guidelines, as we were established prior to the promulgation of the Internet Audio-Video Program
Measures and have not had any regulatory non-compliance records. We and our PRC legal counsel are closely monitoring the regulatory
developments relating to the Internet Audio-Video Program Measures and we will register with the relevant governmental authorities
and obtain the necessary license if required. However, if the governmental authorities decide that our provision of online education
services fall within the Internet Audio-Video Program Measures and we are unable to register or obtain the necessary license timely,
or at all, due to reasons beyond our control, our equity ownership structure may require significant restructuring, or we may become
subject to significant penalties, fines, legal sanctions or an order to suspend our use of audio-video content.
Regulations on information security
Internet content in China is regulated by
the PRC government to protect state security. The NPC has enacted a law that may subject to criminal punishment in China any person
who: (i) gains improper entry into a computer or system of strategic importance; (ii) disseminates politically disruptive
information; (iii) leaks state secrets; (iv) spreads false commercial information; or (v) infringes intellectual
property rights.
The Ministry of Public Security has promulgated
measures that prohibit use of the Internet in ways that, among other things, result in a leakage of state secrets or a spread of
socially destabilizing content. The Ministry of Public Security has supervision and inspection rights in this regard, and we are
subject to the jurisdiction of the local security bureaus. If an ICP license holder violates these measures, the PRC government
may revoke its ICP license and shut down its websites.
Regulations on Protection of the Right of Dissemination
through Information Networks
On May 18, 2006, the State Council
promulgated the Regulations on Protection of the Right of Dissemination through Information Networks, or the Dissemination Protection
Regulations, which became effective on July 1, 2006. The Dissemination Protection Regulations require that every organization
or individual who disseminates a third-party’s work, performance, audio or visual recording products to the public through
information networks shall obtain permission from, and pay compensation to, the copyright owner of such products, unless otherwise
provided under relevant laws and regulations. The copyright owner may take technical measures to protect his or her right of dissemination
through information networks and any organization or individual shall not intentionally evade, circumvent or otherwise assist others
in evading such protective measures unless permissible under law. The Dissemination Protection Regulations also provide that permission
from the copyright owners and compensation for the copyright-protected works is not required in the event of limited dissemination
to teaching or research staff for the purpose of school teaching or scientific research only. We hold copyrights for all of the
course materials on our websites.
Regulation of domain names and website names
PRC law requires owners of Internet domain
names to register their domain names with qualified domain name registration agencies approved by MIIT and obtain registration
certificates from such registration agencies. A registered domain name owner has an exclusive use right over its domain name. Unregistered
domain names may not receive proper legal protections and may be misappropriated by unauthorized third parties. As of December
31, 2019, we have registered 19 domain names with the Internet Corporation for Assigned Names and Numbers and the China Internet
Network Information Center.
PRC law requires entities operating commercial
websites to register their website names with the SAIC or its local offices and obtain commercial website name registration certificates.
If any entity operates a commercial website without obtaining such a certificate, it may be charged a fine or imposed other penalties
by the SAIC or its local offices. On November 5, 2004, the MIIT amended the Measures for Administration of Domain Names for
the Chinese Internet, or the Domain Name Measures. The Domain Name Measures regulate the registration of domain names, such as
the first tier domain name “.cn”. In February 2006, China Internet Network Information Center (“CNNIC”),
issued the Implementing Rules for Domain Name Registration and the Measures on Domain Name Disputes Resolution, pursuant to
which CNNIC can authorize a domain name dispute resolution institution to decide disputes. As of December 31, 2019, we have registered
6 website names which are used in connection with our education business with Beijing Municipal Bureau of Industry and Commerce.
Regulation of privacy protection
PRC law does not prohibit Internet content
providers from collecting and analyzing personal information from their users. PRC law prohibits Internet content providers from
disclosing to any third parties any personal information it collects via Internet or transmitted by users through their networks
unless otherwise permitted by law. If an Internet content provider violates these regulations, MIIT or its local offices may impose
penalties and the Internet content provider may be liable for damages caused to its users. We believe we are in compliance with
these regulations.
Regulation of copyright and trademark protection
China has adopted legislation governing
intellectual property rights, including copyrights and trademarks. China is a signatory to the main international conventions on
intellectual property rights and became a member of the Agreement on Trade Related Aspects of Intellectual Property Rights upon
its accession to the World Trade Organization in December 2001.
Copyright . NPC amended the Copyright
Law in 2001 to widen the scope of works and rights that are eligible for copyright protection which extends copyright protection
to Internet activities, products disseminated over the Internet and software products. In addition, there is a voluntary registration
system administered by the China Copyright Protection Center. In February 2010, the NPC further amended the Copyright Law
to regulate the registration of pledge of copyright, which became effective on April 1, 2010.
To address the problem of copyright infringement
related to the content posted or transmitted over the Internet, the National Copyright Administration and MIIT jointly promulgated
the Administrative Measures for Copyright Protection Related to the Internet on April 29, 2005. These measures became effective
on May 30, 2005.
Trademark . The PRC Trademark Law,
adopted in 1982 and revised in 2001 and 2013, protects the proprietary rights to registered trademarks. The Trademark Office under
the SAIC handles trademark registrations and grants a term of ten years to registered trademarks and another ten years to trademarks
as requested upon expiry of the prior term. Trademark license agreements must be filed with the Trademark Office for record. “Ambow”,
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Regulation of foreign exchange
The PRC government imposes restrictions
on the convertibility of the RMB and on the collection and use of foreign currency by PRC entities. Under current regulations,
the RMB is convertible for current account transactions, which include dividend distributions, and the import and export of goods
and services. Conversion of RMB into foreign currency and foreign currency into RMB for capital account transactions, such as direct
investment, portfolio investment and loans, however, is still generally subject to the prior approval of or registration with SAFE.
Under current PRC regulations, foreign-invested
enterprises such as our PRC subsidiaries are required to apply to SAFE for a Foreign Exchange Registration Certificate for Foreign-Invested
Enterprise. With such a certificate (which is subject to review and renewal by SAFE on an annual basis), a foreign-invested enterprise
may open foreign exchange bank accounts at banks authorized to conduct foreign exchange business by SAFE and may buy, sell and
remit foreign exchange through such banks, subject to documentation and approval requirements. Foreign-invested enterprises are
required to open and maintain separate foreign exchange accounts for capital account transactions and current account transactions.
In addition, there are restrictions on the amount of foreign currency that foreign-invested enterprises may retain in such accounts.
Regulation of foreign exchange in certain onshore and
offshore transactions
In October 2005, SAFE issued the Notice
on Issues Relating to the Administration of Foreign Exchange in Fund-Raising and Return Investment Activities of Domestic Residents
Conducted via Offshore Special Purpose Companies, or SAFE Circular 75, which became effective as of November 1, 2005. In July
2014, SAFE issued a new notice to replace Circular 75, Circular of the State Administration of Foreign Exchange on Issues concerning
Foreign Exchange Administration over the Overseas Investment and Financing and Round-trip Investment by Domestic Residents via
Special Purpose Vehicles. According to SAFE Circular 75 and Circular 37, prior to establishing or assuming control of an offshore
company for the purpose of financing that offshore company with assets or equity interests in an onshore enterprise in the PRC,
each PRC resident, whether a natural or legal person, must complete certain overseas investment foreign exchange registration procedures
with the relevant local SAFE branch. An amendment to the registration with the local SAFE branch is required to be filed by any
PRC resident that directly or indirectly holds interests in that offshore company upon either (i) the injection of equity
interests or assets of an onshore enterprise to the offshore company or (ii) the completion of any overseas fund-raising by
such offshore company. An amendment to the registration with the local SAFE branch is also required to be filed by such PRC resident
when there is any material change involving a change in the capital of the offshore company, such as (i) an increase or decrease
in its capital, (ii) a transfer or swap of shares, (iii) a merger or division, (iv) a long-term equity or debt investment
or (v) the creation of any security interests.
SAFE Circular 37 applies retroactively.
As a result, PRC residents who established or acquired control of offshore companies that made onshore investments in the PRC in
the past were required to apply for supplementary registration. Under SAFE Circular 37, failure to comply with the registration
procedures may result in restrictions on the relevant onshore entity, including restrictions on the payment of dividends and other
distributions to its offshore parent or affiliate and restrictions on the capital inflow from the offshore entity, and may also
subject relevant PRC residents to penalties under the PRC foreign exchange administration regulations.
As a Cayman Islands exempted company, we
are considered a foreign entity in China. If we purchase the assets or equity interests of a PRC company owned by PRC residents
in exchange for our equity interests, such PRC residents will be subject to the registration procedures described in SAFE Circular
37. Moreover, PRC residents who are beneficial holders of our shares are required to register with SAFE in connection with their
investment in us.
Regulations on dividend distribution
The principal regulations governing dividend
distributions by wholly foreign-owned enterprises and Sino-foreign equity joint ventures include:
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Wholly Foreign-Owned Enterprise Law (1986), as amended;
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Wholly Foreign-Owned Enterprise Law Implementing Rules (1990), as amended;
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Sino-foreign Equity Joint Venture Enterprise Law (1979), as amended; and
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Sino-foreign Equity Joint Venture Enterprise Law Implementing Rules (1983), as amended.
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Under these regulations, wholly foreign-owned
enterprises and Sino-foreign equity joint ventures in the PRC may pay dividends only out of their accumulated profits, if any,
determined in accordance with PRC accounting standards and regulations. Additionally, these foreign-invested enterprises are required
to set aside certain amounts of their accumulated profits each year, if any, to fund certain reserve funds. These reserves are
not distributable as cash dividends.
Regulation of overseas listings
On August 8, 2006, six PRC regulatory
agencies, including CSRC, promulgated the Regulation on Mergers and Acquisitions of Domestic Companies by Foreign Investors, which
became effective on September 8, 2006 and was amended by the MOFCOM on June 22, 2009. This regulation, among other things,
has certain provisions that require offshore special purpose vehicles, or SPVs, to obtain the approval of the CSRC prior to listing
their securities on an overseas stock exchange. On September 21, 2006, the CSRC published on its official website a notice
specifying the documents and materials that are required to be submitted for obtaining CSRC approval.
We believe that CSRC’s approval was
not applicable to us in connection with our IPO and listing on a national securities exchange because we established our PRC subsidiaries
by means of direct investment rather than merger or acquisition of PRC domestic companies.
SAFE regulations on employee share options
On March 28, 2007, SAFE promulgated
the Application Procedures of Foreign Exchange Administration for Domestic Individuals Participating in Employee Share Holding
Plan or Share Option Plan of Overseas Listed Company, or the Share Option Rule. On February 15, 2012, SAFE promulgated the
Notice of the State Administration of Foreign Exchange on Issues Related to Foreign Exchange Administration in Domestic Individuals’
Participation in Equity Incentive Plans of Companies Listed Abroad, or the No. 7 Notice, which supersedes the Share Option
Rule in its entirety and immediately became effective upon circulation. According to the No. 7 Notice, domestic individuals,
which include any directors, supervisors, senior managerial personnel or other employees of a domestic company who are Chinese
citizens (including citizens of Hong Kong, Macao and Taiwan) or foreign individuals who consecutively reside in the territory of
PRC for one year, who participate in the same equity incentive plan of an overseas listed company shall, through the domestic companies
they serve, collectively entrust a domestic agency to handle issues like foreign exchange registration, account opening, funds
transfer and remittance, and entrust an overseas institution to handle issues like exercise of options, purchasing and sale of
related stocks or equity, and funds transfer. Where a domestic agency needs to remit funds out of China as required for individuals’
participation in an equity incentive plan, the domestic agency shall apply with the local office of the SAFE for a foreign exchange
payment quota on a yearly basis. A domestic agency shall open a domestic special foreign exchange account in the bank. After repatriation
of foreign currency income earned by individuals from participation in an equity incentive plan, the domestic agency shall request
the bank to transfer the funds from its special foreign currency account to respective personal foreign currency deposit accounts.
In the case of any significant change to the equity incentive plan of a company listed abroad (such as amendment to any major terms
of the original plan, addition of a new plan, or other changes to the original plan due to merger, acquisition or reorganization
of the overseas listed company or the domestic company or other major events), the domestic agency or the overseas trustee shall,
within three months of the occurrence of such changes, go through procedures for change of foreign exchange registration with the
local office of the SAFE. The SAFE and its branches shall supervise, administer and inspect foreign exchange operations related
to individuals’ participation in equity incentive plans of companies listed abroad, and may take regulatory measures and
impose administrative sanctions on individuals, domestic companies, domestic agencies and banks violating the provisions of this
Notice.
We and our employees who have been granted
applicable equity awards shall be subject to the No.7 Notice. If we fail to comply with the No. 7 Notice, we and/or our employees
who are subject to the No.7 Notice may face sanctions imposed by foreign exchange authority or any other PRC government authorities.
In addition, the State Administration of
Taxation has recently issued a few circulars concerning employee share options. Under these circulars, our employees working in
China who exercise share options will be subject to PRC individual income tax. Our PRC subsidiaries have obligations to file documents
relating to employee share options with relevant tax authorities and withhold individual income taxes of those employees who exercise
their share options. If our employees fail to pay and we fail to withhold their income taxes, we may face sanctions imposed by
tax authorities or other PRC government authorities.
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C.
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Organizational Structure
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The diagrams below illustrate our corporate
structure with respect to each of our significant subsidiaries and VIEs and the place of incorporation of each named entity as
of December 31, 2019.
Notes:
(1)
Registered shareholders of Ambow Shida are Xuejun Xie, one of our officers, and Jianguo Xue, one of our officers, who own 90% and
10% of Ambow Shida, respectively.
(2)
Registered shareholders of Ambow Sihua are Xuejun Xie and Gang Huang, one of our employees, who own 57.38% and 42.62% of Ambow
Sihua, respectively.
(3)
Registered shareholders of Ambow Shanghai are Xuejun Xie and Gang Huang, who own 64% and 36% of Ambow Shanghai, respectively.
(4)
Registered Shareholders of Ambow Zhixin are Xuejun Xie and Gang Huang, one of our employees, who own 60% and 40% of Ambow Zhixin,
respectively.
(5)
Registered Shareholders of Ambow Rongye are Xuejun Xie and Gang Huang, one of our employees, who own 60% and 40% of Ambow Rongye,
respectively.
(6)
Registered Shareholders of IValley are Chiao-ling Hsu, one of our officers, and Shu Hui Cai, one of our employees, who own 60%
and 40% of IValley, respectively.
(7)
Certain non-performing entities’ legal status included in the table above are to be cancelled which do not have significant
business.
Ambow Shengying, Ambow Chuangying, IValley
Beijing and the acquired schools and learning centers are the principal operating entities for our business operations within China.
Their functional currency is RMB. Ambow, Ambow NSAD Inc. and Ambow BSC Inc., our investment holding companies, as well as Bay State
College, are the principal operating entity for operations relating to non-Chinese partners. Their functional currency is US$.
IValley and one of its subsidiaries are our investment holding companies in Taiwan and their functional currency is TWD.
Ambow Shengying, Ambow Chuangying and Ambow
Education Management have entered into a series of contractual arrangements with each of the above domestic PRC companies or Taiwan
company that enable us to:
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Exercise effective control over our VIEs and their respective subsidiaries by having such VIEs’ shareholders pledge their respective equity interests in these VIEs to Ambow Chuangying, Ambow Shengying and Ambow Education Management and, through powers of attorney, entrust all the rights to exercise their voting power over these VIEs to Ambow Chuangying, Ambow Shengying and Ambow Education Management. There is no limitation on Ambow Chuangying, and Ambow Shengying’s rights to exercise the voting power over the VIEs or to obtain and dispose of the pledged equity interests in the VIEs holding the tutoring centers and career enhancement centers by exercise of its call option or share pledge. Ambow Chuangying and Ambow Shengying’s rights to obtain and dispose of the pledged equity interests in the VIEs holding the K-12 schools by exercise of its call option or share pledge are subject to Ambow Chuangying and Ambow Shengying’s designating other PRC persons or entities to acquire the pledged equity interests in order not to violate PRC laws that prohibit or restrict foreign ownership in K-12 schools;
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Receive economic benefits from the pre-tax profits of our VIEs and their respective subsidiaries in consideration for technical support, marketing and management consulting services provided by Ambow Chuangying, Ambow Shengying and Ambow Education Management to our VIEs and their respective subsidiaries. Such economic benefits earned by Ambow Chuangying, Ambow Shengying and Ambow Education Management were insignificant for the reporting period (which have been eliminated upon consolidation) in consideration of the services provided to our VIEs’ subsidiaries; and
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Have an exclusive option to purchase all or part of the equity interests in our VIEs and all or part of the equity interest in its subsidiaries, as well as all or part of the assets of our VIEs, in each case when and to the extent permitted by applicable PRC or Taiwan law.
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Accordingly, we treat these domestic PRC
companies as variable interest entities and have consolidated their historical financial results in our financial statements in
accordance with U.S. GAAP. Majority of these domestic PRC companies and their subsidiaries hold the requisite licenses and permits
necessary to conduct our education business in China.
Each of Ambow Shanghai, Ambow Sihua, Ambow
Rongye and Ambow Zhixin has executed a series of control agreements with Ambow Shengying. Ambow Shida has executed a series of
control agreements with Ambow Chuangying. They are described in more detail below through which agreements Ambow Shengying and
Ambow Chuangying exercise effective contractual control over Ambow Shida, Ambow Shanghai, Ambow Sihua, Ambow Rongye and Ambow Zhixin.
IValley has executed a series of control agreements with Ambow Education Management.
Ambow Shida, Ambow Sihua, Ambow Shanghai,
Ambow Rongye and Ambow Zhixin each is a controlling entity operating one of our business lines, including tutoring centers, K-12
schools, career enhancement service centers and training offices, and each owns certain interest in a number of schools and entities.
The detailed description of their interests as of December 31, 2019 is listed in Note 1c to audited consolidated financial statements.
Sponsorship interest under the Law of Promoting
Private Education is substantially similar to equity interest under the PRC Company Law. Minor differences are illustrated in the
following perspectives:
(1) Right to receive return on investment.
Shareholders of companies are entitled to dividends for their investment, while not all sponsors of private schools can claim returns
on their investment in the private schools. Under the Law of Promoting Private Education, the sponsors of a private school may
decide whether to require reasonable returns or not on their contributions to the private school, and accordingly private schools
can be classified into schools whose sponsors require reasonable returns and schools whose sponsors do not require reasonable returns.
Sponsors of schools whose sponsors require reasonable returns are entitled to receive profit distribution from the school while
sponsors of schools whose sponsors do not require reasonable returns cannot.
(2) The portion of after-tax profits
available for distribution. The proportion of after-tax profits that can be distributed by a company to its shareholders is different
from that can be distributed by a schools whose sponsors require reasonable returns to its sponsors. Under the PRC Company Law,
a company is required to allocate 10% of its after-tax profits to statutory reserve funds before making dividends to its shareholders
while, under the Law for Promoting Private Education, a schools whose sponsors require reasonable returns is required to allocate
no less than 25% of its annual net profit to its development fund and make allocation for mandatory expenses as required by applicable
laws and regulations. Pursuant to an amendment to The Law for Promoting Private Education on November 7, 2016, which will go into
effect on September 1, 2017, sponsors of for-profit private schools are entitled to retain the profits from their schools and the
operating surplus may be allocated to the sponsors pursuant to the PRC company law and other relevant laws and regulations.
In addition to the operational entities
described above, on July 20, 2009, we formed an RMB fund, Wenjian Gongying, which was owned by us, our Hong Kong subsidiary, Ambow
Education (Hong Kong) Ltd., and Ambow Shengying. No business operations were conducted by Wenjian Gongying. As a result, we closed
Wenjian Gongying through deregistration procedures of local governmental and corporate service institutions, which was completed
in January 2019.
Agreements that provide effective control over our VIEs
and their respective subsidiaries
Agreements that provide effective control over Ambow Shida
and its subsidiaries
We have entered into a series of agreements
with Ambow Shida and its shareholders. These agreements provide us substantial ability to control Ambow Shida and its shareholders,
and we have obtained an option to purchase all of the equity interests of Ambow Shida. We have no agreements that pledge the assets
of our VIEs for the benefit of Ambow Online or Ambow Chuangying. These agreements include:
Share Pledge Agreement . Ambow Online,
Xuejun Xie and Jianguo Xue, each a shareholder of Ambow Shida, entered into a share pledge agreement on January 31, 2005.
AECL, Ambow Online, Xuejun Xie and Jianguo Xue entered into a supplementary agreement on January 4, 2009, pursuant to which
each of Xuejun Xie and Jianguo Xue pledged all of her or his equity interest in Ambow Shida to Ambow Online to secure the performance
of Ambow Shida under an exclusive cooperation agreement, dated January 31, 2005, between Ambow Online and Ambow Shida. The
share pledge was registered with the local SAIC and then was cancelled. AECL, Ambow Online, Xuejun Xie and Jianguo Xue terminated
the abovementioned share pledge agreement and the supplementary agreement by entering into a termination agreement on June 29,
2017. Ambow Chuangying, Xuejun Xie and Jianguo Xue entered into a new share pledge agreement on June 29, 2017, pursuant to which
each of Xuejun Xie and Jianguo Xue pledged all of her or his equity interest in Ambow Shida to Ambow Chuangying to secure the performance
of Ambow Shida under the technology service agreement dated June 29, 2017 between Ambow Shida and Ambow Chuangying as described
below. If Ambow Shida and its subsidiaries fail to fulfill their obligations under the technology service agreement, or Ambow Shida
and its subsidiaries breach their duties or obligations hereunder, Ambow Chuangying shall have the right to exercise the pledge
in any manner at any time to the extent permitted by applicable laws during the term of pledge. Each of Xuejun Xie and Jianguo
Xue also agreed not to transfer, dispose of or otherwise directly or indirectly create any encumbrance over her or his equity interest
in Ambow Shida, or take any actions that may reduce the value of her or his equity interest in Ambow Shida without the prior written
consent of Ambow Chuangying. The pledge shall be terminated automatically upon termination of the technology service agreement
and full discharge of the secured debt. Without Ambow Chuangying’s prior consent, the pledgors shall not be entitled to grant
or assign their rights and obligations under the agreement. Ambow Chuangying may assign at any time all or any of its rights and
obligations hereunder and other agreements contemplated hereby to any person (either a natural person or a legal person) it designates.
In such case, the assignee shall assume Ambow Chuangying’s rights and obligations under this agreement. This agreement shall
be binding upon the parties and their respective successors and permitted assigns. The parties shall negotiate in good faith to
resolve any disputes arising out of or in connection with this agreement. If the parties cannot reach an agreement on the resolution
of such disputes within sixty days after one party receives the notice of the other party requesting the beginning of discussions
or as otherwise agreed, either party shall submit such disputes to China International Economic and Trade Arbitration Commission
(“CIETAC”) for arbitration in accordance with its then-effective arbitration rules. The arbitration shall be conducted
in Beijing, and the language used in arbitration shall be Chinese. The award of the arbitration shall be final and binding upon
the parties.
Call Option Agreement . Xuejun Xie
and Jianguo Xue, each a shareholder of Ambow Shida, entered into a call option agreement on January 31, 2005, which was amended
by the termination agreement dated April 26, 2007 and further amended by the supplementary agreement dated January 4,
2009 entered into by and among AECL, Ambow Online, Xuejun Xie and Jianguo Xue. AECL, Ambow Online, Xuejun Xie and Jianguo Xue terminated
the abovementioned call option agreement and supplementary agreement by entering into a termination agreement on June 29, 2017.
Ambow Chuangying, Xuejun Xie and Jianguo Xue entered into a new call option agreement on June 29, 2017, pursuant to which Ambow
Chuangying or its designee has an option to purchase from each of Xuejun Xie and Jianguo Xue, to the extent permitted under PRC
laws, all or part of his or her equity interest in Ambow Shida at any time during the term of the agreement. Ambow Chuangying or
its designee shall have sole discretion to decide when to exercise the option, whether in part or in full. Xuejun Xie and Jianguo
Xue agreed not to dispose of the equity interest or exercise any related rights in any form without Ambow Chuangying or its designee’s
written consent. Xuejun Xie and Jianguo Xue agreed that before Ambow Chuangying or its designee exercises the option to obtain
all the equity interest and assets, Xuejun Xie and Jianguo Xue (i) shall not create or allow any option, call option, pledge,
or other equity interest or security interest on equity in Ambow Shida without Ambow Chuangying’s written consent, (ii) shall
irrevocably waive the preemptive right to purchase the equity in Ambow Shida to which it is entitled under the Chinese laws and
the bylaws of Ambow Shida , (iii) shall not transfer the equity in Ambow Shida to any third party without Ambow Chuangying’s
written consent, (iv) shall neither supplement, alter or modify the Articles of Association of Ambow Shida in any form, nor increase
or decrease its registered capital, or otherwise change the structure of its registered capital without Ambow Chuangying’s
written consent, (v) during the term of this agreement, have not engaged in and shall not engage in any act or omission that may
cause any losses to Ambow Chuangying or cause any reduction in value of the equity in Ambow Shida , (vi) without Ambow Chuangying’s
written consent, shall not incur, assume, guarantee or allow the existence of any debt other than the debt that (a) arises in the
normal or routine course of business rather than out of borrowing, and (b) has been disclosed to and approved in writing by Ambow
Chuangying. Ambow Shida has the right to operate all business activities within the approved business scope which it is operating
or it expects to operate in the future. To the fullest extent permitted by the Chinese laws, the transfer price of the equity in
Ambow Shida (or any part thereof) shall be equal to each of Xuejun Xie and Jianguo Xue’s initial contribution to the registered
capital of Ambow Shida in exchange for such Equity in Ambow Shida (or any part thereof). Should we decide to exercise such option,
we or our designee would affect such purchase through the cancellation of loans owed to us by Xuejun Xie and/or Jianguo Xue unless
the then applicable laws require the purchase price to be determined by a valuation or otherwise provided, in which case the transfer
price shall be the minimum amount provided by applicable law and we will effect such purchase through, to the extent necessary,
a combination of cash and cancellation of loans owed to us by each of Xuejun Xie and Jianguo Xue. This call option is not subject
to any time limit and has been effective upon execution by the parties. This agreement shall not terminate until the termination
of the loan agreement. Ambow Chuangying shall have the right to early terminate this agreement. If any dispute arises out of the
interpretation or performance of this agreement, the parties shall negotiate in good faith to resolve such dispute; if such dispute
cannot be resolved within thirty days of the beginning of such negotiations, either party may submit such dispute to CIETAC in
Beijing for arbitration in accordance with its then effective arbitration rules.
Powers of Attorney Pursuant to the
powers of attorney, each dated April 26, 2007, each of Xuejun Xie and Jianguo Xue irrevocably entrusted all the rights to
exercise her or his voting power of Ambow Shida to Ambow Online. Xuejun Xie and Jianguo Xue terminated the powers of attorney and
entered into new powers of attorney on June 19, 2017, pursuant to which each of Xuejun Xie and Jianguo Xue irrevocably entrusted
all the rights to exercise her or his voting power of Ambow Shida to Ambow Chuangying for an indefinite period of time, including
without limitation, proposing to convene a shareholders’ meeting, attending a shareholders’ meeting and exercising
the voting rights at a shareholders’ meeting.
Loan Agreements AECL, Xuejun Xie
and Jianguo Xue, each a shareholder of Ambow Shida, respectively, entered into loan agreements on January 31, 2005, which were
amended by amendment agreements, dated April 26, 2007, among Ambow Online, AECL and Xuejun Xie and Jianguo Xue, respectively,
and further amended by the supplementary agreement dated January 4, 2009 entered into by and among AECL, Ambow Online, Xuejun
Xie and Jianguo Xue or renewed by a loan agreement between Ambow Online and Jianguo Xue dated February 1, 2008. AECL, Ambow
Online, Xuejun Xie and Jianguo Xue terminated the abovementioned loan agreements by entering into a termination agreement on June
29, 2017. Ambow Chuangying, Xuejun Xie and Jianguo Xue entered into a new loan agreement on June 29, 2017, pursuant to which Ambow
Chuangying loaned RMB 2.7 million and RMB 0.3 million to Xuejun Xie and Jianguo Xue, respectively. To the extent permitted by PRC
laws, each loan shall be deemed to have been repaid upon the transfer of the equity interest in Ambow Shida held by Xuejun Xie
and Jianguo Xue, as applicable, to Ambow Chuangying or its designee. This loan agreement shall remain in effect until the loans
thereunder are fully repaid. To the extent permitted by the relevant PRC laws, Ambow Chuangying shall determine at its sole discretion
the timing and method of the repayment of the loans thereunder and notify the borrowers in writing of such arrangements seven days
in advance. The borrowers shall not repay the loans to Ambow Chuangying early unless Ambow Chuangying notifies the borrowers in
writing that the loan thereunder has expired or as otherwise provided therein. Any disputes arising in connection with the interpretation
or execution of this agreement shall be resolved by the parties through friendly consultations; if such disputes cannot be resolved
within thirty days of the beginning of the consultations, either party may submit such disputes to CIETAC in Beijing for arbitration
in accordance with its then effective arbitration rules.
Agreements that provide effective control over Ambow Shanghai
and its subsidiaries
We have entered into a series of agreements
with Ambow Shanghai and its shareholders. These agreements provide us substantial ability to control Ambow Shanghai and its shareholders,
and we have obtained an exclusive option to purchase all of the equity interests of Ambow Shanghai. These agreements include:
Share Pledge Agreement . Ambow Online,
Xuejun Xie and Xiaogang Feng, each a shareholder of Ambow Shanghai, entered into a share pledge agreement on October 31, 2009
and a supplementary agreement on January 4, 2010. The share pledge was registered with the local SAIC and then was cancelled.
Whereas Wenjian Fund and Xiaogang Feng transferred their shares to Gang Huang in June 2017. Ambow Online, Xuejun Xie and Xiaogang
Feng terminated the abovementioned share pledge agreement and the supplementary agreement by entering into a termination agreement
on June 29, 2017. Ambow Shengying, Xuejun Xie and Gang Huang entered into a share pledge agreement on June 29, 2017 to secure the
performance of Ambow Shanghai or its subsidiaries’ obligations under a new technology service agreement dated June 29, 2017
between Ambow Shanghai and Ambow Shengying. If Ambow Shanghai and its subsidiaries fail to fulfill their obligations under the
technology service agreement, or Ambow Shanghai and its subsidiaries breach their duties or obligations hereunder, Ambow Shengying
shall have the right to exercise the pledge in any manner at any time to the extent permitted by applicable laws during the term
of pledge. Ambow Shengying may dispose of the pledged equity in accordance with the provisions of the Security Law of the People’s
Republic of China and relevant laws and regulations, and shall have the right to be indemnified for the secured debt and any other
relevant expenses out of the proceeds from the disposal of the pledged equity. Without Ambow Shengying’s prior written consent,
pledgors shall not (i) make a proposal to amend the articles of association of Ambow Shanghai or cause the making of such
proposal, or increase or reduce Ambow Shanghai’s registered capital, or otherwise change the structure of its registered
capital, (ii) create any further security, encumbrances and any third party’s rights on the pledged equity in addition
to the pledge created under the share pledge agreement, (iii)perform any act that may prejudice any rights of Ambow Shengying under
the share pledge agreement, or any act that may materially affect the assets, business and/or operations of Ambow Shanghai, (iv) distribute
dividends to the shareholders in any form (however, upon Ambow Shengying’s request, pledgors shall immediately distribute
all of their distributable profits to the shareholders), or (v) transfer or dispose of the pledged equity in any way. The
share pledge agreements have been in effect since the date when the authorized representatives of the parties duly execute this
agreement and shall remain in effect until the technology service agreement is terminated and the secured debt is fully repaid.
The share pledge agreements may be unilaterally terminated by Ambow Shengying. Neither of pledgors is entitled to unilaterally
terminate the share pledge agreements. Without Ambow Shengying’s prior written consent, pledgors shall not transfer any of
their rights or obligations under the share pledge agreement to any other party. Ambow Shengying shall have the right to transfer
to any third party any of its rights or obligations under the share pledge agreement and any of its rights or obligations under
other agreements contemplated by the share pledge agreement without pledgor’s prior consent. If any dispute arises between
the parties in connection with the interpretation and performance of the provisions thereunder, the parties shall resolve such
dispute in good faith through discussions. If no agreement can be reached within sixty days after one party receives the notice
of the other party requesting the beginning of discussions or as otherwise agreed, either party shall have the right to submit
such dispute to CIETAC for arbitration in accordance with its then-effective rules. The arbitration shall be held in Beijing. The
award of the arbitration shall be final and binding upon the parties.
Call Option Agreement . Ambow Online,
Xuejun Xie and Xiaogang Feng entered into a call option agreement on October 31, 2009 and a supplementary agreement on January 4,
2010. Gang Huang, as the new shareholder, and Xuejun Xie entered into a new call option agreement with Ambow Shengying on June
29, 2017, which irrevocably granted Ambow Shengying or its designee an exclusive option to purchase, to the extent permitted under
PRC laws, all or part of their equity interest in Ambow Shanghai. The exercise price of such option shall be all or part, as applicable,
of the initial amount of the registered capital contributed by such shareholder to acquire such equity interest in Ambow Shanghai
and may be paid by the cancellation of indebtedness owed by such shareholder to Ambow Shengying, or the minimum amount of consideration
permitted by applicable PRC law at the time when such transfer occurs, in which case we will pay the exercise price through, to
the extent necessary, a combination of cash and cancellation of indebtedness owed by such shareholder to Ambow Shengying. Ambow
Shengying or its designee shall have sole discretion to decide when to exercise the option, whether in part or in full. Currently,
we do not expect to exercise such option in the foreseeable future. Without Ambow Shengying’s written consent, each of Xuejun
Xie and Gang Huang shall not (i) transfer the equity interest in Ambow Shanghai to any third party, (ii) supplement,
alter or modify the articles of association of Ambow Shanghai in any form, or increase or decrease Ambow Shanghai’s registered
capital, or otherwise change the structure of its registered capital, or (iii) incur, assume, guarantee or allow the existence
of any debt other than the debt that (x) arises in the normal or routine course of business rather than out of borrowing or
(y) has been disclosed to and approved in writing by Ambow Shengying. This agreement shall remain effective until the termination
of the loan agreement. Ambow Shengying has the right to early terminate this agreement upon twenty days’ prior notice, but
neither Xuejun Xie nor Gang Huang may early terminate the agreement without Ambow Shengying’s written consent. All disputes
arising out of or in connection with this agreement shall be settled by the parties through good faith consultations. If no agreement
can be reached through consultations within sixty days after one party receives a notice from other party requesting the beginning
of such consultations or as otherwise agreed by the parties, either party shall have the right to submit relevant disputes to CIETAC
for arbitration in accordance with its then-effective arbitration rules. The arbitration shall be held in Beijing. The award of
the arbitration shall be final and binding on both parties.
Powers of Attorney . Each of Xuejun
Xie and Xiaogang Feng entered into a powers of attorney on October 31, 2009. Each of Gang Huang, as the new shareholder, and
Xuejun Xie entered into a new powers of attorney on June 29, 2017, to irrevocably entrust all the rights to exercise his voting
power to Ambow Shengying, including without limitation, the power to sell, transfer or pledge, in whole or in part, such shareholder’s
equity interests in Ambow Shanghai and to nominate and appoint the legal representative, directors, supervisors, general managers
and other senior management of Ambow Shanghai during the term of the share pledge. The powers of attorney have been in effect since
the date of execution. Unless terminated as agreed by the shareholders of Ambow Shanghai and Ambow Shengying, the powers of attorney
shall be irrevocable and remain effective during the term of pledge.
Loan Agreement . Pursuant to the
loan agreement, dated October 31, 2009, and amended by a supplementary agreement dated January 4, 2010, among Ambow Online,
Xuejun Xie and Xiaogang Feng, Ambow Online loaned RMB 0.8 million to Xuejun Xie and RMB 0.2 million to Xiaogang Feng to fund the
registered capital requirements of Ambow Shanghai. Ambow Online, Xuejun Xie and Xiaogang Feng terminated the abovementioned loan
agreement by entering into a termination agreement on June 29, 2017. Ambow Shengying, Xuejun Xie and Gang Huang entered into a
new loan agreement on June 29, 2017, where Ambow Shengying loaned RMB 0.8 million to Xuejun Xie and RMB 0.45 million to Gang Huang.
To the extent permitted by PRC laws, each loan shall be deemed to have been repaid upon the transfer of the equity interest in
Ambow Shanghai held by each of Xuejun Xie and Gang Huang, as applicable, to Ambow Shengying or its designee. To the extent permitted
by the relevant PRC laws, Ambow Shengying shall determine at its sole discretion the timing and method of the repayment of the
loans under the loan agreement and notify the borrowers in writing of such arrangements seven days in advance. The borrowers shall
not repay the loans to Ambow Shengying early unless Ambow Shengying notifies the borrowers in writing that the loans have expired
or as otherwise provided under the loan agreement. The borrowers shall not assign their rights and obligations under the loan agreement
to any third party without Ambow Shengying’s prior written consent. The loan agreement has been in effect since the date
of execution by the parties and shall remain effective until the borrowers fully repay the loans under the agreement. If any dispute
arises between the parties in connection with the interpretation and performance of the terms, the parties shall negotiate in good
faith to resolve such dispute. If no agreement can be reached, either party may submit such dispute to CIETAC for arbitration in
accordance with its then-effective arbitration rules. The arbitration shall be held in Chinese in Beijing. The award of the arbitration
shall be final and binding on both parties.
Agreements that provide effective control over Ambow Sihua
and its subsidiaries
We have entered into a series of agreements
with Ambow Sihua and its shareholders. These agreements provide us substantial ability to control Ambow Sihua and its shareholders,
and we have obtained an exclusive option to purchase all of the equity interests of Ambow Sihua. These agreements include:
Share Pledge Agreements . Ambow Online
and Xuejun Xie, a shareholder of Ambow Sihua, entered into a share pledge agreement on October 31, 2009, which was amended
by a supplementary agreement dated March 4, 2010 between Ambow Online and Xiaogang Feng, a shareholder of Ambow Sihua. The
share pledge was registered with the local SAIC and then was cancelled. Ambow Online, Xuejun Xie and Xiaogang Feng terminated the
abovementioned share pledge agreement and the supplementary agreement by entering into a termination agreement on June 29, 2017.
Whereas Xiaogang Feng transferred his shares to Gang Huang in June 2017, Ambow Shengying, Xuejun Xie and Gang Huang entered into
a new share pledge agreement on June 29, 2017, pursuant to which each of Xuejun Xie and Gang Huang pledged all of her or his equity
interest in Ambow Sihua to Ambow Shengying to secure the performance of Ambow Sihua under the technology service agreement dated
June 29, 2017 between Ambow Sihua and Ambow Shengying as described below. If Ambow Sihua and its subsidiaries fail to fulfill their
obligations under the technology service agreement, or Ambow Sihua and its subsidiaries breach their duties or obligations hereunder,
Ambow Shengying shall have the right to exercise the pledge in any manner at any time to the extent permitted by applicable laws
during the term of pledge. Without Ambow Shengying’s prior written consent, each of Xuejun Xie and Gang Huang shall not (i) make
a proposal to amend the articles of association of Ambow Sihua or cause the making of such proposal, or increase or reduce Ambow
Sihua’s registered capital, or otherwise change the structure of its registered capital, (ii) create any further security,
encumbrances and any third party’s rights on the pledged equity in addition to the pledge created under the share pledge
agreements, (iii) perform any act that may prejudice any rights of Ambow Shengying under the share pledge agreements, or any
act that may materially affect the assets, business and/or operations of Ambow Sihua, (iv) distribute dividends to the shareholders
in any form (however, upon Ambow Shengying’s request, pledgors shall immediately distribute all of their distributable profits
to the shareholders), or (v) transfer or dispose of the pledged equity in any way. The share pledge agreements shall remain
in effect until the technology service agreement is terminated and the secured debt is fully repaid. The share pledge agreements
may be unilaterally terminated by Ambow Shengying. Neither of Xuejun Xie and Gang Huang is entitled to unilaterally terminate the
share pledge agreements. Without Ambow Shengying’s prior written consent, pledgors shall not transfer any of their rights
or obligations under the share pledge agreements to any other party. Ambow Shengying shall have the right to transfer to any third
party any of its rights or obligations under the share pledge agreements and any of its rights or obligations under other agreements
contemplated by the share pledge agreements without pledgor’s prior consent. If any dispute arises between the parties in
connection with the interpretation and performance of the provisions thereunder, the parties shall resolve such dispute in good
faith through discussions. If no agreement can be reached within sixty days after one party receives the notice of the other party
requesting the beginning of discussions or as otherwise agreed, either party shall have the right to submit such dispute to the
CIETAC for arbitration in accordance with its then-effective rules. The arbitration shall be held in Beijing. The award of the
arbitration shall be final and binding upon the parties.
Call Option Agreements Pursuant
to the call option agreement, dated October 31, 2009 and further amended by a supplementary agreement dated March 4,
2010, between Ambow Online and Xuejun Xie, a shareholder of Ambow Sihua, and the call option agreement, dated March 4, 2010,
between Ambow Online and Xiaogang Feng, a shareholder of Ambow Sihua, each of Xuejun Xie and Xiaogang Feng irrevocably granted
Ambow Online or its designee an exclusive option to purchase, to the extent permitted under PRC laws, all or part of her or his
equity interest in Ambow Sihua. Ambow Online, Xuejun Xie and Xiaogang Feng terminated the abovementioned call option agreements
and supplementary agreements by entering into a termination agreement on June 29, 2017. Ambow Shengying, Xuejun Xie and Gang Huang
entered into a new call option agreement on June 29, 2017, pursuant to which Ambow Shengying or its designee has an option to
purchase from each of Xuejun Xie and Gang Huang, to the extent permitted under PRC laws, all or part of his or her equity interest
in Ambow Sihua at any time during the term of the agreement. The exercise price of such option shall be all or part, as applicable,
of the initial amount of the registered capital contributed by such shareholder to acquire such equity interest in Ambow Sihua
and may be paid by the cancellation of indebtedness owed by such shareholder to Ambow Shengying, or the minimum amount of consideration
permitted by applicable PRC law at the time when such transfer occurs, in which case we will pay the exercise price through, to
the extent necessary, a combination of cash and cancellation of indebtedness owed by such shareholder to Ambow Shengying. Ambow
Shengying or its designee shall have sole discretion to decide when to exercise the option, whether in part or in full. Currently,
we do not expect to exercise such option in the foreseeable future. Without Ambow Shengying’s written consent, each of Xuejun
Xie and Gang Huang shall not (i) transfer the equity interest in Ambow Sihua to any third party, (ii) supplement, alter
or modify the articles of association of Ambow Sihua in any form, or increase or decrease Ambow Sihua’s registered capital,
or otherwise change the structure of its registered capital, or (iii) incur, assume, guarantee or allow the existence of
any debt other than the debt that (x) arises in the normal or routine course of business rather than out of borrowing or
(y) has been disclosed to and approved in writing by Ambow Shengying. Xuejun Xie and Gang Huang represent and warrant that
during the term of the call option agreements, Xuejun Xie, Gang Huang and Ambow Sihua have not engaged in and shall not engage
in any act or omission that may cause any losses to Ambow Shengying and may cause any reduction in value of the equity interests
in Ambow Sihua held by Xuejun Xie and Gang Huang. This agreement has been in effect as of the date when the authorized representatives
of the parties duly execute the agreement, and shall remain effective until the termination of the loan agreement. Unless otherwise
provided therein, Ambow Shengying shall have the right to terminate this agreement early upon twenty days’ prior notice,
but neither of Xuejun Xie and Gang Huang shall terminate this agreement early. Ambow Shengying shall have the right to transfer
its rights under the call option agreements and other agreements contemplated by the call option agreements at its sole discretion
to any third party without Xuejun Xie and Gang Huang’s consent. All disputes arising out of or in connection with this agreement
shall be settled by the parties through good faith consultations. If no agreement can be reached through consultations within
sixty days after one party receives a notice from other party requesting the beginning of such consultations or as otherwise agreed
by the parties, either party shall have the right to submit relevant disputes to CIETAC for arbitration in accordance with its
then-effective arbitration rules. The arbitration shall be held in Beijing. The award of the arbitration shall be final and binding
on both parties.
Powers of Attorney . Pursuant to
the powers of attorney, dated October 31, 2009 and March 4, 2010, respectively, each of Xuejun Xie and Xiaogang Feng
irrevocably entrusted all the rights to exercise her or his voting power to Ambow Online. Xuejun Xie and Xiaogang Feng terminated
these powers of attorney on June 29, 2017. Xuejun Xie and Gang Huang entered into new powers of attorney on June 29, 2017, pursuant
to which each of Xuejun Xie and Gang Huang irrevocably entrusted all the rights to exercise her or his voting power to Ambow Shengying,
including without limitation, the power to sell, transfer or pledge, in whole or in part, her or his equity interest in Ambow Sihua
and nominate and appoint the legal representative, directors, supervisors, general managers and other senior management of Ambow
Sihua during the term of the share pledge. The powers of attorney have been in effect since the date of execution. Unless terminated
as agreed by the shareholders of Ambow Sihua and Ambow Shengying, the powers of attorney shall be irrevocable and remain effective
during the term of pledge.
Loan Agreement . Ambow Online and
Xiaogang Feng entered into a loan agreement on March 4, 2010, in which Ambow Online loaned RMB 40.0 million to Xiaogang Feng
to fund the registered capital requirements of Ambow Sihua. Ambow Online and Xiaogang Feng terminated the abovementioned loan agreement
by entering into a termination agreement on June 29, 2017. Ambow Shengying, Gang Huang entered into a new loan agreement on June
29, 2017, pursuant to which Ambow Shengying loaned RMB 40 million to Gang Huang. To the extent permitted by PRC laws, such loan
shall be deemed to have been repaid upon the transfer of the equity interest in Ambow Sihua held by Gang Huang to Ambow Shengying
or its designee. To the extent permitted by the PRC laws, Ambow Shengying shall determine at its sole discretion the timing and
method of the repayment of the loan under the loan agreement and notify the borrower in writing of such arrangements seven days
in advance. The borrower shall not repay the loan early to Ambow Shengying unless Ambow Shengying notifies the borrower in writing
that the loan has expired or as otherwise provided under the loan agreement. The borrower shall not assign his or her rights and
obligations under the loan agreement to any third party without Ambow Shengying’s prior written consent. The loan agreement
has been in effect since the date of execution by the parties and shall remain effective until the borrower fully repays the loan
under the agreement. If any dispute arises between the parties in connection with the interpretation and performance of the terms,
the parties shall negotiate in good faith to resolve such dispute. If no agreement can be reached, either party may submit such
dispute to CIETAC for arbitration in accordance with its then-effective arbitration rules. The arbitration shall be held in Chinese
in Beijing. The award of the arbitration shall be final and binding on both parties.
Agreements that provide effective control over Ambow Rongye
We have entered into a series of agreements
with Ambow Rongye and its shareholders. These agreements provide us with the ability to control Ambow Rongye and grant us the exclusive
option to purchase all of the equity interests of Ambow Rongye. These agreements include:
Share Pledge Agreement . Pursuant
to the share pledge agreement, dated September 8, 2015, among Ambow Shengying, Xuejun Xie and Gang Huang, each a shareholder
of Ambow Rongye, each of Xuejun Xie and Gang Huang pledged all of their equity interest in Ambow Rongye to Ambow Shengying to secure
the performance of Ambow Rongye under a technology service agreement between Ambow Shengying and Ambow Rongye dated September 8,
2015. If (a) Ambow Rongye fails to fulfill its payment obligation or other related obligations to pledgee in accordance with
the provisions of technology service agreement, or (b) the pledgors breach their duties or obligations thereunder, the pledgee
shall have the right to exercise the pledge in any manner at any time it deems appropriate to the extent permitted by applicable
law during the term of pledge, including without limitation: (a) to negotiate with the pledgors to discharge the secured debt
with the pledged equity at a discount rate; (b) to sell off the pledged equity and use the proceeds thereof to discharge the
secured debt; (c) to retain a relevant agency to auction all or part of the pledged equity; and/or (d) to otherwise dispose
of the pledged equity appropriately to the extent permitted by applicable law. Each shareholder of Ambow Rongye also agreed that,
without Ambow Shengying’s prior written consent, each of Xuejun Xie and Gang Huang shall not (i) make a proposal to
amend the articles of association of Ambow Rongye or cause the making of such proposal, or increase or reduce Ambow Rongye’s
registered capital, or otherwise change the structure of its registered capital, (ii) create any further security, encumbrances
and any third party’s rights on the pledged equity in addition to the pledge created under the share pledge agreements, (iii) perform
any act that may prejudice any rights of Ambow Shengying under the share pledge agreements, or any act that may materially affect
the assets, business and/or operations of Ambow Rongye, (iv) distribute dividends to the shareholders in any form (however,
upon Ambow Shengying’s request, the pledgors shall immediately distribute all of their distributable profits to the shareholders),
or (v) transfer or dispose of the pledged equity in any way. The share pledge agreements shall remain in effect until the
technology service agreement is terminated and the secured debt is fully repaid. Without Ambow Shengying’s prior written
consent, the pledgors shall not transfer any of their rights or obligations under the share pledge agreement to any other party.
Ambow Shengying shall have the right to transfer to any third party any of its rights or obligations under the share pledge agreement
and any of its rights or obligations under other agreements contemplated by the share pledge agreement without the pledgor’s
prior consent. The share pledge agreement shall remain in effect until the secured debt is fully repaid. The share pledge agreement
may be unilaterally terminated by Ambow Shengying. None of Xuejun Xie or Gang Huang is entitled to unilaterally terminate the share
pledge agreement. If any dispute arises between the parties in connection with the interpretation and performance of the provisions
thereunder, the parties shall resolve such dispute in good faith through discussions. If no agreement can be reached within sixty
days after one party receives the notice of the other party requesting the beginning of discussions or as otherwise agreed, either
party shall have the right to submit such dispute to CIETAC for arbitration in accordance with its then-effective rules. The arbitration
shall be held in Beijing. The award of the arbitration shall be final and binding upon the parties. The share pledge has been registered
with the local SAIC.
Call Option Agreement . Pursuant
to the call option agreement, dated September 8, 2015, among Ambow Shengying, Xuejun Xie, and Gang Huang, each a shareholder
of Ambow Rongye, each of Xuejun Xie and Gang Huang irrevocably granted Ambow Shengying or its designee an exclusive option to purchase,
to the extent permitted under PRC laws, all or part of his or her equity interest in Ambow Rongye. The exercise price of such option
shall be all or part, as applicable, of the initial amount of the registered capital contributed by such shareholder to acquire
such equity interest in Ambow Rongye and may be paid by the cancellation of indebtedness owed by such shareholder to Ambow Shengying,
or the minimum amount of consideration permitted by applicable PRC law at the time when such transfer occurs, in which case we
will pay the exercise price through, to the extent necessary, a combination of cash and cancellation of indebtedness owed by such
shareholder to Ambow Shengying. Ambow Shengying or its designee shall have sole discretion to decide when to exercise the option,
whether in part or in full. Currently, we do not expect to exercise such option in the foreseeable future. Without Ambow Shengying’s
written consent, each of Xuejun Xie and Gang Huang shall not transfer his or her equity interest in Ambow Rongye to any third party.
Xuejun Xie and Gang Huang represent and warrant that (i) except for the pledge granted under the share pledge agreement, they
have not created or allowed any option, call option, pledge, or other equity interest or security interest on their equity interests
in Ambow Rongye without Ambow Shenying’s written consent, and (ii) during the term of the call option agreement, Xuejun
Xie, Gang Huang and Ambow Rongye have not engaged in and shall not engage in any act or omission that may cause any losses to Ambow
Shengying and may cause any reduction in value of the equity interests in Ambow Rongye held by Xuejun Xie and Gang Huang. This
agreement has been in effect since the date when the authorized representatives of the parties duly execute the agreement, and
shall remain effective until the termination of the loan agreement. Unless otherwise provided therein, Ambow Shengying shall have
the right to terminate this agreement early upon twenty days’ prior notice, but Xuejun Xie and Gang Huang shall not terminate
this agreement early. Ambow Shengying shall have the right to transfer its rights under the agreement and other agreements contemplated
by the agreement at its sole discretion to any third party without Xuejun Xie and Gang Huang’s consent. All disputes arising
out of or in connection with this agreement shall be settled by the parties through good faith consultations. If no agreement can
be reached through consultations within sixty days after one party receives a notice from other party requesting the beginning
of such consultations or as otherwise agreed by the parties, either party shall have the right to submit relevant disputes to CIETAC
for arbitration in accordance with its then effective arbitration rules. The arbitration shall be held in Beijing. The award of
the arbitration shall be final and binding on both parties.
Powers of Attorney . Under powers
of attorney, each dated September 8, 2015, each of Xuejun Xie and Gang Huang granted to Ambow Shengying the power to exercise
all of his or her voting rights of Ambow Rongye during the term of the share pledge. The powers of attorney shall come into effect
upon the date of execution. Unless terminated as agreed by the shareholders of Ambow Rongye and Ambow Shengying, the powers of
attorney shall remain effective during the term of pledge.
Loan Agreement . Pursuant to the
loan agreement among Ambow Shengying, Xuejun Xie and Gang Huang dated September 8, 2015, Ambow Shengying loaned RMB 6 million
to Xuejun Xie and RMB 4 million to Gang Huang to fund the registered capital requirements of a domestic PRC company. Ambow later
formed Ambow Rongye to serve as this domestic PRC company. To the extent permitted by the relevant PRC laws, Ambow Shengying shall
determine at its sole discretion the timing and method of the repayment of the loans and notify borrowers in writing of such arrangements
seven days in advance. Borrowers and Ambow Shengying further agree that borrowers shall not repay the loan to Ambow Shengying early
unless Ambow Shengying notifies borrowers in writing that the loans thereunder have expired or as otherwise provided therein. To
the extent permitted by PRC laws, each loan shall be deemed to have been repaid upon the transfer of the equity interest held by
each of Xuejun Xie and Gang Huang in Ambow Rongye to Ambow Shengying. This agreement has been in effect since the date of execution
by the parties and shall remain effective until the borrowers fully repay the loans under this agreement. If any dispute arises
between the parties in connection with the interpretation and performance of the terms thereof, the parties shall negotiate in
good faith to resolve such dispute. If no agreement can be reached, either party may submit such dispute to CIETAC for arbitration
in accordance with its then-effective arbitration rules. The arbitration shall be conducted in Chinese in Beijing. The award of
the arbitration shall be final and binding upon the disputing parties.
Agreements that provide effective control over Ambow Zhixin
We have entered into a series of agreements
with Ambow Zhixin and its shareholders. These agreements provide us with the ability to control Ambow Zhixin and grant us the exclusive
option to purchase all of the equity interests of Ambow Zhixin. These agreements include:
Share Pledge Agreement . Pursuant
to the share pledge agreement, dated October 14, 2015, among Ambow Shengying, Xuejun Xie and Gang Huang, each a shareholder of
Ambow Zhixin, each of Xuejun Xie and Gang Huang pledged all of their equity interest in Ambow Zhixin to Ambow Shengying to secure
the performance of Ambow Zhixin under a technology service agreement between Ambow Shengying and Ambow Zhixin dated October 14,
2015. If (a) Ambow Zhixin fails to fulfill its payment obligation or other related obligations to the pledgee in accordance
with the provisions of technology service agreement, or (b) the pledgors breach their duties or obligations thereunder, the
pledgee shall have the right to exercise the pledge in any manner at any time it deems appropriate to the extent permitted by applicable
law during the term of pledge, including without limitation: (a) to negotiate with the pledgors to discharge the secured debt
with the pledged equity at a discount rate; (b) to sell off the pledged equity and use the proceeds thereof to discharge the
secured debt; (c) to retain a relevant agency to auction all or part of the pledged equity; and/or (d) to otherwise dispose
of the pledged equity appropriately to the extent permitted by applicable law. Each shareholder of Ambow Zhixin also agreed that,
without Ambow Shengying’s prior written consent, each of Xuejun Xie and Gang Huang shall not (i) make a proposal to
amend the articles of association of Ambow Zhixin or cause the making of such proposal, or increase or reduce Ambow Zhixin’s
registered capital, or otherwise change the structure of its registered capital, (ii) create any further security, encumbrances
and any third party’s rights on the pledged equity in addition to the pledge created under the share pledge agreements, (iii) perform
any act that may prejudice any rights of Ambow Shengying under the share pledge agreements, or any act that may materially affect
the assets, business and/or operations of Ambow Zhixin, (iv) distribute dividends to the shareholders in any form (however,
upon Ambow Shengying’s request, the pledgors shall immediately distribute all of their distributable profits to the shareholders),
or (v) transfer or dispose of the pledged equity in any way. The share pledge agreements shall remain in effect until the
technology service agreement is terminated and the secured debt is fully repaid. Without Ambow Shengying’s prior written
consent, the pledgors shall not transfer any of their rights or obligations under the share pledge agreement to any other party.
Ambow Shengying shall have the right to transfer to any third party any of its rights or obligations under the share pledge agreement
and any of its rights or obligations under other agreements contemplated by the share pledge agreement without the pledgor’s
prior consent. The share pledge agreement shall remain in effect until the secured debt is fully repaid. The share pledge agreement
may be unilaterally terminated by Ambow Shengying. None of Xuejun Xie or Gang Huang is entitled to unilaterally terminate the share
pledge agreement. If any dispute arises between the parties in connection with the interpretation and performance of the provisions
thereunder, the parties shall resolve such dispute in good faith through discussions. If no agreement can be reached within sixty
days after one party receives the notice of the other party requesting the beginning of discussions or as otherwise agreed, either
party shall have the right to submit such dispute to CIETAC for arbitration in accordance with its then-effective rules. The arbitration
shall be held in Beijing. The award of the arbitration shall be final and binding upon the parties. The share pledge has been registered
with the local SAIC.
Call Option Agreement . Pursuant
to the call option agreement, dated October 14, 2015, among Ambow Shengying, Xuejun Xie and Gang Huang, each a shareholder of Ambow
Zhixin, each of Xuejun Xie and Gang Huang irrevocably granted Ambow Shengying or its designee an exclusive option to purchase,
to the extent permitted under PRC laws, all or part of his or her equity interest in Ambow Zhixin. The exercise price of such option
shall be all or part, as applicable, of the initial amount of the registered capital contributed by such shareholder to acquire
such equity interest in Ambow Zhixin and may be paid by the cancellation of indebtedness owed by such shareholder to Ambow Shengying,
or the minimum amount of consideration permitted by applicable PRC law at the time when such transfer occurs, in which case we
will pay the exercise price through, to the extent necessary, a combination of cash and cancellation of indebtedness owed by such
shareholder to Ambow Shengying. Ambow Shengying or its designee shall have sole discretion to decide when to exercise the option,
whether in part or in full. Currently, we do not expect to exercise such option in the foreseeable future. Without Ambow Shengying’s
written consent, each of Xuejun Xie and Gang Huang shall not transfer his or her equity interest in Ambow Zhixin to any third party.
Xuejun Xie and Gang Huang represent and warrant that (i) except for the pledge granted under the share pledge agreement, they
have not created or allowed any option, call option, pledge, or other equity interest or security interest on their equity interests
in Ambow Zhixin without Ambow Shengying’s written consent, and (ii) during the term of the call option agreement, Xuejun
Xie, Gang Huang and Ambow Zhixin have not engaged in and shall not engage in any act or omission that may cause any losses to Ambow
Shengying and may cause any reduction in value of the equity interests in Ambow Zhixin held by Xuejun Xie and Gang Huang. This
agreement has been in effect since the date when the authorized representatives of the parties duly execute the agreement, and
shall remain effective until the termination of the loan agreement. Unless otherwise provided therein, Ambow Shengying shall have
the right to terminate this agreement early upon twenty days’ prior notice, but Xuejun Xie and Gang Huang shall not terminate
this agreement early. Ambow Shengying shall have the right to transfer its rights under the agreement and other agreements contemplated
by the agreement at its sole discretion to any third party without Xuejun Xie and Gang Huang’s consent. All disputes arising
out of or in connection with this agreement shall be settled by the parties through good faith consultations. If no agreement can
be reached through consultations within sixty days after one party receives a notice from other party requesting the beginning
of such consultations or as otherwise agreed by the parties, either party shall have the right to submit relevant disputes to CIETAC
for arbitration in accordance with its then effective arbitration rules. The arbitration shall be held in Beijing. The award of
the arbitration shall be final and binding on both parties.
Powers of Attorney . Under powers
of attorney, each dated October 14, 2015, each of Xuejun Xie and Gang Huang granted to Ambow Shengying the power to exercise all
of his or her voting rights of Ambow Zhixin during the term of the share pledge. The powers of attorney shall come into effect
upon the date of execution. Unless terminated as agreed by the shareholders of Ambow Zhixin and Ambow Shengying, the powers of
attorney shall remain effective during the term of pledge.
Loan Agreement . Pursuant to the
loan agreement among Ambow Shengying, Xuejun Xie and Gang Huang dated October 14, 2015, Ambow Shengying loaned RMB 6 million to
Xuejun Xie and RMB 4 million to Gang Huang to fund the registered capital requirements of a domestic PRC company. Ambow later formed
Ambow Zhixin to serve as this domestic PRC company. To the extent permitted by the relevant PRC laws, Ambow Shengying shall determine
at its sole discretion the timing and method of the repayment of the loans and notify borrowers in writing of such arrangements
seven days in advance. Borrowers and Ambow Shengying further agree that borrowers shall not repay the loan to Ambow Shengying early
unless Ambow Shengying notifies borrowers in writing that the loans thereunder have expired or as otherwise provided therein. To
the extent permitted by PRC laws, each loan shall be deemed to have been repaid upon the transfer of the equity interest held by
each of Xuejun Xie and Gang Huang in Ambow Zhixin to Ambow Shengying. This agreement has been in effect since the date of execution
by the parties and shall remain effective until the borrowers fully repay the loans under this agreement. If any dispute arises
between the parties in connection with the interpretation and performance of the terms thereof, the parties shall negotiate in
good faith to resolve such dispute. If no agreement can be reached, either party may submit such dispute to CIETAC for arbitration
in accordance with its then-effective arbitration rules. The arbitration shall be conducted in Chinese in Beijing. The award of
the arbitration shall be final and binding upon the disputing parties.
Agreements that provide effective control over IValley
We have entered into
a series of agreements with IValley and its shareholders. These agreements provide us with the ability to control IValley and grant
us the exclusive option to purchase all of the equity interests of IValley. These agreements include:
Share Pledge Agreement. Pursuant
to the first and second share pledge agreement, dated March 20, 2017 and November 27, 2017, respectively, among Ambow Education
Management, Chiao-Ling Hsu and Shu Hui Cai, each a shareholder of IValley, each of Chiao-Ling Hsu and Shu Hui Cai pledged all of
their equity interest in IValley to Ambow Education Management to secure the performance of IValley under technology service agreements
between Ambow Education Management and IValley dated March 20, 2017 and November 27, 2017. If (a) IValley and its subsidiaries
fails to perform their payment obligation or other related obligations to the pledgee in accordance with the provisions of technology
service agreement, or (b) the pledgors breach their duties or obligations thereunder, the pledgee shall have the right to
exercise the pledge in any manner at any time it deems appropriate to the extent permitted by applicable law during the term of
pledge, including without limitation: (a) to negotiate with the pledgors to discharge the secured debt with the pledged equity
at a discount rate; (b) to sell off the pledged equity and use the proceeds thereof to discharge the secured debt; (c) to
retain a relevant agency to auction all or part of the pledged equity; and/or (d) to otherwise dispose of the pledged equity
appropriately to the extent permitted by applicable law. Each shareholder of IValley also agreed that, without Ambow Education
Management’s prior written consent, each of Chiao-Ling Hsu and Shu Hui Cai shall not (i) make a proposal to amend the
articles of association of IValley or cause the making of such proposal, (ii) increase or reduce IValley’s registered capital,
or otherwise change the structure of its registered capital, (iii) create any further security, encumbrances and any third
party’s rights on the pledged equity in addition to the pledge created under the share pledge agreements, (iv) perform
any act that may prejudice any rights of Ambow Education Management under the share pledge agreements, or any act that may materially
affect the assets, business and/or operations of IValley, (v) distribute dividends to the shareholders in any form (however,
upon Ambow Education Management’s request, the pledgors shall immediately distribute all of their distributable profits to
the shareholders), (vi) change the director or supervisor of IValley, or (vii) transfer or dispose of the pledged equity in
any way. The share pledge agreements shall remain in effect until the technology service agreement is terminated and the secured
debt is fully repaid. Without Ambow Education Management’s prior written consent, the pledgors shall not transfer any of
their rights or obligations under the share pledge agreement to any other party. Ambow Education Management shall have the right
to transfer to any third party any of its rights or obligations under the share pledge agreement and any of its rights or obligations
under other agreements contemplated by the share pledge agreement without the pledgor’s prior consent. The share pledge agreement
shall remain in effect until the secured debt is fully repaid. The share pledge agreement may be terminated by the consent of Ambow
Education Management or by mutual agreement of Chiao-Ling Hsu, Shu Hui Cai and Ambow Education Management. If any dispute arises
between the parties in connection with the interpretation and performance of the provisions thereunder, the parties shall resolve
such dispute in good faith through discussions. If no agreement can be reached within sixty days after one party receives the notice
of the other party requesting the beginning of discussions or as otherwise agreed, either party shall have the right to submit
such dispute to The Republic of China Arbitration Association for arbitration in accordance with its then-effective rules. The
arbitration shall be held in Taipei. The award of the arbitration shall be final and binding upon the parties.
Call Option Agreement Pursuant to
the first and second call option agreement, dated March 20, 2017 and November 27, 2017, respectively, among Ambow Education Management,
Chiao-Ling Hsu and Shu Hui Cai, each a shareholder of IValley, each of Chiao-Ling Hsu and Shu Hui Cai irrevocably granted Ambow
Education Management or its designee an option to purchase, to the extent permitted by laws, all or part of his or her equity interest
in IValley. The exercise price of such option shall be equal to the initial amount of the registered capital contributed by such
shareholder in exchange for such equity interest in IValley and may be paid by the cancellation of indebtedness owed by such shareholder
to Ambow Education Management. Ambow Education Management or its designee shall have the right to exercise the call option in any
way permitted by law at any time within the term of the option upon effectiveness of the agreement. Currently, we do not expect
to exercise such option in the foreseeable future. Without Ambow Education Management’s written consent, each of Chiao-Ling
Hsu and Shu Hui Cai shall not transfer his or her equity interest in IValley to any third party. Chiao-Ling Hsu and Shu Hui Cai
represent and warrant that (i) except for the pledge granted under the share pledge agreement, they have not created or allowed
any option, call option, pledge, or other equity interest or security interest on their equity interests in IValley without Ambow
Education Management’s written consent, and (ii) during the term of the call option agreement, Chiao-Ling Hsu, Shu Hui
Cai and IValley have not engaged in and shall not engage in any act or omission that may cause any losses to Ambow Education Management
and may cause any reduction in value of the equity interests in IValley held by Chiao-Ling Hsu and Shu Hui Cai. This agreement
has been in effect since the date when the authorized representatives of the parties duly execute the agreement, and shall remain
effective until the termination of the loan agreement. Unless otherwise provided therein, Ambow Education Management shall have
the right to terminate this agreement early upon twenty days’ prior notice, but Chiao-Ling Hsu and Shu Hui Cai shall not
terminate this agreement early. All disputes arising out of or in connection with this agreement shall be settled by the parties
through good faith consultations. If no agreement can be reached through consultations within sixty days after one party receives
a notice from other party requesting the beginning of such consultations or as otherwise agreed by the parties, either party shall
have the right to submit relevant disputes to The Republic of China Arbitration Association for arbitration in accordance with
its then effective arbitration rules. The arbitration shall be held in Taipei. The award of the arbitration shall be final and
binding on both parties.
Powers of Attorney Under the first
and second powers of attorney, each dated March 20, 2017 and November 27, 2017, respectively, each of Chiao-Ling Hsu and Shu Hui
Cai granted to Ambow Education Management the power to exercise all of his or her voting rights of IValley during the term of
the share pledge. The powers of attorney shall come into effect upon the date of execution. Unless terminated as agreed by the
shareholders of IValley and Ambow Education Management, the powers of attorney shall remain effective during the term of pledge.
Loan Agreement Pursuant to the loan
agreement among Ambow Education Management, Chiao-Ling Hsu and Shu Hui Cai dated February 10, 2017, Ambow Education Management
loaned TWD 3.0 million to Chiao-Ling Hsu and TWD 2.0 million to Shu Hui Cai to fund the registered capital requirements of IValley.
The second loan agreement dated July 28, 2017 was signed among Ambow Education Management, Chiao-Ling Hsu and Shu Hui Cai, which
Ambow Education Management loaned TWD 7.2 million to Chiao-Lin Hsu and TWD 4.8 million to Shu Hui Cai to fund the increased registered
capital of IValley. Ambow Education Management, Chiao-Ling Hsu and Shu Hui Cai mutually agree and confirm that the period of both
loans are 10 months from the date of activation. The loan period cannot be extended without the consent from Ambow Education Management,
and the way of return is determined by Ambow Education Management. To the extent permitted by Taiwan laws, each loan shall be deemed
to have been repaid in the amount to the price of the transferred equity interest upon the transfer of the equity interest held
by each of Chiao-Ling Hsu and Shu Hui Cai in IValley to Ambow Education Management. This agreement has been in effect since the
date of execution by the parties and shall remain effective until the borrowers fully repay the loans under this agreement. If
any dispute arises between the parties in connection with the interpretation and performance of the terms thereof, the parties
shall negotiate in good faith to resolve such dispute. If no agreement can be reached, either party may submit such dispute to
The Republic of China Arbitration Association for arbitration in accordance with its then-effective arbitration rules. The arbitration
shall be conducted in Taipei.
Agreements that transfer economic benefits to us
Agreements that transfer economic benefits to us from Ambow
Shida and its subsidiaries
Exclusive Cooperation Agreement or technology
service agreement Ambow Online and Ambow Shida entered into an exclusive cooperation agreement on January 31, 2005, which
was revised on May 13, 2010. Ambow Online and Ambow Shida terminated this exclusive cooperation agreement on June 29, 2017.
Ambow Chuangying and Ambow Shida entered into a technology service agreement on June 29, 2017, pursuant to which Ambow Chuangying
has the exclusive right to provide to Ambow Shida technical support and marketing consulting services. Without Ambow Chuangying’s
written consent, Ambow Shida shall not transfer, pledge or assign to any third party the rights and obligations under this agreement.
The agreement can be terminated by mutual agreement, by written notice from Ambow Chuangying to Ambow Shida. In the event of any
dispute with respect to the interpretation and implementation of this agreement, the parties shall negotiate in good faith to resolve
the dispute. In the event the parties fail to reach an agreement on the resolution of such dispute within 60 days after on party
receives the notice of the other party requesting the beginning of discussion or any longer period agreed upon separately by the
parties, either party may submit such dispute to CIETAC for arbitration in accordance with its then-effective arbitration rules.
We have not received any payment of service fees contemplated by this agreement.
Ambow Chuangying has the unilateral right
to adjust the level of service fee to be charged to Ambow Shida under this technology service agreement unless there is any significant
error. At the time the exclusive cooperation agreement was originally entered into on January 31, 2005, we set the service
fee that could be charged at 65% of Ambow Shida’s profits in order to retain sufficient cash in Ambow Shida to fund its operating
needs and manage liquidity. We subsequently determined that in the short to medium term we would not charge the service fee available
to us in the agreement but on May 13, 2010 we updated the agreement to increase the service fee percentage that could be charged
by Ambow Online to Ambow Shida to 100% of profits so as to provide us with more flexibility in the future.
We have not yet received any payment of
service fees contemplated by this agreement but retain the flexibility to charge these service fees in the future.
No distributions have been made to the shareholders
of Ambow Shida and so no subsequent distributions have been made to us, Ambow Online or Ambow Chuangying. As described above, at
our discretion we have decided to retain all of Ambow Shida’s profits to date for the purpose of managing its liquidity.
Agreement that transfer economic benefits to us from Ambow
Shanghai and its subsidiaries
Technology Service Agreement Ambow
Online and Ambow Shanghai entered into a technology service agreement on October 31, 2009, which was terminated on June 29,
2017. Ambow Shengying and Ambow Shanghai entered into a technology service agreement on June 29, 2017, pursuant to which Ambow
Shengying has the exclusive right to provide to Ambow Shanghai (i) education or training solutions; (ii) employee training
and technical support; and (iii) management and consulting services related to Ambow Shanghai’s operations, in exchange
for certain service fees to be agreed to by the parties from time to time. Ambow Shanghai shall not engage any other third party
as its technology service provider without Ambow Shengying’s prior written consent during the term of this agreement, while
Ambow Shengying shall have the right to provide other entities or individuals with the technology service equivalent or similar
to that under this agreement and to appoint other entities or individuals to provide the technology service under this agreement.
The term of this agreement is indefinite and the agreement may be terminated by Ambow Shengying upon either 15 days’ notice
or Ambow Shanghai’s failure to cure its breach of the agreement or by mutual written agreement at any time. Ambow Shanghai
shall not assign its rights and obligations under this agreement to any third party without Ambow Shengying’s prior written
consent, while Ambow Shengying may assign its rights and obligations under this agreement to any third party at its sole discretion.
If any dispute arises in connection with the interpretation and performance of this agreement, the parties shall first resolve
such dispute in good faith through discussions. If no agreement can be reached within sixty days after one party receives the notice
of the other party requesting the beginning of discussions or any longer period agreed upon separately by the parties, either party
shall have the right to submit such dispute to CIETAC for arbitration in accordance with its then-effective rules. The award of
the arbitration shall be final and binding upon the parties. We have not received any payment of service fees contemplated by this
agreement.
Agreement that transfer economic benefits to us from Ambow
Sihua and its subsidiaries
Technology Service Agreement Ambow
Online and Ambow Sihua entered into a technology service agreement on October 31, 2009, which was terminated on June 29, 2017.
Ambow Shengying and Ambow Sihua entered into a technology service agreement on June 29, 2017, pursuant to which Ambow Shengying
has the exclusive right to provide to Ambow Sihua (i) education or training solutions; (ii) employee training and technical
support; and (iii) management and consulting services related to Ambow Sihua’s operations, in exchange for certain service
fees to be agreed to by the parties from time to time. Ambow Sihua shall not engage any other third party as its technology service
provider without Ambow Shengying’s prior written consent during the term of this agreement, while Ambow Shengying shall have
the right to provide other entities or individuals with the technology service equivalent or similar to that under this agreement
and to appoint other entities or individuals to provide the technology service under this agreement. The term of this agreement
is indefinite and the agreement may be terminated by Ambow Shengying e upon either 15 days’ notice or Ambow Sihua’s
failure to cure its breach of the agreement or by mutual written agreement at any time. Ambow Sihua shall not assign its rights
and obligations under this agreement to any third party without Ambow Shengying’s prior written consent, while Ambow Shengying
may assign its rights and obligations under this agreement to any third party at its sole discretion. If any dispute arises in
connection with the interpretation and performance of this agreement, the parties shall first resolve such dispute in good faith
through discussions. If no agreement can be reached within sixty days after one party receives the notice of the other party requesting
the beginning of discussions or any longer period agreed upon separately by the parties, either party shall have the right to submit
such dispute to CIETAC for arbitration in accordance with its then-effective rules. The award of the arbitration shall be final
and binding upon the parties. We have not received any payment of service fees contemplated by this agreement.
Agreement that transfer economic benefits to us from Ambow
Rongye and its subsidiaries
Technology Service Agreement Pursuant
to the technology service agreement, dated September 8, 2015, by and between Ambow Shengying and Ambow Rongye, Ambow Shengying
has the exclusive right to provide to Ambow Rongye (i) education or training solutions; (ii) employee training and technical
support; (iii) management and consulting services related to Ambow Rongye’s operations; and (iv) other service arrangements
under the consents from both Ambow Shengying and Ambow Rongye, in exchange for certain service fees to be agreed to by the parties
from time to time. Ambow Rongye shall not engage any other third party as its technology service provider without Ambow Shengying’s
prior written consent during the term of this agreement, while Ambow Shengying shall have the right to provide other entities or
individuals with the technology service equivalent or similar to that under this agreement and to appoint other entities or individuals
to provide the technology service under this agreement. The term of this agreement is indefinite and the agreement may be terminated
by Ambow Shengying upon either 15 days’ notice or Ambow Rongye’s failure to cure its breach of the agreement or by
mutual written agreement at any time. Ambow Rongye shall not assign its rights and obligations under this agreement to any third
party without Ambow Shengying’s prior written consent, while Ambow Shengying may assign its rights and obligations under
this agreement to any third party at its sole discretion. If any dispute arises in connection with the interpretation and performance
of this agreement, the parties shall first resolve such dispute in good faith through discussions. If no agreement can be reached
within sixty days after one party receives the notice of the other party requesting the beginning of discussions or any longer
period agreed upon separately by the parties, either party shall have the right to submit such dispute to CIETAC for arbitration
in accordance with its then-effective rules. The award of the arbitration shall be final and binding upon the parties. We have
not received any payment of service fees contemplated by this agreement.
Agreement that transfer economic benefits to us from Ambow
Zhixin and its subsidiaries
Technology Service Agreement Pursuant
to the technology service agreement, dated October 14, 2015, by and between Ambow Shengying and Ambow Zhixin, Ambow Shengying has
the exclusive right to provide to Ambow Zhixin (i) education or training solutions; (ii) employee training and technical
support; (iii) management and consulting services related to Ambow Zhixin’s operations; and (iv) other service arrangements
under the consents from both Ambow Shengying and Ambow Zhixin, in exchange for certain service fees to be agreed to by the parties
from time to time. Ambow Zhixin shall not engage any other third party as its technology service provider without Ambow Shengying’s
prior written consent during the term of this agreement, while Ambow Shengying shall have the right to provide other entities or
individuals with the technology service equivalent or similar to that under this agreement and to appoint other entities or individuals
to provide the technology service under this agreement. The term of this agreement is indefinite and the agreement may be terminated
by Ambow Shengying upon either 15 days’ notice or Ambow Zhixin’s failure to cure its breach of the agreement or by
mutual written agreement at any time. Ambow Zhixin shall not assign its rights and obligations under this agreement to any third
party without Ambow Shengying’s prior written consent, while Ambow Shengying may assign its rights and obligations under
this agreement to any third party at its sole discretion. If any dispute arises in connection with the interpretation and performance
of this agreement, the parties shall first resolve such dispute in good faith through discussions. If no agreement can be reached
within sixty days after one party receives the notice of the other party requesting the beginning of discussions or any longer
period agreed upon separately by the parties, either party shall have the right to submit such dispute to CIETAC for arbitration
in accordance with its then-effective rules. The award of the arbitration shall be final and binding upon the parties. We have
not received any payment of service fees contemplated by this agreement.
Agreement that transfers economic benefits
to us from IValley and its subsidiaries
Technology Service Agreement Pursuant
to the technology service agreement, dated March 20, 2017 and November 27, 2017, by and between Ambow Education Management and
IValley, Ambow Education Management has the exclusive right to provide to IValley (i) education or training solutions; (ii) employee
training and technical support; (iii) administration and consulting services related to IValley’s business operations;
and (iv) other technical service arrangements under the consents from both Ambow Education Management and IValley. IValley shall
not engage any other third party as its technology service provider without Ambow Education Management’s prior written consent
during the term of this agreement, while Ambow Education Management shall have the right to provide other entities or individuals
with the technology service equivalent or similar to that under this agreement and to appoint other entities or individuals to
provide the technology service under this agreement. The term of this agreement is indefinite and the agreement may be terminated
by Ambow Education Management upon either 15 days’ notice or IValley’s failure to cure its breach of the agreement
or by mutual written agreement at any time. If any dispute arises in connection with the interpretation and performance of this
agreement, the parties shall first resolve such dispute in good faith through discussions. If no agreement can be reached within
sixty days after one party receives the notice of the other party requesting the beginning of discussions or any longer period
agreed upon separately by the parties, either party shall have the right to submit such dispute to The Republic of China Arbitration
Association for arbitration in accordance with its then-effective rules. The arbitration shall be held in Taipei. We have not received
any payment of service fees contemplated by this agreement.
|
D.
|
Property, Plant and Equipment
|
Our headquarters are located in Beijing,
China, where we owned approximately 16,146 square meters of office space. We own an aggregate of approximately 75,200 square meters
for K-12 schools. In addition, we lease certain properties for our K-12 schools, tutoring centers, career enhancement centers,
training offices and a career enhancement college.
Item 4A
|
Unresolved Staff Comments
|
Not applicable.
Item 5.
|
Operating and Financial Review and Prospects
|
The following discussion and analysis of
financial condition and results of operations should be read in conjunction with our consolidated financial statements for the
periods specified including the notes thereto included elsewhere in this annual report on Form 20-F as well as “Item
3.A Key Information—Selected Consolidated Financial Data.” We undertake no obligation to update publicly any forward-looking
statements in this annual report on Form 20-F.
Overview
Our business addresses three critical demands
in China’s education market, the desire for students to be admitted into top secondary and post-secondary schools, the desire
for graduates of those schools to obtain more attractive jobs and the need of schools and corporate clients in optimizing their
teaching and operating environment. We offer high-quality, individualized services and products through our integrated online and
offline delivery model powered by our proprietary technologies and robust infrastructure.
Intelligent technology is transforming education
industry as students can be no longer restricted by the traditional learning environment. Intelligent campuses and classes are
becoming the trend leading to increased efficiency, cost savings, and improved experiences for students and staff. We will proactively
introduce our intellectualized operational services to more universities and colleges to provide students access to educational
resources regardless of the location or device, increasing the potential for learning and teaching through cooperation with peers
and experts worldwide and optimizing facilities to create a sustainable campus.
Our net revenues increased from RMB 443.9 million in 2017 to
RMB 531.5 million in 2018 and increased to RMB 583.9 million (US$ 83.9 million) in 2019. The increase from 2017 to 2018 was mainly
due to the revenue from Bay State College and higher student enrollment in our K-12 schools. The increase from 2018 to 2019 was
mainly due to higher student enrollment for both 2018 to 2019 and 2019 to 2020 academic years in K-12 schools and CP&CE Programs.
Our net income/loss changed from RMB 44.9
million profit in 2018 to RMB 100.4 million (US$ 14.4 million) loss in 2019.
Net revenues from our K-12 Schools segment
accounted for 52.4%, 52.3% and 53.7% of our total net revenues in 2017, 2018 and 2019, respectively. Net revenues from our CP&CE
Programs accounted for 47.6%, 47.7% and 46.3% of our total net revenues in 2017, 2018 and 2019, respectively.
Due to certain restrictions and qualification
requirements under PRC law that applies to foreign investment in China’s education industry, our education business is currently
conducted through contractual arrangements among our wholly-owned subsidiaries in China and our consolidated variable interest
entities, or VIEs, in China. Our VIEs and their respective subsidiaries hold the licenses and permits necessary to conduct our
educational and career enhancement services business in China and directly operate our tutoring centers, K-12 schools and career
enhancement centers, develop and distribute educational content, software and other technologies, and operate our online education
business. We have entered into Technology Service Agreements or Exclusive Cooperation Agreements with our VIEs pursuant to which
we may receive economic benefits in the future. We have, however, entered into additional agreements to sell products and provide
services to our VIEs’ subsidiaries. The terms of these sales agreements to our VIEs’ subsidiaries are the same as sales
to third parties described further in this section of the annual report.
Factors affecting our results of operations
General factors affecting our results of operations
We have benefited significantly from the
following recent trends in the China educational and career enhancement services market:
|
·
|
Rapid growth in disposable household income;
|
|
·
|
Intense competition in the education sector and the job market;
|
|
·
|
Increasing hiring needs of existing and new companies doing business in China; and
|
|
·
|
The increased availability and utilization of advanced learning technologies to supplement the traditional education delivery model.
|
The overall economic growth and the increase
in the GDP per capita in China have led to a significant increase in spending on education in China. In addition, education is
a welcomed and supported industry in China, which means that education service providers often get preferential treatment in terms
of infrastructure support and tax rates. We anticipate that the demand for private education and career enhancement training in
China will continue to increase as the economy in China continues to grow and as disposable income of urban households continues
to rise. However, any adverse changes in the economic conditions or regulatory environment in China may have a material adverse
effect on the education and career enhancement industries in China, which in turn may harm our business and results of operations.
We are subject to a legal regime consisting of regulations governing various aspects of our business such as regulations on education,
software, internet, audio-video broadcasting, tax, information security, privacy, copyright and trademark protection and foreign
exchange. These regulations are evolving and are subject to frequent changes which may materially adversely affect our business
in all aspects such as the operation of our K-12 schools, tutoring centers, career enhancement centers and training offices through
the VIE structure, the engagement of public school teachers and the organization of classes with large-size attendance in our tutoring
centers, the establishment of new colleges and the offering of our online services. Although we do not possess the land use right
certificates or building ownership certificates with respect to some of our owned real properties, and the lessors of some of our
leased properties do not have effective ownership certificates, we believe the risk is remote that our ability to maintain and
obtain or renew our licenses or permits for our business operations will be adversely affected by such issues.
Specific factors affecting our results of operations
While our business is influenced by factors
affecting the education and career enhancement industries in China generally and by conditions in each of the geographic markets
we serve within China, we believe our business is more directly affected by company-specific factors, including, among others:
|
·
|
The number of student enrollments . The number of student enrollments is largely driven by the demand for the educational programs offered by K-12 Schools and CP&CE Programs, the amount of fees we charge, the effectiveness of our marketing and brand promotion efforts, the locations and capacity of our tutoring centers, K-12 schools, career enhancement centers and college, and training offices, our ability to maintain the consistency and quality of our teaching, and our ability to respond to competitive pressures, as well as seasonal factors. We plan to continue to add new offerings to better attract students of different needs and provide cross-selling opportunities.
|
|
·
|
The amount of fees we charge . We determine course fees for our tutoring and career enhancement services primarily based on demand for our courses, the targeted market for our courses, the geographic location and capacity of the center, costs of delivering our services, and the course fees charged by our competitors for the same or similar courses.
|
Education services are an investment for
the future, especially for children’s education, in China. Steady growth of the economy will likely result in the continuous
growth of income and higher consumption levels for China’s citizens, who will have more capital for the education of their
children, especially for after-school tutoring. However, we believe that the tuition fees of tutoring services and K-12 schools
and college tuition fees are less impacted by the ups and downs of the overall economy as we believe that people in China generally
cut back on other spending before they reduce their spending on their children’s education.
The maximum tuition fees that a school or
a college can charge vary by locations, but usually the regulations governing these price controls take into consideration China’s
economic growth in determining whether to approve a tuition increase and in setting the size of the tuition increase. Usually the
local governments review and adjust tuition fees every two to three years as necessary to reflect inflation or new educational
services that are provided. Price controls by local governments will affect the amount by which we are able to increase our fees
charged to students in our K-12 schools and college.
|
·
|
Our costs and expenses . We incur costs and expenses at both the head quarter level and at our tutoring centers, K-12 schools, career enhancement centers and training offices. Our most significant costs are compensation and social welfare paid to/for our teachers and rent expense. A substantial majority of our operating expenses are selling and marketing and general and administrative expenses.
|
According to the Law for Promoting Private
Education revised on November 7, 2016, private schools may be operated as nonprofit schools or profit-making schools, but the nine-year
compulsory education schools cannot be operated as profit-making schools. We are currently operating three K-12 schools as profit-making
schools with reasonable return and they will be transitioned to be operated as non-profit schools under this revised law. The detailed
implementation methods for transition of K-12 schools to non-profit schools have not been issued by local government authorities.
We are communicating with local authorities regarding the impact on the operation and registration of the schools. Since we can
still maintain control over the daily operation of the schools and has the right to appoint key management, we believe there will
not be any significant impact on the operation of these schools before any official reply is issued by local authorities. Although
turning into non-profit schools will prohibit the distribution of retained earnings as dividends from these schools, we can still
control and allocate the financial resources of the schools in its daily operation. Therefore we believe there will be no significant
financial impact to us as of the date of this report.
Effects of disposals and other strategic plans
On August 31, 2017, we sold the 100% equity
interest in Ambow Online to a third party for nil consideration. After the disposal, Ambow Online and its remaining VIE Suzhou
Wenjian were no longer consolidated by us. On September 30, 2017, we sold the 100% equity interest in 21st Century Training
Center to a third party, with a consideration of RMB 1 yuan. After the disposal, 21st Century Training Center was no
longer consolidated by us. Please refer to Note 26 to the audited consolidated financial statements for details.
In 2018 and 2019, we closed several subsidiaries
and schools through the deregistration procedures of local governmental and corporate service institutions. Those subsidiaries
and schools had no business operations and had accumulated deficits for years. As a result, we recognized gain from deregistration
of those subsidiaries and schools in a collective amount of RMB 2.9 million and RM 1.8 million in 2018 and 2019, respectively.
In June 2019, we entered into a Membership
Interest Purchase Agreement (“MIPA”) with Laureate Education (“the seller”), to acquire 100% of the outstanding
membership interest in NewSchool of Architecture and Design, LLC. NewSchool is a for-profit institution of higher education based
in San Diego, California, that offers undergraduate and graduate degrees and non-degree certificates in Architecture, Design and
Construction Management. This acquisition was closed in March 2020. According to the calculation methodology of the purchase price
pursuant to the MIPA and estimates from the seller, the estimated closing purchase price was 1 dollar at the closing date and subject
to later adjustment which would be agreed by us and seller. We are evaluating the final purchase price and accounting treatment
upon such acquisition.
There were no other material disposals during
the years 2018 and 2019.
Key financial performance indicators
Our key financial performance indicators
consist of our net revenues, cost of revenues gross profit and operating expenses, which are discussed in greater detail below.
The following table sets forth our net revenues, cost of revenues and gross profit, both in absolute amount and as a percentage
of net revenues, for the periods indicated.
|
|
For the Years Ended December 31,
|
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
|
RMB
|
|
|
%
|
|
|
RMB
|
|
|
%
|
|
|
RMB
|
|
|
US$
|
|
|
%
|
|
|
|
(in thousands, except percentages)
|
|
Net revenues
|
|
|
443,924
|
|
|
|
100.0
|
|
|
|
531,508
|
|
|
|
100.0
|
|
|
|
583,909
|
|
|
|
83,873
|
|
|
|
100.0
|
|
Cost of revenues
|
|
|
(256,395
|
)
|
|
|
(57.8
|
)
|
|
|
(338,143
|
)
|
|
|
(63.6
|
)
|
|
|
(388,894
|
)
|
|
|
(55,861
|
)
|
|
|
(66.6
|
)
|
Gross Profit
|
|
|
187,529
|
|
|
|
42.2
|
|
|
|
193,365
|
|
|
|
36.4
|
|
|
|
195,015
|
|
|
|
28,012
|
|
|
|
33.4
|
|
Net revenues
In 2017, 2018 and 2019, we generated net
revenues of RMB 443.9 million, RMB 531.5 million and RMB 583.9 million (US$ 83.9 million), respectively.
The increase from 2017 to 2018 was mainly
due to revenues from Bay State College and higher student enrollment for both 2017-2018
and 2018-2019 academic years in K-12 schools.
The increase from 2018 to 2019 was mainly
due to higher student enrollment for both 2018-2019 and 2019-2020 academic years in K-12 schools and CP&CE Programs.
We derived net revenues from our two reportable
segments in terms of percentages of our overall net revenues as follows in 2017, 2018 and 2019:
|
|
For the Years Ended December 31,
|
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
|
%
|
|
|
%
|
|
|
%
|
|
K-12 Schools:
|
|
|
52.4
|
|
|
|
52.3
|
|
|
|
53.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CP&CE Programs:
|
|
|
47.6
|
|
|
|
47.7
|
|
|
|
46.3
|
|
K-12 Schools . We operated three
K-12 schools as of December 31, 2019. We recognize revenues from tuition fees and associated accommodation fees collected for enrollment
in our K-12 schools ratably over the corresponding semester or school year. Tuition fees and associated accommodation fees collected
from students at our K-12 schools are recorded as deferred revenue until they are recognized as revenues over the semester or school
year. Our K-12 schools either collect full year tuition fees once a year, or collect half year tuition fees twice per year. Collections
mainly take place between August and October and in February or March. The most significant factors that directly
affect our net revenues for our K-12 schools are the number of student enrollments and the tuition fees we charge. Tuition fees
and associated accommodation fees range from RMB 3,000 to RMB 80,000 per year. We typically adjust tuition fees and associated
accommodation fees based on the market conditions of the city where the particular school is located, subject to the relevant local
governmental authority’s advance approval, if required. Our K-12 schools have classes that range from 30 students to 60 students
per class.
CP&CE Programs . Our
CP&CE Programs include tutoring services and career enhancement services. Our tutoring service provided educational
services in our 25 tutoring centers as of December 31, 2019. These services consist primarily of test preparation courses and tutoring.
We recognize revenues from course fees collected for enrollment in the courses we offer at our tutoring centers proportionally
as we deliver the instruction over the period of the course. Course fees collected are recorded as deferred revenues until they
are recognized as revenues over the period when the course is taught, which typically ranges from one to nine months. The most
significant factors that directly affect our net revenues in our tutoring services are the number of student enrollments in the
courses and the amount of course fees. Although similar courses have comparable rates, course fees vary among our numerous courses.
Tuition fees in our tutoring centers range from RMB 100 to RMB 16,000 per program. We determine course fees primarily based on
demand for our courses, the targeted market for our courses, the geographic location of the tutoring center, the length of time
of the course, cost of services and the course fees charged by our competitors for the same or similar programs. Our courses are
delivered in class settings ranging from 4 students to 20 students per class. In addition, we also deliver these services in premium
classes, including one-on-one tutoring.
Our career enhancement services are provided
in our 32 career enhancement centers, which include 5 career centers, 26 training offices and one career enhancement college. We
recognize revenues over the period of the services, which typically ranges from several days to 12 months. Course fees are either
collected in advance and recorded as deferred revenues or recorded as accounts receivable and collected within credit periods.
The most significant factors that directly affect our revenues in our career enhancement segment are the number of enrollments
in the courses and the amount of course fees. In addition to the specific factors mentioned above, enrollments at our career enhancement
centers are affected by the local job markets’ specific demand for skills such as soft skills, information technology services
and digital art. In addition, we believe many university graduates choose to obtain job-readiness training or acquire supplementary
skills to differentiate themselves from their peers in order to get a better job. Tuition fees in our career enhancement centers
range from RMB 400 to RMB 20,000 per program with course lengths ranging from several days to 12 months. We determine course fees
primarily based on demand for our courses, the targeted market for our courses, the geographic location of the career enhancement
center, costs of services delivered, and the course fees charged by our competitors for the same or similar programs. Our career
enhancement courses are generally delivered in settings ranging from 15 students to 50 students per class. The corporate trainings
are all tailor-made according to customer companies’ requirements, and normally are delivered to 10 to 30 persons per course.
Cost of revenues
Cost of revenues for our educational and
career enhancement programs and services primarily consists of:
|
·
|
Teaching fees and performance-linked bonuses paid to our teachers. Our teachers consist of both full-time teachers and part-time teachers. Full-time teachers deliver teaching instruction and may also be involved in management, administration and other functions at our schools, tutoring centers and career enhancement centers. Their compensation and benefits primarily consist of teaching fees based on hourly rates, performance-linked bonuses based on student evaluations, as well as base salary, annual bonus and standard employee benefits in connection with their services other than teaching. Compensation of our part-time teachers is comprised primarily of teaching fees based on hourly rates and performance-linked bonuses based on student evaluations and other factors;
|
|
·
|
Rental payments for the operation of our school and center properties;
|
|
·
|
Depreciation and amortization of properties and equipment used in the provision of educational and career enhancement services and accommodation facilities;
|
|
·
|
Utilities used in our schools and center properties and accommodation facilities; and
|
|
·
|
Amortization of student population intangible assets.
|
|
·
|
K-12 Schools . Cost of revenues for our K-12 Schools segment primarily consists of teaching fees and performance-linked bonuses paid to our teachers and rental payments for our schools, depreciation and amortization of property and equipment used in the provision of educational services and accommodation facilities and, to a lesser extent, costs of course materials.
|
|
·
|
CP&CE Programs . Cost of revenues for our CP&CE Programs segment primarily consists of teaching fees and performance-linked bonuses paid to our teachers, rental payments for our centers, and depreciation and amortization of property and equipment used in the provision of educational services.
|
Gross profit
Gross profit as a percentage of our net
revenues was 42.2%, 36.4% and 33.4% in 2017, 2018 and 2019, respectively. The change in gross profit margin from 2017 to 2018 was
mainly due to lower profit margin at Bay State College, as the Company is in the process
of consolidating its business operation. The change in gross profit margin from 2018 to 2019 was mainly due to additional investments
in new programs and new technology deployment.
Operating expenses
Our operating expenses consist of selling
and marketing expenses, general and administrative expenses and research and development expenses. The following table sets forth
the components of our operating expenses, both in absolute amounts and as a percentage of revenues, for the periods indicated.
|
|
For the Years Ended December 31,
|
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
|
RMB
|
|
|
%
|
|
|
RMB
|
|
|
%
|
|
|
RMB
|
|
|
US$
|
|
|
%
|
|
|
|
(in thousands, except percentages)
|
|
Net revenues
|
|
|
443,924
|
|
|
|
100
|
|
|
|
531,508
|
|
|
|
100
|
|
|
|
583,909
|
|
|
|
83,873
|
|
|
|
100
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
(36,710
|
)
|
|
|
(8.3
|
)
|
|
|
(43,751
|
)
|
|
|
(8.2
|
)
|
|
|
(55,721
|
)
|
|
|
(8,004
|
)
|
|
|
(9.5
|
)
|
General and administrative
|
|
|
(142,252
|
)
|
|
|
(32.0
|
)
|
|
|
(132,718
|
)
|
|
|
(25.0
|
)
|
|
|
(194,417
|
)
|
|
|
(27,926
|
)
|
|
|
(33.3
|
)
|
Research and development
|
|
|
(6,262
|
)
|
|
|
(1.4
|
)
|
|
|
(1,513
|
)
|
|
|
(0.3
|
)
|
|
|
(3,793
|
)
|
|
|
(545
|
)
|
|
|
(0.6
|
)
|
Impairment loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(38,754
|
)
|
|
|
(5,567
|
)
|
|
|
(6.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
(185,224
|
)
|
|
|
(41.7
|
)
|
|
|
(177,982
|
)
|
|
|
(33.5
|
)
|
|
|
(292,685
|
)
|
|
|
(42,042
|
)
|
|
|
(50.1
|
)
|
Selling and marketing expenses .
Our selling and marketing expenses primarily consist of expenses relating to advertising, seminars, marketing and promotional trips
and other community activities for brand promotion purposes. The increase in selling and marketing expenses was primarily due to
more marketing activities to promote student enrollment.
General and administrative expenses
. Our general and administrative expenses primarily consist of compensation and benefits of administrative staff, amortization
of intangibles, costs of third-party professional services, rental and utilities payments relating to office and administrative
functions, and depreciation and amortization of property and equipment used in our general and administrative activities as well
as bad debt provision. Our general and administrative expenses as a percentage of net revenues increased from 25.0% in 2018 to
33.3% in 2019, which was mainly due to additional investments in new programs and new technology
deployment as well as the increase in staff compensation, and a one-time reversal of the bad debt expense from collection of a
historical receivable in 2018.
Research and development expenses
. Our research and development expenses primarily consist of compensation, benefits and other headcount-related costs associated
with the development of our online education technology platform and courseware and outsourced development costs. The increase
was mainly due to higher spending on research expenses.
Impairment loss . Our impairment
loss was related to the impairment of goodwill and intangible assets. See Note 10 and Note 11 to audited consolidated financial
statements for further detail.
Share-based compensation expenses
. The following table sets forth the allocation of our share-based compensation expenses, both in absolute amount and as a percentage
of total share-based compensation expenses, among our employees based on the nature of work which they were assigned to perform.
|
|
For the Years Ended December 31,
|
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
|
RMB
|
|
|
%
|
|
|
RMB
|
|
|
%
|
|
|
RMB
|
|
|
US$
|
|
|
%
|
|
|
|
(in thousands, except percentages)
|
|
Allocation of share-based expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
(4,640
|
)
|
|
|
100.0
|
|
|
|
(8,121
|
)
|
|
|
100.0
|
|
|
|
(1,624
|
)
|
|
|
(233
|
)
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based expenses
|
|
|
(4,640
|
)
|
|
|
100.0
|
|
|
|
(8,121
|
)
|
|
|
100.0
|
|
|
|
(1,624
|
)
|
|
|
(233
|
)
|
|
|
100.0
|
|
Our predecessor entity, Ambow Education
Co., Ltd., adopted the 2010 Equity Incentive Plan in June 2010 and became effective upon completion of our 2010 IPO.
On December 21, 2018, we adopted the Amended and Restated 2010 Plan, which became effective upon the approval from the Board of
Directors and shareholders. See “Item 6 — Directors, Senior Management and Employees — Compensation—Equity-based
compensation plans.” From 2015 to 2019, we only granted restricted share to our employees. No options were granted. We have
adopted the provisions of ASC 718 “Stock Compensation” for the restricted shares we granted. For restricted shares
granted to our employees, we record share-based compensation expenses based on the fair value of the award as of the date of grant
and amortize the expenses over the vesting periods of the restricted shares.
Taxation
We are a Cayman Islands company and we currently
conduct our operations primarily through our subsidiaries in China and our VIEs and their respective subsidiaries. Under the current
laws of the Cayman Islands, we and our Cayman Island subsidiaries are not subject to tax on our income or capital gains. In addition,
our payment of dividends, if any, is not subject to withholding tax in the Cayman Islands.
We also have five entities incorporated
in Hong Kong which were subject to Hong Kong profit tax at a rate of 16.5% since the beginning of 2008.
Entity incorporated in Taiwan is subject
to Taiwan profit tax at a rate of 17%.
The U.S. Tax Cuts and Jobs Act (the “Tax
Act”) was enacted on December 22, 2017. The Tax Act makes significant changes to U.S. income tax law, including, but not
limited to, reducing the U.S. federal corporate income tax rate from 35 percent to 21 percent, and imposing a mandatory one-time
tax on accumulated earnings of foreign subsidiaries.
On December 22, 2017, the SEC staff issued
Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant
does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete
the accounting for certain income tax effects of the Tax Act. The Company has completed the assessment of the income tax effect
of the Tax Act and there were no adjustments recorded to the provisional amounts.
As outlined in “Item 4.C — Information
on the Company — Organizational Structure,” we operate a number of subsidiaries and through our VIEs, schools, tutoring
centers and career enhancement centers in China. The following is a summary of the types and rates of taxation to which our China
entities are subject to.
VAT
The PRC government implemented a value-added
tax reform pilot program, which replaced the business tax with value-added tax. Since May 2016, the changes from business tax to
VAT are expanded to all other service sectors which used to be subject to business tax. The value-added tax rates applicable to
the subsidiaries and consolidated variable interest entities of the Group ranged from 3% to 6% as compared to the 3% to 5% business
tax rate which was applicable prior to the reform.
As of December 31, 2018 and 2019, the payable
balances for VAT were RMB 9.0 million and RMB 10.6 million, respectively.
Business tax
For those schools and college in China providing
degree-oriented education services, they are exempted from paying business tax on revenue generated from both these services and
any accommodation revenue associated with degree-oriented education. As well as for any revenue generated by schools and college
for non-degree-oriented education services, business tax of between 3% and 5% of gross revenues is payable. From May 2016, as the
final part of the VAT reform, VAT replaced business tax in all industries, on a nationwide basis. The VAT rates applicable to the
subsidiaries and consolidated variable interest entities of the Group ranged from 3% to 6% as compared to the 3% to 5% business
tax rate which was applicable prior to the reform.
As of December 31, 2018 and 2019, the payable
balances for business tax were RMB 18.4 million and RMB 18.5 million, respectively.
Income tax
Current income taxes are provided for in
accordance with the laws and regulations set out below. Deferred income taxes are recognized when temporary differences exist between
the tax bases and their reported amounts in the consolidated financial statements.
Corporate entities
The PRC Enterprise
Income Tax (“EIT”) is calculated based on the taxable income determined under the applicable EIT Law and its implementation
rules, which became effective on January 1, 2008. EIT Law imposes a unified income tax rate of 25% for all resident enterprises
in China, including both domestic and foreign invested enterprises.
EIT Law also imposes a withholding income
tax rate of 10% on dividends distributed by a foreign invested enterprise, or FIE to its immediate holding company outside of PRC.
However, a lower withholding income tax rate of 5% would be applied after the immediate holding company was registered in Hong
Kong or other jurisdiction that have a tax treaty or arrangement with PRC and the FIE’s immediate holding company, and satisfies
the criteria of a beneficial owner set out in Circular Guoshuihan (2009) No. 601, a circular issued by the State Administration
of Taxation on October 27, 2009 on how to understand and identify a beneficial owner in tax treatments. Such withholding income
tax was exempted under the previous income tax laws and rules. A joint circular issued by the Ministry of Finance and State Administration
of Taxation on February 22, 2008 clarified that the withholding income tax is only to be paid for earnings generated after
January 1, 2008. According to the EIT Law and a circular promulgated by the PRC State Administration of Taxation on December 10,
2009, in addition to the withholding income tax on dividends distributed by an FIE, the immediate holding company of an FIE will
also be subject to an income tax at the rate of 10% for capital gain realized from transferring the equity interests in such FIE
to third parties, and shall file and pay such tax within seven days after the date of the transferring agreement. Furthermore,
when the de facto controlling shareholder who controls an FIE through an intermediate controlling entity, “indirectly transfers”
the equity interests in such FIE by selling the intermediate controlling entity, such de facto controlling shareholder shall also
file with the PRC tax authorities in some cases and may be subject to the PRC corporate income tax for the capital gain realized
in such sale.
We have determined that our FIEs in China
will not declare any dividends on which withholding tax should be paid and therefore no withholding tax has been accrued on the
retained earnings of its FIEs in China.
Private schools
Our private schools, being privately run
non-enterprise institutions, acquired in 2008 and 2009 are registered as private schools that either do or do not require a reasonable
return. Prior to January 1, 2008, these private schools were subject to income tax determined in accordance with the Law for
Promoting Private Education and the 2004 Implementing Rules, as well as the Notice on Tax Policy for Educational Institutions and
Notice on Several Preferential Tax Policy jointly issued by the PRC Ministry of Finance and the State Administration of Taxation,
collectively referred to as the 2003 Education Law. Under these laws and regulations, private schools not requiring reasonable
returns were treated in a similar manner to public schools and were generally not subject to income tax. While it is indicated
in the 2004 Implementing Rules that the relevant authorities under the State Council may consider formulating separate preferential
tax treatment policies applicable to private schools requiring reasonable returns, no such tax preferential policy has been promulgated
yet. As a result, the tax treatment applied to our schools varies among different cities.
Under the EIT Law there are specific criteria
that should be met to qualify as a not-for-profit entity that is exempt from corporate income tax, and the preferential corporate
income tax policy for education institutions under the 2003 Education Law has been superseded. No detailed implementation guidance
has been provided to local tax authorities on how to apply these changes to schools. Some of the schools we have acquired have
been able to obtain preferential tax treatment from the local tax authorities or to agree with local tax authorities on a fixed
amount of income tax payable for prior years. Where such preferential tax treatment or fixed amount payable has not been confirmed
by the tax authorities, we have made a full provision for income taxes payable based on our understanding of the 2003 Education
Law and the EIT Law. No provision has been made for interest or late payment fees for such provision.
For our schools that we have acquired in
2008 and 2009, we have recorded a tax liability for estimated liabilities brought forward at the date of acquisition. At the same
time, we have recorded an asset to recognize that all of the sellers of these schools have agreed to indemnify us against any taxes
that may be payable for periods prior to the date of acquisition.
The determination of our provision for income
taxes, particularly for private schools, is subject to uncertainty. The strict application of the EIT Law indicates that certain
of our private schools are subject to income tax of 25% after January 1, 2008. For those private schools where the tax authorities
have not determined a deemed fixed amount or deemed fixed rate for the purposes of calculating income tax payable, we have assumed
that income tax of 25% is payable. However, as of December 31, 2019, no detailed implementation guidance has been provided to local
tax authorities on how to apply the EIT Law to private schools. It is possible that, upon the introduction of the detailed implementation
guidance, we may find ourselves in a position whereby income tax is not payable for periods prior to the release of the detailed
guidance.
The amount of income tax payable by our
PRC subsidiaries, VIEs and schools in the future will depend on various factors, including, among other things, the results of
operations and taxable income of, and the statutory tax rate applicable to, such PRC subsidiaries, and our effective tax rate depends
partially on the extent of each of our subsidiaries’ relative contribution to our consolidated taxable income. If further
detailed guidance is issued by the State Administration of Taxation on how to apply the EIT Law to schools, this may also have
an impact on the amount of income tax payable by our own schools.
Critical accounting policies and estimates
The preparation of consolidated financial
statements in conformity with U.S. GAAP requires estimates and assumptions that affect the reported amounts of assets and liabilities,
revenues and expenses, and related disclosures of contingent assets and liabilities in the consolidated financial statements and
accompanying notes. The SEC has defined a company’s critical accounting policies as the ones that are most important to the
portrayal of the company’s financial condition and results of operations, and which require the company to make its most
difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based
on this definition, we have identified the critical accounting policies and judgments addressed below. We also have other key accounting
policies, which involve the use of estimates, judgments and assumptions that are significant to understanding our results. For
other relevant risks under “Risk in relation to the VIE structure”, see Note 1 (d) of Notes to consolidated financial
statements. Although we believe that our estimates, assumptions and judgments are reasonable, they are based upon information presently
available. Actual results may differ significantly from these estimates under different assumptions, judgments or conditions.
Basis of consolidation
The consolidated financial statements include
the financial statements of the company, its Wholly Owned Foreign Enterprise (“WOFEs”) and its VIEs. We have adopted
the guidance of accounting for VIEs, which requires VIEs to be consolidated by the primary beneficiary of the entity. The company
and its WOFEs have entered into contractual arrangements with the VIEs and their shareholders, which enable the company to (1) have
power to direct activities that most significantly affect the economic performance of the VIEs, and (2) receive the economic
benefits of the VIEs that could be significant to the VIEs. Accordingly, the company is considered the primary beneficiary of the
VIEs and has consolidated the VIEs’ financial results of operations, assets and liabilities in the company’s consolidated
financial statements. All inter-company transactions and balances have been eliminated upon consolidation.
The entities apart from the consolidated
VIEs mainly include Ambow, Ambow Shengying, Ambow Chuangying, Ambow Yuhua, Ambow University Inc., Ambow NSAD Inc., Ambow BSC Inc.,
Bay State College, three holding companies registered in Cayman and six holding companies registered in Hong Kong. Assets and liabilities
of these entities mainly include cash, current accounts balances of inter-group financing and transactions and leasehold improvement.
Except for Bay State College, operations of these entities are mainly inter-group financing and business management.
The company deconsolidates a subsidiary
or derecognizes a group of assets as of the date the company ceases to have a controlling financial interest in that subsidiary
or group of assets.
The separated VIE and Non-VIE financial
net revenue and net income during the year of 2017 was as follows (in RMB thousands):
|
|
VIEs
Consolidated
|
|
|
Non-VIEs
Consolidated
|
|
|
Inter-company
Elimination
|
|
|
Group
Consolidated
|
|
Net Revenue
|
|
|
484,757
|
|
|
|
17,806
|
|
|
|
(58,639
|
)
|
|
|
443,924
|
|
Net Income
|
|
|
41,636
|
|
|
|
4,289
|
|
|
|
-
|
|
|
|
45,925
|
|
The separated VIE and Non-VIE financial information during the
year of 2018 was as follows (in RMB thousands):
|
|
VIEs
Consolidated
|
|
|
Non-VIEs
Consolidated
|
|
|
Inter-company
Elimination
|
|
|
Group
Consolidated
|
|
Cash and cash equivalent
|
|
|
196,339
|
|
|
|
15,097
|
|
|
|
-
|
|
|
|
211,436
|
|
Inter-Group balances due from VIEs/Non VIEs
|
|
|
1,795,324
|
|
|
|
2,840,591
|
|
|
|
(4,635,915
|
)
|
|
|
-
|
|
Other current assets
|
|
|
287,136
|
|
|
|
56,828
|
|
|
|
-
|
|
|
|
343,964
|
|
Non-current assets
|
|
|
259,622
|
|
|
|
95,197
|
|
|
|
-
|
|
|
|
354,819
|
|
Total Assets
|
|
|
2,538,421
|
|
|
|
3,007,713
|
|
|
|
(4,635,915
|
)
|
|
|
910,219
|
|
Inter-Group balances due to VIEs/Non VIEs
|
|
|
2,890,093
|
|
|
|
1,773,450
|
|
|
|
(4,663,543
|
)
|
|
|
-
|
|
Other current liabilities
|
|
|
527,339
|
|
|
|
117,808
|
|
|
|
-
|
|
|
|
645,147
|
|
Non-current liabilities
|
|
|
-
|
|
|
|
2,301
|
|
|
|
-
|
|
|
|
2,301
|
|
Total Liabilities
|
|
|
3,417,432
|
|
|
|
1,893,559
|
|
|
|
(4,663,543
|
)
|
|
|
647,448
|
|
Equity
|
|
|
(879,011
|
)
|
|
|
1,114,154
|
|
|
|
27,628
|
|
|
|
262,771
|
|
Net Revenue
|
|
|
447,844
|
|
|
|
83,674
|
|
|
|
(10
|
)
|
|
|
531,508
|
|
Net Income/(loss)
|
|
|
66,185
|
|
|
|
(21,245
|
)
|
|
|
-
|
|
|
|
44,940
|
|
The separated VIE and Non-VIE financial information during the
year of 2019 was as follows (in RMB thousands):
|
|
VIEs
Consolidated
|
|
|
Non-VIEs
Consolidated
|
|
|
Inter-company
Elimination
|
|
|
Group
Consolidated
|
|
Cash and cash equivalent
|
|
|
94,967
|
|
|
|
62,633
|
|
|
|
-
|
|
|
|
157,600
|
|
Inter-Group balances due from VIEs/Non VIEs
|
|
|
1,881,047
|
|
|
|
2,697,862
|
|
|
|
(4,578,909
|
)
|
|
|
-
|
|
Other current assets
|
|
|
213,126
|
|
|
|
28,914
|
|
|
|
-
|
|
|
|
242,040
|
|
Non-current assets
|
|
|
376,291
|
|
|
|
244,868
|
|
|
|
-
|
|
|
|
621,159
|
|
Total Assets
|
|
|
2,565,431
|
|
|
|
3,034,277
|
|
|
|
(4,578,909
|
)
|
|
|
1,020,799
|
|
Inter-Group balances due to VIEs/Non VIEs
|
|
|
2,879,536
|
|
|
|
1,720,967
|
|
|
|
(4,600,503
|
)
|
|
|
-
|
|
Other current liabilities
|
|
|
527,330
|
|
|
|
81,654
|
|
|
|
-
|
|
|
|
608,984
|
|
Non-current liabilities
|
|
|
120,445
|
|
|
|
127,774
|
|
|
|
-
|
|
|
|
248,219
|
|
Total Liabilities
|
|
|
3,527,311
|
|
|
|
1,930,395
|
|
|
|
(4,600,503
|
)
|
|
|
857,203
|
|
Equity
|
|
|
(961,880
|
)
|
|
|
1,103,882
|
|
|
|
21,594
|
|
|
|
163,596
|
|
Net Revenue
|
|
|
503,221
|
|
|
|
80,688
|
|
|
|
-
|
|
|
|
583,909
|
|
Net Loss
|
|
|
(45,739
|
)
|
|
|
(54,687
|
)
|
|
|
-
|
|
|
|
(100,426
|
)
|
Revenue recognition
We have adopted ASC 606 Revenue from Contracts
with Customers using the modified retrospective transition method from January 1, 2018. Our revenue is generated from delivering
educational programs and services and intellectualized operational services.
The core principle of ASC 606 is that an
entity recognizes revenue when control of the promised goods or services is transferred to customers in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that principal,
the Group applies the following steps:
Step 1: Identify the contract(s) with a
customer;
Step 2: Identify the performance obligations
in the contract;
Step 3: Determine the transaction price;
Step 4: Allocate the transaction price to
the performance obligations in the contract;
Step 5: Recognize revenue when (or as) the
entity satisfies a performance obligation.
We have two reportable segments: 1) K-12
Schools, 2) CP&CE. K-12 schools provide K-12 full curriculums educational services to pre-school children, primary and secondary
students in China. CP&CE Programs offer tutoring services to pre-school children, primary and secondary students, provide vocational
education services to undergraduate students in partner colleges, provide boarding and accommodation services to partner colleges
or corporate customers, provide short term outward bound and in-house training services to corporate clients, and provide intellectualized
operational services to corporate clients, colleges and universities. Bay State College in U.S. under CP&CE Programs offers
career-focused post-secondary educational services to undergraduate students in U.S.
For individual customers including pre-school
children, primary and secondary students and undergraduate students, usually there are no written formal contracts between us and
the students according to business practice. Records with student’s name, grades, tuition and fee collected are signed or
confirmed by students. Academic requirements and each party’s rights are communicated with students through enrollment brochures
or daily teaching and academic activities. For colleges and corporate clients, there are written formal contracts with these customers
which recorded service fee, service period, each party’s rights and obligations and payment terms.
For individual customers including pre-school
children, primary and secondary students and undergraduate students, our performance obligations are to provide acknowledged academic
education from kindergarten till grade twelve to school-aged students within academic years, extracurricular tutoring services
and post-secondary education with Associates and Bachelor’s programs within agreed-upon periods respectively. For college
and corporate customers, our performance obligations are to provide customized vocational educational services to college students
within academic years; or to provide boarding and accommodation services to customers for agreed-upon periods; or to provide short
term outward bound and in-house training services to corporate clients within agreed-upon periods; or to provide intellectualized
operational services and warranty of agreed period of time.
For individual customers including pre-school
children, primary and secondary students and undergraduate students, transaction price of each customer is the tuition and fee
received normally up front. For college and corporate customers, transaction price of each customer is the service fee defined
in the contract, net of value added tax, and would be received either up front or within payment terms depending on each contract.
Circumstances like other variable consideration, significant financing component, noncash consideration, consideration payable
to a customer did not exist.
For individual, college and corporate customers,
we identify one performance obligation. The transaction prices are allocated to the one performance obligation. For intellectualized
operational services to corporate customers, we identify two distinct performance obligations, which is to provide intellectualized
operational services and warranty, since customers obtain different benefits from the two services separately and these two services
are usually quoted to customers with stand-alone prices, which are determined by cost of services plus certain amount of profit.
The transaction price from the contract is allocated according to stand-alone selling prices of each obligation.
For individual customers including pre-school
children, primary and secondary students and undergraduate students, we satisfy performance obligations to students over time,
and recognizes revenue according to tutoring hours or school days consumed in each month of a semester. For vocational education
services, outbound and in-house training services, and boarding and accommodation services to college and corporate customers,
we satisfy performance obligations to customers over time, and recognizes revenue according to the number of months within the
academic year, or training days consumed in each month, or boarding service days within each month. For intellectualized operational
service to corporate clients, we satisfy performance obligations to customers over time, use the cost-based input method to depict
its performance in transferring control of services promised to the clients. Such input measure is determined by the proportional
relation of the contract costs incurred to date relative to the estimated total contract costs at completion. For performance obligation
of warranty, the change of control would be transferred to the customer over time. Accordingly we recognize revenue using a straight
line method within the whole warranty period.
Intangible assets, net
Intangible assets represent brand, software,
trade name, student population, corporative agreement, customer relationship, license, trademark, workforce and non-compete agreement.
The software was initially recorded at historic acquisition costs or cost directly incurred to develop the software during the
application development stage that can provide future benefits, and amortized on a straight-line basis over estimated useful lives.
Other finite lived intangible assets are
initially recorded at fair value when acquired in a business combination, in which the finite intangible assets are amortized on
a straight-line basis except student populations and customer relationships, which are amortized using an accelerated method to
reflect the expected departure rate over the remaining useful life of the asset. We review identifiable amortizable intangible
assets to be held and used for impairment whenever events or changes in circumstances indicate that the carrying value of the assets
may not be recoverable. Determination of recoverability is based on the lowest level of identifiable estimated undiscounted cash
flows resulting from use of the asset and its eventual disposition. Measurement of any impairment loss is based on the excess of
the carrying value of the asset over its fair value. The intangible assets have original estimated useful lives as follows (see
Note 10-”Intangible assets, net” to the audited consolidated financial statements for additional information):
Software
|
|
2 years to 10 years
|
Student populations
|
|
1.8 years to 15 years
|
Cooperative agreements
|
|
1.3 years to 10 years
|
License
|
|
10 years
|
Trademark
|
|
3 years
|
Workforce
|
|
2 years
|
Trade names
|
|
Indefinite
|
Brand
|
|
Indefinite
|
We have determined that trade names have
the continued ability to generate cash flows indefinitely. There are no legal, regulatory, contractual, economic or other factors
limiting the useful life of the respective trade names. Consequently, the carrying amounts of trade names are not amortized but
are tested for impairment annually in the third quarter or more frequently if events or circumstances indicate that the assets
may be impaired. Such impairment test consists of a comparison of the fair values of the trade names with their carrying amounts
and an impairment loss is recognized if and when the carrying amounts of the trade names exceed their fair values.
We performed impairment testing of indefinite-lived
intangible assets in accordance with ASC 350, which requires an entity to evaluate events and circumstances that may affect the
significant inputs used to determine the fair value of the indefinite-lived intangible assets when performing qualitative assessment.
When these events occur, the Group estimates the fair value of these trade names with the Relief from Royalty method (“RFR”),
which is one of the income approaches. RFR method is generally applied for assets that frequently licensed in exchange for royalty
payments. As the owner of the asset is relieved from paying such royalties to a third party for using the asset, economic benefit
is reflected by notional royalty savings. An impairment loss is recognized for any excess in the carrying value over the fair value
of trade names.
Goodwill
Goodwill represents the future economic
benefits arising from other assets acquired in a business combination or an acquisition by a not-for-profit entity that are not
individually identified and separately recognized. Goodwill acquired in a business combination is tested for impairment at least
annually or more frequently when events and circumstances occur indicating that the recorded goodwill may be impaired. The Group
performed impairment analysis on goodwill as of September 30 every year either beginning with a qualitative assessment, or starting
with the quantitative assessment instead. The quantitative goodwill impairment test compares the fair values of each reporting
unit to its carrying amount, including goodwill. A reporting unit constitutes a business for which discrete profit and loss financial
information is available. The fair value of each reporting unit is established using a combination of expected present value of
future cash flows. If the fair value of each reporting unit exceeds its carrying amount, goodwill is not considered to be impaired.
If the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to
that excess, limited to the total amount of goodwill allocated to that reporting unit.
Determining when to test for impairment,
our reporting units, the fair value of a reporting unit and the fair value of assets and liabilities within a reporting unit, requires
judgment and involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth
rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market
conditions and determination of appropriate market comparables. We base fair value estimates on assumptions we believe to be reasonable
but that are unpredictable and inherently uncertain.
Significant changes in the economic characteristics
of components or reorganization of an entity’s reporting structure can sometimes result in a re-assessment of the affected
operating segment and its components to determine whether reporting units need to be redefined where the components are no longer
economically similar.
Future changes in the judgments and estimates
underlying the company’s analysis of goodwill for possible impairment, including expected future cash flows and discount
rate, could result in a significantly different estimate of the fair value of the reporting units and could result in additional
impairment of goodwill.
Impairment of long-lived assets
We review our long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. When these
events occur, we measure impairment by comparing the carrying value of the long-lived assets to the estimated undiscounted future
cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted
cash flow is less than the carrying amount of the assets, we will recognize an impairment loss based on the fair value of the assets,
using the expected future discounted cash flows.
Income taxes
Income tax expense has been allocated between
continued and discontinued operations in all periods. Deferred income taxes are recognized for temporary differences between the
tax basis of assets and liabilities and their reported amounts in the financial statements, net of operating loss carry forwards
and credits, by applying enacted statutory tax rates applicable to future years. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not some portion or all of the deferred tax assets will not
be realized. Income taxes are provided for in accordance with the laws of the relevant taxing authorities.
We do not record PRC withholding tax expense
for foreign earnings which we plan to reinvest to expand our PRC operations. We considered business plans, planning opportunities
and expected future outcomes in assessing the needs for future expansion and support of our operations. If our business plans change
or our future outcomes differ from our expectations, PRC withholding tax expense and our effective tax rate could increase or decrease
in that period.
We adopted the guidance on accounting for
uncertainty in income taxes, which prescribes a more likely than not threshold for financial statement recognition and measurement
of a tax position taken or expected to be taken in a tax return. Guidance was also provided on the de-recognition of income tax
assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for income taxes in
interim periods, and income tax disclosures. Significant judgment is required in evaluating our uncertain tax positions and determining
its provision for income taxes. We establish reserves for tax-related uncertainties based on estimates of whether, and the extent
to which, additional taxes will be due. These reserves are established when we believe that certain positions might be challenged
despite its belief that its tax return positions are in accordance with applicable tax laws. We adjust these reserves in light
of changing facts and circumstances, such as the closing of a tax audit, new tax legislation, or the change of an estimate. To
the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect the
provision for income taxes in the period in which such determination is made. The provision for income taxes includes the effect
of reserve provisions and changes to reserves that are considered appropriate. See Note 17 (c) to audited consolidated financial
statements for additional information.
U.S. Tax Cuts and Jobs Act
The U.S. Tax Cuts and Jobs Act was enacted
on December 22, 2017. The Tax Act makes significant changes to U.S. income tax law, including, but not limited to, reducing the
U.S. federal corporate income tax rate from 35 percent to 21 percent, and imposing a mandatory one-time tax on accumulated earnings
of foreign subsidiaries.
On December 22, 2017, the SEC staff issued
Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant
does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete
the accounting for certain income tax effects of the Tax Act. The Company has completed the assessment of the income tax effect
of the Tax Act and there were no adjustments recorded to the provisional amounts.
Lease
We adopted Accounting Standards Update (“ASU”)
2016-02 Leases (“ASC 842”) as of January 1, 2019, using the non-comparative transition option pursuant to ASU 2018-11.
Therefore, we have not restated comparative period financial information for the effects of ASC 842, and will not make the new
required lease disclosures for comparative periods beginning before January 1, 2019. We elected the package of practical expedients
permitted under the transition guidance within the new standard, which among others things (i) allowed us to carry forward the
historical lease classification; (ii) did not require us to reassess whether any expired or existing contracts are or contain leases;
(iii) did not require us to reassess initial direct costs for any existing leases.
We identify lease as a contract, or part
of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for
a period of time in exchange for consideration. For all operating leases except for short-term leases, we recognize operating right-of-use
assets and operating lease liabilities. Leases with an initial term of 12 months or less are short-term lease and not recognized
as right-of-use assets and lease liabilities on the consolidated balance sheet. The Group recognizes lease expense for short-term
leases on a straight-line basis over the lease term. For finance lease, we recognize finance lease right-of-use assets. The operating
lease liabilities are recognized based on the present value of the lease payments not yet paid, discounted using our incremental
borrowing rate over a similar term of the lease payments at lease commencement. Some of the Group’s lease agreements contain
renewal options; however, the Group do not recognize right-of-use assets or lease liabilities for renewal periods unless it is
determined that the Group is reasonably certain of renewing the lease at inception or when a triggering event occurs. The right-of-use
assets consist of the amount of the measurement of the lease liabilities and any prepaid lease payments. Lease expense for lease
payments is recognized on a straight-line basis over the lease term. Our lease agreements do not contain any material residual
value guarantees or material restrictive covenants.
Operating lease
When none of the criteria of finance lease are met, a lessee
shall classify the lease as an operating lease.
Finance lease
We classify a lease as a finance lease when the lease meets
any of the following criteria at lease commencement:
|
a.
|
The lease transfers ownership of the underlying asset
to the lessee by the end of the lease term;
|
|
b.
|
The lease grants the lessee an option to purchase the
underlying asset that the lessee is reasonably certain to exercise;
|
|
c.
|
The lease term is for the major part of the remaining
economic life of the underlying asset;
|
|
d.
|
The present value of the sum of the lease payments
and any residual value guaranteed by the lessee that is not already reflected in the lease payments in accordance with ASC 842
paragraph 842-10-30-5(f) equals or exceeds substantially all of the fair value of the underlying asset;
|
|
e.
|
The underlying asset is of such a specialized nature
that it is expected to have no alternative use to the lessor at the end of the lease term.
|
Share-based compensation
We grant share options/restricted shares
to our employees and directors. Cost of employee services received is measured at the grant-date using the fair value of the equity
instrument issued net of an estimated forfeiture rate, and therefore only recognizes compensation costs for those shares expected
to vest over the service period of the award. Share-based compensation expense is recorded on a straight-line basis over the requisite
service period, generally ranging from one year to four years.
Forfeitures are estimated at the time of
grant and revised in the subsequent periods if actual forfeitures differ from those estimates.
Foreign currency translation and transactions
We use RMB as our reporting currency. The
functional currency of our company and the subsidiaries incorporated in the Cayman Islands, United States, Hong Kong and the British
Virgin Islands is US$, the functional currency of our VIE incorporated in Taiwan is TWD, while the functional currency of the other
entities of our company is RMB. An entity’s functional currency is the currency of the primary economic environment in which
it operates, normally that is the currency of the environment in which it primarily generates and expends cash. We considered various
indicators, such as cash flows, sales price, market expenses, financing and inter-company transactions and arrangements in determining
an entity’s functional currency.
In the consolidated financial statements,
the financial information of our company and its subsidiaries, which use US$ and TWD as their functional currencies, has been translated
into RMB. Assets and liabilities are translated from each subsidiary’s functional currency at the exchange rates on the balance
sheet date, equity amounts are translated at historical exchange rates, and revenues, expenses, gains, and losses are translated
using the average rate for the year. Translation adjustments are reported as cumulative translation adjustments and are shown as
a separate component of other comprehensive income or loss in the statement of shareholders’ equity and comprehensive income.
Foreign currency transactions denominated
in currencies other than functional currency are translated into the functional currency using the exchange rates prevailing at
the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are
re-measured at the applicable rates of exchange in effect at that date. Foreign exchange gains and losses resulting from the settlement
of such transactions and from re-measurement at year-end are recognized in foreign currency exchange gain/loss, net on the consolidated
statement of operations.
Results of operations
The following table sets forth a summary
of our consolidated statements of operations for the periods indicated. This information should be read together with our consolidated
financial statements and related notes included elsewhere in this annual report. We believe that period-to-period comparisons of
results of operations should not be relied upon as indicative of future performance.
Summary of Consolidated Statements of
Operations
|
|
For the Years Ended December 31,
|
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2019
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in thousands)
|
|
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
NET REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Educational programs and services
|
|
|
432,754
|
|
|
|
525,134
|
|
|
|
582,706
|
|
|
|
83,700
|
|
- Intellectualized operational services
|
|
|
11,170
|
|
|
|
6,374
|
|
|
|
1,203
|
|
|
|
173
|
|
Total net revenues
|
|
|
443,924
|
|
|
|
531,508
|
|
|
|
583,909
|
|
|
|
83,873
|
|
COST OF REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Educational programs and services (1)
|
|
|
(249,400
|
)
|
|
|
(331,939
|
)
|
|
|
(383,635
|
)
|
|
|
(55,106
|
)
|
- Intellectualized operational services
|
|
|
(6,995
|
)
|
|
|
(6,204
|
)
|
|
|
(5,259
|
)
|
|
|
(755
|
)
|
Total cost of revenues
|
|
|
(256,395
|
)
|
|
|
(338,143
|
)
|
|
|
(388,894
|
)
|
|
|
(55,861
|
)
|
GROSS PROFIT
|
|
|
187,529
|
|
|
|
193,365
|
|
|
|
195,015
|
|
|
|
28,012
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing (1)
|
|
|
(36,710
|
)
|
|
|
(43,751
|
)
|
|
|
(55,721
|
)
|
|
|
(8,004
|
)
|
General and administrative (1)
|
|
|
(142,252
|
)
|
|
|
(132,718
|
)
|
|
|
(194,417
|
)
|
|
|
(27,926
|
)
|
Research and development (1)
|
|
|
(6,262
|
)
|
|
|
(1,513
|
)
|
|
|
(3,793
|
)
|
|
|
(545
|
)
|
Impairment loss
|
|
|
-
|
|
|
|
-
|
|
|
|
(38,754
|
)
|
|
|
(5,567
|
)
|
Total operating expenses
|
|
|
(185,224
|
)
|
|
|
(177,982
|
)
|
|
|
(292,685
|
)
|
|
|
(42,042
|
)
|
OPERATING INCOME/(LOSS)
|
|
|
2,305
|
|
|
|
15,383
|
|
|
|
(97,670
|
)
|
|
|
(14,030
|
)
|
OTHER INCOME
|
|
|
53,234
|
|
|
|
33,055
|
|
|
|
10,161
|
|
|
|
1,459
|
|
Income/(loss) before income tax and non-controlling interest
|
|
|
55,539
|
|
|
|
48,438
|
|
|
|
(87,509
|
)
|
|
|
(12,571
|
)
|
Income tax expense
|
|
|
(9,614
|
)
|
|
|
(3,498
|
)
|
|
|
(12,917
|
)
|
|
|
(1,855
|
)
|
NET INCOME/(LOSS)
|
|
|
45,925
|
|
|
|
44,940
|
|
|
|
(100,426
|
)
|
|
|
(14,426
|
)
|
Less: Net loss contributable to non-controlling interest
|
|
|
(538
|
)
|
|
|
(50
|
)
|
|
|
(485
|
)
|
|
|
(70
|
)
|
NET INCOME/(LOSS) ATTRIBUTABLE TO AMBOW EDUCATION HOLDING LTD.
|
|
|
46,463
|
|
|
|
44,990
|
|
|
|
(99,941
|
)
|
|
|
(14,356
|
)
|
NET INCOME/(LOSS) ATTRIBUTABLE TO ORDINARY SHAREHOLDERS
|
|
|
46,463
|
|
|
|
44,990
|
|
|
|
(99,941
|
)
|
|
|
(14,356
|
)
|
(1)
|
Includes depreciation and amortization of RMB 22.7 million, RMB 26.3 million and RMB 26.8 million (US$ 3.9 million) for the years ended December 31, 2017, 2018 and 2019, respectively.
|
Year ended December 31, 2019 compared with year ended
December 31, 2018
Net revenues . Our net revenues
increased by 9.9% from RMB 531.5 million in 2018 to RMB 583.9 (US$ 83.9 million) in 2019. The increase was mainly driven by higher
student enrollment for both the 2018-2019 and 2019-2020 academic years in K-12 schools and CP&CE Programs.
Cost of revenues . Our cost of revenues
increased by 15.0% from RMB 338.1 million in 2018 to RMB 388.9 million (US$ 55.9 million) in 2019. The increase was mainly due
to higher compensation for our teaching faculty and additional investments in new programs
and new technology deployment.
Gross profit . Gross profit as a
percentage of our net revenues decreased from 36.4% in 2018 to 33.4% in 2019. The decrease was mainly due
to additional investments in new programs and new technology deployment.
Operating expenses . Our total operating
expenses increased by 64.4% from RMB 178.0 million in 2018 to RMB 292.7 million (US$ 42.0 million) in 2019. This increase was
mainly due to more marketing activities to promote student enrollment, additional investments in new programs and new technology
deployment, increase in staff compensation, an impairment loss of goodwill and intangible assets in RMB 38.8 million recorded
in 2019, and a one-time reversal of the bad debt expense from collection of a historical
receivable in 2018.
|
·
|
Selling and marketing expenses . Our selling
and marketing expenses increased by 27.4% from RMB 43.8 million in 2018 to RMB 55.7 million (US$ 8.0 million) in 2019.
The increases were mainly due to more marketing activities to promote student enrollment.
|
|
·
|
General and administrative expenses . Our general and administrative expenses increased by 46.5% from
RMB 132.7 million in 2018 to RMB 194.4 million (US$ 27.9 million) in 2019. The increase in 2019 was mainly due to additional
investments in new programs and new technology deployment, increase in staff compensation, and a one-time reversal of the bad debt
expense from collection of a historical receivable in 2018.
|
|
·
|
Research and development expenses . Our research and development expenses increased by 150.7% from
RMB 1.5 million in 2018 to RMB 3.8 million (US$ 0.5 million) in 2019. It was mainly caused by more spending on research expenses
due to the increase in headcount.
|
Other income, net. We recorded net other income of RMB 10.2 million (US$ 1.5 million)
in 2019, compared to net other income of RMB 33.1 million in 2018. The decrease was mainly due to RMB 15.2 million gain on derecognition
of liabilities in 2018 which was nil in 2019.
Income tax expense . Our income tax
expense changed from RMB 3.5 million expense in 2018 to RMB 12.9 million (US$ 1.9 million) expense in 2019.
Net income/(loss) . According to
above mentioned factors, our net income/(loss) changed from income of RMB 44.9 million in 2018 to loss of RMB 100.4 million (US$
14.4 million) in 2019.
Year ended December 31, 2018 compared with year
ended December 31, 2017
Net revenues . Our net revenues increased
by 19.7% from RMB 443.9 million in 2017 to RMB 531.5 in 2018. The increase was mainly driven by revenues from Bay
State College and higher student enrollment for both 2017-2018 and 2018-2019 academic years in K-12 schools.
Cost of revenues . Our cost of revenues
increased by 31.9% from RMB 256.4 million in 2017 to RMB 338.1 million in 2018. There was an increase in performance-based compensation
for teaching faculties and the cost of revenue from Bay State College.
Gross profit . Gross profit as a
percentage of our net revenues decreased from 42.2% in 2017 to 36.4% in 2018. The decrease was mainly driven by lower
profit margin at Bay State College, as the Company is in the process of consolidating its business operation.
Operating expenses . Our total operating
expenses decreased by 3.9% from RMB 185.2 million in 2017 to RMB 178.0 million in 2018. This decrease was mainly due to lower general
and administrative expenses and lower research and development expenses in 2018 compared to 2017.
|
·
|
Selling and marketing expenses . Our selling and marketing expenses increased by 19.3% from RMB 36.7 million in 2017 to RMB 43.8 million in 2018. The increases were mainly due to the consolidation of Bay State College.
|
|
·
|
General and administrative expenses . Our general and administrative expenses decreased by 6.7% from RMB 142.3 million in 2017 to RMB 132.7 million in 2018. The decrease in 2018 was the combined effect from consolidation of Bay State College, and the recovered receivables in the amount of RMB 20.0 million allowing us to reverse the bad debt expense from 2012. The receivables had been due from Xihua Group and the bad debt allowance had been written off in 2012 with an amount of RMB 46.8 million. At that time, because our management was focused on the JPL process, we did not have enough resources to put towards collection of such receivables. In 2018 Xihua Group was seeking for a business cooperation arrangement with us, which led to our ability to collect the receivable. As of December 31, 2018, RMB 20.0 million has been fully collected by us.
|
|
·
|
Research and development expenses . Our research and development expenses decreased by 76.2% from RMB 6.3 million in 2017 to RMB 1.5 million in 2018. It was mainly caused by lower spending on research expenses due to the decrease in headcount.
|
Other income (expense), net. We recorded
net other income of RMB 33.1 million in 2018, compared to net other income of RMB 53.2 million in 2017. The decrease was mainly
due to the disposal gain of RMB 38.1 million of 21st Training Center and Ambow Online during the year 2017 and offset
by the gain from derecognition of liabilities of RMB 15.2 million in 2018. We review our accrued liabilities periodically to ensure
they are active and with reasonable possibility to pay.
Income tax (expense)/benefit . Our
income tax (expense)/ benefit changed from RMB 9.6 million expense in 2017 to RMB 3.5 million expense in 2018.
Net (loss)/income . According to
above mentioned factors, our net (loss)/income changed from income of RMB 45.9 million in 2017 to income of RMB 44.9 million in
2018.
Discussion of segment operations
In the years before 2019, we used to have four operating segments
which were Tutoring, K-12 Schools, Career Enhancement and Others. These four operating segments were also identified as reportable
segments. The reportable segments of Tutoring and K-12 schools were grouped under the “Better Schools” division because
the segments offer programs and education services using a standards-based curriculum that enables students to improve their academic
results and educational opportunities. The reportable segment of Career Enhancement was classified under the “Better Jobs”
division because the segment offers services and programs that facilitate post-secondary students to obtain more attractive employment
opportunities. The reportable segment of Others represents the intellectualized operational services provided, and was classified
under the “Others” division.
From 2019 and onwards, we have changed our management approach
in the way to organize segments for making operating decisions and assessing performance after the shift of business development
focus. In the past few years, in order to organize resources and enhance future growth, we have suspended some non-performing business
units in Tutoring segment. On the other hand, with the higher demand in tertiary level education in China market and the acquisition
of Bay State College, we decided to shift the business focus to career enhancement educational services and empowering students
with the drive and skills to build a better career. Considering the business development trends and shift, we decided to reorganize
the reportable segments into two segments: 1) K-12 schools, 2) CP&CE Programs. There are no changes in the classification of
K-12 schools. CP&CE Programs include the previous Tutoring, Career Enhancement and Others. There are no changes on the measurement
methods used to determine reported segment profit or loss and total assets along with these reportable segments. We have restated
the corresponding items of segment information for the years of 2017 and 2018 according to the new reportable segments as blow.
The following table lists our net revenues, cost of revenues,
gross profit and gross margin by our reportable segments for the periods indicated:
|
|
For the Years Ended December 31,
|
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2019
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in thousands)
|
|
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
K-12 Schools
|
|
|
232,433
|
|
|
|
277,790
|
|
|
|
313,747
|
|
|
|
45,067
|
|
CP&CE Programs
|
|
|
211,491
|
|
|
|
253,718
|
|
|
|
270,162
|
|
|
|
38,806
|
|
Total net revenues of reportable segments and the company
|
|
|
443,924
|
|
|
|
531,508
|
|
|
|
583,909
|
|
|
|
83,873
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
K-12 Schools
|
|
|
(152,509
|
)
|
|
|
(178,645
|
)
|
|
|
(197,064
|
)
|
|
|
(28,306
|
)
|
CP&CE Programs
|
|
|
(103,886
|
)
|
|
|
(159,498
|
)
|
|
|
(191,830
|
)
|
|
|
(27,555
|
)
|
Total costs of revenues of reportable segments and the company
|
|
|
(256,395
|
)
|
|
|
(338,143
|
)
|
|
|
(388,894
|
)
|
|
|
(55,861
|
)
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
K-12 Schools
|
|
|
79,924
|
|
|
|
99,145
|
|
|
|
116,683
|
|
|
|
16,761
|
|
CP&CE Programs
|
|
|
107,605
|
|
|
|
94,220
|
|
|
|
78,332
|
|
|
|
11,252
|
|
Total gross profit of reportable segments and the company
|
|
|
187,529
|
|
|
|
193,365
|
|
|
|
195,015
|
|
|
|
28,012
|
|
Gross margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
K-12 Schools
|
|
|
34.4
|
%
|
|
|
35.7
|
%
|
|
|
37.2
|
%
|
|
|
37.2
|
%
|
CP&CE Programs
|
|
|
50.9
|
%
|
|
|
37.1
|
%
|
|
|
29.0
|
%
|
|
|
29.0
|
%
|
Total gross margin of reportable segments and the company
|
|
|
42.2
|
%
|
|
|
36.4
|
%
|
|
|
33.4
|
%
|
|
|
33.4
|
%
|
Year ended December 31, 2019 compared with year
ended December 31, 2018
K-12 Schools
Net revenues from our K-12 Schools segment
increased from RMB 277.8 million in 2018 to RMB 313.7 million (US$ 45.1 million) in 2019. The increase was primarily driven by
increased student enrollment in K-12 schools for the 2018-2019 and 2019-2020 academic year.
Cost of revenues from our K-12 Schools segment
increased from RMB 178.6 million in 2018 to RMB 197.1 million (US$ 28.3 million) in 2019. The increase was primarily due to more
supporting direct cost related to the increase in student enrollment and an increase in performance-based compensation for teaching
faculties in 2019.
Gross profit as a percentage of our net
revenues from our K-12 Schools segment was 35.7% in 2018 and 37.2% in 2019. The change in the gross profit margin was mainly from
the increase of net revenue.
CP&CE Programs
Net revenues from our CP&CE Programs
segment increased from RMB 253.7 million in 2018 to RMB 270.2 million (US$ 38.8 million) in 2019. The increase was mainly from
higher student enrollment from tutoring services.
Cost of revenues in our CP&CE Programs
segment increased from RMB 159.5 million in 2018 to RMB 191.8 million (US$ 27.6 million) in 2019, which included increased compensation
of teaching faculties and additional investments in new programs and new technology deployment.
Gross profit as a percentage of our net
revenues from our CP&CE Programs segment was 37.1% in 2018 and 29.0% in 2019. The decrease in gross margin was mainly due to
the additional investment in new programs and new technology deployment.
Year ended December 31, 2018 compared with year ended
December 31, 2017
K-12 Schools
Net revenues from our K-12 Schools segment
increased from RMB 232.4 million in 2017 to RMB 277.8 million in 2018. The increase was primarily driven by increased student enrollment
in K-12 schools for the 2017-2018 and 2018-2019 academic year.
Cost of revenues from our K-12 Schools segment
increased from RMB 152.5 million in 2017 to RMB 178.6 million in 2018. The increase was primarily due to more supporting direct
cost related to the increase in student enrollment and an increase in performance-based compensation for teaching faculties in
2018.
Gross profit as a percentage of our net
revenues from our K-12 Schools segment was 34.4% in 2017 and 35.7% in 2018. The change in the gross profit margin was not significant.
CP&CE Programs
Net revenues from our CP&CE Programs
segment increased from RMB 211.5 million in 2017 to RMB 253.7 million in 2018. The increase was mainly caused by the revenue generated
by Bay State College.
Cost of revenues in our CP&CE Programs
segment increased from RMB 103.9 million in 2017 to RMB 159.5 million in 2018, which was in line with the increase in revenue.
Gross profit as a percentage of our net
revenues from our CP&CE Programs segment was 50.9% in 2017 and 37.1% in 2018. The decrease in gross margin was mainly due to
the lower profit margin at Bay State College, as we were in the process of consolidating
its business operation.
B.
|
Liquidity and Capital Resources
|
As of December 31, 2019, our consolidated
current liabilities exceeded our consolidated current assets by RMB 209.3 million. Our consolidated net assets were amounting to
RMB 163.6 million as of December 31, 2019.
Our principal sources of liquidity have
been cash provided by operating activities. We have net cash used in operating activities of RMB 10.2 million, net cash provided
by operating activities in RMB 25.4 million and RMB 20.2 million for the years of 2019, 2018 and 2017, respectively. The cash outflow
in 2019 was mainly caused by more cash spending on compensation, rental, marketing and other operating expenses. As of December
31, 2019, we had RMB 157.6 million in unrestricted cash and cash equivalents. Our cash and cash equivalents consist
of cash on hand and liquid investments that are unrestricted as to withdrawal or use, have maturities of three months
or less and are placed with banks and other financial institutions. As of December 31, 2019, we had RMB
95.0 million in unrestricted cash and cash equivalents from VIEs.
Our operating results for future periods
are subject to numerous uncertainties and it is uncertain if we will be able to achieve a net income position for the foreseeable
future. If management is not able to increase revenue and/or manage cost and operating expenses in line with revenue forecasts,
we may not be able to achieve profitability.
Most recently, from the beginning of 2020, in response to the global spread of a novel
coronavirus pandemic, also known as COVID-19, businesses and schools in China have been suspended since the end of January 2020
as part of quarantine measures to contain the pandemic. Our K-12 schools and training centers in China have been closed since then
and the reopening time is postponed until further notice from local authorities. Bay State College in U.S. is currently moving
all courses online in response to social distancing needs and precautionary measures. The pandemic may adversely affect our liquidity
resources, including but not limited to delayed collection of tuition and fees.
We had approximately RMB 57.5 million and
RMB 31.0 million short term investments, available for sale and short term investments, held to maturity as of December 31, 2019,
which was held as short-term investments to be liquid on the expiration date before the end of 2020. Besides, according to our
historical experience and knowledge, the management believed that certain current liabilities could be delayed for cash payment
through arrangements.
Historically, we have addressed liquidity requirements
through a series of cost reduction initiatives, debt borrowings and the sale of subsidiaries and other non-performing
assets. In 2019 we filed a Form F-3 with the Securities and Exchange Commission to register securities with a maximum aggregate
offering amount not to exceed $100 million. In 2019, our business plan focused on expanding existing business, exploring innovation
in service portfolio, investing in new technology to build up education service platforms, improving operation efficiency and
profitability, and enhancing our internal control procedures. Actions include establishing new tutoring centers and training offices,
continuing to roll out the career-oriented Cross-Border College Program across U.S. and China, implementing comprehensive budget
control and operation assessment, implementing enhanced vendor review and selection processes as well as enhancing internal controls
on payable management, create synergy of our resources, and put forward efforts to pursue historical receivables. From 2020 and
onwards, we are focusing on the development of core cash-generating business and will implement more stringent cost and expense
controls than previous years, including but not limited to cut down numbers of employees, require strict pre-purchase application
and approval, suspend certain business consuming more cash than earned etc.
We are taking a series of measures to respond
to the negative impact from the pandemic, including offering online programs and services, cut down compensation cost, reducing
other costs and expenses for savings, negotiating for relief or postpone of rentals for this special period of time and seeking
for certain credit facilities etc. Moreover, along with the control of the pandemic in China, local authority of Jiangsu Province
have announced the reopening time schedule of local K-12 schools in the beginning of April 2020, which include Shuyang K-12 within
us. Other provinces of China are estimated to follow and announce their own reopening time schedules of schools in the next. The
collection of tuition and fees are expected to gradually recover accordingly. There has no liquidity concerns noted in the next
12 months according to our cash flow projection.
We believe that available cash and cash
equivalents, short term investments, available for sale and short term investments, held to maturity, cash provided by operating
activities, together with cash available from the activities mentioned above, should enable us to meet presently anticipated cash
needs for at least the next 12 months after the date that the financial statements are issued and we have prepared the consolidated
financial statements on a going concern basis. However, we continue to have ongoing obligations and we expect that we will require
additional capital in order to execute its longer-term business plan. If we encounter unforeseen circumstances that place constraints
on its capital resources, management will be required to take various measures to conserve liquidity, which could include, but
not necessarily be limited to, initiating additional public offerings, curtailing our business development activities, suspending
the pursuit of its business plan, obtaining credit facilities, controlling overhead expenses and seeking to further dispose of
non-core assets. Management cannot provide any assurance that we will raise additional capital if needed.
Condensed summary of our cash flows
|
|
For the Years Ended December 31,
|
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2019
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in thousands)
|
|
Net cash provided by/(used in) operating activities
|
|
|
20,210
|
|
|
|
25,445
|
|
|
|
(10,210
|
)
|
|
|
(1,468
|
)
|
Net cash used in investing activities
|
|
|
(61,078
|
)
|
|
|
(28,520
|
)
|
|
|
(33,153
|
)
|
|
|
(4,761
|
)
|
Net cash provided by/(used in) financing activities
|
|
|
39,205
|
|
|
|
46,872
|
|
|
|
(40,620
|
)
|
|
|
(5,835
|
)
|
Effects of exchange rate changes on cash, cash equivalents and restricted cash
|
|
|
66
|
|
|
|
58
|
|
|
|
75
|
|
|
|
11
|
|
Net change in cash, cash equivalents and restricted cash
|
|
|
(1,597
|
)
|
|
|
43,855
|
|
|
|
(83,908
|
)
|
|
|
(12,053
|
)
|
Cash, cash equivalents and restricted cash at beginning of year
|
|
|
199,250
|
|
|
|
197,653
|
|
|
|
241,508
|
|
|
|
34,691
|
|
Cash, cash equivalents and restricted cash at end of year
|
|
|
197,653
|
|
|
|
241,508
|
|
|
|
157,600
|
|
|
|
22,638
|
|
Operating activities
Net cash used in operating activities amounted
to RMB 10.2 million (US$ 1.5 million) in the year ended December 31, 2019, as compared to net cash provided by operating activities
of RMB 25.4 million in the year ended December 31, 2018 and net cash provided by operating activities of RMB 20.2 million
in the year ended December 31, 2017.
Net cash used in operating activities in
the year ended December 31, 2019 was primarily attributable to net loss of RMB 100.4 million (US$ 14.4 million), an increase in
other non-current assets of RMB 13.5 million (US$ 1.9 million), a decrease in accrued and other liabilities of RMB 38.3 million
(US$ 5.5 million), a gain from deregistration of subsidiaries of RMB 1.8 million (US$ 0.3 million), a gain from fair value change
of contingent consideration payable of RMB 1.3 million (US$ 0.2 million), an increase in accounts receivable of RMB 3.0 million
(US$ 0.4 million), partially offset by depreciation and amortization of RMB 26.8 million (US$ 3.9 million), share-based compensation
expense of RMB 1.6 million (US$ 0.2 million), an increase in bad debt provision of RMB 6.0 million (US$ 0.9 million), an increase
in impairment loss of RMB 38.8 million (US$ 5.6 million), an increase in deferred income tax of RMB 6.7 million (US$ 1.0 million),
an increase in income tax payable of RMB 5.8 million (US$ 0.8 million), an increase in deferred revenue of RMB 13.1 million (US$
1.9 million), a decrease in prepaid and other current assets of RMB 6.7 million (US$ 1.0 million), amortization of operating lease
right of use-asset of RMB 30.6 million (US$ 4.4 million) and an increase in operating lease liability of RMB 12.4 million (US$
1.8 million).
Net cash provided by operating activities
in the year ended December 31, 2018 was primarily attributable to net income of RMB 44.9 million, depreciation and amortization
of RMB 26.3 million, share-based compensation expense of RMB 8.1 million, a decrease in accounts receivables of RMB 1.8 million,
an increase in income tax payable of RMB 5.2 million, an increase in deferred revenue of RMB 9.7 million, partially offset by reversal
of bad debt provision of RMB 5.6 million, and increase in other non-current assets of RMB 3.2 million, a decrease in accrued and
other liabilities of RMB 29.4 million, a decrease in accounts payable of RMB 7.9 million, a gain from deregistration of subsidiaries
of RMB 2.9 million, a gain from derecognition of liabilities of RMB 15.2 million, a gain from fair value change of contingent consideration
payable of RMB 5.4 million, an increase in prepaid and other current assets of RMB 6.8 million, and a deferred income tax of RMB
2.2 million.
Investing activities
Net cash used in investing activities amounted
to RMB 33.2 million (US$ 4.8 million) in the year ended December 31, 2019 as compared to RMB 28.5 million net cash outflow in
the year ended December 31, 2018 and RMB 61.1 million net cash outflow in the year ended December 31, 2017.
Net cash used in investing activities in
the year ended December 31, 2019 was mainly attributable to purchase of available-for-sale investments of RMB 219.0 million (US$
31.5 million), purchase of held-to-maturity investments of RMB 387.0 million (US$ 55.6 million), payment as result of disposal
of subsidiaries RMB 25.5 million (US$ 3.7 million), loan to third party of RMB 25.0 million (US$ 3.6 million), purchase of other
non-current assets of RMB 54.1 million (US$ 7.8 million), purchase of property and equipment of RMB 8.7 million (US$ 1.3 million),
and prepayment for leasehold improvement of RMB 8.1 million (US$ 1.2 million), partially offset by proceed from available-for-sale
investments of RMB 210.0 million (US$ 30.2 million), proceeds from collection of loan receivables of RMB 58.7 million (US$8.4
million) and proceed from held-to-maturity investments of RMB 426.0 million (US$ 61.2 million).
Net cash used in investing activities in
the year ended December 31, 2018 was mainly attributable to purchase of available-for-sale investments of RMB 222.0 million, purchase
of held-to-maturity investments of RMB 671.0 million, payment as result of disposal of subsidiaries RMB 112.0 million, purchase
of other non-current assets of RMB 1.6 million, purchase of property and equipment of RMB 8.8 million, and prepayment for leasehold
improvement of RMB 9.9 million, partially offset by proceed from available-for-sale investments of RMB 303.0 million and proceed
from held-to-maturity investments of RMB 694.0 million.
Financing activities
Our financing activities consist primarily
of issuance of ordinary shares and minority shareholder capital injection. Net cash used in financing activities amounted to RMB
40.6 million (US$ 5.8 million) in the year ended December 31, 2019, as compared to net cash provided amounted to RMB 46.9 million
in the year ended December 31, 2018 and net cash provided of RMB 39.2 million in the year ended December 31, 2017.
Net cash used by financing activities in
the year ended December 31, 2019 was attributable to repayment of short-term borrowings amounted to RMB 41.2 million (US$ 5.9 million),
net of proceeds from minority shareholder capital injection amounted to RMB 0.6 million (US$ 0.1 million).
Net cash provided by financing activities
in the year ended December 31, 2018 was attributable to proceeds from issuance of ordinary shares, net of expenses amounted to
RMB 45.4 million and proceeds from minority shareholder capital injection amounted to RMB 1.5 million.
Short-term and Long-term borrowings
During 2017, we and our affiliated entities
entered into various loan agreements in the aggregate amount of long-term borrowing and short-term borrowing of US$ 6.0 million
with terms more and less than one year, respectively. As at December 31, 2019, we have fully repaid the borrowing of US$ 6.0 million.
Short-term and long-term borrowings consisted
of the following:
|
|
|
|
As of December 31
|
|
|
|
Maturities
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
|
|
|
(In thousands)
|
|
Long-term and short-term borrowings from third party
|
|
April 2019
|
|
|
39,205
|
|
|
|
41,179
|
|
|
|
-
|
|
The weighted average interest rate of the
borrowings outstanding was nil per annum as of December 31, 2018 and 2019. The fair values of the borrowings approximate their
carrying amounts. The weighted average borrowings for the years ended December 31, 2018 and 2019 was RMB 41.2 million and
RMB 10.6 million, respectively.
The borrowings incurred interest expenses
were nil for the years ended December 31, 2017, 2018 and 2019. There was neither capitalization as additions to construction
in progress nor guarantee fees for each of three years ended December 31, 2019.
Capital expenditures
Our capital expenditures were RMB 7.7 million,
RMB 8.8 million and RMB 8.7 million (US$ 1.3 million) in the fiscal years ended December 31, 2017, 2018 and 2019, respectively.
These capital expenditures were incurred primarily for investments in property, facilities, equipment and technology.
Holding company structure
We conduct our operations primarily through
our wholly-owned subsidiary in China, Ambow Shengying, Ambow Chuangying, IValley Beijing and their affiliated PRC entities, which
we collectively refer to as our VIEs and their respective subsidiaries.
As a result, our ability to pay dividends
and to finance any debt we may incur depends primarily upon dividends paid by Ambow Shengying, Ambow Chuangying, Ambow Education
Management and fees paid by Ambow Sihua, Ambow Shanghai, Ambow Shida, Ambow Rongye, IValley and Ambow Zhixin and their subsidiaries
to Ambow Shengying, Ambow Chuangying and Ambow Education Management for sales of services and products. Fees paid by VIEs and subsidiaries
are mainly for sales of services. The aggregate amount that VIEs and subsidiaries had paid to Ambow Shengying, Ambow Chuangying
and Ambow Education Management were insignificant for the reporting period, and the aggregate amount of fees payable from the VIE
and subsidiaries to Ambow Shengying, Ambow Chuangying and Ambow Education Management were insignificant for the reporting period.
If our subsidiaries or any newly formed
subsidiaries 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 subsidiaries are permitted to pay dividends to us only out of their retained earnings, if any,
as determined in accordance with PRC accounting standards and regulations. Under PRC law, each of our subsidiaries incorporated
as companies may only distribute dividends after they have made allowances to fund certain statutory reserves. Although the statutory
reserves can be used, among other ways, to increase the registered capital and eliminate future losses in excess of retained earnings
of the respective companies, the reserve funds are not distributable as cash dividends except in the event of liquidation of the
companies.
Ambow Sihua, Ambow Shanghai, Ambow Shida,
Ambow Rongye and Ambow Zhixin own and/or operate private schools, tutoring and career enhancement centers in China. At the end
of each fiscal year, every private school in China is required to allocate a certain amount to its development fund for the construction
or maintenance of the school or procurement or upgrade of educational equipment. In the case of a private school that requires
reasonable returns, this amount shall be no less than 25% of the annual net income of the school, while in the case of four of
our private schools that do not require reasonable returns, this amount shall be equivalent to no less than 25% of the annual increase
in the net assets of the school (as determined under the generally accepted accounting principles of the PRC), if any. Pursuant
to an amendment to The Law for Promoting Private Education on November 7, 2016, which will go into effect on September 1, 2017,
sponsors of for-profit private schools are entitled to retain the profits from their schools and the operating surplus may be allocated
to the sponsors pursuant to the PRC company law and other relevant laws and regulations. See “Item 3.D —Key Information—Risk
Factors—Risks related to regulation of our business and our corporate structure—Our VIEs and their respective subsidiaries
may be subject to significant limitations on their ability to operate private schools or make payments to related parties or otherwise
be materially and adversely affected by changes in PRC laws and regulations.”
Inflation
Inflation in China has not materially impacted
our results of operations in recent years. Although we were not materially affected by inflation in the past, we can provide no
assurance that we will not be affected in the future by higher rates of inflation in China.
Recent accounting standards
See of Notes 3(ee) to the audited consolidated
financial statements for recent accounting standards that could have an effect on us.
C.
|
Research and Development, Patents and Licenses
|
We have an in-house research and development
team with 52 full-time software and educational professionals as of December 31, 2019 help to develop and update our educational
content based on the latest official local government curriculum of each of our specific subjects. We integrate the best content
from our acquired schools, tutoring centers and career enhancement centers into our qualified content database and then introduce
it to our nationwide student user base. In 2017, 2018 and 2019, we spent RMB 6.3 million, RMB 1.5 million and RMB 3.8 million (US$
0.5 million), respectively, on research and development expenses.
For a discussion of significant recent trends
in our financial condition and results of operations, please see “Item 5.A Operating and Financial Review and Prospects—Operating
Results” and “5.B Operating and Financial Review and Prospects—Liquidity and Capital Resources.”
E.
|
Off-balance sheet arrangements
|
We have not entered into any financial guarantees
or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts
that are indexed to our shares and classified as shareholders’ equity, 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 research and development
services with us.
There were no new off-balance sheet arrangements
as of December 31, 2018 and 2019.
|
F.
|
Contractual Obligations
|
The following table presents a summary of
our contractual obligations and payments, by period, as of December 31, 2019.
|
|
Payments Due by Period
|
|
|
|
Total
|
|
|
Less than
1 Year
|
|
|
2-3 Years
|
|
|
4-5 Years
|
|
|
More than
5 Years
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
|
(in millions)
|
|
Operating lease obligations
|
|
|
342.2
|
|
|
|
56.3
|
|
|
|
95.6
|
|
|
|
59.9
|
|
|
|
130.4
|
|
Item 6.
|
Directors, Senior Management and Employees
|
A.
|
Directors and Senior Management
|
The table below sets forth the certain
information relating to our directors and executive officers as of December 31, 2019.
Name
|
|
Age
|
|
Position
|
|
Class
|
|
Nationality
|
|
Residence
|
Jin Huang
|
|
54
|
|
President, Chief Executive Officer and Chairman of the Board
|
|
Class III
|
|
United States
|
|
China
|
|
|
|
|
|
|
|
|
|
|
|
Kia Jing Tan
|
|
47
|
|
Chief Financial Officer
|
|
N/A
|
|
Malaysia
|
|
China
|
|
|
|
|
|
|
|
|
|
|
|
Xuejun Xie
|
|
54
|
|
Vice President, Public Relationship and legal affairs
|
|
N/A
|
|
China
|
|
China
|
|
|
|
|
|
|
|
|
|
|
|
Jianguo Xue
|
|
54
|
|
Vice President, Sales
|
|
N/A
|
|
China
|
|
China
|
|
|
|
|
|
|
|
|
|
|
|
Chiao-Ling Hsu
|
|
50
|
|
Chief Operating Officer
|
|
N/A
|
|
Taiwan
|
|
China
|
|
|
|
|
|
|
|
|
|
|
|
Yanhui Ma(1)(2)
|
|
60
|
|
Director
|
|
Class III
|
|
United States
|
|
United States
|
|
|
|
|
|
|
|
|
|
|
|
Yigong Justin Chen (1)
|
|
50
|
|
Director
|
|
Class I
|
|
China
|
|
China
|
|
|
|
|
|
|
|
|
|
|
|
Ping Wu (1)(2)
|
|
55
|
|
Director
|
|
Class II
|
|
China
|
|
China
|
|
|
|
|
|
|
|
|
|
|
|
John Robert Porter
|
|
67
|
|
Director
|
|
Class II
|
|
United Kingdom
|
|
United Kingdom
|
(1)
|
Member of the audit committee
|
(2)
|
Member of the compensation committee
|
Jin Huang has served as our President
and Chief Executive Officer and as a member of our board of directors since our inception in August 2000. Dr. Huang has
over 15 years of academic and industry experience in Silicon Valley. Prior to founding Ambow, Dr. Huang was a founding engineer
at Avant!, where she was responsible for product design and engineering management. Dr. Huang holds a bachelor’s degree
in Computer Science, a master’s degree in Computer Science and a Ph.D. in Electronic Engineering from the University of Electronic
Science & Technology of China. From 1990 to 1993, Dr. Huang was doing research and completed her Ph.D. dissertation
at the University of California, Berkeley.
Kia Jing Tan, FCPA (Aust.), FCA (Singapore)
joined Ambow as its Corporate Controller in December 2008. In March 2011, Kia Jing Tan was promoted to the position of
Vice President, Finance. In July 2012, Kia Jing Tan was further promoted to the position of Acting Chief Financial Officer.
In May 2015, Kia Jing Tan has started to serve as our Chief Finance Officer of Ambow Education Group. Kia Jing Tan has more than
ten years’ working experience with Big Four accounting firms in both China and Singapore. He was with KPMG Shanghai from
December 2002 to September 2005 and with PricewaterhouseCoopers Shanghai from October 2005 to November 2008.
Prior to joining Ambow, he worked as a Senior Audit Manager in PricewaterhouseCoopers’ Shanghai office. Kia Jing Tan holds
a Bachelor of Commerce degree in accounting from Deakin University, Australia. Kia Jing Tan is a Fellow Certified Practicing Accountant
(FCPA) with CPA Australia and Fellow Chartered Accountant of Singapore (FCA).
Xuejun Xie has served as our Vice
President, Human Resources and Administration since 2000. Prior to joining Ambow, Ms. Xie taught biology at Sichuan Normal
University from July 1988 to October 1999. Ms. Xie holds a bachelor’s degree in biology from East China Normal
University.
Jianguo Xue has served as our Vice
President, Sales in charge of degree schools since December 2003. Prior to joining Ambow, Mr. Xue served as a Managing
Director of Clever Software Group and Executive President of Heilongjiang Clever Networks Co., Ltd., a software company listed
in China, from July 1993 to November 2003. Mr. Xue holds a bachelor’s degree in English Language and Literature
from Beijing Foreign Studies University and a master’s certificate in English linguistics from Beijing Normal University.
Chiao-Ling Hsu has served
as our Chief Operating Officer in June 2015. Ms. Hsu has over 15 years of operating and management experience in the education
industry. Since 2011, she has served as Chief Executive Officer of Hwa Kang Foundation, and as Executive Director of the Innovative
Biz Group in the School of Continuing Education (SCE) at Chinese Culture University in Taipei. From 2012 to 2014, Ms. Hsu also
was Vice Chairperson at the Center For Credentialing & Education in Greensboro, North Carolina in the United States. Previously,
Ms. Hsu held several positions in the SCE at Chinese Culture University, including Chief Operating Office, Director of the Customer
Contact Center, and Director of the E-learning Development Center. Ms. Hsu is a graduate of Chinese Culture University, and also
holds a Master of Business Education from New York University.
Yanhui Ma joined the board of directors
in May 2014. Dr. Ma is an independent non-executive director of the company. Dr. Ma has been involved in the creation, funding
and development of several healthcare companies, especially joint venture corporations between China and the United States. Dr.
Ma also served on the board of directors of several healthcare related corporations he founded or co-founded in the US and China,
including Sinocare and SinoMed. Dr. Ma organized and co-founded the International Drug Delivery Society and served as Vice Chairman
of the Society previously. He also served as the Vice President of US Silicon Valley Chinese Business Association.
Justin Chen has served as a member
of our board of directors since March, 2013. Mr. Justin Chen is a counsel at PacGate Law Group. He is a California licensed attorney
and is qualified to practice before the United States Patent and Trademark Office. Justin Chen graduated from the University of
Iowa, College of Law in 1998, with a Juris Doctor degree and graduated from Peking University, Department of Biochemistry with
a bachelor’s degree in 1992 and obtained his Master of Biochemistry and Juris Doctor degrees, both from University of lowa
in 1995 and 1998, respectively.
Ping Wu has served as a member
of our board of directors since June, 2013. Dr. Ping Wu is the co-founder of SummitView Capital China Venture Capital Funds and
has invested in more than 30 start-up companies since 2010. Prior to co-founding SummitView Capital, he was the co-founder and
has served as President, Chief Executive Officer and Chairman of board of directors of Spreadtrum Communications Inc, a Nasdaq
listed leading fables semiconductor provider in China with Advanced technology in 2G, 3G and 4G wireless communications standards,
since its inception in April 2001. Dr. Ping Wu served as Senior Director at Mobilink Telecon Inc. from 1997 until 2001. Prior to
1997, Dr. Wu served as Sr. Design Manager of Trident Microsystems, Inc. Dr. Wu holds a Bachelor of Science degree in electrical
engineering from Tsinghua University and a master degree and Ph.D. degree in electrical engineering from the China Academy of Aerospace
Aerodynamics.
John Robert Porter has served as
a member of our board of directors since May 2014. Mr. Porter is a non-executive director of the company. Mr. Porter is also a
director of CEIHL. Mr. Porter is an English businessman and philanthropist, best known as the grandson of Sir Jack Cohen, Founder
of Tesco and son of Dame Shirley Porter. Mr. Porter obtained degrees from Oxford, the Institute d’Etudes Politiques in Paris,
and Stanford University Business, where he is also on the advisory council.
The business address of each of our executive
officers and directors is Ambow Education Holding Ltd., 12th Floor, Tower 1, Financial Street, Chang’an Center, Shijingshan
District, Beijing 100043, China.
There are no family relationships among
any of our directors and executive officers.
None of our non-executive directors has
any employment or service contract with our company.
Terms of executive officers
Our executive officers are appointed by,
and serve at the discretion of, our board of directors.
During 2019, the aggregate cash compensation
that we paid to our executive officers as a group was RMB 3.0 million (US$ 0.4 million), which includes bonuses, salaries and other
benefits that were earned in 2018 and paid in 2019. We accrued fees to each non-executive directors for their services rendered
to us starting from October 15, 2018. As of December 31, 2019, we accrued RMB 1.3 million (US$ 0.2 million) for director compensation.
Our full-time employees in the PRC, including our executive officers, participate in a government-mandated multi-employer defined
contribution plan pursuant to which certain pension benefits, medical care, unemployment insurance, employee housing fund and other
welfare benefits are provided to qualified employees. We do not provide our directors with any pension, retirement or similar benefits
on termination.
There were no share-based compensation expenses
for the share options during the years from 2017 to 2019. As of December 31, 2018 and 2019, all share options were vested.
On November 22, 2018, the Board of Directors
approved to convert 293,059 outstanding and expired options with an exercise price of US$0.4749 into 293,059 shares of restricted
stock. All restricted stock subject to this award shall fully vest as of November 22, 2018.
On November 22, 2018, the Board of Directors
approved to grant 200,000 shares of the restricted stock to senior employees of the Company. Twenty-five percent of the awards
shall vest on the one year anniversary of the vesting commence date, and the remainder shall vest in equal and continuous monthly
installments over the following thirty-six months thereafter, subject to participant's continuing service of the Company through
each vesting date. During 2018 and 2019, nil and 54,167 shares of restricted stock were vested, respectively.
Employment agreements
Service agreement with Dr. Jin Huang
We entered into a service agreement dated
August 28, 2007 with Dr. Jin Huang, our Chief Executive Officer. The initial employment term under this service agreement
is two years, which will automatically be extended by successive periods of twelve months, unless we or Dr. Huang gives the
other party a written notice three months prior to the commencement of the next twelve month period indicating that the notifying
party does not wish to extend the employment term, in which case the employment term will expire at the end of such three month
notice period.
In the event that we terminate Dr. Huang’s
employment for cause, or if Dr. Huang voluntarily resigns (other than a resignation for good cause following a change of control),
Dr. Huang will not be entitled to receive any severance benefits; provided, that Dr. Huang will be able to exercise any
vested and unexercised awards under our equity incentive plans in accordance with the terms set forth therein.
In the event that we terminate Dr. Huang’s
employment under circumstances other than a change of control and for any reason other than for cause or voluntary termination,
or if within 24 months after a change of control Dr. Huang is involuntarily terminated (other than for cause) or voluntarily
resigns for good cause, Dr. Huang will be entitled to certain severance benefits, including:
|
·
|
A lump sum payment consisting of: (i) an amount equal to one-time Dr. Huang’s then annual salary; (ii) a prorated bonus based on target opportunity for the year; and (iii) an amount equal to 12 months’ housing allowance;
|
|
·
|
The right to exercise any and all unexercised stock options granted under our equity incentive plans in accordance with their terms, as if all such unexercised stock options were fully vested, within one year of the effective date of such termination; and
|
|
·
|
Any other bonus amounts or benefits to which Dr. Huang may be entitled under any of our benefit plans.
|
Pursuant to the service contract, Dr. Huang
also has agreed to certain non-competition undertakings during the term of her employment and for a period of one-year following
any termination of her employment. These non-competition undertakings include that Dr. Huang may not, during the one-year
period following any termination of her employment, (i) solicit or entice away any of our clients or prospective clients,
(ii) have any business dealings with any of our clients or prospective clients, (iii) solicit or entice away any individual
who is employed by us as a director or in a managerial, executive or technical capacity, or employ or engage any such individual,
or (iv) carry on, set up, be employed, engaged or interested in a business anywhere in the PRC which is in competition with
our business as of the termination date. These non-competition undertakings will not prohibit Dr. Huang from seeking or doing
any business that is not in direct or indirect competition with our business, nor will they prevent Dr. Huang from holding
shares or other capital not amounting to more than 5% of the total issued share capital of any company which is listed on a regulated
market. Dr. Huang is entitled to receive one-half her annual base salary over the post-termination non-competition period
as consideration for her non-competition undertakings, which are subject to our making such payments.
“Cause” means that Dr. Huang
habitually neglects her duties to us or engages in gross misconduct during the term of the service agreement and “gross misconduct”
means her misappropriation of funds, securities fraud, insider trading, unauthorized possession of corporate property, the sale,
distribution, possession or use of a controlled substance, conviction of any criminal offense or entry of a plea of nolo contendere
(or similar plea) to a charge of such an offense or a breach of the service agreement and failure to cure such breach within ten
days after written notice thereof.
“Good cause” means, without
Dr. Huang’s express prior written consent, (i) she is assigned duties materially inconsistent with her position,
duties, responsibilities, or status with the company which substantially vary from that which existed immediately prior to the
change of control, and such reassignment is not directly related to her incapacity, disability or any “cause”; (ii) she
experiences a change in her reporting levels, titles, or business location (more than 50 miles from her current business location
or residence, whichever is closer to the new business location) which substantially varies from that which existed immediately
prior to the change of control, and such change is not directly related to her incapacity, disability or any “cause”;
(iii) she is removed from any position held immediately prior to the change of control, or if she fails to obtain reelection
to any position held immediately prior to the change of control, which removal or failure to reelect is not directly related to
her incapacity or disability, “cause” or death; (iv) she experiences a reduction in salary of more than ten percent
below that which existed immediately prior to the change of control, and such reduction is not directly related to her incapacity,
disability or any “cause”; (v) she experiences an elimination or reduction of any employee benefit, business expenses,
reimbursement or allotment, incentive bonus program, or any other manner or form of compensation available to her immediately prior
to the change of control and such change is not otherwise applied to others in the company with her position or title and is not
directly related to her incapacity, disability or any “cause”; or (vi) we fail to obtain from any successor, before
the succession takes place, a written commitment obligating the successor to perform the service agreement in accordance with all
of its terms and conditions.
“Change in control” means (i) any
merger, consolidation, or sale of the company such that any individual, entity or group acquires beneficial ownership of 50 percent
or more of our voting capital stock, (ii) any transaction in which we sell substantially all of our material assets, (iii) our
dissolution or liquidation, (iv) any change in the control of the composition of our board of directors such that the shareholders
who as of the date of the service agreement controlled the composition of our board of directors shall cease to have such control,
or (v) there has occurred a “change of control”, as such term (or any term of like import) is defined in any of
the following documents which is in effect with respect to us at the time in question: any note, evidence of indebtedness or agreement
to lend funds to us, any option, incentive or employee benefit plan of us or any employment, severance, termination or similar
agreement with any person who is then our employee.
Employment Agreements with our other Executive Officers
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
subject to renewal. We may terminate employment with or without cause in accordance with the Labor Contract Law of the PRC and
the applicable PRC regulations. As stipulated under the applicable laws, we may be required to provide severance compensation as
expressly required by applicable law. In certain cases, in the event of termination without cause, we are also required to provide
severance compensation in accordance with the terms of the applicable employment agreement.
Confidential information and invention assignment agreements
We have also entered into a confidential
information and invention assignment agreement with each of our executive officers. We require all of our employees to execute
the same confidential information and invention assignment agreement or an agreement on substantially similar terms. Under the
terms of the agreement, each executive officer has agreed to hold, both during and after such executive officer’s term of
employment, in strictest confidence and not to use, except for our benefit, or to disclose to any person, firm or corporation without
written authorization, any confidential information. Confidential information does not include any information which has become
publicly known and made generally available through no wrongful act of our executive officers. Each executive officer has also
agreed during such officer’s term of employment not to improperly use or disclose any proprietary information or trade secrets
of any former or current employer or other person or entity unless consented to in writing by such employer, person or entity.
In addition, each executive officer has agreed to disclose to us, hold in trust for the sole right and benefit of us and assign
to us, all right, title and interest in and to, any and all inventions, original works of authorship, developments, concepts, improvements
or trade secrets, whether or not patentable or registerable under copyright or similar laws, which such executive officer may solely
or jointly conceive, develop or reduce to practice or cause to be conceived, developed or reduced to practice, during the period
of employment. Furthermore, each executive officer has agreed to not directly or indirectly solicit, induce, recruit or encourage
any employees to leave their employment during the 12 month period immediately following such executive officer’s termination
of employment.
Equity-based compensation plans
2010 Equity Incentive Plan
Our board of directors adopted our 2010
Equity Incentive Plan in March 2010 and our shareholders approved such plan in June 2010.
Our 2010 Equity Incentive Plan provides
for the grant of ISOs to our employees and any parent and subsidiary corporations’ employees, and for the grant of NSOs,
restricted shares, restricted share units, share appreciation rights, performance units and performance shares to our employees,
directors and consultants and any of our parent and subsidiary corporations’ employees and consultants.
Amended and Restated 2010 Equity Incentive Plan
On December 21, 2018, the Group amended
and restated the 2010 Plan, or the “Amended and Restated 2010 Plan”, which became effective upon the approval of the
shareholders at the Annual Meeting of Shareholders on December.
Share reserve . The maximum aggregate
number of our ordinary shares that may be issued under our Amended and Restated 2010 Equity Incentive Plan is such number of shares
as shall be equal to 6,500,000 Class A Ordinary Shares, plus any shares that subject to stock options or similar awards
granted under the 2005 Stock Plan that expire or otherwise terminate without having been exercised in full, and shares issued pursuant
to awards granted under the 2005 Stock Plan that are forfeited to or converted by the company, with the maximum number of shares
to be added to the Amended and Restated 2010 Equity Incentive Plan equal to 293,059 Class A Ordinary Shares. In addition, our Amended
and Restated 2010 Equity Incentive Plan provides for increases in the number of shares available for issuance thereunder on the
closing day of each future registration before the fiscal years ending December 31, 2020, in the amount equal to 15% of the Class
A Ordinary Shares issued in each registration.
Shares issued pursuant to awards under the
Amended and Restated 2010 Equity Incentive Plan that we repurchase or that are forfeited, as well as shares used to pay the exercise
price of an award or to satisfy the tax withholding obligations related to an award, will become available for future grant under
the Amended and Restated 2010 Equity Incentive Plan. In addition, to the extent that an award is paid out in cash rather than shares,
such cash payment will not reduce the number of shares available for issuance under the Amended and Restated 2010 Equity Incentive
Plan. As of December 31, 2019, the Group granted up to 1,905,222 Class A Ordinary Shares of the company to its employees, outside
directors and consultants.
Administration . Our board of directors
or a committee of our board of directors administers our Amended and Restated 2010 Equity Incentive Plan. Different committees
with respect to different groups of service providers may administer our Amended and Restated 2010 Equity Incentive Plan. Subject
to the provisions of our Amended and Restated 2010 Equity Incentive Plan, the administrator has the power to determine the terms
of the awards, including the recipients, the exercise price, the number of shares subject to each such award, the vesting schedule
applicable to the awards, together with any vesting acceleration, and the form of consideration payable upon exercise. The administrator
also has the authority to modify or amend awards, to prescribe rules and to construe and interpret the Amended and Restated
2010 Equity Incentive Plan and to institute an exchange program whereby the exercise prices of outstanding awards may be reduced,
outstanding awards may be surrendered in exchange for awards with a higher or lower exercise price, or outstanding awards may be
transferred to a third party.
Options . The administrator may grant
ISOs or NSOs under our Amended and Restated 2010 Equity Incentive Plan. The exercise price of options granted under our Amended
and Restated 2010 Equity Incentive Plan must at least be equal to the fair market value of our ordinary shares on the date of grant
and its term may not exceed ten years, except that with respect to any participant who owns more than 10% of the total combined
voting power of all classes of our outstanding shares, or of certain of our parent or subsidiary corporations, the term of an ISO
must not exceed five years and the exercise price of such ISO must equal at least 110% of the fair market value on the grant date.
The administrator determines the term of all other options.
After termination of an employee, director
or consultant, he or she may exercise his or her option, to the extent vested as of such date of termination, for the period of
time stated in the option agreement. In the absence of a specified period of time in the option agreement, the option will remain
exercisable for a period of three months following termination (or twelve months in the event of a termination due to death or
disability). However, in no event may an option be exercised later than the expiration of its term.
Share appreciation rights . Share
appreciation rights may be granted under our Amended and Restated 2010 Equity Incentive Plan. Share appreciation rights allow the
recipient to receive the appreciation in the fair market value of our ordinary shares between the exercise date and the date of
grant. The exercise price of share appreciation rights granted under our Amended and Restated 2010 Equity Incentive Plan must at
least be equal to the fair market value of our ordinary shares on the date of grant. The administrator determines the terms of
share appreciation rights, including when such rights vest and become exercisable and whether to settle such awards in cash or
with our ordinary shares, or a combination thereof. Share appreciation rights expire under the same rules that apply to options.
Restricted shares . Restricted shares
may be granted under our Amended and Restated 2010 Equity Incentive Plan. Restricted share awards are ordinary shares that are
subject to various restrictions, including restrictions on transferability and forfeiture provisions. Restricted shares will vest
and the restrictions on such shares will lapse, in accordance with terms and conditions established by the administrator. The administrator
will determine the number of restricted shares granted to any employee. The administrator may impose whatever conditions to vesting
it determines to be appropriate. For example, the administrator may set restrictions based on the achievement of specific performance
goals and/or continued service to us. Recipients of restricted share awards generally will have voting and dividend rights with
respect to such shares upon grant without regard to vesting, unless the administrator provides otherwise. Restricted shares that
do not vest for any reason will be forfeited by the recipient and will revert to us.
Restricted share units . Restricted
share units may be granted under our Amended and Restated 2010 Equity Incentive Plan. Each restricted share unit granted is a bookkeeping
entry representing an amount equal to the fair market value of an ordinary share. Restricted share units are similar to awards
of restricted shares, but are not settled unless the award vests. The awards may be settled in shares, cash, or a combination of
both, as the administrator may determine. The administrator determines the terms and conditions of restricted share units including
the vesting criteria and the form and timing of payment.
Performance units and performance shares
. Performance units and performance shares may be granted under our Amended and Restated 2010 Equity Incentive Plan. Performance
units and performance shares are awards that will result in a payment to a participant only if performance goals established by
the administrator are achieved or the awards otherwise vest. The administrator will establish organizational or individual performance
goals in its discretion, which, depending on the extent to which they are met, will determine the number and/or the value of performance
units and performance shares to be paid out to participants. Performance units will have an initial dollar value established by
the administrator prior to the grant date. Performance shares will have an initial value equal to the fair market value of our
ordinary shares on the grant date. Payment for performance units and performance shares may be made in cash or in our ordinary
shares with equivalent value, or in some combination, as determined by the administrator.
Transferability . Unless the administrator
provides otherwise, our Amended and Restated 2010 Equity Incentive Plan does not allow for the transfer of awards other than by
will or the laws of descent and distribution and only the recipient of an award may exercise an award during his or her lifetime.
Certain adjustments . In the event
of certain changes in our capitalization, to prevent diminution or enlargement of the benefits or potential benefits available
under the Amended and Restated 2010 Equity Incentive Plan, the administrator will make adjustments to one or more of the number
and class of shares that may be delivered under the plan and/or the number, class and price of shares covered by each outstanding
award and the numerical share limits contained in the plan. In the event of our proposed liquidation or dissolution, the administrator
will notify participants as soon as practicable and all awards will terminate immediately prior to the consummation of such proposed
transaction.
Change in control transactions .
Our Amended and Restated 2010 Equity Incentive Plan provides that in the event of our merger or change in control, as defined in
the Amended and Restated 2010 Equity Incentive Plan, each outstanding award will be treated as the administrator determines, except
that if the successor corporation or its parent or subsidiary does not assume or substitute an equivalent award for each outstanding
award without the prior written consent of the participant, then such award will fully vest, all restrictions on such award will
lapse, all performance goals or other vesting criteria applicable to such award will be deemed achieved at 100% of target levels
and such award will become fully exercisable, if applicable, for a specified period prior to the transaction. The award will then
terminate upon the expiration of the specified period of time.
Amendment and Termination . Our Amended
and Restated 2010 Equity Incentive Plan will automatically terminate in 2020, unless we terminate it sooner. Our board of directors
has the authority to amend, suspend or terminate the 2010 Equity Incentive Plan provided such action does not impair the rights
of any participant with respect to any outstanding awards.
The following table summarizes, as of December
31, 2019, the share options and other equity awards granted to our executive officers under our Amended and Restated 2010 Equity
Incentive Plan or pursuant to other arrangements approved by our board of directors:
Name
|
|
Ordinary Shares
Underlying
Options Granted &
Restricted Shares
|
|
Date of
Grant
(original)
|
|
Date of
Grant
(New)
|
|
Date of
Expiration
|
|
Dr. Jin Huang
|
|
(1)
|
*
|
02/25/10
|
|
11/22/18
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Tan Kia Jing
|
|
(1)
|
*
|
02/10/09
|
|
11/22/18
|
|
|
—
|
|
|
|
(1)
|
*
|
02/25/10
|
|
11/22/18
|
|
|
—
|
|
|
|
(1)
|
*
|
02/25/11
|
|
11/22/18
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Xuejun Xie
|
|
(1)
|
*
|
11/01/06
|
|
11/22/18
|
|
|
—
|
|
|
|
(1)
|
*
|
08/26/08
|
|
11/22/18
|
|
|
—
|
|
|
|
(1)
|
*
|
02/25/10
|
|
11/22/18
|
|
|
—
|
|
|
|
(1)
|
*
|
—
|
|
05/18/15
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Jianguo Xue
|
|
(1)
|
*
|
08/26/08
|
|
11/22/18
|
|
|
—
|
|
|
|
(1)
|
*
|
02/25/10
|
|
11/22/18
|
|
|
—
|
|
|
|
(1)
|
*
|
—
|
|
05/18/15
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Chiao-Ling Hsu
|
|
(1)
|
*
|
—
|
|
05/18/15
|
|
|
—
|
|
*
|
Less than 1% of the outstanding ordinary shares
|
Our non-employee directors have received
restricted shares.
As of December 31, 2019, our board of directors
consisted of five directors:
Dr. Jin Huang, Mr. Justin Chen,
Mr. Ping Wu, Mr. John Porter and Dr. Yanhui Ma. Our directors are elected for three year terms.
We believe that each of the non-executive
members of our board of directors, other than Mr. Porter, is an “independent director” as that term is used in the
NYSE corporate governance rules.
No shareholder has the contractual right
to designate persons to be elected to our board of directors, and our Sixth Amended and Restated Memorandum and Articles of Association
provides that directors will be elected upon a resolution passed at a duly convened shareholders meeting by holders of a majority
of our outstanding shares being entitled to vote in person or by proxy at such meeting, to hold office until the expiration of
their respective terms. There is no minimum shareholding or age limit requirement for qualification to serve as a member of our
board of directors.
We have a staggered board. The Directors
are divided into Class I, Class II and Class III, respectively and are assigned to each class in accordance with
a resolution or resolutions adopted by the Board of Directors.
|
·
|
At the first annual general meeting of Members (a person
whose name is entered in the Register of Members as the holder of a share or shares) following the initial meeting, the term of
office of the Class I Directors shall expire and Class I Directors shall be elected for a full term of three years.
|
|
·
|
At the second annual general meeting of Members following
the initial meeting, the term of office of the Class II Directors shall expire and Class II Directors shall be elected
for a full term of three years.
|
|
·
|
At the third annual general meeting of Members following
the initial meeting, the term of office of the Class III Directors shall expire and Class III Directors shall be elected
for a full term of three years.
|
|
·
|
At each succeeding annual general meeting of Members,
Directors shall be elected for a full term of three years to succeed the Directors of the class whose terms expire at such annual
general meeting.
|
The following table sets forth the names
and classes of our directors as of the date of this annual report:
Class I
|
|
Class II
|
|
Class III
|
Yigong Justin Chen
|
|
Ping Wu
|
|
Jin Huang
|
|
|
John Robert Porter
|
|
Yanhui Ma
|
A director may be removed for negligence
or other reasonable cause at any time before the expiration of his or her term by a special resolution passed at a duly convened
shareholder meeting by the holders of at least two-thirds of our outstanding shares being entitled to vote in person or by proxy
at such meeting or by a unanimous written consent of our shareholders. Vacancies on our board of directors created by such a removal
or by resignation may be filled by resolution passed at a duly convened shareholder meeting by the holders of a majority of our
outstanding shares entitled to vote in person or by proxy at such meeting or by a majority vote of the remaining directors in office.
A director so elected or appointed shall hold office until the next succeeding annual shareholder meeting and may be nominated
for reelection at that time.
A director may vote on a proposal, arrangement
or contract in which the director is interested, provided that such director has disclosed his interest in such matter to the board
of directors at a meeting of the board of directors.
In addition, our board of directors may
exercise all the powers of the company to borrow money, mortgage or charge its undertaking, property and uncalled capital, and
issue debentures, debenture stock and other securities whenever money is borrowed or as a security for any debt, liability or obligation
of the company or of any third party.
Board Meetings and Executive Sessions
Once a quarter, and more often if circumstances
require, our Board of Directors holds meetings. In addition to regularly scheduled Board meetings, the independent directors of
the Board meet on a regular basis to fulfill their responsibilities on each of the Board committees. The independent directors
also meet annually in executive sessions without the presence of management and non-independent directors.
Duties of directors
In general, under Cayman Islands law, our
directors have a duty of loyalty to act honestly, in good faith and in our best interests. Our directors also have a duty to exercise
the care, diligence and skills that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their
duty of care to us, our directors must ensure compliance with our memorandum and articles of association then in effect. In certain
limited circumstances, our shareholders have the right to seek damages through a derivative action in the name of the company if
a duty owed by our directors is breached.
Committees of our board of directors
We have established an audit committee and
a compensation committee. We have adopted a charter for each of these committees. These committees’ members and functions
are briefly described below. As a Cayman Islands company, we are not required to have a separate nominating and corporate governance
committee of the board. Our full board of directors will perform the functions performed by such committee.
Audit committee
Our audit committee consists of Yigong Justin
Chen, Ping Wu and Yanhui Ma, each of whom meets the independence standards of the NYSE and the SEC. Yigong Justin Chen is the Chairperson
of our audit committee. Mr. Yanhui Ma serves as our audit committee financial expert. The responsibilities of our audit committee
include, among other things:
|
·
|
Appointing, and overseeing the work of our independent auditors, approving the compensation of our independent auditors, and, if appropriate, discharging our independent auditors;
|
|
·
|
Pre-approving engagements of our independent auditors to render audit services and/or establishing pre-approval policies and procedures for such engagements and pre-approving any non-audit services proposed to be provided to us by our independent auditors;
|
|
·
|
Discussing with management and our independent auditors significant financial reporting issues raised and judgments made in connection with the preparation of our financial statements;
|
|
·
|
Reviewing and discussing reports from our independent auditors on (1) the major critical accounting policies to be used, (2) significant alternative treatments of financial information within the U.S. generally accepted accounting principles, or GAAP, that have been discussed with management, (3) ramifications of the use of such alternative disclosures and treatments, and (4) other material written communications between our independent auditors and management;
|
|
·
|
Resolving any disagreements between management and our independent auditors regarding financial reporting;
|
|
·
|
Establishing procedures for receiving, retaining and treating any complaints we receive regarding accounting, internal accounting controls or auditing matters and procedures for the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters; and
|
|
·
|
Reporting regularly to the full board of directors.
|
Compensation committee
Our compensation committee consists of Dr.
Yanhui Ma and Dr. Ping Wu, each of whom is an “independent director” as that term is used in the NYSE corporate governance
rules. Ping Wu is the Chairperson of our compensation committee. Our compensation committee assists the board of directors in reviewing
and approving the compensation structure of our directors and officers, including all forms of compensation to be provided to our
directors and officers. The responsibilities of our compensation committee include, among other things:
|
·
|
Reviewing and recommending to our board of directors with respect to the total compensation package for our executive officers;
|
|
·
|
Reviewing and recommending to our board of directors with respect to director compensation, including equity-based compensation; and
|
|
·
|
Reviewing periodically and recommending to the board of directors with respect to any long term incentive compensation or equity plans, programs or similar arrangements, annual bonuses, employee pension and welfare benefit plans.
|
As of December 31, 2019, we and our subsidiaries
had 2,158 full-time employees, and 1,290 part-time employees, respectively. As of December 31, 2019, we had the following numbers
of full-time employees by department: 380 in selling and marketing, 665 in general and administrative functions, 52 in research
and development, and 1,061 teachers. None of our employees are represented by collective bargaining arrangements. We consider our
relations with our employees to be good.
The following table sets forth, as of February
17, 2020, certain information concerning the beneficial ownership of the Class A Ordinary Shares and Class C Ordinary Shares by
(i) each shareholder known by the company to own beneficially five percent or more of the outstanding Class A Ordinary Shares and
Class C Ordinary Shares; (ii) each director and the nominee for director of the company; (iii) each executive officer of the company;
and (iv) all executive officers and directors of the company as a group, and their percentage ownership and voting power.
We have determined beneficial ownership in
accordance with the rules of the SEC. Except as indicated in the footnotes below, we believe, based on the information furnished
to us, that the persons named in the following table have sole voting and investment power with respect to all ordinary shares
that they beneficially own, subject to applicable community property laws. As of February 17, 2020, the percentage of beneficial
ownership for holders of Class A ordinary shares is based on 38,398,089 Class A Ordinary Shares issued and outstanding and the
percentage of beneficial ownership for holders of Class C ordinary shares is based on 4,708,415 Class C Ordinary Shares issued
and outstanding, both of which classes of ordinary shares exclude unvested restricted shares. On all matters subject to vote at
general meetings of the company, the holders of Class A ordinary shares are entitled to one vote per share and the holders of Class
C ordinary shares are entitled to ten votes per share.
Unless otherwise indicated, the address
of such individual is c/o Ambow Education Holding Ltd., 12th Floor, Tower 1, Financial Street, Chang’an Center, Shijingshan
District, Beijing 100043, China.
|
|
Shares
beneficially owned
|
|
|
Percentage
of votes held
|
|
Name
|
|
Number
of
Class A
ordinary shares
|
|
|
Percentage
of
Class A
ordinary
shares (%)
|
|
|
Number
of
Class C
ordinary
shares
|
|
|
Percentage
of
Class C
ordinary
shares (%)
|
|
|
Number
of
total ordinary
shares
|
|
|
Percentage
of
total ordinary
shares (%)
|
|
|
Based
on
total Class
A ordinary
shares (%)
|
|
|
Based
on
total Class
C ordinary
shares (%)
|
|
|
Based
on
total
ordinary
shares (%)
|
|
Directors and Executive Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jin Huang (2)(7)
|
|
|
638,012
|
|
|
|
1.65
|
%
|
|
|
4,708,415
|
|
|
|
100
|
%
|
|
|
5,346,427
|
|
|
|
12.33
|
%
|
|
|
1.65
|
%
|
|
|
100
|
%
|
|
|
55.65
|
%
|
Kia Jing Tan
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
Xuejun Xie
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Jianguo Xue
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Yigong Justin Chen
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Ping Wu (3)
|
|
|
960,383
|
|
|
|
2.48
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
960,383
|
|
|
|
2.21
|
%
|
|
|
2.48
|
%
|
|
|
-
|
|
|
|
1.12
|
%
|
John Porter
|
|
|
999,205
|
|
|
|
2.58
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
999,205
|
|
|
|
2.30
|
%
|
|
|
2.58
|
%
|
|
|
-
|
|
|
|
1.17
|
%
|
Ralph Parks
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Yanhui Ma
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Chiao-Ling Hsu
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All executive officers and
directors of the company as a group (10 persons)(5)
|
|
|
4,010,965
|
|
|
|
10.37
|
%
|
|
|
4,708,415
|
|
|
|
100
|
%
|
|
|
8,719,380
|
|
|
|
20.10
|
%
|
|
|
10.37
|
%
|
|
|
100
|
%
|
|
|
59.58
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5% and Greater Shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment entities affiliated with Baring
Private Equity (6)
|
|
|
3,280,449
|
|
|
|
8.48
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
3,280,449
|
|
|
|
7.56
|
%
|
|
|
8.48
|
%
|
|
|
-
|
|
|
|
3.83
|
%
|
New Summit Global Limited
|
|
|
2,703,475
|
|
|
|
6.99
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
2,703,475
|
|
|
|
6.23
|
%
|
|
|
6.99
|
%
|
|
|
-
|
|
|
|
3.15
|
%
|
CEIHL Partners (I) Limited (4)
|
|
|
3,420,375
|
|
|
|
8.85
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
3,420,375
|
|
|
|
7.89
|
%
|
|
|
8.85
|
%
|
|
|
-
|
|
|
|
3.99
|
%
|
CEIHL Partners (II) Limited (4)
|
|
|
11,144,636
|
|
|
|
28.82
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
11,144,636
|
|
|
|
25.69
|
%
|
|
|
28.82
|
%
|
|
|
-
|
|
|
|
13.00
|
%
|
New Flourish Holdings Limited (8)
|
|
|
1,072,078
|
|
|
|
2.77
|
%
|
|
|
4,288,415
|
|
|
|
91.08
|
%
|
|
|
5,360,493
|
|
|
|
12.36
|
%
|
|
|
2.77
|
%
|
|
|
91.08
|
%
|
|
|
51.26
|
%
|
Spin-Rich Ltd. (9)
|
|
|
-
|
|
|
|
-
|
|
|
|
420,000
|
|
|
|
8.92
|
%
|
|
|
420,000
|
|
|
|
0.97
|
%
|
|
|
-
|
|
|
|
8.92
|
%
|
|
|
4.9
|
%
|
Note: Shares less than 1% of outstanding
shares were not shown.
(1)
|
In computing the number of shares beneficially owned by a person and
the percentage ownership of a person, shares subject to options, warrants or other derivative securities held by that person
that are currently exercisable or exercisable within 60 days are deemed outstanding. Such shares, however, are not deemed
outstanding for purposes of computing the percentage ownership of each other person. Except as indicated in the footnotes
to this table and pursuant to applicable community property laws, the persons named in the table have sole voting and investment
power with respect to all shares.
|
(2)
|
Of the 638,012 Class A Ordinary Shares (i) 573,914 of the Class A
Ordinary Shares are owned by New Flourish Holdings Limited (“New Flourish”) for the benefit of certain officers
of the Company, and (ii) 64,098 of the Class A Ordinary Shares are owned directly by Dr. Huang. Dr. Huang as the sole director
of New Flourish has voting control and investment power over the Class A Ordinary Shares held by New Flourish, but disclaims
beneficial ownership over such shares, because the shares are held for the benefit of certain officers of the Company.
|
|
|
(3)
|
The Class A Ordinary Shares are held by SummitView Investment Fund
I, L.P. and Changzhou SummitView Venture Fund, LLP. Mr. Wu disclaims beneficial ownership of all shares held by SummitView
Investment Fund I, L.P. and Changzhou SummitView Venture Fund LLP., except to the extent of his pecuniary interest therein.
The business address of Mr. Wu is Room 1101, Block E of Poly Plaza, No. 18 Dongfang Road, Shanghai 200120, China. Mr. Wu,
individually owns 135,226 Class A Ordinary Shares that have been vested in his capacity as a Board member of the Company.
|
|
|
(4)
|
Mr. Pan Jingyue is the general partner of CEIHL Partners (I) Limited
and CEIHL Partners (II) Limited (collectively “CEIHL”). CEIHL Partners (I) Limited holds 3,420,375 Class A Ordinary
Shares and CEIHL Partners (II) Limited holds 11,144,636 Class A Ordinary Shares. As the general partner of CEIHL Partners
(I) Limited and CEIHL Partners (II) Limited, Mr. Pan Jianyue has sole voting and dispositive power over the Class A Ordinary
Shares held by CEIHL.
|
|
|
(5)
|
Includes Class A Ordinary Shares, Class C Ordinary Shares and options
to purchase Class A Ordinary Shares held by all of our directors and executive officers as a group.
|
|
|
(6)
|
Consists of 2,899,881 Class A Ordinary Shares held by Baring
Private Equity Asia V Holding (4) Limited, and 380,568 Class A Ordinary Shares held by Campus Holdings Limited. Baring Private
Equity Asia V Holding (4) Limited and Campus Holdings Limited each has its principal office at Columbus Center, 2nd Floor, Suite
210, Road Town, Tortola, British Virgin Islands. The Baring Asia Private Equity Fund V, L.P. and The Baring Asia Private Equity
Fund V Co-Investment L.P. as the joint shareholders of Baring Private Equity Asia V Holding (4) Limited and Campus Holdings Limited,
may be deemed to have acquired beneficial ownership of an aggregate of 3,280,449 Class A Ordinary Shares. Baring Private Equity
Asia GP V Limited, as the general partner of Baring Private Equity Asia GP V, L.P., and Baring Private Equity Asia GP V, L.P.,
which in turn acts as the general partner of The Baring Private Asia Private Equity Fund V, L.P. and The Baring Asia Private Equity
Fund V Co-Investment L.P., each may be deemed to have acquired beneficial ownership of an aggregate of 3,280,449 Class A Ordinary
Shares. The Baring Asia Private Equity Fund V, L.P., The Baring Asia Private Equity Fund V Co-Investment L.P., Baring Private Equity
Asia GP V, L.P. and Baring Private Equity Asia GP V Limited each has its principal office at P.O. Box 309, Ugland House Grand Cayman,
KY 1-1104, Cayman Islands. Jean Eric Salata, as the sole shareholder of Baring Private Equity Asia GP V Limited, may be deemed
to have acquired beneficial ownership of an aggregate of 3,280,449 Class A Ordinary Shares. Mr. Salata disclaims beneficial ownership
of such shares except to the extent of his economic interest. Mr. Salata’s principal office is at 3801 Two International
Finance Center, 8 Finance Street, Central, Hong Kong.
|
|
|
(7)
|
Of the 4,708,415 Class C Ordinary Shares (i) 4,288,415 of the Class
C Ordinary Shares are owned by New Flourish for the benefit of Dr. Jin Huang, and (ii) 420,000 of the Class C Ordinary Shares
are owned by Spin Rich Ltd. Dr. Huang as the sole director of New Flourish has voting control and investment power over the
Class C Ordinary Shares held by New Flourish.
|
(8)
|
Dr. Jin Huang, as the sole
director of New Flourish has voting control and investment power over the Class A Ordinary Shares and the Class C Ordinary
Shares owned by New Flourish. Dr. Huang disclaims beneficial ownership over the Class A Ordinary Shares, which are held
for the benefit of certain officers of the Company.
|
(9)
|
Dr. Jin Huang has sole voting control and investment
power over Class C Ordinary Shares owned by Spin Rich Ltd.
|
Three shareholders of the VIEs, namely Xuejun
Xie, Gang Huang and Jianguo Xue are also beneficial owners of the company. As of February 17, 2019, the aggregated beneficial ownership
of the three individuals was less than 2% of the company.
Except as disclosed in this annual report,
including contractual control arrangements and VIE shareholders’ beneficial ownership in us and equity interest in VIEs,
there are no relationships between the parties. Other than the voting proxies given to Dr. Jin Huang, and the contractual
control arrangements disclosed in this annual report, our officers, directors or shareholders do not have any written or oral agreement
with the VIE shareholders. We are not aware of any relationship or arrangement between or among any shareholders that would enable
any of them to control, in substance or contractually, any other shareholder’s vote.
We believe that under our current corporate
structure, where the shareholders of the VIEs are also our shareholders and officers, the interests of the VIEs and their shareholders
largely are aligned with us and our shareholders as a practical matter. In addition, each shareholder of the VIEs has signed a
power of attorney to exercise his or her voting power. If shareholders of VIEs attempt to revoke the powers of attorney, the company
will instruct AECL, one of our subsidiaries, to exercise its exclusive option to designate other PRC persons to acquire the equity
interests in such VIE from its current shareholders pursuant to call option agreements. Before the current shareholders transfer
the equity interests of the VIE to other PRC persons designated by AECL, it is prohibited from transferring the equity interests
of the VIE to anyone else without the AECL’ prior written consent under the equity pledge agreements. Moreover, pursuant
to call option agreements, VIEs’ shareholders agree not to, and shall cause VIEs not to, sell, assign, mortgage or otherwise
dispose of any assets, lawful income and business revenues of VIEs, or enter into any transactions that may substantially affect
the company’s assets, liabilities, operations, equity and other legitimate interests (other than those made in the ordinary
course of business or have been disclosed to and approved by AECL in writing) before AECL or an entity designated by AECL in writing
exercises call option to obtain all the equity interest and assets. As a cumulative result of the foregoing, we are of the view
that shareholders of VIEs are unable to effectively revoke the powers of attorney under the VIE agreements. For the risk relating
to potential conflicts of interests between shareholders of VIE with us, please also refer to the risk factor captioned. The shareholders
of our VIEs may have potential conflicts of interest with us, which may harm our business and financial condition.
As of February 17, 2020, approximately
43,378,097 of our ordinary shares were issued and outstanding. Citibank, N.A., the depositary, has advised us that, as of February
17, 2020, 5,743,004 ADRs, representing 11,486,008 underlying ordinary shares were outstanding. The number of beneficial owners
of our ADR in the United States is likely to be much larger than the number of record holders of our ordinary shares in the United
States.
Item 7.
|
Major Shareholders and Related Party Transactions
|
Please refer to “Item 6.E Directors,
Senior Management and Employees — Share Ownership.”
B.
|
Related Party Transactions
|
Contractual arrangements with our VIEs and their respective
subsidiaries and shareholders
PRC laws and regulations prohibit foreign
ownership of primary and middle schools for students in grades one to nine and foreign ownership of Internet content business in
China.
We conduct our education business in China
primarily through contractual arrangements among our subsidiaries in China and VIEs. Our VIEs and their respective subsidiaries
hold the requisite licenses and permits necessary to conduct our education business in China and operate our tutoring and training
centers, K-12 schools and career enhancement training centers. These contractual arrangements enable us to:
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Exercise effective control over our VIEs and their respective subsidiaries;
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Receive a substantial portion of the economic benefits from our VIEs and their respective subsidiaries in consideration for products sold and technical support, marketing and management consulting services provided by Ambow Education Management, Ambow Shengying and Ambow Chuangying to our VIEs and their respective subsidiaries; and
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Have an exclusive option to purchase all or part of the equity interests in our VIEs, in each case when and to the extent permitted by applicable PRC law.
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Our subsidiaries and VIEs’ subsidiaries
have engaged, during the ordinary course of business, in a number of customary transactions with each other. All of these inter-company
balances have been eliminated in consolidation.
See “Item 4.C — Information
on the Company — Organizational Structure” for a summary of these contractual arrangements.
As of December 31, 2019, we had RMB 2.3
million (US$ 0.3 million) due from certain related party and owed RMB 2.0 million (US$ 0.3 million) to certain related parties.
For a list of these transactions we have entered into with and the outstanding balances to and from such related parties for the
years ended December 31, 2017, 2018 and 2019, see Note 24 to audited consolidated financial statements. We do not believe
that such transactions with the related parties require approval from the government.
Employment agreements
We have entered into a service contract
with our Chief Executive Officer as well as employment agreements and confidential information and invention assignment agreements
with each of our executive officers. See “Item 6.B— Directors, Senior Management and Employees—Compensation—Employment
agreements.”
Indemnification agreements
We have entered into indemnification agreements
with each of our directors and executive officers that provide our directors and executive officers with additional protection
regarding the scope of the indemnification set forth in our memorandum and articles of association. Pursuant to these agreements,
we indemnify each of our directors and executive officers (to the fullest extent permitted by Cayman Islands law) against all costs
and expenses, including expense advances, incurred in connection with any claim by reason or arising out of any event or occurrence
relating to the fact that such person is our director or executive officer or is serving at our request at another corporation
or entity, or by reason of any activity or inactivity while serving in such capacity. We are not, however, obligated to indemnify
any such person:
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For expenses resulting from matters for which such person is prohibited from being indemnified under our memorandum and articles of association then in effect or applicable laws;
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In respect of any claim initiated or brought voluntarily by such person (other than in limited specified circumstances); or
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For expenses incurred in relation to any proceedings to enforce the agreement in which material assertions in such proceedings made by such person are finally determined by a court to be not made in good faith or to be frivolous.
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Registration rights
We entered into a registration rights agreement
with Campus, Dr. Huang and Spin-Rich Ltd., which entitles them to certain registration rights, including demand registration
rights, Form F-3 registration rights, and piggyback registration rights.
C.
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Interests of Experts and Counsel
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Not applicable.
Item 8.
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Financial Information
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A.
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Consolidated Financial Statements and other Financial Information
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Please see “Item 18. Financial Statements.”
Legal Proceedings
From time to time, we are subject to legal
proceedings, investigations and claims incidental to the conduct of our business. On May 24, 2018, Changsha Yaxing Real Estate
Development Co., Ltd. (“Changsha Yaxing”) filed a claim to Hunan Provincial High Court, against Shida Ambow, Ambow
Chuangying and Changsha K-12 to seek indemnification for Changsha K-12 equity transfer consideration. In July 2018 Hunan Provincial
Court ruled to freeze the bank account of Shida Ambow. As of December 31, 2018, Shida Ambow’s cash in bank amounting to RMB
27.7 million was frozen. Shida Ambow filed an objection of jurisdiction to Hunan Provincial High Court in July 2018. In September
2018 Hunan Provincial High Court overruled the objection of jurisdiction. The Group has appealed to the Supreme Court of PRC. The
Supreme Court of PRC accepted the appeal in February 2019 and assigned the case to the First Circuit Court of the Supreme Court.
The Group withdrew the appeal in July 2019. The restricted cash in bank in RMB 27.7 million was unfrozen in July 2019 due to the
expiration of property preservation period. In October 2019, Changsha Yaxing requested to withdrew the claim against Shida Ambow
from Hunan Provincial High Court. The Court ruled to allow the withdrawal. The case closed hereafter.
As of December 31, 2019, we did not have
any other significant indemnification claims that were probable or reasonably possible.
Dividends
Since our inception, we have not declared
or paid any dividends on our shares. We intend to retain any earnings for use in our business and do not currently intend to pay
cash dividends on our ordinary shares. Dividends, if any, on our outstanding ordinary shares will be declared by and subject to
the discretion of our board of directors, and subject to Cayman Islands law.
Our ability to pay cash dividends will also
depend upon the amount of distributions, if any, received by us from our PRC subsidiaries, which must comply with the laws and
regulations of the PRC and their respective articles of association in declaring and paying dividends to us. Under the applicable
requirements of PRC law, our PRC subsidiaries incorporated as companies may only distribute dividends after they have made allowances
to fund certain statutory reserves. If they record no net income for a year as determined in accordance with generally accepted
accounting principles in the PRC, they generally may not distribute dividends for that year.
Any dividend we declare will be paid to
the holders of ADSs, subject to the terms of the deposit agreement, to the same extent as holders of our ordinary shares, to the
extent permitted by applicable law and regulations, less the fees and expenses payable under the deposit agreement. Any dividend
we declare will be distributed by the depositary bank to the holders of our ADSs. Cash dividends on our ordinary shares, if any,
will be paid in U.S. dollars.
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.
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The Offer and Listing
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A.
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Offer and Listing Details
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See “Item 9. The Offer and Listing—C.
Markets.”
Not applicable.
Our ADSs (each representing two Class A
Ordinary Shares) currently trade in the NYSE American under the symbol “AMBO”.
Not applicable.
Not applicable.
Not applicable.
Item 10.
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Additional Information
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Not applicable.
B.
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Memorandum and Articles of Association
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Our Sixth Amended and Restated Memorandum
and Articles of Association were adopted by our shareholders at an extraordinary general meeting held on June 30, 2015. A copy
of the Sixth Amended and Restated Memorandum and Articles of Association are incorporated by reference to Exhibit 99.1 of our 6-K
filed with the Commission on June 4, 2015.
We have not entered into any material contracts
other than in the ordinary course of business and other than those described in “Item 7.B Related Party Transactions”
or elsewhere in this annual report on Form 20-F.
See “Item 4.B Information on the Company—Business
Overview—Regulation—Regulations on Foreign Exchange.”
The following summary of the material Cayman
Islands, People’s Republic of China and United States federal income tax consequences of any investment in our ADSs or ordinary
shares is based upon laws and relevant interpretations thereof in effect as of the date of this annual report, all of which are
subject to change. This summary does not deal with all possible tax consequences relating to an investment in our ADSs or ordinary
shares, such as the tax consequences under state, local and other tax laws. Prospective investors should consult their professional
advisers on the possible tax consequences of buying, holding or selling any ADSs or ordinary shares under the laws of their country
of citizenship, residence or domicile.
Cayman Islands taxation
The following is a discussion on certain
Cayman Islands income tax consequences of an investment in the ADSs or ordinary shares. The discussion is a general summary of
present law, which is subject to prospective and retroactive change. It is not intended as tax advice, does not consider any investor’s
particular circumstances, and does not consider tax consequences other than those arising under Cayman Islands law.
No stamp duty, capital duty, registration
or other issue or documentary taxes are payable in the Cayman Islands on the creation, issuance or delivery of the ADSs or ordinary
shares. The Cayman Islands currently have no form of income, corporate or capital gains tax and no estate duty, inheritance tax
or gift tax. There are currently no Cayman Islands’ taxes or duties of any nature on gains realized on a sale, exchange,
conversion, transfer or redemption of the ADSs or ordinary shares. Payments of dividends and capital in respect of the ADSs or
ordinary shares will not be subject to taxation in the Cayman Islands and no withholding will be required on the payment of interest
and principal or a dividend or capital to any holder of the ADSs or ordinary shares, nor will gains derived from the disposal of
the ADSs or ordinary shares be subject to Cayman Islands income or corporation tax as the Cayman Islands currently have no form
of income or corporation taxes.
We have been incorporated under the laws
of the Cayman Islands as an exempted company with limited liability and, as such, have applied for and obtained an undertaking
from the Governor of the Cayman Islands that no law enacted in the Cayman Islands during the period of 20 years from the date of
the undertaking imposing any tax to be levied on profits, income, gains or appreciation shall apply to us or our operations and
no such tax or any tax in the nature of estate duty or inheritance tax shall be payable (directly or by way of withholding) on
the ADSs or ordinary shares, debentures or other obligations of ours.
People’s Republic of China taxation
The China EIT Law provides that enterprises
established outside of China whose “de facto management bodies” are located in China are considered “resident
enterprises” and are generally subject to the uniform 25% corporate income tax rate as to their worldwide income. Under the
implementation regulations for the EIT Law issued by the PRC State Council, a “de facto management body” is defined
as a body that has material and overall management and control over the manufacturing and business operations, personnel and human
resources, finances and treasury, and acquisition and disposition of properties and other assets of an enterprise. Currently no
interpretation or application of the EIT Law and its implementing rules is available for non-Chinese enterprise or group enterprise
controlled entity. Therefore, it is unclear whether PRC tax authorities would require (or permit) us to be treated as a PRC resident
enterprise.
Under the EIT Law and implementation regulations
issued by the State Council, PRC income tax at the rate of 10% is applicable to dividends payable to investors that are “non-resident
enterprises,” which do not have an establishment or place of business in the PRC, or which have such establishment or place
of business but the relevant income is not effectively connected with the establishment or place of business, to the extent such
dividends have their sources within the PRC. Similarly, any gain realized on the transfer of ADSs or shares by such investors is
also subject to 10% PRC income tax if such gain is regarded as income derived from sources within the PRC. However, under a PRC
tax law that became effective in January 2008 and the Arrangement between the PRC and the Hong Kong Special Administrative Region
on the Avoidance of Double Taxation and Prevention of Fiscal Evasion, or the Double Taxation Arrangement, which became effective
on January 1, 2007, dividends from our PRC subsidiaries paid to us through our Hong Kong subsidiary may be subject to a withholding
tax at a rate of 5%. If we are considered a PRC “resident enterprise,” it is unclear whether dividends we pay with
respect to our ordinary shares or ADSs, or the gain you may realize from the transfer of our ordinary shares or ADSs, may be treated
as income derived from sources within the PRC and would be subject to PRC tax. It is unclear whether, if we are considered a PRC
“resident enterprise,” holders of our ordinary shares or ADSs might be able to claim the benefit of income tax treaties
entered into between China and other countries.
United States federal income taxation
General
The following are the material U.S. federal
income tax consequences of the acquisition, ownership and disposition of the ADSs or ordinary shares. As used in this discussion,
references to “we,” “us” or “our” refer to Ambow Education Holding Ltd.
The discussion below of the U.S. federal
income tax consequences to “U.S. Holders” will apply to a beneficial owner of the ADSs or ordinary shares that is for
U.S. federal income tax purposes:
· an
individual citizen or resident of the United States;
· a
corporation (or other entity treated as a corporation) that is created or organized (or treated as created or organized) in or
under the laws of the United States, any state thereof or the District of Columbia;
· an
estate whose income is includible in gross income for U.S. federal income tax purposes regardless of its source; or
· a
trust if (i) a U.S. court can exercise primary supervision over the trust’s administration and one or more U.S. persons are
authorized to control all substantial decisions of the trust, or (ii) it has a valid election in effect under applicable U.S. Treasury
regulations to be treated as a U.S. person.
A beneficial owner of the ADSs or ordinary
shares that is described above is referred to herein as a “U.S. Holder.” If a beneficial owner of the ADSs or ordinary
shares is not described as a U.S. Holder and is not an entity treated as a partnership or other pass-through entity for U.S. federal
income tax purposes, such owner will be considered a “Non-U.S. Holder.” The material U.S. federal income tax consequences
applicable specifically to Non-U.S. Holders are described below under the heading “Non-U.S. Holders.”
This discussion is based on the Internal
Revenue Code of 1986, as amended (the “Code”), its legislative history, Treasury regulations promulgated thereunder,
published rulings and court decisions, all as currently in effect. These authorities are subject to change or differing interpretations,
possibly on a retroactive basis.
This discussion does not address all aspects
of U.S. federal income taxation that may be relevant to any particular holder based on such holder’s individual circumstances.
In particular, this discussion considers only holders that purchase ADSs pursuant to this offering and own and hold the ADSs or
ordinary shares as capital assets within the meaning of Section 1221 of the Code, and does not address the potential application
of the alternative minimum tax or the U.S. federal income tax consequences to holders that are subject to special rules, including:
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financial institutions or financial services entities;
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persons that are subject to the mark-to-market accounting rules under Section 475 of the Code;
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governments or agencies or instrumentalities thereof;
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regulated investment companies;
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real estate investment trusts;
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certain expatriates or former long term residents of the United States;
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persons that actually or constructively own 5% or more of our voting shares (including as a result of ownership of the ADSs);
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persons that acquired the ADSs or ordinary shares pursuant to an exercise of employee options, in connection with employee incentive plans or otherwise as compensation;
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persons that hold the ADSs or ordinary shares as part of a straddle, constructive sale, hedging, conversion or other integrated transaction;
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persons whose functional currency is not the U.S. dollar;
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passive foreign investment companies; or
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controlled foreign corporations.
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The discussion below assumes that the representations
contained in the deposit Agreement are true and that the obligations in the deposit Agreement and any related agreement will be
complied with in accordance with their terms. This discussion also assumes that the ADSs will represent only ordinary shares in
us and will not represent cash or any other type of property. For U.S. federal income tax purposes, a holder of the ADSs will be
treated as the beneficial owner of the underlying ordinary shares represented by such ADSs. Accordingly, deposits or withdrawals
of ordinary shares for ADSs will not be subject to U.S. federal income tax.
The U.S. Treasury has expressed concerns
that parties to whom ADSs are pre-released may be taking actions that are inconsistent with the claiming, by U.S. Holders of ADSs,
of foreign tax credits for U.S. federal income tax purposes. Such actions also would be inconsistent with the claiming of the reduced
rate of tax applicable to dividends received by certain non-corporate U.S. Holders, as described below. Accordingly, the availability
of foreign tax credits or the reduced tax rate for dividends received by certain non-corporate U.S. Holders could be affected by
actions that may be taken by parties to whom ADSs are pre-released, or by future actions of the U.S. Treasury Department.
This discussion does not address any aspect
of U.S. federal non-income tax laws, such as gift or estate tax laws, or state, local or non-U.S. tax laws or, except as discussed
herein, any tax reporting obligations applicable to a holder of the ADSs or ordinary shares. This discussion also does not address
the tax treatment of any taxes, fees or expenses that may be payable by an ADS holder pursuant to the deposit Agreement. Additionally,
this discussion does not consider the tax treatment of partnerships or other pass-through entities or persons who hold the ADSs
or ordinary shares through such entities. If a partnership (or other entity classified as a partnership for U.S. federal income
tax purposes) is the beneficial owner of the ADSs or ordinary shares, the U.S. federal income tax treatment of a partner in the
partnership generally will depend on the status of the partner and the activities of the partnership. This discussion also assumes
that any distribution made (or deemed made) to a holder in respect of the ADSs or ordinary shares and any consideration received
(or deemed received) by a holder in connection with the sale or other disposition of the ADSs or ordinary shares will be in U.S.
dollars.
We have not sought, and will not seek, a
ruling from the Internal Revenue Service, (the “IRS”), or an opinion of counsel as to any U.S. federal income tax consequence
described herein. The IRS may disagree with the description herein, and its determination may be upheld by a court. Moreover, there
can be no assurance that future legislation, regulations, administrative rulings or court decisions will not adversely affect the
accuracy of the statements in this discussion.
U.S. Holders
Taxation of Cash Distributions Paid
on ADSs or Ordinary Shares
Subject to the passive foreign investment
company (“PFIC”) rules discussed below, a U.S. Holder generally will be required to include in gross income as ordinary
income the amount of any cash dividend paid on the ADSs or ordinary shares. A cash distribution on the ADSs or ordinary shares
generally will be treated as a dividend for U.S. federal income tax purposes to the extent the distribution is paid out of our
current or accumulated earnings and profits (as determined for U.S. federal income tax purposes). Such dividend generally will
not be eligible for the dividends-received deduction generally allowed to U.S. corporations in respect of dividends received from
other U.S. corporations. The portion of such cash distribution, if any, in excess of such earnings and profits will be applied
against and reduce (but not below zero) the U.S. Holder’s adjusted tax basis in the ADSs or ordinary shares. Any remaining
excess generally will be treated as gain from the sale or other taxable disposition of such ADSs or ordinary shares.
With respect to non-corporate
U.S. Holders, any such cash dividends may be subject to U.S. federal income tax at the lower applicable regular long term capital
gains tax rate (see “—Taxation on the Disposition of ADSs or Ordinary Shares” below) provided that (a) the ADSs
or ordinary shares are readily tradable on an established securities market in the United States or, in the event we are deemed
to be a PRC “resident enterprise” under the EIT Law, we are eligible for the benefits of the Agreement between the
Government of the United States of America and the Government of the People’s Republic of China for the Avoidance of Double
Taxation and the Prevention of Tax Evasion with Respect to Taxes on Income (the “U.S.-PRC Tax Treaty”), (b) we are
not a PFIC, as discussed below, for either the taxable year in which the dividend was paid or the preceding taxable year, and (c)
certain holding period requirements are met. Therefore, if the ADSs or ordinary shares are not readily tradable on an established
securities market in the United States, and we are not eligible for the benefits of the U.S. – PRC Tax Treaty, then cash
dividends paid by us to non-corporate U.S. Holders will not be subject to U.S. federal income tax at the lower regular long term
capital gains tax rate. Under published IRS authority, shares (including ADSs) are considered for purposes of clause (a) above
to be readily tradable on an established securities market in the United States only if they are listed on certain exchanges, which
presently include the NYSE American.
If a PRC income tax applies to any cash
dividends paid to a U.S. Holder on the ADSs or ordinary shares, such tax may be treated as a foreign tax eligible for a deduction
from such holder’s U.S. federal taxable income or a foreign tax credit against such holder’s U.S. federal income tax
liability (subject to applicable conditions and limitations). In addition, if such PRC tax applies to any such dividends, such
U.S. Holder may be entitled to certain benefits under the U.S.-PRC Tax Treaty, if such holder is considered a resident of the United
States for purposes of, and otherwise meets the requirements of, the U.S.-PRC Tax Treaty. U.S. Holders should consult their own
tax advisors regarding the deduction or credit for any such PRC tax and their eligibility for the benefits of the U.S.-PRC Tax
Treaty.
Taxation on the Disposition of ADSs
or Ordinary Shares
Upon a sale or other taxable disposition
of the ADSs or ordinary shares, and subject to the PFIC rules discussed below, a U.S. Holder generally will recognize capital gain
or loss in an amount equal to the difference between the amount realized and the U.S. Holder’s adjusted tax basis in the
ADSs or ordinary shares.
The regular U.S. federal income tax rate
on capital gains recognized by U.S. Holders generally is the same as the regular U.S. federal income tax rate on ordinary income,
except that long term capital gains recognized by non-corporate U.S. Holders generally are subject to U.S. federal income tax at
a maximum regular rate of 20%. Capital gain or loss will constitute long term capital gain or loss if the U.S. Holder’s holding
period for the ADSs or ordinary shares exceeds one year. The deductibility of capital losses is subject to various limitations.
If a PRC income tax applies to any gain
from the disposition of the ADSs or ordinary shares by a U.S. Holder, such tax may be treated as a foreign tax eligible for a deduction
from such holder’s U.S. federal taxable income or a foreign tax credit against such holder’s U.S. federal income tax
liability (subject to applicable conditions and limitations). In addition, if such PRC tax applies to any such gain, such U.S.
Holder may be entitled to certain benefits under the U.S.-PRC Tax Treaty, if such holder is considered a resident of the United
States for purposes of, and otherwise meets the requirements of, the U.S.-PRC Tax Treaty. U.S. Holders should consult their own
tax advisors regarding the deduction or credit for any such PRC tax and their eligibility for the benefits of the U.S.-PRC Tax
Treaty.
Additional Taxes
U.S. Holders that are individuals, estates
or trusts and whose income exceeds certain thresholds generally will be subject to a 3.8% Medicare contribution tax on unearned
income, including, without limitation, dividends on, and gains from the sale or other taxable disposition of, the ADSs or ordinary
shares, subject to certain limitations and exceptions. Under applicable regulations, in the absence of a special election, such
unearned income generally would not include income inclusions under the qualified electing fund (“QEF”), rules discussed
below under “Passive Foreign Investment Company Rules,” but would include distributions of earnings and profits from
a QEF. U.S. Holders should consult their own tax advisors regarding the effect, if any, of such tax on their ownership and disposition
of the ADSs or ordinary shares.
Passive Foreign Investment Company Rules
A foreign (i.e., non-U.S.) corporation will
be a PFIC if either (a) at least 75% of its gross income in a taxable year of the foreign corporation, including its pro rata share
of the gross income of any corporation in which it is considered to own at least 25% of the shares by value, is passive income,
or (b) at least 50% of its assets in a taxable year of the foreign corporation, ordinarily determined based on fair market value
and averaged quarterly over the year, including its pro rata share of the assets of any corporation in which it is considered to
own at least 25% of the shares by value, are held for the production of, or produce, passive income. Passive income generally includes
dividends, interest, rents and royalties (other than certain rents or royalties derived from the active conduct of a trade or business),
and gains from the disposition of passive assets.
Based on the expected composition (and estimated
values) of the assets and the nature of the income of us and our subsidiaries, we do not expect to be treated as a PFIC for the
current taxable year. However, our actual PFIC status for our current taxable year or any subsequent taxable year will not be determinable
until after the end of such taxable year. Accordingly, there can be no assurance with respect to our status as a PFIC for our current
taxable year or any subsequent taxable year.
If we are determined to be a PFIC for any
taxable year (or portion thereof) that is included in the holding period of a U.S. Holder of the ADSs or ordinary shares, and the
U.S. Holder did not make a timely QEF election for our first taxable year as a PFIC in which the U.S. Holder held (or was deemed
to hold) the ADSs or ordinary shares, a QEF election along with a purging election, or a mark-to-market election, each as described
below, such holder generally will be subject to special rules for regular U.S. federal income tax purposes with respect to:
· any
gain recognized by the U.S. Holder on the sale or other disposition of its ADSs or ordinary shares; and
·
any “excess distribution” made to the U.S. Holder (generally, any distributions to such
U.S. Holder during a taxable year of the U.S. Holder that are greater than 125% of the average annual distributions received by
such U.S. Holder in respect of the ADSs or ordinary shares during the three preceding taxable years of such U.S. Holder or, if
shorter, such U.S. Holder’s holding period for the ADSs or ordinary shares).
Under these rules,
· the
U.S. Holder’s gain or excess distribution will be allocated ratably over the U.S. Holder’s holding period for the ADSs
or ordinary shares;
· the
amount allocated to the U.S. Holder’s taxable year in which the U.S. Holder recognized the gain or received the excess distribution
or to the period in the U.S. Holder’s holding period before the first day of our first taxable year in which we qualified
as a PFIC will be taxed as ordinary income;
·
the amount allocated to other taxable years (or portions thereof) of the U.S. Holder and included in its holding period will
be taxed at the highest tax rate in effect for that year and applicable to the U.S. Holder; and
· the
interest charge generally applicable to underpayments of tax will be imposed in respect of the tax attributable to each such other
taxable year of the U.S. Holder.
In general, if we are determined to be a
PFIC, a U.S. Holder may avoid the PFIC tax consequences described above with respect to the ADSs or ordinary shares by making a
timely QEF election (or a QEF election along with a purging election). Pursuant to the QEF election, a U.S. Holder will be required
to include in income its pro rata share of our net capital gains (as long term capital gain) and other earnings and profits (as
ordinary income), on a current basis, in each case whether or not distributed, in the taxable year of the U.S. Holder in which
or with which our taxable year ends if we are treated as a PFIC for that taxable year. A U.S. Holder may make a separate election
to defer the payment of taxes on undistributed income inclusions under the QEF rules, but if deferred, any such taxes will be subject
to an interest charge.
The QEF election is made on a shareholder-by-shareholder
basis and, once made, can be revoked only with the consent of the IRS. A U.S. Holder generally makes a QEF election by attaching
a completed IRS Form 8621 (Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund),
including the information provided in a PFIC annual information statement, to a timely filed U.S. federal income tax return for
the taxable year to which the election relates. Retroactive QEF elections generally may be made only by filing a protective statement
with such return and if certain other conditions are met or with the consent of the IRS.
In order to comply with the requirements
of a QEF election, a U.S. Holder must receive certain information from us. Upon request from a U.S. Holder, we will endeavor to
provide to the U.S. Holder no later than 90 days after the request such information as the IRS may require, including a PFIC annual
information statement, in order to enable the U.S. Holder to make and maintain a QEF election. However, there is no assurance that
we will have timely knowledge of our status as a PFIC in the future or of the required information to be provided.
If a U.S. Holder has made a QEF election
with respect to the ADSs or ordinary shares, and the special tax and interest charge rules do not apply to such ADSs or ordinary
shares (because of a timely QEF election for our first taxable year as a PFIC in which the U.S. Holder holds (or is deemed to hold)
such ADSs or ordinary shares or a QEF election, along with a purge of the PFIC taint pursuant to a purging election, as described
below), any gain recognized on the sale or other taxable disposition of such ADSs or ordinary shares generally will be taxable
as capital gain and no interest charge will be imposed. As discussed above, for regular U.S. federal income tax purposes, U.S.
Holders of a QEF generally are currently taxed on their pro rata shares of the QEF’s earnings and profits, whether or not
distributed. In such case, a subsequent distribution of such earnings and profits that were previously included in income generally
should not be taxable as a dividend to such U.S. Holders. The adjusted tax basis of a U.S. Holder’s ADSs or ordinary shares
in a QEF will be increased by amounts that are included in income, and decreased by amounts distributed but not taxed as dividends,
under the above rules. Similar basis adjustments apply to property if by reason of holding such property the U.S. Holder is treated
under the applicable attribution rules as owning ADSs or ordinary shares in a QEF.
Although a determination as to our PFIC
status will be made annually, an initial determination that we are a PFIC generally will apply for subsequent years to a U.S. Holder
who held the ADSs or ordinary shares while we were a PFIC, whether or not we meet the test for PFIC status in those subsequent
years. A U.S. Holder who makes the QEF election discussed above for our first taxable year as a PFIC in which the U.S. Holder holds
(or is deemed to hold) the ADSs or ordinary shares, however, will not be subject to the PFIC tax and interest charge rules discussed
above with respect to such ADSs or ordinary shares. In addition, such U.S. Holder will not be subject to the QEF inclusion regime
with respect to such ADSs or ordinary shares for any of our taxable years that end within or with a taxable year of the U.S. Holder
and in which we are not a PFIC. On the other hand, if the QEF election is not effective for each of our taxable years in which
we are a PFIC and during which the U.S. Holder holds (or is deemed to hold) the ADSs or ordinary shares, the PFIC rules discussed
above will continue to apply to such ADSs or ordinary shares unless the holder files on a timely filed U.S. federal income tax
return (including extensions) a QEF election and a “purging election” to recognize under the rules of Section 1291
of the Code any gain that it would otherwise recognize if the U.S. Holder sold the ADSs or ordinary shares for their fair market
value on the “qualification” date. The qualification date is the first day of our tax year in which we qualify as a
QEF with respect to such U.S. Holder. The purging election can only be made if such U.S. Holder held the ADSs or ordinary shares
on the qualification date. A purging election generally creates a deemed sale of such ADSs or ordinary shares at their fair market
value. The gain recognized by the purging election generally will be subject to the special tax and interest charge rules treating
the gain as an excess distribution, as described above. As a result of the purging election, the U.S. Holder generally will increase
the adjusted tax basis in its ADSs or ordinary shares by the amount of gain recognized and will also have a new holding period
in its ADSs or ordinary shares for purposes of the PFIC rules.
Alternatively, if a U.S. Holder, at the
close of its taxable year, owns ADSs or ordinary shares in a PFIC that are treated as marketable stock, the U.S. Holder may make
a mark-to-market election with respect to such ADSs or ordinary shares for such taxable year. If the U.S. Holder makes a valid
mark-to-market election for the first taxable year of the U.S. Holder in which the U.S. Holder holds (or is deemed to hold) the
ADSs or ordinary shares and for which we are determined to be a PFIC, such holder generally will not be subject to the PFIC rules
described above with respect to its ADSs or ordinary shares as long as such ADSs or ordinary shares continue to be treated as marketable
stock. Instead, in general, the U.S. Holder will include as ordinary income each year that we are treated as a PFIC the excess,
if any, of the fair market value of its ADSs or ordinary shares at the end of its taxable year over the adjusted tax basis in its
ADSs or ordinary shares. The U.S. Holder also will be allowed to take an ordinary loss in respect of the excess, if any, of the
adjusted tax basis of its ADSs or ordinary shares over the fair market value of its ADSs or ordinary shares at the end of its taxable
year (but only to the extent of the net amount of previously included income as a result of the mark-to-market election). The U.S.
Holder’s adjusted tax basis in its ADSs or ordinary shares will be adjusted to reflect any such income or loss amounts, and
any further gain recognized on a sale or other taxable disposition of the ADSs or ordinary shares in a taxable year in which we
are treated as a PFIC will be treated as ordinary income. Special tax rules may also apply if a U.S. Holder makes a mark-to-market
election for a taxable year after the first taxable year in which the U.S. Holder holds (or is deemed to hold) the ADSs or ordinary
shares and for which we are treated as a PFIC.
The mark-to-market
election is available only for stock that is regularly traded on a national securities exchange that is registered with the Securities
and Exchange Commission, including the NYSE American, or on a foreign exchange or market that the IRS determines has rules sufficient
to ensure that the market price represents a legitimate and sound fair market value. Commencing on June 1, 2018, our ADSs began
trading on the NYSE American. U.S. Holders should consult their own tax advisors regarding the availability and tax consequences
of a mark-to-market election with respect to the ADSs or ordinary shares under their particular circumstances.
If we are a PFIC and, at any time, have
a foreign subsidiary that is classified as a PFIC, a U.S. Holder of the ADSs or ordinary shares generally should be deemed to own
a portion of the shares of such lower-tier PFIC, and generally could incur liability for the deferred tax and interest charge described
above if we receive a distribution from, or dispose of all or part of our interest in, or the U.S. Holder were otherwise deemed
to have disposed of an interest in, the lower-tier PFIC. Upon request, we will endeavor to cause any lower-tier PFIC to provide
to a U.S. Holder no later than 90 days after the request the information that may be required to make or maintain a QEF election
with respect to the lower-tier PFIC. However, there is no assurance that we will have timely knowledge of the status of any such
lower-tier PFIC or that we will be able to cause the lower-tier PFIC to provide the required information. A mark-to-market election
generally would not be available with respect to such a lower-tier PFIC. U.S. Holders are urged to consult their own tax advisors
regarding the tax issues raised by lower-tier PFICs.
A U.S. Holder that owns (or is deemed to
own) ADSs or ordinary shares in a PFIC during any taxable year of the U.S. Holder may have to file an IRS Form 8621 (whether or
not a QEF election or mark-to-market election is or has been made) with such U.S. Holder’s U.S. federal income tax return
and provide such other information as may be required by the U.S. Treasury Department.
The rules dealing with PFICs and with the
QEF and mark-to-market elections are very complex and are affected by various factors in addition to those described above. Accordingly,
U.S. Holders of the ADSs or ordinary shares should consult their own tax advisors concerning the application of the PFIC rules
to the ADSs or ordinary shares under their particular circumstances.
Non-U.S. Holders
Cash dividends paid or deemed paid to a
Non-U.S. Holder with respect to the ADSs or ordinary shares generally will not be subject to U.S. federal income tax unless such
dividends are effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States (and,
if required by an applicable income tax treaty, are attributable to a permanent establishment or fixed base that such holder maintains
or maintained in the United States).
In addition, a Non-U.S. Holder generally
will not be subject to U.S. federal income tax on any gain attributable to a sale or other taxable disposition of the ADSs or ordinary
shares unless such gain is effectively connected with its conduct of a trade or business in the United States (and, if required
by an applicable income tax treaty, is attributable to a permanent establishment or fixed base that such holder maintains or maintained
in the United States) or the Non-U.S. Holder is an individual who is present in the United States for 183 days or more in the taxable
year of such sale or other disposition and certain other conditions are met (in which case, such gain from U.S. sources generally
is subject to U.S. federal income tax at a 30% rate or a lower applicable tax treaty rate).
Cash dividends and gains that are effectively
connected with the Non-U.S. Holder’s conduct of a trade or business in the United States (and, if required by an applicable
income tax treaty, are attributable to a permanent establishment or fixed base that such holder maintains or maintained in the
United States) generally will be subject to regular U.S. federal income tax at the same regular U.S. federal income tax rates as
applicable to a comparable U.S. Holder and, in the case of a Non-U.S. Holder that is a corporation for U.S. federal income tax
purposes, may also be subject to an additional branch profits tax at a 30% rate or a lower applicable tax treaty rate.
Backup Withholding and Information Reporting
In general, information reporting for U.S.
federal income tax purposes should apply to cash distributions made on the ADSs or ordinary shares within the United States to
a U.S. Holder (other than an exempt recipient) and to the proceeds from sales and other dispositions of the ADSs or ordinary shares
by a U.S. Holder (other than an exempt recipient) to or through a U.S. office of a broker. Payments made (and sales and other dispositions
effected at an office) outside the United States will be subject to information reporting in limited circumstances. In addition,
certain information concerning a U.S. Holder’s adjusted tax basis in its ADSs or ordinary shares and adjustments to that
tax basis and whether any gain or loss with respect to such ADSs or ordinary shares is long-term or short-term also may be required
to be reported to the IRS, and certain holders may be required to file an IRS Form 8938 (Statement of Specified Foreign Financial
Assets) to report their interest in the ADSs or ordinary shares.
Moreover, backup withholding
of U.S. federal income tax, at a current rate of 24%, generally will apply to cash dividends paid on the ADSs or ordinary shares
to a U.S. Holder (other than an exempt recipient) and the proceeds from sales and other dispositions of the ADSs or ordinary shares
by a U.S. Holder (other than an exempt recipient), in each case who:
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fails to provide an accurate taxpayer identification number;
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is notified by the IRS that backup withholding is required; or
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in certain circumstances, fails to comply with applicable certification requirements.
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A Non-U.S. Holder generally may eliminate
the requirement for information reporting and backup withholding by providing certification of its foreign status, under penalties
of perjury, on a duly executed applicable IRS Form W-8 or by otherwise establishing an exemption.
Backup withholding is not an additional
tax. Rather, the amount of any backup withholding will be allowed as a credit against a U.S. Holder’s or a Non-U.S. Holder’s
U.S. federal income tax liability and may entitle such holder to a refund, provided that certain required information is timely
furnished to the IRS. Holders are urged to consult their own tax advisors regarding the application of backup withholding and the
availability of and procedures for obtaining an exemption from backup withholding in their particular circumstances.
YOU SHOULD CONSULT WITH YOUR OWN TAX ADVISORS
REGARDING THE APPLICATION OF THE U.S. FEDERAL INCOME TAX LAWS TO YOUR PARTICULAR CIRCUMSTANCES, AS WELL AS ANY ADDITIONAL TAX CONSEQUENCES
RESULTING FROM AN INVESTMENT IN THE ADSs OR ORDINARY SHARES, INCLUDING THE APPLICABILITY AND EFFECT OF THE TAX LAWS OF ANY
STATE, LOCAL OR FOREIGN JURISDICTION, INCLUDING ESTATE, GIFT AND INHERITANCE LAWS.
F.
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Dividends and Paying Agents
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Not applicable.
Not applicable.
The documents concerning our company referred
to in this document and required to be made available to the public are available at our principal executive offices located at
12th Floor, Tower 1, Financial Street, Chang’an Center, Shijingshan District, Beijing 100043, People’s Republic of
China.
In addition, we previously filed with the
SEC our registration statement on Form F-1 (Registration No. 333-168096, as amended) and prospectus under the Securities
Act of 1933, with respect to our ordinary shares. We has filed amended Form F-1 (Registration No. 333-220207, as amended) and prospectus.
We have also filed with the SEC a related registration statement on F-6 (Registration No. 333-168238) to register the ADSs.
We are subject to the periodic reporting
and other informational requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Under the Exchange
Act, we are required to file reports and other information with the SEC. Specifically, we are required to file annually a Form 20-F
within four months after the 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 Securities and Exchange
Commission at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. The public may obtain information regarding the Washington,
D.C. Public Reference Room by calling the Commission at 1-800-SEC-0330. The SEC also maintains a 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.
I.
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Subsidiary Information
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See “Item 4.C Information on the Company—Organizational
Structure” for information about our subsidiaries.
Item 11.
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Quantitative and Qualitative Disclosures About Market Risk
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Interest rate risk . The primary
objective of our investment activities is to preserve principal while maximizing the income we receive from our investments without
significantly increasing the risk of loss. Our exposure to interest rate risk primarily relates to the interest income generated
by excess cash invested in available-for-sale investment, held-to-maturity investments with maturities of three months or less
and term deposits with maturities of greater than three months and less than a year. We have not used any derivative financial
instruments to manage our interest risk exposure. Interest-earning instruments carry a degree of interest rate risk. We have not
been exposed, nor do we anticipate being exposed, to material risks due to changes in interest rates. However, our future interest
income may be lower than expected due to changes in market interest rates. A hypothetical 1% decrease in interest rates would have
resulted in a decrease of approximately RMB 1.0 million (US$ 0.1 million) in our interest income for the year ended December 31,
2019.
At December 31, 2018 and 2019, we had
RMB 41.2 million and nil, respectively, of borrowings outstanding. The interest rates on our borrowings are fixed as defined in
respective loan agreements. A hypothetical 10% increase in interest rates in 2019 would have resulted in an increase of approximately
RMB 1.1 million (US$ 0.2 million) in our interest expense for 2019.
Foreign exchange risk . Substantially
most of our revenues and most of our expenses are denominated in RMB. Our exposure to foreign exchange risk primarily relates to
cash and cash equivalents denominated in U.S. dollars and Taiwan dollars as a result of investment fund. We do not believe that
we currently have any significant direct foreign exchange risk and have not hedged exposures denominated in foreign currencies
or any other derivative financial instruments. Although in general, our exposure to foreign exchange risks should be limited, the
value of an investment in our ADSs will be affected by the foreign exchange rate between U.S. dollars/Taiwan dollars and RMB because
the value of our business is effectively denominated in RMB, while the ADSs are traded in U.S. dollars.
The value of the RMB against the U.S. dollar
and other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic conditions.
The conversion of RMB into foreign currencies, including U.S. dollars and Taiwan dollars, has been based on rates set by the PBOC.
On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar. Under
the policy, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies.
This change in policy resulted in an approximately 21.3% appreciation of the RMB against the U.S. dollar between July 21,
2005 and December 31, 2009. In June 2010, the PBOC announced it has decided to proceed further with reform of the RMB
exchange regime and to enhance the RMB exchange rate flexibility. From 2010 to 2018, the depreciation of the RMB against the U.S.
dollar reached 1.9% in total. There remains significant international pressure on the PRC government to adopt an even more flexible
currency policy, which could result in a further and more significant appreciation of the RMB against the U.S. dollar and Taiwan
dollars. To the extent that we need to convert U.S. dollar or Taiwan dollars denominated financial assets into RMB for our operations,
appreciation of the RMB against the U.S. dollar and Taiwan dollars would have an adverse effect on the RMB amount we receive from
the conversion. We have not used any forward contracts or currency borrowings to hedge our exposure to foreign currency exchange
risk. A hypothetical 10% appreciation of the RMB against the U.S. dollar would have resulted in a decrease of approximately RMB
1.8 million (US$ 0.3 million) in the value of our U.S. denominated cash and cash equivalents as of December 31, 2019. A hypothetical
10% appreciation of the RMB against the Taiwan dollars would have resulted in a decrease of approximately RMB 0.5 million (US$
0.1 million) in the value of our TWD denominated cash and cash equivalents as of December 31, 2019.
Item 12.
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Description of Securities Other Than Equity Securities
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Not applicable.
Not applicable.
Not applicable.
D.
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American Depository Shares
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Fees and Charges Our ADS Holders May Have to Pay
Our ADS holders will be required to pay
the following service fees to the depositary bank for our ADSs:
Service
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Fees
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Issuance of ADSs
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up to U.S. 5¢ per ADS issued
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Cancellation of ADSs
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up to U.S. 5¢ per ADS canceled
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Distribution of cash dividends or other cash distributions
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up to U.S. 5¢ per ADS held
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Distribution of ADSs pursuant to stock dividends, free stock distributions or exercise of rights
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up to U.S. 5¢ per ADS held
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Distribution of securities other than ADSs or rights to purchase additional ADSs
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up to U.S. 5¢ per ADS held
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Depositary Services
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up to U.S. 5¢ per ADS held on the applicable record date(s) established by the depositary
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An ADS holder you will also be responsible
to pay certain fees and expenses incurred by the depositary and certain taxes and governmental charges such as:
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Fees for the transfer and registration of ordinary shares charged by the registrar and transfer agent for the ordinary shares in the Cayman Islands (i.e., upon deposit and withdrawal of ordinary shares);
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Expenses incurred for converting foreign currency into U.S. dollars;
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Expenses for cable, telex and fax transmissions and for delivery of securities;
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Taxes and duties upon the transfer of securities (i.e., when ordinary shares are deposited or withdrawn from deposit); and
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Fees and expenses incurred in connection with the delivery or servicing of ordinary shares on deposit.
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Depositary fees payable upon the issuance
and cancellation of ADSs are typically paid to the depositary by the brokers (on behalf of their clients) receiving the newly issued
ADSs from the depositary and by the brokers (on behalf of their clients) delivering the ADSs to the depositary 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 to the holders of record of ADSs as of the applicable
ADS record date.
The depositary fees payable for cash distributions
are generally deducted from the cash being distributed. In the case of distributions other than cash (i.e., stock dividend, rights),
the depositary 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 sends invoices
to the applicable record date ADS holders. In the case of ADSs held in brokerage and custodian accounts (via DTC), the depositary
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 depositaries.
In the event of refusal to pay the depositary
fees, the depositary 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.
Note that the fees and charges you may be
required to pay may vary over time and may be changed by us and by the depositary. You will receive prior notice of such changes.
Fees and Payments from the Depositary to Us
The depositary has agreed to reimburse us
for certain expenses incurred by us in respect of our ADR program and investor relations program. For the year ended December 31,
2019, there was US$ 14,984 received from Citibank, the depositary bank for our ADR program.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral
part of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The names of certain schools or companies referred to above
represent management’s best effort in translating the Chinese names of these entities as no English names for these entities
have been registered.
PRC regulations restrict foreign owned companies from directly
investing in certain businesses providing educational services in PRC. In order to comply with these regulations, through its PRC
subsidiaries, the Company has entered into exclusive technical consulting and service agreements (the “Service Agreements”)
with a number of VIEs in PRC, which are able to provide such educational services.
The Company has chosen to operate the intellectualized operational
service business in PRC through IValley, a Taiwan VIE. According to Taiwan related regulations, any individual, organization, or
other institution of the Mainland Area, or any company it invests in any third area may not engage in any investment activity in
the Taiwan Area unless permitted by the competent authorities. Hong Kong is considered a third area under Taiwan law. In order
to comply with those regulations, through Ambow Education Management (Hong Kong) Ltd., the Company has entered into exclusive Service
Agreements with IValley, which is able to provide the intellectualized operational services through its subsidiaries.
The shareholders of the VIEs, through share pledge agreements,
have pledged all of their rights and interests in the VIEs, including voting rights and dividend rights, to the Company or its
subsidiaries as collateral for their obligation to perform in accordance with the Service Agreements. Further, the shareholders
of the VIEs, through exclusive call option agreements, granted to the Company or its subsidiaries an exclusive, irrevocable and
unconditional right to purchase part or all of the equity interests in the VIEs for an amount equal to the original cost of their
investment should the purchase become permissible under the relevant PRC law.
Through the contractual agreements described above, the following
companies: Ambow Shida, Ambow Shanghai, Ambow Sihua, Ambow Rongye, Ambow Zhixin and IValley are considered to be VIEs in accordance
with US GAAP for the following reasons:
Through the equity pledge arrangements, call option agreements
and powers of attorney with the shareholders of VIEs, the Company controls decisions in relation to the operations of the VIEs,
VIE’s subsidiaries and schools controlled. Specifically, the Company can make the following decisions which most significantly
affect the economic performance of the VIEs:
Further, the Company is also able to make the following decisions
that enable it to receive substantially all of the economic returns from the VIEs:
The Company, either directly or through its subsidiaries, is
the primary beneficiary of the VIEs because it holds all the variable interests in the VIEs. As a result, the accounts and operations
of the VIEs and their subsidiaries are included in the accompanying consolidated financial statements.
Other than the contractual control arrangements as disclosed,
the Group’s officers, directors or shareholders do not have any written or oral agreement with the VIE shareholders.
The Company conducts education and intellectualized operational
service business in PRC primarily through contractual arrangements among the Group’s subsidiaries and VIEs in PRC and Taiwan.
The Group’s VIEs have power over the activities of subsidiaries
(mainly including schools and centers) through their role as the registered sponsors of schools or controlling shareholders of
corporate centers. The VIEs control the equity in these schools and are also entitled to the economic benefits from the schools.
The schools and centers, which are controlled by the VIEs, hold
the necessary business and education licenses or permits to perform education activities. The schools and centers also sign all
significant contracts, including leases, relating to the performance of these activities.
In addition, the responsibilities of the schools and centers,
under the direction of the VIEs and Company’s management (through the power invested in them by the VIEs) include the following:
Based on the nature of schools, the Company has categorized
the schools into two categories, and applies the voting interest model when consolidating the schools requiring reasonable returns
and applies the VIE model when consolidating the schools not requiring reasonable returns.
For the schools requiring reasonable returns, the VIEs have
a 100% equity interest in the schools, which allows them to make key operating decisions on behalf of the schools. Therefore, the
Company through the VIEs consolidates the schools applying voting interest model.
According to the Law for Promoting Private
Education, which regulates the education industry in China, schools not requiring reasonable returns are prohibited from distributing
annual dividends. The Company through the VIEs has the power to direct the schools’ most significant activities as long as
the VIEs remain the equity holders of the schools and has the obligation to absorb operating losses and the rights to receive the
schools’ expected residual returns. The Company is able to extract profits through technical service agreements. Therefore,
the Company through the VIEs is the primary beneficiary of the schools not requiring reasonable returns and consolidates them under
the VIE model.
The Company identifies and aggregates its subsidiaries and VIEs
with similar nature for consolidation and reporting purpose. The VIEs and their schools and centers have very similar characteristics
and are facing similar kinds/levels of risks:
In addition, the Company enters into different contractual agreements
with the six VIEs but these agreements are of similar format and structure. Therefore, the contract risk, if any, arising from
the contractual relationship with the VIEs is also similar.
As a result, the Company considers it is
appropriate to, according to ASC 810, aggregate all these VIEs together for reporting in the financial statements.
There are substantial uncertainties regarding
the interpretation and application of PRC laws and regulations, including those that govern the Group’s VIE contractual arrangements.
If the Group’s ownership structure and contractual arrangements are found to be in violation of any existing or future PRC
laws or regulations, the relevant regulatory authorities would have broad discretion in dealing with such violation, including
(i) revoking the business and operating licenses of the Company’s PRC subsidiaries and VIEs; (ii) discontinuing
or restricting the operations of any related-party transactions among the Company’s PRC subsidiaries and VIEs; (iii) imposing
fines or other requirements with which the Group or the Company’s PRC subsidiaries and VIEs may not be able to comply; (iv) revoking
the preferential tax treatment enjoyed by the Company’s PRC subsidiaries and VIEs; (v) requiring the Group or the Company’s
PRC subsidiaries and VIEs to restructure the ownership structure or operations. If any of the above penalties is imposed on the
Group, the Group’s business operations and expansion, financial condition and results of operations will be materially and
adversely affected. On March 15, 2019, the new Foreign Investment Law of PRC (the “2018 Foreign Investment Law”) was
passed by the Second Session of the thirteenth National People's Congress and will come into force on January 1, 2020. The 2018
Foreign Investment Law does not mention concepts including “de facto control”, “controlling through contractual
arrangements” or “variable interest entity”, nor does it specify the regulation on controlling through contractual
arrangements or variable interest entity. Furthermore, the 2018 Foreign Investment Law does not specifically stipulate rules on
the education industry. Therefore, the Company believes that the 2018 Foreign Investment Law will not have any material adverse
effect on its VIE structure and business operations.
There are uncertainties as to whether the Company can maintain
the Taiwan VIE structure in the future. If Ambow Education Management (Hong Kong) Ltd. is classified as "organization of the
Mainland Area", there may be a material impact to the viability to our current corporate structure, corporate governance and
business operations. The Company may potentially be subject to fines and/or administrative or criminal liabilities.
The Company’s operations depend on the VIEs and their
respective shareholders to honor their contractual agreements with the Company. All of these agreements between the Company and
Ambow Shida, Ambow Shanghai, Ambow Sihua, Ambow Rongye and Ambow Zhixin are governed by PRC law and provide for the resolution
of disputes through arbitration in the PRC. Agreements between the Company and IValley are governed by Taiwan laws and regulations
and provide for the resolution of disputes through arbitration in the Taipei. The management believes that the VIE agreements
are in compliance with PRC and Taiwan laws and are legally enforceable.
However, the interpretation and implementation of the laws and
regulations in the PRC and their application to the legality, binding effect and enforceability of contracts are subject to the
discretion of competent PRC authorities, and therefore there is no assurance that relevant PRC authorities will take the same position
as the Group herein in respect of the legality, binding effect and enforceability of each of the contractual agreements. Meanwhile,
since the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always
uniform and enforcement of these laws, regulations and rules involve uncertainties, which may limit legal protections available
to the Company to enforce the contractual arrangements should the VIEs or their shareholders fail to perform their obligation under
those arrangements.
In addition, if the Company is unable to maintain effective
control over its VIEs, the Company would not be able to continue to consolidate the Group’s VIEs’ financial results
with its financial results. The Company’s ability to conduct its education business may be negatively affected if the PRC
government were to carry out of any of the aforementioned actions. As a result, the Company may not be able to consolidate Ambow
Shanghai, Ambow Shida, Ambow Sihua, Ambow Rongye, Ambow Zhixin and IValley, their respective schools and subsidiaries in its consolidated
financial statements as it may lose the ability to exert effective control over these entities and their respective schools and
subsidiaries and their shareholders, and it may lose the ability to receive economic benefits from these respective entities, schools
and subsidiaries. The Company, however, does not believe such actions would result in the liquidation or dissolution of the Company,
the subsidiaries or the VIEs, and believes that the risk of losing the ability to maintain effective control over its VIEs is remote.
Currently there are no contractual arrangements that could require
the Company to provide additional financial support to the VIEs. As the Company is conducting its PRC educational and career enhancement
services through the VIEs and their subsidiaries, and PRC intellectualized operational services through IValley and its subsidiaries,
the Company may provide such support on a discretional basis in the future, which could expose the Company to a loss.
The combined financial information of the Group’s VIEs
and, as applicable, subsidiaries/schools of the Group’s VIEs was included in the accompanying consolidated financial statements
of the Group as follows:
The following table sets forth cash and cash equivalents in
RMB held by the Group’s VIEs and non-VIE in PRC as of December 31, 2018 and 2019:
As of December 31, 2019, the
Group’s consolidated current liabilities exceeded its consolidated current assets by RMB 209,344. The Group’s
consolidated net assets were amounting to RMB 163,596 as of December 31, 2019.
The Group’s principal sources of
liquidity have been cash provided by operating activities. The Group had net cash used in operating activities of RMB 10,210, net
cash provided by operating activities of RMB 25,445 and RMB 20,210 for the years ended December 31, 2019, 2018 and 2017, respectively.
The cash outflow in 2019 was mainly caused by more cash spending on compensation, rental, marketing and other operating expenses.
As of December 31, 2019, the Group had RMB 157,600 in unrestricted cash and cash equivalents. The Group’s
cash and cash equivalents consist of cash on hand and liquid investments that are unrestricted as to withdrawal or use, have maturities
of three months or less and are placed with banks and other financial institutions. As of December 31,
2019, the Group had RMB 94,967 in unrestricted cash and cash equivalents from VIEs.
The Group’s operating results for
future periods are subject to numerous uncertainties and it is uncertain if the Group will be able to achieve a net income position
for the foreseeable future. If management is not able to increase revenue and/or manage cost and operating expenses in line
with revenue forecasts, the Company may not be able to achieve profitability.
Most recently, from the beginning of 2020, with the global spread
of a novel coronavirus pandemic, also known as COVID-19, businesses and schools in China have been suspended since the end of January
2020 as part of quarantine measures to contain the pandemic. Our K-12 schools and training centers in China have been closed since
then and the reopening time is postponed until further notice from local authorities. Bay State College in U.S. is currently moving
all courses online in response to social distancing needs and precautionary measures. The pandemic may adversely affect the Group’s
liquidity resources, including but not limited to delayed collection of tuition and fees.
The Group had approximately RMB 57,487
and RMB 31,000 short term investments, available for sale and short term investments, held to maturity as of December 31, 2019,
which was held as short-term investments to be liquid on the expiration date before the end of 2020. Besides, according to historical
experience and knowledge, the management believed that certain current liabilities could be delayed for cash payment through arrangements.
Historically, the Group has addressed liquidity requirements
through a series of cost reduction initiatives, debt borrowings and the sale of subsidiaries and other non-performing
assets. In 2019 the Group filed Form F-3 with the Security and Exchange Commission to register securities with a maximum aggregate
initial offering price not to exceed $100,000. In 2019, the Group’s business plan has focused on expanding existing business,
exploring innovation in service portfolio, invest in new technology to build up education service platforms, improving operation
efficiency and profitability, and enhancing its internal control procedures. Actions include establishing new tutoring centers
and training offices, continuing to roll out the career-oriented Cross-Border College Program across U.S. and China, implementing
comprehensive budget control and operation assessment, implementing enhanced vendor review and selection processes as well as enhancing
internal controls on payable management, create synergy of the Group’s resources, and put forward efforts to pursue historical
receivables. From 2020 and onwards, the Group is focusing on the development of core cash-generating business and will implement
more stringent cost and expense controls than previous years, including but not limited to cut down numbers of employees, require
strict pre-purchase application and approval, suspend certain business consuming more cash than earned etc.
The Group are taking a series of measures
to respond to the negative impact from the pandemic, including offering online programs and services, cut down compensation cost,
reducing other cost and expenses for savings, negotiating for relief or postpone of rentals for this special period of time and
seeking for certain credit facilities etc. Moreover, along with the control of the pandemic in China, local authority of Jiangsu
Province have announced the reopening time schedule of local K-12 schools in the beginning of April 2020, which include Shuyang
K-12 within the Group. Other provinces of China are estimated to follow and announce their own reopening time schedules of schools
in the next. The collection of tuition and fees are expected to gradually recover accordingly. There is no liquidity concerns noted
in the next 12 months according to the Group’s cash flow projection.
The Group believes that available cash and cash equivalents,
short term investments, available for sale and short term investments, held to maturity, cash provided by operating activities,
together with cash available from the activities mentioned above, should enable the Group to meet presently anticipated cash needs
for at least the next 12 months after the date that the financial statements are issued and the Group has prepared the consolidated
financial statements on a going concern basis. However, the Group continues to have ongoing obligations and it expects that it
will require additional capital in order to execute its longer-term business plan. If the Group encounters unforeseen circumstances
that place constraints on its capital resources, management will be required to take various measures to conserve liquidity, which
could include, but not necessarily be limited to, initiating additional public offerings, curtailing the Group’s business
development activities, suspending the pursuit of its business plan, obtaining credit facilities, controlling overhead expenses
and seeking to further dispose of non-core assets. Management cannot provide any assurance that the Group will raise additional
capital if needed.
The consolidated financial statements of the Group have been
prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”).
All amounts in the accompanying consolidated financial statements and notes are expressed in Renminbi (“RMB”). Amounts
in United States dollars (“US$”) are presented solely for the convenience of readers and use an exchange rate of RMB
6.9618, representing the middle rate as set forth in the H.10 statistical release of the U.S. Federal Reserve Board as of December 31,
2019. No representation is made that the RMB amounts could have been, or could be, converted into US$ at such rate.
The preparation of consolidated financial statements in conformity
with U.S. GAAP requires management to make estimates, judgments, and assumptions that affect the reported amounts of assets,
liabilities, revenues, and expenses and the related disclosure of contingent assets and liabilities. On an on-going basis, the
Group evaluates its estimates, including those related to the useful lives of long-lived assets including property and equipment,
stock-based compensation, fair value of assets and liabilities acquired in business combinations, impairment of goodwill and other
intangible assets, income taxes, provision for doubtful accounts and contingencies. The Group bases its estimates of the carrying
value of certain assets and liabilities on historical experience and on various other assumptions that are believed to be reasonable
under the circumstances, when these carrying values are not readily available from other sources. Actual results may differ from
these estimates.
All significant inter-company transactions and balances have
been eliminated upon consolidation. Non-controlling interests represent the equity interests in the Company’s subsidiaries
and VIEs that are not attributable, either directly or indirectly, to the Company.
The consolidated financial statements include the financial
statements of the Company, its subsidiaries and its VIEs.
Cash and cash equivalents consist of cash on hand, cash in bank
with no restrictions, as well as highly liquid investments which are unrestricted as to withdrawal or use, and which have remaining
maturities of three months or less when initially purchased.
Restricted cash relates to special deposit accounts required
by the Education Commission for the purpose of preventing abusive use of tuition and fees of educational and training institutions,
and cash frozen by a court order during an ongoing legal proceeding. Please refer to Note 20-Contingencies for detail.
Short term investments consist of held-to-maturity
investments and available-for-sale investments.
The Group’s held-to-maturity investments consist of financial
products purchased from banks. The Group’s short-term held-to-maturity investments are classified as short-term investments
on the consolidated balance sheets based on their contractual maturity dates which are less than one year and are stated at their
amortized costs.
Investments classified as available-for-sale investments are
carried at their fair values and the unrealized gains or losses from the changes in fair values are reported net of tax in accumulated
other comprehensive income until realized.
The Group reviews its investments for other-than-temporary impairment
(“OTTI”) based on the specific identification method. The Group considers available quantitative and qualitative evidence
in evaluating potential impairment of its investments. If the cost of an investment exceeds the investment’s fair value,
the Group considers, among other factors, general market conditions, expected future performance of the investees, the duration
and the extent to which the fair value of the investment is less than the cost, and the Group’s intent and ability to hold
the investment. OTTI is recognized as a loss in the income statement.
Accounts receivable mainly represent the amounts due from the
customers or students of the Company’s various subsidiaries and VIEs.
An allowance for doubtful accounts is recorded in the period
in which a loss is determined to be probable based on an assessment of specific evidence indicating doubtful collection, historical
experience, account balance aging and prevailing economic conditions. Doubtful accounts balances are written off and deducted from
allowance, when receivable are deemed uncollectible, after all collection efforts have been exhausted and the potential for recovery
is considered remote.
Land use rights are recorded at cost less accumulated amortization.
Amortization is provided on straight-line basis over the useful life of land use right.
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is calculated on a straight-line basis over the following estimated useful lives:
Business combinations are recorded using the acquisition method
of accounting. The assets acquired, the liabilities assumed, and any non-controlling interests of the acquiree at the acquisition
date, if any, are measured at their fair values as of the acquisition date. Goodwill is recognized and measured as the excess of
the total consideration transferred plus the fair value of any non-controlling interest of the acquiree and fair value of previously
held equity interest in the acquiree, if any, at the acquisition date over the fair values of the identifiable net assets acquired.
Common forms of the consideration made in acquisitions include cash and common equity instruments. Consideration transferred in
a business acquisition is measured at the fair value as of the date of acquisition. Acquisition-related expenses and restructuring
costs are expensed as incurred.
Where the consideration in an acquisition includes contingent
consideration the payment of which depends on the achievement of certain specified conditions post-acquisition, the contingent
consideration is recognized and measured at its fair value at the acquisition date and is recorded as a liability, it is subsequently
remeasured at fair value at each reporting date with changes in fair value reflected in earnings.
If the initial accounting for a business combination is incomplete
by the end of the reporting period in which the combination occurs, the Company reports provisional amounts for the items for which
the accounting is incomplete. These provisional amounts are adjusted during the measurement period, or additional assets or liabilities
are recognized, to reflect new information obtained about facts and circumstances that existed at the acquisition date that, if
known, would have affected the amounts recognized at that date.
Business combinations occurred during the years ended December
31, 2017 and 2019 are disclosed in Note 23-Acquisition. There was no business combination occurred during the year ended December
31, 2018.
Intangible assets represent brand, software, trade name, student
population, corporative agreement, customer relationship, license, trademark, workforce and non-compete agreement. The software
was initially recorded at historic acquisition costs or cost directly incurred to develop the software during the application development
stage that can provide future benefits, and amortized on a straight-line basis over estimated useful lives.
Other finite lived intangible assets are initially recorded
at fair value when acquired in a business combination, in which the finite intangible assets are amortized on a straight-line basis
except student populations and customer relationships which are amortized using an accelerated method to reflect the expected departure
rate over the remaining useful life of the asset. The Group reviews identifiable amortizable intangible assets to be held and used
for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable.
Determination of recoverability is based on the lowest level of identifiable estimated undiscounted cash flows resulting from use
of the asset and its eventual disposition. Measurement of any impairment loss is based on the excess of the carrying value of the
asset over its fair value. The intangible assets have original estimated useful lives as follows (Refer to Note 10-Intangible Assets
for further information):
The Group has determined that trade names and brand have the
continued ability to generate cash flows indefinitely. There are no legal, regulatory, contractual, economic or other factors limiting
the useful life of the respective trade names and brand. Consequently, the carrying amounts of trade names and brand are not amortized
but are tested for impairment as of September 30 every year or more frequently if events or circumstances indicate that the assets
may be impaired. Such impairment test consists of a comparison of the fair values of the trade names and brand with their carrying
amounts and an impairment loss is recognized if and when the carrying amounts of the trade names and brand exceed their fair values.
The Group performed impairment testing
of indefinite-lived intangible assets in accordance with ASC 350, which requires an entity to evaluate events and circumstances
that may affect the significant inputs used to determine the fair value of the indefinite-lived intangible assets when performing
qualitative assessment. When these events occur, the Group estimates the fair value of these trade names with the Relief from Royalty
method (“RFR”), which is one of the income approaches. RFR method is generally applied for assets that frequently licensed
in exchange for royalty payments. As the owner of the asset is relieved from paying such royalties to a third party for using the
asset, economic benefit is reflected by notional royalty savings. An impairment loss is recognized for any excess in the carrying
value over the fair value of trade names.
The Group evaluates a reporting unit by first identifying its
operating segments, and then evaluates each operating segment to determine if it includes one or more components that constitute
a business. If there are components within an operating segment that meets the definition of a business, the Group evaluates those
components to determine if they must be aggregated into one or more reporting units. If applicable, when determining if it is appropriate
to aggregate different operating segments, the Group determines if the segments are economically similar and, if so, the operating
segments are aggregated. The Group had four reportable segments in 2017 and 2018. In 2019, in response to the shift of business
development focus, the Group changed its management approach to organize reportable segments to make operating decisions and assess
performance. New reportable segments include K-12 schools and CP& CE Programs. For further details, refer to Note 21-Segment
Information.
Goodwill represents the future economic benefits arising from
other assets acquired in a business combination or an acquisition by an entity that are not individually identified
and separately recognized. Goodwill acquired in a business combination is tested for impairment at least annually or more frequently
when events and circumstances occur indicating that the recorded goodwill may be impaired. The Group performed impairment analysis
on goodwill as of September 30 every year either beginning with a qualitative assessment, or starting with the quantitative assessment
instead. The quantitative goodwill impairment test compares the fair values of each reporting unit to its carrying amount, including
goodwill. A reporting unit constitutes a business for which discrete profit and loss financial information is available. The fair
value of each reporting unit is established using a combination of expected present value of future cash flows. If the fair value
of each reporting unit exceeds its carrying amount, goodwill is not considered to be impaired. If the carrying amount of a reporting
unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount
of goodwill allocated to that reporting unit.
Determining when to test for impairment, the Group’s reporting
units, the fair value of a reporting unit and the fair value of assets and liabilities within a reporting unit, requires judgment
and involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and
operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions
and determination of appropriate market comparable. The Group bases fair value estimates on assumptions it believes to be reasonable
but that are unpredictable and inherently uncertain.
Significant changes in the economic characteristics of components
or reorganization of an entity’s reporting structure can sometimes result in a re-assessment of the affected operating segment
and its components to determine whether reporting units need to be redefined where the components are no longer economically similar.
Future changes in the judgments and estimates underlying the
Group’s analysis of goodwill for possible impairment, including expected future cash flows and discount rate, could result
in a significantly different estimate of the fair value of the reporting units and could result in additional impairment of goodwill.
The Group reviews its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. When these events
occur, the Group measures impairment by comparing the carrying value of the long-lived assets to the estimated undiscounted future
cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted
cash flow is less than the carrying amount of the assets, the Group would recognize an impairment loss, which is the excess of
carrying amount over the fair value of the assets, using the expected future discounted cash flows.
The Group derecognizes a liability only if it has been extinguished.
A liability has been extinguished if either the Group pays the creditor and is relieved of its obligation for the liability, or
the Group is legally released from the liability judicially or by the creditor. In 2018, the Group derecognized liabilities with
long aging over certain years and no claim of debts have been received by the Group, and liability which creditor has ceased to
exist legally. Refer to Note 25-Gain from Derecognition of Liabilities for detail.
The Group has adopted ASC 606 Revenue from Contracts with Customers
using the modified retrospective transition method from January 1, 2018. The Group’s revenue is generated from delivering
educational programs and services and intellectualized operational services.
The core principle of ASC 606 is that an entity recognizes revenue
when control of the promised goods or services is transferred to customers in an amount that reflects the consideration to which
the entity expects to be entitled in exchange for those goods or services.
Step 4: Allocate the transaction price to the performance obligations
in the contract;
Step 5: Recognize revenue when (or as) the entity satisfies
a performance obligation.
For individual customers including pre-school children, primary
and secondary students and undergraduate students, usually there are no written formal contracts between the Group and the students
according to business practice. Records with students’ name, grade, tuition and fee collected are signed or confirmed by
students. Academic requirements and each party’s rights are communicated with students through enrollment brochures or daily
teaching and academic activities. For college and corporate customers, there are written formal contracts which recorded service
fee, service period, each party’s rights and obligations and payment terms.
For individual customers including pre-school children, primary
and secondary students and undergraduate students, the Group’s performance obligations are to provide acknowledged academic
education from kindergarten till grade twelve to school-aged students within academic years, extracurricular tutoring services
and post-secondary education with Associates and Bachelor’s programs within agreed-upon periods respectively. For college
and corporate customers, the Group’s performance obligations are to provide customized vocational educational services to
college students within academic years; or to provide boarding and accommodation services to customers for agreed-upon periods;
or to provide short term outward bound and in-house training services to corporate clients within agreed-upon periods; or to provide
intellectualized operational services and warranty of agreed period of time.
For individual customers including pre-school children, primary
and secondary students and undergraduate students, transaction price of each customer is the tuition and fee received normally
up front. For college and corporate customers, transaction price of each customer is the service fee defined in the contract, net
of value added tax, and would be received either up front or within payment terms depending on each contract. Circumstances like
other variable consideration, significant financing component, noncash consideration, consideration payable to a customer did not
exist.
For individual, college and corporate customers, the Group identifies
one performance obligation. The transaction prices are allocated to the one performance obligation. For intellectualized operational
services to corporate customers, the Group identifies two distinct performance obligations, which is to provide intellectualized
operational services and warranty, since customers obtain different benefits from the two services separately and these two services
are usually quoted to customers with stand-alone prices, which are determined by cost of services plus certain amount of profit.
The transaction price from the contract is allocated according to stand-alone selling prices of each obligation.
For individual customers including pre-school children, primary
and secondary students and undergraduate students, the Group satisfies performance obligations to students over time, and recognizes
revenue according to tutoring hours or school days consumed in each month of a semester. For vocational education services, outbound
and in-house training services, and boarding and accommodation services to college and corporate customers, the Group satisfies
performance obligations to customers over time, and recognizes revenue according to the number of months within the academic year,
or training days consumed in each month, or boarding service days within each month. For intellectualized operational service to
corporate clients, the Group satisfies performance obligations to customers over time, use the cost-based input method to depict
its performance in transferring control of services promised to the clients. Such input measure is determined by the proportional
relation of the contract costs incurred to date relative to the estimated total contract costs at completion. For performance obligation
of warranty, the change of control would be transferred to the customer over time. Accordingly the Group recognizes revenue using
a straight line method within the whole warranty period.
The following table illustrates the disaggregation of revenue
by operating segments for the years of 2017, 2018 and 2019:
The transferred control of promised services
to customers result in the Group’s unconditional rights and conditional consideration receivable on passage of time. Accordingly
as of December 31, 2018 and 2019, the Group has no other contract assets except for Accounts Receivable, in RMB 18,132 and RMB
17,939, respectively. Please refer to Note 6 for detail.
Contract liabilities represent the Group has received consideration
but has not satisfied the related performance obligations. The tuition and service fees received in advance are the Group’s
contract liabilities and presented in deferred revenue in the consolidated balance sheets. The revenue recognized during the year
2018 and 2019 that was previously included in the deferred revenue balances as of December 31, 2017 and December 31, 2018 was RMB
114,396 and RMB 124,250, respectively.
The following table provides the deferred revenue balances by
segments as of December 31, 2018 and 2019.
Cost of revenues for educational programs and services primarily
consist of teaching fees and performance-linked bonuses paid to the teachers, rental payments for the schools and learning centers,
depreciation and amortization of property, equipment and land use rights used in the provision of educational services, costs of
educational materials.
Cost of revenues for intellectualized operational services primarily
include cost of hardware, devices, materials and application services which were procured and integrated, subcontract cost to other
service providers and labor cost of engineers and IT development and operational personnel.
The Group adopted Accounting Standards Update (“ASU”)
2016-02 Leases (“ASC 842”) as of January 1, 2019, using the non-comparative transition option pursuant to ASU 2018-11.
Therefore, the Group has not restated comparative period financial information for the effects of ASC 842, and will not make the
new required lease disclosures for comparative periods beginning before January 1, 2019. The Group elected the package of practical
expedients permitted under the transition guidance within the new standard, which among others things (i) allowed the Group to
carry forward the historical lease classification; (ii) did not require the Group to reassess whether any expired or existing contracts
are or contain leases; (iii) did not require the Group to reassess initial direct costs for any existing leases.
When none of the criteria of finance lease are met, a lessee
shall classify the lease as an operating lease.
The Group classifies a lease as a finance lease when the lease
meets any of the following criteria at lease commencement:
a. The lease transfers ownership of the underlying asset to
the lessee by the end of the lease term;
b. The lease grants the lessee an option to purchase the underlying
asset that the lessee is reasonably certain to exercise;
c. The lease term is for the
major part of the remaining economic life of the underlying asset;
d. The present value of the sum
of the lease payments and any residual value guaranteed by the lessee that is not already reflected in the lease payments in accordance
with ASC 842 paragraph 842-10-30-5(f) equals or exceeds substantially all of the fair value of the underlying asset;
e. The underlying asset is of
such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term;
Research and development expenses comprise of (a) payroll, employee
benefits, and other headcount-related costs associated with the development of online education technology platforms and courseware,
and (b) outsourced development costs. Except for costs related to internal use software and website development costs, the Group
expenses all other research and development costs when incurred for the years presented.
For internal use software, the Group expenses all costs that
are incurred in connection with the planning and implementation phases of development and costs that are associated with repair
or maintenance of the existing software. Direct costs incurred to develop the software during the application development stage
that can provide future benefits are capitalized.
Capitalized internal use software and website development costs
are included in intangible assets.
The Group expenses advertising costs as incurred. Total advertising
expenses were RMB 2,701, RMB 8,450 and RMB 10,664 for the years ended December 31, 2017, 2018 and 2019, respectively, and have
been included as part of selling and marketing expenses.
The Group uses RMB as its reporting currency. The functional
currency of the Company and its subsidiaries incorporated in the Cayman Islands, Hong Kong, the British Virgin Islands and United
States is the US$; the functional currency of the Company’s subsidiary in Taiwan is the TWD; while the functional currency
of the other entities in the Group is the RMB. In the consolidated financial statements, the financial information of the Company
and its subsidiaries, which use US$ and TWD as their functional currency, has been translated into RMB. Assets and liabilities
are translated from each subsidiary’s functional currency at the exchange rates on the balance sheet date, equity amounts
are translated at historical exchange rates, and revenues, expenses, gains, and losses are translated using the average rate for
each quarter. Translation adjustments are reported as cumulative translation adjustments and are shown as a separate component
of other comprehensive income or loss in the statement of shareholders’ equity and comprehensive income.
Foreign currency transactions denominated in currencies other
than functional currency are translated into the functional currency using the exchange rates prevailing at the dates of the transactions.
Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are remeasured at the applicable rates
of exchange in effect at that date. Foreign exchange gains and losses resulting from the settlement of such transactions and from
remeasurement at year-end are recognized in foreign currency exchange gain/loss, net on the consolidated statement of operations.
The RMB is regulated by the PRC government and is not a freely
convertible currency. The State Administration for Foreign Exchange, under the authority of the People’s Bank of PRC, controls
the conversion of RMB into foreign currencies. Limitations on foreign exchange transactions imposed by the PRC government could
cause future exchange rates to vary significantly from current or historical exchange rates. Further, the value of RMB is subject
to changes in central government policies and to international economic and political developments affecting supply and demand
in the PRC Foreign Exchange Trading System market.
Financial instruments include cash and
cash equivalents, short term investments, available for sale and short term investments, held to maturity, accounts receivable,
accounts payable, borrowings, and loan receivable, current. The carrying values of the financial instruments approximate their
fair values due to their short-term maturities.
Basic earnings per share is computed by dividing net income/(loss)
attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year. Diluted earnings
per share is calculated by dividing net income/(loss) 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 equivalent shares outstanding
during the year. Ordinary equivalent shares consist of the ordinary shares issuable upon the exercise of outstanding share options
(using the treasury stock method) and the ordinary shares issuable upon the vest of restricted shares. Ordinary equivalent shares
are excluded from the computation of the diluted net income per share in years when their effect would be anti-dilutive. Ordinary
equivalent shares are also excluded from the calculation in loss periods, as their effects would be anti-dilutive.
Income taxes are provided for in accordance with the laws of
the relevant taxing authorities. Deferred income taxes are recognized for temporary differences between the tax basis of assets
and liabilities and their reported amounts in the financial statements, net of operating loss carry forwards and credits, by applying
enacted statutory tax rates applicable to future years. Deferred tax assets are reduced by a valuation allowance when, in the opinion
of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Deferred tax liabilities and assets are classified as noncurrent
and presented with a netted off amount in the consolidated balance sheets as of December 31, 2018 and 2019, respectively.
The Group adopted the guidance on accounting for uncertainty
in income taxes, which prescribes a more likely than not threshold for financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. Guidance was also provided on the de-recognition 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. The Group establishes reserves
for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These reserves
are established when the Group believes that certain positions might be challenged despite its belief that its tax return positions
are in accordance with applicable tax laws. The Group adjusts these reserves in light of changing facts and circumstances, such
as the closing of a tax audit, new tax legislation, or the change of an estimate. To the extent that the final tax outcome of these
matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which
such determination is made. The provision for income taxes includes the effect of reserve provisions and changes to reserves that
are considered appropriate, as well as the related net interest and penalties where applicable.
U.S. GAAP generally requires that recognized revenue, expenses,
gains and losses be included in net income or loss. Although certain changes in assets and liabilities are reported as separate
components of the equity section of the consolidated balance sheet, such items, along with net income, are components of comprehensive
income or loss. The components of other comprehensive income or loss consist of unrealized gain or loss on short term investments,
available for sale and foreign currency translation adjustments.
The Group grants share options/restricted stock to its employees
and directors. The Group measures the cost of employee services received at the grant-date using the fair value of the equity instrument
issued net of an estimated forfeiture rate, and therefore only recognizes compensation costs for those shares expected to vest
over the service period of the award. The Group records stock-based compensation expense on a straight-line basis over the requisite
service period, generally ranging from one year to four years.
Forfeitures are estimated at the time of grant and revised in
the subsequent periods if actual forfeitures differ from those estimates.
An estimated loss contingency is accrued and charged to the
consolidated statements of operations and other comprehensive income (loss) if both of the following conditions are met: (1) Information
available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability
had been incurred at the date of the financial statements. It is implicit in this condition that it must be probable that one or
more future events will occur confirming the fact of the loss; (2) the amount of loss can be reasonably estimated.
The Group reviews its contingent issues on a timely basis to
identify whether the above conditions are met.
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. ASU 2018-13 removes
the amounts and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy and the valuation processes for Level
3 fair value measurements; modifies certain disclosure requirements in Topic 820; and require additional disclosures such as the
range and weighted average of significant unobservable inputs used to develop Level 3 measurements etc. ASU No. 2018-13 is effective
for the Company beginning in the first quarter of fiscal year 2020. The Company does not expect the adoption of ASU No. 2018-13
will have a significant effect on its consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit
Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which introduced an expected credit loss model for the
impairment of financial assets measured at amortized cost basis. That model replaces the probable, incurred loss model for those
assets and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.
Through the amendments in this Update, the FASB added Topic 326, Financial Instruments-Credit Losses, and made several consequential
amendments to the standard. For public business entities, the amendments in this Update will be effective for fiscal years beginning
after December 15, 2020. The Company is in the process of assessing the impact on its consolidated financial statements from the
adoption of the new guidance.
Recently issued ASUs by the FASB, except for the ones mentioned
above, have no material impact on the Company’s consolidated results of operations or financial position.
The following table provides a reconciliation of cash, cash
equivalents, and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts
shown in the consolidated statements of cash flows.
Short term investments consist of held-to-maturity investments
and available-for-sale investments.
Held-to-maturity investments consist of various fixed-income
financial products purchased from Chinese commercial banks, which are classified as held-to-maturity investments as the Group has
the positive intent and ability to hold the investments to maturity. The maturities of these financial products are ninety days,
with annual interest rate ranging from 3.60% to 4.48% and matured and fully collected with principal and interest as of the date
of this report. They are classified as short term investments on the consolidated balance sheets as its contractual maturity dates
are less than one year. The repayments of principal of the financial products are not guaranteed by the Chinese commercial banks
from which the fixed income financial products were purchased. Historically, the Company has received the principal and the interest
in full upon maturity of these investments.
While these fixed-income financial products are not publicly
traded, the Company estimated that their fair value approximate their amortized costs considering their short term maturities and
high credit quality. No OTTI loss was recognized for the year ended December 31, 2019.
Investments other than held-to-maturity are classified as available-for-sale
investments, which consist of various adjustable-income financial products purchased from Chinese commercial banks. All the available
for sale investments did not have maturity date. They are classified as short-term investments on the consolidated balance sheets
as management intends to hold them for a period less than one year.
Available-for-sale securities are carried at their fair values
and the unrealized gains or losses from the changes in fair values are included in accumulated other comprehensive income. The
aging of all the available-for-sale investments were less than 12 months as of December 31, 2019. No OTTI loss was recognized for
the year ended December 31, 2019.
The amortized cost, gross unrealized gain in accumulated other
comprehensive income, and estimated fair value of investments as of December 31, 2018 and 2019, are reflected in the tables below:
Interest income recognized on held-to-maturity investments for
years ended December 31, 2017, 2018 and 2019 were as follows:
(Note i) Full provision was provided to receivables due from
different customers due to the remote collectability, and certain provision was written off after all collection efforts have been
exhausted and the potential for recovery was remote.
(Note i) A payable balance amounted to RMB 49,800 was recorded
by a subsidiary prior to its acquisition by the Group, and such payable was indemnified by Xihua Investment Group (“Xihua
Group). No provision was made for the indemnity. The indemnity balance was still outstanding as of the date of issuance of the
financial statements.
(Note ii) The balance represented the prepaid operating
rights to the Zhenjiang Foreign Language School and Zhenjiang International School. The Group started a negotiation of returning
the operating right back to the original owner Zhenjiang Education Investment Center in the third quarter of 2011. As a result,
the prepaid operating rights have been reclassified as receivable since then. As of December 31, 2018 and 2019, the payable balance
to Zhenjiang Foreign Language School amounted to RMB 36,770 and RMB 36,770, respectively (see Note 13); therefore, no provision
was made. As of the date of issuance of the financial statements, the negotiation was still in progress.
(Note iii) Ambow Shengying entered into
loan agreements with Beijing Dongyuanzhongheng Investment Management Co., Ltd. (“Dongyuan”) on November 13 and December
16, 2019, respectively. The principles are RMB 15,000 and RMB 10,000, respectively. According to the loan agreements, the annual
interest rates are 5%, and the due dates are December 31, 2019. The loan agreements were without any requirements for collateral
or pledge on the loans. As of December 31, 2019, Dongyuan has fully repaid the principle and interest of the loan in RMB 15,000,
and repaid RMB 1,000 of the loan in RMB 10,000 and interest due. On April 8, 2020, the Group entered into a term sheet with Dongyuan
to agree that the outstanding loan and interest due would be turned into part of consideration for the Group to acquire a no-less-than
51% equity interest of Hebi Ambow Ruiheng Education Technology Co., Ltd. depending on both parties further agreement. Refer to
Note 12-Other Non-Current Assets, Net and Note 31-Subsequent Event for further information. No allowance upon such loan to third
party was provided in the year of 2019.
(Note iv) Others mainly included inventory, prepaid education
supplies, prepaid outsourcing service fee, and other miscellaneous items with trivial amounts.
(Note v) Addition of allowance during the years of 2018 and
2019 was mainly provided against third parties, former employees and former owners due to the remote recoverability. Certain provisions
were written off after all collection efforts being exhausted and the potentials for recovery was remote.
On April 5, 2017, Ambow Shengying entered into an agreement
to provide an interest-free loan to Suzhou Zhixinliren in the amount of RMB 42,677, with a
maturity of April 4, 2018. On March
7, 2018, Ambow Shengying entered into a supplementary agreement with Suzhou Zhixinliren to extend the term of loan for additional
one year. The extended maturity date of the loan was April 4, 2019. Suzhou Zhixinliren is a non-affiliate third party to the Company.
In order to meet the Company’s acquisition fund and working
capital needs in US Dollars, on April 5, 2017, the Company entered into an agreement to receive an interest-free loan from Sino
Accord Investments Limited (“Sino Accord”) in the amount of US$ 6,000 (equivalent to RMB 41,179 as of December 31,
2018). The due date of the loan was April 4, 2018. On March 7, 2018, the Company entered into a supplementary agreement with Sino
Accord to extend the term of loan for additional one year. The extended maturity date of the loan was April 4, 2019. Sino Accord
is a non-affiliated party to the Company. Through an understanding among the Company, Ambow Shengying, Suzhou Zhixinliren and Sino
Accord, the borrowing due to Sino Accord, current at amount of US$ 6,000 was correlated to the loan receivable, current at amount
of RMB 42,677. It was the understanding among the parties that when the borrowing from third party, current is repaid, the loan
receivable, current will similarly be collected.
As of December 31, 2019, the Company fully repaid the borrowing
due to Sino Accord and fully collected the loan receivable, current from Suzhou Zhixinliren. Refer to Note 14-Borrowing From Third
Party, Current.
As of December 31, 2018 and 2019, the Company
has RMB 42,677 and RMB nil of loan receivable, current from Suzhou Zhixinliren, respectively.
For the years ended December 31, 2017, 2018 and 2019, depreciation
expenses were RMB 17,103, RMB 19,973 and RMB 18,481, respectively, which were recorded in cost of revenues, selling and marketing
expenses, general and administrative expenses and research and development expenses.
The capital leases of properties of Shenyang K-12 School was
RMB 12,000, which commenced from December 30, 2010. As at December 31, 2018, the accumulated depreciation of Shenyang K-12 School’s
capital lease of properties were RMB 4,950. For the years ended December 31, 2017 and 2018, depreciation expenses were RMB 600
and RMB 600 respectively and recorded in cost of revenues. The capital leases was reclassified to finance lease right-of-use asset
since the Group adopted ASC 842 Lease from January 1, 2019.
As of December 31, 2019, the Group has not obtained the building
ownership certificates for certain buildings with a total net carrying value of approximately RMB 31,764.
Amortization expenses for intangible assets amounted to RMB
4,782, RMB 4,651 and RMB 6,042 for the years ended December 31, 2017, 2018 and 2019, respectively, of which RMB 1,393, RMB 1,393
and RMB 3,063 are included in cost of sales and the remaining is included in general and administrative expenses. Based on the
current amount of intangible assets subject to amortization, the estimated amortization expenses for each of the future annual
periods is as follows:
(Note i) In April 2019, Ambow Shida
entered into an agreement to lock-up a no-less-than 51% equity interest of Hebi Ambow Ruiheng Education Technology Co., Ltd. (“Hebi
School”) held by Dongyuan for six years, starting from May 1, 2019 till April 30, 2025. Hebi School is a for-profit K-12
school located in Hebi, Henan Province in China, and under campus construction from July 2019. It will provide elementary, junior
and senior high school full curriculum services once put into use. Ambow Shida paid RMB 40,000 to Dongyuan as a deposit in April
2019 according to the agreement. As agreed by both parties, if Ambow Shida and Dongyuan reached for agreement to transfer the equity
interest of Hebi School at any time during the six years, the deposit in RMB 40,000 plus 10% annual interest accrued would not
be returned but as part of the consideration for the transfer; or, Dongyuan will return the deposit to Ambow Shida with 10% annual
interest within seven days upon the termination of the Agreement. Ambow Shida recognized RMB 40,000 as the principal and RMB 2,212
as interest receivable of the lock-up deposit as of December 31, 2019. Refer to Note 31-Subsequent Event for further information.
(Note ii) As of December 31, 2019,
the Group recognized long-term receivables due from Jinghan Taihe of RMB 10,773, including the present value of long-term receivable
related to the acquisition of tutoring centers previously owned by Jinghan Taihe and accrued management fee income from Jinghan
Taihe. The interest income recognized in the Group’s consolidated income statement for the years ended December 31, 2019
and 2018 were RMB 958 and RMB nil, respectively. Refer to Note 23-Acquisition for further background information.
On April 5, 2017, the Company entered into an agreement to receive
an interest-free loan from Sino Accord in the amount of US$ 6,000 (equivalent to RMB 41,179 as of December 31, 2018). The due date
of the loan was April 4, 2018. Sino Accord is a non-affiliated party to the Company. The loan is to provide the Company with sufficient
US dollar-denominated currency to meet its acquisition fund and working capital requirements. On March 7, 2018, the Company entered
into a supplementary agreement with Sino Accord to extend the term of loan for additional one year. The extended maturity date
of the loan was April 4, 2019.
Through an understanding among the Company, Ambow Shengying,
Suzhou Zhixinliren and Sino Accord, the borrowing due to Sino Accord, current at amount of US$ 6,000 was correlated to the loan
receivable, current at amount of RMB 42,677. It was the understanding among the parties that when the borrowing from third party,
current is repaid, the loan receivable, current will similarly be collected.
As of December 31, 2019, the Company fully repaid the borrowing
due to Sino Accord and fully collected the loan receivable, current from Suzhou Zhixinliren. Refer to Note 8-Loan Receivable, Current.
As of December 31, 2018 and 2019, the Company
has RMB 41,179 and RMB nil of borrowings from Sino Accord, current, respectively.
As of December 31, 2017, there were 34,206,939 and 4,708,415
Class A and Class C Ordinary Shares issued and outstanding, respectively.
The addition of ordinary shares during the years ended December
31, 2018 and 2019 came from the vest of restricted shares and the public offering in June 2018. Refer to Note 16-Share Based Compensation
– Restricted Stock Award for further information on the vest of restricted shares and Note 1 (a)-Organization and Principal
Activities – Background for further information on the public offering.
As of December 31, 2018, there were 38,756,289 and 4,708,415
Class A and Class C Ordinary Shares issued and outstanding, respectively.
As of December 31, 2019, there were 38,858,199 and 4,708,415
Class A and Class C Ordinary Shares issued and outstanding, respectively.
On June 1, 2010, the Group adopted the 2010 Equity Incentive
Plan, or the “2010 Plan”, which became effective upon the completion of the IPO on August 5, 2010. The 2010 Plan
allows the Company to offer a variety of incentive awards to employees, outside directors and consultants. Under the plan, the
Group may grant up to 633,333 Class A Ordinary Shares of the Company to its employees, outside directors and consultants, plus
(i) any shares that, as of the completion of the IPO, have been reserved but not issued pursuant to awards granted under the
2005 Plan and are not subject to any awards granted there under, and (ii) any shares subject to awards granted under the 2005
Plan that expire or otherwise terminate without having been exercised in full, and shares issued pursuant to awards granted under
the 2005 Plan that are forfeited to or repurchased by the Company, with the maximum number of shares to be added to the 2010 Plan
pursuant to clauses (i) and (ii) above equal to 333,333 Class A Ordinary Shares; provided, however, that there shall
be an annual increase on the first day of each fiscal year beginning with the 2011 Fiscal Year, in an amount equal to the least
of (i) 833,333 Class A Ordinary Shares, (ii) 5% of the outstanding Class A Ordinary Shares on the last day of the immediately
preceding fiscal year or (iii) such number of Class A Ordinary Shares determined by the Board of Directors. In the event that
any outstanding option or other right for any reason expires, is cancelled, or otherwise terminated, the shares allocable to the
unexercised portion of the 2010 Plan or other right shall again be available for the purposes of the 2010 Plan.
The 2010 Plan was approved by the Board of Directors and shareholders,
and will terminate automatically 10 years after its adoption, unless terminated earlier at the Board of Directors’ discretion.
The exercise price will not be less than the fair market value of the Company’s ordinary shares on the date of grant and
the term may not exceed 10 years. In the case of an ISO granted to an employee of the Company or any parent or subsidiary of the
Company who, at the time the ISO is granted, owns stock representing more than 10% of the voting power of all classes of shares
of the Company or any parent or subsidiary, the exercise price shall be no less than 110% of the fair market value on the date
of grant, and the term of the ISO shall be no less than 5 years from the date of grant.
On December 21, 2018, the Group amended and restated the 2010
Plan, or the “Amended and Restated 2010 Plan”, which became effective upon the approval from the Board of Directors
and shareholders. Under the Amended and Restated 2010 Plan, the maximum aggregate number of shares that may be issued under the
Plan is such number of Shares as shall be equal to 6,500,000 shares, plus any shares subject to stock options or similar awards
granted under the 2005 Plan that expire or otherwise terminate without having been exercised in full and shares issued pursuant
to awards granted under the 2005 Plan that are forfeited to or converted by the Company, with the maximum number of Shares to be
added to the Plan equal to 293,059 Shares. The number of shares available for issuance under the Amended and Restated 2010 Plan
will be increased on the closing day of each future registration (including closing of over-allotment options) during the next
two fiscal years ending December 31, 2020, in an amount equal to fifteen percent (15%) of the shares offered in each registration.
On November 22, 2018, the Board of Directors approved to convert
293,059 outstanding and expired options with an exercise price of US$0.4749 into 293,059 shares of restricted stock. The fair value
of the restricted shares was US$2.70 per share, which was based on the quoted price of the Company’s ADS on November 21,
2018. All restricted stock subject to this award fully vested as of November 22, 2018. After the conversion, there were no options
granted to employees and non-employees.
A summary of the share option activity as of December 31,
2017, 2018 and 2019 is as follows:
Management of the Group is responsible for determining the fair
value of options granted and have considered a number of factors when making this determination, including valuations. The Group
has not granted options during the year of 2017, 2018 and 2019.
There were no share-based compensation
expenses for the share options during the years from 2017 to 2019. As of December 31, 2018 and 2019, all share options were vested
and previously expensed.
On May 18, 2015, the Board of Directors granted 510,000 shares
of the restricted stock to employees and new hires. Twenty-five percent of the awards shall vest on the one year anniversary of
the grant date, and the remainder shall vest in equal and continuous monthly installments over the following thirty-six months
thereafter, subject to participant's continuing service through each vesting date. In 2018 and 2019, 116,291 and 47,743 shares
of restricted stock were vested respectively, with 116,291 and 47,743 of the vested shares separately issued to the board members.
As of December 31, 2019, these awards of restricted stock were fully vested.
On November 22, 2018, the Board of Directors
approved to convert 293,059 outstanding and expired options with an exercise price of US$0.4749 into 293,059 shares of restricted
stock. All restricted stock subject to this award fully vested as of November 22, 2018.
On November 22, 2018, the Board of Directors approved to grant
200,000 shares of the restricted stock to senior employees of the Company. Twenty-five percent of the awards shall vest on the
one year anniversary of the vesting commence date, and the remainder shall vest in equal and continuous monthly installments over
the following thirty-six months thereafter, subject to participant's continuing service of the Company through each vesting date.
In 2018 and 2019, nil and 54,167 shares of restricted stock were vested respectively.
A summary of the restricted stock awards as of December 31,
2018 and 2019 is as follows:
The Company recorded share-based compensation expenses of RMB
4,640, RMB 8,121 and RMB 1,624 in general and administrative expense for the restricted stock awards for the years ended December
31, 2017, 2018 and 2019, respectively, and the unrecognized share-based compensation expenses were amounting to RMB 4,650 and RMB
2,720 as of December 31, 2018 and 2019, respectively.
The PRC government implemented a value-added tax reform pilot
program, which replaced the business tax with VAT. Since May 2016, the change from business tax to VAT are expanded to all other
service sectors which used to be subject to business tax. The VAT rates applicable to the subsidiaries and consolidated variable
interest entities of the Group ranged from 3% to 6% as compared to the 3%~5% business tax rate which was applicable prior to the
reform.
As of December 31, 2018 and 2019, the payable balances for VAT
were RMB 8,973 and RMB 10,645 respectively.
In PRC, business taxes are imposed by the government on the
revenues arising from the provision of taxable services including but not limited to education, the transfer of intangible assets
and the sale of immovable properties in PRC. The business tax rate varies depending on the nature of the revenues. Other than revenues
generated from degree oriented educational activities provided by private schools that are accredited to issue diplomas or degree
certificates recognized by the Ministry of Education of the PRC which are exempted from business tax, the applicable business tax
rate for the Group’s revenues generally ranges from 3% to 5%. Business tax and related surcharges are deducted from revenues
before arriving at net revenues.
From May 2016, as the final part of the VAT reform, VAT replaced
business tax in all industries, on a nationwide basis. The VAT rates applicable to the subsidiaries and consolidated variable interest
entities of the Group ranged from 3% to 6% as compared to the 3%~5% business tax rate which was applicable prior to the reform.
As of December 31, 2018 and 2019, the payable balances for business
tax were RMB 18,430 and RMB 18,456, respectively.
Under the current laws of Cayman Islands, the Company and its
subsidiaries incorporated in the Cayman Islands are not subject to tax on income or capital gains. In addition, upon payment of
dividends by the Company to its shareholders, no Cayman Islands withholding tax will be imposed.
The Company’s subsidiaries incorporated in the BVI are
not subject to taxation.
Entities incorporated in Hong Kong are subject to Hong Kong
profit tax at a rate of 16.5%.
Entity incorporated in Taiwan is subject to Taiwan profit tax
at a rate of 17%.
Significant components of the provision for income taxes on
earnings for the years ended December 31, 2017, 2018 and 2019 are as follows:
The PRC Enterprise Income Tax (“EIT”) is calculated
based on the taxable income determined under the applicable EIT Law and its implementation rules, which became effective on January 1,
2008. EIT Law imposes a unified income tax rate of 25% for all resident enterprises in China, including both domestic and foreign
invested enterprises.
EIT Law also imposes a withholding income tax of 10% on dividends
distributed by a foreign invested enterprise, or FIE, to its immediate holding company outside of PRC. A lower withholding income
tax rate of 5% is applied if the FIE’s immediate holding company is registered in Hong Kong or other jurisdiction that have
a tax treaty or arrangement with PRC and the FIE’s immediate holding company satisfies the criteria of beneficial owner as
set out in Circular Guoshuihan [2009] No. 601. Such withholding income tax was exempted under the previous income tax laws
and rules. On February 22, 2008, the Ministry of Finance (“MOF”) and the State Administration of Taxation (“SAT”)
jointly issued a circular which stated that FIEs that generate earnings in or after 2008 and distribute those earnings to foreign
investors should pay the withholding tax. As stipulated in the EIT Law, if the earnings of a tax resident enterprise are distributed
to another tax resident enterprise, the withholding tax can be exempted. According to EIT Law and EIT Implementing Regulations,
a tax resident enterprise is an entity incorporated in the PRC, or incorporated outside the PRC but its “place of effective
management” is in the PRC. The Company assessed and concluded that it does not satisfy the definition of a tax resident enterprise.
The Company has further determined that its FIEs in PRC will not declare any dividend should the withholding tax on dividends be
applied. Accordingly, the Company did not record any withholding tax on the retained earnings of its FIEs in PRC for the years
ended December 31, 2017, 2018 and 2019.
The Group’s companies providing education services are
taxed as corporate enterprises as referred to above. Private schools or colleges operated for reasonable returns are subject to
income taxes at 25% after January 1, 2008 but are sometimes subject to deemed rates of income tax to be determined by the
relevant tax authorities. In certain cities, schools that were registered as requiring reasonable returns were subject to income
tax of 1.5% to 2.5% on gross revenue.
The principal regulations governing private education in China
are The Law for Promoting Private Education and The Implementing Rules for the Law for Promoting Private Education, or 2004 Implementing
Rules. The Standing Committee of the National People's Congress promulgated an amendment to The Law for Promoting Private Education
on November 7, 2016, which went into effect on September 1, 2017. Pursuant to this amendment, private schools not requiring reasonable
returns were treated in a similar manner to public schools and were generally not subject to income tax. To date, no separate regulations
or guidelines have been released on how to define reasonable return for the purposes of assessing a school’s tax status.
We currently do not believe it is likely that our schools and college would qualify as not-for-profit organizations and therefore
be exempt from corporate income tax under the EIT Law. The Group has recognized income tax payable for the above unrecognized tax
benefits because the obligation was considered probable. Please see Note 17(d) for the movement of uncertain tax position.
The U.S. Tax Cuts and Jobs Act (the “Tax Act”) was
enacted on December 22, 2017. The Tax Act makes significant changes to U.S. income tax law, including, but not limited to, reducing
the U.S. federal corporate income tax rate from 35 percent to 21 percent, and imposing a mandatory one-time tax on accumulated
earnings of foreign subsidiaries.
On December 22, 2017, the SEC staff issued Staff Accounting
Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have
the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting
for certain income tax effects of the Tax Act. The Company has completed the assessment of the income tax effect of the Tax Act
and there were no adjustments recorded to the provisional amounts.
The principal components of the Group’s deferred tax assets
and liabilities were as follows:
For entities incorporated in Hong Kong, net loss can be carried
forward indefinitely; for entity incorporated in Taiwan, net loss can be carried forward for ten years; for entity incorporated
in U.S., net loss generated before 2018 can be carried forward for twenty years, net loss generated in 2018 and onward can be carried
forward indefinitely; for entity incorporated in P.R.C. mainland, net loss can be carried forward for five years.
The following represents the amounts and expiration dates of
operating loss carried forwards for tax purpose:
The following represents a roll-forward of the valuation allowance
for each of the years:
Reconciliation between total income tax expense and the amount
computed by applying the PRC statutory income tax rate to income before income taxes is as follows:
A reconciliation of the beginning and ending amount of liabilities
associated with uncertain tax positions is as follows:
The amounts of unrecognized tax benefits
listed above are based on the recognition and measurement criteria of ASC Topic 740, and the balance is presented as non-current
liability in the consolidated financial statements since December 31, 2019 due to the fact that the Group does not anticipate payments
of cash within one year.
The Group recognizes interest and penalty
charges related to uncertain tax positions as necessary in the provision for income taxes. The Group has a liability for accrued
interest of RMB nil as of December 31, 2018 and 2019, respectively.
However, due to the uncertain and complex
application of tax regulations, it is possible that the ultimate resolution of uncertain tax positions may result in liabilities
which could be materially different from these estimates. In such an event, the Group will record additional tax expense or tax
benefit in the period in which such resolution occurs. As of December 31, 2017, 2018 and 2019, there are RMB 24,619, RMB 26,246
and RMB 32,152 unrecognized tax benefits that if recognized would affect the annual effective tax rate. The Group does not expect
that the position of unrecognized tax benefits will significantly increase or decrease within 12 months of December 31, 2019.
In accordance with PRC Tax Administration Law on the Levying
and Collection of Taxes, the PRC tax authorities generally have up to five years to assess underpaid tax plus penalties and interest
for PRC entities’ tax filings. In the case of tax evasion, which is not clearly defined in the law, there is no limitation
on the tax years open for investigation. Accordingly, the PRC entities remain subject to examination by the tax authorities based
on the above.
Basic net income (loss) per share is computed using the weighted
average number of the ordinary shares outstanding during the period. Diluted net income (loss) per share is computed using the
weighted average number of ordinary shares and ordinary equivalent shares outstanding during the period. Due to the loss for the
year ended December 31, 2019, approximately 68,978 restricted shares were excluded from the calculation of diluted net loss per
share, because the effect would be anti-dilutive. 476,960 and 329,166 share options and restricted shares were included in the
calculation of diluted income per share for year of 2017 and 2018 respectively.
The Group has operating leases for classrooms, dormitories,
corporate offices and certain equipment; and finance lease for a teaching building used by Shenyang K-12 School. For the finance
lease, all lease payments have been paid to the landlord from the commencement date of the lease.
The Group’s lease agreements do not have a discount rate
that is readily determinable. The incremental borrowing rate is determined at lease commencement or lease modification and represents
the rate of interest the Group would have to pay to borrow on a collateralized basis over a similar term and amount equal to the
lease payments in a similar economic environment. The weighted-average discount rate was calculated using the discount rate for
the lease that was used to calculate the lease liability balance for each lease and the remaining balance of the lease payments
for each lease as of December 31, 2019.
The weighted-average remaining lease terms were calculated using
the remaining lease term and the lease liability balance for each lease as of December 31, 2019.
As of December 31, 2019, the Group had no material operating
or finance leases that had not yet commenced.
The Group subleases dormitories and offices to third parties
under operating leases. Sublease income are recorded as a reduction of lease expense in the consolidated statements of operations.
For the years ended December 31, 2017, 2018 and 2019,
gross sublease income of the Group were RMB 385, RMB 4,131 and RMB 3,064, respectively.
As of December 31, 2019, the Company did not have any other
significant indemnification claims that were probable or reasonably possible.
The Group offers a wide range of educational and career enhancement
services and products focusing on improving educational opportunities for primary and advanced degree school students and employment
opportunities for university graduates.
The Group’s chief operating decision maker (“CODM”)
has been identified as the CEO who reviews the financial information of separate operating segments when making decisions about
allocating resources and assessing performance of the Group. In the years before 2019, the Group used to have four operating segments
which were Tutoring, K-12 Schools, Career Enhancement and Others. These four operating segments were also identified as reportable
segments. The reportable segments of Tutoring and K-12 schools were grouped under the “Better Schools” division because
the segments offer programs and education services using a standards-based curriculum that enables students to improve their academic
results and educational opportunities. The reportable segment of Career Enhancement was classified under the “Better Jobs”
division because the segment offers services and programs that facilitate post-secondary students to obtain more attractive employment
opportunities. The reportable segment of Others represents the intellectualized operational services provided, and was classified
under the “Others” division. This segment provide intellectualized operational services to corporate clients, colleges
and universities, which is to design, purchase, modify and integrate electronic equipment and devices, and develop mobile APP for
end users to utilize office facilities, manage resources and administrative matters according to our clients’ office or teaching
space, human resource deployments and office/classroom administration requirements.
From 2019 and onwards, the Group has changed its management
approach in the way to organize segments for making operating decisions and assessing performance after the shift of business development
focus. In the past few years, in order to organize resources and enhance future growth, the management has suspended some non-performing
business units in Tutoring segment. On the other hand, with the higher demand in tertiary level education in China market and the
acquisition of Bay State College, the management decided to shift the business focus to career enhancement educational services
and empowering students with the drive and skills to build a better career. Considering the business development trends and shift,
the management decided to reorganize the reportable segments into two segments: 1) K-12 schools, 2) CP&CE Programs. There are
no changes in the classification of K-12 schools. CP&CE Programs include the previous Tutoring, Career Enhancement and Others.
There are no changes on the measurement methods used to determine reported segment profit or loss and total assets along with these
reportable segments. The Group has restated the corresponding items of segment information for the years of 2017 and 2018 according
to the new reportable segments as blow.
The accounting policies of the segments are the same as those
described in the summary of significant accounting policies. The CODM evaluates performance based on each reporting segment’s
revenues, cost of revenues, gross profit, operating expenses, other income (expense), (loss) income before income tax and non-controlling
interests and total assets as follows.
The following table summarizes the net revenues and long-lived
assets for the years ended and as of December 31, 2017, 2018 and 2019 by geographic areas.
Net revenues are attributed to areas based on the location where
the service is performed to the customers. Other than in PRC and the United States, the Group does not conduct business in any
other individual country.
Long-lived assets represent property and equipment, land use
rights, intangible assets, goodwill, operating and finance lease right-of-use assets for each geographic area.
Full time employees of the Group in the
PRC participate in a government-mandated multiemployer defined contribution plan pursuant to which certain pension benefits, medical
care, unemployment insurance, employee housing fund and other welfare benefits are provided to qualified employees. PRC labor
regulations require the Group to accrue for these benefits based on certain percentages of the employees’ salaries. The
relevant local labor bureau is responsible for meeting all retirement benefit obligations; hence, the Group has no further commitments
beyond its monthly contributions. The total contributions for such employee benefits were RMB 35,241, RMB 37,594 and RMB 44,456
for the years ended December 31, 2017, 2018 and 2019, respectively.
In accordance with the Regulations on Enterprises with Foreign
Investment of PRC and their articles of association, the Company’s subsidiaries in the PRC, being foreign invested enterprises
established in PRC, are required to provide for certain statutory reserves, namely general reserve, enterprise expansion reserve
and staff welfare and bonus reserve, all of which are appropriated from net profit as reported in the Group’s PRC statutory
accounts. The Company’s subsidiaries in the PRC are required to allocate at least 10% of their after-tax profits to the general
reserve fund until such fund has reached 50% of their respective registered capital. Appropriations to the enterprise expansion
fund and staff welfare and bonus fund are at the discretion of the board of directors of the Company’s subsidiaries.
In accordance with the PRC Company Laws, the Group’s VIEs
established in PRC make appropriations from their after-tax profits as reported in their PRC statutory accounts to non-distributable
reserves, namely statutory surplus reserve, statutory public welfare reserve and discretionary surplus reserve. The Company’s
or its non-school subsidiaries’ VIEs are required to allocate at least 10% of their after-tax profits to the statutory surplus
reserve until the reserve reaches 50% of each entity’s registered capital. Appropriation to the statutory public welfare
fund is 5% to 10% of their after-tax profits as reported in the PRC statutory accounts. Effective from January 1, 2006, under
the revised PRC Company Laws, an appropriation to the statutory public welfare reserve is no longer mandatory. Appropriation to
the discretionary surplus reserve is made at the discretion of the board of directors of the VIEs.
In accordance with the Law of Promoting Private Education (2003),
the Group’s school subsidiaries in PRC must make appropriations from their after-tax profits as reported in their PRC statutory
accounts to non-distributable reserves, namely the education development reserve, which requires annual appropriations of at least
25% of after-tax profits or the increase in net assets of private education schools (as determined under accounting principles
generally accepted in the PRC at each year-end) to the statutory reserve.
The following table presents the Group’s appropriations
to the general reserve fund, statutory surplus reserve and education development reserve as of December 31, 2018 and 2019:
In 2017, the Group entered into one acquisition agreement. The
details are as follow:
On November 20, 2017, Ambow BSC Inc. acquired 100% of the outstanding
shares of common stock of Bay State College, Inc., which owns and operates Bay State College (the “BSC”), a higher
education institution offering career-focused post-secondary education with Associates and Bachelor’s programs in Business,
Information Technology, Healthcare, Criminal Justice and Fashion. The acquisition date is determined based on the date at which
the Group obtained control of the acquiree.
Management of the Group is responsible for determining the fair
value of consideration transferred, assets acquired, liabilities assumed and intangible assets identified as of the acquisition
date and considered a number of factors including valuations from an independent appraiser.
The total purchase price of RMB 22,830 (US$ 3,494) consisted
of cash consideration of RMB 16,064 (US$ 2,459) and contingent consideration of RMB 6,766 (US$ 1,036). The contingent consideration
payable was subject to the performance of the acquiree in the future years. The fair value of the contingent consideration was
estimated by using income approach, which was the discounted future payment determined by the projected EBITDA of BSC during the
assessing period. Please also see Note 29-Fair Value Measurements. As of December 31, 2019, the fair value of the contingent consideration
was nil as the Group lowered projected EBITDA of BSC during the assessing period. The decreased RMB 5,444 and 1,322 was recognized
as gain from fair value change of contingent consideration payable in the years of 2018 and 2019, respectively.
The purchase price exceeded the fair value of the net tangible
assets acquired from Bay State College Inc. and as a result, the Group recorded goodwill in connection with this transaction. The
goodwill acquired resulted primarily from the Group’s expected synergies from the integration of businesses acquired into
the Group’s service and product offerings.
The Group used the following valuation methodologies to value
assets acquired, liabilities assumed and intangible assets identified:
Acquisition-related costs incurred for the acquisitions have
been expensed as incurred in general and administrative expense.
The purchase price was allocated based on the fair values of
the acquired assets and liabilities as of the acquisition date as follows:
Of the RMB 7,358 of acquired intangible assets, RMB 5,920 was
assigned to brand that are not subject to amortization. The remaining amortizable intangible assets of RMB 1,438 have a useful
life of 3.3 years. Goodwill is not deductible for tax purposes. For the purposes of presenting operating segments, Bay State College
Inc. and the goodwill arising on its acquisition are classified within the CP&CE Programs.
The net revenue and net income arising from acquisition of Bay
State College Inc. made in period from acquisition date to December 31, 2017 that are included in the Group’s consolidated
income statement for the year ended December 31, 2017 were RMB 6,430 and RMB 295, respectively. The RMB 16,064 (US$ 2,459) of cash
consideration less cash acquired of RMB 15,231 (US$ 2,331) resulted in a net cash outlay of RMB 833 (US$128).
In February 2019, Beijing Xinganxian entered into an agreement
with Beijing Jinghan Taihe Education Technology Co., Ltd. (“Jinghan Taihe”) to operate its ten branch companies located
in Beijing for ten years from March 1, 2019 to February 28, 2029. Such ten branch companies operate ten centers to provide after
school tutoring services to primary and secondary students. According to the Company’s assessment, starting from April 1,
2019 (“the acquisition date”), Beijing Xinganxian had the right to determine all business activities and to receive
the expected residual return, also had the obligation to absorb expected loss of ten branch companies. Therefore Beijing Xinganxian
obtained substantial controls over the ten branch companies from April 1, 2019. Beijing Xinganxian also has the sole discretion
to renew the agreement for another ten years.
The Company applied the acquisition method under ASC 805 Business
Combinations regarding the consolidation of the ten branch companies. Pursuant to the agreement, on February 28, 2029, Jinghan
Taihe shall pay to Beijing Xinganxian: (i) RMB 27,871 which is the balances of deferred revenue of the ten branch companies as
of the acquisition date; (ii) the rental, payroll and welfare payables related to the contracts entered into by Jinghan Taihe as
of and after the acquisition date that is going to be paid by Beijing Xinganxian, the estimated amount is RMB 14,342 as of acquisition
date. Purchase price of this arrangement is negative consideration, which include: the present value of item (i) and (ii) above
in the amount of RMB 5,878 and RMB 3,222, respectively.
The purchase price was allocated based on the fair values of
the acquired assets and liabilities as of the acquisition date as follows:
The Group used the following valuation methodologies to value
assets acquired, liabilities assumed and intangible assets identified:
Note (i) In 2018 and 2019, have reached
agreements to net off and settle the amounts due to Shangdong Shichuang Software Engineering Co., Ltd. in the amount of RMB 1,013
and RMB 572, respectively.
Note (ii) The compensation was for the
services from the non-executive directors of the board to the Company for the year ended December 31, 2018. Compensation of the
non-executive directors for the year ended December 31, 2019 was disclosed in Item 6 Directors, Senior Management and Employees
– B. Compensation.
In 2018, to improve payable management and internal controls,
the Company reviewed the possibility to pay and aging of payables of its subsidiaries and schools on a quarterly basis. As a result,
the Company derecognized payables to Suzhou Wenjian in amount of RMB 9,150 since Suzhou Wenjian was closed in the year and did
not claimed and pursued the debt before its closure. The Company also derecognized payables to other creditors in a collective
amount of RMB 6,076 as those payables were all with long aging over three to seven years and no claim of debts have been received
by the Company as of December 31, 2018, which led to expiration of statute of limitation of those payables. The Company believes
the possibilities to pay are remote and write-off those accrued expenses in 2018 accordingly.
On September 30, 2017, the Company sold the 100% equity interest
in 21st Training Center to a third party, with consideration of RMB 1 yuan, and the third party assumed all assets and liabilities
of 21st Training Center as of September 30, 2017. In connection with the disposal, 21st Training Center also waived the net payables
with the Company. The Company received RMB 1 yuan as consideration in the transaction. The disposal was not a strategic shift of
the business and this transaction would not have major impact on Ambow’s business, therefore this transaction did not qualify
as discontinued operation. As of disposal date on September 30, 2017, the net liabilities of 21st Training Center was RMB 4,540.
In September 2017, the Company recognized a gain of RMB 4,540 on the disposal accordingly.
In 2018 and 2019, the Company closed several subsidiaries and
schools through the deregistration procedures of local governmental and corporate service institutions. Those subsidiaries and
schools had no business operations and were in accumulated deficit for years. As a result, the Company recognized gain from deregistration
of those subsidiaries and schools in a collective amount of RMB 2,858 and RM 1,841 in the years of 2018 and 2019, respectively.
In 2016, the Group established Suzhou Jiaxue under Ambow Zhixin,
with a non-controlling economic interest of 40% amounting to RMB 400 from one individual shareholder and one corporate shareholder.
Also the Group established Huanyu Liren under Kunshan Ambow, with a non-controlling economic interest of 40% amounting to RMB 396
from one individual shareholder.
In 2017, the 40% economic interests of Huanyu Liren and Suzhou
Jiaxue, which was deficit of RMB 758 in total, were derecognized because respective minority shareholders sold their non-controlling
interests to the Group. The total consideration for buy-out such non-controlling interests was RMB 798 and the difference between
the consideration and the carrying amount of non-controlling interest derecognized was recorded as an adjustment to additional
paid-in capital. The Group held 100% economic interests in Huanyu Liren and Suzhou Jiaxue thereafter.
In 2018, the 10% economic interests of Shenyang K-12 owned by
Shenyang Hanwen Classic Books Publishing Co., Ltd., which was RMB 1,885, was derecognized because the Group acquired such non-controlling
interests in court auction. The total consideration for buy-out such non-controlling interests was RMB 4,504 and the difference
between the consideration and the carrying amount of non-controlling interest derecognized was recorded as an adjustment to additional
paid-in capital. The Group held 100% economic interests in Shenyang K-12 thereafter. In addition, the Group established Beijing
Ambow-Cowain Education and Technology Co., Ltd., with a non-controlling economic interest of 49% collectively amounting to RMB
1,470 from one corporate shareholder and one individual shareholder.
In 2019, the Group obtained 51% ownership
of Zhong An Ambow and recognized related non-controlling interest of 49% collectively amounting to RMB 1,285. In December 2019,
the Group closed Shanghai Tongguo Education Technology Co., Ltd. and derecognized a non-controlling economic interest of 40% collectively
amounting to RMB 306.
The Group adopted ASC Topic 820, “Fair Value Measurements
and Disclosures”, which defines fair value, establishes a framework for measuring fair value and expands financial statement
disclosure requirements for fair value measurements.
ASC Topic 820 defines fair value as the price that would be
received from the sale of an asset or paid to transfer a liability (an exit price) on the measurement date in an orderly transaction
between market participants in the principal or most advantageous market for the asset or liability. ASC Topic 820 specifies a
hierarchy of valuation techniques, which is based on whether the inputs into the valuation technique are observable or unobservable.
The hierarchy is as follows:
Level 1-Valuation techniques in which all significant inputs
are unadjusted quoted prices from active markets for assets or liabilities that are identical to the assets or liabilities being
measured.
Level 2-Valuation techniques in which significant inputs include
quoted prices from active markets for assets or liabilities that are similar to the assets or liabilities being measured and/or
quoted prices for assets or liabilities that are identical or similar to the assets or liabilities being measured from markets
that are not active. Also, model-derived valuations in which all significant inputs and significant value drivers are observable
in active markets are Level 2 valuation techniques.
Level 3-Valuation techniques in which one or more significant
inputs or significant value drivers are unobservable. Unobservable inputs are valuation technique inputs that reflect the Group’s
own assumptions about the assumptions that market participants would use in pricing an asset or liability.
Management of the Group is responsible for determining the fair
value of equity issued, assets acquired, liabilities assumed and intangibles identified as of the acquisition date and considered
a number of factors including valuations from independent appraiser.
When available, the Group uses quoted market prices to determine
the fair value of an asset or liability. If quoted market prices are not available, the Group measures fair value using valuation
techniques that use, when possible, current market-based or independently-sourced market parameters, such as interest rates and
currency rates. The following is a description of the valuation techniques that the Group uses to measure the fair value of assets
and liabilities that are measured and reported at fair value on a recurring basis:
At December 31, 2019 and 2018 information about inputs
into the fair value measurements of the assets and liabilities that the Group makes on a recurring basis were as follows:
The following table presents the quantitative
information about the Group’s Level 3 fair value measurements of intangible assets on a recurring basis in 2018 and 2019,
which utilize significant unobservable internally-developed inputs:
The following table presents the quantitative information about
the Group’s Level 3 fair value measurements of contingent consideration payable on a recurring basis in 2018 and 2019, which
utilize significant unobservable internally-developed inputs:
Financial instruments that potentially expose the Group to concentrations
of credit risk consist primarily of cash and cash equivalents, accounts receivable, other receivable and other non-current assets.
The Group places its cash and cash equivalents and term deposits with financial institutions with high-credit ratings. The Group
conducts credit evaluations of its customers and suppliers, and generally does not require collateral or other security from them.
The Group evaluates its collection experience and long outstanding balances to determine the need for an allowance for doubtful
accounts.
No single customer represented 10% or more of the Group’s
total revenues for the years ended December 31, 2017, 2018 and 2019.
No single supplier represented 10% or more of the Group’s
total costs of sales for the years ended December 2017, 2018 and 2019.
A summary of the debtors who accounted for 10% or more of the
Group’s consolidated accounts receivable, prepaid and other current assets and other non-current assets was as follows:
The Chinese market in which the Group operates exposes the Group
to certain macroeconomic and regulatory risks and uncertainties. These uncertainties extend to the ability of the Group to provide
educational and career enhancement services through contractual arrangements in the PRC since this industry remains highly regulated.
The Chinese government may issue from time to time new laws or new interpretations on existing laws to regulate the education industry.
Regulatory risk also encompasses the interpretation by the tax authorities of current tax laws, the status of properties leased
for the Group’s operations and the Group’s legal structure and scope of operations in the PRC, which could be subject
to further restrictions resulting in limitations on the Group’s ability to conduct business in the PRC.
In June 2019, the Company entered into a Membership Interest
Purchase Agreement (“MIPA”) with Laureate Education (“the seller”), to acquire 100% of the outstanding
membership interest in NewSchool of Architecture and Design, LLC. NewSchool is a for-profit institution of higher education based
in San Diego, California, that offers undergraduate and graduate degrees and non-degree certificates in Architecture, Design and
Construction Management. This acquisition was closed in March 2020. According to the calculation methodology of the purchase price
pursuant to the MIPA and estimates from the seller, the estimated closing purchase price was 1 dollar at the closing date and
subject to later adjustment which would be agreed by the Company and seller. The Company is evaluating the final purchase price
and accounting treatment upon such acquisition.
In January 2020, the Group went into additional
loan agreements with Dongyuan. The principles are RMB 9,000, RMB 7,000 and RMB 2,900, respectively. According to the loan agreements,
the annual interest rates are 5%; the due dates of loans of RMB 9,000 and RMB 7,000 are March 31, 2020, and March 25, 2020 for
the loan of RMB 2,900. In March 2020, the Group went into another loan agreement with Dongyuan. The principle is RMB 1,000, with
the annual interest rate of 5% and due date on March 9, 2021.The loan agreements were without any requirements for collateral or
pledge on the loans. On April 8, 2020, the Group entered into a term sheet with Dongyuan to agree that the outstanding loans
and interests due would be turned into part of consideration for the Group to acquire a no-less-than 51% equity interest of Hebi
School depending on both parties’ further agreement.
Most recently in early 2020, in response
to the global spread of the pandemic of COVID-19, business and schools in China have been suspended since the end of January 2020
as part of quarantine measures to contain the pandemic. Our K-12 schools and training centers in China have been closed since then
and the reopening time is postponed until further notice from local authorities. Bay State College in U.S. is currently moving
all courses online in response to social distancing needs and precautionary measures. Consequently, the COVID-19 pandemic may adversely
affect our business operations and the Group’s financial condition and operating results for 2020, including but not limited
to negative impact to the Group’s total revenues, delayed collection of tuition and fees, slower collection of accounts receivables
and additional allowance for doubtful accounts and impairment to the Group’s long-lived assets. The Group are taking a serious
of measures to respond to the negative impact from the pandemic, including offering online programs and services, cut down compensation
cost, reducing other cost and expenses for savings, negotiating for relief or postpone of rentals for this special period of time
and seeking for certain credit facilities etc. Moreover, along with the control of the pandemic in China, local authority of Jiangsu
Province have announced the reopening time schedule of local K-12 schools in the beginning of April 2020, which include Shuyang
K-12 within the Group. Other provinces of China are estimated to follow and announce their own reopening time schedules of schools
in the next. The collection of tuition and fees are expected to gradually recover accordingly. Because of the significant uncertainties
surrounding the COVID-19 pandemic, the extent of the business disruption and the related financial impact cannot be reasonably
estimated at this time.
The Company does not identify any other events with
material financial impact on the Group’s consolidated financial statements.
Relevant PRC statutory laws and regulations permit the payment
of dividends by the Group’s PRC VIEs and subsidiaries only out of their retained earnings, if any, as determined in accordance
with PRC accounting standards and regulations. In addition, PRC laws and regulations require that annual appropriations of certain
percentages of the after-tax income or the increase in net assets for the year (as determined under accounting principles generally
accepted in the PRC) should be set aside at each year end as a reserve prior to the payment of dividends. As a result of these
PRC laws and regulations, the Group’s PRC VIEs and subsidiaries are restricted in their ability to transfer a portion of
their net assets to the Group either in the form of dividends, loans or advances. The Group’s restricted net assets, comprising
of the registered paid in capital and statutory reserve of Company’s PRC subsidiaries and VIEs, were RMB 828,461 and RMB
601,547 as of December 31, 2018 and 2019, respectively.
The condensed financial statements of the
Parent 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 investments in its subsidiaries and VIEs.
The Parent Company, its subsidiaries and
VIEs were included in the consolidated financial statements whereby the inter-company balances and transactions were eliminated
upon consolidation. For the purpose of the Parent Company’s condensed financial statements, its investments in subsidiaries
are reported using the equity method of accounting.
The Company is a Cayman Islands company, 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 Company. 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, 2018 and 2019, there were no material
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, if any.