UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
☐ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2020
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to
_____________.
OR
☐ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report:
Commission file number: 001-38619
Wah Fu Education Group Ltd.
(Exact name of Registrant as Specified in its Charter)
British Virgin Islands
(Jurisdiction of Incorporation or Organization)
L207b, Hesheng Fortune Plaza, No.13 Deshengmenwai Street
Xicheng District,Beijing, China 100088
(Address of Principal Executive Offices)
Xinghui Yang
Tel: + 86 10 57925024 Fax: + 86 10 85171378
L207b, Hesheng Fortune Plaza, No.13 Deshengmenwai Street
Xicheng District,Beijing, China 100088
(Name, Telephone, E-mail and/or Facsimile Number and Address of
Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b)
of the Act:
|
Title of Each Class |
|
Trading symbol |
|
Name of Each Exchange On Which Registered |
| Ordinary shares, par value US$0.01 per share |
|
WAFU |
|
NASDAQ
Capital Market |
Securities registered or to be registered pursuant to Section 12(g)
of the Act:
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act:
None
(Title of Class)
The number of outstanding shares of each of the issuer’s classes of
capital or common stock as of August 13, 2020 was: 4,381,033
ordinary shares, par value $0.01 per share.
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ☒
If this report is an annual or transition report, indicate by check
mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted
electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the
registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer,
or an emerging growth company. See definition of “large accelerated
filer,” “accelerated filer” and “emerging growth company” in Rule
12b-2 of the Exchange Act. (Check one):
| Large
accelerated filer ☐ |
Accelerated
filer ☐ |
Non-accelerated
filer ☒ |
Emerging
growth company ☒ |
If an emerging growth company that prepares its financial
statements in accordance with U.S. GAAP, indicate by check mark if
the registrant has elected not to use the extended transition
period for complying with any new or revised financial accounting
standards† provided pursuant to Section 13(a) of the Exchange
Act. ☐
† The term “new or revised financial accounting standard” refers to
any update issued by the Financial Accounting Standards Board to
its Accounting Standards Codification after April 5, 2012.
Indicate by check mark which basis of accounting the registrant has
used to prepare the financial statements included in this
filing:
| ☒
U.S. GAAP |
☐
International Financial Reporting Standards as issued |
☐
Other |
| |
by
the International Accounting Standards Board |
|
If “Other” has been checked in response to the previous question,
indicate by check mark which financial statement item the
registrant has elected to follow: Item 17 ☐ Item
18 ☐
If this is an annual report, indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes ☐ No ☒
WAH FU EDUCATION GROUP LIMITED
FORM 20-F ANNUAL REPORT
TABLE OF CONTENTS
PART I
CERTAIN INFORMATION
In this annual report on Form 20-F, unless otherwise indicated,
“we,” “us,” “our,” the “Company” and “Wah Fu” refer to Wah Fu
Education Group Limited, a company organized in the British Virgin
Islands, its subsidiaries and variable interest entities.
Unless the context indicates otherwise, all references to “China”
and the “PRC” refer to the People’s Republic of China, all
references to “Renminbi” or “RMB” are to the legal currency of the
People’s Republic of China and all references to “U.S. dollars,”
“dollars” and “$” are to the legal currency of the United States.
This annual report contains translations of Renminbi amounts into
U.S. dollars at specified rates solely for the convenience of the
reader. We make no representation that the Renminbi or U.S. dollar
amounts referred to in this report could have been or could be
converted into U.S. dollars or Renminbi, as the case may be, at any
particular rate or at all. On March 31, 2020, the cash buying rate
announced by the People’s Bank of China was RMB7.07 to $1.00.
FORWARD-LOOKING STATEMENTS
This report contains “forward-looking statements” for purposes of
the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 that represent our beliefs, projections and
predictions about future events. All statements other than
statements of historical fact are “forward-looking statements,”
including any projections of earnings, revenue or other financial
items, any statements of the plans, strategies and objectives of
management for future operations, any statements concerning
proposed new projects or other developments, any statements
regarding future economic conditions or performance, any statements
of management’s beliefs, goals, strategies, intentions and
objectives, and any statements of assumptions underlying any of the
foregoing. Words such as “may”, “will”, “should”, “could”, “would”,
“predicts”, “potential”, “continue”, “expects”, “anticipates”,
“future”, “intends”, “plans”, “believes”, “estimates” and similar
expressions, as well as statements in the future tense, identify
forward-looking statements.
These statements are necessarily subjective and involve known and
unknown risks, uncertainties and other important factors that could
cause our actual results, performance or achievements, or industry
results, to differ materially from any future results, performance
or achievements described in or implied by such statements. Actual
results may differ materially from expected results described in
our forward-looking statements, including with respect to correct
measurement and identification of factors affecting our business or
the extent of their likely impact, and the accuracy and
completeness of the publicly available information with respect to
the factors upon which our business strategy is based or the
success of our business.
Forward-looking statements should not be read as a guarantee of
future performance or results, and will not necessarily be accurate
indications of whether, or the times by which, our performance or
results may be achieved. Forward-looking statements are based on
information available at the time those statements are made and
management’s belief as of that time with respect to future events,
and are subject to risks and uncertainties that could cause actual
performance or results to differ materially from those expressed in
or suggested by the forward-looking statements. Important factors
that could cause such differences include, but are not limited to,
those factors discussed under the headings “Risk Factors”,
“Operating and Financial Review and Prospects,” and elsewhere in
this report.
ITEM 1. IDENTITY OF
DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not Applicable.
ITEM 2. OFFER
STATISTICS AND EXPECTED TIMETABLE
Not Applicable.
ITEM 3. KEY
INFORMATION
3.A. Selected Financial Data
The following selected financial information should be read in
connection with, and is qualified by reference to, our consolidated
financial statements and their related notes and the section
entitled “Operating and Financial Review and Prospects” included
elsewhere in this annual report. The consolidated statements of
operations and other comprehensive income (loss) data for the
fiscal years ended March 31, 2018, 2019 and 2020 and the
consolidated balance sheets data as of March 31, 2018, 2019 and
2020 are derived from audited consolidated financial statements
included elsewhere in this annual report. Our historical results
for any prior period are not necessarily indicative of results to
be expected in any future period.
Selected Consolidated Statements of Operations and Other
Comprehensive Income (Loss) Data:
| |
|
For the Year Ended March 31, |
|
| |
|
2020 |
|
|
2019 |
|
|
2018 |
|
| Revenues |
|
$ |
5,637,370 |
|
|
$ |
5,358,023 |
|
|
$ |
5,967,896 |
|
| Gross profit |
|
$ |
2,250,405 |
|
|
$ |
2,503,644 |
|
|
$ |
3,738,400 |
|
| Operating expenses |
|
$ |
3,821,589 |
|
|
$ |
3,742,235 |
|
|
$ |
2,665,906 |
|
| Income from operations (loss) |
|
$ |
(1,571,184 |
) |
|
$ |
(1,238,591 |
) |
|
$ |
1,072,494 |
|
| Provision (benefit) for Income
taxes |
|
$ |
212,498 |
|
|
$ |
(96,804 |
) |
|
$ |
92,023 |
|
| Net income (loss) |
|
$ |
(1,641,087 |
) |
|
$ |
(1,018,527 |
) |
|
$ |
1,203,477 |
|
Selected Consolidated Balance Sheets Data:
| |
|
As of March 31, |
|
| |
|
2020 |
|
|
2019 |
|
|
2018 |
|
| Current assets |
|
$ |
10,250,785 |
|
|
$ |
6,837,869 |
|
|
$ |
7,715,377 |
|
| Total assets |
|
$ |
12,565,279 |
|
|
$ |
8,482,654 |
|
|
$ |
9,607,704 |
|
| Current liabilities |
|
$ |
2,904,555 |
|
|
$ |
1,784,951 |
|
|
$ |
1,434,391 |
|
| Total liabilities |
|
$ |
3,266,150 |
|
|
$ |
1,784,951 |
|
|
$ |
1,434,391 |
|
| Total shareholders’ equity (net
assets) |
|
$ |
9,299,129 |
|
|
$ |
6,697,703 |
|
|
$ |
8,173,313 |
|
Selected Consolidated Statements of Cash Flows
Data:
| |
|
For the Year Ended March 31, |
|
| |
|
2020 |
|
|
2019 |
|
|
2018 |
|
| Net cash provided by (used
in) operating activities |
|
$ |
937,518 |
|
|
$ |
(513,310 |
) |
|
$ |
(441,647 |
) |
| Net cash provided by (used in)
investing activities |
|
$ |
(2,619,099 |
) |
|
$ |
7,370 |
|
|
$ |
(1,257,949 |
) |
| Net cash provided by financing
activities |
|
$ |
4,851,193 |
|
|
$ |
11,724 |
|
|
$ |
351,334 |
|
| Effect of exchange rate changes on
cash |
|
$ |
(263,439 |
) |
|
$ |
(301,021 |
) |
|
$ |
470,449 |
|
| Net increase (decrease) in cash |
|
$ |
2,906,173 |
|
|
$ |
(795,237 |
) |
|
$ |
(877,813 |
) |
| Cash, beginning of the year |
|
$ |
3,927,718 |
|
|
$ |
4,722,955 |
|
|
$ |
5,600,768 |
|
| Cash, end of the year |
|
$ |
6,833,891 |
|
|
$ |
3,927,718 |
|
|
$ |
4,722,955 |
|
3.B. Capitalization and Indebtedness
Not Applicable.
3.C. Reasons For The Offer And Use Of Proceeds
Not Applicable.
3.D. Risk Factors
An investment in our ordinary shares involves a high degree of
risk. You should carefully consider the risks and uncertainties
described below together with all other information contained in
this annual report, including the matters discussed under the
headings “Forward-Looking Statements” and “Operating and Financial
Review and Prospects” before you decide to invest in our ordinary
shares. We are a holding company with substantial operations in
China and are subject to a legal and regulatory environment that in
many respects differs from the United States. If any of the
following risks, or any other risks and uncertainties that are not
presently foreseeable to us, actually occur, our business,
financial condition, results of operations, liquidity and our
future growth prospects could be materially and adversely
affected.
Risks Related to Our Business and Industry
If we are not able to continue to attract students to
purchase our course packages and to increase the spending of our
students on our platforms, our business and prospects will be
materially and adversely affected.
Our ability to continue to attract students to purchase our course
packages and to increase their spending on our platforms are
critical to the continued success and growth of our business. This
in turn will depend on several factors, including our ability to
effectively market our platforms to a broader base of prospective
students, continue to develop, adapt or enhance quality educational
content and services to meet the evolving demands of our existing
or prospective students and expand our geographic reach. We must
also manage our growth while maintaining consistent and high
quality of course materials, and respond effectively to competitive
pressures. If we are unable to continue to attract students to
purchase our course packages and to increase the spending of our
students on our platform, our revenues may decline, which may have
a material adverse effect on our business, financial condition and
results of operations.
We may not be able to improve the content of our existing
courses, develop new courses or services in a timely or
cost-effective manner.
Historically, our core business centered on the exam preparation
courses offered through our B2C platform. We have since expanded
our course offerings to target students that not only need to take
self-taught higher education exams but who desire to educate
themselves in other fields of study, as well as a broader range of
situation-based education and test preparation targeting a wide
range of student demographics. We constantly update and improve the
content of our existing courses and develop new courses or services
to meet changing market demands. Revisions to our existing courses
and our newly developed courses or services may not be well
received by existing or prospective students. If we cannot respond
effectively to changes in market demands, our business may be
adversely affected. Even if we are able to develop new courses or
services that are well received, we may not be able to introduce
them in a timely or cost-effective manner. If we do not respond
adequately to changes in market demands, our ability to attract and
retain students may be impaired and our financial results could
suffer.
The effectiveness of our program depends on the success of our
personalized learning approach to self-taught and adult higher
education, which in turn is determined by the efficiency of our
data analytics know-how. We might not be able to continue to
efficiently monitor and analyze relevant data important for us to
provide a personalized learning experience for our students, or to
continue to drive our teaching training, curriculum development and
other operational aspects of our platforms.
The timing of the introduction of new courses is subject to risks
and uncertainties, including our ability to find and retain
teachers and attract students. Offering new courses or services or
modifying existing courses may require us to invest in content
development, increase marketing efforts and re-allocate resources
away from other uses. Unexpected technical, operational, logistical
or other problems could delay or prevent the introduction of one or
more new courses. Moreover, we cannot assure you that any of these
courses or programs will match the quality or popularity of those
developed by our competitors, achieve widespread market acceptance
or contribute the desired level of income. We may have limited
experience with the content of new courses or services and may need
to adjust our systems and strategies to incorporate new courses or
services into our existing course catalogue. If we are unable to
continuously improve the content of our existing courses, or offer
new courses or services in a timely or cost-effective manner, our
results of operations and financial condition could be adversely
affected.
Our business depends on the market recognition of our brand,
and if we are unable to maintain and enhance brand recognition, our
business, financial condition and results of operations may be
materially and adversely affected.
We believe that the market recognition of our “Huaxiadadi” brand
has significantly contributed to the success of our business and
that maintaining and enhancing our brand recognition is critical to
sustaining our competitive advantages. Our ability to maintain and
enhance brand recognition and reputation depends primarily on the
perceived effectiveness and quality of our curriculum and teachers,
as well as the success of our branding efforts. Our branding
efforts, however, may not be successful and we may incur
significant branding costs. If we are unable to maintain and
further enhance our brand recognition and reputation and promote
awareness of our platforms, we may not be able to maintain our
current level of students, fees and engage qualified teachers, and
our results of operations may be materially and adversely affected.
Furthermore, any negative publicity relating to our company, our
courses, teachers, platforms and services, regardless of its
veracity, could harm our brand image and in turn materially and
adversely affect our business and results of operations.
If we are unable to conduct sales and marketing activities
cost-effectively, our results of operations and financial condition
may be materially and adversely affected.
We incurred selling and marketing expenses of $1,314,403 and
$1,441,165 for the years ended March 31, 2020 and 2019,
respectively. As we continue to increase our marketing efforts for
our B2C service by establishing office in more provinces, we expect
our selling and marketing expenses to increase for the next three
years.
Our sales activities may not be well received by students and may
not result in the levels of sales that we anticipate and our free
trials may not be attractive to our prospective institution
customers and students. Furthermore, we may not be able to achieve
the operational efficiency necessary to increase the gross billings
per sales and marketing staff. We also may not be able to retain or
recruit experienced sales staff, or to efficiently train junior
sales staff. Further, marketing and branding approaches and tools
in the online education market in China are evolving, especially
for mobile platforms. This further requires us to enhance our
marketing and branding approaches and experiment with new methods
to keep pace with industry developments and student preferences.
Failure to refine our existing marketing and branding approaches or
to introduce new marketing and branding approaches in a
cost-effective manner may reduce our market share, cause our
revenues to decline and negatively impact our profitability.
Collectability of our accounts receivable has adversely
impacted our operating cash flow, and may continue to do
so.
Our net accounts receivable balance was $0.5 million and $1.78
million as of March 31, 2020 and 2019, respectively. As of March
31, 2020 and 2019, the accounts receivable derived from our B2B2C
service accounted for 100% and 29%, respectively, of the total
accounts receivable balance and the accounts receivable derived
from technological development and operation services accounted for
0% and 71%, respectively, of the total accounts receivable balance.
The aging of such accounts receivable ranged from 3 months to over
one year. As of March 31, 2020 and 2019, accounts receivable aging
more than 3 months and less than 12 months was $294,343 and
$1,069,340, respectively, and accounts receivable aging more than
12 months was $108 and $413,429, respectively.
Although we have been taking measures to mitigate the risk of not
being able to collect accounts in a timely fashion, including
negotiating and entering into repayment plans with certain major
customers, there is no assurance that we will be able to collect
accounts receivables pursuant to such plans. Such risk is even
higher due to the impact of the COVID-19 pandemic on certain
university and academic institution customers due to their business
closures required by government protocols. If the accounts
receivables cannot be collected in time, or at all, a significant
amount of bad debt expense will occur, and our business, financial
condition and results of operation may be materially and adversely
affected. In addition, if the market competition becomes more
intense and we extend more credit sales to our customers, the
balance of our accounts receivables may further increase, which may
adversely affect our financial conditions and operation
results.
If we are not able to continue to engage and retain qualified
teachers, we may not be able to maintain consistent teaching
quality on our platforms, and our business, financial condition and
operating results may be materially and adversely
affected.
Our teachers are critical to the learning experience of our
students and our reputation. We seek to engage highly qualified
teachers with strong teaching skills. We must provide competitive
pay and other benefits to attract and retain them. Furthermore, as
we continue to develop new course contents and lesson formats, we
may need to engage additional teachers with appropriate skill sets
or backgrounds to deliver instructions effectively. We cannot
guarantee that we will be able to effectively engage such teachers
quickly, or at all. Further, given other potential more attractive
opportunities for our quality teachers, over time, some of them may
choose to end their relationship with us. We have not experienced
major difficulties in engaging, or retaining qualified teachers in
the past, however, we may not always be able to engage and retain
enough qualified teachers to keep pace with our growth while
maintaining consistent education quality. We may also face
significant competition in engaging qualified teachers from our
competitors or from other opportunities that are perceived as more
desirable. A shortage of qualified teachers, a decrease in the
quality of our teachers’ performances, whether actual or perceived,
or a significant increase in the cost to engage or retain qualified
teachers would have a material adverse effect on our business,
financial condition and results of operations.
Our historical financial and operating results, growth rates
and profitability may not be indicative of future
performance.
We had a net loss of $1,641,087 and $1,018,527 for the years ended
March 31, 2020 and 2019, respectively. Any evaluation of our
business and our prospects must be considered in light of the risks
and uncertainties encountered by companies at our stage of
development. The private education market in China is still at the
development stage, which makes it difficult to evaluate our
business and future prospects. In addition, our past results may
not be indicative of future performance because of new businesses
developed or acquired by us. Furthermore, our results of operations
may vary from period to period in response to a variety of other
factors beyond our control, including general economic conditions
and regulations or government actions pertaining to the private
education service sector in China, changes in spending on private
education and non-recurring charges incurred under unexpected
circumstances or in connection with acquisitions, equity
investments or other extraordinary transactions. Due to these and
other factors, our historical financial and operating results,
growth rates and profitability as well as comparisons of our
semi-annual and annual operating results may not be indicative of
our future performance and you should not rely on them to predict
our future performance.
If our students’ level of performance deteriorates or
satisfaction with our services declines, the students may decide to
withdraw from our courses and request refunds and our business,
financial condition, results of operations and reputation would be
adversely affected.
The success of our business depends in part on our ability to
deliver a satisfactory learning experience and improved academic
results. Our services may fail to improve a student’s academic
performance and a student may perform below expectations even after
completing our courses. Additionally, student satisfaction with our
services may decline. A student’s learning experience may also
suffer if his or her relationship with our teachers does not meet
expectations. We generally offer refunds for the remaining classes
in a course to students who withdraw from the course. If a
significant number of students fail to improve their academic
performance after attending our courses or if their learning
experiences with us are unsatisfactory, they may decide to withdraw
from our courses and request refunds, and our business, financial
condition, results of operations and reputation would be adversely
affected.
We face significant competition, and if we fail to compete
effectively, we may lose our market share or fail to gain
additional market share, which would adversely impact our business,
financial condition and operating results.
The private education market in China is fragmented, rapidly
evolving and highly competitive. We face competition in self-taught
higher education and adult higher education, from existing online
and offline education companies. In the future, we may also face
competition from new entrants into the private education
market.
Some of our competitors may be able to devote more resources than
we can to the development and promotion of their education programs
and respond more quickly than we can to changes in student demands,
market trends or new technologies. In addition, some of our
competitors may be able to respond more quickly to changes in
student preferences or engage in price-cutting strategies. 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
pressure effectively, we may lose market share or be forced to
reduce our fees for course packages, either of which would
adversely impact our results of operations and financial
condition.
Our new courses and services may compete with our existing
courses and services.
We are constantly developing new courses and services to meet
changes in student demands, school curriculum, testing materials,
admission standards, market trends and technologies. While some of
the courses and services that we develop will expand our current
course catalogue and services and increase student enrollment,
others may compete with or render obsolete our existing courses and
services without increasing our total student enrollment. If we are
unable to increase our total student enrollment and profitability
as we expand our course catalogue and services, our business and
growth may be adversely affected.
If we fail to successfully execute our growth strategies, our
business and prospects may be materially and adversely
affected.
Our growth strategies include further enhancing our brand image to
grow our student base and increase student enrollments, developing
our online course catalogue and online education platforms,
increasing our market penetration, expanding into additional
markets, improving the learning experience of our students, and
advancing our technology. We may not succeed in executing these
growth strategies due to a number of factors, including the
following:
|
● |
we
may fail to identify, and effectively market our services in, new
markets with sufficient growth potential into which to expand our
network or promote new courses in existing markets; |
|
● |
we
may fail to further promote our platforms; |
|
● |
we
may not be able to continue to enhance our online offerings or
expand them to new markets, generate profits from online offerings,
or adapt online offerings to changing student needs and
technological advances such that we will continue to face
significant student acquisition costs in the markets we
enter; |
|
● |
we
may not be able to engage and retain a sufficient number of
qualified teachers and other personnel; |
|
● |
we
may fail to maintain the technology necessary to deliver a smooth
learning experience to our students; and |
|
● |
we
may not be able to identify suitable targets for acquisitions and
partnership. |
If we fail to successfully execute our growth strategies, we may
not be able to maintain our growth rate and our business and
prospects may be materially and adversely affected as a result.
We may not be able to adopt new technologies important to our
business.
Technology standards in internet and value-added telecommunications
services and products in general, and in online education in
particular, may change over time. If we fail to anticipate and
adapt to technological changes, our market share and our business
development could suffer, which in turn could have a material and
adverse effect on our financial condition and results of
operations. If we are unsuccessful in addressing any of the risks
related to new courses, our reputation and business may be
materially and adversely affected.
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.
Our business depends on the performance and reliability of the
internet infrastructure in China. In China, almost all access to
the internet is maintained through state-controlled
telecommunications operators. In many parts of China, the internet
infrastructure is relatively underdeveloped, and internet
connections are generally slower and less stable than in more
developed countries. We cannot assure you that the internet
infrastructure in China will remain sufficiently reliable for our
needs or that either country will ever develop and make available
more reliable internet access to our students and teacher. Any
failure to maintain the performance, reliability, security or
availability of our network infrastructure may cause significant
damage to our ability to attract and retain students and teachers.
Major risks involving our network infrastructure include:
|
● |
breakdowns
or system failures resulting in a prolonged shutdown of our
servers; |
|
● |
disruption
or failure in the national backbone networks in China, which would
make it impossible for students and teachers to access our online
and mobile platforms or to engage in live lessons; |
|
● |
damage
from natural disaster or other catastrophic event such as an
typhoon, volcanic eruption, earthquake, flood, telecommunications
failure, or other similar events in China; and |
|
● |
any
infection by or spread of computer viruses. |
Any network interruption or inadequacy that causes interruptions in
the availability of our online and mobile platforms or
deterioration in the quality of access to our online and mobile
platforms could reduce student satisfaction and result in a
reduction in the activity level of our students and the number of
students purchasing our course packages. Furthermore, increases in
the volume of traffic on our online and mobile platforms could
strain the capacity of our existing computer systems and bandwidth,
which could lead to slower response times or system failures. The
internet infrastructure in China may not support the demands
associated with continued growth in internet usage. This would
cause a disruption or suspension in our lesson delivery, which
could hurt our brand and reputation. We may need to incur
additional costs to upgrade our technology infrastructure and
computer systems in order to accommodate increased demand if we
anticipate that our systems cannot handle higher volumes of traffic
in the future.
All of our servers and routers, including backup servers, are
currently hosted by third-party service providers in Tianjin and
Wuhan in China. We also rely on major telecommunication companies
to provide us with data communications capacity primarily through
local telecommunications lines and internet data centers to host
our servers. We may not have access to alternative services and we
have no control over the costs of services. If the prices that we
pay for telecommunications and internet services in China rise
significantly, our gross profit and net income could be adversely
affected. In addition, if internet access fees or other charges to
internet users increase, our visitor traffic may decrease, which in
turn may harm our revenues.
Some students may decide not to continue taking our courses
for a number of reasons, including a perceived lack of improvement
in their performance in specific courses, a change in requirements
or general dissatisfaction with our programs, which may adversely
affect our business, financial condition, results of operations and
reputation.
The success of our business depends in large part on our ability to
retain our students by delivering a satisfactory learning
experience and improving their performance in the courses they have
taken. If students feel that we are not providing them the
experience they are seeking, they may choose not to renew their
existing packages. For example, our courses may fail to
significantly improve a student’s performance in the relevant
subject area. Student satisfaction with our programs may decline
for a number of reasons, many of which may not reflect the
effectiveness of our lessons and teaching methods. Students also
need to be self-motivated in order to successfully complete the
courses in which they enroll. If students’ performances decline as
a result of their own study habits or inability to learn the course
material, they may not purchase additional lessons from us or refer
other students to us, which could materially adversely affect our
business.
A student’s learning experience may also suffer if his or her
relationship with our teaching assistants does not meet
expectations. If a significant number of students fail to
significantly improve their proficiency in the applicable course
subject after taking our lessons or if their learning experiences
with us are unsatisfactory, they may not purchase additional
lessons from us or refer other students to us and our business,
financial condition, results of operations and reputation would be
adversely affected.
Our failure to protect our intellectual property rights may
undermine our competitive position, and litigation to protect our
intellectual property rights or defend against third party
allegations of infringement may be costly and
ineffective.
We believe that our copyrights, trademarks and other intellectual
property are essential to our success. We depend to a large extent
on our ability to develop and maintain the intellectual property
rights relating to our technology and course materials. We have
devoted considerable time and energy to the development and
improvement of our websites, mobile apps, and our course
materials.
We rely primarily on copyrights, trademarks, trade secrets and
other contractual restrictions for the protection of the
intellectual property used in our business. Nevertheless, these
provide only limited protection and the actions we take to protect
our intellectual property rights may not be adequate. Our trade
secrets may become known or be independently discovered by our
competitors. Third parties may in the future pirate our course
materials and may infringe upon or misappropriate our other
intellectual property. Infringement upon or the misappropriation
of, our proprietary technologies or other intellectual property
could have a material adverse effect on our business, financial
condition or operating results. Policing the unauthorized use of
proprietary technology can be difficult and expensive.
Also, litigation may be necessary to enforce our intellectual
property rights, protect our trade secrets or determine the
validity and scope of the proprietary rights of others. Such
litigation may be costly and divert management’s attention away
from our business. An adverse determination in any such litigation
would impair our intellectual property rights and may harm our
business, prospects and reputation. Enforcement of judgments in
China is uncertain, and even if we are successful in litigation, it
may not provide us with an effective remedy. In addition, we have
no insurance coverage against litigation costs and would have to
bear all costs arising from such litigation to the extent we are
unable to recover them from other parties. The occurrence of any of
the foregoing could have a material adverse effect on our business,
financial condition and results of operations.
We may encounter disputes from time to time relating to our
use of intellectual property of third parties.
We cannot be certain that third parties will not claim that our
business infringes upon or otherwise violates trademarks, patents,
copyrights or other intellectual property rights that they hold. We
cannot assure you that third parties will not claim that our
courses and marketing materials, online courses, products, and
platform or other intellectual property developed or used by us
infringe upon valid copyrights or other intellectual property
rights that they hold. We may be subject to claims by educational
institutions and organizations, content providers and publishers,
competitors and others on the grounds of intellectual property
rights infringement, defamation, negligence or other legal theories
based on the content of the materials that we or our teachers
distribute or use in our business operation. These types of claims
have been brought, sometimes successfully, against print
publications and educational institutions in the past. We may
encounter disputes from time to time over rights and obligations
concerning intellectual property, and we may not prevail in those
disputes.
Any claims against us, with or without merit, could be time
consuming and costly to defend or litigate, divert our management’s
attention and resources or result in the loss of goodwill
associated with our brand. If a lawsuit against us is successful,
we may be required to pay substantial damages and/or enter into
royalty or license agreements that may not be based upon
commercially reasonable terms, or we may be unable to enter into
such agreements at all. We may also lose, or be limited in, the
rights to offer some of our programs, parts of our platform and
products or be required to make changes to our course materials or
websites. As a result, the scope of our course materials could be
reduced, which could adversely affect the effectiveness of our
curriculum, limit our ability to attract new students, harm our
reputation and have a material adverse effect on our results of
operations and financial position.
Failure to protect confidential information of our teachers,
students and other customers against security breaches could damage
our reputation and brand and substantially harm our business and
results of operations.
A significant challenge to the online education industry is the
secure storage of confidential information and its secure
transmission over public networks. Most purchases of our course
packages are made through our website and our mobile apps. In
addition, online payments for our course packages are settled
through third-party online payment services. Maintaining complete
security for the storage and transmission of confidential
information on our technology platform, such as student names,
personal information and billing addresses, is essential to
maintaining student confidence.
We have adopted security policies and measures to protect our
proprietary data and student information]. However, advances in
technology, the expertise of hackers, new discoveries in the field
of cryptography or other events or developments could result in a
compromise or breach of the technology that we use to protect
confidential information. We may not be able to prevent third
parties, especially hackers or other individuals or entities
engaging in similar activities, from illegally obtaining such
confidential or private information we hold as a result of our
users’ visits to our website and use of our mobile apps. Such
individuals or entities obtaining our clients’ confidential or
private information may further engage in various other illegal
activities using such information. Any negative publicity regarding
our website’s or mobile apps’ safety or privacy protection
mechanisms and policies, and any claims asserted against us or
fines imposed upon us as a result of actual or perceived failures,
could have a material and adverse effect on our public image,
reputation, financial condition and results of operations.
Practices regarding the collection, use, storage, transmission and
security of personal information by companies operating over the
internet and mobile platforms have recently come under increased
public scrutiny. Increased regulation by the PRC government of data
privacy on the internet may occur and we may become subject to new
laws and regulations applying to the solicitation, collection,
processing or use of personal or consumer information that could
affect how we store and process the data of our teachers, students
and clients. We generally comply with industry standards and are
subject to the terms of our own privacy policies. Compliance with
any additional laws could be expensive, and may place restrictions
on the conduct of our business and the manner in which we interact
with our students and other clients. Any failure to comply with
applicable regulations could also result in regulatory enforcement
actions against us.
Significant capital and other resources may be required to protect
against information security breaches or to alleviate problems
caused by such breaches or to comply with our privacy policies or
privacy-related legal obligations. The resources required may
increase over time as the methods used by hackers and others
engaged in online criminal activities are increasingly
sophisticated and constantly evolving. Any failure or perceived
failure by us to prevent information security breaches or to comply
with privacy policies or privacy-related legal obligations, or any
compromise of security that results in the unauthorized release or
transfer of personally identifiable information or other student
data, could cause our students to lose trust in us and could expose
us to legal claims. Any perception by the public that online
transactions or the privacy of user information are becoming
increasingly unsafe or vulnerable to attacks could inhibit the
growth of online education services generally, which may negatively
impact our business prospects.
Our employees may engage in misconduct or other improper
activities or misuse our platforms, which could harm our
reputation.
We are exposed to the risk of employee fraud or other misconduct.
Employee misconduct could include intentionally failing to comply
with government regulations, engaging in unauthorized activities
and misrepresentation to our potential students and clients during
marketing activities, which could harm our reputation. Employee
misconduct could also involve improper use of our clients’ and
teachers’ sensitive or classified information, which could result
in regulatory sanctions against us and serious harm to our
reputation. Employee misconduct could also involve making payments
to government officials or third parties that would expose us to
being in violation of laws. It is not always possible to deter
employee misconduct, and the precautions we take to prevent and
detect this activity may not be effective in controlling unknown or
unmanaged risks or losses, which could harm our business, financial
condition and results of operations.
Allegations, harassment or other detrimental conduct by third
parties, as well as the public dissemination of negative,
inaccurate or misleading information about us, could harm our
reputation and adversely affect the price of our ordinary
shares.
We may be subject to allegations by third parties or purported
current or former employees, negative internet postings and other
negative, inaccurate or misleading publicity related to our
business and operations. We may also become the target of
harassment or other detrimental conduct by third parties or
disgruntled former or current employees. Such conduct may include
complaints, anonymous or otherwise, to our board, advisors,
regulatory agencies, media or other organizations. Depending on
their nature and significance, we may need to conduct internal
investigations to appropriately review any such allegations. We may
also be subject to government or regulatory inquiries or,
investigations or other proceedings as a result of such third-party
conduct and may be required to spend significant time and incur
substantial costs to address such conduct, and there is no
assurance that we will be able to conclusively refute each of the
allegations within a reasonable period of time, or at all.
Allegations may be posted on the internet, including social media
platforms, by anyone anonymously. Any negative, inaccurate or
misleading publicity about us or our management can be quickly and
widely disseminated. Social media platforms and devices immediately
publish the content of their subscribers’ and participants’ posts,
often without filters or checks on the accuracy of the content
posted. Information posted on the internet or otherwise publicly
released, including by us or our employees, may be inaccurate or
misleading, and the information or the inaccurate or misleading
nature of the information, may harm our reputation, business or
prospects. The harm may be immediate without affording us an
opportunity for redress or correction. Our reputation may be
negatively affected as a result of the public dissemination of
negative, inaccurate, or misleading information about our business
and operations, which in turn may cause us to lose market share or
students, and adversely affect the price of our ordinary
shares.
We may not be able to achieve the benefits we expect from
future acquisitions, and future acquisitions may have an adverse
effect on our ability to manage our business.
We intend to make acquisitions or equity investments in additional
businesses that complement our existing business. We may not be
able to successfully integrate acquired businesses and we may not
have control over the businesses or operations of our minority
equity investments, the value of which may decline over time. As a
result, our business and operating results could be harmed. In
addition, if the businesses we acquire or invest in do not
subsequently generate the anticipated financial performance or if
any goodwill impairment test triggering event occurs, we may need
to revalue or write down the value of goodwill and other intangible
assets in connection with such acquisitions or investments, which
would harm our results of operations. In addition, we may be unable
to identify appropriate acquisition or strategic investment targets
when it is necessary or desirable to make such acquisition or
investment to remain competitive or to expand our business. Even if
we identify an appropriate acquisition or investment target, we may
not be able to negotiate the terms of the acquisition or investment
successfully, finance the proposed transaction or integrate the
relevant businesses into our existing business and operations.
Furthermore, as we often do not have control over the companies in
which we only have minority stake, we cannot ensure that these
companies will always comply with applicable laws and regulations
in their business operations. Material non-compliance by our
investees may cause substantial harm to our reputation and the
value of our investment.
The wide variety of payment methods that we accept subjects
us to third-party payment processing-related risks.
We accept payments using a variety of methods, including bank
transfers, online payments with credit cards and debit cards issued
by major banks in China, and payment through third-party online
payment platforms such as Alipay and WeChat Pay. For certain
payment methods, including credit and debit cards, we pay
interchange and other fees, which may increase over time and raise
our operating costs and lower our profit margins. We may also be
susceptible to fraud and other illegal activities in connection
with the various payment methods we offer. We are also subject to
various rules, regulations and requirements, regulatory or
otherwise, governing electronic funds transfers which could change
or be reinterpreted to make it difficult or impossible for us to
comply. If we fail to comply with these rules or requirements, we
may be subject to fines and higher transaction fees and become
unable to accept credit and debit card payments from our students,
process electronic funds transfers or facilitate other types of
online payments, and our business, financial condition and results
of operations could be materially and adversely affected.
If our senior management is unable to work together
effectively or efficiently or if we lose their services, our
business may be severely disrupted.
Our success heavily depends upon the continued services of our
management. In particular, we rely on the expertise and experience
of Yang Yu, Xinghui Yang and Cuntao Hou. We also rely on the
experience and services from other senior management. If such
individuals cannot work together effectively or efficiently, our
business may be severely disrupted. If one or more of our senior
managers were unable or unwilling to continue in their present
positions, we might not be able to replace them easily or at all,
and our business, financial condition and results of operations may
be materially and adversely affected. If any of our senior
management joins a competitor or forms a competing business,
we may lose students, teachers, and other key professionals and
staff members. Our senior management has entered into employment
agreements with us, including confidentiality and non-competition
clauses. However, if any dispute arises between our officers and
us, we may have to incur substantial costs and expenses in order to
enforce such agreements in China or we may be unable to enforce
them at all.
Our results of operations are subject to seasonal
fluctuations.
Our industry generally experiences seasonality, reflecting a
combination of traditional education industry patterns and new
patterns associated with the online platforms in particular.
Seasonal fluctuations have affected, and are likely to continue to
affect, our business. In general, our self-taught examination
services experiences lower student enrollment during the month
following the four examination periods but enjoys higher student
enrollment during the two months before the four examination
periods. As to our continuing education services, our sales
generally slow down when our cooperating universities and colleges
are summer and winter breaks. Our financial condition and results
of operations for future periods may continue to fluctuate. As a
result, the trading price of our ordinary shares may fluctuate from
time to time due to seasonality.
We have limited insurance coverage for our operations in
China, which could expose us to significant costs and business
disruption.
We do not maintain any liability insurance or property insurance
policies covering students, equipment and facilities for injuries,
death or losses due to fire, earthquake, flood or any other
disaster. Consistent with customary industry practice in China, we
do not maintain business interruption insurance, nor do we maintain
key-man life insurance. However, as the insurance industry in China
is still in an early stage of development, insurance companies in
China currently offer limited business-related insurance products.
We do not maintain business interruption insurance, nor do we
maintain key-man life insurance. We cannot assure you that our
insurance coverage is sufficient to prevent us from any loss or
that we will be able to successfully claim our losses under our
current insurance policy on a timely basis, or at all. If we incur
any loss that is not covered by our insurance policies, or the
compensated amount is significantly less than our actual loss, our
business, financial condition and results of operations could be
materially and adversely affected.
We have identified material weaknesses in our internal
control over financial reporting. If we fail to develop and
maintain an effective system of internal control over financial
reporting, we may be unable to accurately report our financial
results or prevent fraud, and investor confidence and the market
price of our ordinary shares may be materially and adversely
affected.
Prior to the initial public offering consummated in April 2019 (the
“IPO”), we were a private company with limited accounting personnel
and other resources with which to address our internal controls and
procedures. We have identified “material weaknesses” and other
control deficiencies including significant deficiencies in our
internal control over financial reporting. As defined in the
standards established by the Public Company Accounting Oversight
Board of the United States, or PCAOB, a “material weakness” is a
deficiency, or combination of deficiencies, in internal control
over financial reporting, such that there is a reasonable
possibility that a material misstatement of the annual or interim
financial statements will not be prevented or detected on a timely
basis.
One material weakness that has been identified related to our lack
of sufficient financial reporting and accounting personnel with
appropriate knowledge of U.S. GAAP and SEC reporting requirements
to properly address complex U.S. GAAP accounting issues and to
prepare and review our consolidated financial statements and
related disclosures to fulfill U.S. GAAP and SEC financial
reporting requirements. As our operations continue to expand, we
plan to hire additional accounting and finance staff to increase
segregation of duties and also invest in technology infrastructure
to support our financial reporting function. Despite all
these remedial measures, we might efficiently address the
weaknesses we have identified.
Neither we nor our independent registered public accounting firm
undertook a comprehensive assessment of our internal control for
purposes of identifying and reporting material weaknesses and other
control deficiencies in our internal control over financial
reporting as we and they will be required to do after we become a
public company. Had we performed a formal assessment of our
internal control over financial reporting or had our independent
registered public accounting firm performed an audit of our
internal control over financial reporting, additional deficiencies
may have been identified.
We are subject to the Sarbanes-Oxley Act of 2002. Section 404 of
the Sarbanes-Oxley Act, or Section 404, requires that we include a
report from management on the effectiveness of our internal control
over financial reporting in our annual report on Form 20-F
beginning with this report. In addition, once we cease to be an
“emerging growth company” as such term is defined in the JOBS Act,
our independent registered public accounting firm must attest to
and report on the effectiveness of our internal control over
financial reporting. Our management may conclude that our internal
control over financial reporting is not effective. Moreover, even
if our management concludes that our internal control over
financial reporting is effective, our independent registered public
accounting firm, after conducting its own independent testing, may
issue a report that is qualified if it is not satisfied with our
internal controls or the level at which our controls are
documented, designed, operated or reviewed, or if it interprets the
relevant requirements differently from us. In addition, after we
become a public company, our reporting obligations may place a
significant strain on our management, operational and financial
resources and systems for the foreseeable future. We may be unable
to timely complete our evaluation testing and any required
remediation.
During the course of documenting and testing our internal control
procedures, in order to satisfy the requirements of Section 404, we
may identify other weaknesses and deficiencies in our internal
control over financial reporting. In addition, if we fail to
maintain the adequacy of our internal control over financial
reporting, as these standards are modified, supplemented or amended
from time to time, we may not be able to conclude on an ongoing
basis that we have effective internal control over financial
reporting in accordance with Section 404. If we fail to achieve and
maintain an effective internal control environment, we could suffer
material misstatements in our financial statements and fail to meet
our reporting obligations, which would likely cause investors to
lose confidence in our reported financial information. This could
in turn limit our access to capital markets, harm our results of
operations, and lead to a decline in the trading price of our
ordinary shares. Additionally, ineffective internal control over
financial reporting could expose us to increased risk of fraud or
misuse of corporate assets and subject us to potential delisting
from the stock exchange on which we list, regulatory investigations
and civil or criminal sanctions. We may also be required to restate
our financial statements from prior periods.
Any significant interruption in the operations of our
customer hotline could adversely affect our ability to respond to
potential customers’ inquiries and other service requests in a
timely manner.
We have a customer hotline which responds to inquiries from
potential customers and provides customer service to our existing
customers. We have not experienced any significant interruption in
the operations of our customer hotline. We do not currently have a
risk mitigation plan for our customer hotline to prevent an
interruption of its operation due to natural disasters, accidents
or other events. Any significant interruptions as a result of these
events or our failure to successfully expand or upgrade our systems
or manage the necessary expansions or upgrades in the customer
hotline could reduce our ability to respond to customer inquiries
or service requests, which could in turn result in the loss of
potential customers and damage our reputation.
The impact of any kind of epidemic, such as the COVID-19, on
our operations, may harm our business.
Affected by the COVID-19 pandemic in 2020, the daily offline
education and teaching activities of colleges and universities
across the country were suspended due to government protocols. Due
to the fact that colleges and universities throughout the country
did not start school during the pandemic, the Company will likely
experience delay in payments by its customers. Although the number
of existing continuing education users who switch from offline to
online learning is increasing, the new demand for continuing
education promotion in a certain period of time in the future is
still uncertain.
Risks Related to Our Corporate Structure
If the PRC government finds that the contractual arrangements
that establish the structure for holding our Internet Content
Provider (“ICP”) license do not comply with applicable PRC laws and
regulations, we could be subject to severe penalties or be forced
to relinquish our interests in those operations.
Foreign ownership in entities that provide value-added
telecommunication services, is subject to restrictions under
current PRC laws and regulations. For example, in accordance with
the Guidance Catalog of Industries for Foreign Investment, as
amended in June 2017, and other applicable laws and regulations,
foreign investors are not allowed to own more than 50% of the
equity interests in a value-added telecommunication service
provider (except for e-commerce) and any such foreign investor must
have experience in providing value-added telecommunications
services overseas and maintain a good track record.
We are a British Virgin Islands company and our PRC subsidiary,
Beijing Distance Learning is considered a foreign-invested
enterprise. To comply with PRC laws and regulations, we operate our
website, www.edu-edu.com,
through our PRC consolidated VIE, Beijing Digital Information,
which holds our ICP License for www.edu-edu.com. Beijing Digital
Information is 51.5% owned by Yang Yu and 48.5% owned by Xinghui
Yang. All shareholders of Beijing Digital Information are PRC
citizens. We entered into a series of contractual arrangements with
Beijing Digital Information and its shareholders, which enable us
to:
|
● |
exercise
effective control over Beijing Digital Information; |
|
● |
receive
substantially all of the economic benefits; and |
|
● |
have
an exclusive option to purchase all or part of the equity interests
in Beijing Digital Information when and to the extent permitted by
PRC law. |
Because of these contractual arrangements, we are the primary
beneficiary of Beijing Digital Information and treat it as our PRC
consolidated VIE under U.S. GAAP. We consolidate the financial
results of Beijing Digital Information in our consolidated
financial statements in accordance with U.S. GAAP.
Jingtian & Gongcheng, our PRC legal counsel, is of the opinion
that (i) the ownership structure of Shanghai Xin Fu and
Beijing Distance Learning will not result in any violation of PRC
laws or regulations currently in effect; and (ii) the
contractual arrangements among Beijing Digital Information and
Beijing Distance Learning and its shareholders governed by PRC law
are valid, binding and enforceable, and will not result in any
violation of PRC laws or regulations currently in effect. Our PRC
legal counsel is also of the opinion that there are, however,
substantial uncertainties regarding the interpretation and
application of current or future PRC laws and regulations
concerning foreign investment in the PRC, and their application to
and effect on the legality, binding effect and enforceability of
the contractual arrangements. In particular, we cannot rule out the
possibility that PRC regulatory authorities, courts or arbitral
tribunals may in the future adopt a different or contrary
interpretation or take a view that is inconsistent with the opinion
of our PRC legal counsel.
On March 15, 2019, the National People’s Congress, China’s
national legislative body (the “NPC”) approved the Foreign
Investment Law, which took effect on January 1, 2020. Since it
is relatively new, uncertainties exist in relation to its
interpretation and its implementation rules that are yet to be
issued. The Foreign Investment Law does not explicitly classify
whether variable interest entities that are controlled through
contractual arrangements would be deemed as
foreign-invested enterprises if they are ultimately
“controlled” by foreign investors. However, it has a
catch-all provision under definition of “foreign investment”
that includes investments made by foreign investors in China
through other means as provided by laws, administrative regulations
or the State Council. Therefore it still leaves leeway for future
laws, administrative regulations or provisions of the State Council
to provide for contractual arrangements as a form of foreign
investment. Therefore, there can be no assurance that our control
over our consolidated VIE through contractual arrangements will not
be deemed as foreign investment in the future.
The Foreign Investment Law grants national treatment to
foreign-invested entities, except for those
foreign-invested entities that operate in industries specified
as either “restricted” or “prohibited” from foreign investment in a
“negative list” that is yet to be published. It is unclear whether
the “negative list” to be published will differ from the current
Special Administrative Measures for Market Access of Foreign
Investment (Negative List). The Foreign Investment Law provides
that foreign-invested entities operating in “restricted” or
“prohibited” industries will require market entry clearance and
other approvals from relevant PRC government authorities. If our
control over our consolidated VIE through contractual arrangements
are deemed as foreign investment in the future, and any business of
our consolidated VIE is “restricted” or “prohibited” from foreign
investment under the “negative list” effective at the time, we may
be deemed to be in violation of the Foreign Investment Law, the
contractual arrangements that allow us to have control over our
consolidated VIE may be deemed as invalid and illegal, and we may
be required to unwind such contractual arrangements and/or
restructure our business operations, any of which may have a
material adverse effect on our business operation.
If, as a result of such contractual arrangement, we or Beijing
Digital Information is found to be in violation of any existing or
future PRC laws or regulations, or such contractual arrangement is
determined as illegal and invalid by the PRC court, arbitral
tribunal or regulatory authorities, or we fail to obtain, maintain
or renew any of the required permits or approvals, the relevant PRC
regulatory authorities would have broad discretion to take action
in dealing with such violations or failures, including:
|
● |
revoking
the business licenses and/or operating licenses of Beijing Distance
Learning and/or Beijing Digital Information; |
|
● |
discontinuing
or restricting the conduct of any transactions between Beijing
Distance Learning and Beijing Digital Information; |
|
● |
limiting
our business expansion in China by way of entering into contractual
arrangements; |
|
● |
imposing
fines, confiscating the income from Beijing Digital Information, or
imposing other requirements with which we or Beijing Digital
Information may not be able to comply with; |
|
● |
shutting
down our servers or blocking our websites; |
|
● |
requiring
us to restructure our ownership structure or operations, including
terminating the contractual arrangements with Beijing Digital
Information and deregistering the equity pledges of Beijing Digital
Information; |
|
● |
restricting
or prohibiting our use of the proceeds of the IPO to finance our
business and operations in China; |
|
● |
imposing
additional conditions or requirements with which we may not be able
to comply with; or |
|
● |
take
other regulatory or enforcement actions against us that could be
harmful to our business. |
The imposition of any of these penalties could result in a material
and adverse effect on our ability to conduct our business and on
our results of operations. If any of these penalties results in our
inability to direct the activities of Beijing Digital Information
that most significantly impact its economic performance, and/or our
failure to receive the economic benefits from Beijing Digital
Information, we may not be able to consolidate Beijing Digital
Information in our consolidated financial statements in accordance
with U.S. GAAP.
We rely on contractual arrangements with Beijing Digital
Information and its shareholders for a portion of our business
operations, which may not be as effective as direct ownership in
providing operational control.
We have relied and expect to continue to rely on contractual
arrangements with Beijing Digital Information, as well as its
respective shareholders, to operate our www.edu-edu.com website and mobile
apps. For a description of these contractual arrangements, see
“History and Development of the Company.” These contractual
arrangements may not be as effective as direct ownership in
providing us with control over Beijing Digital Information. For
example, Beijing Digital Information and its shareholders could
breach their contractual arrangements with us by, among other
things, failing to conduct their operations, including maintaining
our website and using the domain names and trademarks, in an
acceptable manner or taking other actions that are detrimental to
our interests.
If we had direct ownership of Beijing Digital Information, we would
be able to exercise our rights as a shareholder to change the
executive director of Beijing Digital Information, which in turn
could effect changes, subject to any applicable fiduciary
obligations, at the management level. However, under the current
contractual arrangements, we rely on the performance by Beijing
Digital Information and its shareholders of their obligations under
the contracts to exercise control over Beijing Digital Information.
However, the shareholders of Beijing Digital Information may not
act in the best interests of the Company or may not perform their
obligations under these contracts. Such risks exist throughout the
period in which we intend to operate our business through the
contractual arrangements with Beijing Digital Information. We may
replace the shareholders of Beijing Digital Information at any time
pursuant to our contractual arrangements with it and its
shareholders. However, if any dispute relating to these contracts
remains unresolved, we will have to enforce our rights under these
contracts through the operations of PRC law and therefore will be
subject to uncertainties in the PRC legal system. See “—Any failure
by Beijing Digital Information or its shareholders to perform their
obligations under our contractual arrangements with them would have
a material and adverse effect on our business.” Therefore, our
contractual arrangements with Beijing Digital Information may not
be as effective in ensuring our control over the relevant portion
of our business operations as direct ownership would be.
Substantial uncertainties exist with respect to the enactment
timetable, interpretation and implementation of draft PRC Foreign
Investment Law and how it may impact the viability of our current
corporate structure, corporate governance and business
operations.
The MOC published a discussion draft of the proposed Foreign
Investment Law in January 2015 aiming to, upon its enactment,
replace the trio of existing laws regulating foreign investment in
China, namely, the Sino-foreign Equity Joint Venture
Enterprise Law, the Sino-foreign Cooperative Joint Venture
Enterprise Law and the Wholly Foreign-invested Enterprise
Law . The Draft Foreign Investment Law embodies an
expected PRC regulatory trend to rationalize its foreign investment
regulatory regime in line with prevailing international practice
and the legislative efforts to unify the corporate legal
requirements for both foreign and domestic investments. While the
MOC solicited comments on this draft in early 2015, substantial
uncertainties exist with respect to its enactment timetable,
interpretation and implementation.
Among other things, the Draft Foreign Investment Law expands the
definition of foreign investment and introduces the principle of
“actual control” in determining whether a company is considered an
FIE. The Draft Foreign Investment Law specifically provides that
entities established in China but “controlled” by foreign investors
will be treated as FIEs, whereas an entity set up in a foreign
jurisdiction would nonetheless be, upon market entry clearance by
the MOC, treated as a PRC domestic investor provided that the
entity is “controlled” by PRC entities and/or citizens. In this
connection, “foreign investors” refers to the following subjects
making investments within the PRC: (i) natural persons without
PRC nationality; (ii) enterprises incorporated under the laws
of countries or regions other than China; (iii) the
governments of countries or regions other than the PRC and the
departments or agencies thereunder; and (iv) international
organizations. Domestic enterprises under the control of the
subjects as mentioned in the preceding sentence are deemed foreign
investors, and “control” is broadly defined in the draft law to
cover the following summarized categories: (i) holding,
directly or indirectly, not less than 50% of shares, equities,
share of voting rights or other similar rights of the subject
entity; (ii) holding, directly or indirectly, less than 50% of
the voting rights of the subject entity but having the power to
secure at least 50% of the seats on the board or other equivalent
decision making bodies, or having the voting power to material
influence on the board, the shareholders’ meeting or other
equivalent decision making bodies; or (iii) having the power
to exert decisive influence, via contractual or trust arrangements,
over the subject entity’s operations, financial matters or other
key aspects of business operations. Once an entity is determined to
be an FIE, it will be subject to the foreign investment
restrictions or prohibitions set forth in a “catalogue of special
administrative measures,” which is classified into the “catalogue
of prohibitions” and “the catalogue of restrictions,” to be
separately issued by the State Council later. Foreign investors are
not allowed to invest in any sector set forth in the catalogue of
prohibitions. However, unless the underlying business of the FIE
falls within the catalogue of restrictions, which calls for market
entry clearance by the MOC, prior approval from governmental
authorities as mandated by the existing foreign investment legal
regime would no longer be required for establishment of the
FIE.
The “variable interest entity” structure, or VIE structure, has
been adopted by many PRC-based companies, including us, to obtain
necessary licenses and permits in the industries that are currently
subject to foreign investment restrictions in China. See “—If the
PRC government finds that the contractual arrangements that
establish the structure for holding our ICP license do not comply
with applicable PRC laws and regulations, we could be subject to
severe penalties or be forced to relinquish our interests in those
operations” and “History and Development of the Company.” Under the
Draft Foreign Investment Law, VIEs that are controlled via
contractual arrangement would also be deemed as FIEs, if they are
ultimately “controlled” by foreign investors. Therefore, for any
companies with a VIE structure in an industry category that is on
the “catalogue of restrictions,” the VIE structure may be deemed a
domestic investment only if the ultimate controlling person(s)
is/are of PRC nationality (either PRC companies or PRC citizens).
Conversely, if the actual controlling person(s) is/are of foreign
nationalities, then the VIEs will be treated as FIEs and any
operation in the industry category on the “catalogue of
restrictions” without market entry clearance may be considered as
illegal.
In addition, the Draft Foreign Investment Law does not indicate
what actions shall be taken with respect to the existing companies
with a VIE structure, whether or not these companies are controlled
by Chinese parties. Moreover, it is uncertain whether the online
education industry, in which our PRC consolidated VIE operate, will
be subject to the foreign investment restrictions or prohibitions
set forth in the “catalogue of special administrative measures” to
be issued. If the enacted version of the Foreign Investment Law and
the final “catalogue of special administrative measures” mandate
further actions, such as the MOC market entry clearance, to be
completed by companies with an existing VIE structure like us, we
face uncertainties as to whether such clearance can be timely
obtained, or at all.
The Draft Foreign Investment Law, if enacted as proposed, may also
materially impact our corporate governance practice and increase
our compliance costs. For instance, the Draft Foreign Investment
Law imposes stringent ad hoc and periodic information reporting
requirements on foreign investors and the applicable FIEs. Aside
from an investment information report required at each investment,
and investment amendment reports, which shall be submitted upon
alteration of investment specifics, it is mandatory for entities
established by foreign investors to submit an annual report, and
large foreign investors meeting certain criteria are required to
report on a quarterly basis. Any company found to be non-compliant
with these reporting obligations may potentially be subject to
fines and/or administrative or criminal liabilities, and the
persons directly responsible may be subject to criminal
liabilities.
On December 26, 2018, NPCSC published the 2018 Draft Foreign
Investment Law deliberated by the 7th Meeting of the Standing
Committee of the Thirteenth National People’s Congress, to seek
public comments, which closed on February 24, 2019. The 2018 Draft
Foreign Investment Law does not mention concepts including “de
facto control” and “controlling through contractual arrangements”,
nor did it specify the regulation on controlling through
contractual arrangements. Furthermore, the 2018 Draft Foreign
Investment Law does not specifically stipulate rules on the
education industry.
Any failure by Beijing Digital Information or its
shareholders to perform their obligations under our contractual
arrangements with them would have a material and adverse effect on
our business.
If Beijing Digital Information or its shareholders fail to perform
their obligations under the contractual arrangements, we may have
to incur substantial costs and expend additional resources to
enforce such arrangements. We may also have to rely on legal
remedies under PRC law, including seeking specific performance or
injunctive relief, and claiming damages, which we cannot assure you
will be effective. For example, if the shareholders of Beijing
Digital Information, were to refuse to transfer their equity
interest in Beijing Digital Information to us or our designee if we
exercise the purchase 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 actions to compel them to
perform their contractual obligations.
All the agreements under our contractual arrangements with Beijing
Digital Information are governed by PRC law and provide for the
resolution of disputes through arbitration in China. Accordingly,
these contracts would be interpreted in accordance with PRC law and
any disputes would be resolved in accordance with PRC legal
procedures. The legal system in the PRC is not as developed as in
some other jurisdictions, such as the United States. As a result,
uncertainties in the PRC legal system could limit our ability to
enforce these contractual arrangements. Under PRC law, if the
losing parties fail to carry out the arbitration awards within a
prescribed time limit, the prevailing parties may only enforce the
arbitration awards in PRC courts through arbitration award
recognition proceedings, which would require additional expenses
and delay. In the event we are unable to enforce these contractual
arrangements, we may not be able to exert effective control over
Beijing Digital Information, and our ability to conduct our
business may be negatively affected.
On March 15, 2019, the National People’s Congress promulgated the
Foreign Investment Law, which became effective on January 1, 2020
and replace three existing laws on foreign investments in China,
namely, the Sino-Foreign Equity Joint Venture Enterprise Law, the
Sino-Foreign Cooperative Joint Venture Enterprise Law and the
Foreign Owned Enterprise Law, together with their implementations
and ancillary regulations to become the legal foundation for
foreign investment in the PRC.
According to the Foreign Investment Law, the State Council will
publish or approve to publish a catalogue for special
administrative measures, or the “negative list.” The Foreign
Investment Law grants national treatment to foreign invested
entities, except for those foreign invested entities that operate
in industries deemed to be either “restricted” or “prohibited” in
the “negative list.” Because the “negative list” has yet to be
published, it is unclear whether it will differ from the current
Negative List. The Foreign Investment Law provides that foreign
invested entities operating in foreign restricted or prohibited
industries will require market entry clearance and other approvals
from relevant PRC governmental authorities.
Furthermore, the Foreign Investment Law provides that foreign
invested enterprises established according to the existing laws
regulating foreign investment may maintain their structure and
corporate governance within five years after the implementing of
the Foreign Investment Law.
If the custodians or authorized users of our controlling
non-tangible assets, including chops and seals, fail to fulfill
their responsibilities, or misappropriate or misuse these assets,
our business and operations could be materially and adversely
affected.
Under PRC law, legal documents for corporate transactions,
including agreements and contracts such as the leases and sales
contracts that our business relies on, are executed using the chop
or seal of the signing entity or with the signature of a legal
representative whose designation is registered and filed with the
relevant local branch of the SAIC. We generally execute legal
documents by affixing chops or seals, rather than having the
designated legal representatives sign the documents.
We have three major types of chops—corporate chops, contract chops
and finance chops. We use corporate chops generally for documents
to be submitted to government agencies, such as applications for
changing business scope, directors or company name, and for legal
letters. We use contract chops for executing leases and commercial,
contracts. We use finance chops generally for making and collecting
payments, including, but not limited to issuing invoices. Use of
corporate chops and contract chops must be approved by our legal
department and administrative department, and use of finance chops
must be approved by our finance department. The chops of our PRC
subsidiary and our PRC consolidated VIE are generally held by the
relevant entities so that documents can be executed locally.
Although we usually utilize chops to execute contracts, the
registered legal representatives of our PRC subsidiary and our PRC
consolidated VIE have the apparent authority to enter into
contracts on behalf of such entities without chops, unless such
contracts set forth otherwise. All designated legal representatives
of our PRC subsidiary and our PRC consolidated VIE have signed
employment agreements with us under which they agree to abide by
duties they owe to us.
In order to maintain the physical security of our chops, we
generally have them stored in secured locations accessible only to
the department heads of the legal, administrative or finance
departments. Our designated legal representatives generally do not
have access to the chops. Although we monitor our employees,
including the designated legal representatives of our PRC
subsidiary and our consolidated VIE, the procedures may not be
sufficient to prevent all instances of abuse or negligence. There
is a risk that our employees or designated legal representatives
could abuse their authority, for example, by binding the relevant
subsidiary or consolidated VIE with contracts against our
interests, as we would be obligated to honor these contracts if the
other contracting party acts in good faith in reliance on the
apparent authority of our chops or signatures of our legal
representatives. If any designated legal representative obtains
control of the chop in an effort to obtain control over the
relevant entity, we would need to have a shareholder or board
resolution to designate a new legal representative and to take
legal action to seek the for a new chop with the relevant
authorities, or otherwise seek legal remedies for the legal
representative’s misconduct. If any of the designated legal
representatives obtains and misuses or misappropriates our chops
and seals or other controlling intangible assets for whatever
reason, we could experience disruption to our normal business
operations. We may have to take corporate or legal action, which
could involve significant time and resources to resolve while
distracting management from our operations.
The shareholders of Beijing Digital Information may have
potential conflicts of interest with us, which may materially and
adversely affect our business and financial condition.
We have designated individuals who are PRC nationals to be the
shareholders of Beijing Digital Information. Beijing Digital
Information is owned by Yang Yu and Xinghui Yang. The interests of
these individuals as the shareholders of Beijing Digital
Information may differ from the interests of the Company as a
whole. These shareholders may breach, or cause our PRC consolidated
VIE to breach, or refuse to renew, the existing contractual
arrangements we have with them and Beijing Digital Information,
which would have a material and adverse effect on our ability to
effectively control Beijing Digital Information. We cannot assure
you that when conflicts of interest arise, any or all of these
shareholders will act in the best interests of our company or such
conflicts will be resolved in our favor.
Currently, we do not have any arrangements to address potential
conflicts of interest between these shareholders and the Company,
except that we could exercise our purchase option under the
exclusive option agreement with these shareholders to request them
to transfer all of their equity ownership in Beijing Digital
Information to Beijing Distance Learning or one or more individuals
designated by us. We rely on Messrs. Yu and Yang, who are also
our directors, to abide by PRC law, which provides that directors
owe a fiduciary duty to the company. Such fiduciary duty requires
directors to act in good faith and in the best interests of the
company and not to use their positions for personal gains. If we
cannot resolve any conflict of interest or dispute between us and
the shareholders of Beijing Digital Information, we would have to
rely on legal proceedings, which could result in disruption of our
business and subject us to substantial uncertainty as to the
outcome of any such legal proceedings.
We may rely on dividends and other distributions on equity
paid by our PRC subsidiary to fund any cash and financing
requirements we may have, and any limitation on the ability of our
PRC subsidiary to make payments to us could have a material and
adverse effect on our ability to conduct our business.
We are a holding company, and we may rely on dividends and other
distributions on equity paid by our PRC subsidiary, Beijing
Distance Learning, for our cash and financing requirements,
including the funds necessary to pay dividends and other cash
distributions to our shareholders and service any debt we may
incur. If our PRC subsidiary incurs debt on its own behalf in the
future, the instruments governing the debt may restrict its ability
to pay dividends or make other distributions to us. In addition,
the PRC tax authorities may require Beijing Distance Learning to
adjust its taxable income under the contractual arrangements it
currently has in place with our PRC consolidated VIE in a manner
that would materially and adversely affect its ability to pay
dividends and other distributions to us. See “—Our contractual
arrangements may be subject to scrutiny by the PRC tax authorities,
and a finding that we owe additional taxes could substantially
reduce our consolidated net income and the value of your
investment.”
Under PRC laws and regulations, our PRC subsidiary, which is a
wholly foreign-owned enterprise may pay dividends only out of its
respective accumulated profits as determined in accordance with PRC
accounting standards and regulations. In addition, a wholly
foreign-owned enterprise is required to set aside at least 10% of
its accumulated after-tax profits each year, if any, to fund a
certain statutory reserve fund, until the aggregate amount of such
fund reaches 50% of its registered capital. At its discretion, a
wholly foreign-owned enterprise may allocate a portion of its
after-tax profits based on PRC accounting standards to an
enterprise expansion fund, or a staff welfare and bonus fund. The
statutory reserve funds, enterprise expansion funds and staff
welfare and bonus funds are not distributable as cash
dividends.
Any limitation on the ability of our PRC subsidiary to pay
dividends or make other distributions to us could materially and
adversely limit our ability to grow, make investments or
acquisitions that could be beneficial to our business, pay
dividends, or otherwise fund and conduct our business. See also
“—Risks Related to Doing Business in China—Under the PRC Enterprise
Income Tax Law, we may be classified as a PRC “resident enterprise”
for PRC enterprise income tax purposes. Such classification would
likely result in unfavorable tax consequences to us and our non-PRC
shareholders and has a material adverse effect on our results of
operations and the value of your investment.”
Our contractual arrangements may be subject to scrutiny by
the PRC tax authorities, and a finding that we owe additional taxes
could substantially reduce our consolidated net income and the
value of your investment.
Under PRC laws and regulations, arrangements and transactions among
related parties may be subject to audit or challenge by the PRC tax
authorities. We could face material and adverse tax consequences if
the PRC tax authorities determine that the contractual arrangements
among our PRC subsidiary and our PRC consolidated VIE do not
represent an arm’s-length price and adjust our PRC consolidated
VIEs income in the form of a transfer pricing adjustment. A
transfer pricing adjustment could, among other things, result in a
reduction, for PRC tax purposes, of expense deductions recorded by
our PRC consolidated VIE, which could in turn increase their tax
liabilities. In addition, the PRC tax authorities may impose late
payment fees and other penalties to our PRC consolidated VIE for
under-paid taxes. Our consolidated net income may be materially and
adversely affected if our tax liabilities increase or if we are
found to be subject to late payment fees or other penalties.
If Beijing Digital Information becomes the subject of a
bankruptcy or liquidation proceeding, we may lose the ability to
use and enjoy its assets, which could reduce the size of our
operations and materially and adversely affect our business,
ability to generate revenues and the market price of our ordinary
shares.
To comply with PRC laws and regulations relating to foreign
ownership restrictions in the online value-added telecommunications
business, we hold our ICP license through contractual arrangements
with Beijing Digital Information, our PRC consolidated VIE, as well
as its shareholders. As part of these arrangements, Beijing Digital
Information holds assets that are important to the operation of our
business.
We do not have priority pledges and liens against Beijing Digital
Information’s assets. As a contractual and property right matter,
this lack of priority pledges and liens has remote risks. If
Beijing Digital Information undergoes an involuntary liquidation
proceeding, third-party creditors may claim rights to some or all
of its assets and we may not have priority against such third-party
creditors on Beijing Digital Information’s assets. If Beijing
Digital Information liquidates, we may take part in the liquidation
procedures as a general creditor under the PRC Enterprise
Bankruptcy Law and recover any outstanding liabilities owed by
Beijing Digital Information to Beijing Distance Learning under the
applicable service agreements. To ameliorate the risks of an
involuntary liquidation proceeding initiated by a third-party
creditor, we closely monitor the operations and finances of Beijing
Digital Information through carefully designed budgetary and
internal controls to ensure that Beijing Digital Information is
well capitalized and is highly unlikely to trigger any third-party
monetary claims in excess of its assets and cash resources.
Furthermore, Beijing Distance Learning has the ability, if
necessary, to provide finance support to Beijing Digital
Information to prevent such an involuntary liquidation.
If the shareholders of Beijing Digital Information were to attempt
to voluntarily liquidate Beijing Digital Information without
obtaining our prior consent, we could effectively prevent such
unauthorized voluntary liquidation by exercising our right to
request Beijing Digital Information’s shareholders to transfer all
of their equity ownership interest to Beijing Distance Learning or
one or more individuals designated by us in accordance with the
option agreements with the shareholders of Beijing Digital
Information. In the event that the shareholders of Beijing Digital
Information initiates a voluntary liquidation proceeding without
our authorization or attempts to distribute the retained earnings
or assets of Beijing Digital Information without our prior consent,
we may need to resort to legal of the contractual agreements. Any
such litigation may be costly and may divert our management’s time
and attention away from the operation of our business, and the
outcome of such litigation would be uncertain.
Risks Related to Doing Business in China
Uncertainties in the interpretation and enforcement of PRC
laws and regulations could limit the legal protections available to
you and us.
The PRC legal system is based on written statutes. Unlike common
law systems, it is a system in which legal cases have limited value
as precedents. In the late 1970s, the PRC government began to
promulgate a comprehensive system of laws and regulations governing
economic matters in general. The overall effect of legislation over
the past three decades has significantly increased the protections
afforded to various forms of foreign or private-sector investment
in China. Our PRC subsidiary is subject to various PRC laws and
regulations generally applicable to companies in China. However,
since these laws and regulations are relatively new and 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.
From time to time, we may have to resort to administrative and
court proceedings to enforce our legal rights. However, since PRC
administrative and court authorities have significant discretion in
interpreting and implementing statutory and contractual terms, it
may be more difficult to evaluate the outcome of administrative and
court proceedings and the level of legal protection we enjoy than
in more developed legal systems. Furthermore, the PRC legal system
is based in part on government policies and internal rules (some of
which are not published in a timely manner or at all) that may have
retroactive effect. As a result, we may not be aware of our
violation of these policies and rules until sometime after the
violation. Such uncertainties, including uncertainty over the scope
and effect of our contractual, property (including intellectual
property) and procedural rights, and any failure to respond to
changes in the regulatory environment in China could materially and
adversely affect our business and impede our ability to continue
our operations.
We may be adversely affected by the complexity, uncertainties
and changes in PRC regulation of internet-related
business.
The PRC government extensively regulates the internet industry,
including foreign ownership of, and the licensing and permit
requirements pertaining to, companies in the internet industry.
These internet-related laws and regulations are relatively new and
evolving, and their interpretation and enforcement involves
significant uncertainties. As a result, in certain circumstances it
may be difficult to determine what actions or omissions may be
deemed to be in violation of applicable laws and regulations.
Issues, risks and uncertainties relating to PRC governmental
regulation of the internet industry include, but are not limited
to, the following.
We only have control over our website through contractual
arrangements. We do not own the website in China due to the
restriction of foreign investment in businesses providing
value-added telecommunication services in China, including internet
information provision services. This may significantly disrupt our
business, subject us to sanctions, compromise enforceability of
related contractual arrangements, or have other harmful effects on
us.
The evolving PRC regulatory system for the internet industry may
lead to the establishment of new regulatory agencies. For example,
in May 2011, the State Council announced the establishment of a new
department, the State Internet Information Office (with the
involvement of the State Council Information Office, the MIIT, and
the Ministry of Public Security). The primary role of this new
agency is to facilitate the policy-making and legislative
development in this field, to direct and coordinate with the
relevant departments in connection with online content
administration and to deal with cross-ministry regulatory matters
in relation to the internet industry.
We are required to obtain and maintain various licenses and permits
and fulfill registration and filing requirements in order to
conduct and operate our business. If these new laws and regulations
are promulgated, additional licenses may be required for our
operations. If our operations do not comply with these new
regulations at the time they become effective, or if we fail to
obtain any licenses required under these new laws and regulations,
we could be subject to penalties.
The Circular on Strengthening the Administration of Foreign
Investment in an Operation of Value-added Telecommunications
Business, issued by the MIIT in July 2006, prohibits domestic
telecommunication service providers from leasing, transferring or
selling telecommunications business operating licenses to any
foreign investor in any form, or providing any resources, sites or
facilities to any foreign investor for their illegal operation of a
telecommunications business in China. According to this circular,
either the holder of a value-added telecommunication services
operation permit or its shareholders must directly own the domain
names and trademarks used by such license holders in their
provision of value-added telecommunication services. The circular
also requires each license holder to have the necessary facilities,
including servers, for its approved business operations and to
maintain such facilities in the regions covered by its license. If
an ICP license holder fails to comply with the requirements and
also fails to remediate such non-compliance within a specified
period of time, the MIIT or its local counterparts have the
discretion to take administrative measures against such license
holder, including revoking its ICP license. Currently, Beijing
Digital Information holds an ICP license and operates our website.
Beijing Digital Information owns the relevant domain names and
registered trademarks and has the necessary personnel to operate
such website.
The interpretation and application of existing PRC law, regulations
and policies and possible new laws, regulations or policies
relating to the internet industry have created substantial
uncertainties regarding the legality of existing and future foreign
investments in, and the businesses and activities of, internet
businesses in China, including our business. We cannot assure you
that we have obtained all the permits or licenses required for
conducting our business in China or will be able to maintain our
existing licenses or obtain new ones.
New legislation or changes in the PRC laws or policies
regarding self-taught education may affect our business operations
and prospects.
The self-taught education industry in China and our business are
subject to regulations and policies in various respects. Relevant
rules and regulations could be amended or updated from time to time
to accommodate the development of education in China. We may need
to change our business practices in order to comply with the new
rules and regulations or adapt to policy changes, but we may not be
able to do so timely and efficiently. Any such failure may subject
us to administrative fines or penalties or other negative
consequences which could materially and adversely affect our brand
name, reputation, business, financial condition and results
of operations.
The enforcement of the PRC Labor Contract Law and other
labor-related regulations in the PRC may adversely affect our
business and our results of operations.
The PRC Labor Contract Law became effective and was implemented on
January 1, 2008, which was amended on December 28, 2012.
It has reinforced the protection of employees who, under the PRC
Labor Contract Law, have the right, among others, to have written
labor contracts, to enter into labor contracts with no fixed terms
under certain circumstances, to receive overtime wages and to
terminate or alter terms in labor contracts. According to the PRC
Social Insurance Law, which became effective on July 1, 2011,
and the Administrative Regulations on the Housing Funds, Companies
operating in China are required to participate in pension
insurance, work-related injury insurance, medical insurance,
unemployment insurance, maternity insurance and housing funds
plans, and the employers must pay all or a portion of the social
insurance premiums and housing funds for their employees.
As a result of these laws and regulations designed to enhance labor
protection, we expect our labor costs will continue to increase. In
addition, as the interpretation and implementation of these laws
and regulations are still evolving, our employment practice may not
at all times be deemed in compliance with the new laws and
regulations. If we are subject to severe penalties or incur
significant liabilities in connection with labor disputes or
investigations, our business and results of operations may be
adversely affected.
Regulation and censorship of information disseminated over
the internet in China may adversely affect our business and
reputation and subject us to liability for information displayed on
our website.
The PRC government has adopted regulations governing internet
access and the distribution of news and other information over the
internet. Under these regulations, internet content providers and
internet publishers are prohibited from posting or displaying over
the internet content that, among other things, violates PRC laws
and regulations, impairs the national dignity of China, or is
reactionary, obscene, superstitious, fraudulent or defamatory.
Failure to comply with these requirements may result in the
revocation of licenses to provide internet content and other
licenses, and the closure of the concerned websites. The website
operator may also be held liable for such censored information
displayed on or linked to the websites. If our website is found to
be in violation of any such requirements, we may be penalized by
relevant authorities, and our operations or reputation could be
adversely affected.
The operation of Beijing Digital Information may be deemed by
relevant PRC government authority to be beyond its authorized
business scope. If the relevant PRC government authorities take
actions against Beijing Digital Information, our business and
operations could be materially and adversely affected.
The principal regulations governing private education in China
consist of the Education Law of the PRC, the Law for Promoting
Private Education, or Private Education Law, and the Implementation
Rules for the Law for Promoting Private Education and the latest
amendment of Private Education Law was on December 29, 2018 which
came into effect on the same date. Under these PRC laws and
regulations, sponsors of private schools may choose to
establish non-profit or for-profit private
schools at their own discretion, while prior to the effectiveness
of the Amendment, all private schools shall not be established for
for-profit purposes. Nonetheless, school sponsors are not allowed
to establish for-profit private schools that are engaged
in compulsory education. On December 30, 2016, the MOE, SAIC
and the Ministry of Human Resources and Social Welfare of the PRC
jointly issued the Implementation Rules on the Supervision and
Administration of For-profit Private Schools, pursuant to
which the establishment, division, merger and other material
changes of a for-profit private school shall first be
approved by the education authorities or the authorities in charge
of labor and social welfare, and then be registered with the
competent branch of SAIC.
On April 20, 2018, the MOE issued for public comments the Draft
Revision of the Regulations on the Implementation of the Law for
Promoting Private Education of the PRC (the Draft for Comments), or
the MOE Draft for Comments. As the consultation period for the MOE
Draft for Comments ended in May 2018, on August 10, 2018, the
Ministry of Justice of the PRC, or the MOJ, published the committee
draft of the Regulations on the Implementation of the Law on
Promoting Private Education in PRC (Revised Draft), or the MOJ
Draft for Approval, for public review and comments, which is still
subject to discussion, potential revision and adoption by the State
Council before it becomes effective. Accordingly, substantial
uncertainty remains with respect to its final content, effective
date, interpretation and implementation. Nevertheless, such MOJ
Draft for Approval proposes changes, clarifications and additional
requirements with respect to private schools in addition to the
currently effective Promoting Private Education Law and relevant
implementation rules. In particular, the MOJ Draft for Approval
clarifies that the scope of “private school” includes private
training education institutions engaging in non-degree education,
which could potentially include us. According to the MOJ Draft for
Approval, a for-profit private training institution that provides
online training education or an online platform that facilitates
such training education services, which does not engage in cultural
education related to school curriculums or tutoring services for
kindergarten, primary or second school examinations or entrance
requirements for primary, secondary or high school, or (ii)
education that leads to a degree, would need to obtain the
corresponding internet operating permit and file with the
administrative department for education or the department of human
resources and social security at the provincial level where the
institution is domiciled. MOJ Draft for Approval further provides
that private training institutions for language, art, sports,
science and technology teaching and private training institutions
for adults for cultural education or non-academic continuing
education can directly apply for the registration with the local
administrative departments for industry and commerce, pursuant to
which our private training institutions are not required to obtain
a private school operation permit from education authorities.
However, we cannot guarantee that the regulators will not
subsequently change their view and take a contrary position,
especially in light of the evolving licensing requirements. Should
we be found by the regulators to fail to fully comply with any
relevant requirements as interpreted by such regulators or fail to
obtain the private school operation permits when required, we may
be subject to order to suspend the operation of the affected
private training institutions and refund the course fees, or a fine
of one to five times of the gains from the private training
institutions that failed to obtain the private school operation
permits, which could materially and adversely affect our brand name
and reputation, business, financial condition and results of
operations.
We operate online platforms that provide online educational courses
to students through the internet, and both of our PRC subsidiary
and our PRC consolidated VIE are registered with Beijing AIC as
commercial enterprises. As such, we believe the provisions of the
Private Education Law and its implementing rules, including without
limitation, the requirement for obtaining a private school
operating permit, are not applicable to us. However, as the laws
and regulations are new, it is unclear that how these laws and
regulations will be explained and implemented and we cannot assure
you that the competent PRC governmental authorities will not
ultimately take a view contrary to our opinion. Moreover, because
there is no further official or publicly-available interpretation
of the definition of “private schools”, there are uncertainties
with regard to whether our business currently conducted in PRC will
be deemed by the relevant PRC governmental authorities to be
“private schools” as defined under the relevant PRC laws and
regulations. If our business conducted in PRC is deemed as
operating private schools, we may be required to register our PRC
entity as a private school with education or training-related items
included into its approved business scope. Beijing Digital
Information is registered with Beijing AIC as a limited liability
company, and its current registered business scope only includes
“education consulting” and “computer technology training,” without
“training” or any other education or training-related items.
However, we cannot assure you that we will not be subject to any
penalties in the future. If the relevant PRC government authorities
discover or determine that Beijing Digital Information operates
beyond its authorized business scope, Beijing Digital Information
may be ordered to complete the registration for change of business
scope within a given period, failing which Beijing Digital
Information is subject to a one-time fine of RMB10,000 to
RMB100,000, or may be ordered to cease its operation if the
relevant authorities determine that Beijing Digital Information is
operating without any approval or permit required.
We face risks and uncertainties with respect to the licensing
requirement for Internet audio-video programs.
On December 20, 2007, the State Administration of Press
Publication Radio Film and Television (“SAPPRFT”), and the MIIT,
jointly promulgated the Administrative Measures Regarding Internet
Audio-Video Program Services, or the Internet Audio-Video Program
Measures, which became effective on January 31, 2008 and was
amended and effective as of August 8, 2015. 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 Online Transmission of Audio-Visual Programs
issued by SAPPRFT or its local bureaus or completing the relevant
registration with SAPPRFT or its local bureaus, and only
state-owned or state-controlled entities are eligible to apply for
a License for Online Transmission of Audio-Visual Programs. In a
press conference jointly held by the SAPPRFT and MIIT in February
2008 to answer questions relating to the Internet Audio-Video
Program Measures, the SAPPRFT and MIIT clarified that those
providers of internet audio-visual program services who engaged in
such services prior to the promulgation of the Internet Audio-Video
Program Measure may re-register and continue their operation of
internet audio-visual program services so long as those providers
did not violate the relevant laws and regulations in the past,
regardless whether they are state-owned or state-controlled
entities or not, but any other entities intend to provide internet
audio-visual program services shall comply with all requirements
specified in the Internet Audio-Video Program Measures. On
April 1, 2010, SAPPRFT promulgated the Provisional
Implementation of the Tentative Categories of Internet Audio-Visual
Program Services, or the Categories, which was modified on March
10, 2017. The Categories clarified the scope of Internet
audio-video programs services. According to the Categories, there
are four categories of Internet audio-visual program services which
are further divided into seventeen sub-categories. The third
sub-category to the second category covers the making and editing
of certain specialized audio-video programs concerning, among other
things, educational content, and broadcasting such content to the
general public online. However, there are still significant
uncertainties relating to the interpretation and implementation of
the Internet Audio-Video Program Measures, in particular, the scope
of “internet audio-video programs.”
We offer recorded audio-video lectures to our enrolled students
only. We believe the limited scope of our audience and the nature
of the raw data we transmit distinguishes us from general providers
of internet audio-visual program services, such as the operator of
online video websites, and the provision of the Audio-Visual
Program Provisions are not applicable with regard to our offering
of the lessons. However, we cannot assure you that the competent
PRC government authorities will not ultimately take a view contrary
to our opinion. In addition, as supplementary course materials, we
offer certain audio-video contents on our websites and mobile apps
for the review of all registered members. If the governmental
authorities determine that our relevant activities fall within the
definition of “internet audio-video program service” under the
Audio-Visual Program Provisions, we may be required to obtain the
License for Disseminating Audio-Video Programs through Information
Network. If this occurs, we may not be able to obtain such license
and we may become subject to penalties, fines, legal sanctions or
an order to suspend our use of audio-video content. We cannot
assure you that the measures we have taken will be deemed adequate
by the authorities and we will not be subject to any penalties or
legal sanctions in the future for our use of audio or video
contents on our websites.
We are required to obtain various operating licenses and
permits and to make registrations and filings for our business
operations in China; failure to comply with these requirements may
materially adversely affect our business and results of
operations.
The internet industry in China is highly regulated by the PRC
government. See “Regulations—Regulations Relating to Value-Added
Telecommunications Services.” We are required to obtain and
maintain various licenses and permits and fulfill registration and
filing requirements in order to conduct and operate our business
currently carried out, and we may be required to obtained
additional licenses or permits for our operations as the
interpretation and implementation of current PRC laws and
regulations are still evolving, and new laws and regulations may
also be promulgated. We currently, through our PRC variable
interest entity, Beijing Digital Information, hold an ICP license
for our website, which is valid through January 11, 2016 to January
11, 2021 and is subject to annual review. Beijing Digital
Information, however, may be required to obtain additional licenses
or expand the authorized business scope covered under the licenses
it currently holds. For example, the contents we use on our
websites or mobile apps, including the course materials and
video-audio contents we licensed from third parties, may be deemed
“Internet cultural products”, and our use of those contents may be
regarded as “Internet cultural activities”, thus we may be required
to obtain an Internet Culture Business Operating License for
provision of those contents through our online platforms as
currently there is no further official or publicly-available
interpretation of those definitions. Also, we may be required to
obtain a Publication Business Operating License for distribution of
course books or other course materials, including electronical
version, to our enrolled students. In addition, our providing
content through our online platform may be regarded as “online
publishing” and may thus subject us to the requirement of obtaining
an Online Publishing License. If Beijing Digital Information fails
to obtain or maintain any of the required licenses or approvals,
its continued business operations in the Internet industry may
subject it to various penalties, such as confiscation of illegal
revenues, fines and the discontinuation or restriction of its
operations. Any such disruption in the business operations of our
affiliated entities will materially and adversely affect our
business, financial condition and results of operations.
Changes in China’s economic, political or social conditions
or government policies could have a material adverse effect on our
business and operations.
Currently all of our business operations is conducted in China and
all of our sales are made in China. Accordingly, our business,
financial condition, results of operations and prospects may be
influenced to a significant degree by political, economic and
social conditions in China generally and by continued economic
growth in China as a whole.
China’s economy differs from the economies of most developed
countries in many respects, including the level of government
involvement, level of development, growth rate, control of foreign
exchange and allocation of resources. Although the PRC government
has implemented measures since the late 1970’s emphasizing the
utilization of market forces for economic reform, the reduction of
state ownership of productive assets, and the establishment of
improved corporate governance in business enterprises, a
substantial portion of productive assets in China is still owned by
the PRC government. In addition, 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 the PRC economic growth through allocating
resources, controlling payment of foreign currency-denominated
obligations, setting monetary policy, and providing preferential
treatment to particular industries or companies. For example, as a
result of China’s current nationwide anti-corruption campaign,
public school spending has become strictly regulated. To comply
with the expenditure control policies of the Chinese government,
many public universities, including our clients, temporarily
reduced their self-taught education spending in 2017. This caused
the demand for our courses in 2017 to decrease. If our clients
continue to reduce their demand for our services due to the
policies of the Chinese government, this could adversely impact our
business, financial condition and operating results.
While China’s economy has experienced significant growth over the
past decades, growth has been uneven, both geographically and among
various sectors of the economy, and the rate of growth has been
slowing. Some of the governmental measures may benefit the overall
Chinese economy, but may have a negative effect on us. For example,
our financial condition and results of operations may be adversely
affected by government control over capital investments or changes
in tax regulations. Any stimulus measures designed to boost the
Chinese economy may contribute to higher inflation, which could
adversely affect our results of operations and financial condition.
For example, certain operating costs and expenses, such as employee
compensation and office operating expenses, may increase as a
result of higher inflation.
PRC regulations relating to foreign exchange registration of
overseas investment by PRC residents may subject our PRC resident
beneficial owners or our PRC subsidiary to liability or penalties,
limit our ability to inject capital into these subsidiaries, limit
PRC subsidiary’s ability to increase their registered capital or
distribute profits to us, or may otherwise adversely affect
us.
On July 4, 2014, the State Administration of Foreign Exchange
(“SAFE’) promulgated the Circular on Relevant Issues Relating to
Domestic Resident’s Investment and Financing and Roundtrip
Investment through Special Purpose Vehicles, or SAFE Circular 37,
which replaced the former Notice on Relevant Issues Concerning
Foreign Exchange Administration for PRC Residents to Engage in
Financing and Inbound Investment via Overseas Special Purpose
Vehicles (generally known as SAFE
Circular 75) promulgated by SAFE on October 21,
2005. On February 13, 2015, SAFE further promulgated the
Circular on Further Simplifying and Improving the Administration of
the Foreign Exchange Concerning Direct Investment, or SAFE Circular
13, which took effect on June 1, 2015. This SAFE Circular 13
has amended SAFE Circular 37 by requiring PRC residents or entities
to register with qualified banks rather than SAFE or its local
branch in connection with their establishment or control of an
offshore entity established for the purpose of overseas investment
or financing.
These circulars require PRC residents to register with qualified
banks in connection with their direct establishment or indirect
control of an offshore entity, for the purpose of overseas
investment and financing, with such PRC residents’ legally owned
assets or equity interests in domestic enterprises or offshore
assets or interests, which is referred to in SAFE Circular 37 as a
“special purpose vehicle.” These circulars further require
amendment to the registration in the event of any significant
changes with respect to the special purpose vehicle, such as an
increase or decrease of capital contributed by PRC residents, share
transfer or exchange, merger, division or other material events. In
the event that a PRC resident holding interests in a special
purpose vehicle fails to complete the required SAFE registration,
the PRC subsidiary of that special purpose vehicle may be
prohibited from making profit distributions to the offshore parent
and from carrying out subsequent cross-border foreign exchange
activities, and the special purpose vehicle may be restricted in
its ability to contribute additional capital into its PRC
subsidiary. Furthermore, failure to comply with the various SAFE
registration requirements described above could result in liability
under PRC law for evasion of foreign exchange controls.
Yang Yu and Xinghui Yang, who directly or indirectly hold shares in
our British Virgin Islands holding company and who are known to us
as being PRC residents have initiated the application for foreign
exchange registrations. However, we may not at all times be fully
aware or informed of the identities of all our shareholders or
beneficial owners that are required to make such registrations, and
we may not always be able to compel them to comply with all
relevant foreign exchange regulations. As a result, we cannot
assure you that all of our shareholders or beneficial owners who
are PRC residents will at all times comply with, or in the future
make or obtain any applicable registrations or approvals required
by all relevant foreign exchange regulations. The failure or
inability of such individuals to comply with the registration
procedures set forth in these regulations may subject us to fines
or legal sanctions, restrictions on our cross-border investment
activities or our PRC subsidiary’s ability to distribute dividends
to, or obtain foreign-exchange-dominated loans from, our company,
or prevent us from making distributions or paying dividends. As a
result, our business operations and our ability to make
distributions to you could be materially and adversely
affected.
Furthermore, as these foreign exchange regulations are still
relatively new and their interpretation and implementation has been
constantly evolving, it is unclear how these regulations, and any
future regulation concerning offshore or cross-border transactions,
will be interpreted, amended and implemented by the relevant
government authorities. We cannot predict how these regulations
will affect our business operations or future strategy. 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 foreign
exchange regulations. This may restrict our ability to implement
our acquisition strategy and could adversely affect our business
and prospects.
PRC regulation on loans to, and direct investment in, PRC
entities by offshore holding companies and governmental control in
currency conversion may delay or prevent us from using the proceeds
of the IPO to make loans to our PRC subsidiary and PRC consolidated
VIE or make additional capital contributions to our PRC subsidiary,
which could materially and adversely affect our liquidity and our
ability to fund and expand our business.
We are an offshore holding company conducting our operations in
China through our PRC subsidiary, Beijing Distance Learning. We may
make loans to our PRC subsidiary and PRC consolidated VIE subject
to the approval from governmental authorities and limitation of
amount, or we may make additional capital contributions to our PRC
subsidiary.
Any loans to our PRC subsidiary, which is treated as a
foreign-invested enterprise under PRC law, are subject to PRC
regulations and foreign exchange loan registrations. For example,
loans by us to our PRC subsidiary, Beijing Distance Learning, to
finance its activities cannot exceed statutory limits and must be
registered with the local counterpart of the SAFE. The statutory
limit for the total amount of foreign debts of a foreign-invested
company is either the difference between the amount of total
investment as approved by the MOC or its local counterpart and the
amount of registered capital of such foreign-invested company or
twice of net worth of the foreign-invested company. We may also
decide to finance our PRC subsidiary by means of capital
contributions.
On August 29, 2008, SAFE promulgated the Circular on the
Relevant Operating Issues Concerning the Improvement of the
Administration of the Payment and Settlement of Foreign Currency
Capital of Foreign-Invested Enterprises, or SAFE Circular 142,
regulating the conversion by a foreign-invested enterprise of
foreign currency registered capital into RMB by restricting how the
converted RMB may be used. SAFE Circular 142 provides that the RMB
capital converted from foreign currency registered capital of a
foreign-invested enterprise may only be used for purposes within
the business scope approved by the applicable governmental
authority and may not be used for equity investments within the PRC
unless otherwise provided by law. In addition, SAFE strengthened
its oversight of the flow and use of the RMB capital converted from
foreign currency registered capital of a foreign-invested company.
The use of such RMB capital may not be altered without SAFE
approval, and such RMB capital may not in any case be used to repay
RMB loans if the proceeds of such loans have not been used.
Violations of SAFE Circular 142 could result in severe
monetary or other penalties. On July 4, 2014, SAFE issued the
Circular of the SAFE on Relevant Issues Concerning the Pilot Reform
in Certain Areas of the Administrative Method of the Conversion of
Foreign Exchange Funds by Foreign-invested Enterprises, or SAFE
Circular 36, which launched the pilot reform of administration
regarding conversion of foreign currency registered capitals of
foreign-invested enterprises in 16 pilot areas. According to SAFE
Circular 36, some of the restrictions under SAFE Circular 142
will not apply to the settlement of the foreign exchange capitals
of an ordinary foreign-invested enterprise in the pilot areas, and
such foreign-invested enterprise is permitted to use Renminbi
converted from its foreign-currency registered capital to make
equity investments in the PRC within and in accordance with the
authorized business scope of such foreign-invested enterprises,
subject to certain registration and settlement procedure as set
forth in SAFE Circular 36. As this circular is relatively new,
there remains uncertainty as to its interpretation and application
and any other future foreign exchange related rules. On
March 30, 2015, SAFE promulgated Circular on Reforming the
Management Approach regarding the Settlement of Foreign Exchange
Capital of Foreign-invested Enterprises, or SAFE Circular 19, to
expand the reform nationwide. SAFE Circular 19 came into force and
replaced both SAFE Circular 142 and SAFE Circular 36 on
June 1, 2015. However, SAFE Circular 19 continues to prohibit
a foreign-invested enterprise from, among other things, using RMB
funds converted from its foreign exchange capitals for expenditure
beyond its authorized business scope, providing entrusted loans or
repaying loans between non-financial enterprises. Violations of
these Circulars could result in severe monetary or other penalties.
These circulars may significantly limit our ability to use RMB
converted from the net proceeds of the IPO to fund the
establishment of new entities in China by our PRC subsidiary, to
invest in or acquire any other PRC companies through our PRC
subsidiary, or to establish new consolidated VIEs in the PRC.
In light of the various requirements imposed by PRC regulations on
loans to, and direct investment in, PRC entities by offshore
holding companies, we cannot assure you that we will be able to
complete the necessary government registrations or obtain the
necessary government approvals on a timely basis, if at all, with
respect to future loans by us to our PRC subsidiary or PRC
consolidated VIE or with respect to future capital contributions by
us to our PRC subsidiary. If we fail to complete such registrations
or obtain such approvals, our ability to use the proceeds from the
IPO and to capitalize or otherwise fund our PRC operations may be
negatively affected, which could materially and adversely affect
our liquidity and our ability to fund and expand our business.
Under the PRC Enterprise Income Tax Law, we may be classified
as a PRC “resident enterprise” for PRC enterprise income tax
purposes. Such classification would likely result in unfavorable
tax consequences to us and our non-PRC shareholders and has a
material adverse effect on our results of operations and the value
of your investment.
Under the PRC Enterprise Income Tax Law, or the EIT Law, that
became effective in January, 2008 and was amended in February,
2017, an enterprise established outside the PRC with “de facto
management bodies” within the PRC is considered a “resident
enterprise” for PRC enterprise income tax purposes and is generally
subject to a uniform 25% enterprise income tax rate on its
worldwide income. Under the implementation rules to the EIT Law, 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
properties of an enterprise. In addition, a circular, known as SAT
Circular 82, issued in April 2009 by the State Administration of
Taxation, or the SAT, specifies that certain offshore incorporated
enterprises controlled by PRC enterprises or PRC enterprise groups
will be classified as PRC resident enterprises if the following are
located or resident in the PRC: senior management personnel and
departments that are responsible for daily production, operation
and management; financial and personnel decision making bodies; key
properties, accounting books, company seal, and minutes of board
meetings and shareholders’ meetings; and half or more of the senior
management or directors having voting rights. Further to SAT
Circular 82, the SAT issued a bulletin, known as SAT Bulletin 45,
which took effect in September 2011, to provide more guidance on
the implementation of SAT Circular 82 and clarify the reporting and
filing obligations of such “Chinese-controlled offshore
incorporated resident enterprises.” SAT Bulletin 45 provides
procedures and administrative details for the determination of
resident status and administration on post-determination matters.
Although both SAT Circular 82 and SAT Bulletin 45 only apply to
offshore enterprises controlled by PRC enterprises or PRC
enterprise groups, not those controlled by PRC individuals or
foreign individuals, the determining criteria set forth in SAT
Circular 82 and SAT Bulletin 45 may reflect the SAT’s general
position on how the “de facto management body” test should be
applied in determining the tax resident status of offshore
enterprises, regardless of whether they are controlled by PRC
enterprises, PRC enterprise groups or by PRC or foreign
individuals.
We do not believe that the Company meets all of the conditions
above thus we do not believe that the Company is a PRC resident
enterprise, though a substantial majority of the members of our
management team as well as the management team of our offshore
holding company are located in China. However, if the PRC tax
authorities determine that the Company is a PRC resident enterprise
for PRC enterprise income tax purposes, a number of unfavorable PRC
tax consequences could follow. First, we will be subject to the
uniform 25% enterprise income tax on our world-wide income, which
could materially reduce our net income. In addition, we will also
be subject to PRC enterprise income tax reporting obligations.
Finally, dividends payable by us to our investors and gains on the
sale of our shares may become subject to PRC withholding tax, at a
rate of 10% in the case of non-PRC enterprises or 20% in the case
of non-PRC individuals (in each case, subject to the provisions of
any applicable tax treaty), if such gains are deemed to be from PRC
sources. It is unclear whether non-PRC shareholders of our company
would be able to claim the benefits of any tax treaties between
their country of tax residence and the PRC in the event that we are
treated as a PRC resident enterprise. Any such tax may reduce the
returns on your investment in the ordinary shares.
Enhanced scrutiny over acquisition transactions by the PRC
tax authorities may have a negative impact on potential
acquisitions we may pursue in the future.
Pursuant to the Notice on Strengthening Administration of
Enterprise Income Tax for Share Transfers by Non-PRC Resident
Enterprises, or SAT Circular 698, issued by the SAT on
December 10, 2009, where a foreign investor transfers the
equity interests of a resident enterprise indirectly via
disposition of the equity interests of an overseas holding company,
or an “indirect transfer,” and such overseas holding company is
located in a tax jurisdiction that (i) has an effective tax
rate less than 12.5% or (ii) does not tax foreign income of
its residents, the foreign investor shall report the indirect
transfer to the competent tax authority. The PRC tax authority will
examine the true nature of the indirect transfer, and if the tax
authority considers that the foreign investor has adopted an
“abusive arrangement” in order to avoid PRC tax, it may disregard
the existence of the overseas holding company and re-characterize
the indirect transfer and as a result, gains derived from such
indirect transfer may be subject to PRC withholding tax at a rate
of up to 10%.
On February 3, 2015, the SAT issued the Announcement of the
State Administration of Taxation on Several Issues Concerning the
Enterprise Income Tax on Indirect Property Transfer by Non-Resident
Enterprises, or SAT Bulletin 7, to supersede existing
provisions in relation to the “indirect transfer” as set forth in
Circular 698, while the other provisions of Circular 698 remain in
force. Pursuant to SAT Bulletin 7, where a non-resident
enterprise indirectly transfers properties such as equity in PRC
resident enterprises without any justifiable business purposes and
aiming to avoid the payment of enterprise income tax, such indirect
transfer must be reclassified as a direct transfer of equity in PRC
resident enterprise. To assess whether an indirect transfer of PRC
taxable properties has reasonable commercial purposes, all
arrangements related to the indirect transfer must be considered
comprehensively and factors set forth in SAT Bulletin 7 must
be comprehensively analyzed in light of the actual circumstances.
SAT Bulletin 7 also provides that, where a non-PRC resident
enterprise transfers its equity interests in a 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.
On October 17, 2017, the SAT issued the Announcement of the State
Administration of Taxation on Matters Concerning Withholding of
Income Tax of Non-resident Enterprises as Source, or SAT Bulletin
37, which repealed the entire Circular 698 and the provision in
relation to the time limit for the withholding agent to declare to
the competent tax authority for payment of such tax of SAT Bulletin
7. Pursuant to SAT Bulletin 37, the income from property transfer,
as stipulated in the second item under Article 19 of the Law on
Enterprise Income Tax, shall include the income derived from
transferring such equity investment assets as stock equity. The
balance of deducting the equity’s net value from the total income
from equity transfer shall be taxable income from equity transfer.
Where a withholding agent enters into a business contract,
involving the income specified in the third paragraph of Article 3
in the Law on Enterprise Income Tax, with a non-resident
enterprise, the tax-excluding income of the non-resident enterprise
will be treated as the tax-including income, based on which the tax
payment will be calculated and remitted, if it is agreed in the
contract that the withholding agent shall assume the tax
payable.
There has been very limited application of SAT Bulletin 7 and
SAT Bulletin 37 because these regulations were newly issued and
came into force in February 2015 and in December 2017 respectively.
During the effective period of SAT Circular 698, some intermediary
holding companies were actually looked through by the PRC tax
authorities, and consequently the non-PRC resident investors were
deemed to have transferred the PRC subsidiary and PRC corporate
taxes were assessed accordingly. It is possible that we or our
non-PRC resident investors may become at risk of being taxed under
SAT Bulletin 7 and SAT Bulletin 37 and may be required to
expend valuable resources to comply with SAT Bulletin 7 and
SAT Bulletin 37 or to establish that we or our non-PRC resident
investors should not be taxed under SAT Bulletin 7 and SAT Bulletin
37, which may have an adverse effect on our financial condition and
results of operations or such non-PRC resident investors’
investment in us.
Our PRC subsidiary is subject to restrictions on paying
dividends or making other payments to us, which may restrict our
ability to satisfy our liquidity requirements.
We are a holding company incorporated in the British Virgin
Islands. We may need dividends and other distributions on equity
from our PRC subsidiary to satisfy our liquidity requirements.
Current PRC regulations permit our PRC subsidiary to pay dividends
to us only out of their accumulated profits, if any, determined in
accordance with PRC accounting standards and regulations. In
addition, our PRC subsidiary is required to set aside at least 10%
of their respective accumulated profits each year, if any, to fund
certain reserve funds until the total amount set aside reaches 50%
of their respective registered capital. Our PRC subsidiary may also
allocate a portion of its after-tax profits based on PRC accounting
standards to employee welfare and bonus funds at their discretion.
These reserves are not distributable as cash dividends.
Furthermore, if our PRC subsidiary incurs 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 materially and adversely affect our
PRC subsidiary’s ability to pay dividends and other distributions
to us. Any limitation on the ability of our subsidiary to
distribute dividends to us or on the ability of our PRC
consolidated VIE to make payments to us may restrict our ability to
satisfy our liquidity requirements.
In addition, the EIT Law, and its implementation rules provide that
a withholding tax rate of up to 10% will be applicable to dividends
payable by Chinese companies to non-PRC-resident enterprises unless
otherwise exempted or reduced according to treaties or arrangements
between the PRC central government and governments of other
countries or regions where the non-PRC-resident enterprises are
incorporated.
Governmental control of currency conversion may affect the
value of your investment.
The PRC government imposes controls on the convertibility of the
RMB into foreign currencies and, in certain cases, the remittance
of currency out of China. We receive substantially all of our
revenues in RMB. Under our current corporate structure, our company
in the British Virgin Islands may rely on dividend payments from
our PRC subsidiary to fund any cash and financing requirements we
may have. Under existing PRC foreign exchange regulations, payments
of current account items, such as profit distributions and trade
and service-related foreign exchange transactions, can be made in
foreign currencies without prior approval from SAFE by complying
with certain procedural requirements. Therefore, our PRC subsidiary
in China is able to pay dividends in foreign currencies to us
without prior approval from SAFE, subject to the condition that the
remittance of such dividends outside of the PRC complies with
certain procedures under PRC foreign exchange regulation, such as
the overseas investment registrations by our shareholders or the
ultimate shareholders of our corporate shareholders who are PRC
residents. But approval from or registration with appropriate
government authorities is required where RMB is to be converted
into foreign currency and remitted out of China to pay capital
expenses such as the repayment of loans denominated in foreign
currencies. The PRC government may also at its discretion restrict
access in the future to foreign currencies for current account
transactions. If the foreign exchange control system prevents us
from obtaining sufficient foreign currencies to satisfy our foreign
currency demands, we may not be able to pay dividends in foreign
currencies to our shareholders, including holders of our ordinary
shares.
The M&A Rules and certain other PRC regulations establish
complex procedures for some acquisitions of Chinese companies by
foreign investors, which could make it more difficult for us to
pursue growth through acquisitions in China.
The M&A Rules discussed in the preceding risk factor and
recently adopted regulations and rules concerning mergers and
acquisitions established additional procedures and requirements
that could make merger and acquisition activities by foreign
investors more time consuming and complex. For example, the M&A
Rules require that the MOC be notified in advance of any
change-of-control transaction in which a foreign investor takes
control of a PRC domestic enterprise, if (i) any important
industry is concerned, (ii) such transaction involves factors
that have or may have impact on the national economic security, or
(iii) such transaction will lead to a change in control of a
domestic enterprise which holds a famous trademark or PRC
time-honored brand. Mergers, acquisitions or contractual
arrangements that allow one market player to take control of or to
exert decisive impact on another market player must also be
notified in advance to the MOC when the threshold under the
Provisions on Thresholds for Prior Notification of Concentrations
of Undertakings, or the Prior Notification Rules, issued by the
State Council in August 2008 is triggered. In addition, the
security review rules issued by the MOC that became effective in
September 2011 specify that mergers and acquisitions by foreign
investors that raise “national defense and security” concerns and
mergers and acquisitions through which foreign investors may
acquire de facto control over domestic enterprises that raise
“national security” concerns are subject to strict review by the
MOC, and the rules prohibit any activities attempting to bypass a
security review, including by structuring the transaction through a
proxy or contractual control arrangement. In the future, we may
grow our business by acquiring complementary businesses. Complying
with the requirements of the above-mentioned regulations and other
relevant rules to complete such transactions could be time
consuming, and any required approval processes, including obtaining
approval from the MOC or its local counterparts may delay or
inhibit our ability to complete such transactions. It is unclear
whether our business would be deemed to be in an industry that
raises “national defense and security” or “national security”
concerns. However, the MOC or other government agencies may publish
explanations in the future determining that our business is in an
industry subject to the security review, in which case our future
acquisitions in the PRC, including those by way of entering into
contractual control arrangements with target entities, may be
closely scrutinized or prohibited. Our ability to expand our
business or maintain or expand our market share through future
acquisitions would as such be materially and adversely
affected.
Risks Related to Our Ordinary Shares
The trading prices of our ordinary shares are likely to be
volatile, which could result in substantial losses to
investors.
The trading prices of our ordinary shares are likely to be volatile
and could fluctuate widely due to factors beyond our control. This
may happen because of broad market and industry factors, like the
performance and fluctuation of the market prices of other companies
with business operations located mainly in China that have listed
their securities in the United States. In recent months, the
widespread negative publicity of alleged fraudulent accounting
practices and poor corporate governance of certain U.S. public
companies with operations in China were believed to have negatively
affected investors’ perception and sentiment towards companies with
connection with China, which significantly and negatively affected
the trading prices of some companies’ securities listed in the U.S.
Once we become a public company, any similar negative publicity or
sentiment may affect the performances of our ordinary shares. A
number of PRC companies have listed or are in the process of
listing their securities on U.S. stock markets. The securities of
some of these companies have experienced significant volatility,
including price declines in connection with their initial public
offerings. The trading performances of these PRC companies’
securities after their offerings may affect the attitudes of
investors toward PRC companies listed in the United States in
general and consequently may impact the trading performance of our
ordinary shares, regardless of our actual operating
performance.
Because we are incorporated under the laws of the British
Virgin Islands, we may be required to comply with increased
reporting requirements.
As the global regulatory and tax environment evolves, we may be
subject to new or different statutory and regulatory requirements
(for example, on January 1, 2019, the Economic Substance (Companies
and Limited Partnerships) Act, 2018 of the British Virgin Islands
came into force and related regulations and guidance are
anticipated in due course). It is difficult to predict what impact
the adoption of these laws or regulations, or changes in the
interpretation of existing laws or regulations could have on our
business, however, compliance with various additional obligations
may create significant additional costs that may be borne by us or
otherwise affect our management and operations.
In addition to market and industry factors, the price and trading
volume for our ordinary shares may be highly volatile for factors
specific to our own operations, including the following:
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the
financial projections that we may choose to provide to the public,
any changes in those projections or our failure for any reason to
meet those projections; |
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variations
in our net revenues, net loss/income and cash flow; |
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changes
in the economic performance or market valuation of other education
companies; |
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announcements
of new investments, acquisitions by us or our competitors,
strategic partnerships, joint ventures or capital
commitments; |
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announcements
of new services and expansions by us or our
competitors; |
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detrimental
negative publicity about us, our competitors or our
industry; |
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changes
in financial estimates by securities analysts; |
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additions
or departures of personnel; |
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release
of lock-up or other transfer restrictions on our outstanding equity
securities or sales of additional equity securities; |
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potential
litigation or regulatory investigations; |
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substantial
sales or perception of sales of our ordinary shares in the public
market; |
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fluctuations
in market prices for our products and securities; and |
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general
economic, regulatory or political conditions in China and the
U.S. |
Any of these factors may result in large and sudden changes in the
volume and price at which our ordinary shares will trade. In
addition, the stock market in general, and the market prices for
companies with operations in China in particular, have experienced
volatility that often has been unrelated to the operating
performance of such companies. The securities of some PRC companies
that have listed their securities in the United States have
experienced significant volatility since their initial public
offerings, including, in some cases, substantial price declines in
the trading prices of their securities. The trading performances of
these PRC companies’ securities after their offerings may affect
the attitudes of investors toward PRC companies listed in the
United States, which consequently may impact the trading
performance of our ordinary shares, regardless of our actual
operating performance. In addition, any negative news or
perceptions about inadequate corporate governance practices or
fraudulent accounting, corporate structure or other matters of
other PRC companies may also negatively affect the attitudes of
investors towards PRC-based companies in general, including us,
regardless of whether we have conducted any inappropriate
activities. Further, the global financial crisis and the ensuing
economic recessions in many countries have contributed and may
continue to contribute to extreme volatility in the global stock
markets. These broad market and industry fluctuations may adversely
affect operating performance. Volatility or a lack of positive
performance in our share price may also adversely affect our
ability to retain key employees, some of whom have been granted
restricted shares under our share incentive plan.
We may not maintain our listing on NASDAQ which could limit
investors’ ability to make transactions in our securities and
subject us to additional trading restrictions.
Our ordinary shares are listed on NASDAQ. We cannot assure you that
our securities will continue to be listed on NASDAQ in the future.
In order to continue listing our securities on NASDAQ, we must
maintain certain financial, distribution and share price levels.
Generally, we must (i) maintain a minimum amount in shareholders’
equity (generally above $2,500,000), maintain a minimum market
value of listed securities (generally above $35,000,000) or have a
minimum net income from operations for the prior year of for two of
the preceding years (generally above $500,000); and (ii) a minimum
number of publicly held shares (generally greater than 500,000) and
a minimum number of public shareholders (generally greater than 300
shareholders). Our ordinary shares also cannot have a bid price of
less than $1.00. Moreover, we must comply with certain listing
standards regarding the independence of our board of directors and
members of our audit committee. In addition, NASDAQ recently issued
a series of rules which provide the exchange with broad
discretionary authority over continued listing of securities. Among
other aspects, NASDAQ may deny continued listing of a company when
an officer or a director of the company has a history of regulatory
misconduct, the company fails to make any meaningful progress on
its business plan two years after listing and has not generated any
revenue or when the company engaged an auditor that has not been
subject to an inspection by the Public Company Accounting Oversight
Board (PCAOB), an auditor that PCAOB cannot inspect, or an auditor
that has not demonstrated sufficient resources, geographic reach or
experience to adequately perform the company’s audit. We are
currently in full compliance with these requirements, but we may
not continue to be able to meet these requirements in the
future.
If NASDAQ delists our securities from trading on its exchange and
we are not able to list our securities on another national
securities exchange, we could face significant material adverse
consequences including:
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limited
availability of market quotations for our securities; |
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reduced
liquidity with respect to our securities; |
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a
determination that our shares are “penny stocks,” which will
require brokers trading in our shares to adhere to more stringent
rules and possibly resulting in a reduced level of trading activity
in the secondary trading market for our ordinary
shares; |
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limited
amount of news and analyst coverage for our company;
and |
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a
decreased ability to issue additional securities or obtain
additional financing in the future. |
If securities or industry analysts do not publish research or
reports about our business, or if they adversely change their
recommendations regarding our ordinary shares, the market price for
our ordinary shares and trading volume could decline.
The trading market for our ordinary shares will be influenced by
research reports and ratings that industry or securities analysts
or ratings agencies publish about us, our business and the online
education market in China in general. We do not have any control
over these analysts or agencies. If one or more analysts or
agencies who cover us downgrade our ordinary shares, or publish
unfavorable research about us, the market price for our ordinary
shares would likely decline. If one or more of these analysts cease
to cover us or fail to regularly publish reports on us, we could
lose visibility in the financial markets, which, in turn, could
cause the market price or trading volume for our ordinary shares to
decline.
The sale or availability for sale of substantial amounts of
our ordinary shares could adversely affect their market
price.
Sales of substantial amounts of our Ordinary shares in the public
market, or the perception that these sales could occur, could
adversely affect the market price of our ordinary shares and could
materially impair our ability to raise capital through equity
offerings in the future. The ordinary shares sold in the IPO are
freely tradable without restriction or further registration under
the Securities Act, and shares held by our existing shareholders
may also be sold in the public market in the future subject to the
restrictions in Rule 144 and Rule 701 under the
Securities Act and the applicable lock-up agreements. In connection
with the IPO, we, our directors and executive officers, and our
existing shareholders have agreed not to sell any ordinary shares
for 180 days after the effective date of the registration
statement on Form F-1 (No. 333-223804), without the prior written
consent of the underwriter. However, the underwriter may release
these securities from these restrictions at any time, subject to
applicable regulations of the Financial Industry Regulatory
Authority, Inc. We cannot predict what effect, if any, market
sales of securities held by our significant shareholders or any
other shareholder or the availability of these securities for
future sale will have on the market price of our ordinary
shares.
Raising additional capital may cause dilution to our existing
stockholders, restrict our operations or require us to relinquish
rights to our technologies.
We may seek additional capital through a combination of public and
private equity offerings, debt financings, collaborations and
licensing arrangements. To the extent that we raise additional
capital through the sale of equity or debt securities, your
ownership interest will be diluted and the terms may include
liquidation or other preferences that adversely affect your rights
as a shareholder. The incurrence of indebtedness would result in
increased fixed payment obligations and could involve restrictive
covenants, such as limitations on our ability to incur additional
debt, limitations on our ability to acquire or license intellectual
property rights and other operating restrictions that could
adversely impact our ability to conduct our business. If we raise
additional funds through strategic partnerships and alliances and
licensing arrangements with third parties, we may have to
relinquish valuable rights to our technologies or grant licenses on
terms unfavorable to us.
There can be no assurance that we will not be a passive
foreign investment company, or PFIC, for United States federal
income tax purposes for any taxable year, which could subject
United States investors in our ordinary shares to significant
adverse United States income tax consequences.
A non-United States corporation, such as our company, will be
classified as a PFIC, for U.S. federal income tax purposes for any
taxable year, if either (i) 75% or more of its gross income
for such year consists of certain types of “passive” income or
(ii) 50% or more of the value of its assets (determined on the
basis of a quarterly average) during such year is attributable to
assets that produce or are held for the production of passive
income (the “asset test”). Although the law in this regard is not
clear, we treat our consolidated VIEs as being owned by us for U.S.
federal income tax purposes because we exercise effective control
over the consolidated VIEs and are entitled to substantially all of
their economic benefits. As a result, we consolidate their results
of operations in our consolidated U.S. GAAP financial
statements. Assuming that we are the owner of our consolidated VIEs
for U.S. federal income tax purposes, and based upon our current
and expected income and assets (taking into account goodwill, other
unbooked intangibles, and the proceeds from the IPO) and the value
of our ordinary shares, we do not presently expect to be a PFIC for
the current taxable year or the foreseeable future.
While we do not expect to be or become a PFIC in the current or
foreseeable taxable years, the determination of whether we will be
or become a PFIC will depend, in part, upon the value of our
goodwill and other unbooked intangibles. Furthermore, the
determination of whether we will be or become a PFIC will depend,
in part, on the composition of our income and assets. Fluctuations
in the market price of our ordinary shares may cause us to become a
PFIC for the current or subsequent taxable years. The composition
of our income and assets may also be affected by how, and how
quickly, we use our liquid assets and the cash raised in the IPO.
In addition, because there are uncertainties in the application of
the relevant rules, it is possible that the Internal Revenue
Service may challenge our classification of certain income and
assets as non-passive or our valuation of our tangible and
intangible assets.
Because determination of PFIC status is a fact-intensive inquiry
made on an annual basis that depends upon the composition of our
assets and income, no assurance can be given that we are not or
will not become classified as a PFIC. If we were to be or become
classified as a PFIC in any taxable year, a U.S. Holder (as defined
in “Taxation—United States Federal Income Taxation”) may incur
significantly increased U.S. federal income tax on gain recognized
on the sale or other disposition of our ordinary shares and on the
receipt of distributions on the ordinary shares to the extent such
gain or distributions is treated as an “excess distribution” under
the U.S. federal income tax rules. Further, if we are classified as
a PFIC for any year during which a U.S. Holder holds our ordinary
shares, we generally will continue to be treated as a PFIC for all
succeeding years during which such U.S. Holder holds our ordinary
shares. You are urged to consult your tax advisor concerning the
United States federal income tax consequences of acquiring,
holding, and disposing of ordinary shares if we are or become
classified as a PFIC. For more information, see “Taxation—United
States Federal Income Taxation.”
You may face difficulties in protecting your interests, and
your ability to protect your rights through U.S. courts may be
limited, because we are incorporated under British Virgin Islands
law.
We are a company limited by shares incorporated under the laws of
the British Virgin Islands. Our corporate affairs are governed by
our memorandum and articles of association, the BVI Business
Companies Act (the “Act”) and the common law of the British Virgin
Islands. The rights of shareholders to take action against the
directors, actions by minority shareholders and the fiduciary
responsibilities of our directors to us under British Virgin
Islands law are to a large extent governed by the Act and the
common law of the British Virgin Islands. The common law of the
British Virgin Islands is derived in part from comparatively
limited judicial precedent in the British Virgin Islands as well as
from the common law of England, the decisions of whose courts are
of persuasive authority, but are not binding, on a court in the
British Virgin Islands. The rights of our shareholders and the
fiduciary responsibilities of our directors under British Virgin
Islands law are codified in the Act but are not as clearly
established as they would be under statutes or judicial precedent
in some jurisdictions in the United States. In particular, the
British Virgin Islands has a less developed body of securities laws
than the United States. Some U.S. states, such as Delaware, have
more fully developed and judicially interpreted bodies of corporate
law than the British Virgin Islands. In addition, British Virgin
Islands companies may not have standing to initiate a shareholder
derivative action in a federal court of the United States.
The British Virgin Islands courts are also unlikely:
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to
recognize or enforce against us judgments of courts of the United
States based on certain civil liability provisions of U.S.
securities laws; and |
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to
impose liabilities against us, in original actions brought in the
British Virgin Islands, based on certain civil liability provisions
of U.S. securities laws that are penal in nature. |
There is no statutory recognition in the British Virgin Islands of
judgments obtained in the United States, although the courts of the
British Virgin Islands will in certain circumstances recognize and
enforce a non-penal judgment of a foreign court of competent
jurisdiction without retrial on the merits.
As a result of all of the above, public shareholders may have more
difficulty in protecting their interests in the face of actions
taken by management, members of the board of directors or
controlling shareholders than they would as public shareholders of
a company incorporated in the United States.
Judgments obtained against us by our shareholders may not be
enforceable.
We are a British Virgin Islands company and all of our assets are
located outside of the United States. The majority of our current
operations are conducted in the China. In addition, a majority of
our current directors and officers are nationals and residents of
countries other than the United States. Substantially all of the
assets of these persons are located outside the United States. As a
result, it may be difficult or impossible for you to bring an
action against us or against these individuals in the United States
in the event that you believe that your rights have been infringed
under the United States federal securities laws or otherwise. Even
if you are successful in bringing an action of this kind, the laws
of the British Virgin Islands and of China may render you unable to
enforce a judgment against our assets or the assets of our
directors and officers.
We have broad discretion in the use of our cash, including
the net proceeds from our IPO, and might not use them
effectively.
Our management has broad discretion in the application of our cash,
including the net proceeds from the IPO, and could spend our cash
in ways that do not improve our results of operations or enhance
the value of our ordinary shares. The failure by our management to
apply these funds effectively could result in financial losses that
could have a material adverse effect on our business, cause the
price of our common stock to decline. Pending their use, we may
invest our cash, including the net proceeds from the IPO, in a
manner that does not produce income or that loses value.
We are an emerging growth company within the meaning of the
Securities Act and may take advantage of certain reduced reporting
requirements.
We are an “emerging growth company,” as defined in the JOBS Act,
and we may take advantage of certain exemptions from various
requirements applicable to other public companies that are not
emerging growth companies including, most significantly, not being
required to comply with the auditor attestation requirements of
Section 404 for so long as we are an emerging growth company.
As a result, if we elect not to comply with such auditor
attestation requirements, our investors may not have access to
certain information they may deem important.
The JOBS Act also provides that an emerging growth company does not
need to comply with any new or revised financial accounting
standards until such date that a private company is otherwise
required to comply with such new or revised accounting standards.
However, we have elected to “opt out” of this provision and, as a
result, we will comply with new or revised accounting standards as
required when they are adopted for public companies. This decision
to opt out of the extended transition period under the JOBS Act is
irrevocable.
We are a foreign private issuer within the meaning of the
rules under the Exchange Act, and as such we are exempt from
certain provisions applicable to U.S. domestic public
companies.
Because we qualify as a foreign private issuer under the Exchange
Act, we are exempt from certain provisions of the securities rules
and regulations in the United States that are applicable to U.S.
domestic issuers, including:
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the
rules under the Exchange Act requiring the filing with the SEC of
quarterly reports on Form 10-Q or current reports on
Form 8-K; |
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the
sections of the Exchange Act regulating the solicitation of
proxies, consents, or authorizations in respect of a security
registered under the Exchange Act; |
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the
sections of the Exchange Act requiring insiders to file public
reports of their share ownership and trading activities and
liability for insiders who profit from trades made in a short
period of time; and |
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the
selective disclosure rules by issuers of material nonpublic
information under Regulation FD. |
We will be required to file an annual report on Form 20-F
within four months of the end of each fiscal year. In addition, we
intend to publish our results on a semi-annual basis as press
releases, distributed pursuant to the rules and regulations of
NASDAQ. Press releases relating to financial results and material
events will also be furnished to the SEC on Form 6-K. However,
the information we are required to file with or furnish to the SEC
will be less extensive and less timely as compared to that required
to be filed with the SEC by U.S. domestic issuers. As a British
Virgin Islands company listed on NASDAQ, we are subject to the
NASDAQ corporate governance listing standards. However, NASDAQ
rules permit a foreign private issuer like us to follow the
corporate governance practices of its home country. Certain
corporate governance practices in the British Virgin Islands, which
is our home country, may differ significantly from the NASDAQ
corporate governance listing standards. Although we do not
currently plan to utilize the home country exemption for corporate
governance matters, to the extent that we choose to do so in the
future, our shareholders may be afforded less protection than they
otherwise would under the NASDAQ corporate governance listing
standards applicable to U.S. domestic issuers. As a result, you may
not be afforded the same protections or information, which would be
made available to you, were you investing in a U.S. domestic
issuer.
We will incur increased costs as a result of being a public
company, particularly after we cease to qualify as an “emerging
growth company.”
We are a public company and expect to incur significant legal,
accounting and other expenses that we did not incur as a private
company. The Sarbanes-Oxley Act of 2002, as well as rules
subsequently implemented by the SEC and NASDAQ, impose various
requirements on the corporate governance practices of public
companies. As a company with less than US$1.07 billion in
revenues for our last fiscal year, we qualify as an “emerging
growth company” pursuant to the JOBS Act. An emerging growth
company may take advantage of specified reduced reporting and other
requirements that are otherwise applicable generally to public
companies. These provisions include exemption from the auditor
attestation requirement under Section 404 of the
Sarbanes-Oxley Act of 2002 in the assessment of the emerging growth
company’s internal control over financial reporting and permission
to delay adopting new or revised accounting standards until such
time as those standards apply to private companies. However, we
have elected to “opt out” of this provision and, as a result, we
will comply with new or revised accounting standards as required
when they are adopted for public companies. This decision to opt
out of the extended transition period under the JOBS Act is
irrevocable.
We expect these rules and regulations to increase our legal and
financial compliance costs and to make some corporate activities
more time-consuming and costly. After we are no longer an “emerging
growth company”, we expect to incur significant expenses and devote
substantial management effort toward ensuring compliance with the
requirements of Section 404 of the Sarbanes-Oxley Act of 2002
and the other rules and regulations of the SEC. For example, as a
result of becoming a public company, we will need to increase the
number of independent directors and adopt policies regarding
internal controls and disclosure controls and procedures. We also
expect that operating as a public company will make it more
difficult and more expensive for us to obtain director and officer
liability insurance, and we may be required to accept reduced
policy limits and coverage or incur substantially higher costs to
obtain the same or similar coverage. In addition, we will incur
additional costs associated with our public company reporting
requirements. It may also be more difficult for us to find
qualified persons to serve on our board of directors or as
executive officers. We are currently evaluating and monitoring
developments with respect to these rules and regulations, and we
cannot predict or estimate with any degree of certainty the amount
of additional costs we may incur or the timing of such costs.
In the past, shareholders of a public company often brought
securities class action suits against the company following periods
of instability in the market price of that company’s securities. If
we were involved in a class action suit, it could divert a
significant amount of our management’s attention and other
resources from our business and operations, which could harm our
results of operations and require us to incur significant expenses
to defend the suit. Any such class action suit, whether or not
successful, could harm our reputation and restrict our ability to
raise capital in the future. In addition, if a claim is
successfully made against us, we may be required to pay significant
damages, which could have a material adverse effect on our
financial condition and results of operations.
ITEM 4. INFORMATION
ON THE COMPANY
4A. History and Development of the Company
We began our operations in December 1999 through Beijing Distance
Learning, a company formed under the laws of PRC. Beijing Distance
Learning was formed to engage in the business of online training
for self-taught higher education examination in Beijing. In July
2012, we formed Wah Fu Education Group Limited under the laws of
the British Virgin Islands as an offshore holding company under the
former name “Wah Fu Trade Limited”, which was changed to our
current name in 2016. In May 2016, we established our wholly-owned
Hong Kong subsidiary, Wah Fu Education Holding Limited, which
currently exists as a holding company. We conduct our business
through our subsidiaries and affiliated entities in China, which
are described below. Through contractual arrangements described
below, we control 100% of Beijing Digital Information. These
contractual arrangements allow us to effectively control and derive
100% of the economic interest from Beijing Digital
Information.1 In addition, we directly own equity
interest of a number of PRC entities. Below is a list of our
operating subsidiaries and variable interest entity:
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Beijing
Huaxia Dadi Distance Learning Services Co., Ltd.: our wholly
owned subsidiary formed under the laws of PRC in 1999. The current
business operations of Beijing Distance Learning include research
and development of long-distance education software and development
of long-distance education resources and information. |
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Beijing
HuaXiaDadi Digital Information Technology Co., Ltd.: our
variable interest entity formed under the laws of PRC in September
2000. The current business operations of Beijing Digital
Information include platform development, upgrading, maintenance
and other related services. This entity also holds an ICP license
for our website, www.edu-edu.com. |
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Shanghai
Xin Fu Network Technology Co., Ltd.: our wholly owned
subsidiary formed under the laws of PRC in July 2015 to engage in
the business of development of internet technology and computer
technology, technological consulting, services and transfer.
Shanghai Xin Fu currently doesn’t have any business
operations. |
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Shanghai
Xia Shu Network Technology Co., Ltd.: our wholly owned
subsidiary formed under the laws of PRC in April 2016 to enter into
agreements relating to the platform in Shanghai for tax
reasons. |
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Hunan
Huafu Haihui Learning Technology Co., Ltd.: our subsidiary
formed under the laws of PRC in June 2015. We own 75% of the equity
interests of this entity. Its primary business purpose is to
provide technology services in Hunan relating to online platforms
for preparation of various examinations. |
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Huaxia
MOOC(Hubei) Network Technology Co., Ltd.: a company formed
under the laws of PRC in March 2017 to provide exam preparation
services in Hubei. We currently own 65% of the equity interest of
this entity. Cuntao Hou, our Vice President of Sales, currently
owns 5% of the equity interest in this entity. The rest of its
equity interest is owned by third party individuals and entities
that are not affiliated with us or any of our officers and
directors. |
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Nanjin
Suyun Education Technology Co., Ltd.: a company formed under
the laws of PRC in March 2017 to provide exam preparation services
in Jiangsu. We currently own 70% of the equity interest of this
entity. The rest of its equity interest is owned by third party
individuals and entities that are not affiliated with us or any of
our officers and directors. |
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Guizhou
Huafu Qianyun Network Technology Co., Ltd.: a company formed
under the laws of PRC in April 2017 to provide exam preparation
services in Guizhou. We currently own 51% of the equity interest of
this entity. The rest of its equity interest is owned by third
party individuals and entities that are not affiliated with us or
any of our officers and directors. |
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Fuzhou
Huafu Mingjiao Technology Co., Ltd.: a company formed under the
laws of PRC in May 2018 to provide exam preparation services in
Fujian. We currently own 65% of the equity interest of this entity.
The rest of its equity interest is owned by third party individuals
that are not affiliated with us or any of our officers and
directors. |
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Liaoning
Huafu Zhongtai Learning Technology Co., Ltd.: a company formed
under the laws of PRC in June 2018 to provide exam preparation
services in Liaoning. We currently own 70% of the equity interest
of this entity. The rest of its equity interest is owned by third
parties that are not affiliated with us or any of our officers and
directors. |
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Guangxi Huafu Quanping Education Technology Cot., Ltd.: a
company formed under the laws of PRC in August 2019 to provide
online education services. We currently own 55% of the equity
interest of this entity. The rest of its equity interest is owned
by a third party company.
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Huafu Wanrun (Guangzhou) Education Technology Co., Ltd.: a
company formed under the laws of PRC in October 2019 to provide
online education services. We currently own 60% of the equity
interest of this entity. The rest of its equity interest is owned
by two individuals that are not affiliated with us or any of our
officers and director.
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Sichuan Huafu Gengyun Education Technology Co., Ltd.: a
company formed under the laws of PRC in November 2019 to provide
online education services. We currently own 60% of the equity
interest of this entity. The rest of its equity interest is owned
by two individuals that are not affiliated with us or any of our
officers and director.
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Due to PRC legal restrictions on foreign ownership and investment
in the value-added telecommunications market, we operate our online
platform through Beijing Digital Information, our PRC consolidated
variable interest entity (“VIE”). Beijing Digital Information holds
our ICP license necessary to operate our online platform in China,
our domain names, including www.edu-edu.com, our registered
trademarks in China and our registered software copyrights that are
essential to the Company’s online operation in PRC. We rely on a
series of contractual arrangements among Beijing Digital
Information and its shareholders to operate our online and mobile
platforms in China. These contractual arrangements enable us
to:
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exercise
effective control over Beijing Digital Information; |
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receive
substantially all of the economic benefits of Beijing Digital
Information in consideration for the services provided by us;
and |
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have
an exclusive option to purchase all of the equity interests in
Beijing Digital Information when and to the extent permitted under
PRC law. |
We do not own equity interests in Beijing Digital Information.
However, as a result of these contractual arrangements, we are the
primary beneficiary of Beijing Digital Information and treat it as
our consolidated VIE under U.S. GAAP. We depend upon dividends
and other distributions paid to us by our PRC subsidiaries,
primarily Beijng Distance Learning. Beijing Distance Learning
partially relies on service fees paid by our variable interest
entity Beijing Digital Information. For the year ended March 31,
2020 and 2019, 5.5% and 29.6% of our consolidated revenue was
derived from Beijing Digital Information. Our affiliated variable
interest entity, Beijing Digital Information, did not pay any fee
to our PRC subsidiary, Beijing Distance Learning for fiscal years
ending March 31, 2020 and 2019 since our VIE agreements were
executed in August 2017. We did not receive any dividends from our
PRC subsidiaries in the past two fiscal years and expect that these
levels will continue in the future.
As discussed in details in “Regulations – Regulations Relating to
Foreign Investment” and “Regulations - Regulations Relating to
Foreign Exchange”, current PRC laws and regulations set forth
restrictions on payment of dividends by PRC companies, foreign
exchange and foreign investment in PRC companies. As such, we do
not have unfettered access to revenues of our PRC subsidiaries and
variable interest entity. See “Risk Factors – Risks Related to
Doing Business in China” and “Risk Factor – Risks Related to Our
Corporate Structure.”
The following is a summary of the contracts by and among our
subsidiary Beijing Distance Learning, our PRC consolidated VIE
Beijing Digital Information, and the shareholders of Beijing
Digital Information; each of which is currently in full force and
effect.
The series of contractual agreements include the following:
Exclusive Business Cooperation Agreement
Under the business cooperation agreement, Beijing Digital
Information engages Beijing Distance Learning as its exclusive
technical and operational consultant and under which Beijing
Distance Learning agrees to assist in business development and
related services necessary to conduct Beijing Digital Information’
operational activities. Beijing Digital Information shall not seek
or accept similar services from other providers without the prior
written approval of Beijing Distance Learning. The agreements will
be effective as long as Beijing Digital Information exists. Beijing
Distance Learning may terminate this agreement at any time by
giving a prior written notice to Beijing Digital Information.
Under the above agreements, the shareholders of Beijing Digital
Information irrevocably granted Beijing Distance Learning the power
to exercise all voting rights to which they were entitled. In
addition, Beijing Distance Learning has the option to acquire all
of the equity interests in Beijing Digital Information, to the
extent permitted by the then-effective PRC laws and regulations,
for nominal consideration. Finally, Beijing Distance Learning is
entitled to receive service fees for certain services to be
provided to Beijing Digital Information.
Exclusive Option Agreement
Under the exclusive option agreement, in consideration of an
aggregate payment of RMB 2,000,000, each of the shareholders of
Beijing Digital Information has granted Beijing Distance Learning
or its designated representative(s) an irrevocable and exclusive
option to purchase their equity interests in Beijing Digital
Information when and to the extent permitted by PRC law. Beijing
Distance Learning or its designated representative(s) has sole
discretion as to when to exercise such options, either in part or
in full. Without Beijing Distance Learning’s written consent, the
shareholders of Beijing Digital Information shall not transfer,
donate, pledge, or otherwise dispose any equity interests of
Beijing Digital Information in any way. The acquisition price for
the equity interests will be RMB 2,000,000 or the minimum amount of
consideration permitted under the PRC law at the time when the
option is exercised if such minimum price is higher. The agreement
cannot be terminated by Beijing Digital Information or their
shareholders. The agreement remains in effective until all the
equity interests of each shareholder of Beijing Digital Information
transfers to Beijing Distance Learning or its designee(s).
Equity Interest Pledge Agreement
Under the equity interest pledge agreement, each of the
shareholders pledged all of their equity interests in Beijing
Digital Information to Beijing Distance Learning as collateral to
secure their obligations under the equity pledge agreement, the
exclusive option agreement and the powers of attorney. If the
shareholders of Beijing Digital Information breach their respective
contractual obligations, Beijing Distance Learning, as pledgee,
will be entitled to certain rights, including the right to dispose
the pledged equity interests. Pursuant to the agreement, the
shareholders of Beijing Digital Information shall not transfer,
assign or otherwise create any new encumbrance on their respective
equity interest in Beijing Digital Information without prior
written consent of Beijing Distance Learning. The equity pledge
right held by Beijing Distance Learning will terminate upon the
satisfaction of all its obligations by all parties under the VIE
contractual arrangements.
Power of Attorney
Each of the shareholders of Beijing Digital Information has
executed a power of attorney to grant Beijing Distance Learning the
power of attorney to act on his or her behalf on all matters
pertaining to Beijing Digital Information and to exercise all of
his or her rights as a shareholder of Beijing Digital Information,
including but not limited to convene, attend and vote at
shareholders’ meetings and designate and appoint directors and
senior management members. The power of attorney will remain in
effect unless each shareholder ceases to own any equity interests
of Beijing Digital Information.
If our variable interest entity and its shareholders fail to
perform their obligations under the above contractual arrangements,
we could be limited in our ability to enforce these VIE agreements
and maintain effective control over our variable interest entity
Beijing Digital Information. See “Risk Factors – Risks Related to
Our Corporate Structure - Any failure by Beijing Digital
Information or its shareholders to perform their obligations under
our contractual arrangements with them would have a material and
adverse effect on our business.” If we are unable to maintain
effective control, we would not be able to continue to consolidate
Beijing Digital Information’s financial results. See “Risk Factors
– Risks Related to Our Corporate Structure - If the PRC government
finds that the contractual arrangements that establish the
structure for holding our Internet Content Provider (“ICP”) license
do not comply with applicable PRC laws and regulations, we could be
subject to severe penalties or be forced to relinquish our
interests in those operations” and “Risk Factors – Risks Related to
Our Corporate Structure - We rely on contractual arrangements with
Beijing Digital Information and its shareholders for a portion of
our business operations, which may not be as effective as direct
ownership in providing operational control.”
4B. Business Overview
We are a provider of online exam preparation services and related
technology solutions as well as a producer of online training
course materials in China and have been in operation for over 20
years. We develop our own online education materials that are
offered through the cloud and that can be used for a wide range of
purposes, such as standard examination preparation, professional
training and interactive programs for educational purposes other
than exam preparation. We also produce thousands of online classes.
Our services not only include development of online education
platforms and online course materials but also includes
comprehensive cloud service for online education and exam
preparation training.
Our Services
We currently offer online education services and technology
research & development services. Our online education services
currently comprises Online Education Cloud Services and Online
Training Services.
Online Education Cloud Service (“B2B2C”)
We provide online education platforms to institutions, such as
universities and training institutions, and online course
development service companies. Our teachers are well regarded and
recommended by our clients, which include universities and academic
institutions. Through our product development team, we interview
and enlist teachers who we use to record teaching sessions. In
return, we provide fixed compensation to teachers. We have
developed three separate types of B2B2C platforms: a self-study
examination platform, a continuing education platform and a
non-diploma training platform (which allows students to enroll in
courses for college credit). These platforms are available both
online and via mobile app that we design for each of our clients.
Currently, we are primarily focused on providing clients with B2B2C
services relating to self-study examinations, which are a set of
standard national examinations necessary to obtain college degrees
in China. We have offered such services since September 2009. We
also entered into the adult education field and commenced offering
continuing education platforms in late 2016. Currently, over 1,950
courses are available on such platforms and approximately 95
universities and education institutions are using and testing our
platforms. We commenced offering our non-diploma training platforms
in March 2017. We currently provide services in ten provinces in
China and believe that we are the leading service provider in this
market.
The flow chart below shows our B2B2C service:
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Self-Study
Examination Platform |
This platform is a cloud based education system for universities,
government examination officials as well as students who would like
obtain college degrees through self-taught higher education
examination. We created customized homepage systems for each
university that uses our platform. Our system allows the university
management to import their student data into the data base of our
platform and will generate accounts for each specific student.
Students can login the platform, choose to participate in recorded
or live courses that are available on the platform. The platform
will grant government examination officials the authority to
monitor the learning process of each student. The platform can
record the student’s learning data, giving each student a score for
evaluation of the performance of each course for use by the
university and government officials.
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Continuing
Education Platform |
This platform is also cloud based and targets college students and
students aiming to complete adult higher education. Similar to the
self-study examination platform, this platform offers customized
interface for each university using the platform where the school
management can integrate their student data into the platform.
Students can log in and take courses. The system will keep track of
the students’ leaning data and generate scores based on students’
performance for school evaluation. What’s different from the
self-study examination platform, this platform offers additional
teaching administrative functions, including student profile
management, tuition payment, management of different campus, course
arrangement as well as statistical screening management, etc.
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Non-Diploma
Training Platform |
This platform is cloud based as well, but services training
institutions and individual students. A large number of traditional
face-to-face training institutions can use this platform to provide
their training courses online without overspending on personnel,
servers and online training platform. Similar to the other systems,
the training institutions have their own interfaces and can create
accounts for their students to take courses on the platform. In
addition, the platform also provides a large number of online
educational operations to the training institutions, including the
management of their own courses, and pricing, promotion, enrollment
and payment functions.
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Vocational Education 1+X and Higher
Vocational Enrollment Expansion Teaching and Educational
Administration Platform |
This is a cloud computing platform for vocational education
information management and online teaching. According to the policy
requirements set forth under the “National Vocational Education
Reform Implementation Plan” and other relevant policy requirements
of the PRC Ministry of Education as well as the actual needs of
higher vocational colleges, the platform provides information
services for vocational colleges to implement “Academic Certificate
+ Several Vocational Skill Level Certificates” or “1+X” and higher
vocational enrollment expansion business. It covers admission
evaluation management, educational administration management,
teaching resource management, online learning and other related
aspects, and provides complete solutions for occupational colleges
by providing hardware, software, resources and services.
Huafu e-school system is a website setup system for individuals,
educational institutions and enterprise training centers. It
helps customers without in-house technical capacities to create
their own brand online schools for free, and provides one-stop
“Internet + education” service. The e-school system supports two
cooperation models: online education self-supporting and
cooperative operation. The platform supports multiple terminals, PC
online school, mobile app online school, etc. The self-supporting
program is for our own online training programs and the cooperative
operation is for institutions that we work with. These institutions
can have an independent homepage, which supports their independent
domain name and independent brand. The platform can authorize the
use of Huafu’s existing curriculum resources to institutions or
they can also setup and sell their own training courses.
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Paperless examination platform |
This platform is a complete online examination solution for
paperless examination of all subjects. The platform integrates key
aspects for testing by most universities in China, such as
management of question database, test paper, examination, grading,
management of examination paper monitoring, etc., and provides
related technical services for colleges. Through the platform, the
school carries out routine examination evaluation activities such
as tests, final examinations and make-up examinations. Students’
examination terminals can carry out examinations through app,
browser or client-side. The examination process monitoring can
adopt face recognition or ID card reader recognition for identity
authentication. Teachers can grade papers online or export answers
for marking up paper.
For all the five platforms, we will be paid by the schools or
training institutions based on the number of courses taken by their
students.
Online Training Service (“B2C”)
We provide online training and examination preparation services
directly to students for a fee. We have provided this service since
2000, however, due to limited marketing efforts, the revenue
generated from this service has been limited. We have been
increasing our marketing efforts for our B2C service since early
2017 and our revenue from this service has stabilized during the
year ended March 31, 2019. With the increased demand for continuing
education, we plan to expand our B2C service. In connection with
our B2C service, we provide an online cloud education platform
targeting end users, which is available both online and via the
mobile app we design for each program. We can also license this
platform to other offline education and training institutions for
them to offer online services, and to manage their online courses
and online users. Students that use this service are primarily
college students and students preparing for the self-study
examination. During the year ended March 31, 2020, we provided
approximately 1,104,000 courses to students. The flow chart below
illustrates our B2C services:
Technology Research & Development Services
Another major aspect of our business is dedicated to developing and
maintaining online education platforms and online courses for our
clients, comprising universities, government agencies and private
clients such as publishers. We also provide consulting, maintenance
and updating services relating to online education programs we have
developed for our clients. We have provided these services to our
clients since Beijing Distance Learning commenced operations in
1999. Our largest clients in this segment are World Publishing
(Shanghai) Co., Ltd. and the State Intellectual Property Bureau
Training Center. Pursuant to our agreements with World Publishing
(Shanghai) Co., Ltd., we develop and update platforms for its
Electric Backpack program, an online interactive teaching program
for elementary and middle school students in China. We have been
providing online course development services to the State
Intellectual Property Bureau Training Center since 2002. Our
services to the center include training course recording, editing
and posting as well as platform maintenance and updating for a
fixed fee agreed upon by both parties.
Our Strengths
We believe that the following competitive strengths contribute to,
and will continue to reinforce, our success and leading market
position in the online self-taught education industry in the PRC
and differentiate us from our competitors:
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Education
Cloud Platform Advantage. We are dedicated to the development
of our education platforms and actual operations and is one of the
companies with the longest history in the industry. Our platforms
are constantly improved and upgraded and have been well recognized
by its users for being comprehensive and easy to use. |
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Leading
Service Provider in Online Preparation of Self-Taught
Examination. According to CRI, we are the leading provider and
standards setter of online education service of self-study
examination courses in the PRC and the first company in China that
provides such services. The Company has over 920online
courses and provides services to over 83 universities and colleges
across 14 provinces in China. |
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Leading
Service Provider in Online Adult Education. We launched our
adult continue education platform in late 2016. There are
approximately 84 schools that currently have service agreements
with us and approximately 91 that are testing our services. The
platform has become well-known in the industry. |
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Strong
Brand Recognition with Nationwide Experience in Online
Education. After many years in operation, our brand is well
recognized. “Huaxiadadi华夏大地” is an online education course brand in
PRC. We kept improving our course designs over the years. With an
experienced and cooperative team, we are able to provide quality
services and exceed customer expectations. In 2015, we were awarded
“2015 Chinese Brand Influence Educational Institution” by Sina
Education. In 2016, we were recognized as “2016 Famous Online
Education Brand” by Tencent Echo China. In 2017, we were awarded
“2017 China Internet Education Brand Enterprise” by the Online
Study magazine of China Long-Distance Education Magazine and China
Online Education Leaders Association. |
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Technology
Advantage. We have dedicated considerable resources to our
technology and product development efforts. More than 25% of our
employees are in our technology and product development departments
and are very experienced with research and development. 30% of
these employees hold master or doctor degrees. In addition, we have
30 registered copyrights and have accumulated two decade’s
experience. |
Our Strategies
Our goal is to strengthen our position as a leading provider of
online self-taught courses in PRC by pursuing the following
business strategies:
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In
response to the increased demand from over 3,000 universities in
China, we plan to expand our client base for our B2B2C
service. |
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We
continue to improve on the breadth and quality of our online
courses, which are key components for our B2B2C and B2C
services. |
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In
addition to cloud services, we intend to provide offline training
and testing services to supplement the online services provided to
universities and colleges based on their demand. |
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While
implementing our national expansion strategy, we intend to acquire
or set up local training companies to localize our B2B2C service.
We intend to continue to increase our research and development
department. |
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We
intend to expand internationally by setting up branches or
acquiring training institutions in North America and also
leveraging international education resources to operations in
China. |
Our Mission, Vision and Values
Our mission is to improve education in China. Recognizing the unmet
demand for higher education and the potential social and commercial
value of private education, we started our business by providing
education services focusing on long-distance learning. Our vision
is to utilize our technology advantages accumulated over our nearly
two-decade operations to become the best education technology
company in China. We believe the core of distance-learning is
service – customer satisfaction and innovation are critical to our
success and we strive to promote and adhere to these values.
Steps to Improve Our Performance
Recruitment of Professional Personnel
We believe that our existing products and services with
technological development of our online platform and quality
improvement of our online courses will enable us to capture
increased market demands for online education. With these
opportunities we are able to provide, we plan to expand our team by
recruiting professionals in various fields. In recent years, supply
and demand of professionals tend to be stable, as long as we can
provide development opportunities, we are able to hire more
outstanding personnel, such as technology development
professionals, online course producers, teaching professionals and
senior management expertise. As our team keeps growing, we expect
to be able to improve the quality of our courses, negotiate and
cooperate with more schools, achieve more revenue and better
financial results.
Implementation of “Provincial Partnership Model”
There are 32 provinces in China and the population in each province
varies from tens of millions to hundreds of millions. We are
currently implementing a “Provincial Partnership Model” under which
we establish subsidiaries in different provinces. Our local
partners in each province, who are also the shareholders of each
local subsidiary, can develop business not only with the
reputation, platform and courses of the Company, but also with
their own capability and deep understanding of local education
market. We have founded subsidiaries in Hunan, Hubei, Jiangsu and
Guizhou, Fujian, Liaoning and Beijing in the past two fiscal years.
We believe that this “Provincial Partnership Model” will create
more revenue by motivating our partners of subsidiaries to explore
potential market and provide better services to local customers. In
addition, “Provincial Partnership Model” will decrease the
Company’s payroll and travel expenses by hiring local staff instead
of recruiting staff in Beijing, where our headquarters is
located.
Expansion to Online Non-Diploma Courses
As of now, most of our online courses are provided to self-taught
learners and college students pursuing higher education degrees. We
are also exploring continuing education and professional
development courses for qualification certificates. For example, we
have completed development of online courses for the “National
Teacher Certificate Examination”. There are a very limited amount
of institutions developing courses for the “National Teacher
Certificate Examination” in China, especially promoting these
courses through B2B2C model like us. Therefore, competition in this
field is not strong. On the other hand, our online education
platform was successfully built and there will be much less cost in
the upcoming periods. As such, our gross profit is more likely to
increase with the development of other professional development
courses.
Continuous Expansion to Online Non-Diploma Education Courses
and Adult Continuing Higher Education Courses
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Online non-diploma education courses |
As of now, most of our online courses are provided to self-taught
learners and college students pursuing higher education degrees. We
are also exploring non-diploma education courses and professional
development courses for qualification certificates. For example, we
have completed development of online courses for the “National
Teacher Certificate Examination”. There are a very limited amount
of institutions developing courses for the “National Teacher
Certificate Examination” in China, especially promoting these
courses through B2B2C model like us. Therefore, competition in this
field is not strong. On the other hand, our online education
platform was successfully built and there will be much less cost in
the upcoming periods. As such, our gross profit is more likely to
increase with the development of other professional development
courses.
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Online adult continuing higher education
courses |
Adult higher education examination is an alternative way to obtain
higher education for adults and an important part of China’s higher
education system. According to the statistics from China Research
and Intelligence www.shcri.com, there were 288 universities
and colleges offering continuing education services, most of which
adopted face-to-face teaching. There is barely B2B2C service
provider for adult continuing higher education courses and market
size of China’s online continuing higher education is relatively
small.
We entered into the adult education field and launched our
continuing education platforms in late 2016. Currently, there are
over 80 universities and education institutions that we have
contracts with and over 90 other universities and education
institutions that are in trial period of using our platforms. We
generated $0.8 million in revenue from such programs in the fiscal
year ended March 31, 2020. We expect revenue from such programs
will increase in the next fiscal year. Given the unmet market
demands for this type of services as well as the PRC government’s
promotion of the “Internet Plus” model, China’s institutions of
higher education, including our existing and potential clients,
will likely increase their use of adult continuing higher education
cloud platform to standardize teaching process and monitor learning
process. As such, we expect our revenue from services for online
adult continuing education will increase in the long term.
Key Aspects of Our Operations
Sales and Marketing
We market our services through both offline and online channels.
Since our inception, the bulk of our marketing is done through
traditional offline channels. Our sales representative visit our
targeted potential customers, such as universities and schools, and
then schedule meetings and demos for these potential clients to
learn about our services and for us to learn about the specific
needs of each potential client. We also develop customers through
referrals from existing clients and business partners. We also
attend industry conferences to promote our brand and further expand
our client base. We started online marketing in 2004, including
search engine marketing and mobile app advertising.
Fees
Fees for B2B2C business: we provide the platform to
universities or schools for free but charge students a fee of RMB
20 to 120 per class, depending upon the course.
Fees for our B2C services: we charge fees based on the
specific training program. Low end programs only include online
courses and we charge RMB 50 to 180 per class for this type of
programs. High end programs include both online courses and in
person training. We charge RMB 200 to 600 per course for this type
of programs.
Technical services fees: we charge service fees based on our
development and maintenance costs plus a 30% profit. The fee for
each client varies, depending upon the specific program design as
well as our costs for providing the services, primarily including
human resources and computer hardware and software related
expenses. Such fees are set forth in our agreements with such
clients.
Customers
Our customers for our online education services include
universities, academic institutions, government agencies, private
clients such as publishers as well as students preparing for
various types of standard examination. For the B2B2C service, our
customers are universities and academic institutions in ten
provinces in the PRC such as Hunan, Hubei, Jiangsu, Fujian and
Anhui. Our top customers for the B2B2C service include College of
continuing education of Wuhan University, Changsha University of
Science &Technology, Hunan Agricultural University, Shandong
Yingcai University and Fujian Education Institution. Our customers
for the B2C service are students located nationwide. For our
technology services business, customers include government agencies
and private companies such as publishers. Our largest clients of
our technology services are World Publishing (Shanghai) Co., Ltd.
and the State Intellectual Property Bureau Training Center.
In terms of geographic areas, all of our customers are currently
based in the PRC. We plan to expand our client base internationally
as we continue to grow our business.
Technology
Our Proprietary Platform
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1. |
Development
Strategy: We have developed proprietary online education platforms
which we have designed and updated based on the needs of our
customers. In addition to traditional training features, we added
additional features to facilitate intellectual studies. We own
relatively mature technologies for platform development and can
design specific platforms based on such technologies according to
the commercial needs of our customers. We believe that this
approach saves our customers’ costs, reduces development period and
allows us to quickly respond to market demands. |
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2. |
Purposes
and Advantages: The primary purpose of our platforms is for our own
business, namely training programs for students preparing for
various examinations. Our platform is compatible with Windows, H5,
Android and iOs systems. Our institution customers can develop
their own mobile app based on their own data management capacity
and sales system. |
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Platform
Security: We have adopted security policies and measures, including
encryption technology, to protect our proprietary data and customer
information, and we back up our database, including customer data,
every day. |
All of our servers and routers, including backup servers, are
currently hosted by third-party service providers in Beijing,
Jiujiang and Wuhan in China. We back up our databases daily. Our IT
department regularly monitors the performance of our websites,
mobile apps and technology infrastructure to enable us to respond
quickly to potential problems. We have not experienced any major
problems in our network infrastructure. In addition, we also
engaged well known cloud service provider to have a cloud host to
provide online services, and cloud storage and cloud-on-demand
services.
Research and Development
Our technology team also dedicates part of its time to our research
and development efforts. Our technology team has experience in the
development, design, operation and maintenance of platform
products, servers and mobile apps. In the past three years, we have
over 30 employees in the technology and development department on
average. Most of our team members have 5 years or more of
experience, 30% of our team members have master’s or doctor’s
degree and certain team members have work experience at Fortune 500
companies. Our research and development efforts are closely tied to
the market. We adjust our product development and services based on
market conditions and government policies. We launched three new
platforms to obtain more customers and expand our business in new
area of on-line education . The focuses of our research and
development efforts include improving our online training data
collection, programs focused on intelligent study, education
resource integration and technology service. In the past three
years, we keep a stable input in research and development to obtain
a technology advantage in the on-line education industry. We
anticipate that we will continue to increase the expenditure of
research and development in the future.
Intellectual Property
We currently have 30 software registrations for our online course
delivery and examination preparation programs and related mobile
applications. We have also registered 21 trademarks with the China
Trademark Office and an additional 2 trademark applications are
currently pending. We, however, cannot assure that all of our
trademark applications will be successful.
Employees
We are headquartered in Beijing, where most of our senior
management and technology teams are based. We also host part of our
general and administrative personnel, content development
professionals and sales and marketing staff in our Beijing offices.
The rest of our sales and marketing staff are based in Hunan and
Jiangsu. Our offices in Hunan and Jiangxi host our teacher
assistance department, technology team and general and
administrative personnel.
As of March 31, 2020, we had 145 employees, including 142 full time
employees and 3 part time employees. As of March 31, 2020, 50 of
these employees were based in our headquarters in Beijing and 95
were based in other cities in the PRC. The table below breaks down
the full-time personnel of the Company by function:
|
Function |
|
Number of
Employees |
|
|
% of Total |
|
| Management |
|
|
7 |
|
|
|
5 |
% |
| Technology and Development |
|
|
32 |
|
|
|
22 |
% |
| Teaching Assistance |
|
|
36 |
|
|
|
25 |
% |
| Sales and Marketing |
|
|
33 |
|
|
|
23 |
% |
| Product Development and Customer
Service |
|
|
24 |
|
|
|
16 |
% |
| General and
Administrative |
|
|
13 |
|
|
|
9 |
% |
| Total |
|
|
145 |
|
|
|
100 |
% |
We enter into employment contracts with our full-time employees.
For our full-time employees in China, we also enter into
stand-alone confidentiality and non-compete agreements with them.
In addition to salaries and benefits, we provide performance-based
bonuses for our full-time employees and commission-based
compensation for our sales and marketing force.
Foreign teachers delivering paid lessons on our platform are
generally not our full-time employees. We enter into service
contracts with such teachers, and pay service fees to them based on
the number of lessons they teach and their teaching
performance.
As required by regulations in China, we participate in various
employee social security plans that are organized by municipal and
provincial governments for our PRC-based full-time employees,
including pension, unemployment insurance, childbirth insurance,
work-related injury insurance, medical insurance and housing
insurance. We are required under PRC law to make contributions from
time to time to employee benefit plans for our PRC-based full-time
employees at specified percentages of the salaries, bonuses and
certain allowances of such employees, up to a maximum amount
specified by the local governments in China.
Our employees are not covered by any collective bargaining
agreement. We believe that we maintain a good working relationship
with our employees, and we have not experienced any significant
labor disputes.
Seasonality
The current operations of the Company have demonstrated
seasonality. There are major examinations scheduled in April and
October of each year and other examinations scheduled in January
and July of each year. As a result, the number of students enrolled
in our programs is the highest within the two months period prior
to each exam. In addition, Adult Continue Education business slows
down during the summer and winter breaks of our partner schools.
See “Risk Factor—Risks Related to Our Business and Industry—Our
results of operations are subject to seasonal fluctuations.”
Competition
With respect to the B2B2C service, we believe that we are a leading
service provider in the self-study online training area. Our
primary competitors are four other companies providing similar
types of programs, including Beijing Shangde Online Education
Technology Co., Ltd., Suzhou Qingying Feifan Software Technology
Co., Ltd., Beijing Aopeng Long Distance Education Center Co., Ltd.
and Hongcheng Technology Development Co. but we have competitive
advantages in terms of geographic coverage, the number of partner
schools, the number of courses and our years of operating
experience in the industry. With respect to the B2C service, we
have two major competitors in the PRC, Beijing Shangde Online
Education Technology Co. and Bejing Dongda Zhengbao Technology Co.,
Ltd. Our competitive advantages with respect to this service are
our long operating history, our brand recognition and the number
and types of courses that we offer. For the B2C service, we compete
with traditional offline training institutions as well as well as
other companies that provide online training services. In terms of
our technology service, we primarily face competition from Shenzhen
Youxuepai World Education Development Co., Ltd, Teewon Digital
Media Technology Co., Ltd., Founder Tech and Hanwon Technology. Our
current client base strongly relies on these services. We face
competition from other online and mobile platforms or internet
companies that plan to expand their business into the online
education space but we believe our long established relationship
with our clients, experienced technology team and many years’
experience will provide us an edge in competing with these market
new entrants.
Facilities
We lease executive office space in Beijing of an aggregate of 720
square meters. These facilities currently accommodate our
management headquarters, as well as part of our sales and
marketing, product development and general and administrative
activities.
As of the date of this report, we have also leased an aggregate of
approximately 1,893 square meters office space in Beijing, Jiangsu,
Hunan and Fuzhou. A summary of our leased properties as of the date
of this report is shown below:
|
Location |
|
Space
(in square
meters) |
|
|
Address |
|
Use |
|
|
Beijing |
|
720 |
|
|
L207b,
Hesheng Fortune Plaza, No.13 Deshengmenwai Street, Xicheng
District, Beijing, China & Room 1303A, 1303B, Building 40, No.
1 Shengbei Road, Economic Development Zone, Daxing District,
Beijing, China |
|
Office |
|
| Nanjing,
Jiangsu |
|
570 |
|
|
4th
floor, No. 601Zhushan Roan, Jianning District, Nanjin,
Jiangsu. |
|
Office |
|
| Changsha, Hunan |
|
548 |
|
|
Room
617-625, Building B1, No. 568 Queyuan Road, Tianxin District,
Changsha, Hunan, China |
|
Office |
|
| Fuzhou,
Fujian |
|
55 |
|
|
Room
1420, Building 1, Henli Bona Plaza, Gulou District, Fuzhou,
Fujian,China |
|
Office |
|
We own office space of 570 square meters located at 4th
floor, No. 601Zhushan Roan, Jianning District, Nanjin, Jiangsu,
which is where our Jiangsu office is based.
We own office space of Room 617-625, Building B1, No. 568 Queyuan
Road, Tianxin District, Changsha, Hunan, which is where our
Hunan office is based.
We also own office space of 55 square meters located at Room 1420,
Building 1, Henli Bona Plaza, Gulou District, Fuzhou, Fujian.
Other than our office space in Jiangsu, Hunan and Fujian, we lease
all of the facilities that we currently occupy from independent
third parties. We believe that the facilities that we currently
lease are adequate to meet our needs for the foreseeable future,
and we believe that we will be able to obtain adequate facilities,
principally through leasing of additional properties, to
accommodate our future expansion plans.
Insurance
We currently do not have any insurance coverage other than
participation in various government statutory social security
plans, including a pension contribution plan, a medical insurance
plan, an unemployment insurance plan, a work-related injury
insurance plan, a maternity insurance plan and a housing provident
fund.
Regulations
This section sets forth a summary of the most significant laws,
rules and regulations that affect our business and
operations.
Regulations Relating to Foreign Investment
Laws of Wholly foreign-owned Enterprise
The establishment procedures, examination and approval procedures,
registered capital requirement, foreign exchange restriction,
accounting practices, taxation and labor matters of a wholly
foreign-owned enterprise are governed by the Wholly Foreign-owned
Enterprise Law of China, or the Whole Foreign-owned Enterprise Law,
which was promulgated by NPCSC, and effective as of April 12, 1986,
amended on October 31, 2000 and September 3, 2016 and the
Implementation Rules for the Wholly Foreign-owned Enterprise Law,
which was promulgated by the Ministry of Foreign Economic Relations
and Trade on December 12,1990 and amended on April 12,2001 and
February 19, 2014 by the State Council. According to the Wholly
Foreign-owned Enterprise Law and its Implementation Rules, the
establishment of wholly foreign-owned enterprises shall be subject
to the examination and approval by the MOFCOM, or the Chinese
Government level of province, autonomous region, municipality
directly under the central Chinese Government, municipality
separately listed on the State plan or special economic zone, as
authorized by the State Council, which will issue a certificate of
approval in respect thereof. Where the establishment of wholly
foreign-owned enterprises does not involve the implementation of
special access administrative measures prescribed by the State, the
establishment of wholly foreign-owned enterprises are subject to
record-filing management. Profits and other legal rights and
interests obtained by foreign investors in China shall be protected
by Chinese laws, and legitimate profits, other lawful income and
post-liquidation funds received by foreign investors from the
wholly foreign-owned enterprises may be remitted abroad.
The Guidance Catalog of Industries for Foreign
Investment
Investment activities in the PRC by foreign investors shall comply
with the Guidance Catalog of Industries for Foreign Investment, or
the Catalog, which was promulgated and is amended from time to time
by MOFCOM, and the National Development and Reform Commission, or
NDRC. The Catalog divides industries into three categories:
encouraged foreign invested industries, restricted foreign invested
industries and prohibited foreign invested industries. Any industry
not listed in the Catalog or any encouraged foreign invested
industry listed in the Catalog is a permitted industry. Some
restricted industries are limited to equity or contractual joint
ventures, while in some cases Chinese partners are required to hold
the majority interests in such joint ventures. Foreign investors
are not allowed to invest in industries in the prohibited category.
On June 28, 2018, NDRC and MOFCOM promulgated the Special
Administrative Measures for Access of Foreign Investment (the
“Negative List 2018”), which came into effect on July 28, 2018.
According to the Negative List 2018, the provision of value-added
telecommunications services falls in the restricted category and
the percentage of foreign ownership cannot exceed 50% (except for
e-commence).
The M&A Rules
The Provisions Regarding Mergers and Acquisitions of Domestic
Enterprises by Foreign Investors, or the M&A Rules, was jointly
promulgated by MOFCOM, China Securities Regulatory Commission, or
CSRC, the State-owned Assets Supervision and Administration
Commission of the State Council, State Administration of Taxation,
State Administration of Industry and Commerce and State
Administration of Foreign Exchange, or SAFE, on August 8, 2006
and became effective as of September 8, 2006, and were later
amended on June 22, 2009. This M&A Rules governs among
other things, the purchase and subscription by foreign investors of
equity interests in a domestic enterprise, and the purchase and
operation by foreign investors of the assets and business of a
domestic enterprise. An offshore special purpose vehicle, or SPV,
is defined under the M&A Rules as an offshore entity directly
or indirectly controlled by Chinese individuals or enterprises for
the purpose of an overseas listing, and the main assets of which
are the rights and interests in affiliated domestic enterprises.
Under the M&A Rules, if a SPV intends to merge with or acquire
any domestic enterprise affiliated with such Chinese individuals or
enterprises that control the SPV, the proposed merger or
acquisition shall be submitted to the MOFCOM for approval. The
M&A Rules also require a SPV to obtain an approval from the
CSRC prior to the listing and trading of its securities on an
overseas stock exchange.
The Draft PRC Foreign Investment Law
The Draft Foreign Investment Law specifically provides that
entities established in China but “controlled” by foreign
investors, such as via contracts or trust, will be treated as
Foreign-invested enterprises, or FIEs, whereas foreign investment
in China in the foreign investment restricted industries by a
foreign investor may nonetheless apply for being, when approving
market entry clearance by the foreign investment administration
authority, treated as a PRC domestic investment if the foreign
investor is determined by the foreign investment administration
authority as being “controlled” by PRC entities and/or citizens. In
this connection, “actual control” is broadly defined in the Draft
Foreign Investment Law to cover the following summarized
categories: (i) holding 50% of more of the voting rights of
the subject entity; (ii) holding less than 50% of the voting
rights of the subject entity but having the power to secure at
least 50% of the seats on the board or other equivalent decision
making bodies, or having the voting power to materially influence
the board, the shareholders’ meeting or other equivalent decision
making bodies; or (iii) having the power to exert decisive
influence, via contractual or trust arrangements, over the subject
entity’s operations, financial matters or other key aspects of
business operations. According to the Draft Foreign Investment Law,
VIEs would also be deemed as FIEs, if they are ultimately
“controlled” by foreign investors, and be subject to restrictions
on foreign investments. However, the Draft Foreign Investment Law
has not taken a position on what actions will be taken with respect
to the existing companies with the “variable interest entity”
structure, whether or not these companies are controlled by Chinese
parties.
On December 26, 2018, NPCSC published the 2018 Draft Foreign
Investment Law deliberated by the 7th Meeting of the Standing
Committee of the Thirteenth National People’s Congress, to seek
public comments, which will be closed on February 24, 2019. The
2018 Draft Foreign Investment Law does not mention concepts
including “de facto control” and “controlling through contractual
arrangements”, nor did it specify the regulation on controlling
through contractual arrangements. It is still uncertain when the
draft would be signed into law and whether the final version would
have any substantial changes from this draft.
Regulations Relating to Value-Added Telecommunications
Services
Licenses for Value-Added Telecommunications
Services
The State Council issued the Regulations on Telecommunications of
China, or the Telecommunications Regulations, on September 25,
2000 which was amended on February 6, 2016, to regulate
telecommunications activities in China. The Telecommunications
Regulations divide the telecommunications services into two
categories, namely “infrastructure telecommunications services” and
“value-added telecommunications services.” Pursuant to the
Telecommunications Regulations, operators of value-added
telecommunications services must first obtain a Value-added
Telecommunications Business Operating License, or Value-Added
Telecommunications License, from the Ministry of Industry and
Information Technology, or MIIT, or its provincial level
counterparts. On July 3, 2017, the MIIT promulgated the
Administrative Measures for the Licensing of Telecommunications
Business, effective as of September 1, 2017, which sets forth more
specific provisions regarding the types of licenses required to
operate value-added telecommunications services, the qualifications
and procedures for obtaining such licenses and the administration
and supervision of such licenses.
According to the Catalog of Classification of Telecommunications
Businesses effective from April 1, 2003, internet information
services, also called internet content services, or ICP services,
are deemed as a type of value-added telecommunications services. On
December 28, 2015, the MIIT published a revised Catalog of
Classification of Telecommunication Business, or the 2016 MIIT
Catalog, which took effect on March 1, 2016. According to the
2016 MIIT Catalog, internet information services, which include
information release and delivery services, information search and
query services, information community platform services,
information real-times interactive services, and information
protection and processing services, continues to be classified as a
category of value-added telecommunication services. The
Administrative Measures on Internet Information Services, or ICP
Measures, also promulgated by the PRC State Council on
September 25, 2000 and amended on January 8, 2011, sets forth
more specific rules on the provision of ICP services. According to
ICP Measures, any company that engages in the provision of
commercial ICP services shall obtain a sub-category Value-Added
Telecommunications License for Internet Information Services, or
ICP license, from the relevant government authorities before
providing any commercial internet content services within the PRC,
and when the ICP services involve areas of news, publication,
education, medical treatment, health, pharmaceuticals and medical
equipment, and if required by law or relevant regulations, specific
approval from the respective regulatory authorities must be
obtained prior to applying for the ICP License from the MIIT or its
provincial level counterpart. Pursuant to the above mentioned
regulations, “commercial ICP services” generally refers to
provision of specific information content, online advertising, web
page construction and other online application services through
internet for profit making purpose.
Foreign Investment in Value-Added Telecommunication
Services
The Regulations on Administration of Foreign-Invested
Telecommunications Enterprises, or the FITE Regulations, which took
effect on January 1, 2002 and amended on September 10,
2008 and February 6, 2016, are the key regulations that regulate
foreign direct investment in telecommunications companies in China.
The FITE Regulations stipulate that the foreign investor of a
telecommunications enterprise is prohibited from holding more than
50% of the equity interest in a foreign-invested enterprise that
provides value-added telecommunications services. In addition, for
a foreign investor to acquire any equity interest in a business
providing value-added telecommunications services in China, it must
demonstrate a positive track record and experience in providing
such services.
Regulations Relating to Private Education in the PRC
Education Law of the PRC
On March 18, 1995, the National People’s Congress of the PRC,
or the NPC, enacted the Education Law of the PRC, or the Education
Law, which was amended on August 27, 2009 and December 27,
2015. The Education Law provides that in principle, enterprises,
social organizations and individuals are encouraged to establish
and operate schools and other types of education institutions in
accordance with PRC laws and regulations. Meanwhile, schools and
other education institutions sponsored wholly or partially by
government financial funds or donated assets remain prohibited from
being established as for-profit organizations.
The Law for Promoting Private Education and the
Implementation Rules for the Law for Promoting Private
Education
The Law for Promoting Private Education of the PRC became effective
on September 1, 2003 and the latest amendment, or the
Amendment, was on December 29, 2018 which came into effect on the
same date. Under the Amendment, sponsors of private schools may
choose to
establish non-profit or for-profit private
schools at their own discretion. Nonetheless, school sponsors are
not allowed to establish for-profit private schools that
are engaged in compulsory education.
The key features of the Amendment include the following: (i)
sponsors of for-profit private schools are entitled to
retain the profits and proceeds from the schools and the operation
surplus may be allocated to the sponsors pursuant to the PRC
Company Law and other relevant laws and regulations; (ii) sponsors
of non-profit private schools are not entitled to the
distribution of profits or proceed from
the non-profit schools and all operation surplus
of non-profit schools shall be used for the operation of
the schools; (iii) for-profit private schools are entitled to
set their own tuition and other miscellaneous fees without the need
to seek prior approvals from or report to the relevant government
authorities. The collection of fees by non-profit private
schools, on the other hand, shall be regulated by the provincial,
autonomous regional or municipal governments; (iv) private
schools (for-profit and non-profit) may enjoy
preferential tax treatments. Non-profit private schools
will be entitled to the same tax benefits as public schools.
Taxation policies for for-profit private schools after
the Amendment taking effect are still unclear as more specific
provisions are yet to be introduced; (v) where there is
construction or expansion of a non-profit private school,
the school may acquire the required land use rights in the form of
allocation by the government as a preferential treatment. Where
there is construction or expansion of
a for-profit private school, the school may acquire the
required land use rights by purchasing them from the government;
(vi) the remaining assets of non-profit private schools
after liquidation shall continue to be used for the operation
of non-profit schools. The remaining assets
of for-profit private schools shall be distributed to the
sponsors in accordance with the PRC Company Law; and people’s
governments at or above the county level may support private
schools by subscribing to their services, provision of student
loans and scholarships, and leases or transfers of unused state
assets. The governments may further take such measures as
government subsidies, bonus funds and incentives for donation in
support of non-profit private schools.
On December 30, 2016, the MOE, MCA, SAIC, the Ministry of
Human Resources and Social Welfare and the State Commission Office
of Public Sectors Reform jointly issued the Implementation Rules on
the Classification Registration of Private Schools to reflect the
new classification system for private schools as set out in the
Amendment. Generally, if a private school established before
promulgation of the Amendment 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 such private school chooses to register as
a for-profit school, it shall conduct financial
liquidation process, have the property rights of its assets such as
lands, school buildings and net balance being authenticated by
relevant government authorities, pay up relevant taxes, apply for a
new Permit for Operating a Private
School, re-register as for-profit schools and
continue its operation. Specific provisions regarding the above
registrations are yet to be introduced by people’s governments at
the provincial level.
On December 30, 2016, the MOE, SAIC and the Ministry of Human
Resources and Social Welfare jointly issued the Implementation
Rules on the Supervision and Administration
of For-profit Private Schools, pursuant to which the
establishment, division, merger and other material changes of
a for-profit private school shall first be approved by
the education authorities or the authorities in charge of labor and
social welfare, and then be registered with the competent branch of
SAIC.
On April 20, 2018, the MOE issued for public comments the Draft
Revision of the Regulations on the Implementation of the Law for
Promoting Private Education of the PRC (the Draft for Comments), or
the MOE Draft for Comments. As the consultation period for the MOE
Draft for Comments ended in May 2018, on August 10, 2018, the MOJ
published the committee draft of the Regulations on the
Implementation of the Law on Promoting Private Education in PRC
(Revised Draft), or the MOJ Draft for Approval, which further
provides that private training institutions for language, art,
sports, science and technology teaching and private training
institutions for adults for cultural education or non-academic
continuing education can directly apply for the registration with
the local administrative departments for industry and commerce.
Pursuant to the MOJ Draft for Approval, organizations that use
Internet technology to implement training and education activities
online, occupational qualifications or occupational skills
activities, or internet technology service platforms that provide
services for online implementation of the aforementioned activities
shall obtain the corresponding Internet business license and
approval from the education administrative authorities and the
human resources and social security authorities of the state level
where the institution resides and shall not implement educational
or teaching activities which require the private school operation
permit. The MOJ has not provided the timeframe for the promulgation
of the revised implementation rules on the Law for Promoting
Private Education of the PRC, even though the public consultation
on the MOJ Draft for Approval has ended on September 10, 2018. If
the abovementioned MOJ Draft for Approval is enacted as proposed,
certain training institutions, such as our private training
institutions, are not required to obtain a private school operation
permit from education authorities. However, as the MOJ Draft for
Approval is still in draft form, there can be no assurance that it
will be enacted as proposed or at all.
Besides the Amendment and the above regulations, the other details
of the operation requirement of non-profit schools
and for-profit schools will further be provided in
implementation regulations that are yet to be introduced: (i) the
amendment to the Implementation Rules for the Law for Promoting
Private Education of the PRC; (ii) the local regulations relating
to legal person registration
of for-profit and non-profit private schools;
and the specific measures to be formulated and promulgated by the
competent authorities responsible for the administration of private
schools in the province(s) in which the schools are located,
including but not limited to the specific measures for registration
of pre-existing private schools, the specific requirements for
authenticating various parties’ property rights and payment of
taxes and fees of for-profit private schools, taxation
policies for for-profit private schools, measures for the
collection of non-profit private schools’ fees.
Regulations Relating to Online and Distance Education
Pursuant to the Administrative Regulations on Educational Websites
and Online and Distance Education Schools issued by the MOE on
July 5, 2000, educational websites and online education
schools may provide educational services in relation to higher
education, elementary education, pre-school education, teaching
education, occupational education, adult education, other education
and public educational information services. “Educational websites”
refer to organizations providing education or education-related
information services to website visitors by means of a database or
online education platform connected via the Internet or an
educational television station through an Internet Service
Provider, or ISP. “Online education schools” refer to educational
websites providing academic education services or training services
with the issuance of various certificates. Setting up education
websites and online education schools is subject to approval from
relevant education authorities, depending on the specific types of
education. Any educational website and online education school
shall, upon the receipt of approval, indicate on its website such
approval information as well as the approval date and file
number.
On February 3, 2016, the State Council promulgated the
Decision on Cancelling the Second Batch of 152 Items Subject
to Administrative Examination and Approval by Local Governments
Designated by the Central Government, explicitly cancelled the
approval requirements for operating educational websites and online
education schools that provided by the Administrative Regulations
on Educational Websites and Online Education Schools, and
reiterated the principle that administrative approval requirements
may only be imposed in accordance with the Administrative
Licensing Law.
Regulations Relating to Internet Information Services
The Internet Information Service Administrative Measures, or the
Internet Information Measures, was promulgated on September 25,
2000 and amended on January 8, 2011. The Internet Information
Measures requires that commercial Internet content providers, or
ICP providers, obtain a license for Internet information services,
or ICP license, from the appropriate telecommunications authorities
in order to offer any commercial Internet information services in
the PRC. ICP providers shall 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 obtain
additional approvals from the relevant authorities regulating those
sectors as well.
Regulations Relating to Internet Culture Activities
On February 17, 2011, the Ministry of Culture, promulgated the
Interim Administrative Provisions on Internet Culture, or the
Internet Culture Provisions, which became effective on
April 1, 2011, as amended by Decision of the Ministry of
Culture on Repealing and Amending Certain Departmental Regulations
on December 15, 2017. The Internet Culture Provisions require ICP
services providers engaging in commercial “internet culture
activities” to obtain a permit from the Ministry of Culture.
“Internet cultural activities” is defined in the Internet Culture
Provisions as an act of provision of Internet cultural products and
related services, which includes (i) the production,
duplication, importation, and broadcasting of the Internet cultural
products; (ii) the online dissemination whereby cultural
products are posted on the Internet or transmitted via the Internet
to end-users, such as computers, fixed-line telephones, mobile
phones, television sets and games machines, for online users’
browsing, use or downloading; and (iii) the exhibition and
comparison of the Internet cultural products. In addition,
“Internet cultural products” is defined in the Internet Culture
Provisions as cultural products produced, broadcast and
disseminated via the Internet, which mainly include internet
cultural products specially produced for the Internet, such as
online music entertainment, online games, online shows and plays
(programs), online performances, online works of art and online
cartoons, and internet cultural products produced from cultural
products such as music entertainment, games, shows and plays
(programs), performances, works of art, and cartoons through
certain techniques and duplicate those to internet for
dissemination.
Regulations Relating to Online Publishing
On February 4, 2016, the SAPPRFT and the MIIT jointly issued
the Administrative Provisions on Online Publishing Services, or the
Online Publishing Provisions which took effect as of March 10,
2016. The Online Publishing Provisions sets out detailed provisions
for online publishing activities, which mainly cover issues such as
defining online publishing services, licensing and approvals, the
administrative and supervisory regime and legal liabilities.
According to the Online Publishing Provisions, all online
publishing services provided within the territory of China are
subject to the Online Publishing Provisions, and an online
publishing services permit shall be obtained to provide online
publishing services. Pursuant to the Online Publishing Provisions,
“online publishing services” refer to providing online publications
to the public through information networks; and “online
publications” refer to digital works with publishing features such
as having been edited, produced or processed and are made available
to the public through information networks, including:
(i) written works, pictures, maps, games, cartoons,
audio/video reading materials and other original digital works
containing useful knowledge or ideas in the field of literature,
art, science or other fields; (ii) digital works of which the
content is identical to that of any published book, newspaper,
periodical, audio/video product, electronic publication or the
like; (iii) network literature databases or other digital
works, derived from any of the aforesaid works by selection,
arrangement, collection or other means; and (iv) other types
of digital works as may be determined by the SAPPRFT.
Regulations Relating to Publication Distribution
Under the Administrative Measures for the Publications Market, or
Publications Market Measures, which was jointly promulgated by
SAPPRFT and MOFCOM and became effective on June 1, 2016, any
enterprise or individual who engages in publication distribution
activities shall obtain permission from SAPPRFT or its local
counterpart. “Publication” is defined as “books, newspapers,
periodicals, audio-video products, and electronic publications,”
and “distributing” is defined as “wholesale, retail, rental,
exhibition and other activities,” respectively, in the Publication
Market Measures. Any enterprise or individual that engages in
retail of publications shall obtain a Publication Business
Operating License issued by the local counterpart of SAPPRFT at the
county level. In addition, any enterprise or individual that holds
a Publication Business Operating License shall file with the
relevant local counterpart of SAPPRFT that granted such license to
it within 15 days since it begins to carry out any online
publication distribution business. Where an entity or individual is
engaged in the distribution of publications via the internet or
other information networks, it or he/she shall obtain the operation
permit for publications.
Regulations Relating to Online Transmission of Audio-Visual
Programs
The SAPPRFT and the MIIT jointly promulgated the Administrative
Provisions on Internet Audio-Visual Program Service, or the
Audio-Visual Program Provisions, on December 20, 2007, which
came into effect on January 31, 2008 and was amended and
effective on August 28, 2015. Under the Audio-Visual Program
Provisions, “internet audio-visual program services” is defined as
activities of producing, redacting and integrating audio-visual
programs, providing them to the general public via internet, and
providing service for other people to upload and transmits
audio-visual programs, and providers of internet audio-visual
program services are required to obtain a License for Online
Transmission of Audio-Visual Programs issued by SAPPRFT, or
complete certain registration procedures with SAPPRFT. In general,
providers of internet audio-visual program services must be either
state-owned or state-controlled entities, and the business to be
carried out by such providers must satisfy the overall planning and
guidance catalog for internet audio-visual program service
determined by SAPPRFT. On March 30, 2009, SAPPRFT promulgated
the Notice on Strengthening the Administration of the Content of
Internet Audio-Visual Programs, which reiterates the pre-approval
requirements for the audio-visual programs transmitted via the
internet, including through mobile networks, where applicable, and
prohibits certain types of internet audio-visual programs
containing violence, pornography, gambling, terrorism, superstition
or other similarly prohibited elements.
On March 17, 2010, SAPPRFT promulgated the Provisional
Implementation of the Tentative Categories of Internet Audio-Visual
Program Services, or the Categories, which was modified on March
10, 2017. The Categories clarified the scope of Internet
audio-video programs services. According to the Categories, there
are four categories of Internet audio-visual program services which
are further divided into seventeen sub-categories. The third
sub-category to the second category covers the making and editing
of certain specialized audio-video programs concerning, among other
things, educational content, and broadcasting such content to the
general public online. However, there are still significant
uncertainties relating to the interpretation and implementation of
the Audio-Visual Program Provisions, in particular, the scope of
“internet audio-video programs.”
Regulations Relating to the Software Industry
On June 24, 2000, the State Council issued Certain
Policies to Encourage the Development of Software and Integrated
Circuit Industries, effective from July 1, 2000, or the Policies,
to encourage the development of software and integrated circuit
industries in China and to enhance the ability of PRC information
technology companies to compete in the international market. The
Policies facilitate the development of software and integrated
circuit industries in China through various methods, including: (i)
encouraging venture capital investments in software industry and
providing capital to software enterprises or assisting such
software enterprises to raise capital overseas; (ii) providing
tax incentives, including an immediate tax rebate for taxpayers who
sell self-developed software products before 2010 in the amount of
the statutory value-added tax that exceeds 3% and a number of
exemptions and reduced corporate income tax rates; (iii)
providing government support, such as government funding in the
development of software technology; (iv) providing
preferential treatments, such as credit facilities with low
interest rates to enterprises that export software
products; (v) taking various strategies to ensure that the
software industry has sufficient expertise; and (vi)
implementing measures to enhance intellectual property protection
in China. According to Certain Policies to Further Encourage
the Development of the Software Industry and the Integrated Circuit
Industry which was promulgated on January 28, 2011 by the State
Council, preferential value-added tax shall continue to be
implemented and relevant preferential business tax policies shall
be further implemented and improved. Eligible software enterprises
and integrated circuit design enterprises, which engage in software
development and testing, information system integration, consulting
and operation maintenance, integrated circuit design and other
businesses, shall be exempt from business tax and relevant
procedures for them shall be simplified.
To qualify for preferential treatments, an enterprise must be
recognized as a software enterprise by governmental authorities. A
software enterprise is subject to annual inspection, failure to
pass such inspection in a given year would cause the enterprise to
lose the relevant benefits.
Regulations Relating to Privacy Protection
The PRC Constitution states that PRC law protects the freedom and
privacy of communications of citizens and prohibits infringement of
these rights. In recent years, PRC government authorities have
enacted laws and regulations on internet use to protect personal
information from any unauthorized disclosure. Pursuant to the
Decision on Strengthening the Protection of Online Information
issued by the NPCSC on December 28, 2012 and the Order for the
Protection of Telecommunication and Internet User Personal
Information issued by the MIIT in July 16, 2013, any
collection and use of user personal information must be subject to
the consent of the user, abide by the principles of legality,
rationality and necessity and be within the specified purposes,
methods and scopes. “Personal information” is defined in these
regulations as information that identifies a citizen, the time or
location for his use of telecommunication and internet services, or
involves privacy of any citizen such as his birth date, ID card
number, and address. An ICP services provider must also keep
information collected strictly confidential, and is further
prohibited from divulging, tampering or destroying of any such
information, or selling or providing such information to other
parties. Any violation of the above decision or order may subject
the ICP service provider to warnings, fines, confiscation of
illegal gains, revocation of licenses, cancellation of filings,
closedown of websites or even criminal liabilities.
Regulations Relating to Intellectual Property Rights
Copyright and Software Registration
The NPCSC adopted the Copyright Law in 1990 and amended it in 2001
and 2010, respectively. The amended Copyright Law 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. The amended Copyright Law also requires registration of a
copyright pledge. To address the problem of copyright infringement
related to the content posted or transmitted over the Internet, the
National Copyright Administration and the MIIT jointly promulgated
the Measures for Administrative Protection of Copyright Related to
Internet on April 29, 2005. This measure became effective on
May 30, 2005.
The Computer Software Protection Regulations was promulgated by the
State Council on June 4, 1991 and last amended on
January 30, 2013 which stipulates that Chinese citizens, legal
entities or other organizations enjoy, in accordance with these
Regulations, copyright in the software which they have developed,
whether published or not. In order to further implement the
Computer Software Protection Regulations, the State Copyright
Bureau issued the Computer Software Copyright Registration
Procedures on February 20, 2002, which apply to software
copyright registration, license contract registration and transfer
contract registration.
Patents
The NPCSC adopted the Patent Law of the PRC in 1984 and amended it
in 1992, 2000 and 2008, respectively. A patentable invention,
utility model or design must meet three conditions: novelty,
inventiveness and practical applicability. Patents cannot be
granted for scientific discoveries, rules and methods for
intellectual activities, methods used to diagnose or treat
diseases, animal and plant breeds or substances obtained by means
of nuclear transformation. The Patent Office under the State
Intellectual Property Office is responsible for receiving,
examining and approving patent applications. A patent is valid for
a twenty-year term for an invention and a ten-year term for a
utility model or design, starting from the application date. Except
under certain specific circumstances provided by law, any third
party user must obtain consent or a proper license from the patent
owner to use the patent, or else the use will constitute an
infringement of the rights of the patent holder.
Domain Name
On November 5, 2004, the MIIT promulgated the Measures for
Administration of Domain Names for the Chinese Internet, or the
Domain Name Measures, as amended on August 24, 2017. According to
the Domain Name Measures, “domain name” shall refer to the
character identifier for identifying and locating the hierarchical
structure of a computer on the Internet, which corresponds to the
Internet protocol (IP) address of the computer concerned. A domain
name registration service shall observe the principle of “first
apply, first register”. Where the domain name is completed, the
applicant for the domain name registration shall be the holder of
the domain name. The holder of the domain name shall pay operation
fees for a registered domain name on a regular basis. If the domain
name holder fails to pay the corresponding operation fees as
required, the original domain name registry shall write it off and
notify the holder of the domain name in written form.
Trademark
Trademarks are protected by the PRC Trademark Law which was adopted
in 1982 and subsequently amended in 1993, 2001 and 2013 as well as
the Implementation Regulation of the PRC Trademark Law adopted by
the State Council in 2002 and amended in 2014. The Trademark Office
under the SAIC handles trademark registrations and grants a term of
ten years to registered trademarks which may be renewed for
consecutive ten-year periods upon request by the trademark owner.
Trademark license agreements must be filed with the Trademark
Office for record. The PRC Trademark Law has adopted a
“first-to-file” principle with respect to trademark registration.
Where a trademark for which a registration has been made is
identical or similar to another trademark which has already been
registered or been subject to a preliminary examination and
approval for use on the same kind of or similar commodities or
services, the application for registration of such trademark may be
rejected. Any person applying for the registration of a trademark
may not prejudice the existing right first obtained by others, nor
may any person register in advance a trademark that has already
been used by another party and has already gained a “sufficient
degree of reputation” through such party’s use.
Regulations Relating to Foreign Exchange
Foreign Exchange Settlement
The Circular of the State Administration of Foreign Exchange on
Reforming the Management Approach regarding the Settlement of
Foreign Exchange Capital of Foreign-invested Enterprises, which was
promulgated by the SAFE on March 30, 2015 and became effective as
of June 1, 2015, adopts the approach of discretional foreign
exchange settlement, under which the foreign exchange capital in
the capital account of a foreign-invested enterprise for which the
foreign-invested enterprise has obtained confirmation by the local
SAFE branches regarding the rights and interests of monetary
contribution (or the book-entry registration of monetary
contribution by the banks) can be settled at the banks based on the
actual operation needs of such foreign-invested enterprise. The
capital in Renminbi obtained by the foreign-invested enterprise
from the discretionary settlement of foreign exchange capital shall
be managed under the account pending for foreign exchange
settlement payment. The proportion of discretionary settlement of
foreign exchange capital is temporarily determined as 100%, subject
to the adjustment of the SAFE.
Regulations Relating to Foreign Exchange Registration of
Overseas Investment by PRC Residents
SAFE Circular on Relevant Issues Relating to Domestic Resident’s
Investment and Financing and Roundtrip Investment through Special
Purpose Vehicles, or Circular 37, issued by SAFE and effective in
July 4, 2014, regulates foreign exchange matters in relation
to the use of special purpose vehicles, or SPVs, by PRC residents
or entities to seek offshore investment and financing and conduct
round trip investment in China. Under Circular 37, a SPV refers to
an offshore entity established or controlled, directly or
indirectly, by PRC residents or entities for the purpose of seeking
offshore financing or making offshore investment, using legitimate
domestic or offshore assets or interests, while “round trip
investment” refers to the direct investment in China by PRC
residents or entities through SPVs, namely, establishing
foreign-invested enterprises to obtain the ownership, control
rights and management rights. Circular 37 requires that, before
making contribution into an SPV, PRC residents or entities are
required to complete foreign exchange registration with the SAFE or
its local branch. SAFE Circular 37 further provides that option or
share-based incentive tool holders of a non-listed SPV can exercise
the options or share incentive tools to become a shareholder of
such non-listed SPV, subject to registration with SAFE or its local
branch.
PRC residents or entities who have contributed legitimate domestic
or offshore interests or assets to SPVs but have yet to obtain SAFE
registration before the implementation of the Circular 37 shall
register their ownership interests or control in such SPVs with
SAFE or its local branch. An amendment to the registration is
required if there is a material change in the SPV registered, such
as any change of basic information (including change of such PRC
residents, name and operation term), increases or decreases in
investment amount, transfers or exchanges of shares, or mergers or
divisions. Failure to comply with the registration procedures set
forth in Circular 37, or making misrepresentation on or failure to
disclose controllers of foreign-invested enterprise that is
established through round-trip investment, may result in
restrictions on the foreign exchange activities of the relevant
foreign-invested enterprises, including payment of dividends and
other distributions, such as proceeds from any reduction in
capital, share transfer or liquidation, to its offshore parent or
affiliate, and the capital inflow from the offshore parent, and may
also subject relevant PRC residents or entities to penalties under
PRC foreign exchange administration regulations.
Regulations Relating to Employment and Social Insurance
Pursuant to the PRC Labor Law effective as of January 1, 1995
(as last amended on December 29, 2018), and the PRC Labor Contract
Law effective as of January 1, 2008 (as amended on
December 28, 2012), a written labor contract shall be executed
by employer and an employee when the employment relationship is
established, and an employer is under an obligation to sign an
unlimited-term labor contract with any employee who has worked for
the employer for ten consecutive years. Further, if an employee
requests or agrees to renew a fixed-term labor contract that has
already been entered into twice consecutively, the resulting
contract must have an unlimited term, with certain exceptions. All
employers are required to establish a system for labor safety and
sanitation, strictly abide by state rules and standards and provide
employees with appropriate workplace safety training. Moreover, all
PRC enterprises are generally required to implement a standard
working time system of eight hours a day and forty hours a week,
and if the implementation of such standard working time system is
not appropriate due to the nature of the job or the characteristics
of business operation, the enterprise may implement a flexible
working time system or comprehensive working time system after
obtaining approvals from the relevant authorities.
Pursuant to the Social Insurance Law of China effective from July
1, 2011 (as last amended on December 29, 2018), and the Housing
Fund Regulation which was amended and became effective on March 24,
2002, employers in China shall pay contributions to the social
insurance plan and the housing fund plan for their employees, and
such contribution amount payable shall be calculated based on the
employee actual salary in accordance with the relevant
regulations.
Regulations Relating to Taxation
PRC Enterprise Income Tax Law
In January 2008, the PRC Enterprise Income Tax Law, or the EIT Law,
took effect (as last amended on December 29, 2018). The EIT Law
applies a uniform 25% enterprise income tax rate to both
foreign-invested enterprises and domestic enterprises, except where
tax incentives are granted to special industries and projects. An
enterprise established outside China with “de facto management
bodies” within China is considered a “resident enterprise” for PRC
enterprise income tax purposes and is generally subject to a
uniform 25% enterprise income tax rate on its worldwide income.
According to the EIT Law and its implementation regulations,
certain high and new technology enterprises which have proprietary
intellectual property rights and simultaneously meet the prescribed
requirements as stipulated in the implementation regulations of the
EIT Law and other relevant regulations are permitted to enjoy a
reduced EIT rate of 15%.
Under the EIT Law and its implementation regulations, dividends
generated from the business of a PRC subsidiary after
January 1, 2008 and payable to its foreign investor may be
subject to a withholding tax rate of 10% if the PRC tax authorities
determine that the foreign investor is a non-resident enterprise,
unless there is a tax treaty with China that provides for a
preferential withholding tax rate. Distributions of earnings
generated before January 1, 2008 are exempt from PRC
withholding tax.
Under the PRC Enterprise Income Tax Law, an enterprise established
outside China with “de facto management bodies” within China is
considered a “resident enterprise” for PRC enterprise income tax
purposes and is generally subject to a uniform 25% enterprise
income tax rate on its worldwide income. The implementing
regulations of the EIT Law define the term “de facto management
bodies” as a management body which substantially manages, or has
control over the business, personnel, finance and assets of an
enterprise. On April 22, 2009, the State Administration of
Taxation, or SAT issued the Circular on Issues Concerning the
Identification of Chinese-Controlled Overseas Registered
Enterprises as Resident Enterprises in Accordance With the Actual
Standards of Organizational Management, or Circular 82, which
provides certain specific criteria for determining whether the “de
facto management bodies” of a PRC-controlled enterprise that is
incorporated offshore is located in China. However, there are no
further detailed rules or precedents governing the procedures and
specific criteria for determining “de facto management body.”
PRC Value-Added Tax Law
Pursuant to the Interim Regulations on Value-added Tax of China, or
VAT Regulations which was promulgated by the State Council on
December 13, 1993 and became effective as of January 1, 1994 and
further amended on November 5, 2008, February 6, 2016 and November
19, 2017, all units and individuals engaging in the sale of goods,
provision of processing, repair and fitting services, and
importation of goods within the territory of China are taxpayers of
value-added tax (“VAT”), and shall pay VAT in accordance with the
VAT Regulations. According to the VAT Regulations, a VAT tax rate
at 17% applies to the Chinese enterprises unless otherwise exempted
or reduced according to the VAT Regulations and other relevant
regulations.
Pursuant to the Circular on Comprehensively Promoting the Pilot
Program of the Collection of Value-added Tax in Lieu of Business
Tax jointly promulgated by the State Administration of Taxation and
the Ministry of Finance (“Circular 36”), the pilot program of the
collection of VAT in lieu of business tax shall be promoted
nationwide in a comprehensive manner as of May 1, 2016. Entities
and individuals engaged in sales of services, intangible assets or
real property within the territory of the PRC are value-added
taxpayers, and shall pay VAT rather than business tax. Any taxable
activities of taxpayers shall be subject to a tax rate of 6%,
except those taxpayers who provide services related to
transportation, postal services, basic telecommunications,
construction, leasing of real property, sell any real property,
transfer any land use rights, leasing services of tangible personal
property or any cross-board taxable activity.
Pursuant to the Circular of the Ministry of Finance and the State
Administration of Taxation on Adjusting Value-added Tax Rates which
was promulgated by Ministry of Finance and State Administration of
Taxation on April 4, 2018 and became effective on May 1, 2018, for
the purpose of improving the value-added tax system, adjustments to
relevant policies on VAT rates are notified. Where a taxpayer
engages in a taxable sales activity for the VAT purpose or imports
goods, the previous applicable 17% and 11% tax rates are adjusted
to be 16% and 10%, respectively.
4C. Organizational Structure
The following chart reflects our organizational structure as of the
date of this report. For descriptions of our subsidiaries and
variable interest entity, please see “4A. History and Development
of the Company.”
4D. Property, Plants and Equipment
Under PRC law, land is owned by the state. “Land use rights” are
granted to an individual or entity after payment of a land use
right fee is made to the applicable state or rural collective
economic organization. Land use rights allow the holder the right
to use the land for a specified long-term period. We do not
currently own any real estate or land use rights. For descriptions
of our leased properties, please see “Item 4B. Business Overview –
Facilities.”
ITEM 4A. UNRESOLVED
STAFF COMMENTS
Not Applicable
ITEM 5. OPERATING
AND FINANCIAL REVIEW AND PROSPECTS
The following discussion and analysis should be read in
conjunction with our consolidated financial statements, the notes
to those financial statements and other financial data that appear
elsewhere in this annual report. In addition to historical
information, the following discussion contains forward-looking
statements based on current expectations that involve risks and
uncertainties. Actual results and the timing of certain events may
differ significantly from those projected in such forward-looking
statements due to a number of factors, including those set forth in
“Risk Factors” and elsewhere in this report. Our consolidated
financial statements are prepared in conformity with U.S.
GAAP.
5A. Operating Results
Business Overview
We are a holding company incorporated under the laws of the British
Virgin Islands. Through our subsidiaries and variable interest
entity, we provide online exam preparation services and related
technology solutions and produce online training course materials
in China and have been in operation for nearly 20 years. We develop
our own online education materials that are offered through the
cloud and that can be used for a wide range of purposes, such as
standard examination preparation, professional training and
interactive programs for educational purposes other than exam
preparation. We also produce thousands of online classes. Our
services not only include development of online education platforms
and online course materials but also include comprehensive cloud
service for online education and exam preparation training. The
bulk of our operations is conducted via our wholly owned
subsidiaries, primarily Beijing Huaxia Dadi Distance Learning
Services Co., Ltd. while the rest of our business operations,
including certain portions of our B2C services and technology
services, are conducted through our variable interest entity
Beijing Huaxia Dadi Digital Information Technology Co., Ltd. We do
not directly own the businesses or assets in the PRC that are
operated by our variable interest entity, including our PRC
internet content license.
In fiscal year 2020, we increased our efforts in expanding our
business and services of online education. We successfully
developed Vocational Education 1+X and Higher Vocational Enrollment
Expansion Teaching and Educational Administration Platform, Huafu
E-School System and Paperless Examination Platform. These platforms
and system enable us to provide more courses, attract more
customers and cooperate with more education institutions. On the
other hand, As we switched our business focus to online education
service, we do not plan to make great efforts on our technological
development and maintenance business in the near future since most
of the technological development services are one-off, and the
subsequent maintenance service does not generate significant
revenue.
Impact of COVID-19 on Our Business
In January 2020, the WHO declared a global public health emergency
as the novel coronavirus outbreak, later known as the COVID-19
pandemic, which has continued to spread beyond China. In compliance
with the government health emergency rules in place, we temporarily
closed our offices in China on January 24, 2020 and all the staff
were back to office on March 2, 2020. Because our main business is
online education, our staff was able to work from home from January
24 to March 2, 2020. Our online platforms kept running during that
period. However, due to the change of examination schedule and
school closures in China, our revenue declined temporily and our
financial results adversely impacted in the short term.
During the COVID-19 pandemic, in response to the call of the
Ministry of Education’s “Suspension of classes and no suspension of
school”, the Company made full use of the advantages of “Internet+
education”. We opened more than 200 online courses to medical staff
and their families who fought on the forefront during the pandemic,
and we believe that we established a good reputation. We speeded up
the iterative update of our products and services and improved the
capacity of the e-learning platform to meet the growing demand
during the pandemic.
Our business data shows, during the period from January to July
2020, our online platforms provided approximately 1.2 million
courses to users comparing to 0.5 million in the same period of
2019. The increase of courses provided was mainly due to the
growing demand for remote learning during the pandemic, and our
promotion of our new platform (Vocational Education 1+X and Higher
Vocational Enrollment Expansion Teaching and Educational
Administration Platform).
For technological development and operation service, there was no
material new contract signed in January to July 2020. We still have
several ongoing development and maintenance contracts. Based on our
current business strategy, we will focus on the business growth in
online education services. We expect our technological and
development and operation service revenue to decrease. Because
technological development and operation service revenue only
accounted for 4.7% of our total revenue in fiscal year 2020, we
believe the decrease will not materially affect our revenue going
forward. Due to the unpredictability of the revenue generated from
technological development services, we expect to shift our focus to
online education in the near future.
Based on the current situation, in the short run, our educational
institution customers might delay their payment as many
universities did not open for the spring semester. Our revenue may
also be impacted by the postponed self-study examinations. However,
we do not expect a significant impact of the COVID-19 pandemic on
our operations and financial results in a long run. Our goal is to
strengthen our position as a leading provider of online self-taught
courses in the PRC. Due to the impact of the COVID-19, the daily
offline education and teaching activities of colleges and
universities across the country were suspended due to government’s
regulation. Online education became more important and attractive
for users. With over 20 years operating experience in the online
education industry and our own platform and technology, we will
continue to reinforce our success and leading market position in
the online self-taught education industry in the PRC and
differentiate ourselves from our competitors.
Factors Affecting Our Results of Operations
We have benefited significantly from the following recent trends in
the China educational and career enhancement services market and we
anticipate that the demand for online education will continue to
grow:
Increasing Internet and broadband penetration rates in China
- We have benefited from the rapid improvement of internet
and broadband connectivity in China, which have increased the
accessibility of online education courses as an effective and
convenient way for people to meet their educational and career
development needs.
Increasing awareness of the importance of higher and
professional education - We believe people in China are
increasingly willing to invest in higher and professional education
as it may lead to better career opportunities and enhanced earning
power. We also believe that the market for post- secondary
education and career enhancement services in China is expected to
grow due to demand from various sources, including demand from
employers for well-trained professionals, demand from an increasing
number of high school and university graduates seeking employment
that requires practical skills and professional certifications, and
demand from working professionals who wish to further achieve their
career and salary advancement potential.
Need to differentiate oneself from peers - Each step
of academic advancement requires an individual to differentiate
oneself. Despite China’s rapid economic growth, university students
in China are experiencing difficulties in finding an ideal job that
meets their salary and personal growth expectations upon
graduation. According to the 2017 Chinese College Graduates’
Employment Annual Report by MyCOS Research, only about 65% of
college graduates were satisfied with their jobs. We believe that,
in this highly competitive job market, many students may choose to
enhance their core skill sets by taking additional training courses
or obtaining a second degree to differentiate themselves from their
peers in order to get a better job. This may increase demand for
our services and products.
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:
Number of enrollments in our courses - Our ability to
generate and grow our revenues is primarily affected by our ability
to increase the number of course enrollments. This in turn is
driven by several factors, including government and industry
requirements for education in various professions, recognition of
our brand and services, Internet and broadband connectivity rate,
and the perceived effectiveness of our education courses.
Fees for our courses - Our revenue is also affected
by the amount of fees we charge for our courses, which depends on
the overall demand, the prices and availability of competing
courses, and the perception of the quality and effectiveness of our
courses. We may also experience pricing pressure as we expand our
course offerings into new areas, or new service within existing
areas that we cover, in an effort to attract new course
participants.
Our ability to expand the range of courses and other
services - Our ability to address market needs by expanding
the range of our course offerings and other services has a direct
impact on our ability to maintain growth in our course enrollments.
Diversifying our sources of revenues also helps protect us from
potential reduced course enrollment due to down-turns in certain
industries or professions. To date, we have provided not only
diversified online education courses, such as courses of laws,
mathematics, accounting, nursing to participants, but also
technological development and operation services to other
educational organizations such as universities. In the future, we
will continue to expand our course offerings in other areas to
diversify and further grow our revenues.
Our ability to maintain and expand cooperation with
universities and colleges - our ability to maintain and
expand our customer base will have a material impact on our
operations. A majority of our revenue is derived from our
cooperation with universities and colleges. We have entered into
agreements with more than 100 universities and colleges to provide
online education services or technological services and expect to
keep expanding our customer base in the near future. If we fail to
maintain or further expand our customer base, our results of
operations will be adversely affected.
Results of Operations
The following table sets forth the key components of our results of
operations for the periods indicated, in dollars and as a
percentage of revenue.
|
|
|
2020 |
|
|
% of Revenue |
|
|
2019 |
|
|
% of Revenue |
|
|
2018 |
|
|
% of Revenue |
|
|
Revenue |
|
$ |
5,637,370 |
|
|
|
100 |
% |
|
$ |
5,358,023 |
|
|
|
100 |
% |
|
$ |
5,967,896 |
|
|
|
100 |
% |
|
Cost of revenue and business and sales related tax |
|
|
3,386,965 |
|
|
|
60 |
% |
|
|
2,854,379 |
|
|
|
53 |
% |
|
|
2,229,496 |
|
|
|
37 |
% |
|
Gross profit |
|
|
2,250,405 |
|
|
|
40 |
% |
|
|
2,503,644 |
|
|
|
47 |
% |
|
|
3,738,400 |
|
|
|
63 |
% |
|
Selling expenses |
|
|
1,314,403 |
|
|
|
23 |
% |
|
|
1,441,165 |
|
|
|
27 |
% |
|
|
1,084,599 |
|
|
|
18 |
% |
|
General and administrative expenses |
|
|
2,507,186 |
|
|
|
44 |
% |
|
|
2,301,070 |
|
|
|
43 |
% |
|
|
1,581,307 |
|
|
|
26 |
% |
|
Income (loss) from operations |
|
|
(1,571,184 |
) |
|
|
-28 |
% |
|
|
(1,238,591 |
) |
|
|
-23 |
% |
|
|
1,072,494 |
|
|
|
18 |
% |
|
Interest income |
|
|
135,359 |
|
|
|
2 |
% |
|
|
126,663 |
|
|
|
2 |
% |
|
|
177,723 |
|
|
|
3 |
% |
|
Gain from investments in unconsolidated entities |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
56,421 |
|
|
|
1 |
% |
|
Other income (expenses) |
|
|
7,236 |
|
|
|
0 |
% |
|
|
(3,403 |
) |
|
|
0 |
% |
|
|
(11,138 |
) |
|
|
0 |
% |
|
Income (loss) before income tax provision |
|
|
(1,428,589 |
) |
|
|
-25 |
% |
|
|
(1,115,331 |
) |
|
|
-21 |
% |
|
|
1,295,500 |
|
|
|
22 |
% |
|
Provision (benefit) for income taxes |
|
|
212,498 |
|
|
|
4 |
% |
|
|
(96,804 |
) |
|
|
-2 |
% |
|
|
92,023 |
|
|
|
2 |
% |
|
Net income (loss) |
|
$ |
(1,641,087 |
) |
|
|
-29 |
% |
|
$ |
(1,018,527 |
) |
|
|
-19 |
% |
|
$ |
1,203,477 |
|
|
|
20 |
% |
|
Other comprehensive income (loss): foreign currency translation
gain (loss) |
|
|
(351,286 |
) |
|
|
-6 |
% |
|
|
(522,250 |
) |
|
|
-10 |
% |
|
|
676,673 |
|
|
|
11 |
% |
|
Less: Comprehensive income (loss) attributable to non-controlling
interest |
|
|
23,187 |
|
|
|
0 |
% |
|
|
(71,411 |
) |
|
|
-1 |
% |
|
|
74,680 |
|
|
|
1 |
% |
|
Comprehensive income (loss) attributable to Wah Fu Education Group
Ltd. |
|
$ |
(2,015,560 |
) |
|
|
-36 |
% |
|
$ |
(1,469,366 |
) |
|
|
-27 |
% |
|
$ |
1,805,470 |
|
|
|
30 |
% |
Results of Operations for the years ended March 31, 2020 and
2019
Revenues
We derive revenues from online education services and technological
development and operation services. Our net revenues are presented
net of PRC business tax and related surcharges, as well as
value-added taxes. The following table sets forth a breakdown of
our total revenues for the periods indicated:
| |
|
For
the year ended March 31, |
|
|
Variance |
|
|
|
|
2020 |
|
|
% |
|
|
2019 |
|
|
% |
|
|
Amount |
|
|
% |
|
|
Online
education services |
|
$ |
5,370,700 |
|
|
|
95.27 |
% |
|
$ |
4,185,596 |
|
|
|
78.12 |
% |
|
$ |
1,185,104 |
|
|
|
28.31 |
% |
|
Technological
development and operation service |
|
|
266,670 |
|
|
|
4.73 |
% |
|
|
1,172,427 |
|
|
|
21.88 |
% |
|
|
(905,757 |
) |
|
|
(77.25 |
)% |
|
Total
Amount |
|
$ |
5,637,370 |
|
|
|
100.00 |
% |
|
$ |
5,358,023 |
|
|
|
100.00 |
% |
|
$ |
279,347 |
|
|
|
5.21 |
% |
We derive most of our revenues from online education services,
through our B2B2C services and B2C services. For B2B2C service, we
provide online education platforms to institutions, such as
universities and training institutions. For B2C service, we provide
online training and examination preparation services directly to
students for a fee. Our online education services mainly consist of
courses designed for self-taught learners pursuing higher education
degrees, including laws, mathematics, accounting, nursing,
administration management and others. In addition, we provided
continuing education, professional development and general interest
courses to students, such as information technology, accounting and
language courses.
Since we provide our B2B2C service mainly through universities and
educational institutions for the higher education degrees, our
service period is directly related to school years and the
examination periods. Each province organizes its own self-taught
higher education exams, usually two to four times a year, which
will impact the number of course participants and the number of
courses we provide.
On the other hand, our B2C service is not impacted by school years
and examination periods as much, because the courses we provide are
more diverse and not degree oriented.
We also provide technological development and operation services,
such as information technology system design and monitoring, daily
system support, cloud platform development and other related
services.
For the years ended March 31, 2020 and 2019, revenue derived from
online education services was $5,370,700 and $4,185,596,
respectively, which represented an increase of $1,185,104 or
28.31%. The increase was primarily due to an increase in the
revenue from B2B2C and the number of B2B2C courses. In fiscal year
2019, several provinces cancelled one examination, thus the number
of courses provided for self-study deceased which led to the
decrease in revenue. The number of self-study examinations changed
back to two to four times a year in fiscal 2020. As such, the
courses provided for self-study increased which led to an increase
of revenue.
For the years ended March 31, 2020 and 2019, revenue from
technological development and operation services was $266,670 and
$1,172,427, respectively, representing an decrease of $905,757 or
77.25%. We worked with World Publishing (Shanghai) Co., Ltd., one
of our major customers, since November 2017. In September 2018, we
have finished one software system development contract for them,
while no such services were provided in fiscal 2020. Thus the
technological development and operation services decreased
significantly in fiscal year 2020.
Cost of Revenue
The following table sets forth the breakdown of the Company’s cost
of revenue for the years ended March 31, 2020 and 2019
respectively:
| |
|
For the year ended March 31, |
|
|
Variance |
|
| |
|
2020 |
|
|
% |
|
|
2019 |
|
|
% |
|
|
Amount |
|
|
% |
|
|
Online education services |
|
$ |
2,982,268 |
|
|
|
88.05 |
% |
|
$ |
2,388,799 |
|
|
|
83.69 |
% |
|
$ |
593,469 |
|
|
|
24.84 |
% |
|
Technological development and operation service |
|
|
364,320 |
|
|
|
10.76 |
% |
|
|
427,532 |
|
|
|
14.98 |
% |
|
|
(63,212 |
) |
|
|
(14.79 |
)% |
|
Business and sales related tax |
|
|
40,377 |
|
|
|
1.19 |
% |
|
|
38,048 |
|
|
|
1.33 |
% |
|
|
2,329 |
|
|
|
6.12 |
% |
|
Total Amount |
|
$ |
3,386,965 |
|
|
|
100.00 |
% |
|
$ |
2,854,379 |
|
|
|
100.00 |
% |
|
$ |
532,586 |
|
|
|
18.66 |
% |
Cost of revenue accounted for 60% and 53% of our net revenues in
the fiscal years ended March 31, 2020 and 2019, respectively. Cost
of revenue mainly comprised of salaries and related expenses for
our teaching support, course and content development, website
maintenance and information technology engineers and other
employees, fees paid to our course lecturers, depreciation and
amortization expenses, server relocation and bandwidth leasing fees
paid to third-party providers and other miscellaneous expenses.
For the years ended March 31, 2020 and 2019, cost of revenue from
online education services was $2,982,268 and $2,388,799,
respectively, representing an increase of $593,469 or 24.84%. The
increase in cost of revenue of online education services was
primarily attributable to the increased payroll expenses. During
fiscal year 2020, in order to develop new courses to expand our
market and customer base, we increased the number of employees
focusing on course development.
For the years ended March 31, 2020 and 2019, cost of revenue from
technological development and operation service was $364,320 and
$427,532, respectively. The revenue from technological development
and operation services decreased by $905,757, but the number of
employees in technology and development department did not decrease
proportionately. As we switched our business focus to online
education service, we might further adjust our employee structure
and transfer technical employees to develop and maintain our
self-used platforms to reduce cost of revenue from technical
development and operation service.
Gross Profit
The following table sets forth the breakdown of the Company’s gross
profit for the years ended March 31, 20120 and 2019,
respectively:
| |
|
For the
year ended March 31, |
|
|
Variance |
|
|
|
|
2020 |
|
|
% |
|
|
2019 |
|
|
% |
|
|
Amount |
|
|
% |
|
|
Online education services |
|
$ |
2,349,965 |
|
|
|
104.42 |
% |
|
$ |
1,767,074 |
|
|
|
70.58 |
% |
|
$ |
582,891 |
|
|
|
32.99 |
% |
|
Technological development and operation service |
|
|
(99,560 |
) |
|
|
(4.42 |
)% |
|
|
736,570 |
|
|
|
29.42 |
% |
|
|
(836,130 |
) |
|
|
(113.52 |
)% |
|
Total Amount |
|
$ |
2,250,405 |
|
|
|
100.00 |
% |
|
$ |
2,503,644 |
|
|
|
100.00 |
% |
|
$ |
(253,239 |
) |
|
|
(10.11 |
)% |
Gross profit from online education services increased by $582,891
or 32.99% for the year ended March 31, 2020 as compared to the same
period of 2019. The increase in gross profit of online education
services was primarily due to the increase in revenue.
Gross profit from technological development and operation services
decreased by $836,130 or 113.52% for the year ended March 31, 2020
as compared to the same period of 2019. The decreased margin of
technological development and operation services was mainly
attributable to the decrease in revenue, while cost of revenue
remained relatively stable, as discussed above.
Expenses
The following table sets forth the breakdown of our operating
expenses for the years ended March 31, 2020 and 2019,
respectively:
| |
|
For the
year ended March 31, |
|
|
Variance |
|
|
|
|
2020 |
|
|
% |
|
|
2019 |
|
|
% |
|
|
Amount |
|
|
% |
|
|
Selling expenses |
|
$ |
1,314,403 |
|
|
|
34.39 |
% |
|
$ |
1,441,165 |
|
|
|
38.51 |
% |
|
$ |
(126,762 |
) |
|
|
(8.80 |
)% |
|
General and administrative expenses |
|
|
2,507,186 |
|
|
|
65.61 |
% |
|
|
2,301,070 |
|
|
|
61.49 |
% |
|
|
206,116 |
|
|
|
8.96 |
% |
|
Total Amount |
|
$ |
3,821,589 |
|
|
|
100.00 |
% |
|
$ |
3,742,235 |
|
|
|
100.00 |
% |
|
$ |
79,354 |
|
|
|
2.12 |
% |
Selling expenses primarily consist of salaries and related expenses
of our sales team, sales commissions, and advertising and promotion
expenses. Our selling expenses decreased by 8.8% to $1.31million in
fiscal year 2020 from $1.44 million in fiscal year 2019. The
decrease was mainly due to that in fiscal year 2020, we terminated
our cooperation with certain marketing agencies, who used to
promote our services. We are exploring other marketing approach as
we are adjusting to the post COVID-19 online learning market and
business environment.
General and Administrative Expenses
For the year ended March 31, 2020, our general and administrative
expenses were $2,507,186, representing an increase of $206,116 or
8.96%, as compared to the same period of 2019. The increase was
mainly due to the impairment loss. For the years ended March 31,
2020 and 2019, impairment loss was $261,574 and $76,425
respectively. Due to the continual losses of investment
unconsolidated companies, Digital accrued for $118,024 impairment
loss for the investment in Beijing Tianyuebowen and $143,550
impairment loss for the investment in Zhongtai in fiscal year
2020.
Interest Income, net
Interest income is primarily generated from our cash deposits in
the banks and interest from loans to third parties and related
parties. For the year ended March 31, 2020, interest income was
$135,359 as compared to interest income of $126,663 in the same
period of 2019. The increase in interest income was primarily due
to the increase in the principal amount of loans to a related
party.
Provision (Benefit) for Income Taxes
The Company’s income tax provision was $212,498 in fiscal year 2020
while benefit for income tax was $96,804 in fiscal year
2019 as a result of an increased current income tax of $0.1
million and a decreased deferred income tax benefit of $0.2 million
for the year ended March 31, 2020 compared to fiscal 2019. The
increase in current income tax is mainly due to the increased
taxable income of Hunan Huafu and Huaxa Muke. The decrease in
deferred income tax benefit is primarily due to the decrease of net
operating loss (“NOL”) carry-forwards of Digital Information.
Net loss
Our net loss was $1,641,087 and $1,018,527 for the years ended
March 31, 2020 and 2019, respectively. These are mainly due to the
decrease of gross profit by $253,239, and the increase of general
and administrative expenses by $206,116, as discussed above.
Comprehensive income (loss)
The foreign currency translation gain or loss resulting from
translation of the financial statements expressed in RMB to USD is
reported in other comprehensive income (loss) in the consolidated
statements of operations and comprehensive income (loss). The
comprehensive loss attributable to Wah Fu were $2,015,560 and
$1,469,366 for the years ended March 31, 2020 and 2019,
respectively. The change was mainly due to the increased net loss
partially offset by decreased foreign currency translation loss in
fiscal year 2020 when comparing with fiscal year 2019.
Working Capital
The following table provides the information about our working
capital at March 31, 2020 and 2019:
| |
|
As
of |
|
|
As
of |
|
| |
|
March 31,
2020
|
|
|
March 31,
2019
|
|
| |
|
|
|
|
|
|
| Current Assets |
|
$ |
10,250,785 |
|
|
$ |
6,837,869 |
|
| Current
Liabilities |
|
|
2,904,555 |
|
|
|
1,784,951 |
|
| Working
Capital |
|
$ |
7,346,230 |
|
|
$ |
5,052,918 |
|
Working capital increased by $2,293,312 or 45.39 % from March 31,
2019 to March 31, 2020. Our working capital requirements are
influenced by the level of our operations, the quantity and amount
of our sales contracts, the progress of execution on our customer
contracts, and the timing of accounts receivable collections.
Capital Commitments and Contingencies
Capital commitments refer to the allocation of funds for a possible
liability in the near future arising out of capital expenditures.
Contingency refers to a condition that arises from past
transactions or events, the outcome of which will be confirmed only
by the occurrence or non-occurrence of uncertain futures
events.
As of March 31, 2020 and 2019, we had no material capital
commitments or contingent liabilities.
Cash Flows
The following table provides detailed information about our net
cash flows for the years ended March 31, 2020 and 2019.
| |
|
For the years ended
March 31,
|
|
| |
|
2020 |
|
|
2019 |
|
| |
|
|
|
|
|
|
| Net cash provided by (used
in) operating activities |
|
$ |
937,518 |
|
|
$ |
(513,310 |
) |
| Net cash provided by (used in)
investing activities |
|
|
(2,619,099 |
) |
|
|
7,370 |
|
| Net cash provided by financing
activities |
|
|
4,851,193 |
|
|
|
11,724 |
|
| Effect of
exchange rate changes on cash |
|
|
(263,439 |
) |
|
|
(301,021 |
) |
| Net increase (decrease) in cash |
|
|
2,906,173 |
|
|
|
(795,237 |
) |
| Cash, beginning
of the year |
|
|
3,927,718 |
|
|
|
4,722,955 |
|
| Cash, end of the
year |
|
$ |
6,833,891 |
|
|
$ |
3,927,718 |
|
Operating Activities
Net cash provided by operating activities during the year ended
March 31, 2020 was $0.9 million. Net loss for fiscal year was $1.6
million, including $0.3 million of impairment loss, $0.2 million
non-cash lease expense and $0.2 million depreciation and
amortization. Account receivable decreased by $1.2 million since
the Company collected aged AR from its customers. Deferred revenue
increased by $1.0 million, because we now provide longer service
period for some B2B2C service, from one month to six months. This
caused us to recognize revenue over a longer period. In addition,
some institutions now request students to pay the Company directly,
instead of collecting from the students and then settle with the
Company. This has accelerated the Company’s collection of advance
payment.
Net cash used in operating activities during the year ended March
31, 2019 was $0.5 million, mainly consisting of net loss of $1.0
million, changes in provision of doubtful accounts of $0.4 million,
changes in depreciation and amortization of $0.1 million. Deferred
tax benefit increased by $0.1 million due to deferred tax assets
recognized for Distance Learning in current year. Accounts
receivable decreased by $0.2 million. Deferred offering cost
increased by $0.3 million because the company paid more legal,
underwriting and registration costs in connection with the Initial
Public Offering (the “IPO”) of the Company’s ordinary shares that
closed in April 2019. This was offset by the increase of deferred
revenue of $0.3 million, the increase of other payable of $0.2
million, and the increase of accrued expenses and other liabilities
of $0.1 million.
Investing Activities
For the year ended March 31, 2020, net cash used in investing
activities amounted to $2.6 million as compared to net cash
provided by investing activities of $0.01 million for the same
period of 2019. This change was mainly due to the payments made for
loans to a related party of $2.5 million.
Financing Activities
For the year ended March 31, 2020, net cash provided by financing
activities amounted to $4.9 million as compared to net cash
provided by financing activities of $0.01 million for the same
period of 2019. This change was mainly due to the net proceeds
received from initial public offering (“IPO”) of $4.8 million.
Results of Operations for the years ended March 31, 2019 and
2018
Revenues
We derive revenues from online education services and technological
development and operation services. Our net revenues are presented
net of PRC business tax and related surcharges, as well as
value-added taxes. The following table sets forth a breakdown of
our total revenues for the periods indicated:
|
|
|
For the year ended March 31, |
|
|
Variance |
|
|
|
|
2019 |
|
|
% |
|
|
2018 |
|
|
% |
|
|
Amount |
|
|
% |
|
|
Online education services |
|
$ |
4,185,596 |
|
|
|
78.12 |
% |
|
$ |
5,022,085 |
|
|
|
84.15 |
% |
|
$ |
(836,489 |
) |
|
|
(16.66 |
)% |
|
Technological development and operation services |
|
|
1,172,427 |
|
|
|
21.88 |
% |
|
|
945,811 |
|
|
|
15.85 |
% |
|
|
226,616 |
|
|
|
23.96 |
% |
|
Total Amount |
|
$ |
5,358,023 |
|
|
|
100.00 |
% |
|
$ |
5,967,896 |
|
|
|
100.00 |
% |
|
$ |
(609,873 |
) |
|
|
(10.22 |
)% |
We derive most of our revenues from online education services. Our
online education services mainly consist of courses designed for
self-taught learners pursuing higher education degrees, including
laws, mathematics, accounting, nursing, administration management
and others. In addition, we provided continuing education and
professional development courses to students, such as information
technology, accounting and language courses.
To enroll in our courses, course participants may choose to
purchase pre-paid study cards from our distributors or to pay us
through bank transfers, online payments with credit cards and debit
cards issued by major banks in China, and through third-party
online payment platforms such as Alipay and WeChat Pay.
We also provide technological development and operation services,
such as information technology system design and monitoring, daily
system support, cloud platform development and other related
services.
For the years ended March 31, 2019 and 2018, revenue derived from
online education services was $4,185,596 and $5,022,085,
respectively, which represented a decrease of $836,489 or 16.66%.
The decrease was primarily due to the revenue from B2B2C and the
number of B2B2C courses decreased. The main reason for a decreased
number of B2B2C courses was that, in certain provinces, due to the
implementation of local policies, certain provinces reduced the
number of self-study examinations from three or four times a year
to twice or only once a year, at the same time the duration of each
self-study examination has been reduced to two days, which results
in a less number of subjects that could be taken by each self-
study student. During this year, several provinces canceled once
examination, thus the number of courses provided for self-study
deceased which lead to the decrease in revenue. The number of
self-study examinations changed back to three or four times a year
subsequent to March 31, 2019. As such, we expect the courses
provided for self-study will increase subsequently.
For the years ended March 31, 2019 and 2018, revenue from
technological development and operation services was $1,172,427 and
$945,811, respectively, representing an increase of $226,616 or
23.96%. The increase was mainly attributable to our cooperation
with a client, World Publishing (Shanghai) Co., Ltd.. We have been
working with World Publishing (Shanghai) Co., Ltd. since November
2017. In September 2018, we finished one software system
development contract for them which attributed $0.5 million for our
technological development revenue.
Moreover, the decrease in revenue was due to the devaluation of RMB
against USD. The average translation rates for the years ended
March 31, 2019 and 2018 were at $1 to 6.7116 RMB and at $1 to
6.6269 RMB, respectively, which represented a decrease of
1.26%.
Cost of Revenue
The following table sets forth the breakdown of the Company’s cost
of revenue for the year ended March 31, 2019 and 2018,
respectively:
|
|
|
For the year ended March 31, |
|
|
Variance |
|
|
|
|
2019 |
|
|
% |
|
|
2018 |
|
|
% |
|
|
Amount |
|
|
% |
|
|
Online education services |
|
$ |
2,388,799 |
|
|
|
83.69 |
% |
|
$ |
1,788,288 |
|
|
|
80.21 |
% |
|
$ |
600,511 |
|
|
|
33.58 |
% |
|
Technological development and operation service |
|
|
427,532 |
|
|
|
14.98 |
% |
|
|
414,080 |
|
|
|
18.57 |
% |
|
|
13,452 |
|
|
|
3.25 |
% |
|
Business and sales related tax |
|
|
38,048 |
|
|
|
1.33 |
% |
|
|
27,128 |
|
|
|
1.22 |
% |
|
|
10,920 |
|
|
|
40.25 |
% |
|
Total Amount |
|
$ |
2,854,379 |
|
|
|
100.00 |
% |
|
$ |
2,229,496 |
|
|
|
100.00 |
% |
|
$ |
624,883 |
|
|
|
28.03 |
% |
Cost of revenue accounted for 53.3% and 37.4% of our net revenues
in the fiscal years ended March 31, 2019 and 2018, respectively.
Cost of revenue is mainly composed of salaries and related expenses
for our teaching support, course and content development, website
maintenance and information technology engineers and other
employees, fees paid to our course lecturers, depreciation and
amortization expenses, server relocation and bandwidth leasing fees
paid to third-party providers and other miscellaneous expenses.
For the years ended March 31, 2019 and 2018, cost of revenue from
online education services was $2,388,799 and $1,788,288,
respectively, representing an increase of $600,511 or 33.58%. The
increase in cost of revenue of online education services was
primarily attributable to the increased payroll expenses. During
fiscal year 2019, in order to develop new courses and expand our
market, we increased the number of employees focusing on course
development.
For the years ended March 31, 2019 and 2018, cost of revenue from
technological development and services was $427,532 and $414,080,
respectively. This was mainly due to that the number of employees
in technology and development department increased by 9 for the
year ended March 31, 2019. We hired more employees for technology
and development department to improve the ability of research and
development, which we expect will not only improve the revenue in
this period but will also attract more potential customers in the
future. Cost of revenue from technological development and
operation services increased in line with the increased
revenue.
Gross Profit
The following table sets forth the breakdown of the Company’s gross
profit for the years ended March 31, 2019 and 2018,
respectively:
| |
|
For the year ended March 31, |
|
|
Variance |
|
| |
|
2019 |
|
|
% |
|
|
2018 |
|
|
% |
|
|
Amount |
|
|
% |
|
| Online education
services |
|
$ |
1,767,074 |
|
|
|
70.58 |
% |
|
$ |
3,210,968 |
|
|
|
85.89 |
% |
|
$ |
(1,443,894 |
) |
|
|
(44.97 |
)% |
| Technological
development and operation services |
|
|
736,570 |
|
|
|
29.42 |
% |
|
|
527,432 |
|
|
|
14.11 |
% |
|
|
209,138 |
|
|
|
39.65 |
% |
| Total
Amount |
|
$ |
2,503,644 |
|
|
|
100.00 |
% |
|
$ |
3,738,400 |
|
|
|
100.00 |
% |
|
$ |
(1,234,756 |
) |
|
|
(33.03 |
)% |
Gross profit from online education services decreased by $1,443,894
or 44.97% for the year ended March 31, 2019 as compared to the same
period of 2018. The decrease in gross profit of online education
services was primarily due to the decrease in revenue and the
increase in cost of revenue, as discussed above.
Gross profit from technological development and operation services
increased by $209,138 or 39.65% for the year ended March 31, 2019
as compared to the same period of 2018. The increased margin of
technological development and operation services was mainly
attributable to the increase in revenue, and cost of revenue keep
stable, as discussed above.
Expenses
The following table sets forth the breakdown of our operating
expenses for the years ended March 31, 2019 and 2018,
respectively:
| |
|
For the year ended March 31, |
|
|
Variance |
|
| |
|
2019 |
|
|
% |
|
|
2018 |
|
|
% |
|
|
Amount |
|
|
% |
|
| Selling expenses |
|
$ |
1,441,165 |
|
|
|
38.51 |
% |
|
$ |
1,084,599 |
|
|
|
40.68 |
% |
|
$ |
356,566 |
|
|
|
32.88 |
% |
|
General and administrative expenses |
|
|
2,301,070 |
|
|
|
61.49 |
% |
|
|
1,581,307 |
|
|
|
59.32 |
% |
|
|
719,763 |
|
|
|
45.52 |
% |
| Total Amount |
|
$ |
3,742,235 |
|
|
|
100.00 |
% |
|
$ |
2,665,906 |
|
|
|
100.00 |
% |
|
$ |
1,076,329 |
|
|
|
40.37 |
% |
Selling Expenses
Selling expenses primarily consist of salaries and related expenses
of our sales team, sales commissions, advertising and promotion
expenses. Our selling expenses increased by 32.88% to $1.44 million
in the fiscal year ended March 31, 2019 from $1.08 million in the
fiscal year ended March 31, 2018. This increase was primarily due
to the increased salaries for our sales department, as the number
of employees in sales department increased by 18 or 138.5% for the
year ended March 31, 2019 compared to the same period of 2018, from
13 to 31. The increase was also due to selling expenses for our
newly formed subsidiaries Fuzhou Huafu, Liaoning Huafu and Huafu
Silu in connection with the expansion of our sales in Fujian and
Liaoning provinces in the fiscal year ended March 31, 2019. We
expect that our selling expenses to further increase as we expand
to other areas of China.
General and Administrative Expenses
For the year ended March 31, 2019, our general and administrative
expenses were $2,301,070, representing an increase of $719,763 or
45.52%, as compared to the same period of 2018. The increase was
mainly due to the $0.4 million in payroll expenses for employees of
new subsidiaries Liaoning Huafu, Fuzhou Huafu and Huafu Silu in
fiscal year 2019. The company set up new subsidiaries in more
provinces to develop new services and entering new commercial
markets. Since the new subsidiaries are still under the start-up
stage, they are generating general and administrative expense but
not much revenue. Bad debt provision increased by $0.4 million,
because of bad debt allowance based on the Company’s policy. The
increase of payroll expenses and bad debt provision was partially
offset by the $0.2 million decrease of professional fees, such as
consulting fees and attorney fees etc.
Interest Income, net
Interest income is primarily generated from our cash deposits in
the banks and interest from short-term loans to third parties. For
the year ended March 31, 2019, interest income was $126,663 as
compared to interest income of $177,723 in the same period of 2018.
The decrease in net interest income was primarily due to the
decrease in the amount of loans lent to third parties.
Provision (Benefit) for Income Taxes
The Company’s benefit for income tax was $96,804 in fiscal year
2019 while income tax provision was $92,023 in fiscal year 2018.
The increase in deferred income tax benefit is primarily
attributable to the increased allowance for doubtful accounts of
Distance Learning and net operating loss (“NOL”) carry-forwards of
Digital Information, which are deductible temporary differences can
be deducted from future taxable income. According to Chinese tax
regulations, NOL can be carried forward to offset taxable income
for five years, management is confident that it is more likely than
not that the recognized NOL will be realized through future taxable
income. The NOL previously recognized was mostly from Digital
Information, Digital Information has made a profit from operating
since fiscal year 2019. We expect Digital Information will continue
to make a profit in the future, therefore we will be able to
utilize the NOL.
Net income (loss)
Our net loss was $1,018,527 for the year ended March 31, 2019 and a
net income of $1,203,477 for the year ended March 31, 2018.These
are mainly due to the decrease of revenue and operating expenses
for the year ended March 31, 2019 as discussed above.
Comprehensive income (loss)
The foreign currency translation gain or loss resulting from
translation of the financial statements expressed in RMB to USD is
reported in other comprehensive income (loss) in the consolidated
statements of income and comprehensive income. The comprehensive
loss attributable to Wah Fu was $1,469,366 for the year ended March
31, 2019 and an income of $1,805,470 for the year ended March 31,
2018. The change was mainly due to the net loss of $1,018,527 and
foreign currency translation loss of $522,250 in fiscal year 2019
when it was net income and foreign currency translation income in
fiscal year 2018.
Working Capital
The following table provides the information about our working
capital at March 31, 2019 and 2018:
| |
|
As of
March 31,
2019
|
|
|
As of
March 31,
2018
|
|
| |
|
|
|
|
|
|
| Current Assets |
|
$ |
6,837,869 |
|
|
$ |
7,715,377 |
|
| Current
Liabilities |
|
|
1,784,951 |
|
|
|
1,434,391 |
|
| Working
Capital |
|
$ |
5,052,918 |
|
|
$ |
6,280,986 |
|
The working capital decreased by $1,228,068 or 19.55% from March
31, 2018 to March 31, 2019. Our working capital requirements are
influenced by the level of our operations, the numerical and dollar
volume of our sales contracts, the progress of execution on our
customer contracts, and the timing of accounts receivable
collections.
Capital Commitments and Contingencies
Capital commitments refer to the allocation of funds for a possible
liability in the near future arising out of capital expenditures.
Contingency refers to a condition that arises from past
transactions or events, the outcome of which will be confirmed only
by the occurrence or non-occurrence of uncertain futures
events.
As of March 31, 2019 and 2018, we had no material capital
commitments or contingent liabilities.
Cash Flows
The following table provides detailed information about our net
cash flows for the years ended March 31, 2019 and 2018.
| |
|
For the years ended
March 31,
|
|
| |
|
2019 |
|
|
2018 |
|
| |
|
|
|
|
|
|
| Net cash used in operating
activities |
|
$ |
(513,310 |
) |
|
$ |
(441,647 |
) |
| Net cash provided by (used in)
investing activities |
|
|
7,370 |
|
|
|
(1,257,949 |
) |
| Net cash provided by financing
activities |
|
|
11,724 |
|
|
|
351,334 |
|
| Effect of
exchange rate changes on cash |
|
|
(301,021 |
) |
|
|
470,449 |
|
| Net decrease in cash |
|
|
(795,237 |
) |
|
|
(877,813 |
) |
| Cash, beginning
of the year |
|
|
4,722,955 |
|
|
|
5,600,768 |
|
| Cash, end of the
year |
|
$ |
3,927,718 |
|
|
$ |
4,722,955 |
|
Operating Activities
Net cash used in operating activities during the year ended March
31, 2019 was $0.5 million, mainly consisting of net loss of $1.0
million, changes in provision of doubtful accounts of $0.4 million,
changes in depreciation and amortization of $0.1 million. Deferred
tax benefit increased by $0.1 million due to deferred tax assets
recognized for Distance Learning in current year. Accounts
receivable decreased by $0.2 million since the Company accrued more
provisions for doubtful accounts according to the bad debt policy.
Deferred offering cost increased by $0.3 million because the
company paid more legal, underwriting and registration costs in
connection with the Initial Public Offering (the “IPO”) of the
Company’s ordinary shares that closed in April 2019. This was
offset by the increase of deferred revenue of $0.3 million, the
increase of other payable of $0.2 million, and the increase of
accrued expenses and other liabilities of $0.1 million.
Net cash used in operating activities during the year ended March
31, 2018 was $0.4 million, consisted of net income of $1.2 million,
provision of doubtful accounts of $0.1 million as reconciled and
net changes in our operating assets and liabilities, which mainly
included an increase in accounts receivable of $1.4 million and
other current assets including deferred offering cost and advances
to supplies of $0.3 million, a decrease in deferred revenue of $0.2
million.
Investing Activities
For the year ended March 31, 2019, net cash provided by investing
activities amounted to $0.01 million as compared to net cash used
in investing activities of $1.3 million for the same period of
2018. The decrease was primarily due to the decrease in purchases
of property and equipment of $0.2 million and decrease in payments
made for loans to third parties of $0.9 million, and increase of
proceeds from loans to third parties of $0.2 million during the
year ended March 31, 2019.
Financing Activities
For the year ended March 31, 2019, net cash provided by financing
activities amounted to $11,724 as compared to net cash provided by
financing activities of $351,334 for the same period of 2018. The
decrease of $339,610 in net cash provided by financing activities
was mainly due to a decrease of $0.4 million in due to related
parties during the year ended March 31, 2019.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results
of operations are based upon our consolidated financial statements.
These financial statements are prepared in accordance with U.S.
GAAP, which requires us to make judgments, estimates and
assumptions that affect the reported amounts of our assets and
liabilities and revenues and expenses, to disclose contingent
assets and liabilities on the date of the consolidated financial
statements, and to disclose the reported amounts of revenues and
expenses incurred during the financial reporting period. We
continue to evaluate these estimates and assumptions that we
believe to be reasonable under the circumstances. Since the use of
estimates is an integral component of the financial reporting
process, actual results could differ from those estimates as a
result of changes in our estimates.
An accounting policy is considered critical if it requires an
accounting estimate to be made based on assumptions about matters
that are highly uncertain at the time such estimate is made, and if
different accounting estimates that reasonably could have been
used, or changes in the accounting estimates that are reasonably
likely to occur, could materially impact the consolidated financial
statements. We believe that the following accounting policies
involve a higher degree of judgment and complexity in their
application and require us to make significant accounting
estimates. The following descriptions of critical accounting
policies, judgments and estimates should be read in conjunction
with our consolidated financial statements and other disclosures
included in this prospectus.
Accounts receivable, net
Accounts receivable are recognized and carried at original invoiced
amount less an estimated allowance for uncollectible accounts. We
usually grant credit to customers with good credit standing with a
maximum of 90 days. As China's online education market is intensely
competitive in recent years, in order to retain existing and
attract new universities, educational institutions and
technological service customers to capture additional market share,
we extend more credit sales with longer credit terms to certain
customers which have a well-established business relationship with
the Company for more than five years, such as the B2B2C customers,
Jiangxi University of Finance and Economics, Jiangxi University of
Science and Technology, Xinyu University, Nanchang University and
the technological service customer, World Publishing (Shanghai)
Co., Ltd..
As of March 31, 2020 and March 31, 2019, the accounts receivable
derived from the B2B2C services were $0.54 million and $0.52
million respectively, and the accounts receivable derived from
technological development and operation services were nil and $1.26
million respectively. There were no accounts receivable derived
from the B2C services. As of March 31, 2020 and March 31, 2019, Nil
and $1.24 million, respectively, of accounts receivable were due
from customers accounting for 10% or more of total outstanding
receivables and/or 10% or more of total revenues.
We determine the adequacy of reserves for doubtful accounts based
on individual account analysis and historical collections. We
establish a provision for doubtful receivables when there is
objective evidence that we may not be able to collect amounts due.
The allowance is based on management’s best estimates of specific
losses on individual exposures, as well as a provision on
historical trends of collections. The provision is recorded against
accounts receivable balances, with a corresponding charge recorded
in the consolidated statements of operations and comprehensive
income (loss). Actual amounts received may differ from management’s
estimate of credit worthiness and the economic environment.
Delinquent account balances are written-off against the allowance
for doubtful accounts after management has determined that the
likelihood of collection is not probable. As of March 31, 2020 and
2019, the allowances for doubtful accounts were $511,037 and
$610,816, respectively.
As of March 31, 2020 and 2019, accounts receivable aging more than
3 months and less than 12 months were $294,343 and $1,069,340
respectively, accounts receivable aging more than 12 months were
$108 and $413,429, respectively.
Investments in unconsolidated entities
Our investments in unconsolidated entities consist of equity method
investments and equity investments without readily determinable
fair value.
We follow ASC Topic 321, Investments Equity Securities (“ASC 321”)
to account for investments that do not have readily determinable
fair value and over which the Company does not have significant
influence. We use the measurement alternative to measure those
investments at cost, less any impairment, plus or minus changes
resulting from observable price changes in orderly transactions for
identical or similar investments of the same issuer, if any.
For an investee over which the Company has the ability to exercise
significant influence, but does not own a controlling interest, we
account for that investment using the equity method. Significant
influence is generally considered to exist when hawse have an
ownership interest in the voting stock of the investee between 20%
and 50%. Other factors, such as representation on the investee’s
board of directors, voting rights and the impact of commercial
arrangements, are also considered in determining whether the equity
method of accounting is appropriate.
An impairment charge is recorded if the carrying amount of the
investment exceeds its fair value and this condition is determined
to be other-than temporary. The Company recorded impairment loss of
$261,574, $76,425 and nil on its equity investments during the
years ended March 31, 2020, 2019 and 2018, respectively.
Revenue recognition
We previously recognized revenue when the following four criteria
are met: (i) persuasive evidence of an arrangement exists, (ii) the
service has been rendered, (iii) the fees are fixed or
determinable, and (iv) collectability is reasonably assured.
On April 1, 2018, we adopted Accounting Standards Update (“ASU”)
2014-09 Revenue from Contracts with Customers (FASB ASC Topic 606)
(“ASC 606”) using the modified retrospective method under which
cumulative effects are recognized at the date of the initial
application of ASC 606. With the adoption of ASC 606, revenue is
recognized when all of the following five steps are met: (i)
identify the contract(s) with the customer; (ii) identify the
performance obligations in the contract; (iii) determine the
transaction price; (iv) allocate the transaction price to the
performance obligations; (v) recognize revenue when (or as) each
performance obligation is satisfied. We believe that its current
revenue recognition policies are generally consistent with the new
revenue recognition standards set forth in ASC 606. Based on our
assessment, potential adjustments to input measures are not
expected to be pervasive to the majority of its contracts. As such,
we have concluded that the adoption of this new guidance will not
result in a material cumulative catch-up adjustment to the opening
balance sheet or retained earnings at the effective date or any
other material impact on its consolidated financial statements.
Online education service
The online education services provided by us to customers are an
integrated service, including audio-video course content, mock
examinations and online chat rooms during the subscription service
period. Audio-video course content, mock examinations and online
chat rooms are not practical to be sold on standalone basis and
have never been sold separately. Therefore, the contracts have a
single performance obligation for an integrated service and the
transaction price is stated in the contracts, usually as a price
per student or course. Quantity of students enrolled or courses
provided is determined before rendering service. We typically
satisfy the performance obligations in contracts with customers
upon render of the services. For examination service, the revenue
is recognized at a point in time when customer/student completes
the examination on the platform. At this point in time,
customer/student is able to direct use of and obtain substantially
all of the benefits from the online education platform at the time
the services are delivered. Except examination service, all other
revenues for the online education service are recognized on a
straight line basis over the subscription period from the month in
which students enroll in the courses to the month in which the
subscriptions expire. The subscription period for a majority of the
online education services is six months or less. Customer/student
can access to the courses. anytime during the subscription period.
The online education services include online education cloud
services (“B2B2C”), which are provided through educational
institutions to individual students, and online training services
(“B2C”), which are provided to students directly. B2C services can
be cancelled and is refundable no later than 24 hours after
enrollment. B2B2C services cannot be cancelled and is not
refundable after enrollment. All estimates are based on our
historical experience, complete satisfaction of the performance
obligation, and our best judgment at the time the estimates are
made. Returns and allowances are not a significant aspect of the
revenue recognition process as historically they have been
immaterial.
Technological development and operation service
Revenues from technological development service, including
information technology system design and cloud platform
development, are recognized when the system or platform are
delivered and accepted by the customers, normally within a year.
Upon delivery of services, project completion inspection and
customer acceptance notice are required as proof of the completion
of performance obligations, which is a confirmation of customer to
its ability to direct the use of and obtain substantially all of
the benefits from, the design and development service. In instances
where substantive completion inspection and customer acceptance
provisions are specified in contracts, revenues are deferred until
all inspection and acceptance criteria have been met.
From time to time, we enter into arrangement to provide
technological support and maintenance service of online platforms
to our customers. our efforts are expended evenly throughout the
service period. The revenues for the technological support and
maintenance service are recognized over the support and maintenance
services period., usually from 3 months to one year. The contracts
have a single performance obligation and are primarily on a
fixed-price basis. No significant returns, refund and other similar
obligations during each reporting period.
The core principle underlying the revenue recognition ASU is that
we will recognize revenue to represent the transfer of services to
customers in an amount that reflects the consideration to which we
expect to be entitled to in such exchange. This will require us to
identify contractual performance obligations and determine whether
revenue should be recognized at a point in time or over time, based
on when services are provided to a customer.
Income taxes
We account for income taxes under ASC 740. Deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the consolidated financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period including
the enactment date. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to
be realized.
The provisions of ASC 740-10-25, “Accounting for Uncertainty in
Income Taxes,” prescribe a more-likely-than-not threshold for
consolidated financial statement recognition and measurement of a
tax position taken (or expected to be taken) in a tax return. This
interpretation also provides guidance on the 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, and related disclosures.
We do not believe that there was any uncertain tax position at
March 31, 2020 and 2019.
Recent accounting pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic
842). The main objective is to increase transparency and
comparability among organizations by recognizing lease assets and
lease liabilities on the balance sheet and disclosing key
information about leasing arrangements. The ASU is effective for
fiscal years beginning after December 15, 2018, including interim
periods within those fiscal years, for (1) public business
entities, (2) not-for-profit entities that have issued, or are
conduit bond obligors for, securities that are traded, listed, or
quoted on an exchange or an over-the-counter market, and (3)
employee benefit plans that file financial statements with the SEC.
In July 2018, the FASB issued an update that provided an additional
transition option that allows companies to continue applying the
guidance under the lease standard in effect at that time in the
comparative periods presented in the consolidated financial
statements. Companies that elect this option would record a
cumulative-effect adjustment to the opening balance of retained
earnings on the date of adoption. Early adoption is permitted for
all entities. The Company adopted this ASU starting April 1, 2019,
and evaluated and deemed that it did not have a material impact on
the Company’s consolidated statements of operations and
comprehensive income (loss).
In June 2016, the FASB issued ASU 2016-13 (“ASU 2016-13”),
Measurement of Credit Losses on Financial Instruments (Topic 326):
Measurement of Credit Losses on Financial Instruments”. ASU 2016-13
requires companies to measure credit losses utilizing a methodology
that reflects expected credit losses and requires a consideration
of a broader range of reasonable and supportable information to
inform credit loss estimates. ASU 16-13 was further amended in
November 2019 in “Codification Improvements to Topic 326, Financial
Instruments-Credit losses”. This guidance is effective for fiscal
years beginning after December 15, 2019, including those interim
periods within those fiscal years. For emerging growth companies,
the effective date is has been extended to fiscal years beginning
after December 31, 2022. The Company is currently assessing the
impact of adopting this standard. Based on a preliminary
assessment, the Company does not expect the adoption of this
guidance to have a material impact on its consolidated financial
statements.
In August 2018, the FASB issued ASU 2018-13, “Fair Value
Measurement (Topic 820): Disclosure Framework – Changes to the
Disclosure Requirements for Fair Value Measurement,” to improve the
effectiveness of disclosures in the notes to financial statements
related to recurring or nonrecurring fair value measurements by
removing amounts and reasons for transfers between Level 1 and
Level 2 of the fair value hierarchy, policies for timing of
transfers between different levels for fair value measurements, and
the valuation processes for Level 3 fair value measurements. The
new standard requires disclosure of the range and weighted average
of significant unobservable inputs used to develop Level 3 fair
value measurements. The amendments in this update are effective for
all entities for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2019. The Company does
not expect that the adoption of this ASU will have a material
impact on its consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic
740): Simplifying the Accounting for Income Taxes,” which removes
certain exceptions to the general principles in Topic 740, and also
improves consistent application of and simplify U.S. GAAP for other
areas of Topic 740 by clarifying and amending existing guidance.
For public business entities, the amendments in this update are
effective for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2020. For all other entities,
the amendments in this update are effective for fiscal years
beginning after December 15, 2021, and interim periods within
fiscal years beginning after December 15, 2022. Early adoption of
the amendments is permitted. The Company expects that the adoption
of this ASU will not have a material impact on the Company’s
consolidated financial statements.
The Company does not believe other recently issued but not yet
effective accounting standards, if currently adopted, would have a
material effect on the consolidated financial position, statements
of operations and cash flows.
5B. Liquidity and Capital Resources
Our cash primarily consists of cash on hand and cash in banks in
China, which is unrestricted for withdrawal and use and is
deposited with banks in China. As of March 31, 2020 and March 31,
2019, we had approximately $6.8 million and $3.9 million of cash in
bank, respectively, and had no outstanding bank loans or third
party loans due.
On April 29, 2019, we announced the closing of our IPO of 1,181,033
ordinary shares at a public offering price of $5.00 per share, for
total gross proceeds of approximately $5.9 million before deducting
underwriting discounts, commissions and other related expenses.
After the IPO, we have more cash on hand for implementation of our
growth strategies and for our operating activities.
Management believes that our current cash and cash flows from
current and future operations will be sufficient to meet our
working capital needs for at least the next 12 months. We intend to
continue carefully executing our growth plans and managing market
risk.
5C. Research and Development, Patents and Licenses, etc.
See the discussion under the headings “Research and Development”,
“Intellectual Property” and “Patents” in Item 4 above.
5D. Trend Information
We have noted the existence of the following trends, all of which
are likely to affect our business to the extent they continue in
the future:
China’s economy is growing rapidly
We have benefited significantly from overall economic growth and
the expansion of the education market in China. Economic growth and
increasing domestic consumption in China have contributed to a
significant increase in spending on education. According to data
from National Bureau of Statistics of China, gross
domestic product (“GDP”) of China reached RMB 99,087 billion in
year 2019, increased by 7.8% over year 2018; disposable income per
capita of urban residents increased from RMB 31,195 in 2015 to RMB
42,359 in 2019, representing an increase of 35.79% during this
period. (Source: China Research and
Intelligence www.shcri.com) We believe that the
increase trend of the disposable income per capita creates
favorable economic environment for online self-taught higher
education. People who would like to obtain more education are
likely to invest more in education as their disposable income
increases.
Market size of China’s Online Self-taught Higher Education is
increasing
As reflected in the table below, the scale of China’s online
education industry was enlarged in recent years, mainly driven by
the internet technology upgrading. The self-taught higher education
sector was transformed from offline classroom schooling to online
platforms because of the broader audience reached and the economic
benefit provided by online platforms. Therefore, the market size of
China’s online self-taught higher education grew rapidly year by
year, exceeded RMB 39.07 billion in year 2019 and expect to RMB
41.02 billion in year 2020.
|
|
|
|
2016 |
|
|
|
2017 |
|
|
|
2018 |
|
|
|
2019 |
|
|
|
2020
E |
|
| Market
Size (RMB, billion) |
|
|
23.40 |
|
|
|
28.83 |
|
|
|
35.52 |
|
|
|
39.07 |
|
|
|
41.02 |
|
(Source: China Research and Intelligence
www.shcri.com)
Market size of Online Self-taught Higher Education B2B2C
Service in China is also increasing
B2B2C service is our major service line. For the year ended March
31, 2020, approximately 83% of our revenue was generated from B2B2C
service. Market size of online self-taught higher education
B2B2C service in China increased from RMB 543.3 million to RMB
1,369.12 million from year 2016 to year 2019, and is expect to RMB
1.5 billion for year 2019.
| |
|
2016 |
|
|
2017 |
|
|
2018 |
|
|
2019 |
|
|
2020 E |
|
| Market
Size (RMB, million) |
|
|
543.30 |
|
|
|
814.95 |
|
|
|
1,222.43 |
|
|
|
1,369.12 |
|
|
|
1,478.65 |
|
(Source: China Research and Intelligence www.shcri.com)
Steps to Improve Our Performance
Recruiting professional personnel is expected to help
increase our sales.
We believe that our existing products and services with
technological development of our online platform and quality
improvement of our online courses will enable us to capture
increased market demands for online education. With these
opportunities we are able to provide, we plan to expand our team by
recruiting professionals in various fields. In recent years, supply
and demand of professionals tend to be stable, as long as we can
provide development opportunities, we are able to hire more
outstanding personnel, such as technology development
professionals, online course producers, teaching professionals and
senior management expertise. As of March 31, 2020, we had 142 full
time employees and 3 part time employees and there were 150 full
time employees and 3 part time employees as of March 31, 2019. As
our team keeps growing, we will be able to improve the quality of
our courses, negotiate and work with more schools, achieve more
revenue and better financial results.
We expect our income will benefit from the implementation of
“Provincial Partnership Model.”
There are 32 provinces in China and the population in each province
varies from tens of millions to hundreds of millions. We are
currently implementing a “Provincial Partnership Model” under which
we establish subsidiaries in different provinces. Our local
partners in each province, who are also the shareholders of each
local subsidiary, can develop business not only with the
reputation, platform and courses of the Company, but also with
their own capability and deep understanding of local education
market. We have founded subsidiaries in Hunan, Hubei, Jiangsu,
Guizhou, Fujian, Liaoning, Sichuan, Guangxi, Guangzhou Province and
Beijing. We believe that this “Provincial Partnership Model” will
create more revenue by motivating our partners to explore potential
market and provide better services to local customers. Meanwhile,
“Provincial Partnership Model” will decrease the Company’s payroll,
travel and administrative expenses by hiring local staff instead of
recruiting staff in Beijing, where our headquarters is located.
Other than self-taught higher education courses, we are
exploring online non-diploma education courses and adult continuing
higher education courses
(1) Online non-diploma education courses
As of now, most of our online courses are provided to self-taught
learners and college students pursuing higher education degrees. We
are also exploring non-diploma education courses and professional
development courses for qualification certificates. For example, we
have completed development of online courses for the “National
Teacher Certificate Examination”. There are a very limited amount
of institutions developing courses for the “National Teacher
Certificate Examination” in China, especially promoting these
courses through B2B2C model like us. Therefore, competition in this
field is not strong. On the other hand, our online education
platform was successfully built and its cost will be much lower in
the upcoming periods. As such, our gross profit is more likely to
increase with the development of other professional development
courses.
(2) Online adult continuing higher education
courses
Adult higher education examination is an alternative way to obtain
higher education for adults and an important part of China’s higher
education system. According to the statistics from China Research
and Intelligence www.shcri.com, there were 288 universities
and colleges offering continuing education services, most of which
adopted face-to-face teaching. There is barely B2B2C service
provider for adult continuing higher education courses and market
size of China’s online continuing higher education is relatively
small. The market size of online continuing higher education
increased from RMB 17.80 billion in 2016 to RMB 29.62 billion in
2019, and it is expected to RMB31.99 billion for year 2020.
| |
|
2016 |
|
|
2017 |
|
|
2018 |
|
|
2019 |
|
|
2020E |
|
| Market
Size (RMB, billion) |
|
|
17.80 |
|
|
|
21.89 |
|
|
|
26.93 |
|
|
|
29.62 |
|
|
|
31.99 |
|
We entered into the adult education field and launched our
continuing education platforms in late 2016. Currently, there are
over 175 universities and education institutions using and testing
our platforms. Given the unmet market demands for this type of
services as well as the Chinese government’s promotion of the
“Internet+” model, China’s institutions of higher education,
including our existing and potential clients, will likely increase
their use of adult continuing higher education cloud platform to
standardize teaching process and monitor learning process. As such,
we expect that our revenue from services for online adult
continuing education will increase in the long term.
5.E. Off-Balance Sheet Arrangements
There were no off-balance sheet arrangements for the years ended
March 31, 2020, 2019 and 2018, that have or that in the opinion of
management are likely to have, a current or future material effect
on our financial condition or results of operations.
5.F. Tabular Disclosure of Contractual Obligations
The following table represents our contractual commitments as of
March 31, 2020:
| |
|
Payments Due by Period |
|
| |
|
Total |
|
|
Within
1 Year |
|
|
2-3
Years |
|
|
4-5
Years |
|
|
After
5 Years |
|
| Operating lease
obligations |
|
$ |
652,053 |
|
|
$ |
278,715 |
|
|
$ |
373,338 |
|
|
$ |
- |
|
|
$ |
- |
|
There have been no material changes to our contractual obligations
since March 31, 2020.
ITEM 6. DIRECTORS,
SENIOR MANAGEMENT AND EMPLOYEES
6.A. Directors, Executive Officers and Key Employees
The following table sets forth the name, age, positions and a brief
description of the business experience of each of our directors,
executive officers and key employees as of the date hereof.
| Directors
and Executive Officers |
|
Age |
|
Position/Title |
| Yang
Yu |
|
48 |
|
Chairman
of the Board and Executive Director |
| |
|
|
|
|
| Xinghui
Yang |
|
50 |
|
Chief
Executive Officer and Director |
| |
|
|
|
|
| Gang
Yao |
|
47 |
|
Chief
Financial Officer |
| |
|
|
|
|
| Cuntao
Hou |
|
41 |
|
Vice
President |
| |
|
|
|
|
| Defang
Li |
|
75 |
|
Director |
| |
|
|
|
|
| Yik C
Chan |
|
63 |
|
Director |
| |
|
|
|
|
| Wenxiang
Xing |
|
57 |
|
Director |
There are no family relationships among our directors and officers.
There are no arrangements or understandings with major
shareholders, customers, suppliers or others, pursuant to which any
person referred to above was selected as a director or member of
senior management, except as disclosed in Note 10 in the
“accompanying consolidated financial statements”. The address of
each of our directors and executive officers is c/o Wah Fu
Education Group Limited, Economic and Technological Development
Zone, Beijing, China 100176.
Executive Officers and Directors
Yang Yu has been serving as Chairman of the Board of
Directors and Executive Director of the Company since November
2016. Mr. Yu has been serving as the executive director of several
of our subsidiaries and VIE, including the executive director of
Beijing Distance Learning since July 2015, the executive director
of Beijing Digital Information since October 2012, the executive
director of Shanghai Xia Shu network Technology Co., Ltd. since
April 2016 and the executive director of Shanghai Xin Fu Network
Technology Co., Ltd. since July 2015. He has also been the acting
executive director of Beijing Hao Hua Hao Tai Investment Co., Ltd,
an investment company, since July 2009. Mr. Yu obtained his Ph.D.
in law from China University of Political Science & Law, a
Master of Laws degree from Xian Jiaotong University and a
Bachelor’s Degree in Medicine from The Fourth Military Medical
University in Xi’an, China.
Xinghui Yang has been serving as director of the Company
since March 2013 and Chief Executive Officer of the Company since
November 2016. Mr. Yang has served as chief executive officer of
our wholly owned subsidiary Beijing Distance Learning since March
2013 and Deputy General Manager of this subsidiary from November
2006 to February 2013. He has also been serving as chief executive
officer of Beijing Digital Information since March 2013. While with
Beijing Distance Learning, Mr. Yang managed the daily operations of
the company. From October 2003 to October 2006, Mr. Yang served as
Deputy General Manager of Beijing Meiming Media Co., Limited, an
integrated marketing company. Mr. Yang obtained his B.S. in
Industrial & Electrical Automation from Beijing Information
Science & Technology University and his M.B.A from University
of International Business and Economics in Beijing, China.
Gang Yao has been serving as our Chief Financial Officer
since August 2018. Mr. Yao has been serving as Executive Chairman
of Beijing Clean2Organic Technology Co., Ltd. since January 2017,
responsible for overall decision making in connection with key
aspects of the company’s operations. From October 2013 to April
2015, he served as Chief Executive Officer of Hanwang Technology
Co., Ltd. (Shenzhen Stock Exchange 002362) where he managed the
company’s operations (including finance and supply chain),
implemented organizational reforms and developed its internal
control program. From May 2015 to July 2017, Mr. Yao served as
Chief Executive Officer of Qingdao Hengshun Zhongsheng Group Co.,
Ltd. (Shenzhen Stock Exchange 300208) where he was managed the
company’s operations, led its internal reform and also managed the
company’s international expansions in Southeast Asia and Africa.
From September 2010 to June 2013, he served as RMB Fund Partner at
Zero2IPO Venture, managing the firm’s private equity funds such as
modern agriculture funds and clean technology funds. Previously,
Mr. Yao was with Baker Tilly China from July 2003 and September
2010 where he held various finance and accounting positions. He
started his career as an engineer at Huaihua Raiway Co., Ltd. Mr.
Yao obtained his B.S. in Household Electrical Appliances Technology
and Management from Hunan University of Commerce in Changsha,
China, his Master’s degree in Accountancy from Central South
University in Changsha, China and his Doctor degree in Accountancy
from Chinese Academy of Fiscal Science in Beijing, China. He holds
the qualification of Certified Public Accountant in China and
Australia, and the member of the Institute of Chartered Accountant
of England and Wales.
Cuntao Hou has been Vice President of the Company since
December 2016. Mr. Hou has held various managerial positions at our
subsidiaries. He has served as Deputy General Manager of Beijing
Distance Learning since February 2015 where he has been in charge
of marketing and sales. He has also been serving as the General
Manager of Hunan Huafu Haihui Learning Technology Co., Ltd., our
subsidiary based in Hunan, China, in charge of key aspects of daily
operations. Mr. Hou was previously the Assistant Manager of the
Marketing Department at Beijing Distance Learning from June 2006 to
July 2013, responsible for sales and marketing in relation to the
company’s self-study education preparation programs. He joined
Beijing Distance Learning in June 2003 and worked as a software
engineer at the company’s R&D Department until June 2006. He
then served as Assistant Manager of the R&D Department at
Beijing Distance Learning from July 2006 to May 2009. Mr. Hou
obtained his B.S. degree in Computer Science from Beijing Applied
Science and Technology University and his B.A. degree in Management
from Beijing Normal University in Beijing, China.
Defang Li has been serving as an independent director since
August 2018. Mr. Li has been a professor of Beijing Normal
University since 1986. He has also held various leadership
positions at the university, including Dean of the Continuing
Education Department, Dean of Higher Vocational Education and
Deputy Dean of Network Education School. In addition to his
positions at Beijing Normal University, Mr. Li has been in
leadership positions at various professional associations dedicated
to education since 2005. He is currently Deputy Secretary of the
National Colleges & Universities Modern Remote Education
Collaboration, Vice President of Beijing Adult Education
Association and Secretary of National Teachers’ Network
Association. Mr. Li has published two books and over 20 articles on
education related subjects. He received his M.A. in Social
Anthropology, Cultural Anthropology & Folklore Studies and his
B.A. in Chinese Literature from Beijing Normal University in
Beijing, China.
Yik C Chan has been serving as an independent director since
August 2018. Since 2016, Mr. Chan has served as the Managing
Director Asia of IAA-Advisory Associates, which provides
specialized advisory services in leasing and asset finance in the
areas of strategy and planning, corporate development, mergers and
acquisitions, vendor and captive finance, turnaround and
restructures, international expansion and funding strategies.
Before joining IAA, from 2012 to 2016, Mr. Chan served as Operating
Partner of CITIC Capital, one of the largest private equity firms
in China, where he operated in the non-bank financial services
industry, including leasing, commercial factoring and supply chains
financing. From 2007 to 2012, Mr. Chan served as Chief Executive
Officer of BNP Paribas Leasing Solutions China, a provider of
leasing and finance solutions, a position he held from the
company’s inception in 2007. Mr. Chan is an experienced general
manager and finance and treasury executive with more than 30 years’
experience in private equity, global leasing, supply chains, and
structured finance in the US, Pan Asia and China. Mr. Chan is a
Certified Public Accountant in the U.S., and received a B.A. in
Accounting from Baruch College and a M.B.A. in Business
Administration from New York University.
Wenxiang Xing has been serving as an independent director
since December 2018. Mr. Xing has been a professor of Central
University of Finance and Economics since July 2008 and was a
professor of China University of Geosciences from November 2005 to
July 2008. Mr. Xing has previously served as a director of a number
of companies. He has served as Chairman of the Board of Directors
of Hangzhou Jinjiang Group Ecology Technology Co., Ltd. since
August 2016. From March 2000 to November 2005, he served as
President of Yida Group Co., Ltd and Chairman of the Board of
Directors of Yida Group Investment & Development Co., Ltd. In
addition, Mr. Xing has served as an independent director of other
public companies. He served as an independent director of Fujian
Longma Environmental Sanitation Equipment Co., Ltd from September
2010 to September 2016. He also served as an independent director
of Yi Lianzhong Information Technology Co. Ltd. from June 2012 to
June 2018. Mr. Xing received a Ph.D. in Chinese philosophy from
Hebei University in 2010, a Master’s degree in Economics in 1994
from Liaoning University and a Bachelor’s degree in philosophy in
1984 from the same institution.
Each of our directors will serve as a director until our next
annual general meeting and until their successors are duly elected
and qualified.
6.B. Compensation
For the year ended March 31, 2020, the aggregate cash compensation
that we paid to our executive officers and directors was
approximately $277,467. For the year ended March 31, 2019, the
aggregate cash compensation that we paid to our executive officers
and directors was approximately $172,929. There are no service
contracts between us and any of our directors, except for those
directors who are also our executive officers. Pursuant to PRC law,
We make contributions equal to certain percentages of each
employee’s salary for his or her pension insurance, medical
insurance, housing fund, unemployment and other statutory benefits.
Other than the above-mentioned statutory contributions mandated by
applicable PRC law and the insurance policy, we have not set aside
or accrued any amount to provide pension, retirement or other
similar benefits to our executive officers and directors.
Employment Agreements
We have entered into employment agreements with each of our
executive officers. We may terminate an executive officer’s
employment for cause at any time without advance notice or
remuneration, if (i) the executive officer is convicted or
pleads guilty to a felony or to an act of fraud, misappropriation
or embezzlement, (ii) the executive officer has been negligent
or acted dishonestly to our detriment, (iii) the executive
officer has engaged in actions amounting to misconduct or failed to
perform his/her duties thereunder and such failure continues after
the executive officer is afforded a reasonable opportunity to cure
such failure, (iv) the executive officer has died, or
(v) the executive officer has a disability which shall mean a
physical or mental impairment which, as reasonably determined by
our board of directors, renders the executive officer unable to
perform the essential functions of his/her employment with us, even
with reasonable accommodation that does not impose an undue
hardship on the Company, for more than 180 days in any
12-month period, unless a longer period is required by applicable
law, in which case that longer period would apply. We may also
terminate an executive officer’s employment under PRC Labor Law
Articles 36, 39 40 and 41 and under other applicable laws and
regulations. An executive officer may terminate his or her
employment at any time by giving a thirty days’ prior written
notice.
Each executive officer has agreed to hold, at all times during and
after the termination or expiry of his or her employment agreement,
in strict confidence and not to use, except as required in the
performance of his or her duties in connection with the employment
or pursuant to applicable law, any of our confidential information,
or the confidential or proprietary information disclosed to the
executive officer by or obtained by the executive officer from us
either directly or indirectly in writing, orally or otherwise, if
specifically indicated to be confidential or reasonably expected to
be confidential.
In addition, each executive officer has agreed to be bound by
non-competition and non-solicitation restrictions during the term
of his or her employment and for two years following the last date
of employment. Specifically, each executive officer has agreed not
to (i) approach our suppliers, clients, customers or contacts
of us or other persons or entities introduced to the executive
officer in the executive officer’s capacity as our representative
for the purposes of doing business with such persons or entities
which will harm the business relationship between the Company and
such persons and/or entities; (ii) unless expressly consented
to by us, assume employment with or provide services to any of our
competitors, engage, whether as principal, partner, licensor or
otherwise, any of our competitors; or (iii) unless expressly
consented to by us, seek directly or indirectly, by the offer of
alternative employment or other inducement whatsoever, to solicit
the services of any of our employees who is employed by us.
We have also entered into indemnification agreements with each of
our directors and executive officers. Under these agreements, we
agree to indemnify our directors and executive officers against
certain liabilities and expenses incurred by such persons in
connection with claims made by reason of their being a director or
officer of our company.
Each executive officer has agreed to hold in confidence any
confidential information that he has obtained about the
Company.
6.C. Board Practices
Terms of Directors and Officers
Expiration of Term of Directors
Pursuant to our memorandum and articles of association, the
business of our company is managed by our board of directors.
Commencing with the first annual meeting of the shareholders,
directors are elected for a term of office to expire at the next
succeeding annual meeting of the shareholders after their election.
Each director will hold office until the expiration of his or her
term of office and until his or her successor has been elected and
qualified, or until his or her earlier death, resignation or
removal by the shareholders or a resolution passed by the majority
of the remaining directors.
In the interim between annual meetings of shareholders, or special
meetings of shareholders called for the election of directors, any
vacancy on the board of directors may be filled by the vote of a
majority of the remaining directors then in office, although less
than a quorum, or by the sole remaining director. A director
elected to fill a vacancy resulting from death, resignation or
removal of a director will serve for the remainder of the full term
of the director whose death, resignation or removal will have
caused such vacancy and until his successor will have been elected
and qualified.
Director Remuneration Upon Termination
The directors may receive such remuneration as our board of
directors may determine from time to time. The compensation
committee will assist the directors in reviewing and approving the
compensation structure for the directors. Currently, our directors
are not entitled to receive any remuneration upon termination of
employment.
Audit Committee
Our audit committee consists of Yik C. Chan, Wenxiang Xing and
Defang Li. e have determined that each of these three
director nominees satisfies the “independence” requirements of the
NASDAQ Listing Rules and meet the independence standards under
Rule 10A-3 under the Securities Exchange Act of 1934, as
amended. We have determined that Mr. Chan qualifies as an “audit
committee financial expert.” The audit committee oversees our
accounting and financial reporting processes and the audits of the
financial statements of the Company. The audit committee is
responsible for, among other things:
| |
● |
selecting
the independent registered public accounting firm and pre-approving
all auditing and non-auditing services permitted to be performed by
the independent registered public accounting firm; |
| |
|
|
| |
● |
reviewing
with the independent registered public accounting firm any audit
problems or difficulties and management’s response; |
| |
● |
reviewing
and approving all proposed related party transactions, as defined
in Item 404 of Regulation S-K under the Securities
Act; |
| |
|
|
| |
● |
discussing
the annual audited financial statements with management and the
independent registered public accounting firm; |
| |
|
|
| |
● |
reviewing
the adequacy and effectiveness of our accounting and internal
control policies and procedures and any special steps taken to
monitor and control major financial risk exposures; |
| |
|
|
| |
● |
annually
reviewing and reassessing the adequacy of our audit committee
charter; |
| |
|
|
| |
● |
meeting
separately and periodically with management and the independent
registered public accounting firm; |
| |
|
|
| |
● |
monitoring
compliance with our code of business conduct and ethics, including
reviewing the adequacy and effectiveness of our procedures to
ensure proper compliance; and |
| |
|
|
| |
● |
reporting
regularly to the board. |
Compensation Committee
Our compensation committee consists of Wenxiang Xing and Yik C.
Chan, each of whom satisfies the independence requirements of Rule
5605 of the NASDAQ rules. The compensation committee assists the
board in reviewing and approving the compensation structure,
including all forms of compensation, relating to our directors and
executive officers. Our chief executive officer may not be present
at any committee meeting during which their compensation is
deliberated upon. The compensation committee is responsible for,
among other things:
| |
● |
reviewing
and approving, or recommending to the board for its approval, the
compensation for our chief executive officer and other executive
officers; |
| |
|
|
| |
● |
reviewing
and recommending to the board for determination with respect to the
compensation of our non-employee directors; |
| |
|
|
| |
● |
reviewing
periodically and approving any incentive compensation or equity
plans, programs or other similar arrangements; and |
| |
|
|
| |
● |
selecting
compensation consultant, legal counsel or other adviser only after
taking into consideration all factors relevant to that person’s
independence from management. |
Nominating and Corporate Governance Committee
Our corporate governance and nominating committee consists of
Defang Li and Yik C. Chan, each of whom satisfies the independence
requirements of Rule 5605 of the NASDAQ rules. The nominating and
corporate governance committee assists the board in selecting
individuals qualified to become our directors and in determining
the composition of the board and its committees. The nominating and
corporate governance committee is responsible for, among other
things:
| |
● |
recommending
nominees to the board for election or re-election to the board, or
for appointment to fill any vacancy on the board; |
| |
● |
reviewing
annually with the board the current composition of the board with
regards to characteristics such as independence, knowledge, skills,
experience, expertise, diversity and availability of service to
us; |
| |
|
|
| |
● |
selecting
and recommending to the board the names of directors to serve as
members of the audit committee and the compensation committee, as
well as of the nominating and corporate governance committee
itself; |
| |
|
|
| |
● |
developing
and reviewing the corporate governance principles adopted by the
board and advising the board with respect to significant
developments in the law and practice of corporate governance and
our compliance with such laws and practices; and |
| |
|
|
| |
● |
evaluating
the performance and effectiveness of the board as a
whole. |
6.D. Employees
See the section entitled “Employees” in Item 4.B above.
6.E. Share Ownership
As of August 13, 2020, 4,381,033 of our ordinary shares were
outstanding. Holders of our ordinary shares are entitled to vote
together as a single class on all matters submitted to shareholders
for approval. No holder of ordinary shares has different voting
rights from any other holders of ordinary shares. We are not aware
of any arrangement that may, at a subsequent date, result in a
change of control of our company.
Beneficial ownership is determined in accordance with the rules and
regulations of the SEC. The percentages of shares beneficially
owned in the table below are based on 4,381,033 ordinary shares
outstanding as of August 13, 2020.
The following table sets forth information with respect to the
beneficial ownership of our common shares as of August 13, 2020
by:
| |
● |
each
of our directors and executive officers; and |
| |
|
|
| |
● |
each
person known to us to beneficially own more than 5% of our
outstanding ordinary shares. |
Unless otherwise noted below, the address for each listed
shareholder, director or executive officer is Room 505 Building
No.40, No.1 Disheng North Street, Economic and Technological
Development Zone, Beijing, China 100176.
| |
|
Ordinary shares
beneficially owned |
|
|
Name |
|
Number |
|
|
% |
|
| Directors and Executive
Officers: |
|
|
|
|
|
|
| Yang
Yu(1) |
|
|
1,648,000 |
|
|
|
38 |
% |
| Xinghui
Yang(2) |
|
|
1,552,000 |
|
|
|
35 |
% |
| Gang Yao |
|
|
- |
|
|
|
- |
|
| Cuntao Hou |
|
|
- |
|
|
|
- |
|
| Defang Li |
|
|
- |
|
|
|
- |
|
| Yik C Chan |
|
|
- |
|
|
|
- |
|
| Wenxiang
Xing |
|
|
- |
|
|
|
- |
|
| All directors and
executive officers as a group (seven persons) |
|
|
3,2000,000 |
|
|
|
73 |
% |
| Principal
Shareholders: |
|
|
|
|
|
|
|
|
| River
Business Limited (3) |
|
|
1,392,000 |
|
|
|
32 |
% |
| Silver
Thousand International (4) |
|
|
320,000 |
|
|
|
7 |
% |
| HFGFR
INC. (5) |
|
|
1,488,000 |
|
|
|
34 |
% |
| (1) |
Includes
1,488,000 ordinary shares held through HFGFR INC. and
160,000 ordinary shares held through Silver Thousand
International. |
| (2) |
Includes
1,392,000 ordinary shares held through River Business Limited and
160,000 ordinary shares held through Silver Thousand
International. |
| (3) |
The
registered office address of River Business Limited is Sea Meadow
House, PO Box 173, Road Town, Tortola, VG1110 British Virgin
Islands. As the holder of all of the equity interest in River
Business Limited, Yang Xinghui has voting and dispositive power
with respect to all of the ordinary shares of the Company held by
River Business Limited. |
| (4) |
The
registered office address of Silver Thousand International is Sea
Meadow House, PO Box 173, Road Town, Tortola, VG1110, British
Virgin Islands. As of the date of this report, Silver Thousand
International is 50% owned by Mr. Yang and 50% owned by HFGFR
INC. |
| (5) |
The
business address of HFGFR INC. is Ajeltake Road, Ajeltake Island,
Majuro, Marshall Islands MH96960. As the holder of all of the
equity interest in HFGFR INC., Yu Yang has voting and dispositive
power with respect to all of the ordinary shares of the Company
held by HFGFR INC. |
None of our major shareholders have differing voting rights, and as
of the date of this report, none of our outstanding ordinary shares
are held by record holders in the United States. We are not aware
of any arrangement that may, at a subsequent date, result in a
change of control of our company.
ITEM 7. MAJOR
SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
7.A. Major Shareholders
See Item 6.E., “Share Ownership,” for a description of our major
shareholders.
7.B. Related Party Transactions
The Company’s related parties balance consisted of the
following:
(i) Loan to related parties:
| |
|
As of
March 31,
2020 |
|
|
As of
March 31,
2019 |
|
| Loan
to related parties(a) |
|
$ |
2,537,532 |
|
|
$ |
- |
|
|
(a) |
The balance is due from Horwath
Capital Consultants Limited (“Horwath Capital”), to which our
chairman serves as a director. On November 1, 2019 and December 4,
2019 the Company loaned $851,825 and $1,650,000 to Horwath Capital,
respectively. The loan bears an interest rate of 4% and is not
guaranteed. The maturity was July 31, 2020. On July 20, 2020 and
July 30, 2020, Horwath Capital fully repaid $851,825 and $1,650,000
to the Company, respectively. |
(ii) Due to related party:
| |
|
As of
March 31,
2020 |
|
|
As of
March 31,
2019 |
|
| Due to shareholders |
|
$ |
282,121 |
|
|
$ |
245,006 |
|
| Due to key
management personnel |
|
|
4,232 |
|
|
|
7,868 |
|
| Due
to related parties |
|
$ |
286,353 |
|
|
$ |
252,874 |
|
|
(b) |
The balance of due to shareholders
mainly due to the principal shareholders of the Company who provide
funds for the Company’s operations. The payables are unsecured,
non-interest bearing and due on demand. |
7.C. Interests of Experts and Counsel
Not applicable.
ITEM 8. FINANCIAL
INFORMATION
Consolidated Statements and Other Financial Information
The financial statements required by this item may be found at the
end of this report on 20-F, beginning on page F-1.
Legal Proceedings
In September 2019, we sued Beijing Chuangyouyi Education
Technology Co., Ltd (“Chuangyouyi”) in Haidian District People’s
Court of Beijing Municipality for the unpaid principal and interest
in the aggregated amount of approximately $89,958 under a loan
agreement between Chuangyouyi and Distance Learning. On July 30,
2020, the district court issued its decision, which supported all
claims of the Company.
Other than the foregoing proceeding, we are not currently, and have
not recently been, a party to any material legal or administrative
proceedings. We are not aware of any material legal or
administrative proceedings threatened against us. From time to
time, we are subject to various legal or administrative proceedings
arising in the ordinary course of our business.
Dividends
We have never declared or paid any dividend on our ordinary shares
and we do not anticipate paying any dividends on our ordinary
shares in the future. We currently intend to retain all future
earnings to finance our operations and to expand our business.
No Significant Changes
No significant changes to our financial condition have occurred
since the date of the annual financial statements contained
herein.
ITEM 9. THE OFFER
AND LISTING
9.A. Offer and Listing Details
Our ordinary shares are listed for trading on the NASDAQ Capital
Market under the symbol “WAFU.” The shares began trading on April
30, 2019 on the NASDAQ Capital Market. The closing price for the
ordinary shares was $5.28 on August 14, 2020.
9.B. Plan of Distribution
Not Applicable.
9.C. Markets
Our ordinary shares are currently traded on the NASDAQ Capital
Market.
9.D. Selling Shareholders
Not Applicable.
9.E. Dilution
Not Applicable.
9.F. Expenses of the Issuer
Not Applicable.
ITEM 10. ADDITIONAL
INFORMATION
10.A. Share Capital
Not Applicable.
10.B. Memorandum and Articles of Association
We are a British Virgin Islands company limited by shares and our
affairs are governed by our memorandum and articles of association
and the Act (as amended or modified from time to time).
Our authorized share capital is $300,000 divided into 30,000,000
ordinary shares of a par value of US$0.01 each. All options,
regardless of grant dates, will entitle holders to an equivalent
number of ordinary shares once the vesting and exercising
conditions are met. The following are summaries of material
provisions of our post-offering amended and restated memorandum and
articles of association and the Act insofar as they relate to the
material terms of our ordinary shares.
Ordinary Shares
General. Our authorized share capital is US$300,000
divided into 30,000,000 ordinary shares, with a par value of
US$0.01. Holders of ordinary shares will have the same rights. All
of our outstanding ordinary shares are fully paid and
non-assessable. Certificates representing the ordinary shares are
issued in registered form. Our shareholders who are non-residents
of the British Virgin Islands may freely hold and transfer their
ordinary shares.
Dividends. The holders of our ordinary shares are
entitled to such dividends as may be declared by our board of
directors. Our post-offering amended and restated articles of
association provide that dividends may be declared and paid at such
time, and in such an amount, as the directors determine subject to
their being satisfied that the Company will meet the statutory
solvency test immediately after the dividend. Holders of ordinary
shares will be entitled to the same amount of dividends, if
declared.
Voting Rights. In respect of all matters subject to a
shareholders’ vote, each ordinary share is entitled to one vote for
each ordinary share registered in his or her name on our register
of members. Holders of ordinary shares shall at all times vote
together on all resolutions submitted to a vote of the members.
Voting at any meeting of shareholders is by show of hands unless a
poll is demanded. A poll may be demanded by the chairman of such
meeting or any one shareholder.
A quorum required for a meeting of shareholders consists of two or
more shareholders who hold at least one-half of all voting power of
our share capital in issue at the date of the meeting present in
person or by proxy or, if a corporation or other non-natural
person, by its duly authorized representative. Shareholders’
meetings may be held annually. Each general meeting, other than an
annual general meeting, shall be an extraordinary general meeting.
Extraordinary general meetings may be called by a majority of our
board of directors or our chairman or upon a requisition of
shareholders holding at the date of deposit of the requisition not
less than 30% of the aggregate voting power of our company. Advance
notice of at least 10 days is required for the convening of
our annual general meeting and other general meetings unless such
notice is waived in accordance with our articles of
association.
Transfer of Ordinary Shares. Under the Act the
transfer of a registered share which is not listed on a recognized
exchange is by a written instrument of transfer signed by the
transferor and containing the name of the transferee. However, the
instrument must also be signed by the transferee if registration
would impose a liability on the transferee to the company. The
instrument of transfer must be sent to the company for
registration. Subject to the company’s memorandum or articles of
association the company shall on receipt of an instrument of
transfer enter the name of the transferee of the share in the
register of members unless the directors resolve to refuse or delay
registration of the transfer for reasons that should be specified
in a resolution of directors. The transfer of a registered share is
effective when the name of the transferee is entered in the
register of members. The entry of the name of a person in the
company’s register of members is prima facie evidence that legal
title in the share vests in that person.
The procedure is different for the transfer of shares that are
listed on a recognized exchange. Such shares may be transferred
without the need for a written instrument of transfer if the
transfer is carried out in accordance with the laws, rules,
procedures and other requirements applicable to shares listed on
the recognized exchange and subject to the company’s memorandum and
articles of association.
The registration of transfers may, after compliance with any notice
required of NASDAQ, be suspended and the register closed at such
times and for such periods as our board of directors may from time
to time determine, provided, however, that the registration of
transfers shall not be suspended nor the register closed for more
than 30 days in any year as our board may determine.
Liquidation. On a return of capital on winding up or
otherwise (other than on conversion, redemption or purchase of
ordinary shares), assets available for distribution among the
holders of ordinary shares shall be distributed among the holders
of the ordinary shares on a pro rata basis. Any distribution of
assets or capital to holders of an ordinary share will be the same
in any liquidation event.
Calls on Ordinary Shares and Forfeiture of Ordinary
Shares. Our board of directors may from time to time
make calls upon shareholders for any amounts unpaid on their
ordinary shares in a notice served to such shareholders at least 14
clear days prior to the specified time of payment. The ordinary
shares that have been called upon and remain unpaid are subject to
forfeiture.
Redemption of Ordinary Shares. The Act and our
amended and restated articles of association permit us to purchase
our own shares with the prior written consent of the relevant
shareholders and resolution of directors and applicable law.
Variation of Rights of Shares. All or any of
the special rights attached to any class of shares may, subject to
the provisions of the Act, only be varied with the written consent
of the holders of a majority of the issued shares of that class or
with the sanction of a resolution passed at a general meeting of
the holders of the shares of that class. The rights conferred upon
the holders of the shares of any class issued shall not, unless
otherwise expressly provided by the terms of issue of the shares of
that class, be deemed to be varied by the creation or issue of
further shares ranking pari passu with such existing class
of shares.
Inspection of Books and Records.
A member of a company is entitled, on giving written notice to the
company, to inspect (a) the memorandum and articles of association;
(b) the register of members; (c) the register of directors; and (d)
the minutes of meetings and resolutions of members and of those
classes of members of which he is a member; and to make copies of
or take extracts from the documents and records. Subject to the
memorandum and articles of association, the directors may, if they
are satisfied that it would be contrary to the company’s interests
to allow a member to inspect any document, or part of a document,
specified in (b), (c) and (d) above, refuse to permit the member to
inspect the document or limit the inspection of the document,
including limiting the making of copies or the taking of extracts
from the records.
Where a company fails or refuses to permit a member to inspect a
document or permits a member to inspect a document subject to
limitations, that member may apply to the BVI High Court for an
order that he should be permitted to inspect the document or to
inspect the document without limitation.
A company is required to keep at the office of its registered
agent: the memorandum and articles of association of the company;
the register of members or a copy of the register of members; the
register of directors or a copy of the register of directors; and
copies of all notices and other documents filed by the company in
the previous ten years.
Issuance of Additional Shares. Our post-offering
amended and restated memorandum of association authorizes our board
of directors to issue additional ordinary shares from time to time
as our board of directors shall determine, to the extent of
available authorized but unissued shares.
Register of Members
Under the Act we must keep a register of members and there should
be entered therein:
| |
● |
the
names and addresses of our members, a statement of the number and
class of shares held by each member; |
| |
|
|
| |
● |
the
date on which the name of any person was entered on the register as
a member; and |
| |
|
|
| |
● |
the
date on which any person ceased to be a member. |
Under the Act, the register of members of our company is prima
facie evidence of the matters set out therein (that is, the
register of members will raise a presumption of fact on the matters
referred to above unless rebutted) and a member registered in the
register of members is deemed as a matter of the Act to have legal
title to the shares as set against its name in the register of
members. We perform the procedure necessary to immediately update
the register of members to record and give effect to the issuance
of shares by us to the Depositary (or its nominee) as the
depositary. Once our register of members has been updated, the
shareholders recorded in the register of members will be deemed to
have legal title to the shares set against their name.
If the name of any person is incorrectly entered in or omitted from
our register of members, or if there is any default or unnecessary
delay in entering on the register the fact of any person having
ceased to be a member of our company, the person or member
aggrieved (or any member of our company or our company itself)
may apply to the High Court of the British Virgin Islands for an
order that the register be rectified, and the Court may either
refuse such application or it may, if satisfied of the justice of
the case, make an order for the rectification of
the register.
Material Differences between U.S. Corporate Law and British
Virgin Islands Corporate Law
The Act differs from laws applicable to United States corporations
and their shareholders. Set forth below is a summary of the
significant differences between the provisions of the Act
applicable to us and the laws applicable to companies incorporated
in the State of Delaware.
Mergers and Similar Arrangements. Under the Act two
or more companies, each a “constituent company”, may merge or
consolidate. A merger involves the merging of two or more companies
into one of the constituent companies (to the merger) with one
constituent company continuing in existence to become the surviving
company post-merger. A consolidation involves two or more companies
consolidating into a new company.
A merger is effective on the date that the articles of merger (as
described below) are registered by the Registrar of Corporate
Affairs in the BVI, or on such later date, not exceeding 30 days
from the date of registration as is stated in the articles of
merger.
The Act provides that any member of the Company is entitled to
payment of the fair value of his shares upon dissenting from a
merger, unless the Company is the surviving company of the merger
and the member continues to hold the same or similar shares. The
following is a summary of the position under the Act.
A dissenter is in most circumstances required to give to the
Company written objection to the merger, which must include a
statement that the dissenter proposes to demand payment for his
shares if the merger takes place. This written objection must be
given before the meeting of members at which the merger is
submitted to a vote, or at the meeting but before the vote.
However, no objection is required from a member to whom the Company
did not give notice of the meeting of members or where the proposed
merger is authorized by written consent of the members without a
meeting.
Within 20 days immediately following the written consent, or the
meeting at which the merger was approved, the Company shall give
written notice of the consent or resolution to each member who gave
written objection or from whom written objection was not required,
except those members who voted for, or consented in writing to, the
proposed merger.
A member to whom the Company was required to give notice who elects
to dissent shall, within 20 days immediately following the date on
which the copy of the plan of merger or an outline of the merger is
given to him, give to the Company a written notice of his decision
to elect to dissent, stating:
| |
(a) |
his
name and address; |
| |
|
|
| |
(b) |
the
number and classes of shares in respect of which he dissents (which
must be all shares that he holds in the Company); and |
| |
|
|
| |
(c) |
a
demand for payment of the fair value of his shares. |
Upon the giving of a notice of election to dissent, the dissenter
ceases to have any of the rights of a member except the right to be
paid the fair value of his shares, and the right to institute
proceedings to obtain relief on the ground that the action is
illegal.
The Company shall make a written offer to each dissenter to
purchase his shares at a specified price that the Company
determines to be their fair value. Such offer must be given within
7 days immediately following the date of the expiration of the
period within which members may give their notices of election to
dissent, or within 7 days immediately following the date on which
the merger is put into effect, whichever is later.
If the Company and the dissenter fail, within 30 days immediately
following the date on which the offer is made, to agree on the
price to be paid for the shares owned by the dissenter, then within
20 days:
| |
(a) |
the
Company and the dissenter shall each designate an
appraiser; |
| |
|
|
| |
(b) |
the
two designated appraisers together shall designate an
appraiser; |
| |
|
|
| |
(c) |
the
three appraisers shall fix the fair value of the shares owned by
the dissenter as of the close of business on the day prior to the
date of the meeting or the date on which the resolution was passed,
excluding any appreciation or depreciation directly or indirectly
induced by the action or its proposal, and that value is binding on
the Company and the dissenter for all purposes; and |
| |
|
|
| |
(d) |
the
Company shall pay to the dissenter the amount in money upon the
surrender by him of the certificates representing his shares, and
such shares shall be cancelled. |
Shareholders’ Suits.
Under the provisions of the Act, the memorandum and articles of
association of a company are binding as between the company and its
members and between the members. In general, members are bound by
the decision of the majority or special majorities as set out in
the articles of association or in the Act. As for voting, the usual
rule is that with respect to normal commercial matters members may
act from self-interest when exercising the right to vote attached
to their shares.
If the majority members have infringed a minority member’s rights,
the minority may seek to enforce its rights either by derivative
action or by personal action. A derivative action concerns the
infringement of the company’s rights where the wrongdoers are in
control of the company and are preventing it from taking action,
whereas a personal action concerns the infringement of a right that
is personal to the particular member concerned.
The Act provides for a series of remedies available to members.
Where a company incorporated under the Act conducts some activity
which breaches the Act or the company’s memorandum and articles of
association, the BVI High Court can issue a restraining or
compliance order. Members can now also bring derivative, personal
and Representative Actions under certain circumstances.
The traditional English basis for members’ remedies have also been
incorporated into the Act: where a member of a company considers
that the affairs of the company have been, are being or are likely
to be conducted in a manner likely to be oppressive, unfairly
discriminating or unfairly prejudicial to him, he may apply to the
BVI High Court for an order on such conduct.
Any member of a company may apply to the BVI High Court for the
appointment of a liquidator for the company and the Court may
appoint a liquidator for the company if it is of the opinion that
it is just and equitable to do so.
The Act provides that any member of a company is entitled to
payment of the fair value of his shares upon dissenting from any of
the following:
| |
(a) |
a
merger; |
| |
|
|
| |
(b) |
a
consolidation; |
| |
|
|
| |
(c) |
any
sale, transfer, lease, exchange or other disposition of more than
50 per cent in value of the assets or business of the company if
not made in the usual or regular course of the business carried on
by the company but not including (i) a disposition pursuant to an
order of the court having jurisdiction in the matter; (ii) a
disposition for money on terms requiring all or substantially all
net proceeds to be distributed to the members in accordance with
their respective interest within one year after the date of
disposition; or (iii) a transfer pursuant to the power of the
directors to transfer assets for the protection
thereof; |
| |
|
|
| |
(d) |
a
redemption of 10 per cent, or fewer, of the issued shares of the
company required by the holders of 90 percent, or more, of the
shares of the company pursuant to the terms of the Act;
and |
| |
|
|
| |
(e) |
an
arrangement, if permitted by the BVI High Court. |
Generally any other claims against a company by its members must be
based on the general laws of contract or tort applicable in the BVI
or their individual rights as members as established by the
company’s memorandum and articles of association.
The Act provides that if a company or a director of a company
engages in, proposes to engage in or has engaged in, conduct that
contravenes the Act or the memorandum or articles of association of
the company, the BVI High Court may, on the application of a member
or a director of the company, make an order directing the company
or director to comply with, or restraining the company or director
from engaging in conduct that contravenes the Act or the memorandum
or articles of association.
Indemnification of Directors and Executive Officers and
Limitation of Liability. BVI law does not limit the extent
to which a company’s articles of association may provide for
indemnification of officers and directors, except to the extent any
such provision may be held by the BVI High Court to be contrary to
public policy (e.g. for purporting to provide indemnification
against the consequences of committing a crime). An indemnity will
be void and of no effect and will not apply to a person unless the
person acted honestly and in good faith and in what he believed to
be in the best interests of the company and, in the case of
criminal proceedings, the person had no reasonable cause to believe
that his conduct was unlawful. Our post-offering amended and
restated memorandum and articles of association permit
indemnification of officers and directors for losses, damages,
costs and expenses incurred in their capacities as such unless such
losses or damages arise from dishonesty or fraud of such directors
or officers. This standard of conduct is generally the same as
permitted under the Delaware General Corporation Law for a Delaware
corporation. In addition, we have entered into indemnification
agreements with our directors and executive officers that provide
such persons with additional indemnification beyond that provided
in our post-offering amended and restated memorandum and articles
of association.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to our directors, officers or
persons controlling us under the foregoing provisions, we have been
informed that in the opinion of the SEC, such indemnification is
against public policy as expressed in the Securities Act and is
therefore unenforceable.
Directors’ Fiduciary Duties. Under Delaware corporate
law, a director of a Delaware corporation has a fiduciary duty to
the corporation and its shareholders. This duty has two components:
the duty of care and the duty of loyalty. The duty of care requires
that a director act in good faith, with the care that an ordinarily
prudent person would exercise under similar circumstances. Under
this duty, a director must inform himself of, and disclose to
shareholders, all material information reasonably available
regarding a significant transaction. The duty of loyalty requires
that a director acts in a manner he reasonably believes to be in
the best interests of the corporation. He must not use his
corporate position for personal gain or advantage. This duty
prohibits self-dealing by a director and mandates that the best
interest of the corporation and its shareholders take precedence
over any interest possessed by a director, officer or controlling
shareholder and not shared by the shareholders generally. In
general, actions of a director are presumed to have been made on an
informed basis, in good faith and in the honest belief that the
action taken was in the best interests of the corporation. However,
this presumption may be rebutted by evidence of a breach of one of
the fiduciary duties. Should such evidence be presented concerning
a transaction by a director, the director must prove the procedural
fairness of the transaction, and that the transaction was of fair
value to the corporation.
As a matter of British Virgin Islands law, a director of a British
Virgin Islands company is in the position of a fiduciary with
respect to the company and therefore it is considered that he or
she owes the following duties to the company—a duty to act bona
fide in the best interests of the company, a duty not to make a
profit based on his or her position as director (unless the company
permits him or her to do so) and a duty not to put himself or
herself in a position where the interests of the company conflict
with his or her personal interest or his or her duty to a third
party. Under the Act, a director must act honestly in good faith
and in the best interests of the Company. A director of a British
Virgin Islands company owes to the company a duty to act with skill
and care. It was previously considered that a director need not
exhibit in the performance of his or her duties a greater degree of
skill than may reasonably be expected from a person of his or her
knowledge and experience. However, English and Commonwealth courts
have moved towards an objective standard with regard to the
required skill and care and these authorities are likely to be
followed in the British Virgin Islands.
Shareholder Action by Written Consent. Under
the Delaware General Corporation Law, a corporation may eliminate
the right of shareholders to act by written consent by amendment to
its certificate of incorporation. Although British Virgin Islands
law may permit shareholder actions by written consent, our
post-offering amended and restated articles of association provide
that shareholders may not approve corporate matters by way of a
unanimous written resolution signed by or on behalf of each
shareholder who would have been entitled to vote on such matter at
a general meeting without a meeting being held.
Shareholder Proposals. Under the Delaware General
Corporation Law, a shareholder has the right to put any proposal
before the annual meeting of shareholders, provided it complies
with the notice provisions in the governing documents. A special
meeting may be called by the board of directors or any other person
authorized to do so in the governing documents, but shareholders
may be precluded from calling special meetings.
British Virgin Islands law and our amended and restated articles of
association provide that shareholders holding 30% or more of the
voting rights entitled to vote on any matter for which a meeting is
to be converted may request that the directors shall requisition a
shareholder’s meeting. As a British Virgin Islands company, we are
not obliged by law to call shareholders’ annual general
meetings.
Cumulative Voting. Under the Delaware General
Corporation Law, cumulative voting for elections of directors is
not permitted unless the corporation’s certificate of incorporation
specifically provides for it. Cumulative voting potentially
facilitates the representation of minority shareholders on a board
of directors since it permits the minority shareholder to cast all
the votes to which the shareholder is entitled on a single
director, which increases the shareholder’s voting power with
respect to electing such director. There are no prohibitions in
relation to cumulative voting under the laws of the British Virgin
Islands but our post-offering amended and restated articles of
association do not provide for cumulative voting. As a result, our
shareholders are not afforded any less protections or rights on
this issue than shareholders of a Delaware corporation.
Removal of Directors. Under the Delaware General
Corporation Law, a director of a corporation with a classified
board may be removed only for cause with the approval of a majority
of the outstanding shares entitled to vote, unless the certificate
of incorporation provides otherwise. Under our post-offering
amended and restated articles of association, directors may be
removed with or without cause, by a resolution of our shareholders,
or with cause by a resolution of the directors.
Transactions with Interested Shareholders. The
Delaware General Corporation Law contains a business combination
statute applicable to Delaware corporations whereby, unless the
corporation has specifically elected not to be governed by such
statute by amendment to its certificate of incorporation, it is
prohibited from engaging in certain business combinations with an
“interested shareholder” for three years following the date that
such person becomes an interested shareholder. An interested
shareholder generally is a person or a group who or which owns or
owned 15% or more of the target’s outstanding voting share within
the past three years. This has the effect of limiting the ability
of a potential acquirer to make a two-tiered bid for the target in
which all shareholders would not be treated equally. The statute
does not apply if, among other things, prior to the date on which
such shareholder becomes an interested shareholder, the board of
directors approves either the business combination or the
transaction which resulted in the person becoming an interested
shareholder. This encourages any potential acquirer of a Delaware
corporation to negotiate the terms of any acquisition transaction
with the target’s board of directors.
British Virgin Islands law has no comparable statute. As a result,
we are not afforded the same statutory protections in the British
Virgin Islands as we would be offered by the Delaware business
combination statute. However, although British Virgin Islands law
does not regulate transactions between a company and its
significant shareholders, it does provide that such transactions
must be entered into bona fide in the best interests of the company
and not with the effect of constituting a fraud on the minority
shareholders. See also “Shareholders’ Suits” above. We have adopted
a code of business conduct and ethics which requires employees to
fully disclose any situations that could reasonably be expected to
give rise to a conflict of interest, and sets forth relevant
restrictions and procedures when a conflict of interest arises to
ensure the best interest of the Company.
Dissolution; Winding up. Under the Delaware General
Corporation Law, unless the board of directors approves the
proposal to dissolve, dissolution must be approved by shareholders
holding 100% of the total voting power of the corporation. Only if
the dissolution is initiated by the board of directors may it be
approved by a simple majority of the corporation’s outstanding
shares. Delaware law allows a Delaware corporation to include in
its certificate of incorporation a supermajority voting requirement
in connection with dissolutions initiated by the board.
The liquidation of a company may be a voluntary solvent liquidation
or a liquidation under the Insolvency Act. Where a company has been
struck off the Register of Companies under the Act continuously for
a period of 7 years it is dissolved with effect from the last day
of that period.
Voluntary Liquidation
If the liquidation is a solvent liquidation, the provisions of the
Act governs the liquidation. A company may only be liquidated under
the Act as a solvent liquidation if it has no liabilities or it is
able to pay its debts as they fall due and the value of its assets
exceeds its liabilities. Subject to the memorandum and articles of
association of a company, a liquidator may be appointed by a
resolution of directors or resolution of members but if the
directors have commenced liquidation by a resolution of directors
the members must approve the liquidation plan by a resolution of
members save in limited circumstances.
A liquidator is appointed for the purpose of collecting in and
realizing the assets of a company and distributing proceeds to
creditors.
Liquidation under the Insolvency Act
The Insolvency Act governs an insolvent liquidation. Pursuant to
the Insolvency Act, a company is insolvent if (a) it fails to
comply with the requirements of a statutory demand that has not be
set aside pursuant to the Insolvency Act, execution or other
process issued on a judgement, decree or order of court in favor of
a creditor of the company is returned wholly or partly unsatisfied
or either the value of the company’s liabilities exceeds its assets
or the company is unable to pay its debts as they fall due. The
liquidator must be either the Official Receiver in BVI or a BVI
licensed insolvency practitioner. An individual resident outside
the BVI may be appointed to act as liquidator jointly with a BVI
licensed insolvency practitioner or the Official Receiver. The
members of the company may appoint an insolvency practitioner as
liquidator of the company or the court may appoint an Official
Receiver or an eligible insolvency practitioner. The application to
the court can be made by one or more of the following: (a) the
company (b) a creditor (c) a member (d), the supervisor of a
creditors’ arrangement in respect of the company, the Financial
Services Commission and the Attorney General in the BVI.
The court may appoint a liquidator if:
| (a) |
the
company is insolvent; |
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| (b) |
the
court is of the opinion that it is just and equitable that a
liquidator should be appointed; or |
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| (c) |
the
court is of the opinion that it is in the public interest for a
liquidator to be appointed. |
An application under (a) above by a member may only be made with
leave of the court, which shall not be granted unless the court is
satisfied that there is prima facie case that the company is
insolvent. An application under (c) above may only be made by the
Financial Services Commission or the Attorney General and they may
only make an application under (c) above if the company concerned
is, or at any time has been, a regulated person (i.e. a person that
holds a prescribed financial services license) or the company is
carrying on, or at any time has carried on, unlicensed financial
services business.
Order of Preferential Payments upon Liquidation
Upon the insolvent liquidation of a company, the assets of a
company shall be applied in accordance with the following
priorities: (a) in paying, in priority to all other claims, the
costs and expenses properly incurred in the liquidation in
accordance with the prescribed priority; (b) after payment of the
costs and expenses of the liquidation, in paying the preferential
claims admitted by the liquidator (wages and salary, amounts to the
BVI Social Security Board, pension contributions, government taxes)
- preferential claims rank equally between themselves and, if the
assets of the company are insufficient to meet the claims in full,
they shall be paid ratably; (c) after the payment of preferential
claims, in paying all other claims admitted by the liquidator,
including those of non-secured creditors - the claims of
non-secured creditors of the Company shall rank equally among
themselves and if the assets of the company are insufficient to
meet the claims in full, such non-secured creditors shall be paid
ratably; (d) after paying all admitted claims, paying any interest
payable under the BVI Insolvency Act; and finally (e) any surplus
assets remaining after payment of the costs, expenses and claims
above shall be distributed to the members in accordance with their
rights and interests in the Company. Part VIII of the Insolvency
Act provides for various applications which may be made by a
liquidator to set aside transactions which have unfairly diminished
the assets which are available to creditors.
The appointment of a liquidator over the assets of a company does
not affect the right of a secured creditor to take possession of
and realize or otherwise deal with assets of the company over which
that creditor has a security interest. Accordingly, a secured
creditor may enforce its security directly without recourse to the
liquidator, in priority to the order of payments described in
paragraph 25.7. However, so far as the assets of a company in
liquidation available for payment of the claims of unsecured
creditors are insufficient to pay the costs and expenses of the
liquidation and the preferential creditors, those costs, expenses
and claims have priority over the claims of chargees in respect of
assets that are subject to a floating charge created by a company
and shall be paid accordingly out of those assets.
The court has authority to order winding up in a number of
specified circumstances including where it is, in the opinion of
the court, just and equitable to do so. Under the Act and our
post-offering amended and restated articles of association, our
company may be dissolved, liquidated or wound up by a resolution of
our shareholders.
Variation of Rights of Shares. Under the
Delaware General Corporation Law, a corporation may vary the rights
of a class of shares with the approval of a majority of the
outstanding shares of such class, unless the certificate of
incorporation provides otherwise. Under British Virgin Islands law
and our post-offering amended and restated articles of association,
if our share capital is divided into more than one class of shares,
we may vary the rights attached to any class with the written
consent of the holders of a majority of the issued shares of that
class or with the sanction of a resolution passed at a general
meeting of the holders of the shares of that class.
Amendment of Governing Documents. Under the Delaware
General Corporation Law, a corporation’s governing documents may be
amended with the approval of a majority of the outstanding shares
entitled to vote, unless the certificate of incorporation provides
otherwise. As permitted by British Virgin Islands law, our
post-offering amended and restated memorandum and articles of
association may be amended with a resolution of our shareholders
or, with certain exception by resolutions of directors.
Rights of Non-resident or Foreign Shareholders. There
are no limitations imposed by our post-offering amended and
restated memorandum and articles of association on the rights of
non-resident or foreign shareholders to hold or exercise voting
rights on our shares. In addition, there are no provisions in our
post-offering amended and restated memorandum and articles of
association governing the ownership threshold above which
shareholder ownership must be disclosed.
10.C. Material Contracts
Below is a summary of all material contracts to which we are a
party dated within the preceding two years from the date
hereof:
In addition to the series of variable interest entity agreements
discussed under “Item 4A. History and Development of the Company,”
we have entered into the following material agreements.
Partnership Agreements with Jiangxi Normal University and Hunan
Agricultural University
We have entered into 5-year partnership agreements in relation to
preparation of Self-Study Examination with Jiangxi Normal
University and Hunan Agricultural University, each a major customer
for our B2B2C services. Pursuant to each of these agreements, we
have agreed to development, maintenance, security and technical
consulting services in relation to self-study examination
preparation platform and online courses. Each university will have
the right to give students access to the platform and online
courses. Under our partnership agreement with Jiangxi Normal
University, we are entitled to a service fee of RMB 100
(approximately $15.2) per course for online courses we develop and
a service fee of 20% to 30% of actual fee charged by the
university, depending on how many times the course has been used by
students. Under our partnership agreement with Hunan Agricultural
University, we are entitled to a service fee of RMB 90/course. We
own intellectual property rights in connection with the platform
and online courses. Each partnership agreement contains customary
confidentiality provisions.
10.D. Exchange Controls
British Virgin Islands
There are currently no exchange control regulations in the British
Virgin Islands applicable to us or our shareholders.
The PRC
China regulates foreign currency exchanges primarily through the
following rules and regulations:
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Foreign
Currency Administration Rules of 1996, as amended; and |
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Administrative
Rules of the Settlement, Sale and Payment of Foreign Exchange of
1996. |
As we disclosed in the risk factors above, Renminbi is not a freely
convertible currency at present. Under the current PRC regulations,
conversion of Renminbi is permitted in China for routine
current-account foreign exchange transactions, including trade and
service related foreign exchange transactions, payment of dividends
and service of foreign debts. Conversion of Renminbi for most
capital-account items, such as direct investments, investments in
PRC securities markets and repatriation of investments, however, is
still subject to the approval of SAFE.
Pursuant to the above-mentioned administrative rules,
foreign-invested enterprises may buy, sell and/or remit foreign
currencies for current account transactions at banks in China with
authority to conduct foreign exchange business by complying with
certain procedural requirements, such as presentment of valid
commercial documents. For capital-account transactions involving
foreign direct investment, foreign debts and outbound investment in
securities and derivatives, approval from SAFE is a pre-condition.
Capital investments by foreign-invested enterprises outside China
are subject to limitations and requirements in China, such as prior
approvals from the PRC Ministry of Commerce or SAFE.
10.E. Taxation
The following discussion of British Virgin Islands, PRC and
United States federal income tax consequences of an investment in
our ordinary shares is based upon laws and relevant interpretations
thereof in effect as of the date of this report, all of which are
subject to change. This discussion does not deal with all possible
tax consequences relating to an investment in our ordinary shares,
such as the tax consequences under state, local and other tax
laws.
British Virgin Islands Taxation
The Company and all dividends, interest, rents, royalties,
compensation and other amounts paid by the Company to persons who
are not resident in the BVI and any capital gains realized with
respect to any shares, debt obligations, or other securities of the
Company by persons who are not resident in the BVI are exempt from
all provisions of the Income Tax Ordinance in the BVI.
No estate, inheritance, succession or gift tax, rate, duty, levy or
other charge is payable by persons who are not resident in the BVI
with respect to any shares, debt obligation or other securities of
the Company.
All instruments relating to transfers of property to or by the
Company and all instruments relating to transactions in respect of
the shares, debt obligations or other securities of the Company and
all instruments relating to other transactions relating to the
business of the Company are exempt from payment of stamp duty in
the BVI. This assumes that the Company does not hold an interest in
real estate in the BVI.
There are currently no withholding taxes or exchange control
regulations in the BVI applicable to the Company or its
members.
People’s Republic of China Taxation
Under the EIT Law, an enterprise established outside the PRC with
“de facto management bodies” within the PRC is considered a
“resident enterprise” for PRC enterprise income tax purposes and is
generally subject to a uniform 25% enterprise income tax rate on
its worldwide income. Under the implementation rules to the EIT
Law, 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 properties of an enterprise.
Our PRC subsidiary and PRC consolidated VIE are companies
incorporated under PRC law and, as such, are subject to PRC
enterprise income tax on their taxable income in accordance with
the relevant PRC income tax laws. Pursuant to the EIT Law, which
became effective on January 1, 2008 and was amended on
February 24, 2017, a uniform 25% enterprise income tax rate is
generally applicable to both foreign-invested enterprises and
domestic enterprises, except where a special preferential rate
applies. The enterprise income tax is calculated based on the
entity’s global income as determined under PRC tax laws and
accounting standards. We are subject to VAT at a rate of 6% on the
services we provide, less any deductible VAT we have already paid
or borne. We are also subject to surcharges on VAT payments in
accordance with PRC law.
In addition, the SAT Circular 82 issued by the SAT in April 2009
specifies that certain offshore incorporated enterprises controlled
by PRC enterprises or PRC enterprise groups will be classified as
PRC resident enterprises if the following are located or resident
in the PRC: senior management personnel and departments that are
responsible for daily production, operation and management;
financial and personnel decision making bodies; key properties,
accounting books, company seal, minutes of board meetings and
shareholders’ meetings; and half or more of the senior management
or directors having voting rights. Further to SAT Circular 82, the
SAT issued the SAT Bulletin 45, which took effect in September 2011
and was revised by the Announcement of the State Administration of
Taxation on Revising Certain Taxation Normative Documents in 2018.
SAT Circular 45 provides more guidance on the implementation of SAT
Circular 82. In particular, SAT Bulletin 45 provides for procedures
and administration details of determination on resident status and
administration on post-determination matters. Wah Fu is a company
incorporated outside the PRC. As a holding company, its key assets
are its ownership interests in its subsidiaries, and its key assets
are located, and its records (including the resolutions of its
board of directors and the resolutions of its shareholders) are
maintained, outside the PRC. As such, we do not believe that Wah Fu
meet all of the conditions above or are PRC resident enterprises
for PRC tax purposes. For the same reasons, we believe our other
entities outside of China are not PRC resident enterprises either.
However, the tax resident status of an enterprise is subject to
determination by the PRC tax authorities and uncertainties remain
with respect to the interpretation of the term “de facto management
body.” There can be no assurance that the PRC government will
ultimately take a view that is consistent with us. If the PRC tax
authorities determine that our British Virgin Islands holding
company is a PRC resident enterprise for PRC enterprise income tax
purposes, a number of unfavorable PRC tax consequences could
follow. One example is that a 10% withholding tax would be imposed
on dividends we pay to our non-PRC enterprise shareholders and with
respect to gains derived by our non-PRC enterprise shareholders
from transferring our shares and potentially a 20% of withholding
tax would be imposed on dividends we pay to our non-PRC individual
shareholders and with respect to gains derived by our non-PRC
individual shareholders from transferring our shares s. See “Risk
Factors—Risk Related to Doing Business in China—Under the PRC
Enterprise Income Tax Law, we may be classified as a PRC “resident
enterprise” for PRC enterprise income tax purposes. Such
classification would likely result in unfavorable tax consequences
to us and our non-PRC shareholders and has a material adverse
effect on our results of operations and the value of your
investment.”
As a British Virgin Islands holding company, we may receive
dividends from our PRC subsidiaries. The EIT Law and its
implementing rules provide that dividends paid by a PRC entity to a
non-resident enterprise for income tax purposes is subject to PRC
withholding tax at a rate of 10%, subject to reduction by an
applicable tax treaty with China. There is currently no such
preferential tax treaty between China and British Virgin
Islands.
In January 2009, the SAT promulgated the Provisional Measures for
the Administration of Withholding of Enterprise Income Tax for
Non-resident Enterprises, pursuant to which the entities that have
the direct obligation to make certain payments to a non-resident
enterprise should be the relevant tax withholders for the
non-resident enterprise, and such payments include: income from
equity investments (including dividends and other return on
investment), interest, rents, royalties and income from assignment
of property as well as other incomes subject to enterprise income
tax received by non-resident enterprises in China. Further, the
measures provide that in case of an equity transfer between two
non-resident enterprises which occurs outside China, the
non-resident enterprise which receives the equity transfer payment
must, by itself or engage an agent to, file tax declaration with
the PRC tax authority located at place of the PRC company whose
equity has been transferred, and the PRC company whose equity has
been transferred should assist the tax authorities to collect taxes
from the relevant non-resident enterprise. The SAT issued a SAT
Circular 59 together with the MOF in April 2009 and a SAT Circular
698 in December 2009. Both Circular 59 and Circular 698 became
effective retroactively as of January 1, 2008. By promulgating
and implementing these two circulars, the PRC tax authorities have
enhanced their scrutiny over the direct or indirect transfer of
equity interests in a PRC resident enterprise by a non-resident
enterprise. Under SAT Circular 698, where a non-resident enterprise
transfers the equity interests of a PRC “resident enterprise”
indirectly by disposition of the equity interests of an overseas
holding company, and such overseas holding company is located in
certain low tax jurisdictions, the non-resident enterprise, being
the transferor, must report to the relevant tax authority of the
PRC “resident enterprise” this Indirect Transfer. The PRC tax
authority may disregard the existence of the overseas holding
company if it lacks a reasonable commercial purpose and was
established for the purpose of reducing, avoiding or deferring PRC
tax. As a result, gains derived from such Indirect Transfer may be
subject to PRC tax at a rate of up to 10%. On February 3,
2015, the SAT issued the Announcement of the State Administration
of Taxation on Several Issues Concerning the Enterprise Income Tax
on Indirect Property Transfer by Non-Resident Enterprises, or SAT
Bulletin 7, to supersede existing provisions in relation to the
Indirect Transfer as set forth in Circular 698, while the other
provisions of Circular 698 remain in force. SAT Bulletin 7
introduces a new tax regime that is significantly different from
that under Circular 698. Public Notice extends its tax jurisdiction
to capture not only Indirect Transfer as set forth under Circular
698 but also transactions involving transfer of immovable property
in China and assets held under the establishment and place, in
China of a foreign company through the offshore transfer of a
foreign intermediate holding company. SAT Bulletin 7 also addresses
transfer of the equity interest in a foreign intermediate holding
company widely. In addition, SAT Bulletin 7 provides clearer
criteria than Circular 698 on how to assess reasonable commercial
purposes and introduces safe harbor scenarios applicable to
internal group restructurings. However, it also brings challenges
to both the foreign transferor and transferee of the Indirect
Transfer as they have to make self-assessment on whether the
transaction should be subject to PRC tax and to file or withhold
the PRC tax accordingly. Although it appears that SAT Circular 698
and/or SAT Bulletin 7 was not intended to apply to share transfers
of publicly traded companies, there is uncertainty as to the
application of SAT Circular 698 and/or SAT Bulletin 7 and we and
our non-resident investors may be at risk of being required to
file a return and being taxed under SAT Circular 698 and/or
SAT Bulletin 7 and we may be required to expend valuable resources
to comply with SAT Circular 698 or to establish that we should not
be taxed under SAT Circular 698 and/or SAT Bulletin 7.
On October 17, 2017, the SAT issued the Announcement of the State
Administration of Taxation on Matters Concerning Withholding of
Income Tax of Non-resident Enterprises as Source, or SAT Bulletin
37, which repealed the entire Circular 698 and the provision in
relation to the time limit for the withholding agent to declare to
the competent tax authority for payment of such tax of SAT Bulletin
7. Pursuant to SAT Bulletin 37, the income from property transfer,
as stipulated in the second item under Article 19 of the Law on
Enterprise Income Tax, shall include the income derived from
transferring such equity investment assets as stock equity. The
balance of deducting the equity’s net value from the total income
from equity transfer shall be taxable income from equity transfer.
Where a withholding agent enters into a business contract,
involving the income specified in the third paragraph of Article 3
in the Law on Enterprise Income Tax, with a non-resident
enterprise, the tax-excluding income of the non-resident enterprise
will be treated as the tax-including income, based on which the tax
payment will be calculated and remitted, if it is agreed in the
contract that the withholding agent shall assume the tax
payable.
United States Federal Income Taxation
The following discussion is a summary of U.S. federal income tax
considerations generally applicable to U.S. Holders (as defined
below) of the ownership and disposition of our ordinary shares.
This summary applies only to U.S. Holders that hold our ordinary
shares as capital assets (generally, property held for investment)
and that have the U.S. dollar as their functional currency. This
summary is based on U.S. tax laws in effect as of the date of this
report, on U.S. Treasury regulations in effect or, in some cases,
proposed as of the date of this report, and judicial and
administrative interpretations thereof available on or before such
date. All of the foregoing authorities are subject to change, which
could apply retroactively and could affect the tax consequences
described below. Moreover, this summary does not address the U.S.
federal estate, gift, Medicare, backup withholding, and alternative
minimum tax considerations, or any state, local, and non-U.S. tax
considerations, relating to the ownership and disposition of our
ordinary shares. The following summary does not address all aspects
of U.S. federal income taxation that may be important to particular
investors in light of their individual circumstances or to persons
in special tax situations such as:
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banks
and other financial institutions; |
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insurance
companies; |
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pension
plans; |
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cooperatives; |
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regulated
investment companies; |
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real
estate investment trusts; |
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broker-dealers; |
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traders
that elect to use a mark-to-market method of
accounting; |
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certain
former U.S. citizens or long-term residents; |
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tax-exempt
entities (including private foundations); |
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persons
liable for alternative minimum tax; |
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persons
holding stock as part of a straddle, hedging, conversion or
integrated transaction; |
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persons
that actually or constructively own 10% or more of the total
combined voting power of all classes of our voting stock;
or |
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partnerships
or other entities taxable as partnerships for U.S. federal income
tax purposes, or persons holding common stock through such
entities. |
Investors are urged to consult their own tax advisors regarding
the application of U.S. federal taxation to their particular
circumstances, and the state, local, non-U.S., or other tax
consequences of the ownership and disposition of our ordinary
shares.
For purposes of this discussion, a “U.S. Holder” is a beneficial
owner of our ordinary shares that is, for U.S. federal income tax
purposes:
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an
individual who is a citizen or resident of the United
States; |
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a
corporation (or other entity taxable as a corporation for U.S.
federal income tax purposes) created or organized in the United
States or under the laws of the United States, any state thereof or
the District of Columbia; |
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an
estate, the income of which is subject to U.S. federal income
taxation regardless of its source; or |
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a
trust that (1) is subject to the primary supervision of a court
within the United States and the control of one or more U.S.
persons for all substantial decisions, or (2) has a valid election
in effect under applicable U.S. Treasury regulations to be treated
as a U.S. person. |
If a partnership (or other entity treated as a partnership for U.S.
federal income tax purposes) is a beneficial owner of our ordinary
shares, the tax treatment of a partner in the partnership will
generally depend upon the status of the partner and the activities
of the partnership. Partnerships holding our ordinary shares and
their partners are urged to consult their tax advisors regarding an
investment in our ordinary shares.
Passive Foreign Investment Company Considerations
A non-U.S. corporation, such as our company, will be classified as
a PFIC, for U.S. federal income tax purposes for any taxable year,
if either (i) 75% or more of its gross income for such year
consists of certain types of “passive” income or (ii) 50% or
more of the value of its assets (determined on the basis of a
quarterly average) during such year is attributable to assets that
produce or are held for the production of passive income (the
“asset test”). For this purpose, cash and cash equivalents are
categorized as passive assets and the company’s goodwill and other
unbooked intangibles are taken into account as non-passive assets.
Passive income generally includes, among other things, dividends,
interest, rents, royalties, and gains from the disposition of
passive assets. We will be treated as owning a proportionate share
of the assets and earning a proportionate share of the income of
any other corporation in which we own, directly or indirectly, more
than 25% (by value) of the stock.
Although the law in this regard is not clear, we treat our
consolidated VIEs as being owned by us for U.S. federal income tax
purposes because we exercise effective control over the
consolidated VIEs and are entitled to substantially all of their
economic benefits. As a result, we consolidate their results of
operations in our consolidated U.S. GAAP financial statements.
If it were determined that we are not the owner of the consolidated
VIEs for U.S. federal income tax purposes, we would likely be
treated as a PFIC for the current taxable year and any subsequent
taxable year. Assuming that we are the owner of the VIEs for U.S.
federal income tax purposes, and based upon our current and
expected income and assets (including goodwill, other unbooked
intangibles, and the cash proceeds following our initial public
offering), we do not presently expect to be a PFIC for the current
taxable year or the foreseeable future.
While we do not expect to be or become a PFIC in the current or
foreseeable taxable years, no assurance can be given in this regard
because the determination of whether we will be or become a PFIC is
a factual determination made annually that will depend, in part,
upon the composition of our income and assets. Furthermore, the
composition of our income and assets may also be affected by how,
and how quickly, we use our liquid assets and the cash raised in
our initial public offering. Under circumstances where our revenue
from activities that produce passive income significantly increase
relative to our revenue from activities that produce non-passive
income, or where we determine not to deploy significant amounts of
cash for active purposes, our risk of becoming classified as a PFIC
may substantially increase. In addition, because there are
uncertainties in the application of the relevant rules, it is
possible that the Internal Revenue Service may challenge our
classification of certain income and assets as non-passive or our
valuation of our tangible and intangible assets, each of which may
result in our becoming a PFIC for the current or subsequent taxable
years. If we were classified as a PFIC for any year during which a
U.S. Holder held our ordinary shares, we generally would continue
to be treated as a PFIC for all succeeding years during which such
U.S. Holder held our ordinary shares even if we cease to be a PFIC
in subsequent years, unless certain elections are made.
The discussion herein under “Dividends” is written on the basis
that we will not be or become classified as a PFIC for U.S. federal
income tax purposes. If we are treated as a PFIC, the U.S. federal
income tax considerations that apply generally are discussed under
“Passive Foreign Investment Company Rules.”
10.F. Dividends and Paying Agents
Not Applicable.
10.G. Statement by Experts
Not Applicable.
10.H. Documents on Display
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, and will file reports,
registration statements and other information with the SEC. The
Company’s reports, registration statements and other information
can be inspected on the SEC’s website at www.sec.gov. You may also
visit us on website at http://www.edu-edu.com. However, information
contained on our website does not constitute a part of this annual
report.
10.I. Subsidiary Information
Not Applicable.
ITEM 11.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Exchange Risk
Our functional currency is RMB, and our financial statements are
presented in U.S. dollars. RMB has gradually appreciated against
U.S. dollars over the past few years. The average exchange rate for
U.S. dollars against RMB has changed from US$1.00 for RMB 6.7116 in
the year ended March 31, 2019 to US$1.00 for RMB 6.9662 in the year
ended March 31, 2020. The change in the value of RMB relative to
the U.S. dollar may affect our financial results reported in the
U.S. dollar terms without giving effect to any underlying change in
our business or results of operation. If using the average exchange
rate of fiscal 2019, our revenue, cost of revenue and total
expenses, including selling expenses and general and administrative
expenses, for the year ended March 31, 2020 would increase by
approximately $0.2 million, $0.1 million and $0.1 million,
respectively.
Currently, our assets, liabilities, revenues and costs are
denominated in RMB, our exposure to foreign exchange risk will
primarily relate to those financial assets denominated in U.S.
dollars. Any significant revaluation of RMB against U.S. dollar may
materially affect our earnings and financial position, and the
value of, and any dividends payable on, our ordinary shares in U.S.
dollars in the future.
Credit Risk
As of March 31, 2020 and 2019, $1,889,093 and $1,113 of our cash
were on deposits at financial institutions in Hong Kong, are
insured by Hong Kong Deposit Board and subject to a certain
limitation of HKD 500,000 (about $64,505). As of March 31, 2020 and
2019, $4,940,406 and $3,920,811 of our cash were on deposits at
financial institutions in the mainland China, where there currently
is no rule or regulation requiring such financial institutions to
maintain insurance to cover bank deposits in the event of bank
failure.
Accounts receivable are typically unsecured and derived from
revenue earned from customers, thereby exposed to credit risk. The
risk is mitigated by the Company’s assessment of its customers’
creditworthiness and its ongoing monitoring of outstanding
balances.
Inflation Risk
Inflationary factors such as increases in the cost of our product
and overhead costs may adversely affect our operating results.
Although we do not believe that inflation has had a material effect
on our financial position or results of operations to date, a high
rate of inflation in the future may have an adverse effect on our
ability to maintain current levels of gross profit and selling,
general and administrative expenses as a percentage of net sales if
the selling prices of our services do not increase with these
increased costs.
ITEM 12. DESCRIPTION
OF SECURITIES OTHER THAN EQUITY SECURITIES
None.
PART II
ITEM 13. DEFAULTS,
DIVIDEND ARREARAGES AND DELINQUENCIES
Not Applicable.
ITEM 14. MATERIAL
MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
Not Applicable.
ITEM 15. CONTROLS
AND PROCEDURES
| |
(a) |
Disclosure
Controls and Procedures |
Under the supervision and with the participation of our management,
including our principal executive officer and our principal
financial officer, we conducted an evaluation of our disclosure
controls and procedures, as such term is defined under Rule
13a-15(e) promulgated under the Securities Exchange Act of 1934, as
amended. Our principal executive officer and principal
financial officer have concluded that our disclosure controls and
procedures were not effective as of the end of the period covered
by this annual report. This conclusion was based on the material
weakness in our internal control over financial reporting further
described below.
| |
(b) |
Management’s
Report on Internal Control Over Financial Reporting |
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such item is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act,
for our company. Internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
consolidated financial statements in accordance with U.S. GAAP and
includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of a company’s
assets, (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of consolidated
financial statements in accordance with generally accepted
accounting principles, and that a company’s receipts and
expenditures are being made only in accordance with authorizations
of a company’s management and directors, and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of a company’s assets that could
have a material effect on the consolidated financial
statements.
Because of its inherent limitations, internal control over
financial reporting is not intended to provide absolute assurance
that a misstatement of our financial statements would be prevented
or detected. Also, projections of any evaluation of effectiveness
to future periods are subject to the risks that controls may become
inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Our management has conducted an assessment, including testing of
the design and the effectiveness of our internal control over
financial reporting as of March 31, 2020. In making its assessment,
management used the criteria in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO) in Internal Control —
Integrated Framework (2013) .
A material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material misstatement
of our annual or interim consolidated financial statements will not
be prevented or detected and corrected on a timely basis.
The Company identified deficiencies related to corporate
governance, management’s application of disclosure requirements for
SEC reporting and documentation of our financial statement
reporting process. Such deficiencies are common for companies of
our size.
The Company identified deficiencies related to management’s
application of disclosure requirements for SEC reporting and
documentation of our financial statement reporting process.
Although our accounting staff employees are professional and
experienced in accounting requirements and procedures generally
accepted in the PRC, management has determined that they require
additional training and assistance in U.S. GAAP methods and SEC
reporting. Our management’s assessment of the control deficiency
over accounting and finance personnel as of March 31, 2020
considered the below factors, including:
| |
● |
the
number of adjustments proposed by our independent auditors during
our quarterly review and annual audit processes; |
| |
● |
how
adequately we complied with U.S. GAAP on transactions;
and |
| |
● |
how
accurately we prepared supporting information to provide to our
independent auditors on a quarterly and annual basis. |
Based on this assessment, management concluded that our internal
controls over financial reporting were not effective as of March
31, 2020 due to the material weakness related to management’s
application of disclosure requirements for SEC reporting and
documentation of our financial statement reporting process.
| |
(c) |
Attestation
Report of Independent Registered Public Accounting
Firm |
We are a non-accelerated filer under the rules of the Securities
and Exchange Commission. Accordingly, we are not required to
include in this annual report an attestation report of our
independent registered public accounting firm.
| |
(d) |
Changes
in Internal Control over Financial Reporting |
There were no changes in our internal controls over financial
reporting during our fiscal year ended March 31, 2019 that have
materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
| |
(e) |
Remediation
Initiatives |
For 2020, we implemented our remediation plan to address the
underlying causes of the material weakness described above by
hiring accounting staff who understands U.S. GAAP methods and SEC
reporting measures and also educating existing staff on these
subjects. For fiscal year 2021, we plan to continue improving our
internal control by implementing the following remediation plans,
including:
| |
● |
Reassessing
the design and operation of internal controls over financial
reporting, including interim and annual accruals cutoff procedures
and review procedures related to information received from our
outside consulting technical experts; |
| |
|
|
| |
● |
continuing our training of
accounting personnel so they can better on U.S. GAAP methods and
SEC reporting matters; and |
| |
|
|
| |
● |
Increasing
staffing levels and expertise to implement this remediation
plan. |
Our management, including our Chief Executive Officer and our Chief
Financial Officer, does not expect that our disclosure controls and
procedures or our internal controls will prevent or detect 100% of
all errors and fraud that may occur. A control system, no matter
how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are
met. Further, the design of a control system must reflect the fact
that there are resource constraints and the benefits of controls
must be considered relative to their costs. Due to the inherent
limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of
fraud, if any, within our company have been detected.
ITEM 16.
RESERVED
ITEM 16A. AUDIT
COMMITTEE FINANCIAL EXPERT
Our audit committee consists of Yik C. Chan, Wenxiang Xing and
Defang Li. Our board of directors has determined that Yik C. Chan,
Wenxiang Xing and Defang Li are “independent directors” within the
meaning of NASDAQ Stock Market Rule 5605(a)(2) and meet the
criteria for independence set forth in Rule 10A−3(b) of the
Exchange Act. Yik C. Chan meets the criteria of an audit committee
financial expert as set forth under the applicable rules of the
SEC.
ITEM 16B. CODE OF
ETHICS
Our board of directors has adopted a code of business conduct and
ethics. The purpose of the code is to promote ethical conduct and
deter wrongdoing. The policies outlined in the Code are designed to
ensure that our directors, executive officers and employees act in
accordance with not only the letter but also the spirit of the laws
and regulations that apply to our business. We expect our
directors, executive officers and employees to exercise good
judgment, to uphold these standards in their day-to-day activities,
and to comply with all applicable policies and procedures in the
course of their relationship with the company. Any amendment to or
waivers of the Code for members of our board of directors and our
executive officers that are required to be disclosed by the rules
of the SEC or NASDAQ will be disclosed on our website at
http://www.edu-edu.com within four business days following the
amendment or waiver. During fiscal year 2020, no amendments to or
waivers from the Code were made or given for any of our executive
officers.
Our code of business conduct and ethics are publicly available on
our website at http://www.edu-edu.com.
ITEM 16C. PRINCIPAL
ACCOUNTANT FEES AND SERVICES
| |
|
Year Ended
March 31,
2020 |
|
|
Year Ended
March 31,
2019 |
|
| |
|
|
|
|
|
|
|
|
| Audit fees* |
|
$ |
225,000 |
|
|
$ |
215,000 |
|
|
* |
Audit
Fees – This category includes the audit of our annual financial
statements, review of financial statements included in our
quarterly reports and services that are normally provided by the
independent registered public accounting firm in connection with
engagements for those years and services that are normally provided
by our independent registered public accounting firm in connection
with statutory audits and Securities and Exchange Commission
regulatory filings or engagements. |
The policy of our audit committee and our board of directors is to
pre-approve all audit and non-audit services provided by our
principal auditors, including audit services, audit-related
services, and other services as described above, other than those
for de minimis services which are approved by the audit committee
or our board of directors prior to the completion of the
services.
ITEM 16D. EXEMPTIONS
FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not Applicable.
ITEM 16E. PURCHASES
OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS
None.
ITEM 16F. CHANGE IN
REGISTRANT’S CERTIFYING ACCOUNTANT
None.
ITEM 16G. CORPORATE
GOVERNANCE
Our ordinary shares are listed on the NASDAQ Capital Market, or
NASDAQ. As such, we are subject to corporate governance
requirements imposed by NASDAQ. Under NASDAQ rules, listed non-US
companies such as ourselves may, in general, follow their home
country corporate governance practices in lieu of some of the
NASDAQ corporate governance requirements. A NASDAQ -listed non-US
company is required to provide a general summary of the significant
differences to its US investors either on the company website or in
its annual report distributed to its US investors. We are committed
to a high standard of corporate governance. As such, we endeavor to
comply with the NASDAQ corporate governance practices and there is
no significant difference between our corporate governance
practices and what the NASDAQ requires of domestic U.S.
companies.
ITEM 16H. MINE
SAFETY DISCLOSURE
Not applicable.
PART III
ITEM 17. FINANCIAL
STATEMENTS
Not applicable.
ITEM 18. FINANCIAL
STATEMENTS
The consolidated financial statements and related notes required by
this item are contained on pages F-1 through F-25.
ITEM 19.
EXHIBITS
Exhibit
Number |
|
Description of Documents |
| |
|
|
| 1.1 |
|
Amended
and Restated Memorandum of Association
(2) |
| |
|
|
| 1.2 |
|
Articles
of Association (1) |
| |
|
|
| 2.1 |
|
Description
of Securities* |
| |
|
|
| 4.1 |
|
Exclusive
Business Cooperation Agreement, dated August 16, 2017, by and
between Beijing Huaxia Dadi Distance Learning Services Co., Ltd.
and Beijing Huaxia Dadi Digital Information Technology Co., Ltd.
(1) |
| |
|
|
| 4.2 |
|
Exclusive
Option Agreement, dated August 16, 2017, by and among Beijing
Huaxia Dadi Distance Learning Services Co., Ltd., Yang Yu, Xinghui
Yang and Beijing Huaxia Dadi Digital Information Technology Co.,
Ltd. (1) |
| |
|
|
| 4.3 |
|
Equity
Interest Pledge Agreement, dated August 18, 2017, by and among
Beijing Huaxia Dadi Distance Learning Services Co., Ltd., Yang Yu,
Xinghui Yang and Beijing Huaxia Dadi Digital Information Technology
Co., Ltd. (1) |
| |
|
|
| 4.4 |
|
Form
of Power of Attorney(1) |
| |
|
|
| 4.5 |
|
English
Translation of Property Lease Agreement, dated June 1, 2016, by and
between Beijing Huaxia Dadi Distance Learning Services Co., Ltd.
and Beijing Jinkai Gongda Investment Management Co., Ltd.
(1) |
| |
|
|
| 4.6 |
|
Platform
and Online Course Development, dated April 24, 2017, by and between
Beijing Huaxia Dadi Digital Information Co., Ltd. and Zhengqing
Heya Education Technology (Beijing) Co., Ltd.
(1) |
| |
|
|
| 4.7 |
|
English
Translations of Online Course Resource Purchase Contract, dated
December 19, 2017, by and between Beijing Huaxia Dadi Distance
Learning Services Co., Ltd. and Higher Education Press Co., Ltd.
(3) |
| |
|
|
| 4.8 |
|
Employment Agreement, dated November 11, 2011, by and between
Beijing Huaxia Dadi Distance Learning Services Co., Ltd. and
Xinghui Yang (5) |
| |
|
|
| 4.9 |
|
Employment Agreement, dated January 1, 2018, by and between the
Company and Gao Yao(5) |
| |
|
|
| 8.1 |
|
Subsidiaries of the Registrant* |
| |
|
|
| 12.1 |
|
Certificate
of Principal Executive Officer pursuant to Rule 13a-14(a) of the
Exchange Act* |
| |
|
|
| 12.2 |
|
Certificate
of Principal Financial Officer pursuant to Rule 13a-14(a) of the
Exchange Act* |
| |
|
|
| 13.1 |
|
Certificate
of Principal Executive Officer pursuant to 18 U.S.C. Section 1350
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002* |
| |
|
|
| 13.2 |
|
Certificate
of Principal Financial Officer pursuant to 18 U.S.C. Section 1350
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002* |
|
* |
Filed
as an exhibit hereto. |
| (1) |
Incorporated
by reference to our Registration Statement on Form F-1, filed on
March 20, 2018. |
| |
|
| (2) |
Incorporated
by reference to our Registration Statement on Form F-1/A, filed on
April 11, 2018. |
| |
|
| (3) |
Incorporated
by reference to our Registration Statement on Form F-1/A, filed on
June 15, 2018. |
| |
|
| (4) |
Incorporated
by reference to our Registration Statement on Form F-1/A, filed on
June 28, 2018. |
| |
|
| (5) |
Incorporated
by reference to our 20-F, filed on August 15, 2019. |
SIGNATURES
The registrant hereby certifies that it meets all of the
requirements for filing on Form 20-F and that it has duly caused
and authorized the undersigned to sign this annual report on its
behalf.
|
|
WAH
FU EDUCATION GROUP LIMITED |
| |
|
| Date:
August 17, 2020 |
/s/
Xinghui Yang |
| |
Name: Xinghui
Yang |
| |
Title:
Chief Executive Officer |
WAH FU EDUCATION GROUP LIMITED
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Wah Fu Education Group Limited
Opinion on the Financial
Statements
We have audited the accompanying consolidated balance sheets of Wah
Fu Education Group Limited and its subsidiaries (collectively, the
“Company”) as of March 31, 2020 and 2019, and the related
consolidated statements of operations and comprehensive income
(loss), changes in equity, and cash flows for each of the three
years in the period ended March 31, 2020, and the related notes (collectively
referred to as the “consolidated financial statements”). In our
opinion, the consolidated financial statements present fairly, in
all material respects, the financial position of the Company as
of March 31, 2020 and
2019, and the results of its operations and its cash flows for each
of the three years in the period ended March 31, 2020, in conformity with accounting
principles generally accepted in the United States of
America.
Basis for Opinion
These consolidated financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on the Company’s
consolidated financial statements based on our audits. We are a
public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (“PCAOB”) and are
required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We conducted our audits in
accordance with the standards of the PCAOB. Those standards require
that we plan and perform the audits to obtain reasonable assurance
about whether the consolidated financial statements are free of
material misstatement, whether due to error or fraud. The Company
is not required to have, nor were we engaged to perform, an audit
of its internal control over financial reporting. As part of our
audits we are required to obtain an understanding of internal
control over financial reporting, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express
no such opinion.
Our audits included
performing procedures to assess the risks of material misstatement
of the consolidated financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the consolidated
financial statement. We believe that our audits provide a
reasonable basis for our opinion.
/s/ Friedman LLP
New York, New York
August 17, 2020
We have served as the Company’s auditor since 2017.
WAH FU EDUCATION GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| |
|
As
of
March 31, |
|
|
As
of
March 31, |
|
| |
|
2020 |
|
|
2019 |
|
| ASSETS |
|
|
|
|
|
|
| CURRENT
ASSETS: |
|
|
|
|
|
|
| Cash |
|
$ |
6,833,891 |
|
|
$ |
3,927,718 |
|
| Accounts receivable, net |
|
|
542,913 |
|
|
|
1,781,360 |
|
| Other receivables, net |
|
|
143,920 |
|
|
|
75,213 |
|
| Loan to third parties, current |
|
|
42,316 |
|
|
|
490,420 |
|
| Loan to related parties |
|
|
2,537,532 |
|
|
|
- |
|
| Other current assets |
|
|
150,213 |
|
|
|
146,058 |
|
| Deferred
offering costs |
|
|
- |
|
|
|
417,100 |
|
| TOTAL CURRENT
ASSETS |
|
|
10,250,785 |
|
|
|
6,837,869 |
|
| |
|
|
|
|
|
|
|
|
| Loan to third parties,
noncurrent |
|
|
579,335 |
|
|
|
89,404 |
|
| Property and equipment, net |
|
|
775,465 |
|
|
|
868,802 |
|
| Investments in unconsolidated
entities |
|
|
10,977 |
|
|
|
283,113 |
|
| Operating lease right-of-use
assets |
|
|
603,553 |
|
|
|
- |
|
| Long-term rent deposit |
|
|
73,049 |
|
|
|
- |
|
| Deferred tax
assets, net |
|
|
272,115 |
|
|
|
403,466 |
|
| TOTAL
ASSETS |
|
$ |
12,565,279 |
|
|
$ |
8,482,654 |
|
| |
|
|
|
|
|
|
|
|
| CURRENT
LIABILITIES: |
|
|
|
|
|
|
|
|
| Due to related parties |
|
$ |
286,353 |
|
|
$ |
252,874 |
|
| Deferred revenue |
|
|
1,524,918 |
|
|
|
620,332 |
|
| Operating lease liabilities,
current |
|
|
254,332 |
|
|
|
- |
|
| Taxes payable |
|
|
314,052 |
|
|
|
318,685 |
|
| Other payables |
|
|
189,201 |
|
|
|
268,550 |
|
| Accrued
expenses and other liabilities |
|
|
335,699 |
|
|
|
324,510 |
|
|
TOTAL CURRENT LIABILITIES |
|
|
2,904,555 |
|
|
|
1,784,951 |
|
| |
|
|
|
|
|
|
|
|
| Operating
lease liabilities, noncurrent |
|
|
361,595 |
|
|
|
- |
|
|
TOTAL LIABILITIES |
|
|
3,266,150 |
|
|
|
1,784,951 |
|
| |
|
|
|
|
|
|
|
|
| COMMITMENTS AND
CONTINGENCIES |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| EQUITY |
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, 30,000,000 shares authorized;
4,381,033 and 3,200,000 shares issued and outstanding as of March
31, 2020 and March 31, 2019, respectively * |
|
|
43,810 |
|
|
|
32,000 |
|
| Additional paid-in capital |
|
|
4,799,384 |
|
|
|
217,395 |
|
| Statutory reserve |
|
|
231,424 |
|
|
|
222,180 |
|
| Retained earnings |
|
|
4,723,999 |
|
|
|
6,421,944 |
|
| Accumulated
other comprehensive loss |
|
|
(734,028 |
) |
|
|
(407,169 |
) |
| Total shareholders’ equity |
|
|
9,064,589 |
|
|
|
6,486,350 |
|
|
Non-controlling interest |
|
|
234,540 |
|
|
|
211,353 |
|
|
TOTAL EQUITY |
|
|
9,299,129 |
|
|
|
6,697,703 |
|
| TOTAL
LIABILITIES AND EQUITY |
|
$ |
12,565,279 |
|
|
$ |
8,482,654 |
|
|
* |
Retrospectively restated for effect of stock
split and reorganization |
The accompanying notes are an integral part of these consolidated
financial statements.
WAH FU EDUCATION GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(LOSS)
| |
|
For the Year Ended March 31, |
|
| |
|
2020 |
|
|
2019 |
|
|
2018 |
|
| |
|
|
|
|
|
|
|
|
|
|
REVENUE |
|
$ |
5,637,370 |
|
|
$ |
5,358,023 |
|
|
$ |
5,967,896 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| COST OF REVENUE
AND RELATED TAX |
|
|
|
|
|
|
|
|
|
|
|
|
| Cost of
revenue |
|
|
3,346,588 |
|
|
|
2,816,331 |
|
|
|
2,202,368 |
|
|
Business and sales related tax |
|
|
40,377 |
|
|
|
38,048 |
|
|
|
27,128 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT |
|
|
2,250,405 |
|
|
|
2,503,644 |
|
|
|
3,738,400 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| OPERATING
EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|
| Selling expenses |
|
|
1,314,403 |
|
|
|
1,441,165 |
|
|
|
1,084,599 |
|
| General and
administrative expenses |
|
|
2,507,186 |
|
|
|
2,301,070 |
|
|
|
1,581,307 |
|
|
Total operating expenses |
|
|
3,821,589 |
|
|
|
3,742,235 |
|
|
|
2,665,906 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) FROM OPERATIONS |
|
|
(1,571,184 |
) |
|
|
(1,238,591 |
) |
|
|
1,072,494 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| OTHER INCOME
(EXPENSE) |
|
|
|
|
|
|
|
|
|
|
|
|
| Interest income |
|
|
135,359 |
|
|
|
126,663 |
|
|
|
177,723 |
|
| Gain from investments in
unconsolidated entities |
|
|
- |
|
|
|
- |
|
|
|
56,421 |
|
| Other income
(expenses) |
|
|
7,236 |
|
|
|
(3,403 |
) |
|
|
(11,138 |
) |
|
Total other income, net |
|
|
142,595 |
|
|
|
123,260 |
|
|
|
223,006 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| INCOME (LOSS)
BEFORE INCOME TAX PROVISION |
|
|
(1,428,589 |
) |
|
|
(1,115,331 |
) |
|
|
1,295,500 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION (BENEFIT) FOR INCOME TAXES |
|
|
212,498 |
|
|
|
(96,804 |
) |
|
|
92,023 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| NET INCOME
(LOSS) |
|
|
(1,641,087 |
) |
|
|
(1,018,527 |
) |
|
|
1,203,477 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Less: net
income (loss) attributable to non-controlling interest |
|
|
47,614 |
|
|
|
(72,344 |
) |
|
|
58,874 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) ATTRIBUTABLE TO WAH FU EDUCATION GROUP
LIMITED |
|
$ |
(1,688,701 |
) |
|
$ |
(946,183 |
) |
|
$ |
1,144,603 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|